oversight

Changes to the Federal Employees Group Life Insurance Program Are Needed

Published by the Government Accountability Office on 1977-05-06.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                           DOCUMENT RESUME                 /
 02264 - [A1332321J]   ,J-+cted)
 Changes to the Federal Employees Group Life Insurance Program
 Are Needed. FPCD-77-19; B-125004. May 6, 1977. 61 pp.
 Rep3ct to Rep. Robert N. C. NJi, Chairman,, House
 Post Office and Civil Service; by Elmer B. Staats,Committee on
                                                     Comptroller
 General.
Issue Area: Personnel management and Compensation: Compensation
     (305).
Contact: Federal Personnel and Compensation Div.
Budget Function: Income Security: Federal Employee Retirement
    and Disability (602).
Organization Concerned: Civil Ser'ice Commission.
Congressional Relevance: House Committee on Post Office and
    Civil Service.
Authority: Federal Employees Compeinsation Act. P.L. 90-206.

          A comparative analysis was made of life insurance
 other death benefit programs available to Federal employees and
 retirees with similar programs in the rion-Federal sector.     and
 Findings/conclusions: Death benefits for Federal Emplcyees
                                                              are
 Svailable from several sources, including the Federal Employees'
 Group Life Insurance Program, varicus retirement programs,
 workers' compensation. As a package, these are generally     and
comparable with benefits provided by larger non-Federal
employers? hoe,.qr, benefits are less for younger employees
retirees over age 65. Federal employees also pay more for      and
benefits than do their non-Federal counterparts.             their
Recommendations: Changes should be made to the method of
                                                            funding
and the benefit structure of the Federal life insurance program
to make coverage attractive and equitable. The Congress should
reevaluate the funding requirements and should consider making
basic changes to the structure of the program. Possible changes
which should be considered include: prefund
liabilities arising from benefits payable to only  those
                                              retired employees;
revise present legislation to provide that the Government
the interest on the program's unfunded liability if the      pay
                                                          present
funding method is retained; use Government contribution as
paymeLt in full for a portion of the coverage for all employees;
continue premium payments to age 65 rather than terminating
retirement; and provide greater amounts of optional insuranceat
coverage to employees. (Author/SC)
01      IRc7f    _KSFPlt to be raleased outside the     eou   l
Axmnatn.g Office xcep on the basis of speciftl        approval
  VWr Olfie ed cGKIreienal Relatioth


REPORT TO THE HOUSE COMMITTE
ON POST OPFICE AND
CIVIL SERVICE
BY THE COMPTROLLER GENERAL
OF THE UNITED STATES




Changes To The Federal Employees
Group Life Insurance Program
Are Needed
Civil Service Commission

Death benefits for Federal employees &re
available from several sources, including the
Federal Employees Group Life Insurance
Program, various retirement programs, and
workers' compensation. As a package, these
are generally comparable with benefits pro-
vided by larger non-Federal employers. How-
ever, benefits are less for younger employees
and retirees over age 65. Federal employees
also pay more for their benefits than their
non-Federal counterparts.
Death benefits a.'e only a part of Federal
employees' total compensation. Although
improvements to the various compensation
elements should be considered in the context
of total compensation comparability with the
non-Federal sector, changes should be made
to the method of funding and the benefit
structure of the Federal life insurance
program to make coverage more attractive
and equitable.




                                                 MAY 6, 1977
FPCD-77-19
                COMPTROLLER GENERAL OF THE UNITTED STATES
                           WASHING(TON. D.C.   1C341




B-125004


The Honorable Robert N. C. Nix
Chairman, Committee on Post Office
  and Civil Service
House of Representatives
Dear Mr. Chairman:

     This report, prepared in response to the former
Chairman's November 17, 1975, request, provides a comparative
analysis of life insurance and other death benefit programs
available to Federal employees and retirees with similar pro-
grams in the non-Federal sector. It recommends that changes
be made to the Federal Employees Group Life Insurance program
to make life insurance a viable part of the Federal death
benefits package.
     This report contains recommendations to the Congress and
to the Chairman, Civil Service Commission, which are set
forth on pages 21 and 33. As you know, section 236 of the
Legislative Reorganization Act of 1970 requirec the head of a
Federal agency to submit a writter statement on actions taken
on our recommendations to the House Committee on Government
Operations and the Senate Committee on Governmental Affairs
not later than 60 days after the date of the report and to
the House and Senate Committees on Appropriations with the
agency's first request for appropriations made more than 60
days after the date of the report. We will be in touch with
your office in the near future to arrange for release of the
report so that the requirements of section 236 can be set in
motion. Copies of this report are being sent to the Subcom-
mittee on Compensation and Employee Benefits.

                                    S           y      your




                                    Comptroller General
                                    of the United States
COMFTROLLER GENERAL'S REPORT TO        CHANGES TO THE FEDERAL
THE HOUSE COMMITTEE ON                 EMPLOYEES GROUP LIFE
POST OFFICE AND CIVIL SERVICE          INSURANCE PROGRAM ARE NEEDED
                                       Civil Service Comnmission

             DIGEST

             Death benefits are an important element of
             Fedecal civilian employees' compensation and
             are available from several sources, including
             the Federal Employees Group Life Insurance
             program (Group Life), various retirement sys-
             tems, and workers' compensation. Changes
             should be made to the Group Life program to
             make it a viable part of the death benefits
             package.

             GAO compared death benefits available to Fed-
             eral personnel from all programs with those
             provided by 21 major employers in the non-
             Federal sector. This comparison showed that,
             although Federal benefits are greater in
             some instances and lower in others, the
             overall death benefits are generally compa-
             rable. However, Federal employees are re-
             quired to contribute greater amounts toward
             the costs of the programs than their non-
             Federal counterparts.   (See pp. 5 to 16.)
             Life insurance coverage is superior in the
             non-Federal sector and usually is free to
             employees. In general, however, survivor
             benefits under the civil service retirement
             system are superior to survivor benefits in
             the non-Federal sector from employer retire-
             ment programs and social security combined.
             Considering life insurance and retirement
             programs together, total death benefits
             are comparable, except for younger employees
             and retirees over age 65 where social secu-
             rity puts the non-Federal sector ahead.   (See
             pp. 15 and 16.)

             Workers' compensation benefits are provided
             to survivors qf Federal and non-Federal em-
             ployees in case cf job-related deatns. Ben-
             efits under Federil and non-Fede:al programs
             are generally comparable.  (See pp. 14 and
             15.)

 lowL-Sha. Upon rnmoval, the report
con date should be noted hereon.

                                                        FPCD-77-19
The relationship between the Government and
insurance companies in the Group Life program
differs from the relationships between other
employers and insurance carriers under their
group life insurance plans. Under Group
Life, the Government, for all practical pur-
poses, assumes all liabilities and risks,
establishes and collects premiums, and man-
ages most of the funds.  In non-Federal
plans, these functions are primarily the re-
sponsibility cf the insurance carriers.
(See pp. 17 to 19.)
Since Group Life is, in effect, a self-
insured progLam, GAO is recommending that
the Congress rescind the requirement that
Group Life pay State premium taxes and in-
surance company risk charges. Annual saaing.
of more than $6 million in premium taxes and
$0.8 million in risk charges could be real-
ized.  (See pp. 19 to 21.)

Group Life premiums are much higher than
those in the non-Federal sector primarily
because of the way the Government has chosen
to fund anticipated benefit payments. Pre-
miums for most non-Federal programs are es-
tablished on a pay-as-you-go basis without
funding for future costs; however, the Gov-
ernment operates on a level-cost principle
whereby liabilities are estimated into
perpetuity and premiums are established in
amounts sufficient to cover the future ben-
efit payments. The level-cost concept is
an attempt to keep premiums relatively
stable; however, Group Life premiums have
increased considerably.  (See pp. 23 to 33.)

In computing level costs and premium amounts,
the Civil Service Commission does not con-
sider the fact that Federal employees' sal-
aries--and thus, future benefit payments--
will continue to increase. This omission
has contributed to an unfunded liability of
about $3.7 billion in Group Life. Interest
on the unfunded liability represents 36 per-
cent of the current Group Life premium.
Lower premiums would result if pay increase
assumptions were made in the premium deter-
minations. The Commission should revise
its policy and recognize anticipated pay


                     ii
              increases in determining these pre:miums.
              (See pp. 27 and 28.)
              Interest on the unfunded liability of Group
              Life is treated quite differently from inter-
              est on the unfunded liability cf the civil
              service retirement system. The Government is
              required, by law, to pay the entire interest
              cost on the retirement system's unfunded
              liability, xwnereas the employees pay two-
              thirds of the interest cost for Group Life
              and the Government pays one-third. (See
              p. 28.)
              Employees' share of premiums plus interest
              on the reserve balance have, since the incep-
              tion of the program, paid all insurance
              claims. Thus the Government has made little
              or no cash outlays to the program, and its
              share of the premium payments has been added
              to the Group Life reserve fund in the form of
              Federal debt securities. Projections of esti-
              mated income and expenses indicate that this
              situation will continue. (See pp. 29 and 30.)
              Changes to Group Life are needed if the pro-
              gram is to become more attractive to younger
              employees and more equitable for all. The
              Congress should reevaluate the funding re-
              quirements and should consider making basic
              changes to the structure of the program. The
              possible changes GAO discusses are not all
              inclusive but warrant consideration by the
              Congress because of their impact on equity,
              comparability, and cost.
              -- Prefund only those liabilities arising from
                 benefits payable to retired employees.
                 Such a change would be more consistent with
                 practices in the non-Federal sector and
                 would also result in reduced premiums.
              -- If the present funding method is retained,
                 revise th? Group Life legislation to pro-
                 vide that the Government pay the interert
                 on the program's unfunded liability.
              --Use Government contribution as payment in
                full for a portion of the coverage for all
                employees. (See pp. 35 and 36.)


TIsar Mgiii
-- Continue premium payments to age 65 rather
   than terminating at retirement.  (See
   pp. 36 and 37.)
-- Correlate a cetiree's postretirement ben-
   efits with the length of time he partici-
   pated in Group Life as a premium-paying
   employee.  (See p. 37.)

-- Establish a maximum 50-percent reduction
   in retiree coverage in lieu of the current
   75-percent reduction.  (See p. 38.)

-- Start reductions in coverage upon retire-
   ment instead of age 65.  (See p. 38.)

-- Provide greater amounts of optional insur-
   ance coverage to employees.  (See p. 38.)

-- Provide dependent coverage and business
   travel accident insurance.  (See p. 39.)

The Civil Service Commssion expressed concern
about the low level of participation in Group
Life by younger employees and generally agreed
that changes to make the program more attrac-
tive should be considered. The Commission
agreed that other funding approaches could be
used but declined to take a position on
whether future pay increases should be recog-
nized.in Group Life premium determinations
pending completion of its review of the same
issue in the civil service retirement system.




                      iv
                        Contents


DIGEST                                                     i

CHAPTER

   1      INTRODUCTION                                     1
              Federal Employees Group Life Insurance       1
              Federal retirement programs                  1
              Federal employees' compensation program      2
              Federal group health insurance               3
              Scope of review                              3

   2      COMPARISON OF DEATH BENEFITS FOR FEDERAL AND
            NON-FEDERAL EMPLOYEES                          5
              Approach to death benefit comparisons        5
              Group life insurance                         6
              Optional insurance                          10
              Death benefits under retirement programs    10
              Workers' compensation programs              14
              Comparison of total death benefits          15
              Agency comments and our evaluation          16

   3      FEGLI IS NOT A TYPICAL GROUP LIFE INSURANCE
            PROGRAM                                       17
              How FEGLI differs from other group in-
                surance                                   17
              Government as a self-insurer                19
              Conclusions                                 21
              Recommendation to the Congress              21
              Agency comments and our evaluation          21

  4       FEGLI:   FUNDING AND ESTABLISHING PREMIUMS      23
              FEGLI premiums are higher than those of
                 other plans                              24
              How FEGLI premiums are established and
                 why they have increased                  24
              Relationship of funding to premiums         25
              Industry funding practices                  30
              Conclusions                                 32
              Recommendation to the Civil Service
                 Commission                               33
              Matters for consideration by the Congress   33
              Agency comments and our evaluation          33

  5       CAN FEGLI BE MADE MORE ATTRACTIVE WITH NO
            INCREASE IN TOTAL COST?                       35
              Redistribute premiums                       35
              Increase coverage for retirees              37
              Increase coverage for employees             38
CHAPTER                                                   Page

              Conclusions                                  39
              Agency comments                              40

APPENDIX

   I       Comparison of survivor benefits provided by
             the Federal Government and by 21 non-
             Federal employers                             41

  II       Letter dated November 17, 1975, from the
             Chairman, House Committee on'Post Office
             and Civil Service                             57

 III       Letter dated March 8, 1977, from the Direc-
             tor, Bureau of Retirement, Insurance, and
             Occupational Health, Civil Service Commis-
             sion                                          58

  IV       Principal officials of the Civil Service
             Commission responsible for administering
             activities discussed in this report           61

                          ABBREVIATIONS

FECA       Federal Employees Compensation Act

FEGLI      Federal Employees Group Life Insurance

GAO        General Accounting Office
                         GLOSSARY

Actuarial assumptions    Assumptions made to tentatively
                         resolve uncertainties concerning
                         future events which will affect
                         life insurance cost, e.g., mortal-
                         ity rate, employee turnover, com-
                         pensation levels, and investment
                         earnings.

Actuarial valuation      A computation of the liability of
                         a life insurarnce program and the
                         periodic contributions required to
                         provide future benefits.

Consumer   Price Index   A measure of increases or decreases
                         in the cost of living.

Cost of living           The relative prices at various
                         times of a selected group of goods
                         and services typically bought by
                         urban families.

