DIRECTOR OF OPM'S TESTIMONY BEFORE THE HOUSE POST OFFICE AND CIVIL SERVICE COMMITTEE ON 23 FEBRUARY 1984.

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89-00066R000700090001-8
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 21
• Document Creation Date: December 27, 2016
• Document Release Date: August 5, 2013
• Sequence Number: 1
• Publication Date: February 21, 1984
• Content Type: MEMO

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STAT
FEB 2 1 1984
MEMORANDUM FOR: Director, Office of Legislative Liaison
FROM: Robert W. Magee
Director of Personnel
SUBJECT: Director of OPM's Testimony Before the House Post Office
and Civil Service Committee on 23 February 1984.
1. We have reviewed the draft testimony that the Director, Office
of Personnel Management will present before the House Post Office and
Civil Service Committee on 23 February 1984. The testimony serves to
highlight the varying opinions on this complex issue, thus reaffirming
the importance of thorough consideration by the Congress in designing an
equitable and effective new retirement system.
2. The Central Intelligence Agency, Foreign Service of the Department
of State and select other groups of employees have special legislated
retirement systems to support their unique work force requirements in
carrying out their essential functions. We therefore concur with the
Director, OEM on the essential need for continuation of these retirement
systems for those groups of employees with unique skills and abilities.
We strongly support his statement that it is not feasible for some employees
to continue to work in positions requiring a young and vigorous work force
until Social Security benefits commence. This especially applies to
employees of CIA.
OP/SP
gwwt W?
Robert W. Magee
(21 February 1984)
Distribution:
Original - Addressee
1 - DDA
1 - D/Pers
1 - DD/SP
'IN- Asst. to DD/SP
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FEB 1 61984
STATEMENT OF
HONORABLE DONALU J. OEV1NE
DIRECTOR, U.S. OFFICE OF PERSONNEL MANAGEMENT
before the
COMMITTEE ON POST OFFICE ANU CIVIL SERVICE
U.S. HOUSE OF REPRESENTATIVES
on
DEVELOPMENT Of A NEW RETIREMENT PLAN
FOR FEDERAL EMPLOYEES COVERED
bY SOCIAL SECURITY
February 23, 1964
MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE:
THANK YOU FOR INVITING ME TO APPEAR THIS MORNING TO DISCUSS THE ISSUES
INVOLVED IN ESTABLISHING A RETIREMENT SYSTEM FOR NEW FEDERAL EMPLOYEES WHO
ARE COVERED BY SOCIAL SECURITY. I AM ACCOMPANIED TODAY BY JAMES W.
MORRISON, JR., OPM'S ASSOCIATE DIRECTOR FOR COMPENSATION, AND JEAN M.
BARBER, ASSISTANT DIRECTOR FOR FINANCIAL CONTROL ANU MANAGEMENT.
I WOULD LIKE TO BEGIN BY EXPRESSING MY PERSONAL APPRECIATION TO YOU,
MR. CHAIRMAN, AND THE OTHER MEMBERS OF THE COMMITTEE, FOR BEGINNING
DISCUSSIONS ON THIS ISSUE ON SD TIMELY A BASIS. I THINK WE ARE ALL AWARE
THAT WE MUST HAVE SERIOUS DISCUSSIONS THIS YEAR, IF WE ARE GOING TO BE ABLE
TO PRODUCE AN EQUITABLE RETIREMENT PACKAGE FOR NEW EMPLOYEES NEXT YEAR.
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THE MAuNITUDE ANU COMPLEXITY OF THE PROBLEMS WE FACE MAKE IT ABSOLUTELY
ESSENTIAL THAT WE BEGIN OUR WORK IMMEDIATELY. MUCH OF THE NEEDED ANALYTICAL
GROUNDWORK IS WELL UNDER WAY, BOTH THROUGH THE WORK BEINU DONE BY
LEGISLATIVE BRANCH STAFF AND THEIR CONSULTANT, AND BY UPM. THEREFORE, IT IS
TIMELY To dEuIN POLICY-LEVEL DISCUSSIONS AS WELL.
IN YOUR LETTER INVITING ME To APPEAR TODAY, YOU HAVE OUTLINED A
COMPREHENSIVE AGENUA. I WUULU LIKE TO RESPOND TO EACH CONCERN IN THE SAME
ORDER. BEFORE I BEGIN, I WISH TO EmPHASILE THAT I Am PURPOSELY BEING
GENERAL IN MY REMARKS, SO THAT WE CAN PROCEED IN THE VST CONSTRUCTIVE
MANNER. THE ADMINISTRATION HAS OFFERED SPECIFIC PROPOSALS IN THE FY-84
BUDGET, AND HAS RE-ENDORSED THEM IN THE FY-85 BUDGET. HOWEVER, WE HAVE
ALWAYS SAIL) THAT THESE PROPOSALS ARE NOT OUR FINAL WORD. WE ARE INTERESTED
IN THE VIEWS OF FEDERAL EMPLOYEES, OUTSIDE GROUPS AND MEMBERS OF CONGRESS.
WE ARE ENTERING THESE DISCUSSIONS WITH AN OPEN MIND, ANO A COMMITMENT TO
WORK WITH ALL INTERESTED PARTIES TOWARDS ATTAINING OUR OBJECTIVE OF A
FEDERAL RETIREMENT PLAN THAT IS FAIR BOTH TO EMPLOYEES AND TAXPAYERS.
