DOCUMENT RESUMF 03168 - [A21732861 Federal Retirement Systems: Unrecognized Costs, Inadequate Funding, Inconsistent Benefits, FPCD-77-48; B-179810. August 3, 1977. 33 pp. 16 appendices (41 pp.). Report to the Congress; by Elmer B. Staats, Comptroller General. Issue Area: Personnel Management and Compensation (300); Personnel Management and Compensation: Compensation (305). Contact: Federal Personnel and Compensation Div. Budget Function: Income Security: Federal Employee Retirement and Disability (602). Organization Concerned: Administrative office of the United States Courts; Civil Service Commission; Department of Defense; Department of State; Federal Reserve System; Tennessee Valley Authority; United States Tax Court. Congressional Relevance: ouse Committee on Armed Services; Senate Committee on Armed Services: Congress. Authority: Employee Retirement Income Security Act of 1974 (88 Stat. 829)} (P.1. 94-350; 90 Stat.. 823).. tP.L. 94-554; 90 Stat. 2611). (P.L. 91-93; 83 Stat. 136). OMB Circular A-"6. The cost and liabilities of Federal retirement programs are much greater than recognized by current costing and funding procedures. Findings/Conclusions: In 1976, seven of the Government's retirement systems paid over $15..6 billion to retirees and the survivors of decease3 employees and ret'rees--an increase of 10 billion since 1970. The systems also reported liabilit' s exceeding $320 billion for which less than 44 billion had been set aside i Federal trust funds. Federal retirement systems' funding requirements vary, but in most cases are less stringent than those imposed by law on private pension plans. sually, little or no consideration is given to the effect of future general pay increases and annuity adjustments on ultimate benefit payments, resulting in considerable understatement of benefit costs accruing each year. Recommendations: The Congress should enact legislation equiring that the full cost of Federal retirement systems be recognized and funded and that the difference between currently accruing cost and employee contributions be charged to agency operations. In addition, Congress should establish an overall Federal retirement policy to guide retirement system development. Centralization of committee jurisdiction over all Federal employee retirement systems would facilitate the establishment and implementation of such a policy. (Author/SC) co REPORT TO THE CONGRESS Y THE CMPTROLLER BY THE COMPTROLLER GENERAL X,4s s OF THE UNITED STATES Federal Retirement Systems: Unrecogni7ed Costs, Inadequate Funding, Inconsistent Benefits Costs and liabilities of the seven Federal re- tirement systems discussed in this report are not fully recognized and funded. Conse- quently, the costs of agency operations and programs are understated. This also results in unrecognized subsidies to agencies whose operations are intended to be self-supporting. The Congress has not provided an overall policy to guide the development of Federal retirement systems and should do so. The systems have developed on an independent, piecemeal basis, causing inequities and il,con- sistencies, as well as common problems. Many of the differences are without apparent ex- planation. FPCD-77-8 AUGUST 3, 1977 COMPTROLLER GENERAL OF THE UNITED STATES WASHINGTON. D.C. 248 B-179810 To the President of the Senate and the Speaker of the House of Representatives This report reiterates our retirement systems and discusses concern over Federal employee the many inequities, incon- sistencies, and common problems that exist. We are particu- larly concerned that the full costs of benefits accruing under the systems are not being recognized, thereby the ability of the Congress to make sound decisions inhibiting lishing, amending, or ut.ding retirement and on estab- agency An overall policy is needed to guide the development programs. eral retirement systems. of Fed- We made our review pursuant to the Budget and Accounting Act, 1921 (31 U.S.C. 53), and the Accounting and Auditing Act of 1950 (31 U.S.C. 67). We are sending copies of this report to Civil Service Commission; the irector, Officethe Chairman, of Management and Budget; the Secretary of Defense; the Secretary the Director. Administrative Office of the United of State; Courts; the Court Executive, United States Tax States Court; the Secretary of the Board, Board of Governors of the Federal Reserve System; and the General Manager, Tennessee Authority. Valley Comptroller General of the United States COMPTROLLER GENERAL'S FEDERAL RETIREMENT SYSTEMS: REPORT TO THE CONGRESS UNRECOGNIZED COSTS, INADEQUATE FUNDING, INCONSISTENT BENEFITS DIGEST This report states once again GAO's concern over Federal employee retirement systems. In 1976, seven of the Government's retire- ment systems paid over $15.6 billion to retirees and the survivors of deceased employees and retirees--an increase of billion since 1970. The systems also $10 reported liabilities exceeding $320 billion for which less than $44 billion had been set aside in Federal trust funds. The Congress should enact legislation requiring that the full cost of Federal retirement systems be recognized and funded and that difference between currently acc ruing cost the and employee contributions be charged to agency operations. Federal retirement systems' funding require- ments vary, and in most cases are less strin- gent than those imposed by law on private pension plans. The cost and liabilities of Federal retirement programs are much greater than recognized by current costing and ing procedures. Usually, little or no fund- con- sideration is given to the effect of future general pay increases and annuity adjust- ments on ultimate benefit payments, resulting in a considerable understatement of benefit costs accruing each year. For the civil service retirement system alone. unrecognized retirement costs in 1976 amounted to an esti- mated $7 billion. In some programs. none the currently accruing cost is recognized. of (See pp. 3 to 5.) Because most Federal retirement crust funds are requir,)d by law to be invested in Federal debt securities, full funding of Govern- ment retirement liabilities would not elimi- nate the need for future taxing and borrowing to meet benefit payments as they become due. ia nremowe te eroot FPCD-77-48 MW MdA . *Ib noW,. htwo. However, full funding would enhance cost recognition and budgetary discipline as well as promote sounder fiscal and legis- lative decisionmaking. Under existing fund- ing provisions, the unfunded liabilities of Federal retirement systems will continue to grow. (See pp. 5 to 13.) Costs not covered by employee contributions must ultimately be paid by the Govern- ment. When retirement costs are understated, the costs of Government operations and agency programs are also understated. One side effect of the underallocation of retire- ment costs to agency operations is the unre- cognized subsidy that accrues