Funding                  A method of paying for benefits by
                         collecting and jnveFsing contribu-
                         tions.

Level cost               A method of funding whereby a con-
                         stant premium, supplemented by ir-
                         terest earnings on a fund created
                         by the excess of premiums over ben-
                         efits in the early years of tte
                         program, will pay for all future
                         costs.

Pay as you go            A method of recognizing life in-
                         surance cost only when benefits
                         are paid to survivors.

Pension                  A series of periodic payments,
                         usually for life.

 Unfunded actuarial       The unfunded actuarial liability
 liability                (someti;.es called the unfunded
                          liability) of a life insurance
                          program is the difference between
                          the expected future benefit pay-
                          ments and the sum of expected
                          collections plus program assets
                          all expressed in present values.
                           CHAPTER 1

                           INTRODUCTION

     Death benefits are available to Federal civilian
employees under various programs, including group life in-
surance, retirement systems, and workers' compensation.

FEDERAL EMPLOYEES GROUP LIFE iNSURANCE

     Employees may elect to be covered by the Federal Employ-
ees Group Life Insurance (FEGLI) program in amounts equal to
their annual rate of pay rounded to the next higher $1,000,
plus $2,000, with a minimum coverage of $10,000.   The maxi-
mum coverage is based on the annual basic  pay for level II
positions of the Executive Schedule and automatically  in-
creases whenever that pay scale increases.   The Government
pays one-third of the premium, and the employee pays the re-
maining two-thirds. Employees may purchase additional cov-
erage of $10,000 with no Government contributions.

     The premium for the regular coverage is currently
$13.845 annually for each $1,000 of insurance, regardless of
age. For the optional $10,000 of insurance, premiums vary
ty age group as follows.
                                Annual rate for
               Age group            $10,000

               Less than 35         $ 20.80
               35 to 39               31.20
               40 to 44               49.40
               45 to 49               75.40
               50 to 54              117.00
               55 to 59              273.00
               60 and over           364.00

     Employees who retire with at least 12 years of Govern-
ment service retain their life insurance, but their cover-
age is reduced after age 65, at the rate of 2 percent a
month until a reduction of 75 percent is reached. Retirees
receive the regular insurance at no cost, but they must pay
for the optional insurance until age 65.
FEDERAL RETIREMENT PROGRAMS

     Federal retirement programs provide benefits to survi-
vors of employees and retirees. The ci.ll service retire-
ment system is the largest of these programs and covers most
full-time personnel. We did not include the other retirement
programs in this review.
      Under civil service retirement, annuities are paid to
surviving spouses and children of employees with at least 18
months of civilian service. The spouse receives 55 percent
of the lesser of (1) 40 percent of the high 3 years' average
pay or (2) the annuity that would have been paid had the em-
ployee continued working until age 60 at the same high
3 years' average pay. Annuities to surviving spouses are
paid for life unless they remarry before age 60. Each qual-
ifying unmarried child receives the lesser of

     -- 60 percent of the high 3 years' average pay divided
        by the number of qualified children.
     -- $4,636 divided by the number of qualified children.
       or

     -- $1,545.
Higher annuities are paid for children of an employee not
survived by a spouse. Children's annuities are paid to age
18 (22 if a full-time student).

     If, at the time of retirement, an annuitant accepts a
reduced annuity, a survivor annuity is payable to his or her
surviving spouse. The survivor's annuity will be 55 percent
of the retiree's annuity before reduction. An unmarried
annuitant, by accepting a reduced annuity, can also opt for
survivor benefits to an individual in whom he or she has an
insurable interest. An insurable interest exists when the
beneficiary stands to gain from the insured's continued life
and suffers economic loss upon his or her demise.

     Regardless of the type of annuity elected at retirement,
the children of deceased annuitants are entitled to a sur-
vivor annuity under the same conditions and in the same
amounts as-the children of a deceased employee.
     Benefits under the civil service retirement system are
adjusted semiannually on the basis of the percentage increase
in the Consumer Price Index during the preceding 6-month
period.
     The cost of the retirement system is shared by the em-
ployees (generally 7 percent of their salary) and the Gov-
ernment (the remainder of the costs).
FEDERAL EMPLOYEES' COMPENSATION PROGRAM

     The Federal Employees' Compensation Act (FECA), adminis-
teLrd by the Department of Labor, provides compensation to



                             2
Federal employees for disability due to a personal injury
sustained in the performance of duty or to an employment-
related disease. The act also provides benefits to depend-
ents if the injury or disease causes the employee's death.
Survivor annuities are generally paid:
    -- To a childless spouse, 50 percent of th2 employee's
       pay at the time of death.

    -- To a spouse with eligible children, 45 percent of
       pay and 15 percent of pay to each child not to exceed
       75 percent of the employee's pay.
    -- To eligible children as sole survivors to be shared
       equally 40 percent for the first child and 15 per-
       cent for each additional child not to exceed 75 per-
       cent of the emplovee's pay.
     The maximum total rayments established by law may not
exceed 75 percent of the monthly pay of the highest step for
a GS-15.
     Benefits are automatically increased whenever the Con-
sumer Price Index increases at least 3 percent and remains
at least 3 percent higher for 3 consecutive months.

     Survivors have the option of receiving benefits under
this act or the retirement system.  If they opt for the FECA
benefits, they are entitled to a refund of the employee's
retirement contributilos. BeneFits received under the act
are not cubject to Federal incone taxes.  Burial expenses
not to exceed $800 are also paid.
FEDERAL GROUP HEALTH INSURANCE

     A variety of group health insurance plans are available
for selection by employees and may be retained during retire-
ment. Under various cost-sharing formulas, the Government
pays up to 75 percent of the premiums, and the employee pays
the remaining percentage. Survivors of employees and re-
ti.ees may continue the coverage in the same cost-sharing
ratio so long as their annuities are sufficient to meet
their share of the cost. We did not review the survivor
benefits available under these programs.
SCOPE OF REVIEW

     Our review included:

     --A comparative analysis of life insurance and other
       death benefit programs available to civilian Federal

                            3
       employees and retirees with similar programs offered
       to non-Federal employees and retirees both public and
       private.
     -- Identification of possible savings and improvements
        if the Government were to become a self-insurer.

     -- An analysis of the process by which FEGLI is funded
        and premiums are established.
     -- Identification of possible methods by which the FEGLI
        program could be restructured to provide more attrac-
        tive and equitable coverage at no additional cost.
     We made the review at the Civil Service Commission,
Washingtc,, D.C., and at the Metropolitah Life Insurance
Compary, New York, New York. The review included examination
of legislation, documents, records, and reports relating to
FEGLI and other death benefits.   We also visited 21 major
employers, nationwide, in both the private (17) and public
(4) sectors of the economy to discuss their death benefit
programs and related cost information.

     We obtained and considered the views of officials of
various Federal employee organizations and analyzed benefit
surveys made by the U.S. Department of Labor, The Conference
Board, and the Commission.




                             4
                           CHAPTER 2
              COMPARISON OF DEATH BENEFITS FOR

              FEDERAL AND NON-FEDERAL EMPLOYEES
      Our comparison of Federal death benefits with benefits
provided by 21 non-Federal employers showed that total ben-
efits are generally comparable except at the younger and
older ages, where social security puts the non-Federal sector
ahead. However, Federal employees pay more for their bene-
fits.   Life insurance coverage generally is superior in the
non-Federal sector and usually is free to employees. Sur-
vivor benefits under the Federal retirement system are supe-
rior to death benefits of the non-Feder;tl retirement systems
and social security combined for certain age groups but not
as liberal for others. Workers' compensation benefits pro-
vided to non-Federal survivors vary by State, with the Fed-
eral program falling within the States' range of benefits.
Summary comparisons of survivor benefits are contained in
appendix I.

     Comparisons of this nature are informative and useful,
but death benefit programs are only part of Federal employ-
ees' total compensation.  In our opinion, improvements to
these and other compensation elements should be considered
in the context of total compensation comparability with the
non-Federal sector. 1/

APPROACH TO DEATH BENEFIT COMPARISONS

     To make comparisons of Federal and nun-Federal death
benefit programs, w= selected five ages at time of death and
made certain assumptions regarding the years of service,
salary and/or annuity amounts, marital status, and number of
dependents, when the death occurred. Our calculations of
benefits payable under the various programs were made for
persons assumed to have the following characteristics at the
time of death.

    -- A single 25-year-old male with no dependents earning
       $10,000 a year with 3 years' service.
    --A married 28-year-old male with 4 years' service
      earning $14,000 a year and having a 28-year-old
      wife and a 5-year-old child.


1/See GAO report entitled "Need for a Comparability Policy
  for Both Pay and Benefits of Federal Civilian Emlloyees"
  (FPCD-75-62, July 1, 1975).


                             5
     --A married 45-year-old male with 20 years' service
       earning $18,000 a year and having a 45-year-old wife
       and two children ages 10 and 18.

     --A married 58-year-old male who retired at 55 earning
       $20,000 a year with 30 years' service and having a
       58-year-old wife.

     -- A married 63-year-old male who retired at 65 earning
        $20,000 with 35 years' service and having a 68-year-
        old wife.

     The non-Federal employers included in the comparison
base were 17 large private companies representing a variety
of industries dispersed throughout the country and 4 public
bodies. All of these employers offered their employees
relatively good fringe benefit packages; they should not be
considered to be representative of the non-Federal sector as
a whole.

GROUP LIFE INSURANCE

     Most of the non-Federal employers provide active employ-
ees with basic group term life insurance in amounts equal to
one to two times their annual saiary, whereas others provide
a fixed amount regardless of salary. Some provide additional
amounts to married employees and to those with children.

     After retirement most employers reduce by 50 percent or
less the face amount of basic term insurance provided. Some
plans make the full reduction immediately upon retirement
while others reduce by monthly increments until the estab-
lished level is reached. Still others defer the reduction
until age 65 for those who retire before then.

     The amount of preretirement coverage for participants
in the non-Federal plans we examined follows.




                             6
         Coverage expressed
            as multiples                  Number of
             of salary                      plans
             Up to 1.0                         9
                   1.5                         2
                   2.0                         8
                   2.5                         1
                   3.0                         0
                   3.5                         1
                   Other                    a/ 1
                                            b/22
a/One company offered a flat $10,000 in life insurance cover-
  age.
b/One employer had two plans--one for salaried and the other
  for hourly employees.
     The postretirement reductions under these plans were:

          Percent reduced                  Number
          after retirement                of plans
                18.75                         1
                25.00                         1
                30.00                         1
                33.33                         1
                50.00                         8
                60.00                         1
                80.00                         1
               100.00                         2
               Other                       a/ 6

                                             22
a/One plan provided a 50-percent reduction upon retirement
  with additional gradual reductions to 75 percent. The re-
  maa)ing five plans provided for reductions based on vari-
  ous factors, such as a fixed amount plus a percentage of
  salary based on years of service.

     Under FEGLI employees and retirees generally receive
less. Employee coverage is equal to annual salary rounded
to the next thousand dollars plus $2,000. Insurance is pro-
vided without reduction upon retirement until age 65.   Be-
ginning at 65, the amount of insurance is reduced by 2 per-
cent monthly until the minimum of 25 percent of the original
coverage is reached.



                              7
     The following table compares the amount of regular life
insurance benefits payable to beneficiaries under FEGLI with
amounts payable under non-Federal programs.


                                                             Number of
                                                           non-Federal
                         Non-Federal plans                plans offering
                                                        Less         More
    Age         FEGLI    Minimum   Maximum   Median   coverage     coverage
Active:
    25         $12,000 $ 5,000     $25.000 $15,000        9          13
    28          16,000 10,000       49,000 24,000         8          14
    45          20,000 10,000       63,000 31,500         8          14
Retired
  (note ai):
    58          22,000       500    42,000   14,700      13           6
    68           5,500       500    33,800   11,500       5          15

a/One employer did not allow retirement at age 55, and two canceled
  life insurance coveraae whenever employees retired.


     Since most of the employers offer coverage exceeding
annual salary and only reduce their postretirement coverage
to 50 percent of the preretirement coverage, life insurance
benefits available to non-Federal employees and retirees are
superior to those available to the FEGLI participant. This
advantage may be offset somewhat to the extent that Federal
employees generally retire before age 65, and the reduction
in their coverage does not begin until age 65. As shown
above, FEGLI was superior to the non-Federal plans only for
the 58-year-old retiree.

Accidental death and
dismemberment insurance
     Of the 21 non-Federal employers, 17 provide additional
accidental death and dismemberment coverage. Most of the
plans provide one to two times the annual salary when an em-
ployee's death or dismemberment results from an accident.
This coverage generally terminates at retirement. FEGLI
offers a similar benefit, but the amount of coverage is often
less, amounting to an individual's annual salary rounded to
the next thousand dollars plus $2,000. It also terminates
upon retirement.

     Of the non-Federal plans that provided accidental death
and dismemberment coverage, nine offered coverage exceeding
annual salary. The following chart illustrates the maximum
coverage available.
                                    8
               Maximum
               coverage
             expressed as                Number
               multiple                    of
              of salary                  plan
              0,5                            2
              1.0                            5
              1.5                            1
              2.0                            6
              2.5                            1
              3.0                            1
              Other                       a/ 1
                  Total                     17
a/One company offered a flat $4,000 in accidental death and
  dismemberment coverage.

Other life insurance benefits

     Other features included in some non-Federal life insur-
ance packages but not available to Federal employees are:

     -- Coverage for a spouse in amounts of $1,500 to $5,000
        and $1,000 for each child.