COMPARABILITY ANALYSIS
THE FIRST ISSUE YOU HAVE'RAISEU IS WHETHER THE RETIREMENT SYSTEM SHOULD
BE CONSIDERED BY ITSELF OR WHETHER CONSIUERATIUN SHOULD BE EXPANDED TO
INCLUDE OTHER BENEFITS ANL) CASH COMPENSATION. WE BELIEVE THIS QUESTION
SHOULD BE LOOKED AT FROM TWO PERSPECTIVES. FIRST, WE DO BELIEVE IT MAKES
SENSE, WHEN CONSIDERING RETIREMENT REFORMS, THAT ONE CONSIDER THE WHOLE
RANGE OF COMPENSATION PROGRAMS AVAILABLE To THE PUBLIC AND PRIVATE SECTORS.
SECOND, BECAUSE THESE BENEFITS TOTALS DIFFER DRAMATICALLY AND BECAUSE
DIFFERENT PREFERENCE PATTERNS PROBABLY EXIST IN EACH SECTOR, IT BECOMES
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OBVIOUS THAT ONE SHUULU NOT ATTEMPT To TOTALLY OVERHAUL THE WHOLE BENEFITs
AND PAY SYSTEM ALL AT ONCE. THE DIFFERENCES BETwEEN GOVERNMENT AND THE
PRIVATE SECTOR ARE SIMPLY TUU GREAT TO BE SO RADICAL IN OUR REFORMS.
YOU WILL RECALL THAT BOTH THIS AND THE PREVIOUS ADMINISTRATION
ATTEMPTED TO PRESENT A "TOTAL COMPENSATION COMPARABILITY" (TCC) APPROACH TO
FEDERAL PAY AND BENEFITS. AT THE REQUEST OF THE ADVISORY COMMITTEE UN
FEDERAL PAY, THE PRESIDENT'S PAY AGENT AGREED TO WITHDRAW ITS TOTAL COMPEN-
SATION APPROACH, AND TO PURSUE SEPARATELY CHANGES IN THE DIFFERENT ELEMENTS
OF OUR COMPENSATION PACKAGE. THIS HAS BEEN THE APPROACH TAKEN IN THE FY-84
AND FY-85 BUDGETS. WE BELIEVE THIS APPROACH IS MORE POSITIVE, AND MORE
RESPONSIVE TO THE VIEWS PRESENTED BY CONGRESS ANU THIS COMMITTEE WHEN YOU
CONSIDERED THE ICC APPROACHES OF BOTH ADMINISTRATIONS.
THE DIFFICULTY IN MAKING A ICC COMPARISON CAN BE SEEN WHEN ONE LOOKS
CLOSELY AT PRIVATE AND PUBLIC SECTOR BENEFITS. IN MAKING THE COMPARISON, WE
HAVE ATTEMPTED TO LOOK AT ALL BENEFITS, TO ANSWER A QUESTION RAISED IN YOUR
LETTER, AND AT ALL OF THE MAJOR STUDIES WHICH HAVE MADE SUCH A COMPARISON.
AN APPENDIX To THIS TESTIMONY SHOWS EACH BENEFIT ELEMENT PRESENTED
SEPARATELY. A SummARY TABLE IS ENTERED IN MY STATEMENT AT THIS POINT.
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THREE ESTImATES OF THE PRIVATE SECTOR ARE PRESENTED: A CHAMBER OF
COMMERCE STUDY WHICH IS BROADLY REPRESENTATIVE OF THE PRIVATE SECTOR BECAUSE
IT INCLUUES A REPRESENTATIVE SAMPLE OF SMALL FIRMS, THE GRACE COMMISSION
SURVEY WHICH LOOKED AT LARGE CORPORATIONS BUT DID INCLUDE SOME SMALL FIRMS,
THE STUDY UERIVEU FROM THE PROFESsIUNAL, ADMINISTRATIVE, TECHNICAL AND
CLERICAL (PATC) SURVEY USED BY UPm IN ITS PREVIOUS TCC COMPARISON OF
ESSENTIALLY LARGE FIRMS, AND A HAY ASSOCIATES STUDY IN WHICH LARGE FIRMS
PREDOMINATED. THE COST ESTIMATES ARE BASED UPON COST TO THE EMPLOYER, AS A
PERCENT OF PAYROLL. THE PENSION COSTS ARE ESTIMATED ON A "NORMAL COST"
BASIS INCLUDING SOCIAL SECURITY, WHERE APPROPRIATE. THE YEARS OF THE
STUDIES DIFFER, WITH THE GRACE CoMMISSIUN SURVEY AND THE FEDERAL SECTOR
SURVEY BOTH DUNE IN 1983. THE YEARS OF THE OTHER STUDIES ARE CLOSE ENOUGH,
HOWEVER, TO MAKE SOME GENERALILATIONS.
THE MUST BROADLY REPRESENTATIVE SURVEY OF THE PRIVATE SECTOR, THE ONE
BY THE CHAMBER of COMMERCE, SUGGESTS THAT THE GOVERNMENT PAYS 16 PERCENT OF
PAYROLL MORE FOR FUNDED BENEFITS THAN DOES THE PRIVATE SECTOR. ON THE OTHER
HAND, IF ONE JUST LOOKS AT LARGE FIRMS, THE HAY ASSOCIATES STUDY SUGGESTS
THAT THE FEDERAL GOVERNMENT ONLY PAYS 5 PERCENT MORE ON FUNDED BENEFITS.
DIRECTLY COMPARING 1983 BENEFIT LEVELS, USING THE GRACE COMMISSION WHICH HAS
A SMATTERING OF SMALL FIRMS, SUGGESTS THAT THE GOVERNMENT PAYS 14 PERCENT
MORE IN FUNDED BENEFITS THAN THE PRIVATE SECTOR.