to Gove-nment organizations whose programs are required by law to be financed by the users of their services. Understatement of retirement costs may also rsult in a tendenuy to adopt bene- fits which could jeopardize the affordability of the retirement systems. (See pp. 16 to 21.) Some of the agencies responsible for adminis- tering Federal retirement programs tcreed with GAO that the full cost of retirement benefits should be recognized. The Depart- ment of Defense did not comment on the report, and others had no comments on GO's ecommend- ations. Self-supporting agencies, whose retirement contributions would be higher if costing and funding techniques recognized general pay increases and annuity adjust- ments, generally agreed that the costs of their operations were being understated. Some believed the Congress hould appropriate funds to pay the higher costs rather than increase charges to the users of the agencies' services. (See pp. 21 and 22.) GAO further recommends that the Congress establish an overall Federal retirement policy to guide retirement system develop- ment. Centralization of committee jurisdic- tion over all Federal employee retirement systems would facilitate the establishment and implementation of such a policy. There is no standard or method of assessing the adequacy of Federal employee retirement programs. Different committees of the Congiess ii have legislative jurisdiction over the various systems. There is no overall policy for guid- ance in establishing, financing, or amending these progrLms. Federal retirement systems have developed on an independent, piecemeal basis. Many inequities, inconsistencies, and common problems exist among the systems. Some of the differences be legitimate, but many of the benefit may provi- sions differ without apparent explanation. -- Employee contribution Ttes vary. Some systems require no cost haring by he covered employees. (See app. I.) -- Each system has its own age and service requirements that employees must meet to become eligible for a retirement annuity. (See pp. 23 and 24.) -- Transfers of service credits between re- tirement systems are treated inconsistently. (See pp. 23 and 25-26.) -- Benefits payable at retirement vary from system to system. (See pp. 26 to 28.) -- There are wide variations in the survivor benefit programs of the systems. (See pp. 28 and 29.) -- Each system has differing provisions re- garding the amounts reemployed annuitants may receive. (See pp. 29 to 31.) -- Disability provisions and practices are not consistent. (See pp. 31 and 32.) -- Social security coverage is provided to employees under two of the retirement systems. Employees in the other systems are prohibited by law from participating in social security through their Federal employment. (See p. 32.) Most Federal agencies responsible for admin- istering the various retirement systems no specific comments to GAO on whether made the many different provisions and practices lowed are justified. fol- (See pp. 32 and 33.) IL Sht iii Con t e n t Page DIGEST CHAPTER 1 INTRODUCTION 1 Scope of review 2 2; COST OF RETIREMENT PROGRAMS: UNDERSTATED AND UNDERFUNDED Recognizing retirement costs 3 Funding retirement costs 3 5 Financing and funding p ctyies of Federal retirement systems Funding requirements in the 7 private sector Conclusions 13 Recommendation to the Congress 14 Agency comments 15 15 3 UNDERSTATED CIVIL SERVICE RETIREMENT COSTS RESULT IN UNRECOGNIZED SUBSIDIES Selected agencies receiving subsidies 16 Conclusions 16 Agency comments and our evaluation 21 21 4 INEQUITIES AND INCONSISTENCIES OF FEDERAL RETIREMENT PROGRAEMS Retirement eligibility 23 Service credits and portability 23 Benefit formulas 23 Survivor benefits 26 Reemployed annuitants 28 Disability retirement 29 Social security coverage for 31 Federal employees Conclusions 32 Recommendation to the Congress 32 Agency comments and our evaluation 32 32 APPENDIX I Financing provisions 34 I Survivor benefits 35 Page APPENDIX III Disability retirement 40 IV May 16, 1977, letter from the Director, Bureau of Retirement, Insurance, and Occupational Health, Civil Service Commission 47 V April 28. 1977, letter from the Deputy Assistant Secretary for Budget and Finance, Department of State 49 VI April 27. 1977, letter from the Court Executive, United States Tax Court 51 VII May 20, 1977, letter from the Secretary of the Board of Governors, Federal Reserve System 54 VIII May 10, 1977, letter from the Director, Administrative Office of the United States Courts 56 IX May 12, 1977, letter from the General Manager, Tennessee Valley Authority 58 X April 29. 1977, letter from the Director, Accounting and Fiscal Operations, Federal Home Loan Bank Board 59 XI May 6, 1977, letter from the Controller, Federal Deposit Insurance Corporation 60 XII April 25, 1977, letter from the Acting Governor of the Canal Zone and Vice President. Panama Canal Company 62 XIII May 4, 1977, letter from the Governor, Farm Credit Administration 63 XIV April 29, 1977. letter from the Vice President for Administratior, Federal National Mortgage Association 66 XV June 3, 1977, letter from the Postmaster General 68 pag APPENDIX XVI May 19. 1977. letter frcm the Mayor, District of Columbia 72 ABBREVIATIONS ERISA Employee Retirement Income Security Act GAO General Accounting Office OMB Office of Management and Budget TVA Tennes ,e Valley Authority CPI Consumer Price Index CHAPTER 1 INTRODUCTION In a 1974 report to the Congress, financial status and oenefit provisions we summarized the of various Federal employee retirement systems and discussed a number of issues related to basic policies, financing, administration, benefits. 1/ and We recommended that the Congress assume role in est-ablishing an overall retirement a major objectives and principles to guide future policy to provide development and improvement of Government retirement systems. have reviewed in depth and reported on various Since then we Federal retirement programs and are presently, aspects of of three House committee and subcommittee at the request chairmen, conduct- ing a comprehensive study of the desirability of consolidating all or part of the retirement systems administered and instrumentalities of the Federal Government by agencies into a cen- tralized mechanism. This report reiterates our concern over Federal employee retirement systems and provides additional mation on the issues involved. and updated infor- A retirement system is basically a program for providing a pension to retired employees. The amount is generally based on either length of serviceof the pension some combination of both. Although a life or salary, or pension is con- sidered the primary benefit of any system, also frequently plrovide benefits for death, retirement systems involuntary termination. disability, and Seven retirement systems cover most Federal personnel. The table on the following page shows, for fiscal the number of employees and annuitants covered year 1976, tem and the amount of benefits paid. by each sys- 1/"Federal Retirement Systems: Key Issues, and Benefit Provisions" (B-179810), July Financial Data, 30, 1974. Benef iciar ies Retirement (retirees and Outlays systems Employees survivors) (millions) Civil service 2,721,900 1,452,353 $ 8,284.1 Foreign Service 7,983 4.606 66.9 Uniformed services 2,924,624 1,109,357 7,295.7 U.S. Tax Court judges 13 13 .4 Tennessee Valley Authority (TVA) 17,799 4,599 22.2 Federal judiciary 503 343 a/7.8 Federal Reserve Board 1,302 289 a/2.4 5,674,124 2,571.560 $15,679.5 a/As of Dec. 31, 1975. SCOPE OF REVIEW Our examinatio.. included a review of retirement legis- lation and related documents and reports, actuarial valua- tions, agency statistical reports, and previous studies of Federal employment retirement systems. We also interviewed system actuaries and other Government officials responsible for administering these programs. 