     -- Coverage of two to three times the salary for acci-
        dental death incurred while traveling for the employer.
     --A combination of whole life and term insurance based
       on an individual's salary. The whole life coverage.
       has a cash surrender value which increases annually,
       while the term portion has a corresponding decrease.
     -- Survivor income insurance of about 20 to 30 percent
        of salary. This benefit differs from regular group
        life insurance in that it is restricted to monthly
        payments to a specified eligible survivor for as long
        as that person lives.

Cost-sharing arrangements
     Most employers pay the full insurance premium whereas
others require some contribution by the employee.  Under
FEGLI the cost-sharing ratio is two-thirds for the individ-
ual and the remaining one-third for the Government. This
ratio has not changed since FEGLI was established in 1954.

     Participants under 15 of the plans received free cover-
age, whereas participants under 7 others were required to


                                9
make some payment for their insurance.  In each case FEGLI
participants were required to pay more than those in the
other plans.

     All non-Federal plans which provided poscretirement
coverage (20 of 22) did so at no cost to the retiree. Under
PEGLI, the cost of postretirement coverage is included in
the current Government and employee premiums and retirees
are not required to contribute.

OPTIONAL INSURANCE
     Only 15 of the non-Federal employers provid-dt   optional
insure ce. Ten of these offered employees a max'        ot one
to tw times the annual salary. On the other ha         FEGLI
participants are limited to $10,000.

     Most non-Federal plans provide for termination of op-
tional insurance upon retirement, whereas some pe'mit cover-
age to age 65 when employees retire sooner. Under FEGLI,
optional insurance continues after retirement and, like reg-
ular insurance, coverage declines by 2 percent a month start-
ing at age 65, until it reaches 25 percent of the original
$10,000.

     The premiums for optional insurance under both FEGLI
and the non-Federal plans are paid by the employees. Fed-
eral retirees must pay for optional coverage until age 65;
however, premiums at this age are very expensive.

DEATH BENEFITS UNDER RETIREMENT PROGRAMS

     Survivor benefit provisions ray be included in retire-
ment programs in addition to retirement annuities. For non-
Federal employees, death benefits accrue from employer plans
and the social security program. For most Federal civilian
employees, benefits are provided by the retirement system
only since they are generally prohibited by law from partic-
ipating in social security through their Federal employment.

Employer plans
     Non-Federal employees receive leath benefits from their
employers through group pension plans which provide either
lump-sum or life annuity payments to beneficiaries. The
amount paid is based on a percent of the deceased's accrued
pension benefit and varies widely contingent upon age, sal-
ary, and length of service. Benefits are generally consid-
ered as a supplement to social security benefits. An in-
creasing number of group pension plans are now being com-
pletely financed by the employers.  In its 1974 publication

                             10
"Profile of Employee Benefits" covering 1,800 firms, The
Conference Board reported:

     "Most of the companies in this survey do, in fact,
     provide pension plans for their employees. The
     pension plan is typically provided free of charge
     to the employee--only 20 percent require employee
     contributions."
Similarly, only about 20 percent of the plans we looked at
required an employee contribution.
     Some of the major survivorship provisions in the 18
plans for which we were able to obtain data follow.

     --One provided an annuity and a $1,000 lump-sum payment
       regardless of age or length of service.
     -- Seven provided annuity benefits at age 5) with from
        10 to 30 years' service. Additionally, one provided
        a lump-sum payment of 1 year's salary regardless of
        age or length of service.
     -- Seven provided annuity benefits at age 55 with fi)m
        10 to 20 years' service.
     -- Two provided annuity benefits at age 60 with less than
        10 years' service.
     --One provided annuity benefits at age 65 with 15 years'
       service.

     Under the civil service retirement system, employees be-
come eligible for survivor benefits upon completing 18
months' service. The system also provides for cost-of-living
increases, whereas only 4 of the 18 non-Federal programs had
such a provision. Civil service survivor benefits are de-
scribed in detail on pages 1 and 2.

Social security

     Survivor benefits are generally available to non-
Federal employees under the old-age survivor and disability
insurance program commonly referred to as social security.
The program is funded through contributions paid by both the




                             11
employee and the employer. At the time of our review, the
rate paid by each was 4.95 percent of the first $15,300 of
annual salary. 1/
     The extent and amount of coverage varies, depending on
the insured's year of birth and death and the number of
quarters insured.
      Survivor brnefits for fully insured employees are paid
to:
      1.   A widow, widower, or divorced wife, 60 or over, or
           50 to 59 and disabled.

      2.   A dependent parent, 62 or over.

      3.   A widow, widower, or surviving divorced mother, any
           age, caring for child to age 18 except students to
           age 21.

      4.   A child or grandchild, under 18, 18 to 21 if stu-
           dent, or any age if disabled.

     If an employee does not have sufficient credit to qual-
ify as fully insured, certa'n benefits can still be paid if
he qualifies as being currently insured (has credit for at
least six quarters during the 3 years before death).
     Survivor benefits for currently insured employees are
paid to the third and fourth categories listed above.
     The survivor benefits consist of a lump-sum payment of
$253 and monthly annuities of various amounts, depending on
the worker's average annual earnings under social security.
Examples of monthly cash benefits based on different levels
of average annual earnings follow.
                                Average annual earnings of
                               $923 or
             Recipient          less     $5,000    $10,000

      Child                   $101.40    $214.60   $334.10
      Spouse, age 60            74.90     204.60    318.50
      Spouse and one c'hild    152.10     429.20    668.20
      Highest family belefits 152.10      528.10    779.60



 1/The total social security contribution rate is 5.85 per-
   cent.  However, 0.9 percent covers medical benefits paid
   from the Medicare program.  Effective Jan. 1, 1977, the
   social security contribution base increased to $16,500.

                               12
     Annuities are subject to annual cost-of-living
increases.

Comparison of benefits under pension elans

     We ccl,  ed the present values 1/ of the death benefits
payable te     'ivors of personnel covered under the civil
service re    .ment system with those available to survivors
of non-Federal employees anid retirees under 22 employer pen-
sion plans and social security. In computing the benefit
amounts, we used the same assumptions as to age, salary,
years of service, marital status, and number of dependents
as in our life insurance analysis.   (See pp. 5 and 6.) The
following table shows the present value comparison.



                                               Non-Federal employers                       Number providing
             Federal                             Social         Total          Median    Liss than   More than
           Government
           Age               Private plans      security  ,inimum   Maxiimm   (note a)    Federal     Federal
                         Minimum    Kaximum
Activet
     25     $            $   -      $  1,000   $     255 $    255 $ 1,255     $    255       0         22
     28       74,0C          -        47,000    103,000 103,000    150,000     103,000       0         22
     45      114,06          -       124.000     64,000    64,000 188,000       64,000      21          1
Retired:
    58          78,000      -       91,000        29,000   29,000   119,000     66,000      14          5
    68          71,000    12,000    81,000        38,000   50,000   119,000     77,000       2         18

a/The typical (median) employer retirement plan provided no survivor benefits to active employees
  with the characteristics (age, service, etc.) used in our assumptions. Survivor benefits for
  these employees were provided solely by the social security program.




     Survivors of a single Federal employee receive no bene-
fits from the civil service retirement system. The survivors,
however, receive a refund of what the deceased had paid into
the system. Survivors of a non-Federal single employee re-
ceive only a small amount from social security for burial ex-
penses. At ages 45 and 58, Federal personnel generally rp-
ceive greater benefits. However, at ages .8 and 68, they do
not fare as well, receiving less than their non-Federal coun-
terparts because of social security benefits.




1/Present value is a concept which recognizes the time value
  of money. It is a technique for determining the amount of
  money which, if invested today at a given interest rate,
  would be sufficient to provide the monthly benefits in the
  future.

                                                     13
     Most of the pension plans provided by non-Federal
employers (18 out of 22) did not require employee contribu-
tions. However, the non-Federal employees all contributed
to social security. The following table compares 1 years'
Federal employee contributions with those of non-Federal
counterparts. It illustrates that Federal employees, at all
ages, pay more toward their retirement programs than most of
their non-Federal counterparts.
                            __a_t    Non-Federal employees
                          Private                                         Numbet requiring
               Federal     planq     Social           Tot.l             Iore than   Less than
              employees   maximum   security   Minimum Maximu   Mo-de    Federal      Federal
Ae   Salary
               $  700      $500       $495     $495    $ 995'   $495        4           18
 25 $10,000                                                                             17
 28 14,000        980       700        693      f63     1,393    693        5
                1,260       900        757      157     1,657    757        4           18
 45 18,000


WORKERS' COMPENSATION PROGRAMS
     Federal and non-Federal employees receive compensation
benefits for any disability sustained while working or for an
employment-related disease. Benefits, including those of sur-
vivors, are available in the non-Federal sector from State
workers' compensation programs. Federal employees receive
disability and survivor benefits under the Federal Employees
Compensation Act which is administered by the Department of
Labor.

      In the majority of cases, workers' compensation benefits
are  paid  to non-Federal employees in addition to any regular.
pension   benefits  they receive. However, Federal employees
must  make  an.election  as to whether they want to receive ben-
efits  under  the  retirement system or the Federal Employees
CoSpensation Act.

     Survivor benefits paid by the 50 States and the Govern-
ment vary in amounts. The States' base for computing bene-
fits is weekly, whereas the Federal Government's base is
monthly. In most cases the payments are equivalent to a per-
centage of an employee's salary at the time of his death
plus a one-time burial allowance. Death benefits are gen-
erally paid to the spouse until remarriage.  For children,
however, payments are made until a specified age. Some pro-
grams establish a maximum period for which benefits can be
paid. Variations are illustrated in the following table.




                                               14
                                   Compensation as
                                percent of pay at the
                          time of employee's death (note a)
                                                   Federal
                             State programs        program
                           Minimum     Maximum     (note b)
Recipient:
    Spouse only             32.5            80        50
    One child (only)        2r              80        40
    Spouse with child       60              90        75
Burial allowance          $400.00       $1,800.00   $800.00
a/Maximum dollar amounts are set in each State. These
  amounts are subject to automatic adjustments based on the
  State's average weekly wage.

b/The total monthly compensation may not exceed 75 percent
  of the employee's pay (except when due to authorized cost-
  of-living increases) or 75 percent of the monthly pay of
  the highest step for GS-15 of the General Schedule.

COMPARISON OF TOTAL DEATH BENEFITS

     The amount of survivor benefits available to Federal
and non-Federal employees from the various programs vary
widely. Federal benefits are greater in some instances and
lower in others. Moreover, benefit amounts often differ,
depending on the circumstances causing the death. To com-
pare total benefits, we determined the benefits payable from
all sources when death occurred from the following causes:

     -- Natural causes.

     -- Job-related accidental tiuses.
     -- Non-job-related accidental causes.

Death due to natural causes
     The table on page 16 shows the present value of benefits
payable to survivors of employees and retirees who die from
natural causes.




                                   15
                                                                                             Non-Federal benefits
                                                          .........             P'rvate
                         Federala Ietitement                                                                                             Federal
                        benefits                      life insulrance               plans     Social           Total (note a)            benefits
  Age         iLI      Retirement        Total    Minimu       Mxm -                asimum   security    Minimum Macimou Median        More      Lea.
Active:
     25      $12,000         -          12,00     5     ,000             000                               5.250 $ 25,255 $.16,000       9        13
     28       16,000     14,000         90,003        10,000          49,000     47,000       103,000    113,000 171,000 131,000         0        22
     45       20,000    114,000        134,000         J1.000         63,000    124,000        64,000     7t,000 215,000 100,000        20         2
Retired:
    58       22,000      78,000        100,000           %00          42,000        91,000      29,000    29,000    123,000   78,000    15    b c/4
    68        5,500      71,000         77.000           50           3:,000        81.000      38,000    54,000    129,000   88,000     3      7/17


a/The totals may not closs-foot since the employel who provides the minimum or maximui group life  insurance aount uill
  not necessrlil, be the same employe, who plvOl es the minimum o maximum benetfit under the private retirement
  plan.

D/One plan offered no ,etirenert at .qe           5i.

c/lnfoimation   not availaole fo, two pl{nq.



Job-related accidental death

     When an employee dies because of a job-related accident,
the present value of the total benefits paid to his survivors
are:

  Age                                                                 Non-Federal                                    Federal
(note a)               Federal                   Minimum                Maximum Median                              More Less

        25             $ 25,000 $ 11,000 $ 60,000 $ 28,000                                                           11          11
        28              172,000 150,000 390,000 214,000                                                               3          19
        45              201,000 111,000 343,000 192,000                                                              13           9

Non-job-related accidental death
     When an employee dies because of a non-job-related acci--
dent, the present value of his survivor's benefits are:
  Age                                                   Non-Federal                                                  Federal
(note a)               Federal                   Minimum Maximum Median                                             More Less

        25             $ 24,000 $ 10,000 $ 45,000 $ 23,000                                                           12          10
        28              106,000 106,000 194,000 145,000                                                               0          22
        45              154,000   78,000 242,000 119,000                                                             19           3

a/Ages 58 and 68 were not included since accidental death
  coverage ceases at retirement.

AGENCY COMMENTS AND OUR EVALUATION

     The Civil Service Commission has agreed that Federal
death benefits are generally comparable to benefits of other
large employers and that non-Federal employers pay more of
the costs. It cautioned and we agree, however, against
changing Federal life insurance contributions to be com-
parable to other employers without considering the compa-
--bility of all elements of Federal and non-Federal employee
   9ensation.


                                                                               16
                          CHAPTER 3

     FEGLI IS NOT A TYPICAL GROUP LIFE INSURANCE PROGRAM

     The relationship between the Government and insurance
companies in the FEGLI program differs considerably from the
relationships between other employees and insurance carriers
under their group life insurance plans. Under FEGLI the Gov-
ernment, for all practical purposes, assumes all risks, estab-
lishes and collects premiums, establishes reserves and manages
most of the funds.  In non-Federal plans, these functions are
primarily the responsibility of the insurance carriers.