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? THESE COMPARISONS, HOWEVER, ONLY DEAL WITH FUNDED BENEFITS. IF ONE
INCLUDES UNFUNDED LIABILITIES, AT A MINIMUM, THE FEDERAL GOVERNMENT PAYS
TWICE THE BENEFITS PAID BY THE PRIVATE SECTOR, AS A PERCENTAGE OF PAYROLL,
(109% OF PAYROLL VERSES 143%). THIS DUES NOT CONSIDER SOCIAL SECURITY'S
UNFUNDED LIABILITY, BUT SINCE THREE-FOURTHS OR mord OF FEDERAL EMPLOYEES
WILL ULTIMATELY RECEIVE SOCIAL SECURITY TOO, THIS IS APPROPRIATE.
WHEN ONE LOOKS AT THE TOTAL BENEFITS COST, IT BECOMES CLEAR WHY THE TCC
APPROACH IS TOO RADICAL. EVEN IF ONE ACCEPTED THE QUESTIONABLE RESULTS OF
THE PATC PAY SURVEY ON WAGES (WHICH FEW DO), AND THE MUST MODEST SURVEY OF
PRIVATE BENEFITS, COMPARABILITY WOULD DEMAND SUCH A DRAMATIC DECREASE IN
BENEFITS AND PAY FOR FEDERAL EMPLOYEES THAT ANY SUCH CONSIDERATION WOULD BE
UNREALISTIC.
IT IS, OF COURSE, TRUE THAT EVEN A STUDY LIMITED Ti) A COMPARISON OF
RETIREMENT BENEFITS SHOWS A DECIDED ADVANTAGE TO THE FEDERAL SECTOR. THIS
TRUTH SHOULD SHAPE OUR VIEWS WHEN WE ATTEMPT TO DEVELOP A NEW RETIREMENT
PACKAGE, AS WELL AS WHEN WE CONSIDER CHANGES TO THE PRESENT RETIREMENT
SYSTEM FOR EXISTING EMPLOYEES. BUT LIMITING THE DEBATE TO RETIREMENT ONLY
MAKES THE DEBATE mANAGEABLE. OTHERWISE, WE WOULD BE FORCED TO ARGUE FOR
REDUCTIONS IN BENEFITS AND SALARY ACROSS THE BOARD, GIVEN THE TCC APPROACH,
WITH ONLY A FEW MINOR EXCEPTIONS. THE MORE CONSTRUCTIVE ROUTE IS TO LOOK AT
RETIREMENT BENEFITS BY THEMSELVES AND MAKE THEM COMPARABLE TO PRIVATE SECTOR
PRACTICES, ALTHOUGH NOT NECESSARILY
EQUIVALENT TO THEM.
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GENERAL DESIGN
Yuu NEXT ASKED WHETHER WE SHOULD LOOK AT A DEFINED BENEFIT UK A DEFINED
CONTRIBUTION PLAN, OR PERHAPS A COMBINATION OF THE TWO. THIS IS CERTAINLY
ONE OF THE MUST IMPORTANT QUESTIONS TO BE DECIDED, AND ONE WHERE WE ARE
PARTICULARLY EAGER To HEAR THE VIEWS OF OTHERS, ESPECIALLY THE VIEWS OF
AFFECTED FEDERAL EMPLOYEES.
FORTUNATELY, OUR 1983 FEDERAL EMPLOYEE ATTITUDE SURVEY (FEAS) HAS
ALREADY SHED SOME LIGHT ON EMPLOYEE ATTITUDES ON THIS MATTER. WHEN A
REPRESENTATIVE SAMPLE OF FEDERAL EMPLOYEES (INVOLVING 20,000 RESPONSES IN
THE FEAS), WAS ASKED TO CHOOSE BETWEEN DIFFERENT RETIREMENT OPTIONS, THE TWO
FAVORITE CHOICES ARE THE PRESENT DEFINED BENEFITS SYSTEM WITH A SUBSTANTIAL
INCREASE IN EmPLUYEE CONTRIBUTIONS EVEN TO 17 PERCENT OF PAYROLL, ANO A PLAN
WHERE THE GOVERNMENT WOULD SET UP AN ANNUITY MU CONTRIBUTE 11 PERCENT OF
PAYROLL WHILE EMPLOYEES WOULD ADD WHATEVER THEY WANTED ON TOP OF IT. THE
WAY THE RESPONSES WERE WORDED, THERE ARE SIMILARITIES BETWEEN THE FORMER AND
A DEFINED BENEFITS APPROACH, AND THE LATTER AND A DEFINED CONTRIBUTION
PROGRAM.
SPECIFICALLY, THE QUESTION WAS, "IF YOU HAD A CHOICE, WHICH OF THE
FOLLOWING WOULD YOU CHOOSE AS A PENSIONS SYTEM?"
1) SOCIAL SECURITY BENEFITS AND CONTRIBUTIONS ONLY--THEN
RELY UN YOUR OWN PERSONAL SAVINGS OR IRA TO SUPPLEMENT
SOCIAL SECURITY (GOVERNMENT AND EMPLOYEE EACH CONTRIBUTE
b.6 PERCENT OF PAYROLL): 2.6 OF FEDERAL EMPLOYEES.
2) SOCIAL SECURITY PLUS BENEFITS AND CONTRIBUTIONS FOR A
MODIFIED CIVIL SERVICE RETIREMENT SYSTEM TO SUPPLEMENT
SOCIAL SECURITY (GOVERNMENT AND EMPLOYEE EACH CONTRIBUTE
II PERCENT): 10.8 PERCENT OF FEDERAL EMPLOYEES.