2 CHAPTER 2 COST OF RETIREMENT PROGRAMS: UNDERSTATED AND UNDERFUNDED The benefits accruing under Federal retirement systems represent a large and growing long-term financial of the U.S. Government. Full recognition of these commitment growing liabilities as they accrue is essential not only in deter- mining and allocating the cost of Government operations, also in determining the present and future financial but tion of the United States. However, benefit costs condi- are not fully recognized and consequently the costs of Governmant programs are understated and large unfunded liabilities been created. have RECOGNIZING RETIREMENT COSTS In actuarial terminology, the value of benefit rights earned (accrued) annually by employees covered under retirement system is referred to as the "normal cost" a system. For most Federal retirement systems, the of the normal cost is understated, and for some it is not estimated cal- culated at all. Because of the uncertainty of such future events as death, disability, or retirement, the ultimate cost retirement system can be determined only as actual of a tures emerge throughout the life of the system. By expendi- the very nature of a retirement system, there is a timelag between the accrual of benefit rights and the actual payment of benefits. Under most Federal retirement systems, rights accrue during an employee's years of service. benefit is, each year of service has an associated benefit That value. Normal cost is commonly expressed as a percent of pay- roll, and from a financing point of view represents an estimate of the amount of funds which, if accumulated annually and invested over covered employees' careers, be enough to meet their future benefit payments. will the normal cost is a complex actuarial process whichEstimating requires consideration of a multitude of factors. Basically, however, the process involves mathematically predicting the future experience of the system (for example, salary progression, rate of return on invested funds, probable rates of employees' death, disability, retirement, and termination of employment) and translating this experience into cost on the basis systems' benefit provisions. If reasonable assumptions of the not made on all factors affecting future benefit payments, are normal cost will be incorrect. 3 Normal cost can be calculated on either a "static" or "dynamic" basis. Static calculations do not consider future general pay increases or future annuity cost-of-living adjustments, dynamic calculations consider such increases. The normal cost of most Federal retirement systems is calculated on a static basis even though annuities are generally based on an employee's salary and length of service and most systems provide for increasing these annuities based on increases in the Consumer Price Index (CPI). General pay and annuity increases have occurred frequently and in large amounts. However, because the probability that such increases will occur in the future is generally ignored in calculating normal cost, accruing Government retirement liabilities are greatly understated. For example, the costs accruing under the civil service retirement system are determined on a static basis, even though since 1969 Federal white-collar pay has increased 65 percent and annuity adjustments have totaled 80 percent. In its most recent actuarial report, the Board of Actuaries estimated the system's static normal cost to be 13.64 per- cent of pay. Thus, agency and employee contributions of 7 percent of pay each, as required by law, appear to cover the normal colt of the system. However, the report also included estimates of the system's dynamic normal cost which ranged from 21,56 to 28.74 percent, depending on the economic assumptions used. These estimates were not intended as a prediction of the system's future experience but as an expression of the Board's concern that the potential long- range obligations resulting from general pay increases and annuity cost-of-living adjustments be recognized. Between November 1969 and March 1976, benefit adjustments increased the system's liabilities by approximately $28 billion. The Office of Management and Budget (OiB) recently gave official recognition to the dynamic normal cost of the civil service retirement system. Using economic assumptions derived from past pay and cost-of-living increase experience, OMB estimated the dynamic normal cost to be 31.7 percent of pay. In October 1976, OMB instructed Federal agencies to use a retirement cost factor of 24.7 percent of base pay (31.7 per- cent less 7-percent employee contributions) when preparing cost analyses under OMB Circular A-76. 1/ In June 1977, l/This circular provides guidance to Federal agencies in making decisions and cost comparisons pertaining to in-house vs. contracting out for needed products and services. 4 OMB temporarily suspended use of this factor pending a complete review of the circular and its implementation. We were advised by OMB officials, however, that they have no reason to question the accuracy of the 31.7 percent dynamic normal cost figure. In fiscal year 1976, the total payroll for employees covered by the civil service system was approximately $39.2 billion. Based on this payroll figure, the following table indicates the difference in the estimated costs accruing under the system depending on whether such costs are determined on a static or dynamic basis. Normal cost Percent Amount Computation method of pay (billions) Dynamic 31.70 $12.4 Static 13.64 5.3 Understated cost 17.06 $ 7.1 FUNDING RETIREMENT COSTS The primary purpose of Government funding is to formally recognize cost. Fundin Federal retirement systems promotes sound fiscal and legislative responsibility and enhances 'udgetary discipline. The conventional approach to financing pension benefits is for the employer (and the employees in a contributory plan) to set aside funds in advance of the date on which the benefits become payable. However, some Federal retirement systems (for example, the uniformed services system) operate on a "pay-as-you-go' basis whereby the Government finances benefit payments through annual appropriations. A retirement system is considered fully funded if funds on hand and to be received are equal to the system's liability for benefit payments to present retirees and the anticipated liability for active employees, expressed in terms of present value. 