     The Government, in effect, is a self-insurer of the
FEGLI program but does not reap all the advantages that could
accrue from such a relationship. As a self-insurer the Gov-
ernment would not be obligated to annually pay premium taxes
to the States and risk charges to the insurance companies of
$6.4 million and $850,000, respectively, in 1975.
HOW FEGLI DIFFERS FROM OTHER GROUP INSURANCE

     In a typical group insurance program, an employer pur-
chases coverage for its employees from an insurance carrier.
The insurance carriers for most group life insurance plans
assume any liability for claims exceeding the premiums paid.
Although premiums are generally established high enough to
cover all claims in normal years, the carriers are liable
for unusually high claims in any one year and for extremely
high claims in the event of a disaster. Disasters obviously
are rare. Carriers would tend to increase subsequent pre-
miums on those plans where excessive claims were paid in any
one year. However, the employer need not renew his policies
with that carrier. On the other hand, under FEGLI the Gov-
ernment reimburses the insurance company for all claims
paid in good faith, regardless of the number or nature of
death. Carriers for most group life insurance plans also:
     -- Establish premium rates.
     -- Establish the type and amount of reserves.

     -- Manage reserve funds.

Civil Service Commission
responsibilities under FEGLI
     The Commission:

     -- Establishes premiums.
    -- Contracts with private insurance companies to provide
        claims processing and other services.

                                17
    -- Prepares regulations and procedures for employees,
       retirees, and employing agencies.

    -- Answers inquiries and advises employees and retirees
       of their rights, privileges, and benefits.

    -- Receives and accounts for employees', retirees', and
       agencies' premium payments.

    -- Determines obligations and authorizes payments to the
       insurance companies.

    -- Develops and maintains financial and statistical
       data for management use and for annual reporting to
       the Congress.

    -- Audits and reports on the operations of the insurance
       companies.

     The premiums collected are deposited in a trust fund in
the U.S. Treasury. The fund is available, without fiscal
year limitation for the payment of claims, administrative ex-
penses, and other charges. At June 30, 1976, the fund
amounted to about $2 billion.

     The Commission's Bureau of Retirement Insurance and
Occupational Health administers the FEGLI program. About
2.5 million active employees and 800,000 retirees, or a total
of 3.3 million persons, are insured under the program. In-
surance in force as of July 1, 1975, was about $55.5 bil-
lion--$49.1 billion regular and $6.4 billion optional.    In
fiscal year 1975 claims  paid  amounted to $382 million.  From
inception of the program  in  1954 through fiscal year 1975,
insurance claims totaling $3.5 billion have been paid.

Insurance companies' responsibilities
under FEGLI
     Over 360 insurance companies are involved in the FEGLI
program, but the Metropolitan Life Insurance Ccmpanj carries
out practically the entire role. Metropolitan's Office of
Federal Employees Group Life Insurance, under a contract
with the Commission: 1/




1/The Commission also has a contract with the Shenandoah Life
  Insurance Company for coverage of employees under various
  employee beneficial associations' policies in effect before
  FEGLI was enacted.


                             18
     --Settles and pays life insurance and accidental death
       and dismemberment claims.

     --Contracts for and administers the contracts with the
       other insurance companies (reinsurers) in the FEGLI
       program.

     -- Participates with about 100 other carriers in main-
        taining a conversion pool to cover those terminated
        Federal employees who choose to convert their FEGLI
        coverage to private insurance.

     -- Maintains a contingency reserve for fluctuations in
        claims. The reserve has been reduced from $195 mil-
        lion in fiscal year 1972 to $50 million in fiscal
        year 1976.

     -- Prepares annual financial statements covering its
        activities.

     -- Determines and pays tax liabilities.
     The Commission monthly remits amounts necessary for the
payment of benefit claims to Metropolitan. Premium collec-
tions exceeding these payments are retained in the FEGLI
fund under the Commission's control.

GOVERNMENT AS A SELF-INSURER

     The primary motivation for an employer to assume the
role of a self-insurer is to reduce such costs as State pre-
mium taxes, risk charges, and administrative expenses, as
well as to maintain control over reserve funds.

Premium taxes

     Generally, States do not impose premium taxes on group
life insurance programs which are self-insured. They do, how-
ever, impose such taxes on insurance carriers when they under-
write group life programs. Furthermore, States are precluded
from imposing any taxes on the Government. Since FEGLI is not
by law a self-insured program, Metropolitan is required to pay
State premium taxes on the claims it pays. The Government
reimburses Metropolitan for its FEGLI tax payments. Although
those taxes amounted to $6.4 million in 1975, the amounts
being paid to each State are relatively insignificant, as
shown below.




                               19
                                        Number of States,
                                             including
                                        Washington, D.C.,
               Amount                    and Puerto Rico

        Under       $50,000                        19
        $50,001 to $100,000                        14
       $100,001 to $200,000                        10
       $200,001 to $300,000                         4
        Over       $300,000                         5

             Total                                 52

California received the largest amount--$715,000.

     These taxes are being paid in response to congressional
intent as articulated in hearings held before the FEGLI Act
of 1954 was passed. Those hearings indicated that the Fed-
eral Government should be treated as any other major employer
in that premiums paid are subject to State taxes. The hear-
ings were silent regarding the de facto self-insurer role
played by the Government under FEGLI.

Reinsurers

     The major function of reinsurers is to share the risk
of catastrophic loss with the prime insurance carrier so that
no one company is unduly burdened by such a loss. The
amount is usually subject to some stated maximum liability
for each catastrophe, and the reinsurer is paid for the
assumption of.that risk. Unlike other large employers' pol-
icies, the Commission's contract with Metropolitan does not
include a catastrophic loss provision.
     Since the Federal Government reimburses Metropolitan for
all claims paid in good faith regardless of reason, no insur-
rance risk is being assumed by anyone save the Government.
Despite this, the Commission's policy with Metropolitan pro-
vides for risk charge payments to Metropolitan and its 363
reinsurers of about $46,000 and $804,000, respectively. The
amount being paid to each company is relatively insignifi-
cant, as shown below.

         Amount of risk charge        Number of reinsurers

             Less than $250                   57
             $251 to $1,500                   94
             $1,501 to $4,000                185
             $4,001 to $10,000                21
             More than $10,000                 6

                 Total                       363

                                 20
     The FEGLI Act encouraged and required the use of
reinsurers. In fact, however, they are not performning any
services for FEGLI.
Administrative expenses

     The fiscal year 1975 administrative expenses for the
FEGLI program follow.
          Metropolitan                $1,435,000
          Civil Service Commission       572,000

              Total                   $2,007,000

Metropolitan's administrative expenses are subject to audit
by the Commissions' Program and Audits Office. For our study,
we assumed that it would not cost the Government less than
Metropolitan to perform the functions currently being carried
out by Metropolitan.
CONCLUSIONS

     FEGLI is not a typical group life insurance program in
that the Government does not purchase employees' coverage
from an insurance carrier.  Under FEGLI, the Government, for
all practical purposes, assumes all risks and liabilities,
establishes and collects premiums, establishes reserves and
manages most of the funds. Metropolitan's function is pri-
marily to settle and pay insurance claims for which it is re-
imbursed by the Government.

     We believe the practice of contracting with Metropoli-
tan to process insurance claims, instead of the Government's
performing this function itself, may be beneficial since it
uses Metropolitan's experience and knowledge in the life in-
surance field. We question, however, the appropriateness of
Metropolitan's being required to pay State premium taxes
since FEGLI is, in effect, a self-insured program. Also we
believe the payment of risk charges to Metropolitan and its
"reinsurers" is highly questionable since the Government pays
all the FEGLI claims.
RECOMMENDATION TO THE CONGRESS

     We recommend that the Congress rescind the requirement
that FEGLI pay State premium taxes and insurance company
risk charges.
AGENCY COMMENTS AND OUR EVALUATION
      The Commission stated that our report may have over-
 simplified the distinction between FEGLI and other group

                             21
life insurance programs and maintained that other
employers handle many of the administrative duties large
insurance programs in a manner not too dissimilar in their
                                                   from
FEGLI.

      We agree that there is a range of administrative
tions performed by the parties in various life          func-
programs and that, the larger the employer, the insurance
trative duties it is likely to perform. However,more adminis-
major employers we visited, none followed the FEGLIof the 21
                                                     practice
of reimbursing the carrier for claims paid and administra-
tive expenses and of retaining premiums in excess
amounts in the employer's possession. Because      of these
                                                of the respec-
tive responsibilities of the Government and the
                                                 carrier,
whereby the Government bears the risks, we still
that FEGLI is, in effect, a self-insured program believe
                                                  and should
not be subject to State premium taxes and insurance
risk charges.                                        company




                            22
                          CHAPTER 4

          FEGLI:   FUNDING AND ESTABLISHING PREMIUMS

     As originally conceived, FEGLI coverage, premiums, and
                                                        com-
required-employee contributions were anticipated to be
parable to the best programs in the non-Federal sector.
These objectives have not been met.  Since the program's in-
ception in 1954, FEGLI premiums have increased dramatically
                                                       pre-
and are considerably higher than group life insurance
                                  Similarly, Federal  employ-
miums in the non-Federal sector.
ees generally pay much more as their share of premium cost
thar their non-Federal counterparts.

     FEGLI premiums are much higher than those paid by the
                                                         the
21 non-Federal employers reviewed primarily because of
                                               payments.  The
way the Government funds anticipated benefit
                                        on  a  pay-as-you-go  1/
non-Federal employers generally operate
basis or prefund a limited amount of future   costs; however,
the Government operates on a level-cost principle which
estimates liabilities for every participant and establishes
premiums in amounts sufficient to cover all future benefit
payments. But at June 30, 1973 (effective date of the latest
actuarial valuation), the FEGLI program had an unfunded ac-
tuarial liability of $3.7 billion.
     Although the Government pays one-third of the FEGLI pre-
mium, the employees' share of premiums plus interest on the
reserve balance have, since the inception of the program.
generally been sufficient to pay all insurance claims. Thus
the Government has made little or no cash outlays to the pro-
gram, and its share of the premium payments have been added
to the FEGLI reserve fund in the form of Federal debt secu-
rities.

     The annual FEGLI premium rate of $13.845 for each
$1,000 of insurance includes S4.986, or 36 percent of the
premium, for interest on the unfunded liability. Interest sys-
on the unfunded liability of the civil service retirement
tem is treated quite differently. The Government is re-
quired, by law, to pay the entire interest cost on the re-
tirement system's unfunded liability, but under FEGLI the
employees pay two-thirds of the interest cost.
     A major reason for the unfunded liability in the FEGLI
program is the lack of recognition in the level cost and



 1/A method of recognizing cost only when benefits are paid.



                               23
premium determinations that Federal employee salaries will
continue to increase, causing higher benefit payments in the
future. Use of the "dynamic" assumption that pay rates will
increase 4 percent annually, for example, would result in a
premium rate of $12.60, of which $1.09, or about 8.6 percent,
is interest on the unfunded liability.
FEGLI PREMIUMS ARE HIGHER
THAN THOSE OF OTHER PLANS

     Employers for 12 plans furnished sufficient information
to compute the premium rate per $1,000 of insurance for the
past 3 to 5 years. The rates ranged from a low of $3.62 to
a high of $10.29.
              Plan                   Premium rate

                1                       $ 3.62
                2                         3.75
                3                         4.01
                4                         4.43
                5                         5.26
                                          5.75
                7                         6.29
                8                         6.60
                9                         6.90
               10                         7.55
               11                         8.42
               12                        10.29


     FEGLI's average rate during the same period was $11.04,
which was the highest and significantly higher than 11 of
the 12 other plans.

HOW FEGLI PREMIUMS ARE ESTABLISHED
AND WHY THEY HAVE INCREASED

     The FEGLI Act of 1954 set the initial premium at $9.75
annually for each $1,000 of coverage. The employee's share
of the premium was $6.50, whereas the Government's contribu-
tion was $3.25 annually. The rate, which was expected to
decline as the average age of the insured group stabilized,
was based on the rates generally being charged by carriers
on other existing group policies. However, the Commission's
actuarial valuations showed that rate increases were needed,
as shown below.




                             24
                             Recommended       Increase
                                annual         effective
           Date                premium           as of
    Original rate              $ 9.75
    Mar. 1963                   10.725         Feb. 1968
    Feb. 1971 (note a)          12.47
    Dec. 1973                   13.811         Mar. 1975
a/No increase implemented.
     The Commission believes that the increases in the pre-
mium rate were necessary because:

     --The fund had to be compensated to cover the cost of
       those estimated future benefits which were not pro-
       vided for in previously established premiums.

     --The $10,000 minimum coverage is less significant in
       reducing level-cost premiums as salaries increase be-
       cause fewer participants are affected. The minimum is
       most effective when it results in a proportionately
       greater insurance coverage for the under-age-35 en-
       rollees, particularly females who have lower mortal-
       ity rates.
     --The trend toward earlier optional retirement and an
       increase in the use of involuntary retirement pro-
       visions resulted in a smaller number of active pre-
       mium-paying participants than the number estimated.
       Program costs must be spread over a shorter working
       life necessitating a higher premium rate.

     ---The number of new and young employees waiving FEGLI
        coverage has increased. This group traditionally has
        had a lower mortality rate than the insured universe
        as a whole thereby helping to maintain a lower pre-
        mium rate. The 197? actuarial valuation showed that
        15 percent of all new employees were declining FEGLI.
        contrasted with only 2 percent in 1967.
RELATIONSHIP OF FUNDING TO PREMIUMS

     Initially, FEGLI premium rates were established by law,
but in 1967 the Congress authorized the Commission to estab-
lish premium rates based on the level cost of the program.
Public Law 90-206 requires employees to pay two-thirds of
level cost and the employing agency one-third.




