A NEW CIVIL SERVICE RETIREMENT PROGRAM

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86B00338R000400620006-6
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• Document Creation Date: December 21, 2016
• Document Release Date: September 16, 2008
• Sequence Number: 6
• Publication Date: April 25, 1984
• Content Type: OPEN SOURCE

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0 6
CONGRESSIONAL RECORD - SENATE
into revolution, which makes it all much
more difficult to contain or to answer.
These personality types do not respond to
electoral options. They are the quintessen-
tial old absolutists of Spanish history. In
fact, there is much of the Spanish Civil War
in Central America today.
Fuentes, rightly I believe, sees the strug-
gle as Latin America's effort to enter the
modern age. He recognizes "an intellectual
inclination that sometimes drives us from
one church to another in search of refuge
and certitude" (i.e., from Catholicism to
Marxism or, better, to both together). He
sums up: "Today, we are on the verge of
transcending this dilemma by recasting it as
an opportunity, at last, to be ourselves-so-
cieties neither new nor old, but, simply, au-
thentically Latin American as we sort out,
in the excessive glare of instant communica-
tions or in the eternal dusk of our isolated
villages, the benefits and the disadvantages
of a tradition that now seems richer and
years of solitude ago."
Any U.S. policy which does not un
have already seen: it risks a total cultur
break between the two linked Americas.
Point No. 6: There has been too much
casual talk about Central America being
"another Vietnam". Charles Mohr, the fine
New York Times correspondent recently
was sent to Salvador to compare his long
Vietnam experience with that situation. He
saw "the analogy in the reluctance of U.S.
officials, particularly those in Washington,
to apply strong pressure on the host coun-
tries when they ignore U.S. advice or pursue
what the Washington officials consider to
be self-destructive policies." As to the certi-
fication every 180 days on human rights im-
provements, he noted "that as certification
has routinely followed certification, it seems
to have become apparent to Salvadorean of-
ficials that only cosmetic measures are re-
quired on their part." He further notes that
even "the South Vietnamese authorities and
security forces never showed the same cal-
lousness that prevails here."
What Mohr writes is not only true, It puts
a very new and different light on the entire
Central America saga. For it is not that the
United States dominates a country like Sal-
vador too much, it is that it does not domi-
nate it enough-that it does not demand
enough of its surrogates. There has never
been such a situation in history: a great
power puts its total prestige and power on
the line, at the service of others (and often
a murderous set) and does not even call the
shots!
And it is here, ironically, that President
Reagan may lose the whole business. For
the missing element in the Central Ameri-
can equation-what will emerge as the fatal-
ly missing element-is American pressure to
clean up the murderousness of the Salva-
dorean security forces. The United States
should exact this, making clear the threat
that otherwise we will withdraw our sup-
port. If we do not do this, not only will any
U.S. policy fail, we will lose any remaining
prestige we have in the area. It is not U.S.
pressure that Is hated (expecially when it is
for a decent cause), it is U.S. support of cor-
rupt leaders or U.S. Indifference, which
brings ridicule for everything American.
If we look back into recent history as to
where we succeeded, in every single case-
from post-war Japan, to post-war Europe to
Korea-these were situations in which we
kept the ultimate power to ourselves and
did not delegate it to corrupt surrogates.
This is how we succeeded and how we lost in
the twilight struggles.
Finally, the importance of Central Amer-
ica to this country cannot be overestimated.
We are now involved in something totally
new in American history. For the first time,
we. have lost our territorial isolation-our
protection from the cycles of the world and
from the wheel of fortune-and we are a
country like other countries, open to inva-
sion or, more crucial and more likely, to
every type of ideological subversion. The
world of the "irregulars"-the guerrillas,
terrorists, non-governmental and non-insti-
tutional combatants of all sorts who control
so much of the world today-is now upon us.
This is the first war that Americans can
walk to. We are about to lose our innocence.
The policy answers to such a prolonged
twilight struggle on so many levels must, of
necessity and of reality, be on many and the
most sophistiTtgfi levels. Initiatives must
be taken at on and policy must be imple-
mented with eatest sophistication and
subtlety-t eft ents that have not char-
A NEW CIVIL SERVICE
RETIREMENT PROGRAM
Mr. STEVENS. Madam President,
ne of the major issues to confront
a new civil service retirement program.
The Subcommittee on Civil Service,
Post Office and General Services,
which I chair, has been sponsoring
pension policy forums and studies to
help draft such a new plan. The sub-
committee's special counsel, Jamie
Cowen, has just completed a series of
articles for the Federal Times which
examines the issues to be considered
in designing a new civil service pension
plan. I ask unanimous consent that
the series of articles be printed in the
RECORD.
There being no objection, the arti-
cles were ordered to be printed in the
RECORD, as follows:
DESIGNING A NEW RETIREMENT SYSTEM
(By James S. Cowen)
With passage of the Social Security
Amendments of 1983, all federal employees
hired after December 1983 will be covered
by both the social security system and the
civil service retirement system.
Establishing a new civil service retirement
plan is necessary to coordinate the two sys-
tems and reduce the excessive contributions
and benefits they provide for.
Under special legislation introduced by
Sen. Ted Stevens, R-Alaska, and passed in
the waning days of the last session of Con-
gress, employees hired after December 1983
will contribute to the civil service system at
a reduced rate until December 1985 or the
establishment of a new retirement program,
whichever is earlier. Congress will be consid-
ering proposals to establish a new plan im-
mediately after the 1984 elections.
Now is the time to influence the design of
a new retirement plan coordinated with
social security, and the federal community
must get involved at the ground level in the
design work. It must study the particulars
of the pension field and then tell Congress
what is desired.
This article and others to follow will try
to give a basic framework for understanding
pensions. We'll be looking at the.importance
April 25, 1984
of a new plan to the current work force, the
objectives of a retirement plan, social securi-
ty and how to coordinate it with a new plan,
the major features and basic structure of re-
tirement plans and, finally, the financing
and costs associated with such plans.
Why is a new plan important to all federal
workers?
The obvious answer to this question is: to
preserve the continued solvency and benefit
structure of the current plan. The advent of
a new system, however, will have little or no
impact on the solvency of the current
system.
The current system's financial condition
does not depend upon new entrants. Its
soundness is secured solely by continued
government appropriations into the retire-
ment trust fund. Whether or not a new plan
is linked to the current one has little to do
with the sufficiency of the trust fund.
But the overall level of benefits provided
in the new plan may affect the current
plan's benefit structure. If the new plan is
substantially less generous than the current
one, pressure may mount to pare the benefit
levels in the current plan.
The fear that. a social security-based plan
will be forced on current workers is prob-
ably unfounded. There appears to be little
support in Congress for such a move. Typi-
cally, companies and state governments es-
tablishing new plans grandfather current
workers into existing ones. Concern should
focus on mounting pressures to reduce the
benefits of the current program.
A second reason for interest is the impact
a new plan will have on the makeup of the
future federal work force.
Retirement plans drive the demographics
of a work force. Generous benefits for pri-
marily long-career employees will attract in-
dividuals who want to spend their working
life in government. Benefits for short-term
workers will appeal to those who want
career flexibility.
Retirement ages affect upward mobility in
the work force and retention of expertise.
What's beneficial to a government executive
may not be to a carpenter. Because the cur-
rent work force understands the benefits
and shortcomings of the current retirement
program, it can assist in the development of
a new plan and, hence, a future work force.
Finally, many in the work force may have
concluded that the current retirement plan
does not adequately serve their own career
and retirement plans. The current system
primarily benefits individuals who retire at
earliest eligibility. For those who leave gov-
ernment before retirement, it fails miser-
ably.
In such a situation one may withdraw con-
tributions at little or no interest, or leave
the money in the system and defer receiving
an annuity until age 62. Since the annuity is
not indexed for inflation until retirement,
deferring it until age 62 often results in the
real benefit being significantly diminished.
Employees who work well beyond retire-
merit age fare better in many private sector
plans. Social security serves as the basis for
private plans. It provides a full benefit at
age 65 and a reduced one at 62. Many. who
retire at social security eligibility in the pri-
vate sector would find that the combined
benefits of social security and their private
pensions exceed that of a federal employee
retiring at the same age.
These federal employees may find that a
new plan serves them better. Thus, they
should ensure an attractive option exists to
transfer to the new plan.
Normally, such arrangements exist In two
forms.
An employee's benefits accrued up to the
point of transfer are frozen, with the unde"
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6 40
April 25, 1984 CONGRESSIONAL RECORD - SENATE
America who didn't," and he nodded and
said, "She was!"