1/ However, when the fund balance and future receipts are less than the liability, an unfunded liability 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 monthly benefits in the future. 5 is said to exist. (Under a pay-as-you-go system, all of the liability is unfunded.) As shown in the following table, the reported unfunded liabilities for three major Federal retire- ment systems have grown, on a static basis, from $157 billion in fiscal year 1970 to $280 billion in fiscal year 1976, an increase of 79 percent. Under existing funding provisions, the unfunded liabilities will continue to increase. Percent of 1970 1976 increase in Liability Fund Unfunded Liability Fund Unfunded unfunded note a) balance liability (note a) balance liability liability ----------------------- (millions)------- Uniformed services $103,426 $ $103,426 $172,239 $ $172,239 67 Civil service 75,236 22,432 52,804 150,470 43,470 107,000 103 Foreign Service 528 53 475 b/1,252 185 b/1.067 125 $179,190 $22,485 $156,705 $323,961 $43,655 $280,306 79 a/Net liability after deducting future agency and employee contributions and future amortization payments covering specific liability increases. (See pp. 8 and 10.) b/As of Sept. 30, 1976. Although some Federal retirement systems provide for advance funding of future benefit payments, Federal and pri- vate funding practices differ. Contributions to private pension funds are usually made in cash by employers and/or employees. These funds are managed by independent trustees who invest the contributions in income-producing securities and, as needed to make benefit payments, convert the invest- ments into cash by selling them in the secirities market. The essence of the private trust fund is tat its receipts and balance represent cash or assets that can be converted to cash. Some Federal retirement trust funds have the outward characteristics of private pension funds, but with an im- portant difference. The receipts of Government retirement funds--for example, deductions from employees' salaries. agency contributions, direct appropriations, and interest earnings--are generally required by law to be invested in 6 Federal securities. 1/ There is' no cash involved in this kind of intragovernmental transaction, only bookkeeping entries. Thus, funding in itself does not cause a finan- cial hardship for the Government. When funds are needed to make benefit payments, the Treasury obtains the cash through its normal channels of tax receipts or borrowing from the public. Billions of dollars in benefits are paid annually under Federal retirement programs. These annual outlays are increasing greatly. The following table shows the 1970 to 1976 increases for three Government retirement systems which cover approximately 98 percent of all Federal em- ployees. Retirement Outlays Percent of system 197U 17 increase (millions) Civil service $2,752 $ 8,284 201 Uniformed services 2.853 7,296 156 Foreign Service 16 67 319 Total $5,621 15,647 178 The increase in outlays during this period was due primarily to (1) an increase in number of beneficiaries (50 percent), (2) increases in the pay rates upon which annuities a:e based (36 percent in white-collar jobs, for example), and (3) annuity cost-of-living adjustments (64 percent), FINANCING AND FUNDING PRACTICES OF FEDERAL RETIREMENT SYSTEMS No uniform practices or principles exist with respect to financing and funding Federal retirement systems. Dif- ferent methods are used by each system. Some require em- ployees to contribute to retirement funds, and some do not. l/The funds of two Federal retirement systoms--TVA and the Federal Reserve Board--are not required by law to be invested in Federal securities. These funds are in diversi- fied investments including fixed-income securities, common stocks, and real property. 7 Some provide for fully funding benefit rights some provide for partial funding, and some as they accrue, unfunded. Following is a brief discussion are completely of and funding practices of each system covered the financing by this report. Civil service retirement system The last major change in civil service funding occurred in October 1969 with the enactment policies of Public Law 91-93 (83 Stat. 136). Immediately before the only contributions to the fund consisted this change, employee contributions of 6.5 percent each. of agency and that time indicated the fund would be depletedEstimates at by 1987 un- less funding changes were made. The 1969 legislation increased both agency and employee contributions to 7 percent. In fiscal year 1976, the agen- cies and their employees each contributed about to the retirement fund. $2.7 billion The 1969 law also requires appropriations to liquidate, in the Government to make direct 30 annual installments, any increase in the unfunded liability resulting from pay in- creases, liberalization of retirement benefits, or extension of retirement coverage to new groups of employees. tion, the Secretary of the Treasury is required In addi- to the civil service retirement fund annual to tra:nsfer interest on the unfunded liability and for payments for the cost of allow- ing credits for military service. In fiscal Government appropriations and the Treasury year 1976, the transfers totaled $4.7 billion. In addition, the fund earned $2.5 billion in on assets invested in Federal securities. interest While the intent of the 1969 legislation was the fund and retard the to stabilize growth of the unfunded liability, was not achieved. The Government's contributions this to the Civil Service Retirement and Disibility Fund, as well as the un- funded liability and outlays, are growing dramatically. the end of fiscal year 1970 to the end of fiscal From year 1976 -- Government contributions to the retirement fund increased by 280 percent to S7.4 billion, 18.9 cent of payroll; per- -- cash outlays increased by 201 percent to $8.3 billion; and 8 -- the unfunded liability, computed on a static basis, increased by 103 percent to $107 billion. The $107 billion unfunded liability was attributable to various causes, including (1) creditable service for which neither the Government nor the employees made con- tributions; (2) not funding liabilities resulting from general pay increases, cost-of-living adjustments to annui- ties, and benefit liberalizations; and (3) lost interest in- come which would have been earned if the accrued liability had been fully funded. The