                             25
Level-cost funding

     Under the level-cost concept, future benefit payments
are estimated for every participant in the program and pre-
miums are established in amounts sufficient to cover the
anticipated outlays. This means that, if the Government
collected the level premium each year for all new employees
during their active careers and invested any cash flow ex-
cess in interest-bearing securities, enough funds in the
form of principal and interest woulc' be available to pay
death benefit claims for these employees. Although the Con-
gress mandated level-cost funding, it provided no criteria
or procedures for calculating a level-cost premium rate.

     The Commission, by an actuarial valuation as of June 30,
1973, established the current premium rate as follows:

                                                     Amount
          Actuarial liability               (000,000 omitted)
Present value of estimated future bene-
  fits                                                   $7,458
Current assets (represents funds held by
  the U.S. Treasury and Metropolitan)      a/$1,371
Present value of future premiums              2,394       3,765
Unfunded actuarial liability                             $3,693

                                                  Amount
                                                per $1,000
              Annual cost                      of insurance
Level cost of regular benefits                   $ 7.761
Accidental death and dismemberment ben-
  efits                                                .430
Interest on unfunded actuarial liability              4.986
Other costs                                            .222
Expenses and taxes                                     .412
   Total annual cost                           b/$13.811

a/Includes accrued interest and other receivables.

b/The difference between the total annual premium in effect
  ($13.845) and the $13.811 computed above is due to round-
  ing required by law.



                               26
      The first step in the valuation was the determination
of the average annual level cost of basic insurance for new
employees over their careers--$7.761 per $i,000 of insurance.
This was based on a model age, sex, and salary distribution
of 100,000 employees enrolled during fiscal years 1971 through
1973.   The Commission estimated the present value of future
benefits for all current active employees and annuitants to be
$7.4 billion.   From the benefits total, the Commission sub-
tracted current assets of $1.3 billion and the present value
of future premiums at the premium . : of $7.761 per $1,000,
or $2.4 billion.   The difference  f 51.7 billion represented
the program's estimated unfunded .    arial liability.  FEGLI
would have been fully funded if its assets equeaed $5 billion
rather than the existing $1.3 billion.

     Projections of the type needed to establish level pre-
miums by their nature must be based on many assumptions re-
garding the future.  They include, but are not limited to,
interest, mortality, inflation, retirement and disability
rates, and salary scales.

     We did not audit the Commission's actuarial valuation.
However, we noted that, in projecting employees' salary pro-
gressions, the Commission included factors for anticipated
promotion and within-grade salary increases but did not con-
sider future gnjsiral pay increases.

     Various laws require that the pay of Federal employees
be adjusted periodically to maintain comparability with their
counterparts in the private sector.  Pay increases have oc-
curred frequently and in large amounts.  Since the amount of
insurance in force and benefit payments are directly related
to employees' salaries, the results of the actuarial valua-
tion can be significantly affected by the pay progression
used.  To illustrate, the Commission prepared a valuation for
us on a dynamic basis assuming that pay rates would increase
4 percent annually as a result of the pay comparability proc-
esses.  Following is a comparison of the static and dynamic
valuations.

                           Rate per $1,000
                            of insurance        Difference
                          Static     Dynamic    increase or
                        valuation   valuation   decrease(-)

Level cost               $ 7.761     $10.497     $ 2.736
Interest on unfunded
  liability                4.986       1.089      -3.897
Other cost                 1.064       1.015      - .049

    Total annual cost    $13.811     $12.601      -1.21



                             27
     As shown, dynamic assumptions would increase the level
cost of insurance for new employees from $7.761 to $10.497
but would decrease interest costs on the unfunded liability
from $4.986 to $1.089, resulting in a reduction in the pre-
mium of $1.21 per $1,000 of coverage. The reduction takes
place because interest and other costs are spread over a
larger amount of insurance in force.
Unfunded liability
      An actuarial unfunded liability is the difference be-
tween what is expected to be paid in fut:re benefits and the
sum of what is expected to be collected plus program assets
all expressed in present value.
     According to the Commission, the $3.7 billion unfunded
liability was caused by the following factors.

     -- Employees who retired shortly after the program's in-
        ception in 1954 received substantial benefits with
        little contributions.
     -- The effects of general pay raises on benefit amounts
        were not included in the level-cost determinations.
     -- The premium rates in effect before the March 1975 in-
        crease were insufficient to cover accruing benefit
        costs.
     The FEGLI rate established in March 1975 includes
$4.986. or 36 percent of the $13.845 annual premium, as in-
terest on the $3.7 billion actuarial liability. When pre-
miums are calculated on a dynamic basis, as shown above, in-
terest costs of $1.089 annually represents about 8.6 percent
of the premium. The interest is for the amount which must be
paid to prevent the liability from increasing and does not
include any payment of the liability. According to the Com-
mission, interest costs are included in the premium calcula-
tions since, by law, all costs associated with the FEGLI pro-
gram must be shared by the employees and their agencies.

     However, interest on the unfunded FEGLI liability is
treated quite differently from interest on the unfunded lia-
bility of the civil service retirement system. In 1969 the
Congress enacted Public Law 91-93 which requires the Gov-
ernment to pay all the interest on the unfunded liability of
the retirement system.  Under FEGLI employees are paying two-
thirds of the interest cost.




                             28
 Ptemiums versus current program costs

      The Commission's financial statements showed that the
 premium rates generated sufficient income to meet
                                                     benefit
 payments made and other program costs ar.d to build
                                                      up a re-
 serve of almost 52 billion.  In fiscal year 1976, for ex-
 ample, insurance premiums exceeded expenses by over
                                                       $243
 million.  The premium income, reserves, and expenses for
 years 1971 through 1976 follow.




                                                                         Cumulative
                         Income                  Expenses    Excess of     reserve
           Contributions     Interest              and        income       balance
 Fiscal   Govern- Employ-       on    Total      benefit       over       at yearend
  year      ment     ees     reserve income      payments     outlays      (note a)
          ----------      …(-----------------(millions)------------------------------
  1971     $119        $238     $ 59      $416     $278        $138
  1972                                                                     $1,090
            126         252       69       447      298         150
  1973                                                                      1,199
            126         252       78       456      321         135
  1974                                                                      1,331
            133         266       87       486      348         138
  1975                                                                      1,431
          b/220         231       97       548      357         191
  1976                                                                      1,664
            307         307      128       743      371         372         1,991
 a/Some of the excess was credited to other balance sheet accounts.
 b/Starting in July 1974 the United States Postal Service began to
                                                                    pay 100
   percent of the premium cost for regular insurance for its employees,
   thereby increasing the Government's contribution slnificantly.


     Since FEGLI's inception in 1954 through 1975, the
                                                        Gov-
ernment's contribution totaled about $1,604 million,
                                                      or about
$60 million less than the accumulated reserve balance
                                                       of
$1,664 million.  This indicates that the Governmen- made no
cash outlay for its share of tie premium cost; r-cher,
                                                         its
contribution, for the most part, was added to the
                                                  reserve
balance through a bookkeeping entry.  The reserve fund held
by the Government is in Federal debt securities.

     The dramatic rise in reserves in fiscal years 1975
                                                           and
1976 resulted primarily from the March 1975 increase
                                                       in the
FEGLI premium rate.  The Commission estimates that premiums
will continue to exceed expenses until a crossover
                                                     point is
reached in the late 1980s.   Although premiulms alone are not
expected to cover program costs, from that point forward,
premiums plus interest income on the reserve balance
                                                       will be
sufficient for that purpose.   Additionally, the Commission
believes that by the late 1980s the FEGLI group will
                                                       have a
stabilized population which will include about 1.8
                                                     million
retirees.




                                        29
                                                    point was
     Under the dynamic approach, the crossover         but the
                                and the   year   2000,
estimated to fall between 1990                           periods
                                  For  the   two  5-year
reserve would continue to grow.
                                    Government     contributions
ended 1975 and 1976, employees and
                                          5.14 percent, whereas
increased at an average annual rate of
claims and other expenses increased   at  a rate of 7.2 percent.
                                         the  next 10 years.
We projected these average rates over
Data for selected years follows.

                      Income
                                                              Excess of
           Contributions                                       income       Reserve
             (note a)                               Benefit                 balance
             (notea                                payments     over
Fiscal   Govern- Employ-                                       outlays    at yearend
          ment      ees    Interest   Total        expenses
 year
                     …-(000,000
         ----------------------                   omitted)-------------------------

                            $143      $     857      $457       $401       $3,130
 1979_    $238     $476                                                     4,479
                    563      207          1,047       562        475
 1982      277                                                   554        6,061
           322      643      282          1,247       693
 1985                                                 743        582        6,643
 1986      338      676      310          1,324

                                             pays 103 percent of the pre-
a/Although the United States Postal Service of our projections, we used
  miums for its Employees, for the purpose
                                                           by law.
  the one-third, two-thirds cost-sharing ratio prescribed




       The projections indicate the reserve                   balance will in-
                                                              $6.6 billion in
 crease from $1.9 billion in 1976 to about
         The projections also show that the                   employees' share
 1986.                                                        continue to exceed
 plus interest on the reserve balance will
 claims and other costs indefinitely.

 INDUSTRY FUNDING PRACTICES
                                            those of various
      Our comparison of the FEGLI plan with
                                          differences in pre-
 other group insurance plans showed major
 mium computations and funding.
                                              provided infor-
      Employers for 17 group insurance plans
 mation on funding practices.   Nine of them established pre-
                                       without funding for fu-
 miums basically on annual term costs
                                                     annual
 ture costs.   Eight established premiums exceeding
                                               The  funds were
 costs to provide funds for future premiums.           retired
                                            disabled,
 to cover benefits for employees that were
                both.  The level-cost concept used by the Com-
 employees, or
                                         was not used by any
 mission in establishing FEGLI premiums
 of the 17 plans.
                                                 and the prefund-
          A comparison of the claims experience
                                                of FEGLI with
  ing    (averages over the past 3 to 5 years)


                                          30
those of six other plans that included prefunding provisions
follows.

                              Rate per $1,000 of insurance
                                  Funding
                              excess premiums
                     Claims    plus interest       Average
                       and      on reserves        premium
                     other      over claims         plus
      Plan           costs    and other costs     interest
     1               $4.39          $5.90          $10.29
     2                3.86           1.40            5.26
     3                5.70            .S0            6.60
     4                7.65            .77            8.42
     5                7.03            .52            7.55
     6                5.74            .01            5.75
  FEGLI               7.75           3.29           11.04
  FEGLI (esti-
    mate, fiscal
    year 1976)        7.32           6.20           13.52
     Employers for 12 plans furnished enough information to
compute the claims and other costs as a rate per $1,000 of
insurance for the past 3 to 5 years. The rates ranged from
a low of $3.62 to a high of $7.65 as follows:

                                    Claims and
              Plan                 other costs
                1                     $3.62
                2                      3.75
                3                      3.86
                4                      4.01
                5                      4.39
                6                      4.43
                7                      5.70
                8                      5.74
                9                      6.29
               10                      6.90
               11                      7.03
               12                      7.65
     The prefunding practice followed for FEGLI was, by far,
the major cause for the higher FEGLI premium rate.   However,
average claims and other costs for FEGLI were also generally
higher than the other plans. The information needed to ana-
lyze the precise causes for these differences was not avail-
able. Generally, the differences come about because of dis-
similar characteristics of the universe insured as to age,
sex, type of employment, turnover of young employees,


                              31
percentage of active employees and annuitants, retirement
ages, and mortality rates.  One of the more important factors
affecting rates is the extent of the participation in the
plan by younger employees who have lower mortality rates.
Most of the non-Federal plans have some form of noncontribu-
tory insurance which induces participation by all employees.
On the other hand, FEGLI's relatively high premium rate dis-
courages participation by younger employees, most of whom
can obtain their own term insurance at lower rates.

CONCLUSIONS

     FEGLI, as initially conceived, was to be a low-cost
group life insurance program comparing favorably with those
being offered in the private sector. Additionally, the pre-
mium rate used to inaugurate the program w.s expected to de-
cline as the program stabilized.  These objectives were not
met.

     FEGLI is funded on a basis unlike any other group pro-
gram we examined. Whereas future FEGLI benefits are pre-
funded, non-Federal employers operate on a pay-as-you-go ba-
sis or prefund only a portion of anticipated benefit claims.
This difference in funding approach is the primary reason
that FEGLI premiums are higher than those in the non-Federal
sector.  Even though the level-cost concept, on which FEGLI
premiums are based, is an attempt to keep premiums constant
ovp time, FEGLI premiums have increased dramatically.

     Because of the high premiums and the requirement that
employees pay two-thirds, benefit payments to FEGLI bene-
ficiaries have been financed solely by employee contributions
since the program began.  The Government should reevaluate
its funding approach and consider adopting one more consist-
ent with the practices followed by non-Federal employers.

     In estimating level costs to establish premiums, the
Commission ignored a very important assumption--general pay
increases.   Recognition of this factor would have moderated
the premium increase initiated in March 1975.   Including in-
terest costs on FEGLI's unfunded liability in the premium de-
terminations has also contributed to the high premium rate.
The unfunded liability exists because of past funding in-
sufficiencies and is unrelated to the cost of providing FEGLI
to new employees.   The Government pays all interest on the
unfunded liability of the retirement program. Adoption of
a similar approach under FEGLI could further reduce premiums
to employees.




                            32
RECOMMENDATION TO THE
CIVIL SERVICE COMMISSION

     We recommend that the Chairman, Civil Service Commission,
revise the Commission's policy and recognize anticipated pay
increases in determining FEGLI premiums.