Equally blatant among international
policy circles was the doomed future of So-
moza's regime. I have to ask: Why, when it
was so abundantly clear to anyone with an
ounce of political sense that a man like
Somoza could not survive, did the United
States not act in time to get him out and
usher in a moderate demccrnt? Why is it
that the United States could do such a mag-
nificent job of rebuilding Europe and Japan
but cannot anticipate when revolutionary
change can still be evolutionary-and act
upon it.
A year and a half later, I was main in Ma-
nagua the week after the Sandinistas
marched victoriously on the city. By then,
Somoza had fled to Paraguay, where he was
eventually assassinated, but not before
bombing the country and Milling at least
50.000 Nicaraguans in a country of only 2.5
million.
Comandante Daniel Ortega, later to
become the main leader after that, told me
soberly and clearly that there would be a
"compromiso" or agreement of all the forces
which had taken part in the Sandinistas
revolution. This included, he said, the politi-
cal parties, the Catholics and the Catholic
organization, the businessmen, and the
press. But somehow the stage for the denial
of this scenario was already being set.
Eden Pastora, the famous "Commandante
Zero," already was standing outside the
Intercontinental Hotel looking into himself,
a tropical Hamlet who already knew things
were going wrong in the "democratic" revo-
lution. But it was Tomas Borge, the cold-
eyed and cold-minded Minister of the Interi-
or, whom I found most revealing.
One night returning from the pool about
10 o'clock, I found the little, gnomelike
Borge, who had suffered unspeakably under
Somoza, in a clutch with a small, top-level
group of Latin diplomats. As I stood there
dripping and unnoticed by the group, Borge
actually outlined all of their plans for Latin
America.
"The fewer problems we have, the more
Latin America will be attracted to us," he
was saying in a low, conspiratorial voice.
"The more problems we have the less." He
went on to say that the Nicaraguan revolu-
tion would be less sanguinary in its after-
math than the Cuban, but he made it clear
that this was only tactical. "Me," he said, "I
would shoot the Somozistas, but we won't
because we do not want to turn the rest of
the Latin American revolution against us."
It did not, therefore, come as any great
surprise to me when, in the next 18 months,
these types of totally indoctrinated leaders
(against the wishes of the great majority of
the Nicaraguan people, who wanted a de-
mocracy) went like lemmings to the extreme
Soviet side (even against the advice of
Cuban President Fidel Castro). But it was
also important that in those 18 months the
United States kept a totally open and gener-
ous posture toward the Sandinistas. It is im-
portant because now we know that we are
dealing with hard-line ideologues and not
people we pushed-as many believe we did
Castro-to Marxism.
These reminiscences may at first glance
seem to some to be irrelevant, even selfin-
dulgent. They are not. Actually, they are at
the very heart of the looming tragedy. For
the fact is that we, as a nation, and particu-
larly as a government, have had painfully
little realization of the intrinsic qualities of
the struggle on Central America: a struggle
that is at heart ambiguous, grey, of John F.
Kennedy's classical "twilight" genre.
Part of the potential tragedy, too, is that
we today have so little institutional memory
that we often do not know we are repeating
old wrongs because we do not remember the
mistakes that were made in the beginning.
We impose the Cuban analogy on every situ-
ation-or we don't impose it at all. There is
no accountability for those who repeat the
old mistakes, no analysis, no understanding
of the solid, sullen, often sordid roots of the
problem.
In discussing the Nicaraguan problem
c-ith one of the leading American policy-
makers, I mentioned the 50,000 Nicaraguans
killed by Somoza. He was stunned. Three
days later, he mentioned again to me that
he had not known this. How can a govern-
ment dev'se a policy which speaks to the in-
trinsic qualities of such a situation, when
the leading decisionrnakers do not know
these basic facts and speak to these basic
wounds of a people?
It is my own judgment that President
Reagan is right in about 80 percent of his
policy toward Central America. Certainly we
need economic aid, military strength, and
negotiation. But I am also convinced beyond
the shadow of a doubt that there remains 20
percent of the problem that the president
and his advisers still do not understand. The
problem is that this area could and will be
fatal if it is not addressed. It is this crucial
grey political area which I will now address:
Point No. 1: The struggle is not at core
economic (arising out of economic poverty
as the liberals think) and it is not basically
military and a problem of communist infil-
tration (as the conservatives think). It is a
political problem. These revolutions were
and are made by middle class young people,
a class created by economic development
and then ostensibly moved by economic
misery and oppression of the "masses"
when they are denied political power in le-
gitimate ways and then become radicalized.
The brilliant Mexican writer Carlos
Fuentes spoke at the Harvard commence-
ment in 1983 about how this syndrome can
be traced across the fiery little countries of
the exploding isthmus. "The conflict in El
Salvador," he said, "is the indigenous result
of a process of political corruption and
democratic impossibility that began in 1931
with the electoral fraud of the Army, and
culminated in the electoral fraud of 1972,
which deprived the Christian Democrats
and the Social Democrats of their victory
and forced the sons of the middle class into
armed insurrection. The army had exhaust-
ed the electoral solution."
The first imperative demands that there
be a political solution above all, even
though the hour is late because of the radi-
calization of these factors. U.S. policy must
offer some vehicle for the political expres-
sion of this group, or for the democratic
groups that remain, or for the democratic
groups that remain. And ironically, there is
still a healthy liberal democratic center par-
ticularly in Salvador. Much of this will of
necessity be rhetorical, but more about that
later.
Point No. 2: Whatever either the far right
or the far left argues about Central Amer-
ica, it isn't true. There is only one truth in
Central America today: that this is an am-
biguous struggle, John F. Kennedy's "Twi-
light stuggle", in which there are only shad-
ows of grey and men on grey horses and no
assurance of the outcome. It is exactly the
kind of struggle that Americans, with their
love of black and white and of easy-to-hate,
clear devils like Hitler, Tojo, and Mussolini,
are most incapable of confronting-but now
must.
Point No. 3: There are real Marxists in
Central America and many of them do not
emerge from or care about social misery or
reform at all-many just want power.
To digress a bit, in 1965 I was the first cor-
respondent to write about the Tupumaros, a
54781
group of guerrillas trained by Castro for
Uruguay. At first, the Tupumaros appeared
to be rather amusing Robin Hoods, robbing
the Punta del Este casinos and giving the
money to the poor. They then proceeded to
become the most vicious, murderous group
in the hemisphere, kidnapping innocent
professionals and holding them for years in
underground "people's prison" cells and
murdering others.
Uruguay, at the time was a near-perfect
democracy. Furthermore, it was one of the
original socialist countries, with wealth de-
liberately and consistently redistributed.
But Castro's Tupumaros proceeded to de-
stroy both Uruguayan democracy and Uru-
guayan socialism, and the nationalistic mili-
tary of the right took over to stop the anar-
chy-and still ruthlessly hold power today
in that once peaceful and prosperous
nation.
The point is that the ? Castroite intention
'is not only to attack countries with terrible
social grievances, like Salvador and Guate-
mala, but to destroy the democracies as
well. The Nicaraguan Sandinistas, who came
to power only through the generous aid of
the Costa Rican government, now are trying
to overthrow that democratic government.
The murderous Castroite colonel who has
taken over Surinam, once another prosper-
ing nation, has now murdered all of the op-
position and declared himself a "Marxist."
One has to differentiate, to see where social
grievances leave off and the sheer lust for
power-the total power that only Marxism
can offer these men-picks up.
Point No. 4: There has been remarkably
little. serious discussion about what the
Soviet intentions really are in Central
America. The Soviets, of course, are not ba-
sically classical imperialists but exploiters of
poisoned situations. The Soviets are exploit-
ing a situation that offered itself to them
and to the Cubans in Central America. But I
am convinced that their intentions is not
really to stay there, if any cost is involved.
The Soviet intent is to exploit the propa-
ganda potential, which they have done bril-
liantly. (Consider the world's damning of
the 55 American military advisors in Salva-
dor, compared to 154,000 troops in Afghani-
stan!) It is to spread neutralism and paci-
fism within the United States and-most of
all-it is to divert the American navy away
from other trouble spots. Central America
itself is a diversion to them and will remain
so unless it is balanced by some cost on
their side, like greater Western aid to the
Afghan resistance.
Point No. 5: The most subtle and in the
end most important part of the struggle en-
suing in Central America is simply not un-
derstood in the Reagan administration and
it is the key. It Is the struggle for a new per-
sonality in Central and Latin America.
The brilliant Venezuelan writer Carlos
Rangel, who is not a critic of the United
States, has raved how the "noble savage" of
Latin America (as the Europeans saw them)
has now been transmuted into the "noble
revolutionary." "The end of history must be
a return to the golden age," he writes, and
goes on to trace how the "noble savage is
turned into the good revolutionary, the ro-
mantic adventurer, Red Robin Hood, the
Don Quixote of Cuba, the New Garibaldi,
the Marxist St. Juste, the Sid Campeador of
the wretched of the earth, the secular
Christ, the San Ernesto de la Higuera,.. .