unfunded liability will continue to increase, primarily because of cost-of-living adjustments for which no funding provision has been made. Assuming the same yearly average pay and cost-of-living increases (6 percent) as occurred in fiscal years 1970 to 1975, it is estimated that by 1985 -- the Government's annual contributions to the fund will increase another 192 percent to $21.6 billion, about 34 percent of pay; --expected benefit payments will increase another 254 percent to $29.4 billion; and -- the unfunded liability will increase another 93 percent to about $207 billion. Foreign Service retirement system This system is funded in much the same manner as the civil service system. Participants contribute 7 percent of their pay, and the employing agency makes a matching con- tribution. In addition, Public Law 94-350 (90 Stat. 823), approved July 12, 1976, authorized annual appropriations to the retirement fund equal to he amount that the system's normal cost exceeds employee and employer contributions. The normal cost of the Foreign Service system as determined by the latest actuarial valuation was 18.6 percent of payroll. As in the civil service system, this figure is a static calculation that does not include the effect of future general pay increases or annuity adjustments. At the time of our review, a new valuation was being made which was to include future annual annuity cost-of-living adjustments. However, it did not provide for future general pay increases. Consequently, normal cost will continue to be understated. 9 The Government makes direct appropriations to amortize any increase in the unfunded liability resulting from (1) increases, (2) liberalization of retirement benefits, or pay (3) extension of retirement coverage to new groups of employees. Also, the Secretary of the Treasury annually credits to the retirement fund an amount equivalent to the interest on the unfunded liability and the cost associated with allowing credit for military service. For fiscal year 1976, amorti- zation payments, interest on the unfunded liability, and military service credit payments totaled $54.5 million. The unfunded liability of t system as of September 30, 1976, was about $1.1 billion. A In the civil service system, cost-of-living adjustments granted to annuitants had not been funded. Another factor which contributed to the unfunded liability was the requirement that Foreign Service staff ployees be covered by the civil ervice system until they em- completed 10 continuous years with the Foreign Service. (This requirement was rescinded by Public Law ing the time of the 10-year requirement, these 94-350.) Dur- employees and the Department of State made matching contributions to the civil service fund. When the 10-year requirement was met, the employees' service was creJited to the Foreign Service system and employees' contributions plus interest earnings were transferred from the civil service fund to the Foreign Service fund. However, the agency contributions and amortiza- tion payments, along with the associated interest earnings, remained in the civil service fund. Uniformed services retirement system This system is noncontributory, meaning that the Govern- ment pays the entire cost of providing benefits. / The tem operates on a pay-as-you-go basis, and benefits are sys- financed through annual congressional appropriations. As a result, the Department of Defense budget reflects some of the cost of operating the military services in prior years, but does not include any accrual of retirement costs for current military personnel. The following able shows actual and accrue liabilities through fiscal and projected outlays year 1978. i/Military personnel are also covered under social security and provided certain death and disability coverage by the Veterans Administration. 10 Outlays (note a) Accrued Amoun Percent of basicpy (oe ) liabilities (millions) (millions) 1970 $2,743 22.3 $103,426 1971 3,260 26.0 1972 113,389 3.742 28.5 121.392 1973 4,218 28.7 1974 130,373 4.962 33.2 148.016 1975 6,028 39.7 1976 169,228 7,048 45.5 172.239 1977 7,822 48.7 1978 175.085 8,536 51.9 177.724 a/Actual costs, fiscal year 1970 to 1976; projected costs, cal years 1977 and 1978. Excludes reserve retired pay fis- and survivor benefits. b/Based on budgeted basic pay for all years. U.S. Tax Court judges retirement system Retirement benefits under this system are annual congressional appropriations. Judges whofinanced elect to by participate in the system's survivor benefit plan contribute 3 percent of pay before and after retirement. Survivor fit payments in excess of such contributions are financedbene- annual appropriations. by Estimates of the expenditures and appropriations necessary for the maintenance and operation the survivor annuity fund are submitted annually to OMB. of crnise the system is basically a pay-as-you-go operation. Be- normal cost is not determined. The unfunded liability the survivor benefit plan as of September 30, 1976, was of less than $500,000. The unfunded liability of the noncontributory retirement plan has not been determined. Retirement Plan for Employees of the Board of Governors of-the Federal Reserve System This system is funded through employee contributions 7 percent of pay and contributions by the employer equal of the difference between employee contributions and normal to cost. In calculating normal cost, the actuary has always included an economic assumption regarding future general pay increases. 11 Employee contributions during calendar year 1976 totaled about $1.5 million, while the employer contributed about $2.7 million. In addition, $1.2 million was required to fully fund the 5.4 percent annuity cost-of-living adjustment effective March 1, 1976, and this was covered by previously accumulated excess reserves of the plan. According to the plan's most recent annual report, issued in July 1976, the employer's required contribution was 11.1 percent of basic pay, based on assumptions of 4-percent future annual salary increases and a return on investments at the rate of 5.5 percent. This contribution when combined with the 7-percent employee contributions covers the current normal cost, but not the costs of annuity adjustments based on changes in the CPI. Under the system, any annuity adjustments granted because of changes in the CPI are to be funded immediately by the employer, thus call- ing for lump sum payments in the amount determined by the actuary. Based on the required normal cost contributions and lump sum payments, the plan's actuary expressed the opinion that funds on hand and those to be received will be sufficient to provide benefits to all retired and active members; in ether words, the system reports no unfunded liability. Federal judiciary retirement system Federal judiciary retirement benefits are financed from funds appropriated for Federal judicial salaries. Because