MATTERS FOR CONSIDERATION BY THE CONGRESS
     The Congress should reevaluate the FEGLI funding re-
quirements. It should consider prefunding only those liabil-
ities arising from benefits payable to retired employees.
Such a change would be more consistent with what is being
done in the non-Federal sector and could materially reduce
premiums.

     If the present funding method is retained, the Congress
should consider revising the FEGLI legislation to provide
that the interest on the program's unfunded liability be paid
by the Government.

AGENCY COMMENTS AND OUR EVALUATION
     The Commission agreed that FEGLI's level-cost funding
criteria was far more stringent than the various criteria
used by other employers and pointed out that, unlike retire-
ment, there are no standard funding concepts for group life
insurance. The Commission did not oppose revision of the
FEGLI funding concept but cautioned that introduction of a
lower financing system today could possibly conceal the true
cost of the program and could lead to higher funding in the
future, particularly if employees were not required to share
in future cost increases.
     The Commission stated that it was currently reviewing
the question of whether future general salary increases
should be recognized in cost calculations for tne civil
service retirement program and thought it would be premature
to apply dynamic financing techniques to FEGLI until the
whole question of dynamic funding or financing by the Govern-
ment is resolved.

     We continue to believe the level-cost concept being
used for the FEGLI program, which requires advance funding
of future benefits payable to both active and retired employ-
ees, should be reevaluated. As long as other employers do
not prefund benefit costs in this manner, FEGLI premiums will
continue to exceed those in the non-Federal sector. Although
revising the level-cost concept to provide advance funding of
retirees' benefits only, as we have suggested, might cause
premiums to increase in the future, FEGLI premiums have


                             33
increased considerably and will continue to increase
                                                     under
the level-cost concept as now applied.

      We fully support and have recommended dynamic
techniques for the Government's retirement programs,costing
as FEGLI, and agree that the question of dynamic fundingas well
should be resolved for all programs. However, we
                                                    believe
that life insurance and retirement programs are sufficiently
different so that the issue could be resolved independently
and dynamic costing could be used for the FEGLI program
                                                           re-
gardless of whether the concept is also used for retirement.
In retirement programs, employee contributions are
                                                     fixed.
generally at 7 percent of pay, and the Government
                                                    is respon-
sible for all additional costs without regard to whether
costs are determined on a static                            the
                                  or a dynamic basis. Under
FEGLI, however, the failure to consider future pay
results in higher premiums of which employees must increases
two-thirds share.                                    pay a




 B/.                       34
                             CHAPTER 5

              CAN FEGLI BE MADE MORE ATTRACTIVE
               WITH NO INCREASE IN TOTAL COST?

      FEGLI can be restructured to provide more attractive
and equitable coverage. The possible choices presented may
either increase or decrease the level cost of insurance
somewhat or more equitably shift the cost burden on the ba-
sis of age, salary, and employment status. The choices pre-
sented can be combined in various ways and are not all in-
clusive; rather, they are those we believe warrant consider-
ation because of their impact on equity, comparability, and
cost.
     The eight different methods we discuss for restruc-
turing FEGLI fall under one of three basic categories.

     1.   Improve equity to various segments of FEGLI members
          by redistributing premiums.

     2.   Increase coverage for retirees and thereby make
          FEGLI more comparable with non-Federal plans.

     3. Increase coverage for active employees which would
        make FEGLI more comparable with non-Federal plans.

REDISTRIBUTE PREMIUMS

Noncon' ributory insurance
     Most other employers give their employees some non-
contributory insurance coverage. The Government could pro-
vide a similar benefit by using its contribution, (one-third
of total premiums) as payment in full for a portion of the
coverage for all employees. At current premium rates, the
Government's contribution would purchase $6,000 of insurance
for each employee. This method would reduce the burden of
high FEGLI premiums for younger and lower salaried employees
and perhaps induce higher participation.    It would also pro-
vide more equitable distribution of  the Government's  contri-
bution in thac each employee would  receive  the same benefit
regardless of salary.

     A comparison of the cost-sharing relationship which
would result from this variation follows.




                                35
                                                                   Govern-     Differ-
               Current (note a_                  Revised            ment's     ence in
                   - pl - y -   oveTrn-           Empy-            contri-   employee's
           :ment's    ee's              ment's      ee's           bution    contribu-
Coverage   share      share   Total      share     share   Total     rate       tion
 10,000    $ 46.15   $ 92.30 $138.45 ,$83.07     $ 55.38 $138.45      60%     $(36.92)
 12,000      55.38   110.76   166.14     83.07     83.07 166.14       50       (27.69)
 15.000      69.23   138.45   207.68     83.07    124.61  207.68      40       (13.84)
 20,000      92.30   184.60   276.90     83.07    193.83  276.90      30         9.23
 25,000     115.38   230.75   346.13     83.07    263.06  346.13      24        32.31
 30.000     138.45   276.90   415.35     83.07    332.28  415.35      20        55.38
 35,000     161.53   323.05   484.5R     83.07    401.51  484.58      17        78.46
 40,000     184.60   369.20   553. %,    83.07    470.73  553.80      15       101.53
 45,000     207.69   415.35   6'.75.0i   83.07    539.97  623.04      13       124.62
 47,000     216.91   433.81   650.72     83.07    567.65  650.72      13       133.84

a/Contribution rate is fixed at one-third Government, two-thirds employees.



Pay premiums to age=65
     Under the current system. Federal employees who retire
before age 65 retain their full insurance coverage without
paying premiums. During fiscal year 1975, 37 percent of the
claims were paid to this group even though they comprised
only 12 percent of the insured population. People who work
to age 65 continue to pay premiums.

     Requiring retirees and the Government to pay premiums
to age 65 would reduce the burden on younger employees and
more equitably distribute premiums to those generating the
cost. This change should induce younger employees to par-
ticipate, since their premiums would be lowered.

     The impact on premiums would be considerable. The level
cost per $1,000 of insurance would decrease by $2.183 from
the current $13.811 to $11.628. The annual premiums for an
active employee with minimum insurance of $10,000 would de-
crease from $138.45 to $116.28. The annual premium for a te-
tiree under 65 with $20,000 insurance would increase from
zero to $232.56, of which the retiree would pay $155.04.

     A possibly more important reason for continuing premium
payments to age 65 is the significant differences in retire-
ment ages of individual employees under the civil service re-
tirement system, as well as the other Federal retirement sys-
tems whose covered employees also participate in FEGLI. For
example, optional retirement under the civil service retire-
ment system is allowed as age 55 with 30 years' service, age
60 with 20 years, and age 62 with 5 years. Also, the system
has numerous other provisions whereby employees may retiLe
at earlier ages. For example, law enforcement and fire
fighter personnel may retire at age 50 with 20 years' serv-
ice, and disabled employees may retire at any age after


                                          36
5 years' service.  In 1975 the average age of new retirees
under the system was about 58, ranging from 53 for involun-
tary retirees to 71 for mandatory retirees.  Moreover, other
Federal retirement systems have quite different retirement
requirements, such as the District of Columbia's policemen
and firemen's retirement system whose employees may retire
at any age after 20 years of service; the foreign service
retirement system with retirement at age 50, and the Tennes-
see Valley Authority retirement system where employees must
serve to age 65 to receive full retirement benefits.

Correlate postretirement benefits
with length of FEGLI participation

     Employees who waive FEGLI coverage are permitted to
later join the program provided:

     -- They are less than 50 years of age.

     -- More than 1 year has expired since the insurance was
        waived.

     -- They furnish proof of medical insurability.

     Retiring employees retain their regular coverage if
they have completed at least 12 years of Government service.
The law does not require that these employees be covered by
FEGLI for the entire 12 years to receive the free postretire-
ment coverage. Disability retirees receive free coverage
without the 12-year requirement.

     Under the current high premium structure, employees
younger than 44 can generally obtain term insurance in the
marketplace at lower premiums than their share of the FEGLI
premium.  Regulations permit employees to join the program in
later years when FEGLI costs become competitive.  Later join-
ing employees upon retirement still have the same insurance
benefits wi.tkut paying premiums for their entire career.
Since the premiums include estimated postretirement costs, a
significant inequity exists in the FEGLI program.  Greater
equity would result if the law were changed to correlate the
amount of postretirement coverage with the length of time a
retiree was covered by the FEGLI program as an active em-
ployee.

INCREASE COVERAGE FOR RETIREES

     Most employers reduce insurance coverage by 50 percent
either at the time of retirement or when retirees reach age
65.  FEGLI requires insurance coverage of retirees to be
reduced at the rate of 2 percent per month starting at age
65, with a maximum reduction of 75 percent.

                              37
     Two 'possible methods for increasing retirees' coverage
can be considered to improve FEGLI comparability.

Establish maximum 50-percent reduction
     This method would retain the 2-percent reduction per
month starting at the later age of 65 or retirement and
change the maximum reduction from 75 percent to 50 percent.

     The impact on premiums is significant. The level cost
per $1,000 of insurance would increase $3.089 from the cur-
rent $13.811 to $16.90. Annual premiums for an active em-
ployee with minimum insurance of $10,000 would increase from
$138.45 to $169. A retiree with $10,000 of insurance would
now retain, without paying premiums, $5,000 of insurance
after completion of reductions starting at age 65 rather than
$2,500 of insurance as at present.

Start reduction upon retirement
with maximum 50-percent reduction

     This method would retain the 2-percent reduction per
month, start the reductions upon retirement rather than at
age 65, and change the maximum reduction from 75 percent to
50 percent.

     The level cost per $1,000 of insurance would increase by
$0.922 from the current $13.811 to $14.733. Annual premiums
for an active employee with minimum insurance of $10,000
would increase from $138.45 to $147.33. A retiree with
$10,000 of insurance would now have $5,000 of insurance upon
completion of deductions starting at retirement and retain
it rather than receive reductions starting at age 65 down to
$2,500 of insurance, as is currently the case.
INCREASE COVERAGE FOR EMPLOYEES
     Most employers provide employees with a substantially
higher amount of insurance coverage than FEGLI. Some em-
ployers also provide dependent coverage and additional cov-
erage while in a travel status which is not available to
Federal employees.

Increase amount of insurance

      This will include an alternative of providing greater
amounts of optional insurance to employees based on a slid-
ing scale of needs by age groups.   FEGLI's $10,000 of op-
tional insurance premiums for employees under 35 years of
age are very reasonable--$20.80 annually. Thus younger em-
ployees who need more insurance can obtain it at reasonable
rates.

                               38
Deendent-coverase
     FEGLI could provide for group life insurance coverage for
an employee's spouse ($1,000) and children ($500 each child).
Without accidental death and dismemberment coverage and dis-
continuing insurance after retirement, the total annual cost
for this insurance would be:

                                         Annual
                  Age                     cost
              Under 35                   $ 2.34
              35 to 39                     3.12
              40 to 44                     4.16
              45 to 49                     6.24
              50 to 54                     9.10
              55 to 59                    14.04
              60 and over                 22.36
Business travel accident coverage

     Insurance coverage could be provided for accidental
death or dismemberment incurred while an employee is travel-
ing on official Government business. This benefit would be
in addition to the current FEGLI coverage for accidental
death and dismemberment. Data required for computing the
cost impact is not readily available.  However, the cost is
not significant; it would be less than the annual cost for
accidental death and dismemberment which amounts to $0.41
per $1,000 coverage. An employee with $10,000 of insurance
would pay less than $4.10 annually.
CONCLUSIONS

     FEGLI can be restructured in many ways to provide more
attractive and equitable coverage. The choices discussed are
not all inclusive but represent those we believe warrant con-
sideration because:
     --They would impact favorably on FEGLI's equity and com-
       parability with non-Federal programs.
    -- They could be implemented at little or no additional
       cost to the Government, with a relatively moderate in-
       crease in the total costs to employees.
     If FEGLI is to become more attractive to younger employ-
ees and more equitable for all personnel, employee contribu-
tions should be reduced. Although some of the suggested
structural changes would achieve this, changes to the funding
concept (see pp. 32 to 34) and different allocation of costs

                            39
between employees and the Government could further reduce
employee premiums. Limited savings would also result if the
law recognized that FEGLI is, in effect, a self-insured pro-
gram. (See pp. 21 and 22.)
AGENCY COMMENTS
     The Commission agreed that the possible modifications we
suggested for restructuring the program might make FEGLI more
attractive to younger employees and stated that these and
other suggestions would be considered by the Commission in
reviewing and recommending changes to the program.