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3) PRESENT CIVIL SERVICE RETIREMENT BENEFITS AS THEY
ARE--EVEN IF IT MEANS YOU MAY HAVE TO SUBSTANTIALLY
INCREASE YOUR CUNTRIBUTION TO 17 PERCENT: 31.9 PERCENT
OF FEDERAL EMPLOYEES.
4) LOWER CIVIL SERVICE RETIREMENT BENEFITS OUTSIDE SOCIAL
SECURITY--IF IT MEANS THAT YOUR CONTRIBUTION TO THE
SYSTEM WILL NUT BE INCREASED FROM THE PRESENT 7 PERCENT:
6.5 PERCENT UF FEDERAL EMPLOYEES.
5) A RETIREMENT SYSTEM IN WHICH MONEY WUULU BE DEPOSITED
IN AN APPROVED PRIVATE ANNUITY ACCOUNT--THE GOVERNMENT
WOULD CONTRIBUTE 11 PERCENT OF PAYROLL AND YOU WOULD AUU
WHATEVER YOU WANT: 41.6 PERCENT OF FEDERAL EMPLOYEES.
6) NO CHOICE BETWEEN THE ABOVE WAS MADE BY 6.7 PERCENT OF
FEDERAL EMPLOYEES.
THE FEAS ALSO CLEARLY SHOWS THAT FEDERAL EMPLOYEES PREFER DEFERRED
dEALFITS SUCH AS RETIREMENT, OVER IMMEDIATE COMPENSATION SUCH AS SALARY.
ONLY 21 PERCENT SAID THAT THEY WOULD RATHER HAVE MORE TAKE HOME PAY NOW WITH
LOWER RETIREMENT BENEFITS, AS OPPOSED TO 52.7 PERCENT WHO SAID THEY WOULD
RATHER HAVE LESS TAKE HOME PAY NOW WITH HIGHER RETIREMENT BENEFITS LATER.
IT IS IMPORTANT TO NOTE THAT FEDERAL EMPLOYEES DU NOT HAVE A UNIFORM
OPINION UN HOW THE RETIREMENT SYSTEM SHOULD BE STRUCTURED. WE KNOW THAT A
TRADITIONAL DEFINED BENEFIT PLAN, SUCH AS THE CURRENT CIVIL SERVICE
RETIREMENT SYSTEM, IS VERY ATTRACTIVE TO MANY EMPLOYEES. THIS IS SU BOTH
BECAUSE IT IS WHAT THEY ARE USED TO AND BECAUSE IT AT LEAST APPEARS TO OFFER
MORE CERTAIN BENEFITS UPON RETIREMENT. HOWEVER, THERE IS NO INHERENT REASON
WHY EITHER THE COSTS OR THE BENEFITS ULTIMATELY RECEIVED SHOULD BE ANY
DIFFERENT UR LESS CERTAIN UNDER THE TWO TYPES OF PLANS.
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WE ARE INCLINED To THINK THAT DEFINED CONTRIBUTION PLANS ARE VERY
ATTRACTIVE ,BECAUSE, BY THEIR NATURE, THEY ARE FULLY FUNDED AND THERE IS NU
RISK OF GETTING INTO THE KINDS OF FINANCIAL SITUATIONS WE BELIEVE THE
CURRENT RETIREMENT SYSTEM NOW FACES. EMPLOYEES' CONCERNS ABOUT FUTURE
BENEFITS CAN BE DEALT WITH BY TYING SECURITIES INCOME TO SOME OBJECTIVE
DEVICE, SUCH AS THE CURRENT TREASURY BILL RATE, OR SOME ECONOMIC INDICATOR.
THESE CHARACTERISTICS MAY MAKE IT POSSIBLE TU PROVIDE LUNG TERM ASSURANCE TO
EMPLOYEES ABOUT THE STABILITY OF THEIR RETIREMENT PLAN, EVEN THOUGH DUNE
THROUGH DEFINED CONTRIBUTION.
WITH RESPECT TO THE SPECIFIC RELATIONSHIP BETWEEN BENEFITS UNDER THE
NEW PLAN AND SOCIAL SECURITY BENEFITS--WHETHER, FOR INSTANCE, WE SHOULD HAVE
AN "INTEGRATED" OR AN "UFFSET" APPROACH--WE HAVE NO FIXED VIEW. CERTAINLY
ONE MAJOR FACTOR TO BE CONSIDERED HERE WILL BE WHETHER BENEFITS COMMENCE AT
THE SAME TIME AS SOCIAL SECURITY BENEFITS OR AT AN EARLIER AGE. WE ALSO
.HUPE THAT ANY LINKAGE BETWEEN BENEFITS SYSTEMS WILL TAKE INTO ACCOUNT THE
VERY REAL ADMINISTRATIVE DIFFICULTIES THAT COULD OCCUR IN THIS AREA. WE
NOTE THAT SEVERAL STATE GOVERNMENTS HAVE ADDRESSED THIS PARTICULAR QUESTION
RECENTLY AND THEIR EXPERIENCES MIGHT BE INSTRUCTIVE FOR THE FEDERAL SECTOR.
IN THIS REGARD, MANY OF THEM HAVE NOT PRECISELY INTEGRATED THE TWO BECAUSE
OF THE LACK OF ADMINISTRATIVE FEASIBILITY IN DOING SU.