Che Guevara."
What we are seeing here is another cycle
in the struggle between the pragmatic, em-
pirical, practical Anglo-Saxon Protestant
America of the North and the old, romantic,
mystical, Catholic America of the South.
Only this time, the struggle is transmuted
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April 25, 1984 C?GRESSIONAL RECORD - SENATT S 4783
standing that service in the new plan be Social security attempts to provide a
counted for purposes of eligibility for retire- safety net for the elderly. Civil service re-
ment in the old plan. tirement, in a sense, defers wages.
An employee's service is simply trans- Coordination of the two programs, howev-
ferred to the new plan and the option is er, is readily feasible. Private firms, for ex-
sweetened with an incentive such as a ample, often coordinate their pension pro-
refund of old-plan contributions with inter- grams with social security.
est.
SOCIAL SECURITY
The point is th
t
f
a
current
ederal employ-
ees
should take an active role in developing
the new plan. They have a unique perspec-
tive and possibly have the most to gain from
such involvement.
The primary purpose of a retirement plan
is to provide employees with a comfortable
transition from a working career to retire-
ment.
This doesn't mean the retiree must receive
a benefit equal to 100 percent of his prere-
tirement salary. Many costs borne by the
working population are not applicable to re-
tirees. For them, mortgages are often fully
repaid, children are gone, work-related ex-
penses no longer exist and favorable tax
treatment of the elderly applies.
Most experts agree that to maintain the
standard of living for a low income worker,
benefits equal to 70 to 80 percent of prere-
tirement salary are necessary. For a high
income employee, the amount suggested is
55 to 60"percent. This means that ideally
the combined benefit of social security and
the employer's pension for a career employ-
ee should equal those amounts.
From an employer's perspective, retire-
ment should be encouraged at the point
where the employer would benefit by re-
placing the older worker with a younger
one. This point can vary greatly depending
upon the type of job. For instance, employ-
ees in white collar jobs generally can work
longer than those employed in blue collar
positions. Thus an employer may vary re-
tirement eligibility depending upon the type
of work involved.
If an employer desires long-term employ-
ees with minimal turnover, the plan should
provide for late vesting with generous bene-
fits at a specified retirement age.
The plan's formula should be tilted to
reward long-term employees as the civil
service retirement system currently does. A
compensation system tilted away from pay
but toward rich retirement benfits will also
encourage long-term employment.
If an employer prefers a certain amount
of turnover, possibly an early withdrawal
feature, common in thrift plans, could be
made available to employees. If mid- or late-
career recruitment is wanted, then a formu-
la weighted toward early years of service
and based on some final salary arrangement
could be employed Obvi usl th 4b
O
The basic benefit of social security is the
old-age benefit. This is based on average
career wages adjusted for inflation.
An eligible beneficiary can begin drawing
a full old-age benefit at age 65 (this will in-
crease gradually to ages 66 and 67 after the
year 2000) and a reduced one at age 62.
Workers become eligible for an old-age ben-
efit if they work in covered employment the
lesser of 10 years (40 quarters) or one quar-
ter for every year after 1950 and before age
62.
A spouse of an eligible beneficiary is enti-
tled to an additional 50 percent of the basic
benefit upon reaching age 65. Survivor ben-
efits are also available to spouses upon at-
taining age 60 or age 50 if disabled or any
age if the spouse has dependent children.
The elderly spouse is entitled to 100 per-
cent of the worker's basic benefit. The
younger spouse and dependent children are
entitled to 75 percent of the worker's bene-
fit. Generally, survivors are eligible for ben-
efits if the worker had 18 months (six quar-
ters) of covered employment.
Finally, disability benefits are available to
the covered worker and his family if the
worker is ruled totally disabled and unfit for
substantial gainful employment for one
year or longer. Such workers are entitled to
100 percent of the basic benefit.
An elderly spouse or one.with dependent
children is eligible for an additional 50 per-
cent for each person subject to a maximum
family benefit. To be eligible for a disability
benefit, the worker must have had five
years (20 quarters) of covered employment,
less if the worker is younger than age 31.
Social security benefits are skewed to the
low-income worker, while civil service bene-
fits replace the same percentage of salary at
all income levels.
Assume employees A, B, and C work for
three years and retire at different salary
levels. Table I is a rough example of the
basic benefits provided under both pro-
grams and their replacement of final salary
for the three employees.
y, e r c er or final year's salary .. .................... _.............. $15,000 $30,000 $45,000
more costly the package the more successful Social amity bereft _................. ....... 56,000 $8,200 $8,400
the employer will be in recruiting and re- In percent .......... __..... _..._.._.... _..... 40 27 11
training desired personnel. Civil service benef t...__ .............................. $8,000 $16,000 $24,300
A retirement plan is only one part of an In percent ................................... _........... 54 54 54
employer's compensation package, but it ' Ed Hustead, Hay Associate&
clearly will influence the work force's make
up. Thus, before designing a new retirement
plan for the government, decisions must be
made as to the desired characteristics of a
future federal work force.
COMBINING PENSION PLANS: WHAT'S BEST?
(By James S. Cowen)
The social security system and the civil
service retirement system differ in the types
of benefits provided, when they are provid-
ed and how they are provided. In fact, their
goals also differ.
Social security is, in part, a social insur-
ance program that redistributes wealth
from high to low-Income workers. Civil serv-
ice retirement, on the other hand, is a staff Retirement benefits are normally viewed
retirement plan which replaces a certain as deferred compensation and, hence, bear a
percentage of an employee's pre-retirement direct relationship to earnings. Social secu-
earnings at all income levels. rity's policy of redistributing wealth to low-
While under both programs the high-
income worker receives a larger benefit than
the low-income worker, the low-income
worker receives proportionately a much
greater percentage of final salary under
social security..
The question becomes how to coordinate a
new civil service plan with social security to
achieve reasonable replacements of salary
as well as normal employer goals such as de-
sired work force characteristics, competi-
tiveness with other employers, high or low
employee turnover, and the rewarding of
long-term employees.
income workers conflicts with the underly-
ing policy of many pension programs.
There are ways for employers to deal with
this problem. They can implicitly recognize
the value of social security to the employee
by granting a pension which when coupled
with social security provides a reasonable
retirement income.
Table II is such an example using the
same assumptions as Table I.
Final year's salary ..._..._ ................. :......._..
$15,000
$30,000
$45,000
Social security benefit ................... _.............
$6,000
$8,200
$8,400
Pension benefit (1.5 percent times serv-
ice) ..........................................................
$6,100
$12,200
$18,200
Total income .................................................
$12,100
$20,400
$26,600
In percent .......................... :.............. _....
80
68
55
I Ed Hustead, Hay Associates.
Note in this example that the pension
benfit-1.5 percent times service-is less
than the current program. Yet. In most
cases, it provides greater income than the
current civil service System when coupled
with social security.
Also note that the large redistributive
nature of the social security program is re-
tained, thereby proportionately benefiting
those with lower income.
The Internal Revenue Code permits an
employer's pension formula to substantially
reverse or explicitly recognize the tilt in
social security in order to level the percent-
age of pre-retirement earnings, replaced in
the overall retirement benefit.
In Table III, for example, the pension
benefit is reduced by one-half of the
amount of the social security benefit:
Final year's salary ___..._............... .........
$15,000
$30,000 '
$45,000
Social security benefit .................................
$6,000
$8.200
$8,400
Penmen benefits gross benefits (2 percent
limes service)........_.......__......_...........
$8,100
$16,200
$24,300
Halt soda) security benebt......_ ...................
$3,000
$4,100
$4,200
Net benefit ....................................................
$5,100
$12,100
$20,100
Total income (pension and social securi
ty)....... ....___....... _._ ................... ._...
$11,100
$20,300
$28,500
in percent ..__........... ............. _..............
74
68
63
Ed Hustead, Hay Associates.
Note that while Employee C is still receiv-
ing a lower percentage of his final salary
than Employee A, the difference is not as
great as the example shown in Table II. Em-
ployees, in effect, are being treated in a
more consistent fashion at all income levels.
Many state governments use formulas
similar to that shown in Table II. Most pri-
vate employers, however, use some variation
of the integrated method shown in Table
III. This issue can be very significant.
Should the government adjust for the re-
distributive formula in social security, or
should it keep that tilt in the new plan?
Additionally, depending upon the plan's
structure, if the pension plan permits retire-
ment before social security eligibility, pen-
sion benefits may be relatively small until
receipt of social security benefits.