the financing is pay-as-you-go, normal cost is not calculated and the system is completely unfunded. No determination has been made of the amount of the system's unfunded liability. The system also provides an elective survivor benefit plan which, under Public Law 94-554 (90 Stat. 2611) of October 19, 1976, is financed jointly by contributions of 4.5 percent of salary each by participants and the Govern- ment. These contributions are made both before and after re- tirement. The law also requires the Government to make a direct appropriation to fund the plan's unfunded liability as of January 1, 1977. At the time of our review, the amount of appropriation needed to fund the liability had not been determined. As of March 1, 1976, the unfunded liability of the survivors plan was $8.5 million. Tennessee Valley Authority retirement system The TVA retirement system is financed by employee and employer contributions. The system provides retirement 12 benefits composed of two amounts--an annuity, financed portion of the benefit, and a pension,the employee- financed portion. The standard employee the employer- contribution 6 percent of basic pay, but it may be adjusted is the member's date of entry into the system. depending on are also covered under social security, TVA employees elect to reduce his contributions and a memb(rr may to the TVA retirement sys- tem by 3 percent on that part of his salary not in excess of the social security base. In fiscal year ployees contributed $13.9 million to the 1976, TVA em- retirement system. TVA contributes the amoIut required to cover the admin- istrative cost of operating the system and to provide all benefits other than those derived from members' The amount TVA contributes, determined by contributions. an annual valuation, consists of a normal cost contribution, actuarial bution to amortize any unfunded liability, a contri- and a cost-of- living contribution. In fiscal year 1976 $24.9 million. TVA contr buted Based on the most recent actuarial system, prepared as of June 30, 1975, thevaluation of the contribution rate is 10.01 percent of pay. current employer sists of This rate con- -- 6.81 percent of pay to cover the normal cost, --. 25 percent of pay to fund fiscal year living increases, and 1975 cost-of- -- 2.95 percent of pay to amortize the remaining liability. unfunded In computing normal cost, factors for prospective creases were included. The system's unfunded pay in- estimated to be $85 million. liability was FUNDING REQUIREMENTS IN THE PRIVATE SECTOR While the Government has not adopted practices or principles for financing and any uniform funding its own retirement programs, it has imposed stringent on pension plans in the private sector through requirements the Employee Retirement Income Security Act enactment of (88 tat. 829). Although government plans of 1974 (ERISA) are from these requirements, the law does provide exempted sional committee studies of retirement plans for congres- estaolished by Federal, State, and local governments. 13 Generally, the minimum funding requirements for private employer plans include: (1) payment of normal cost and (2) minimum amortization periods for funding unfunded liabilities that -- arise initially upon establishment of a new plan (30 years); -- exist as of January 1, 1976, for plans in operation (40 years); -- are created by plan amendments (30 years); -- arise from variations between assumed and actual plan experience (15 years); or --are created by a change in the plan's actuarial assumptions (30 years). ERISA does not specify the manner in which normal cost and unfunded liabilities of the private plans are to be de- termined. It does, however, require that the actuarial as- sumptions used in making the determinations be reasonable. Section 1013 of the statute states that "* * * all costs, liabilities, rates of interest, and other factors under the plan shall be deter- mined on the basis of actuarial assumptions and methods which, in the aggregate, are reasonable (taking into account the experience of the plan and reasonable expectations) and which, in com- bination, offer the actuary's best estimate of anticipated experience under the plan." Following the enactment of ERISA, the Committee on Actuarial Principles and Practices in Connectiolt with Pension Plans, a body of the American Academy of Actuaries, approved draft recommendations for exposure to the membership of the academy regarding compliance with the ERISA requirements. One of the committee's recommendations would require that the impact of future inflation on retirement costs be recognized in each actuarial assumption affected. CONCLUSIONS The Congress s not being provided realistic and consis- tent informecion on he cost of Federal retirement programs; this inhibits its ability to make sund fiscal and legislative 14 decisions on establishing, amending, or funding retirement and agency programs. Funding of Federal retirement systems remains a serious, growing problem that needs further attention. We believe that retirement costs for all systems should be determined and funded on a dynamic basis. The Congress, employees, and the taxpayers should not be misled by unrealistic estimates of retirement costs. When the full costs are not recognized, there may be a tendency to adopt added benefits which could jeopardize the eventual affordability of the retirement sys- tems. Lack of full cost recognition also results in the understatement of the cost of Government programs, including subsidies to agencies whose operations are intended to be self-supporting. (See ch. 3.) Furthermore, without full funding, the Government's retirement system liabilities are not totally reflected in the public debt. RECOMMENDATION TO THE CONGRESS We recommend that the Congress enact legislation requir- ing all Federal retirement systems to be funded on a dynamic normal cost basis and that the difference between dynamic normal cost and employee contributions be charged to agency operations. AGENCY COMMENTS The Civil Service Commission generally agreed with our conclusions and acknowledged that current financing measures do not directly show the long-range cost of the civil service retirement system or proposed amendments to the system. The Commission agreed that the full long-term cost of the system should be recognized and stated tha' it is currently studying various possible approaches to introducing dynamic cost mea- sures into the system's financing. The Federal Reserve Board indicated full agreement with the report. The Board and the Tennessee Valley Authority reiterated that their retirement system costs were already calculated on a dynamic basis. The Department of Defense did not comment on the report, and responses from the agen- cies responsible for administering the other three systems did not comment on the recommendation that costs for these systems be calculated on a dynamic