ELIGIBILITY AND INFLATION PROTECTION
WE FULLY RECUGNILE THAT RETIREMENT AGE AND INFLATION PROTECTION ARE
VERY LIKELY TO BE THE MUST CONTROVERSIAL AND DIFFICULT ISSUES THAT MUST BE
DECIDED. I THINK THAT MUST OBSERVERS WOULD AGREE THAT IT IS IN THESE TWO
AREAS THAT THE CURRENT CIVIL SERVICE RETIREMENT SYSTEM IS MOST UNLIKE
PRIVATE SECTOR PLANS. AND I AM PERSONALLY CUNVINCEU THAT REFORMS ARE GOING
TO HAVE TO BE MADE UNDER THE CURRENT RETIREMENT SYSTEM, AS WELL AS FUR THE
NEW PLAN, ON BOTH OF THESE ISSUES.
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THE PRESIDENT'S 1984 BUDGET ADDRESSED THE NEED TO REMOVE THE INCENTIVES
FOR EMPLOYEES TO RETIRE EARLY, AT THE PEAK OF THEIR CAREERS, WHILE THEY
STILL HAVE SUCH A VALUABLE CONTRIBUTION TO MAKE IN TERMS OF THEIR EXPERTISE
AND INSTITUTIONAL KNOWLEDGE. THIS NEED REMAINS A PARAMOUNT PERSONNEL
MANAGEMENT CONSIDERATION.
THE PRESIDENT'S BUDGET FOR FISCAL YEAR 1985 INCLUDES PROPOSALS FOR WHAT
WE BELIEVE TU BE THE RIGHT APPROACH TO INFLATION PROTECTION. FIRST,
COST-OF-LIVING ADJUSTMENTS WOULD BE LIMITED TO THE LESSOR OF PRICE INCREASES
OR FEDERAL WAGE INCREASES. SECOND, FULL INDEXATION WOULD ONLY APPLY TO
THOSE ABOVE AGE 62 AND TU THE FIRST $10,000 OF ANNUITY?APPROXIMATELY'
EQUIVALENT TO THE MAXIMUM INDIVIDUAL SOCIAL SECURITY BENEF1T--AND AN ANNUITY
ABOVE THIS AMOUNT WOULD RECEIVE ONLY 55 PERCENT OF THE COST-OF-LIVING
ADJUSTMENT. THOSE BELOW AGE 62 WOULD RECEIVE UNE-HALF THE COST-OF LIVING
INCREASE. WE BELIEVE THIS APPROACH WOULD MUCH MORE CLOSELY RESEMBLE WHAT
RETIREES RECEIVE IN .THE PRIVATE SECTOR, WHERE ONLY THE SOCIAL SECURITY
BENEFIT IS FULLY INDEXED AND WHERE ANY INCREASE IN PRIVATE PENSIONS BENEFITS
ARE ONLY PARTIAL OR AD HOC.
OUR TCC COMPARISON, SHOWN ABOVE, RAISES QUESTIONS ABOUT YOUR PREMISE
THAT FEDERAL RETIREMENT SYSTEM OUSTS ARE MORE THAN OFFSET BY "SHORTFALLS" IN
OTHER BENEFITS. I ONLY MENTION THAT BECAUSE YOUR LETTER RAISES THAT ISSUE
HERE. YET, THAT GETS AWAY FROM THE PRINCIPAL FOCUS OF THIS HEARING. I AM
PARTICULARLY INTRIGUED, HOWEVER, BY YOUR SUGGESTION THAT IT MIGHT BE
POSSIBLE TU STRUCTURE THE INDEXATION FEATURE TU REDUCE COSTS IN ORDER TO
OFFER SOME SORT OF THRIFT PLAN. WE WOULD VERY MUCH LIKE TO WORK WITH YOU UN
THIS SUBJECT.
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ONE AUDITIUNAL POINT UN THE RETIREMENT ELIGIBILITY QUESTION: WE UU HAVE
CERTAIN SPECIAL GROUPS OF EMPLOYEES, SUCH AS LAW ENFORCEMENT OFFICERS,
FIREFIGHTERS, AND AIR TRAFFIC CONTROLLERS, FOR WHOM SPECIAL ARRANGEMENTS MAY
BE NECESSARY UNDER THE NEW PLAN SIMILAR TU THOSE UNDER THE CURRENT
RETIREMENT SYSTEM. IT IS SIMPLY NOT FEASIBLE FOR SOME EMPLOYEES TO CONTINUE
TO WORK IN POSITIONS REQUIRING A YOUNG AND VIGOROUS WORKFORCE UNTIL SOCIAL
SECURITY BENEFITS COMMENCE. STILL, CONSIDERABLE WORK MAY NEED TO BE DONE TO
RATIONALIZE AND UPDATE DEFINITIONS OF WHO SHUULU BE COVERED IN THESE SPECIAL
GROUPS AND PRECISELY WHAT THEIR BENEFITS SHOULD BE.
FUNDING
AS IS WELL KNOWN, I HAVE BEEN VERY CRITICAL OF THE FUNDING ARRANGEMENTS
UNDER THE CURRENT CIVIL SERVICE RETIREMENT SYSTEM. THE FUNDING SYSTEM THAT
HAS BEEN IN USE, WHILE PRODUCING TECHNICAL SOLVENCY, HAS ALLOWED AN
ACCUMULATION OF A HUGE UNFUNDED LIABILITY--NOW $515 BILLION?ESSENTIALLY
OBLIGATING TOMORROW'S CITIZENS TO PAY A MAJOR PORTION OF THE COSTS FOR THE
SERVICES WE ARE RECEIVING FROM FEDERAL EMPLOYEES TODAY. THE SIZE OF THIS
MUSHROOMING LIABILITY HAS CAUSED GROWING APPREHENSION AMONG A BROAD SPECTRUM
OF OBSERVERS, AND SHOULD BE A SOURCE OF GREAT CONCERN TO FEDERAL EMPLOYEES
TOO--SINCE THEY MUST COMPLETELY RELY UN THE BENEFICANCE OF TOMORROW'S
TAXPAYERS TO PAY THE COSTS OF A RETIREMENT SYSTEM THAT IS GENEROUS WHEN
COMPARED TO THE PRIVATE SECTOR.