Some private plans offer what is termed a
leveling option in which the employee re-
ceives a larger portion of his pension benefit
in the years prior to social security eligibil-
ity. When social security payments begin,
the pension is substantially reduced to
maintain the same total income as prior to
the commencement of social security.
Irrespective of how coordination with
social security is accomplished, the result
will significantly affect the total retirement
package for the federal government.
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B4784 ?NGRIESSI[ONAL RECORD - SEN April 25, 1984
Thought must be given to how the new plan Rathern than providing for a certain ben- after retirement. Even while being disbursed
will meld with social security in providing efit, a contribution plan assures a certain through an annuity, funds in a contribution
basic benefits as well as survivor and disabil- cost-an advantage for the employer. But a plan are being reinvested. Thus, the money
ity benefits. well invested contribution plan can provide earned by the disbursing account can pro-
In many cases, social security survivor employees with good benefits while not in- vide inflationary protection.
benefits exceed current civil service bene- creasing employer costs. Very few defined benefit plans in the pri-
fits. Should there be a dollar-for-dollar The employee's certainty in a defined con- vate sector incorporate automatic COLAs.
offset from the two plans? tribution plan is in owning the account. Those that do cap the adjustments at 3 or 4
Additionally, social security disability ben- Normally, annual statements are provided percent. Most companies will provide
efits are fairly generous but eligibility is to the employees showing their accumula- COLAs on an ad hoc basis depending on a
very restrictive. So, many private firms pro- tions. These statements keep the employees company's ability to pay for them.
vide a separate disability program with far involved in their own retirement planning But the lack of any regular adjustment
less stringent eligibility requirements than and assist them in determining when to for employees in private plans must be seen
social security. retire. in light of the fact that these same employ-
Currently, disability retirements account A more esoteric and yet perhaps more cru- ees receive social security benefits, which
for 15 to 20 percent of government retire- cial point concerns congressional power over are adjusted for inflation.
ments. Proper coordination with social secu- the plan. If federal employees owned their The defined benefit plan, if it includes a
rity is vital to a complete retirement plan. accounts, Congress could not reduce them. COLA comparable to that provided in the
clear-
DIFFERENT PLANS PRESENT A CRUCIAL CHOICE While Congress could change future contri- civil service retirement system, would clear-
butions, it would be prohibited from tam- ly be preferable. But the cost of the full,
(By James S. Cowen) pering with the current accounts and funds. automatic COLAS now applied to federal re-
Both the social security and civil service In such a case, a contribution plan would be tirement programs is one of the budgetary
retirement systems are known as defined more secure than a benefit plan. Items most under attack. It may be very dif-
benefit plans. Both systems promise a cer- In most situations, however, the defined ficult to establish a new pension system
tain benefit calculated as a percentage of benefit plan provides certainty for the em- with that feature given the current econom-
salary and in some measure are dependent ployee while the defined contribution plan is climate.
upon length of service. provides the same for the employer. Private industry often provides a combina-
There is another common type of retire- The greatest advantage of a contribution tion of the two plans for its employees.
ment plan: the defined contribution plan. In plan is its portability. Most firms offer a defined benefit plan as
this case, the employer, and occasionally Because an employee owns his account, the basic pension. Yet many also -offer a
the employee as well, contributes a specified most plans permit the employee to take his supplemental contribution plan such as a
percentage of salary to an employee trust account with him if he leaves the organiza- thrift, salary. reduction, stock option or
fund account. The money is then invested in tion. This allows the employee to roll over profit-sharing plan.
various types of interest-bearing instru- the accrued funds into an IRA or the subse- The two plans together meet the objec-
ments. The employee's retirement benefit quent employer's pension system, so the tives of many employees by providing the
consists of the contributions in his account funds can continue to grow. defined benefit plan
plus their accumulated earnings. In other words, the employee loses noth- security inherent in attached d a defined
In such a case, an arrangement is normal- Ing by changing jobs. This allows a great with cpportability a ly made with the retiring employee to trans- deal of flexibility in career planning. contribution on plans can can plan.
make A for refina ed very mixture ixtture attractive of the
re-
form his or her account into a lifetime an- Most benefit plans in effect penalize less
nuity. -
nuity. The amount of the annuity is deter- than full-career employees. A departing em- tirement program.
mined by the employee's projected mortali- ployee rarely can take any benefits with
ty, the amount of money currently in the him. Instead, if he is vested, he is entitled to How RETIREMENT ELIGIBILITY CAN AFFECT
employee's account, and the returns the ac- receive the benefit at retirement age. In WORK FORCE
count is expected to earn while being dis- most cases, however, benefits are not adjust- (By James S. Cowen)
bursed. ed for inflation after the employee leaves, at Employer objectives must be carefully
Both types of plans, defined benefit and least not until he begins receiving them. considered before the actual design of a re-
defined contribution, have their advantages Thus, the real level of the benefit will be tirement program.
and disadvantages. The decision as to which greatly reduced. The earlier the retirement age, the great-
plan will serve as the new civil service pen- Another important factor is the entry age er the potential for young employees to
sion is probably the most significant issue of an employee into the plan. move up as older employees retire. This has
facing the federal work force. A contribution plan is more advantageous been true with the federal government.
Defined benefit plans are more prevalent for a worker starting a job while relatively Additionally, an employer's major concern
in older, unionized industries. In recent young. This gives his account time to accu- is to encourage retirement at the point
years, however, defined contribution plans mulate contributions and take advantage of where the employer would benefit from re-
have been used more frequently. This can compounding interest. tiring the older worker and replacing him
be attributed to difficult economic times For example, an early participant in the with a younger one.
and to the fewer legal requirements imposed Teacher's Insurance and Annuity Associa- When this point is reached depends in
on employers who use contribution plans. tion and College Retirement Equities Fund, large part upon the position involved. Jobs
The most consequential difference be- the nation's largest defined contribution requiring physical stress or labor may re-
the a benefit and a contribution plan is plan, would have seen his 1952 stock unit fairly ph physical stress or retirement age. Later re-
fit certainty of the benefit. A defined bene- valued at $10.50 increase to $140. today quire quire a early
should be considered for
fit plan promises a specific benefit regard- when the compounding effect is considered. those tirement whages ite collar jobs.
less of the economic climate. Poor economic The defined benefit plan is better for a But in the employer wants long-term em-
em-
conditions do not affect that benefit, espe- middle-aged worker taking a new job. As
cially if it is adjusted for inflation, as in the noted above, the employee will receive a ployees-including white collar ones-an
civil service retirement system. In a sense, specified benefit not dependent upon accu- early retirement age with a substantial serv-
the government bears the risks and costs of mulated contributions. ice requirement should be provided.
an inflation-adjusted benefit plan. Obviously, the contribution plan account An early retirement age, however, may
An important caveat to this is the assump- of an older-entry employee will not have cause a loss of expertise by spurring senior
tion that an employer will not reduce the sufficient time to fully accumulate unless employees to retire early. A recent phe-
level of benefits under a defined benefit the employee is permitted to roll over a. nomenon in the civil service is a case in
plan during an economic slump. The Em- cashed-out account of another plan into his point. Retirees were getting full inflation-
ployee Retirement Income Security Act, present one. Also, a benefit plan is far more adjusted benefits while active employees
which regulates private pensions, prohibits adaptable to crediting past service than a saw their pay capped or restrained, thus cre-
reductions in accrued benefits once employ- contribution plan. ating an economic incentive for senior em-
ees are vested. For employees who plan to work beyond ployees to leave at earliest eligibility.
But ERISA does not cover the civil service retirement age, the contribution plan may Two major questions are involved in set-
retirement system, and thus changes are be more attractive. While benefits increase ting the retirement eligibility age. At what
not prohibited. Congress has reduced bene- under both types of plans as one works age may an employee retire with an Immedi-
fit levels often in recent years. In fact, it is longer, the rate of increase under a contri- ate annuity? And when may he or she retire
unlikely a government benefit plan can ever bution plan accelerates in later years due to with an unreduced annuity?
be fully insulated from subsequent acts of compounding. Currently, the earliest age at which feder-
Congress. Finally, which plan better hedges against al employees can retire with an immediate
In a contribution plan, the employee owns inflation after retirement will depend upon annuity is 55. Employees retiring at that age
the account and thus bears the economic the extent of the cost-of-living adjustment also receive an unreduced annuity. Age 55 is
risk. If investments do well, the employee's available in a defined benefit plan. A contri- a common minimum retirement age else-
account gains. The reverse .is equally true. bution plan can protect against inflation where, but except in state and local govern-
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April'25, 1984 ONGRESSIONAL RECORD - SENA S 4785
ments, employers usually reduce annuities
between 2 and 6 percent for every year
under the more typical retirement age of 62.