basis and charged to agency operations, 15 CHAPTER 3 UNDERSTATED CIVIL SERVICE RETIREMENT COSTS RESULT IN UNRECOGNIZED SUBSIDIES Because agencies are being charged only a portion of the costs accruing to the Government for the civil service retire- ment system, those agencies whose operations are intended to be self-supporting are annually receiving large unrecognized subsidies. Most agencies whose employees are covered by the civil service retirement system are required to make a matching contribution of 7 percent of pay to the retirement fund. While this combined employer-employee contribution of 14 per- cent of pay covers the static normal cost (13.64 percent) of the ystem, it is less than half the cost of the system when future pay increases and annuity adjustments are con- sidered. Based on OMB's economic assumptions (see p. 4), the system's dynamic normal cost is 31.7 percent of pay. Using this cost factor as a guide, agencies' operating costs are understated by approximately 17.7 percent of pay (31.7 minus 14). SELECTED AGENCIES RECEIVIN SUBSIDIES Many Government agencies have been established to operate on a self-supporting basis, and others that sell products or services are expected to recover costs incurred. However, because most of these agencies are charged only 7 percent of payroll for civil service retirement contributions, their oterations are, in effect, subsidized by an amount equal to their share of unrecognized and unallocated retirement costs. For example, the agencies listed below received subsidies of approximately $41 million in 1976. These subsidies were calculated using OMB's estimate of 24.7 percent as the dynamic normal cost for the retirement system not covered by employee contributions. 16 Estimated Agency contri- cost of accru- bution to the Estimated Agency ing benefits retirement fund subsidy --------------- (millions)--------------- Federal Home Loan Bank Board $ 6.6 $ 1.9 $ 4.7 Export-Import Bank 2.0 .6 1.4 Federal Deposit Insurance Corporation 12.6 3.6 9.0 Panama Canal Company and Canal Zone Government 35.0 9.9 25.1 Farm Credit Administration 1.1 .3 .8 Total $57.3 $16.3 $41.0 Certain other self-supporting agencies--the Federal Na- tional Mortgage Association and the various Farm credit banks-- are not requiredto match employees' contributions but must, by law, contribute the difference between their employees' contributions and the system's total normal cost. The ob- vious purpose of this requirement was to charge these agen- cies the total cost, less employee contributions, of providing retirement benefits to their employees. In actual practice, however, they are payinq far less than the full cost. In 1976 the agencies were required to pay only 6.77 percent of pay into the retirement fund (imputed static normal cost estimate for 1976 less 7 percent employee contributions). Based on the 31.7 percent dynamic normal cost figure, we estimate they re- ceived subsidies totaling approximately $2.2 million in 1976. Estimated Agency contri- cost of accru- bution to the Estimated Agency ing benefits retirement fund subsidy --------------- (millions)--------------- Federal National Mortgage As- sociation $1.3 $.3 $1.0 Farm credit banks 1.7 .5 1.2 Total $3.0 $.8 2.2 17 As a further indication that the Congress intended these agencies to be charged their share of all costs associated with the retirement system, laws require that they pay a por- tion of the cost of administering the system. In 1976 the two agencies paid administrative expenses of $5.41 for each employee covered by the retirement system at the end of the year. This amount was determined by dividing the total administrative expense of the civil serv- ice retirement system by the total number of active employ- ees covered by the system at the end of 1976. Although a relatively minor amount, this charge actually represents a double payment by these agencies, because the Commission includes a factor for administrative epenses in computing normal cost. The administrative expenses paid by the Farm credit banks go into te Treasury as miscellaneous receipts, while the amount paid by the Federal National Mortgage As- sociation goes into the civil service retirement fund. Postal Service The United States Postal Service is required by law to match its employees' contributions to the retirement fund and to pay additional amounts to cover the retirement liabilities associated with employee-management bargaining agreements. The additional payments include, but are not limited to, retirement liabilities resulting from negotiated employee pay increases. If retirement costs were calculated on a dynamic basis, total Postal Service and employee con- tributions would be insufficient to cover the retirement costs accruing each year. The Postal Reorganization Act (84 Stat. 719) of August 12, 1970, created the Postal Service to be a self- sustaining enterprise and authorized it to bargain collec- tively with its employees. When initially enacted, however, the act made no provision for funding the retirement liabili- ties created by employee-management agreements. The Civil Service Commission requested appropriations from the Congress for fiscal years 1972 and 1973 to cover the annual installments necessary to amortize the Postal Service's portion of the retirement system liability caused by past pay raises. However, the Subcommittee on Treasury--Postal Service--General Government, House Com- mittee on Appropriations, denied the request because it was not clear whether the liability was to be funded by Government appropriations or by the Postal Service. Fol- lowing this denial, the Comptroller General rendered a 18 decis 4 on to the subcommittee chairman expressing the opinion that it was technically permissible to finance the Postal Service's portion of the amortization payments out of the General Fund of the Treasury. Reaiz'ing the substantial subsidy that would be going to the Postal Service each year by not requiring it to fund the retirement liabilities resulting from employee-management agreements, the Congress passed Public Law 93-349 (88 Stat. 354) in July 1974, making the Postal Service liable for such costs. However, the law did not require the Postal Service to pay for cost-of-living adjustments received by its re- tirees. The retirement liabilities resulting from employee- management agreements are determined by the Civil Service Commission and are payable by the Postal Service in 30 equal annual installments, with interest computed at the rate used in the most recent valuation of the retirement system. Al- though the requirements of Public Law 93-349 were made retro- active to July 1. 1971, the Postal Service was relieved of payments due June 30, 1972, 1973, and 1974, attributable to pay increases granted before July 1. 