FUR THIS REASON, I FEEL VERY STRONGLY THAT ANY NEW RETIREMENT PLAN WE
ESTABLISH MUST BE FULLY FUNDED ON A CURRENT BASIS, SU THAT BOTH EMPLOYEES
AND TAXPAYERS WILL KNOW THAT MONEY TO PAY FOR BENEFITS IS BEING PUT ASIDE AS
RAPIDLY AS THE LIABILITY To PAY THOSE BENEFITS IS ACCRUING.
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WITH RESPECT TO WHETHER THE MONEY FOR THE NEW PLAN SHOULD BE HELD
WITHIN THE CURRENT CIVIL SERVICE RETIREMENT FUND, OR HELD SEPARATELY, WE
HAVE NO FIXED OPINION. HOWEVER, I DO WISH TO STRESS TWO POINTS THAT I
BELIEVE ARE VERY IMPORTANT HERE.
FIRST, ALTHOUGH IT PROBABLY WILL BE NECESSARY TU FUND THE SYSTEM WITHIN
GOVERNMENT, I 00 NOT THINK WE SHuULD USE THE MONEY BEING PUT ASIDE ON BEHALF
OF EMPLOYEES UNDER THE NEW PLAN TO PAY BENEFIT LIABILITIES ACCRUED UNDER THE
CURRENT CIVIL SERVICE RETIREMENT SYSTEM. THIS USE OF THE RETIREMENT FUND
TREATS THE FUND ESSENTIALLY AS A REVuLVING FUND, RATHER THAN A BONA FIUE
TRUST FUND, AND HAS LED To THE FINANCIAL SITUATION WE ARE IN TODAY. THIS
MUST BE AVOIDED AT ALL COSTS. ACCORDINGLY, IF THE MONEY FUR THE NEW PLAN IS
INCLUDED WITHIN THE CURRENT RETIREMENT FUND, I BELIEVE THAT IT MUST, AT THE
VERY LEAST, BE SEPARATELY ACCOUNTED FUR AND SEPARATELY TARGETED TOWARDS
BENEFITS.
SECOND, WHILE WE ARE CREATING A NEW RETIREMENT PLAN, I BELIEVE WE MUST
MAKE APPROPRIATE ARRANGEMENTS TO ENSURE THAT THE CURRENT CIVIL SERVICE
RETIREMENT SYSTEM REMAINS ABLE To MEET ITS OBLIGATIONS FUR THE NOW-CLOSED
WORKFORCE IT COVERS, ESPECIALLY AS EMPLOYEES MATURE AND RETIRE. WE BELIEVE
THAT THIS COULD MUST SIMPLY BE DUNE BY CREATING A NEW ACTUARIAL ESTIMATE OF
THE UNFUNDED LIABILITY AND THE CURRENT 30 YEAR PAYMENTS AND DETERMINING AN
APPROPRIATE AmORTILATION SCHEDULE WHICH WOULD RISE AS EMPLOYEE AND AGENCY
CONTRIBUTIONS DECLINE. THIS WOULD GUARANTEE THE INTREGRITY OFTHAT SYSTEM
AND ALLOW US TO PAY FUTURE,BENEFITS. THIS WOULD NOT BE SU CIJV,ERWHELmING
BURDEN ON FUTURE TAXPAYERS IF SOME REDUCTIONS IN CURRENT BENEFITS ARE MADE
AT THE SAME TIME. NONETHELESS, IT IS NECESSARY TO GUARANTEE THAT THE
OBLIGATION TO CURRENT EMPLOYEES, HOWEVER MODIFIED, IS ACTUALLY PAID.
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WE HAVE AN OPEN MIND WITH RESPECT TO WHETHER THE PLAN SHOULD BE
CONTRIBUTORY OR NON-CONTRIBUTORY FOR ITS EMPLOYEE PARTICIPANTS. OF COURSE,
EMPLOYEES WILL BE CONTRIBUTING TOWARDS SOCIAL SECURITY ANU, IN THAT SENSE,
MUST MAKE CONTRIBUTIONS. PROBABLY SOME LEVEL OF CONTRIBUTIONS ABOVE THAT
MAKES SENSE, GIVEN EMPLOYEE PREFERENCES FOR HIGH RETIREMENT BENEFITS, BUT WE
ARE WILLING TO DISCUSS OTHER ALTERNATIVES.
COVERAGE
WITH RESPECT TO COVERAGE UNDER THE NEW PLAN, WE HOPE THAT IT WILL HAVE
ATTRACTIVE FEATURES FOR CURRENT EMPLOYEES. ONE MAJOR DEFICIENCY IN THE
PRESENT RETIREMENT SYSTEM IS THE WAY IT REWARDS LONG-SERVICE EMPLOYEES, AT
THE EXPENSE OF SHORT-SERVICE EMPLOYEES. HAVING COVERAGE UNDER SOCIAL
SECURITY WILL IMMEDIATELY BE ATTRACTIVE TO SHORT-SERVICE EMPLOYEES BECAUSE
SOCIAL SECURITY IS PORTABLE. IF GIVEN THE CHOICE, SOME EMPLOYEES--
ESPECIALLY THOSE AT THE LOWER INCOME LEVELS--WILL FIND IT ATTRACTIVE TO
SWITCH, WHATEVER THE OTHER BENEFITS. THIS IS BECAUSE SOCIAL SECURITY
"TILTS" TOWARD LOW INCOME RETIREES. IF THE NEW PLAN OFFERS MORE PORTABILITY
OF BENEFITS?AS WE THINK IT PROBABLY SHOULD?THERE WILL CERTAINLY BE GREAT
INTEREST ON THE PART OF SOME CURRENT EMPLOYEES TO MOVE TO THE NEW PLAN, AND
WE ARE INCLINED TO THINK THEY SHOULD BE ABLE TO UO SU.