An unreduced retirement benefit available
at age 55 costs employers twice as much as
full retirement at age 65. This is the main
reason employers reduce the annuity for
those who retire at an early age. ?
It should be noted that almost all private
plans recognize social security as part of the
total retirement package. Most employers
try to structure a pension benefit which
provides a reasonable retirement benefit
when added to social security. But social se-
curity payments do not begin until age 62,
so a pension benefit received at an earlier
age often is not adequate for retirement.
Thus, providing a retirement benefit
equivalent in value to the one currently
available at age 55 may be difficult in the
new federal plan.
One way to handle this potential problem
is for the government to add a supplemental
savings plan to the basic pension. The accu-
mulated money in a savings plan could be
used to subsidize early retirement.
Regardless of one's position, setting a new?
retirement age for a future federal work
force will be a very sensitive issue. Concern
must be shown for the needs of both the
government as employer and of the employ-
ees themselves.
Vesting-when an employee becomes enti-
tled to an eventual benefit under a pension
plan-is another important issue. It Is a par-
ticularly vital point to employees who want
flexible careers, because a benefit vested
after relatively short service is a portable
benefit.
Under most defined benefit plans, employ-
ees are vested after 10 years on the job.
Most defined contribution plans, on the
other hand, vest either immediately or after
only one year of service.
The early vesting In defined contribution
plans contributes to the portable nature of
such plans. Early vesting in a defined bene-
fit plan can also help employers recruit late-
career employees. If the rate of benefit ac-
crual is constant with the new employer, an
employee would not necessarily be penalized
by leaving a former employer late in career.
But early vesting is often a trade-off for
other benefits. Because early vesting costs
the employer more as a result of vested em-
ployees terminating before retirement, ben-
efits to long-term employees may be re-
strained to compensate.
Adoption of later vesting can foster in-
creased benefits for long-career employees.
In short, if long-career employment is de-
sired, later vesting is preferable. If short-
career employment is to be encouraged, ear-
lier vesting Is best.
Employee contributions to a pension plan
are normally used to reduce employer costs,
increase the eventual employee benefit and
foster a sense of employee involvement in
the plan.
Each percent of contribution means ap-
proximately a 3 percent addition to the em-
ployee's replacement rate of final salary. So
employee contributions can significantly in-
crease benefits. But employee contributions
do not bolster an employee's legal right to a
benefit. Therefore, a larger retirement ben-
efit is the only employee gain from a man-
datory contribution system.
The current federal system requires em-
ployees to contribute. However, employees
in any new plan will have to pay 7 percent
and more up to the maximum earnings base
to social security.
The great majority of plans in the private
sector are non-contributory. Most In state
and local government are contributory. This
is because most government plans existed
before social security. Governments that
Approved For
have restructured their retirement pro- Without cost-of-living adjustments, and
grams in recent years have tended to con- assuming inflation continues, the standards
vert to non-contributory plans. of living for a retiree will gradually decline.
If a contributory plan is desirable, adding Indexation of retirement benefits, howev-
a voluntary supplemental plan to the basic er, is expensive. It accounts for more than
pension may be the best way to go. Offering 30 percent of the cost of the civil service
an optional plan, particularly one where dif- benefit.
ferent contribution amounts are allowed, The current civil service program is one of
permits employees to individually build for the few that offers an automatic and fully
their retirement. adjusted COLA. Many employers will grant
The rate of accrual of benefits can also ad hoc increases when the company is able
affect the work force. Accrual of benefits is to provide them.
how ehch particular year of service is cred- But employers realize that retirement
ited for retirement purposes. benefit increases shift Income from active
For example, the current civil service workers to retired ones.
system credits 1.5 percent of an employees Another problem concerns the method of
"high three" years of salary for each of the indexation. The few plans that do provide
employees' first five years of service-1.75 automatic indexing tie the increases to
percent for each of the next five years and 2 changes in the cost of living.
percent for every year thereafter. The re- The most frequently used index is the
tirement benefit cannot exceed 80 percent Consumer Price Index. Many have criticized
of the "high three" average, which is the CPI as not accurately reflecting the con-
reached at 42 years. sumption patterns of the elderly. It is
This type of benefit accrual is known as argued that the elderly face smaller cost of
"back loading." The civil service retirement living increases than those indicated by
system was designed for long-career employ- changes in the CPI.
ees and the back-loaded formula reflects Full and automatic Indexation of the new
that. Early years of service receive far less civil service pension plan will be heatedly
benefit accrual than later years, thereby en- debated. One important note is that the
couraging longer service. social security benefit is fully indexed, thus
Plans can also be either frontloaded or relieving some pressure on the new pension
constant. Some employers may want a plan.
youthful work force. If so, the plan's formu- Social security provides a survivor benefit
la would be weighted toward the early years to* an aged spouse or one with dependent
of service. If an employer wants to employ children. The Employee Retirement Income
mid- or late-career employees, a front- Security Act additionally requires that a
loaded retirement plan would be an attrac- pension plan provide a post retirement sur-
tive offer. vivor benefit equal to 50 percent of the
Finally, the formula can be designed to worker's benefit.
foster retirements. The Age Discrimination But a worker may choose no survivor cov-
Act generally prohibits mandatory retire- erage. One who chooses the survivior bene-
ment ages, at least outside the government. fit often finds his retirement benefit re-
But many employers circumvent the act by duced by the total projected value of this
prohibiting further accrual of retirement benefit, which is usually significant.
benefits after age 65. The current system's Private pension plans are not required to
benefit lid of 80 percent of final salary ac- provide a pre-retirement survivor benefit
complishes a similar goal. except to those workers who are eligible to
retire. Thus, few do.
HOW SHOULD NEW SYSTEM INDEX Most firms, however, provide substantial
RETIREMENT BENEFITS? life insurance coverage, which when coupled
(By James S. Cowen) with social security may be adequate survi-
vor income.
Indexation can affect a retirement plan at The current civil service plan offers both
two different points. The first affects the a pre and post retirement benefit. With
amount of the initial benefit. The second social security serving as the base of the
maintains the real level of the benefit after new plan, the extent of additional survivor
retirement. coverage needs to be considered.
The goal of a good retirement plan is to Life insurance could act as an adequate
maintain a career worker's standard of supplement of social security, thereby di-
living into retirement. Normally, employees minishing the need for additional survivor
earn their highest incomes in the years just protection, Also, the increasing number of
before retirement. two-worker families reduces the need for
In order to maintain their standard of such coverage.
living, a retirement plan should base its ben- On the other hand, young spouses with no
efits on an average of the salaries of those dependents are not eligible for social securi-
years. ty benefits, possibly creating a need for
The problem is cost and accounting. some further protection.
Basing a retirement benefit on a final salary Disability benefits are meant to provide a
formula is expensive. The fewer years used level of income to disabled employees.
in the formula, the more expensive the These benefits support employees during
plan. their disability but encourage them to at-
In addition, private plans must prefund an tempt rehabiliation and return to work.
employee's eventual retirement benefit. A The actual amount to accomplish this is
final salary formula requires an employer to difficult to ascertain and varies among
project employees' final salaries and to con- income groups. Social security provides
tribute to the pension fund accordingly, fairly good disability benefits, particularly
The projections of final salary and other to those with a low income.
factors required by such a plan are quite In fact, these often exceed current civil
variable. service disability benefits.
Private industry normally uses the high- Rather than provide disability retirement,
est five years of salary as a formula to deter- many employers offer a long term disability
mine retirement benefits. A formula using insurance program. If an employee becomes
the highest three years of salary costs more. disabled, he is placed in such a program
Indexation after retirement is used to with benefits approximating 50 to 60 per-
maintain a retiree's real income over time. cent of his pay.
In industry, retirees are limited to social se- If his disability meets the social security
curity increases and company pensions. definition, than the firm's benefits are
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?NGRESS!ONAL RECORD - SEN April 25, 1984
offset by social security benefits to maintain
the 50 to 60 percent of pay as total income.
If he fails to become eligible for social se-
curity and is not restored to employment,
he can usually remain on the disability pro-
gram for up to two years and is then cut off.
The current civil service plan maintains
employees on the disability rolls as long as
they continue to meet the civil service defi-
nitions. Those with less than 22 years of
service, however, are limited to 40 percent
of their "high three" years of salary.
The major issues involved in the design of
the new civil service retirement are the defi-
nition of disability, the amount of the dis-
ability benefit, whether the plan's payments
should be offset by social security, and
whether those failing to meet social securi-
ty's definition of disability should be cut off.