                            40
APPENDIX I                                           APPENDIX I
         COMPARISON OF SURVIVOR BENEFITS PROVIDED BY

     THE FEDERAL GOVERNMENT AND BY 21 NON-FEDERAL EMPLOYERS

                    yne of benefit                         Page
Regular group life insurance                                42
Optional group lite insurance                               43
Optional accidental death coverage                          44
Social security and private retirement plans                45.
Total retirement plan benefits                              46

Employee annual contributions for regular life
  insurance                                                 47
Employee annual contributions for social security
  and private retirement plans                              48
Total employee annual contributions for retirement
  plan benefits                                             49
Workers' compensation benefits and employer survivor
  benefits for work-related accidental death                50

Accidental death benefits (not work related)                51
Total benefits paid on natural death                        52

Total benefits paid on non-job-related accidental
  death                                                     53

Total benefits paid on job-related accidental death         54




                                41
APPENDIX I                                                         APPENDIX I

  COMPARISON OF EMPLOYEES' AND RETIREES' SURVIVOR BENEFITS

    'AMOUNTS REPRESENT LUMP-SUM PAYMENTS AND/OR PRESENT

                       VALUE OF ANNUITIES
 FEDERAL GOVERNMENT VERSUS 21 PRIVATE AND PUBLIC EMPLOYERS


                   Regular Griup Life Insurance
                                       Active                    Retired
Age (note a)             25            28            45      58            68
Employer:
    FEGLI              $12,000 $16,000 $20,000 $22,000 $ 6,0u0
Other employers                               -
  (note b):
    1                   11,000       15,000       19,000   15,000     15,000
    2                   22,000       30,000       38,000      500        500
    3                    5,000       35,000       45,000    5,000      5,000
    4                   10,000       14,000       18,000   11,000      8,000
    5                   15,000       21,000       27,000    2,500      5,000
    6                   19,000       28,000       36,000    9,000     11,000
    7                   10,000       14,000       18,000   40,000     14,000
    8                   10,000       14,000       18,000   20,000     16,000
    9                   20,000       28,000       36,000     (c)      13,000
   10                   12,000       16,000       17,000   17,000      9,000
   10-1 (note d)        20,000       28,000       36,000   40,000     21,000
   11                   10,000       14,000       18,000    8,400      8,000
   12                   23,000       30,000       38,000   42,000     31,000
   13                   25,000       49,G00       63,000   26,000     26,000
   14                   22,000       30,000       38,000   17,000     17,000
  15                   20,000        28,000       36,000     -             -
  16                    20,000       28,000       36,000   40,000     10,000
  17                    15,000       21,000       27,000    4,000      4,000
  18                    14,000       18,000       22,000   12,000     12,000
  19                    10,000       10,000       10,000     -             -
  20                   10,000        14,000       18,000    5,000      5,000
  21                   20,000        28,000       36,000   40,000     20,000




                                42
APP,.E'NDIX I                                                                          APPENDIX                I



                                 Optional Group Life Insuranc&

Age (note a)                                            Active                                   Retired
                         -            --                                          -     --                 -
Employer (note e):
    FEGLI            $       10,000            $    10.000           $   10.000        $10,000 $ 2.500
Other employers:
    A.                       11,000                 15,000               19,000         20,000
    2 (note'f)                                                                                             -
                                                                           -                 -

    4                        20.000                 28,000               36,000        11,000         8.000

    7                     20.000                    14.,000              18.000          -             -
    8                     70,000                    90.000               54,000        19.000          -
    9                    120.000                   169.000               73.000          (c)
   10                                                                                                23,000
                                           -                     -                -                    -
  10-1 (note d)      5.000 to 50.000           5.,000 to 70,000      5.000 to 90,000     -
  11                                                                                                   -
                         10.000                     14,000               18.000          -             -
  1 (note f)             10.000                     14.000               18,000
  13 (note f)                                                                          25,000          -
                                                      -                    -                 -
  14                                                                       -             _
  15                                                                       -             _             _
  16                           -                      _
  17                         15,000                 21,000               27,000          -             -
  18            _        _
  19                         20.000                 20.000               20.000         5,000         5.000
  20                         20.000                 28.000               36.000          -             -
  21 (note f)                                      4 _                     -




                                                   43
APPENDIX I                                                              APPENDIX I




                    Optional Accidental Death Coverage

Age (note a)                                      _tive
                            25
SEployer (notes e
  and g):
    erGLI           $    10,000            $    10,000             $
Other employerse                                                         10.000
    1
    2               22.000 to     66.000   30,000 to ,90,000        38,000 to 114,000
       3
       4                 20,000                 28,000                   36.000
       5                  3.000                  3,000                    3.000

   8                                                                       _
   9                10.000 to    50,000    10.000 to      70.000    10,000 to     90.000
  10
  10-1 (note d)     10.000 to 250,000      10,000 to 250,000        10.000 to 250,000
   2
  =.                25,000 to    50,000    25,000 to      75,000   225,000 to 100,000
  ±4
  15
  16
  17
  18
  19
  21                10,000 to 250.000      10,000 to 250.000       10.000 to 25 .000
                            -
                            21             10.000 to 150,000       10.000 to 150.000




                                     44
APPENDIX I                                                        APPENDIX I




             Social Security and Private Retirement Plans
                              Active                          Retired
Age (note a)           25      28          45          58                 68

Social security   $     255 $103,000 $ 64,000 $      29,000       $     38,000
  private retire-
  ment plans:
    Employer:
        1               -     14,000      18,000     55,000             57,000
        2               -       -           -        43,000             51,000
        3               -       -           -        38,000             45,000
        4               -       -           -        27,000             34,000
        5             1,000   47,000     124,000     39,000             70,000
        6               -       -          -         38,000          37,000
        7               -      6,000     42,000      26,000          35,000
        8               -     16,000     43,000      37,000          29,000
        9               -       -          -           (C)           39,000
       10               -       -        13,000    Not avail-      Not avail-
                                                     able               able
       10-1
          (note d)      -     3.000      13,000    Not avail-      Not avail-
                                                     able            able
       11               -     3,000        -         43,000             37,000
       12               -      -           -           -                39,000
       13               -      -         44,000      60,000             50,000
       14               -      -           -          8,000             12,000
       15               -      -           -           -                39,000
       16               -      -           -         29,000             81,000
       17               -      -           -         91,000             75,000
       18               -      -           -         66,000             58,000
      19                -      -           -         17r000             34,000
      20                       -           -         53,000             48,000
      21                       -           -         34,000             41,000




                                    45
APPENDIX     I                                                      APPENDIX   I




                      Total Retirement Plan Benefits

                                    Active                    Retired
Age    (note a)             5        28-     --               Rt--
                                                                 ir--------d
                                                                         ---
Employer:
    Federal                 -     $ 74,000 $114,G03     $ 78,000
Other employers:                                                    $ 71,000
    1                 $     255   117,000     82,000       84.000       95.000
    2                       255   103,000     64,000       72,000       89,000
    3                       255   103,000     64,000       67,000      82.000
    4                       255   103,000     64,000       56,000
    5                                                                  71.000
                          1,255   150,000    188.000       68,000     108.000
    6                       255   103,000     64,000       66,000      75,000
    7                       255   109,000    106,C00       55,000      73,000
    8                       255   119,000    107,000       65,000      67,000
    9                       255   103,000     64,000         (c)
   10                                                                  77,000
                            255   106,000     77,000   Not avail-   Not avail-
                                                         able          able
      10-1 (note d)        255    106,000     77,000   Not avail-   Not avail-
                                                         able          able
  11                       255    103,000     64.000      71,000       74,000
  12                       255    103,000     64.000      29,000       76.000
   Ad3                     255    103,000    108,000      88,000
  14                                                                   87,000
                           255    103,000     64,000      37,000       50,000
  15                       255    103,000     64,00C      29,000
  16                                                                  77,000
                           255    103,000     64,000      57,000     119.000
  17                       255    103,000     64.000     119,000
  18                                                                 113,000
                           255    103,000     64,000      95,000      95.000
  t9                       255    103,000     64,000      46,000      72,000
  20                       255    103,000     64,000      82,000
  21                                                                  86,000
                           255    103.000     64,000      63.000      79,000




                                        46
APPENDIX I                                               APPENDIX I

  Employee Annual Contributions For Regular Life Insurance
                                          Active

Age (note a)                25              28               45

Employer (note g):
    Federal            $   111      $      148       $      185
Other employees:
    2                      126             174              266



    6                       78             114              390


    9
   10
   10-1 (note d)
   11
   12
   13                  Not avail-       Not avail-       Not avail-
                         able             able             able
   14                     132              180              228
   15                      48               67               86
   16                      72              101              130
   17                      -                -                -
   18                      73               94              114
   19                      -                -                -
   20
   21




                            47
APPENDIX I                                          APPENDIX I

              Employee Annual Contributions for
         Social Security and Private Retirement Plans
                                           Active

Age (note a)                        25       28            45

Social security (note g)           $535     $819          $825

Private retirement plans
  (note g):




    5                               304      464           624



    9                               102      222           342
   10                                -        -
   10-1 (note d)                              -
   11
   12
   13                                -        -
   14                                -        -
   15                                -        -
   16                               500      700           900
   17                               281      402           602
   18                               200      280           477
   19
   20
   21




                              48
APPENDIX I                                            APPENDIX I

               Total Employee Annual Contributions
                   for Retirement Plan Benefits
                                          Active

Age (note a)                  25               28           45
Employee (note g):
    Federal                 $ 700         $     980       $1,260
Other employees:
    1                         585               819          825
    2                         585               819          825
    3                         585               819          825
    4                         585               819          825
    5                         889             1,283        1,449
    6                         585               819          825
    7                         585               819          825
    8                         585               819          825
    9                         637             1,041        1,167
   10                         585               819          825
   10-a (note d)              585               819          825
   11                         585               819          825
   12                         585               819          825
   13                         585               819          825
   14                         585               819          825
   15                         585               819          625
   16                       1,085             1,519        1,725
   17                         866             1,221        1,427
   18                         785             1,099        1,302
   19                         585               819          825
   20                         585               819          825
   21                         585               819          825




                              49
APPENDIX I                                        APPENDIX I

        Workers' Compensation Benefits and Employer

     Survivor Benefits for Work-Related %ccidental Death
                                        Active

Age (note a)                   25        28              45

Employer (note g):
    Federal (note h)     $      800   $155,000        $161,000
Other employers:
    1 (note i)                1,250     78,000          63,000
    2                         1,000    156,000         106,000
    3                         1,000     37,000          37,000
    4                           750     78,000          62,000
    5                           745     40,000          41,000
    6 (note i)               21,150     61,000          69,000
    7                           750     78,000          62,000
    8 (note i)               20,750    158,000         144,00
    9                         1,000    155,000         106,000
   10                         1,500     54,000          54,000
   10-1 (notes d and
      i)                     11,500     68,000          72,000
   11                         1,000     37,000          37,000
   12                           750     78,000          62,000
   13                           750     78,000          62,000
   14                         1,750     33,000          33,000
   15                         1,500     54,000          54,000
   16                           800     57,000          57,000
   17 (note i)                  750    266,000         252,000
   18        .                1,000    156,000         106,000
   19                         1,750     33,000          33,000
   20                         1,000     37,000          37,000
   21                         1,000     15,000          15,000




                                50
APPENDIX I                                        APPENDIX I
       Accidental Death Benefits (Not-Work Related)

                                      Active
Age (note a)                 25           28             45
Employer (note g):
    Federal               $12,000      $16,000        $20,000
Other employers:
    1                      11,000       15,000         19,000
   3                        5,000       35,000        45,000
   4                       10,000       14,000        18,000
   5                       15,000       21,000        27,000
   6                       19,000       28,000        36,000
   7                       20,000       28,000        36,000
   9                      10,000        14,000        18,000
  10                       6,000         8,000         9,000
  10-1 (note d)           10,000        14,000        18,000
  11                      20,000        28,000        36,000
  12                        -              -            -
  13                      20,000        42,000        54,000
  14                        -              -            _
  15                      10,000        28,00('       36,000
  16                      20,000        28,000        36,000
  17                        -              -            -
  18
  19                       4,000         4,000         4,000
  20_                       -             -
  21 (note g)             20,000        28,000        36,000




                            51
APPENDIX I                                            APPENDIX I
             Total Benefits Paid on Natural Ueath

                            Active                   Retired
Age (note a)          25      28       45       58         68
Employer:
     Federal     $12,000 $ 90,000 $134,000 $100,000 $ 77,000
Other employers:
     1            11,000 132,000 101,000     99,000 110,000
     2            22,000 133,000 102,000     72,000   90,000
     3             5,000 138,000 109,000     72,000   87,000
     4            10,000 117,000    82,000   67,000   79,000
     5            16,000 171,000 215,000     71,000 113,000
     6            20,000 131,000 100,000     75,000   86,000
     7            10,000 123,000 124,000     95,000   87,000
     8            10,000 133,000 125,000     85,000   83,000
     9            20,000 131,000 100,000        (b)   90,000
   10             12,000 121,000    94,000
   1!-1 (note d) 20,000 134,000 113,000
   11             10,000 117,000    82,000   80,000   83,000
   12             23,000 133,00n 102,000     71,000 107,000
   13             25,000 152,000 171,000 114,000 113,000
   14             22,000 133,000 102,000     54,000   67,000
   15             20,000 131,000 100,000     29,000   77,000
   16             20,000 131,000   100,000   97,000  129,000
   17             15,000 124,000    91,000 123,000 117,000
   18             14,000 121,000    86,000 107,000 107,000
   19             10,000 113,000    74,000   46,000   72,000
   20             10,000 117,000    82,000   87,000   91,000
   21            20,000 131,000 100,000 103,000       99,000




                             52
APPENDIX I                                        APPENDIX I

   Total Benefits Paid on Non-Job-Related Accidental Death
                                        Active

Age (note a)                25           28            45

Employer (note g):
    Federal              $24,000      $106,000      $154,000
Other employers:
    1                     22,000       147,000       120,000
    2                     22,000       133,000       102,000
    3                     10,000       173,000       154,000
    4                     20,000       1.31,000      100,000
    5                     31,000       192,000       242,900
    6                     39,003       158,000       136,000
    7                     30,000       151,000       160,000
    8                     10,000       133,000       125,000
    9                     30,000       145,000       118,000
   10                     18,000       129,000       102,000
   10-1 (note d)          30,000       148,000       131,000
   11                     30,000       145,000       118,000
   12                     23,000       133,000       102,000
   13                     45,000       194,000       225,000
   14                     22,000       133,000       102,000
   15                     30,000       159,000       136,000
   16                     40,000       159,000       136,000
   17                     15,000       124,000        91,000
   18                     14,000       121,000        86,000
   19                     14,0(c       117,000        78,000
   20                     10,000       117,000        82,000
   21                     40,000       159,000       136,000