IN CLOSING, I WOULD LIKE TO EXPRESS ONCE AGAIN OUR READINESS TO WORK
WITH THE COMMITTEE AND OTHER INTERESTED PARTIES ON THESE AND OTHER ISSUES.
WE APPRECIATE THE COMMITTEE'S TIMELY CONSIDERATION OF THESE DISCUSSIONS AND
I WOULD BE HAPPY TO ANSWER ANY QUESTIONS THE COMMITTEE MAY HAVE.
APPENDIX; COMPARISON OF.EMPLOYER COSTS FOR BENEFITS, FEDERAL AND PRIVATE
SECTOR
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COMPARISON OF EMPLOYER COSTS FOR BENEFITS, FEDERAL AND PRIVATE SECTOR
(PERCENT OF BASIC PAY)
1. Pensions and Legally
Required Payments
(a) OASDI(FICA), Pen-
sions/Retirement
(b) Unemployment
Compensation
(c) Workers Compen-
sation (FECA)
(d) Railroad Retire-
ment Tax
2. Other Agreed-upon
Payments
(a) Health Insurance,
Life Ins., Death
Benefits
(b) Short Term Dis-
ability
(c) Long Term Dis-
ability
(d) Dental Ins. Pre-
miums
(e) Employee Dis-
counts
(f) Meals Furnished 1
by Employer
U S Chamber
of Commerce
(Small firms
.included)
1981
Private
II
Grace
Commission
1983
Sector Benefits
III
TCC
Results
(Large and
medium firms
1980
IV
Hay
Associates
(Large firm
emphasis)
1982
Hay/C of C
(I & IV)
VI
Federal
Sector
(:)
1983
11.5
12.4
1710
1556
15.5e
29.5
1.2
1.5
A
A
1.2
A
1.4
1.7
A
A
1.4
1.4J
0.1
A
A
A
0.1
A
6.0
6.5
5.8
7.3
7.3
4.5
0.4
0.2
0.1
0.1
0.1
0.4
0
0
0
0.1
A
0.1
0.1
0.1
0.2
A
A
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Employer Benefits Costs, continued
I II
U S Chamber
of Commerce
(Small firms
Included)
1981
Private Sector Benefits
Grace
Commission
1983
III
TCC
Results
(Large and
medium firms)
1980
1 IV
Hay
Associates
(Large firm
emphasis)
1982
V
HAy/C of t
(I & IV)
VI
Federal
Sector
IMO
(g) Miscellaneous
(Vision Care,
Prescription
Drugs, Separation
Pay/Severance Pay,
Moving Expenses,
etc.)
3. Paid Rest Periods,
Lunch Periods,
Travel Time, Wash-up
Time, etc.
4. Payments for Time
Not Worked
(a) Paid Vacations
(b) Paid Holiday Not
Worked
(c) Paid Sick Leave
(d) Misc. Payments
for Nonwork Time;
Jury Duty,
Voting, Personal
Reasons,. Guard
Duty Family
yeatfi, or other
0.2
3.4
3.7
3.8
3.8
3.8
3 1
' 5.0 5.2 5.9.4 3.6 3.9
1.3 1.8 1.8 12.8 12.8
0.3 0.3 I 0.3 I I
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0.2
2.0
7.7
3.4
3.5
0.3J
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Employer Benefits Costs, continued
I
U S Chamber
of Commerce
(Small firms
included)
1981
Private
II
Grace
Commission
1983
Sector Benefits
III
TCC
Results
(Large and
medium firms)
1980
IV
Hay
Associates
(Large firm
emphasis)
1982
V
Hay/C of C
(I A IV)
VI
Feder/
Sector
1983
CO
5. Other Items
(a) Profit Sharing
Payments
(b) Thrift/Capital
Accumulation Plan
(c) Bonuses:Xmas/Other
Awards :Suggestion/
Other,ttc.
(d) Employee Education
Expenditures
(e) Special Wage
Payments Ordered
By Courts to Union
Stewards, etc.
(f) Auto Parking and
Personal Use
(g) Other Miscellan-
eous Benefits
1.1
0.4
0.3
0.2
0.2
A
A
1.6
H
0.4
A
A
A
0.7
2.4
1.1
0.9
0.1
A
0.8
0.6
2.4
2.1
0.9
0.1
A
0.8
0.6
2.4
2.1
0.9
0.1
0.2
0.8
0.6
F
F
0.3J
0.2
Ar
A
0.6
Total as Percent of
Payroll
6. Unfunded Pension
Liability
37.3%
0.1
39.4%
0.1
44.7%
0.1
46.5%
0.1
49.4%
0.1
53.6%
5S.5'
Grand Total as Percent
AO S%
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II .M..11.....eala
109.1%
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4
SURVEY SOURCES
1. U. S. Chamber of Commerce, "Employee Benefits - 1981."
President's Private Sector Survey on Cost Control. "Report of the Task
Force on Personnel Management", April 15, 1983 (Grace Commission).