In addition to social security and a staff
retirement plan, most major employers also
offer a supplemental plan, such as a thrift
plan, salary reduction, stock option or profit
sharing. Two government agencies, the Fed-
eral Reserve Board and the Tennessee
Valley Authority, now offer thrift plans.
The Fed also has a salary reduction plan.
In a thrift plan, an employee's contribu-
tions to a savings account are matched by
the employer. In a salary reduction plan,
the employee sets aside a portion of his pay,
deferring some tax liability.
Supplemental plans also are fully porta-
ble. Vesting is normally immediate and
there are several tax advantages. In any
case, supplemental plans can provide a great
deal of flexibility to employers and employ-
ees in their retirement plans.
FUNDING FEDERAL RETIREMENT WITHOUT
HIDING COSTS
(By James S. Cowen)
Cost of a pension plan is derived from Its
benefits, the age of retirements, mortality,
turnover, administrative expenses and in-
vestment income. A plan's actual cost is
equal to benefits paid plus administrative
expenses minus investment income.
There are many ways to estimate the cost
of a pension plan. Estimates that account
for present realities and future probabilities
are the most reliable.
The most common method to estimate
cost-and the one used by the Board of Ac-
tuaries of the civil service system-is termed
entry age normal cost.
This method estimates the cost of retire-
ment benefits for a group of newly hired
employees, taking into account the plan's
benefit formula, wage growth, investment
income, price inflation, mortality, turnover,
age of retirements and administrative ex-
penses. It reflects a plan's cost as a percent-
age of current payroll.
For example, the Board of Actuaries has
determined the normal ccst of the civil serv-
ice system to be 36 percent of payroll. After
the employees' 7 percent contribution, the
government must contribute 29 percent of
pay to fully fund the total retirement bene-
fits.
But the normal cost method assumes such
major economic variables as future wage*
growth, price inflation and interest income.
If projections for wage growth or price in-
flation are too low, the system will cost
more. If projections for interest are too low,
the system will cost less. For instance, hold-
ing other things constant, a 1 percent
change in the interest component can affect
the normal cost by 25 percent.
The Board of Actuaries uses the following
economic assumptions to determine normal
cost: 6 percent annual interest, 4 percent
annual price inflation.
The Social Security Administration uses
other sets of economic assumptions for its
programs. Its moderate set of assumptions,
termed II-B, project 6.1 percent interest, 5.5
percent wage growth and 4 percent infla-
tion.
When these assumptions are used to esti-
mate the cost of the civil service system, the
total normal cost is 31 percent rather than
36 percent. The government's cost is 24 per-
cent versus 29 percent.
These estimates do not change the actual
cost. They simply provide a measure by
which the employer can properly finance
the system.
The primary purpose In calculating the
cost of a pension system is to determine the
funding levels necessary to fulfill the obliga-
tions.
Fully funding a system is usually unneces-
sary. This would entail an employer contrib-
uting the total amount required to fund em-
ployees' eventual benefits at the beginning
of the plan.
Funding a plan as obligations arise, or a
"pay as you go system," characterizes the
military retirement system. The Internal
Revenue Code, however, prohibits a quali-
fied private retirement plan from doing this.
Early private plans that did so eventually
failed to meet obligations.
The Employee Retirement Income Securi-
ty Act requires a level of contributions that
would, in essence, fund a plan on a normal
cost basis. This is one form of partial fund-
ing.
ERISA requires a plan to fully fund em-
ployees' accrued benefits to assure benefit
obligations will be met if a plan is terminat-
ed. But because the law provides that other
liabilities be amortized over time, accrued
benefits usually are not fully funded.
Currently, the civil service system is a par-
tially funded system. If covered by ERISA,
however, the system would be deemed un-
derfunded. To comply with ERISA, agencies
would be required to fund the normal cost
of employees-29 percent of payroll-plus
the government would be required to amor-
tize the civil service system's massive un-
funded liability in 30 to 40 years.
One of the most serious issues in design-
ing a new civil service plan will be adequacy
of funding.
The civil service retirement fund is part of
the unified federal budget. Thus, public
monies contributed to the fund become gov-
ernment assets.
The government uses agency contribu-
tions and treasury appropriations to buy
specially issued government bonds, which
are placed in the fund. Becasue the transac-
tion is from one account to another within
the unified budget-treasury to retirement
fund-tax or borrowing increases are not
necessary to fund the payments. Such an ar-
rangement is really an accounting transac-
tion.
When benefit payments come due, the
government redeems the bonds and pays
the benefits. At this point, benefits are paid
from tax revenues and funds borrowed from
the market. Therefore, the first true budg-
etary effect of the civil service system
occurs when retirees get benefits.
This is very different from what occurs in
the private sector. ERISA prohibits a com-
pany retirement plan from holding more
than a small portion of the company's own
stocks or bonds. Therefore, the company
must generate real money and contribute it
to the funding instruments.
In a sense, the company's budget is affect-
ed at the point of contribution. The intent
of the law is to secure the eventual benefit
payments to retirees. If money is held inter-
nally by the company and the firm enters fi-
nancially troubled times, the adequacy of
the retirement fund could be jeopardized.
. In the federal plan, the retirement fund is
required to hold government securities.
Since there is little chance of the federal
government .going bankrupt, financing the
retirement plan from the outside is unneces-
sary for this purpose.
From a pure budgetary standpoint, there
is no need to prefund a new government re-
tirement plan, since the timing of the fund-
ing has no impact on the budget or the
health of the system.
As long as a new government plan holds
only government -securities, the budgetary
cost in the beginning will be minimal but
will increase over time regardless of its
funding adequacy. On the other hand, with-
out adequate prefunding, the true cost of a
new plan could be hidden until later years,
causing backlash now experienced by the
civil service system.
Therefore, a new plan should provide for
funding methods that the federal govern-
ment requires of private plans. If funds are
to remain within the government, the budg-
etary impact will remain the same-at the
point of benefit distribution.
But the true annual cost to the public will
always be known. The recognition of the
full cost of a new plan, accompanied by ade-
quate funding, should go a long way to the
plan's public acceptance.
HOW PRIVATE INVESTMENTS COULD CHANGE
RETIREMENT
(By James S. Cowen)
What are the benefits and draw-backs-
from the government's and employee's per-
spectives-of investing pension funds out-
side the federal government? And what are
the economic implications of such a change?
Currently, funds of the civil service
system are invested solely in government se-
curities. Although, the interest earnings
have no budgetary effect, they do have a
positive impact on the accounting solvency
of the retirement fund.
If a portion of the new civil service retire-
ment fund is held outside the government
and earnings exceed current earnings, the
cost of the new plan eventually could be
substantially reduced without necessarily
affecting benefit levels.
The determinant is called the real rate of
return on investments. This is the interest
earned over inflation.
The Board of Actuaries of the civil service
system estimates the current fund in the
long run will earn a 1 percent real rate of
return. Long-term rates of return in the pri-
vate sector, however, have traditionally ex-
ceeded this figure.
Thirty and 50 year historical averages
show Treasury bill returns barely exceeding
inflation, with more mixed investment port-
folios of stocks and bonds earning 2 to 3 per-
cent real rates of return.
This can have a dramatic impact on a pen-
sion fund. Costs can be reduced in a defined
benefit plan or benefits will increase in a de-
fined contribution plan.
Investing solely in government securities
can be justified on two counts. One, the gov-
ernment as employer completely controls
the money at no risk to ttself or to the fund.
Two, real money is not needed until benefit
payments become due many years after the
establishment of the plan.
It should be noted, however, that almost
all other pension funds invest outside the
employer's entity, including state and local
governments to which such investments are
optional. The two federal government thrift
plans, at the Federal Reserve Board and the
Tennessee Valley Authority, invest in a vari-
ety of instruments.
In other words, employers have found out-
side investments beneficial to their pension
plans, regardless of the increased risk.
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April 25, 1984
?
CONGRESSIONAL RECORD - SENATE S 4787
While internally held funds reduce costs
in the earlier years, they make no difference
in the eventual cost. The primary impact of
private investment of a new pension plan
would be a short-term federal budget phe-
nomenon.
Real money contributions would be made
which, when coupled with benefit payments
from the current program, would increase
government spending at least for the near
term. But the question becomes: What real
impact would be felt on financial markets?
Presumably, the Treasury would borrow
additional monies from private markets to
make the contributions.
Generally, government intrusion Into the
market increases interest rates because of
increased demand on a constant supply of
money. In this case, however, the money is
returning to the market in the form of long-
term investments. So in essence, the same
money is borrowed and then recycled back
into investments, not altering the total cap-
ital available in the markets.
In defined contribution plans or thrift
plans, private investment can provide oppor-
tunities for employees to become more in-
volved in their own retirement planning.