                             53
APPENDIX I                                            APPENDIX I

       Total   Benefits Paid on Job-Related Accidental Death

                                            Active

Age   (note a)                  25           28            45

Employer (note g):
     Federal                 $25,000      $172,000      $201,000
Other employers:
     1                        24,000       211,000       164,000
     2                        23,000       289,000       208,000
     3                        11,000       210,000       191,000
     4                        21,000       209,000       162,000
     5                        32,000       232,000       283,000
     6                        60,000       219,000       205,000
     7                        31,000       229,000       222,000
     8                        31,000       291,000       268,000
     9                        31,000       301,000       224,000
    10                        19,000       183,000       156,000
    10-1 (note d)             42,000       215,000       202,000
    11                        31,000       182,000       155,000
    12                        24,000       211,000       164,000
      13                      46,000       272,000       287,000
      14                      24,000       166,000       135,000
      15                      32,000       213,000       189,000
      16                      41,000       216,000       193,000
      17                      16,000       390,000       343,000
      18                      15,000       277,000        192,000
      !9                      16,000       150,000          11i,000
      20                      ].1,000      154,000        119,000
      21                      41,000       174,000        151,000




                                 54
APPENDIX I                                        APPENDIX I

a/Our calculations of benefits payable under the various
  programs were made for persons assumed to have the follow-
  ing characteristics at time of death.
    --A single 25-year-old male with no dependents earning
      $10,000 a year with 3 years' service.
    --A married 28-year-old male with 4 years' service earn-
       ing $14,000 a year and having a 28-year-old wife and a
      5-year-old child.
    --A married 45-year-old male with 20 years' service
      earning $18,000 a year and having a 45-year-old wife
      and two children, ages 10 and 18.
    --A married 58-year-old male who retired at age 55 earn-
      ing $20,000 a year with 30 years' service and having a
      58-year-old wife.
    --A married 68-year-old male who retired at age 65 earn-
      ing $20,000 with 35 years' service and having a 68-
      year-old wife.
     The non-Federal employers included in the comparison
base were 17 large private companies representing a variety
of industries dispersed throughout the country and 4 public
bodies. All of these employers were known to offer their
employees relatively good fringe benefit packages. Since
some of the data we collected from these employers was sen-
sitive confidential, we are not identifying them.
b/Other life insurance benefits included in the packages
  offered by several non-Federal employers but not available
  to FEGLI participants are:
     -- Coverage for a spouse in amounts of $1,500 to $5,000
        and $1,000 for each child.

     --Coverage of two to three times the salary for acci-
       dental death incurred while traveling for the em-
       ployer.

      -A combination of whole life and term insurance based
       on an individual's salary.

c/Employer benefits do not provide for retirement at age 55.

d/This employer has two separate fringe benefit plans--one
  for hourly wage employees and one for salaried employees.




                             55
APPENDIX I                                         APPENDIX I

e/Participation in the optional group life insurance plans
  varies in the non-Federal sector from a low of 50 percent
  to a high of 80 percent of eligible employees.   Only 24
  percent of eligible Federal employees participate in
  FEGLI's optional insurance.   We were unable to obtain par-
  ticipation data on optional accidental death and dismem-
  be,-ment insurance of non-Federal employees.

f/These employers offec survivor income insurance of about
  20 to 30 percent of salary.   This benefit differs from
  regular group life  insurance in that it is restricted to
  monthly payments to a specified eligible survivor for as
  long as that person lives.

g/Retirees are not required to contribute to any death ben-
  efit plan and generally are not provided any job-related
  death benefit or accidental death and dismemberment insur-
  ance.  One non-Federal employer (indicated on our list as
  number 21) provided accidental death coverage after retire-
  ment until age 65.

h/Survivors of Federal employees have   the option of select-
  ing elther workers' compensation or   retirement system ben-
  efits.

i/These totals include employer benefits, in addition to
  workers' compensation benefits, as follows:

     Employer 1--$500 burial benefit.
     Employers 6 and 8--Two times the annual salary.
     Employers 10 and 1--Annual salary.
     Employer 17--Age 28, $135,841 and age 45, $144,345.




                              56
                                                                                                      APPENDIX II
APPENDIX II




               NINETY-FOtJURTH CONGRESS


                                 Not.
                            N.AENmVI         N.a..o                       U      .                   "4AIiMAN
           BOBNK.

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                                             jam,      mar.            COM M I      Om rPOU OFIUMANDCIVIL IVISW
       M= yP                                                                                         U I   NO
                                                       EMBEMVM07
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                    IMma Yi. M
           mo          __.                         TA-L-'.
                                                _efm
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   pm           m       -           m.
                                    ,         {n w rnafT.   we.


                "
                L.           'nA.                                                    November 17, 1975
       _        E.          VLA.
       I
   (I~i&             IIni      fIa..


   j       _          __.        .
                                KY.

                                               B-125004

                                Honorable Elmer B. Staats
                                Comptroller General of the United States
                                U.S. General Accounting Office
                                Washington, D. C. 20548


                                 Dear Mr. Comptroller General:

                                         Recent hearings by the Subco ittee       on Retirement and Employee
                                    Benefits on the Federal Erployees'     Group  Life Insurance (FEGLI) pro-
                                                     that a re-evaluation    of  the  program is needed. We
                                    gram have shown
                                                                             are  declining    to participate
                                    are concerned that younger employees
                                                                its  cost,  while,   at  the  same  time, the re-
                                    in the program because of                         be   adequate   or comparable
                                    duced level of coverage to retirees     may  not
                                                                retirees   under  other    employers'     life insur-
                                    with coverage provided to
                                    ance programs.
                                                                                                      Office per-
                                          I am hereby requesting that the General Accounting
                                                                      of life  insurance    and  other    death
                                    form a comprehensive analysis                                            with
                                                      available   to  Federal  employees    and  retirees
                                    benefit programs                                                      public  and
                                                                                     employees,   both
                                    similar programs prk vided for non-Federal
                                               Your review  should   identify  possible    alternative methods
                                    private.
                                                                                              to provide better
                                     in which the FEGLI program could be restructured
                                                          coverage   for the  premiums    being  paid as well as
                                     and more acceptable
                                                                                  be  accomplished     if the Gov-
                                     the savings and improvements that could                       as    a self-
                                                             responsibility     for  the  program
                                     ernment were to assume
                                     insurer.

                                             Thank you for your cooperation.

                                                                                 nYely y7urs,



                                                                              DAVID N. HENDERSON
                                                                              Chairman

                                       DNH:bjl




                                                                     57
APPENDIX III                                                              APPENDIX III



                UNITED STATES CIVIL r-ERVICE COMMISSION                       "IIN,   e T
                                                                                      N
               BUREAU OF RETIREMENT. INSUrANCE. AND OCCUPATIONAL HEALTH
                                WAelHIJnow. D.C.   04111



                                 MAR 8 1977

    Mr. H. L. Kreiger
    Director
    Federal Personnel and Compensation Division
    U. S. General Accounting Office
    Washington, D. C. 20548




    Dear Mr. Kreiger:

    This is in response to your January 11, 1977 request for cocments on the
    GAO draft report, "Changes to the Federal Employees Group Life Insurance
    Progr are Needed." We find the report to be a clear and thorough ex-
    planation of a very complicated subject and wish to compliment you for it.
    The coments below are divided into the same sections as the draft report.

    Comarison of death benefits for Federal and non-Federal employees

    Your report notes that there are several Federal programs providing death
    benefits and includes a comparison of the benefits of 21 other employers.
    We agree that all sources of death benefits, including FIGLI, Civil Service
    Retirement, and Federal   1mployeea Compensation, as well as others, should
    be considered. Federal benefits are, es you note, generally comparable to
    benefits of other large   ployers but the trend has been toward a larger
    share of the cost paid by other employers than by the Federal government.
    In many caseq the employer pays the entire cost of insurance benefits.
    However, we would caution against changing life insurance contributions to
    be "comparable" to the contributions of other employers without considering
    the comparability of all elements of compensation.

    FEGLI is not a typical Eroup life insurance proatrm

    The report notes that the participation of the government in the FEGLI
    contract differs significantly from that of other employers because, among
    other things, the goverment establishes premius, answers employee in-
    quiries, accounts for pr mium payments nd audits the operation of the
    insurance companies.  Conaequently, the report suggests that C ngress con-
    sider whether F.CLI should be liable for the premium taxes and risk charges
    paid under a standard contract.

    The distinction between FIGLI and the typical group life insurance program
    may be oversimplified.  It is true that a sall employer purchasing group
    life insurance will leave all administrative duties t^ the insurer. Larler




          THE MERIT SYSTEM-A GOOD INV.TMENT IN GOOD GOVERNMENT




                                           58
APPENDIX   III                                                    APPENDIX      III



   groups will, however, handle many of the administrative duties. We sug-
   gest that you may want to note that there are not just two types of
   contracts-lqFGLI and all others-but that there are many varieties in
   between and the employers' participation in FEGLI may not be too dis-
   similar from the insurance programs of other very large groups.

   As you note, Congress decided in 1954 to subject FEGLI contributions to
   premium tsies and the Commission and the carrier cannot change this situ-
   ation without the action of Congress.

   Funding and establishing premiums

   The funding of FEGLI is a very complex question as reflected in your
   report. You note that FEGLI is funded on a much stronger basis than is
   typical for group insurance contracts and suggest changes in the funding
   criteria and/or the government share of the cost.

   The FEGLI program began with a total payment of 37.5 cents biweekly per
   $1,000 of insurance. Early projections showed that, while the 37.5 cents
   might eventually have to be supplemented, it would only happen after a
   long time. We saw no reason to ask for an increase in the rate until
   the need for such increase was imminent and certain. Our 1957 valuation
   of the system noted that "the necessity for increasing contributions to
   support the ultimate benefit 1cad is not a problem of the ft,#eseeable
   future."

   The General Accounting Office, however, took a different view of the
   possible long range short fall. In a letter dated May 16, 1962, the
   Comptroller General recommended that "Congress adopt the level cost prin-
   ciple in establishing premium rates as the need arises." Based on this
   advice, Congress added the level cost concept to the program. Your cur-
   rent recommendation is more in line with the funding criteria followed
   by the Commission prior to that time. Excess funds were set aside to pay
   benefits to retirees but there was no formal level cost goal.

   As you point out, the level cost criteria is far more stringent than ttie
   various criteria used in the private sector. Unlike retirement financing,
   there are no standard funding concepts for group life insurance. Em-
   ployers pay the term cost for active employees and, if they have post-
   retiremant insurance, fund that cost in many different ways. Post-retirement
   funding ranges from simply setting aside any excess gains to a formalized
   contribution system like FEGLI.

   There are many pre-funding systems in use and many others which could be
   devised.

   We would caution, however, against introducing a lower financing system
   and possibly concealing the true cost. Radically lower levels of funding
   today will lead to much higher funding in the future. If the employee pays




                                         59
APPENDIX III                                                     APPENDIX III



   two-thirds of a lower cost today, and does not share in the Increasing
   cost, the government will wind up paying more than one-third of the
   cost. Rather than approach higher government funding by using lower
   funding criteria, we recommend that the question of the appropriate share
   for the employee and the government be directly faced and decided on.

   The report includes one funding recommendation for the Commission--
   recognition of future general salary increases in the cost calculation.
   As you know, the question of use of "dynamic" funding criteria-including
   general salary increases--is currently being reviewed for the Civil
   Service Retirement System. Also, the Board of Actuaries is beginning a
   major reevaluation of the Civil Service Retirement System. It would be
   premature to take one element of dynamic financing And apply it to FEGLI
   until the whole question of "dynamic" funding or financing by the govern-
   ment is resolved.

   Can FEGLI be improved with no increase in total cost?




                             [See GAO note.]




  We share your concern about the low level of participation in the program
  by younger employees. If even lower levels of participation occur, the
  rates may have to be increased, and even more younger employees may be
  driven out.

  You have suggested a number of possible modifications that might make
  the program more attractive to younger employees. Other changes will
  undoubtedly be'suggested as we review the FEGLI program and those you
  have suggested as well as others will be considered and evaluated in terms
  of costs and benefits before we make our recoinendations for changes in
  the program.

                                                 crely yours



                                             Thomas A. Tinsley        7
                                             Director
  GAO note:    The deleted comments relate to matters which were
               discussed in the draft report but which were omitted
               from this report.




                                       60
APPENDIX IV                                         APPENDIX IV

     PRINCIPAL OFFICIALS OF THE CIVIL SERVICE COMMISSION

          RESPONSIBLE FOR ADMINISTERING ACTIVITIES
                  DISCUSSED IN THIS REPORT


                                        Tenure of office
                                       From           To
COMMISSIONERS:
    Chairman (vacant)               Jan.     1977    Present
    Georgiana H. Sheldon, Vice
      Chairman                      Mar.     1976    Present
    L. J. Andolsek                  Apr.     1963    Present
    Robert E. Hampton, Chairman     Jan.     1969    Jan. 1977
    John W. Macy, Jr., Chairman     Mar.     1961    Jan. 1969
    Jayne B. Spain, Vice Chairman   June     1971    Dec. 1975
    James E. Johnson                Jan.     1969    June 1971
    Robert E. Hampton               July     1961    Jan. 1969
EXECUTIVE DIRECTOR:
    Raymond Jacobson                July     1975    Present
    Bernard Rosen                   June     1971    June 1975
    Nicholas J. Oganovic            June     1965    May   1971
DIRECTOR, BUREAU OF RETIREMENT,
  INSURANCE AND OCCUPATIONAL
  HEALTH:
    Thomas A. Tinsley               Jan.  1974       Present
    Andrew E. Ruddock               Sept. 1959       Dec.  1973




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