III. U. S. Office of Personnel Management, unpublished 1980 data.
IV. Hay Associates, "Comparability of Federal and Private Sector Non-Cash
Compensation - 1982."
V. Hay Associates (column IV) data where available. Remaining data are
from U.S. Chamber of Commerce (column I).
VI. U. S. Office of Personnel Management data, except as indicated.
FOOTNOTES
A. Not in survey.
B. The Hay and TCC retirement results are higher than those for the Chamber
and Grace Commission largely because of a difference in the estimated value of
the Social Security benefit. The Chamber and Grace Commission Social Security
figures, 6.3% and 6.2% respectively, are strictly on an employer outlay
basis. The Hay (15.5%) and TCC (17.1%) total retirement figures are based on
the estimated normal cost of Social Security which exceeds combined employer
and employee outlays. The Hay estimate of the employer cost of Social
Security (post-1983r reform) is 7.0% while the TCC estimate (pre-1983 reform)
is 8.2%. Also, Hay and ICC include factors of 1.7% and 2.0%, respectively,.
for the Social Security tax advantage. The Chamber and Grace Commission do
not include tax advantage. If done on a consistent basis with the Chamber and
Grace Commission, the Hay and TCC retirement values would be 13.0% and 13.1%,
respectively.
C.
D.
E.
F.
G.
.H.
Included in sick leave benefit.
Included in health insurance benefit.
Included in other miscellaneous benefits.
Less than 0.1%.
Included in pension benefit.
Included in profit-sharing benefit.
I. Basic data from Table IV-3, report of Grace Commission Task Force on
Personnel Management, converted to percent of total basic payroll using FY
1981 ratio of Total Payroll Accounts to Total Basic Payroll (1.0679) from
Table IV-1 of report.
J. From Grace Commission report.
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Comparison of Federal and Private Sector Employer Costs
for Benefits, Survey Information
I. U.S. Chamber of Commerce, 'Employee Benefits - 1981."
- Survey Participants: 994 manufacturing and non-manufacturing
companies. (52 percent manufacturing, 48 percent non-manufactur-
ing.) Participants included firms reporting in the Chamber's 1979
and 1980 surveys, plus samples of firms from Poors Register of
Corporations, Directors and Executives 1981 (omitting firms with
fewer than 100 employees). Survey results reflect simple aver-
aging of establishment values with no correction for non-respon-
dents.
^ Employees Covered: Generally non-exempt from FLSA. The largest
group of respondents had between 5 and 499 employees (41%); 17%
had between 500 and 999 employees; 19% had between 1,000 and
2,499 employees; 11% had between 2,500 and 4,999 employees; and
12% had 5,000 or over.
II. The President's Private Sector Survey on Cost Control (Grace Commission)
'Report of the Task Force on Personnel Management, April 1983."
- Primary Survey Sources: Hay Associates Non-Cash Compensation
Survey, 1982 (described above).
Bankers Trust Company, "Corporate Pension Plan Study, a Guide for
the 1980's."
^ Surve, Participants (Bankers Trust): A total of 240 companies in
55 different industrial categories.
? Employees covered (Bankers Trust): More than 8,200,000 employees
under 325 different benefit plans.
III. U.S. Office of Personnel Management. (TCC Results) Unpublished 1980 Data
^ Survey Sources: USDL, Bureau of Labor Statistics survey of Level
of Benefits (LOB) among 1,469 establishments (mining, construc-
tion, manufacturing, transportation and others). This survey was
conducted using the same survey universe as the annual survey of
Professional Administrative, Technical and Clerical Pay (PATC),
with data analysis conducted by OPM. This survey involved random
selection and the results were corrected for non-respondents and
weighted by number of plan participants in each establishment.
- Employees Covered: Survey represents 21 million employees in
Professional-Administrative, Technical-Clerical, and Production
occupations.
Participant Distribution: The survey respondents were in metro-
politan and non-metropolitan areas within the 48 contiguous
states.
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6
IV. Hay Associates, 'Comparability of Federal and Private Sector Non-Cash
Compensation - 1982.*
Hay conducted an update of OPM's 1979 Federal and private benefit
data using their proprietary data base as described below.
- Survey Participants: 805 manufacturing and non-manufacturing
companies. (36 percent manufacturing, 64 percent non-manu-
facturing and services.)
- Employees Covered: FLSA exempt and non-exempt salaried and hourly
employees. The survey respondents were predominantly medium and
large employers; Less than 5% of the respondents had fewer than
100 employees; 23% had between 100 and 999 employees; 40% had
between 1,000 and 4,999 employees; and 34% had in excess of 5,000,
employees.
- Participant Distribution: Most of the survey respondents were in
the Mid-Atlantic states (34%); 21% were in the Central states;
16% in the South; 9% in the Plains states; 8% on the West Coast;
8% in the Northeast; and 3% in the Mountain states.
V. Hay and Chamber of Commerce
- Hay Associates (Source IV) survey data where applicable.
Remaining data are from U. S. Chamber of Commerce (Source I)
survey.
V. Federal
Benefits
Data sources: OPM actuarial
, financial and personnel data (excluding
USPS).
?
FEHBP contributions
- Calender yr. 1983
?
CSRS normal cost
- Fiscal yr. 1982
?
FEGLI contributions
- Calendar yr. 1983
?
Leave usage and accrual
- Calendar yr. 1980
?
Other Federal benefits
- 1980 TCC data
Analysis prepared by Office of Pay and Benefits Policy, December, 1983.
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