Often these plans grant employees invest-
ment options in which they can designate a
certain percentage of contributions to spe-
cific funds such as stocks, bonds or real
estate.
It has been shown that investment needs
vary not only among individual employees
but also among different age groups. Thus
these arrangements could enhance career
and retirement flexibility.
Private investment of a government plan
also raises the possibility of governmental
interference in investment decisions. Strin-
gent safeguards would have to be applied to
assure that investments were made solely
for the benefit of the participants. An inde-
pendent board would have to oversee such
an arrangement.
Again, though, most state and local gov-
ernment plans and the two federal thrift
plans similarly invest in private concerns
and are subject to the same potential con-
flicts a new civil service plan would experi-
ence. Adequate protection can be afforded,
but it is impossible to absolutely prevent
abuse. The risk would always exist.
Questions could be raised as to whether fi-
nancial markets could absorb such a large
infusion of new capital. This is not a serious
problem.
The nation's largest 1000 pension funds
currently hold more than $750 billion in
assets. Total contributions to the new plan
will be fairly low in the early years due to
its coverage of a relatively few number of
people. As the plan's coverage and contribu-
tions grow, other funds will similarly grow.
Besides, other large states and corpora-
tions have substantial pension funds which
do not overwhelm the capital markets.
Finally, a private investment feature in a
new plan has the potential of assisting in
capital formation. Monies now used solely
for benefit payments would be first invested
in long-term securities providing additional
capital to business.
Private investment of funds by a new civil
service plan would be a major break from
historical practice, but it should be consid-
ered. Such an initiative, however, should be
approached carefully.
MISCELLANEOUS TARIFF. TRADE,
AND CUSTOMS MATTERS
The PRESIDING OFFICER. Under
the previous order, the Senate will
now resume consideration of H.R.
2163, which will be stated by title.
The assistant legislative clerk read
as follows:
A bill (H.R. 2163) to amend the Federal
Boat Safety Act of 1971, and for other pur-
poses.
Mr. DOMENICI. Madam President,
I suggest,the absence of a quorum.
The PRESIDING OFFICER (Mrs.
HAWKINS). The clerk will call the roll.
The assistant legislative clerk pro-
ceeded to call the roll. ,
Mr. HELMS. Mr. President, I ask
unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER (Mr.
RUDMAN). Without objection, it is so
ordered.
AMENDMENT NO. 3028
(Purpose: To provide for a ten percent
reduction in budget authority)
Mr. HELMS. Mr. President, I send
an amendment to the desk.
The PRESIDING OFFICER. The
amendment will be stated.
The legislative clerk read as follows:
The Senator from North Carolina (Mr.
HELMS) proposes an amendment numbered
3028.
Mr. HELMS. Mr. President, I ask
unanimous consent that reading of the
amendment be dispensed with. _
The PRESIDING OFFICER. With-
out objection, it is so ordered.
The amendment is as follows:
At the appropriate place in the amend-
ment, insert the following:
TEN PERCENT REDUCTION IN SPENDING
REQUIRED
SEC. . (a) Notwithstanding any other
provision of this Act, it shall not be in order
in the Senate to consider a concurrent reso-
lution on the budget for fiscal year 1985 if
such concurrent resolution does not comply
with the provisions of this section.
(b)(1) A concurrent resolution on the
budget for fiscal year 1985 shall set forth
for each of the fiscal years 1985, 1986, and
1987, a total amount of budget authority for
discretionary Federal programs which does
not exceed an amount equal to the product
of the total amount of budget authority
provided by law for such programs for fiscal
year 1984 multiplied by 90 percent.
(2) For purposes of this subsection, the
term "discretionary Federal program"
means any Federal program other than-
(A) a program classified under the func-
tional category of National Defense in the
budget submitted by the President for the
applicable fiscal year under section 1105(a)
of title 31, United States Code: and
(B) a program for which spending author-
ity (as defined in section 401(c)(2)(C) of the
Congressional Budget Act of 1974) is provid-
ed by law.
(c)(1) A concurrent resolution on the
budget for fiscal year 1985 shall set forth
for each of the fiscal years 1985. 1986, and
1987, a total amount of budget authority for
the payment of obligations under spending
authority (as defined in section 40l(cX2XC) of
the Congressional Budget Act of 1974) pro-
vided by law which does not exceed an
amount equal to the total amount of budget
authority provided for such payments for fis-
cal year 1984 multiplied by 90 percent.
(2) The requirements of paragraph (1)
shall not apply to budget authority provid-
ed for payments under spending authority
provided by titles II and XVIII of the Social
Security Act.
(d) To carry out subsection (c), a concur-
rent resolution on the budget for fiscal year
1985 shall contain provisions to require the
committees described in clauses (1) through
(10) of this subsection to submit, by June 1,
1984, recommendations to the Senate Com-
mittee on the Budget in accordance with
such clauses. After receiving those recom-
mendations, the Committee on the Budget
shall report to the Senate a reconciliation
bill, or resolution, or both, carrying out all
such recommendations without any sub-
stantive revision.
(1) The Senate Committee on Agriculture,
Nutrition and Forestry shall report changes
in laws within the jurisdiction of that com-
mittee which provide spending authority as
defined In section 401(c)(2)(C) of Public Law
93-344, sufficient to reduce budget author-
ity by $7,000.000,000 in fiscal year 1985; to
reduce budget authority by $8,900,000,000 in
fiscal year 1986: and to reduce budget au-
thority by $10,800,000,000 in fiscal year
1987.
(2) The Senate Committee on Armed Serv-
ices shall report changes in laws within the
jurisdiction of that committee which pro-
vide spending authority as defined in sec-
tion 401(c)(2)(C) of Public Law 93-344, suffi-
cient to reduce budget authority by
$2,500,000,000 in fiscal year 1985; to reduce
budget authority by $3,800,000,000 in fiscal
year 1986; and to reduce budget authority
by $5,000,000,000 in fiscal year 1987.
(3) The Senate Committee on Finance
shall report changes in laws within the ju-
risdiction of that committee which provide
spending authority as defined in section
401(c)(2)(C) of Public Law 93-344, sufficient
to reduce budget authority by
$13,500.000,000 In fiscal year 1985: to reduce
budget authority by $15,100,000,000 in fiscal
year 1986; and to reduce budget authority
by $18.700,000,000 in fiscal year 1987.
(4) The Senate Committee on Foreign Af-
fairs shall report changes in laws within the
jurisdiction of that committee which pro-
vide spending authority as defined In sec-
tion 401(c)(2)(C) of Public Law 93-344, suffi-
cient to reduce budget authority by
$1,900,000,000 in fiscal year 1985; to reduce
budget authority by $2,200,000.000 in fiscal
year 1986; and to reduce budget authority
by $2,500,000,000 in fiscal year 1987.
(5) The Senate Committee on Governmen-
tal Affairs shall report changes in laws
within the jurisdiction of that committee
which provide spending authority as defined
in section 401(c)(2)(C) of Public Law 93-344.
sufficient to reduce budget authority by
$1,700,000,000 in fiscal year 1985: to reduce
budget authority by $1,000.000,000 in fiscal
year 1986; and to reduce budget authority
by $300,000,000 in fiscal year 1987.
(6) The Senate Committee on the Judici-
ary shall report changes in laws within the
jurisdiction of that committee which pro-
vide spending authority as defined in sec-
tion.401(c)(2)(C) of Public Law 93-344, suffi-
cient to reduce budget authority by
$100,000,000 in fiscal year 1985; to reduce
budget authority by $100,000.000 in fiscal
year 1986; and to reduce budget authority
by $100,000,000 in fiscal year 1987.
(7) The Senate Committee on Labor and
Human Resources shall report changes in
laws within the jurisdiction of that commit-
tee which provide spending authority as de-
fined in section 401(c)(2)(C) of Public Law
93-344. sufficient to reduce budget author-
ity by $1,300,000,000 in fiscal year 1985: to
reduce budget authority by $1,300,000,000 in
fiscal year 1986: and to reduce budget au-
thority by $1,300,000,000 in fiscal year 1987.
(8) The Senate Committee on Rules and
Administration shall report changes in laws
within the jurisdiction of that committee
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S 4788 CONGRESSIONAL RECORD SENATE
which provide spending authority as defined
in section 401(c)(2)(C) of.Public Law 93-344?
sufficient to reduce budget authority by
$400,000,000 in fiscal year 1985; to reduce
budget authority by $400,000,000 in fiscal
year 1986; and to reduce budget authority
by $500,000,000 in fiscal year 1987.
(9) The Senate Committee on Veterans'
Affairs shall report changes in laws within
the jurisdiction of that committee which
provide spending authority as defined in
section 401(c)(2)(C) of Public law 93-344,
sufficient to reduce budget authori ty by
$2,100,000,000 In fiscal year 1985; to reduce
budget authority by $2,400,000,000 in fiscal
year 1986; and to reduce budget authority
by $2,600,000,000 in fiscal year 1987.
(10) The Senate Committee on Indian Af-
fairs shall report changes in laws within the
jurisdiction of that committee which pro-
vide spending authority as defined in sec-
tion 401(c)(2)(C) of Public Law 93-344, suffi-
cient to reduce budget authority by
$100,000,000 in fiscal year 1985; to reduce
budget authority by $100,000,000 in fiscal
year 1986; and to reduce budget authority
by $100,000,000 in fiscal year 1987.
.Mr. HELMS. Mr. President, earlier
this year, I indicated I would offer a
budget amendment that would sub-
stantially reduce the Federal deficit.
Along with my distinguished col-
leagues, Senator 'MCCLVRE and Sena-
tor NICKLES, I proposed an amend-
ment to reduce Federal spending by 10
percent in all areas of the budget
except the social security function,.in-
cluding medicare, and national de-
fense. I asked for this amendment to
be held at the desk until a suitable
time during the budget debate.
Mr. President, because of the unusu-
al nature of the budget debate this
year, as the first installment on a so-
called deficit reduction plan, I feel
April 25, 1984
ways of streamlining the programs to
achieve it.
Second, the pending amendment
provides for a 10-percent cut in budget
authority relative to fiscal year 1984
levels for the so-called nondefense dis-
cretionary programs. In other words, I
propose that the Senate cut spending
authority for all programs Congress
chooses to fund, except defense.
Mr. President, the Congressional
Budget Office has prepared several
tables which reflect my proposal,
which I ask unanimous consent to
have printed in the RECORD.
There being no objection, the tables
were ordered to be printed in the
RECORD, as follows:
TABLE 1.-APRIL 23,1984, HELMS PLAN 3-PRELIMINARY
ESTIMATES
(By fiscal year in billions of dollars]
1984 1985 1986 1987 1985-87
total
SBC Baseline........ ............. 189.4 197.3 216.9 245.2 ...................
Deficit Reductions:
Revenues (No .._.____._-......
.D
Spending ........_._
Defense: Senate
Republican defense
targets...____..._
Entitlements: fiscal year
1985-87 outlays 10
percent below fiscal
year 1984 exc.Soc.
Sec. and Medicare ..................-- -30.5 -35.1 -41.9 -107.5
Nondefense discretionary:
Fiscal year 1985-87
budget authority 10
percent below fiscal
year for other
-15.0 -24.8 -31.6 -71.4
Offsets' ............_.........._._._ ....... .........._._.........._............ ...... 0
Interest ........................... 0 -2.2 -7.8 -15.4 -25.5
Total deficit change... 0 -45.1 -67.7 -87.5 -200.4
New deficit ......................... 189.4 152.2 149.2 157.7 ...................
Budget authority Outlays authority Outlays authority
150 .........................................................................-............................................................................
-3.216
-1.502
250 ......................................................................................................................................................
-1.760
-1.191
270 ..........................................................................................................
-1
224
-0
620
.............................................
300.....- ................................................................................................................................................
.
-2.538
.
-1.590
350 .......................................................................................................................................................
-0.628
-0.613
370 .......................................................................................................................................................
-1.108
-0.462
400 .......................................................................................................................................................
-2.207
-1.505
450 .......................................................................................................................................................
-1.083
-0.443
500 .......................................................................................................................................................
-4.411
-1.102
550 .......................................................................................................................................................
-1.873
-1.003
570 .......................................................................................................................................................
-0.000
-0.219
600 .......................................................................................................................................................
-3.231
-0.863
650 .......................................................................................................................................................
-0.000
-0.593
700 .......................................................................................................................................................
-1.827
-1.366
750 .......................................................................................................................................................
-1.060
-0.867
800 .......................................................................................................................................................
-1.067
-0.919
850 .......................................................................................................................................................
-0.100
-0.100
Total ...........................................................................:.................................................................
-27.333
-14.957
now is an appropriate time to offer my
proposal -and to discuss it.
As we .always say around this place,
my amendment is very simple, Mr.
President. It provides for a 10-percent
across-the-board reduction in spending
for all Federal programs except the
ones I have mentioned-specifically,
social security, including medicare,
and national defense.
The Congressional Budget Office es-
timates that my proposal, if adopted,
would cut roughly $200 billion in Fed=
eral spending over the next 3 years. In
arriving at that amount of savings, the
CBO used economic assumptions
which I feel may be overly. pessimistic,
but which, nevertheless, are consistent
with those used by the Senate Budget
Committee this year. In terms of de-
fense spending, CBO used numbers
suggested by the leadership on this
side of the 'aisle which I understand
are fully acceptable to .President
Reagan.
Mr. President, this amendment
would achieve these spending cuts in
two ways: First, the amendment pro-
vides instructions for the Senate com-
mittee having jurisdiction over entitle-
ments to recommend ways of restruc-
turing these programs to reduce the
cost to the taxpayers by 10 percent.
Again, I emphasize that it specifically
exempts social security .and medicare.
I emphasize that my proposal does
not-for the purpose of emphasis, let
me reiterate-does not instruct the
committees how to reduce the cost of
entitlements by 10 percent. I prefer to
give the committees a target amount
of savings and to have .them report
-3.768 -2.461 -4.957
-2.206 -2.005 -2.664
-1.568 -0.901 -1.932
-3.065 -2.154 -3.602
-0.718 -0.706 -0.815
-1.272 -0.742 -1.440
-2.590 -2.034 -3.010
-1.164 -0.645 -1.437
-5.657 -4.498 ' -6.939
-2.366 -2.086 -2.882
-0.000 -0.287 -0.000
-3.989 -1.406 -4.805
-0.000 -0.694 -0.000
-2.095 -1.835 -2.378
-1.192 -1.068 -1.328
-1.194 -1.139 -1.324
-0.108 -0.108 -0.116
-32.952 -24.771 -39.629
Committee:
Agriculture ..........................................
0.0
-7.0
-8.9
-10.8
Armed Services ..................................
0.0
-2.5
-3.8
-5.0
Banking ..............................................
0.0
0.0
0.0
0.0
Commerce ..........................................
0.0
0.0
0.0
0.0
Energy ................................................
0.0
0.0
0.0
0.0
Environment .......................................
0.0
0.0
0.0
0.0
Finance ...............................................
0.0
-13.5
-15.1
-18.7
Foreign Affairs ............... .........:...........
0.0
-1.9
-2.2
-2.5
Government Affairs .............................
0.0
-1.7
-1.0
-0.3
JudiciM .............................................
0.0
-0.1
-0.1
-0.1
Human Resources ...............................
0.0
-1.3
-1.3
Rules ..................................................
0.0
-0.4
-0.4
Veterans .......................... _.................
0.0
-2.1
-2.4
Indian Affairs .....................................
0.0
-0.1
-0.1
-35.1
Budget
authority
-3.255 -5.772 -4.134 -6.502 -5.042
-2.452 -3.173 -2.944 -3.705 -3.465
-1.179 -2.345 -1.491 -2.706 -1.806
-2.718 -4.178 -3.383 -4.777 -3.904
-0.792 -0.905 -0.883 -1.001 -0.982
-1.069 -1.651 -1.417 -1.853 -1.645
-2.747 -3.462 -3.809 -3.942 -4.881
-0.871 -1.720 -1.025 -2.011 -1.277
-5.900 -8.264 -7.174 -9.612 -8.491
-2.584 -3.456 -3.128 -4.059 -3.713
-0.305 -0.000 -0.321 -0.000 -0.337
-2.001 -5.695 -2.550 -6.598 -3.137
-0.755 -0.000 -0.918 -0.000 -0.984
-2.258 -2.673 -2.544 -2.992 -2.854
-1.276 -1.476 -1.440 -1.627 -1.590
-1.296 -1.468 -1.438 -1.618 -1.587
-0.116 -0.124 -0.124 -0.132 -0.132
-31.634 -46.362 -38.724 -53.135 -45.827
TABLE 4.-HELMS, FUNCTION 050
[In billions of dollars]
-1.3 SBC baseline:
-0.5 Budget authority .............................. 264.1 297.3 329 367.2
-2.6 Outlays ............................................. 234.4 263.4 294.6 329
-0.1 Helms:
-41.9
-107.5
Budget authority ........... - ................ 264.1 299 333.7 372
Outlays ............................................. 234.4 266 294.6 330.4
Difference:
Budget authority ................... :.......... 0 +1.7 +4.7 +4.8
Outlays ............................................. 0 +2.6 0 +1.4
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