1973. The Congress ap- propriated money for these payments to the Postal Service, which in turn transferred the appropriation to the Civil Service Retirement and Disability Fund. The Postal Service was made responsible for making all amortization payments beginning in 1975. The following table shows the annual payments required to amortize the increases in the unfunded liability resulting from negotiated pay increases, Postal Service payments, and the Government appropriations neces- sary to cover the amortization payments which the Postal Service was not required to make. Annual payments required Postal to amortize the increase Service Government in unfunded liability payments appropriations ------------ (000 omitted)------------ 1972 $ 62,991 $ - $ 62,991 1973 104.985 104,985 1974 174.185 69,200 104,985 1975 207.441 207,441 - 976 385,865 385,865 - Of all the agencies participating in the civil service retirement system, the Postal Service is the only one re- 19 quired to amortize the increases in the unfunded liability resulting from employee pay raises and benefit improvements. In 1976, the Postal Service paid about $1 billion to the civil service retirement fund, including $614.5 million to match employees' contributions and $385.9 million in amorti- zation payments. However, if accruing costs were calculated on a dynamic basis and the Postal Service was required to pay all costs not covered by employees' contributions, the Service's 1976 contribution would have been approximately $2.2 billion--$1.2 billion more than the amount paid. Sub- sidies will continue each year as long as the Postal Serv- ice is not required to pay for cost-of-living adjustments received by its retirees. Tennessee Valley Authority Basically, TVA operates independently of appropriations. Its power prograins--which accounted for about 96 percent of its fiscal year 1975 program receipts--are completely self-supporting. Its nonpower programs, with the exception of its fertilizer program, depend primarily on appropriated funds. The fertilizer program is supported 80 percent through fees charged to users and 20 percent through appro- priations. TVA had about 31,000 employees as of June 30, 1976, of which 248 wer covered by the civil se.vice retirement sys- tem. (Employien entering TVA within 3 days after leaving a position in which they were covered under the civil service system are required to continue under civil service cover- age.) Of the 248 employees, 121 are in the power program, 23 are in the fertilizer program, and the remaining 104 are in programs primarily financed through Government appropria- tions. The remainder of TVA's employees are covered by the TVA retirement system and/or social security. TVA employees contributed $384,404 to the civil service retirement fund in 1976P and TVA matched their contributions. We estimate, using dynamic calculations, that TVA was under- charged about $1 million in retirement system costs. Of this amount, about $574,000 was applicable to programs not dependent on appropriations. District of Columbia Although the District of Columbia annually receives a Federal payment, its main source of income is money col- lected through local taxes. The District has about 58,000 20 employees, of which approximately 31,000 participate in the civil service retirement system. In 1976, District employees contributed lion to the civil service retirement about $28.8 mil- system. and the District matched employees' contributions. Using dynamic costing, we estimate that in 1976 the District was subsidized $72 million through the retirement system. more than This underallocation of civil service retirement costs to the District is in sharp contrast to the Federal Government finances benefits the manner in which Park Police, Executive Protective Service,for the 1,500 U.S. and Secret Serv- ice Federal employees who participate in Columbia's policemen and firemen retirement the District of system is financed essentially on a pay-as-you-gosystem. That basis. Employees covered by it are required of their basic pay, which passes into to contribute 7 percent the District of Columbia. The Federal the general revenue of the District for all Federal annuitant Government reimburses excess of the amounts contributed benefit payments in to the District by active Federal employees. CONCLUSIONS Failure to recognize and allocate civil service retirement system results the full cost of the not only in an under- statement of the cost of Government operations, but also in subsidies to certain agencies and instrumentalities whose operations the Congress intended to be understatement of operational costs and self-supporting. The continue until the full dynamic normal the subsidies will cost of the system is recognized and allocated to those agencies and instru- mentalities whose employees are covered by the retirement system. AGENCY COMMENTS AND OUR EVALUATION Eight of the agencies identified in the being wholly or partially self-supporting report as comments. They generally agreed that provided written civil service retirement system was notthe full cost of the being paid by agency and employee contributions, and pointed the users of their services would have out that charges to higher retirement contributions were to be increased if required. Some of the agencies expressed concern that a retirement reflecting Government-wide experience cost factor reflect their specific experience. Theymight not properly suggested that 21 separate actuarial valuations should be performed in de- terminig their retirement contributions. One agency also sugges, :hat the retirement fund could receive a higher rate of .turn if the law were changed to allow investments in other than Federal Government securities. In our opinion, theze observations and suggestions regarding cost calculations and investment policies may be worthy of consideration in future refinements of the system. However, they should have little bearing on the need to fully recognize and allocate the accruing cost of retirement benefits. To calculate costs by individual agency, it would be necessary to assemble data on the demographic characteristics of the personnel employed by each agency in the system. We are unaware that any such data is available, and even if it were there is no reason to believe that the results would appreciably differ from those achieved by using rGovernment-wide data. The Postal Service agreed in principle with the concept of dynamic costing and also agreed that agencies should be charged with all costs not covered by employee contributions. It maintained, however, that the Postal Service should not be required to pay the cost of its retirees' cost-of-living ad- justments since they were authorized in law by the Congress and were beyond the Postal Service's control. Similarly, the District of Columbia questioned whether employee pay raises and retiree -- ,t-of-living adjustments provided by law should be ;- in the contribution formula, because agencies can d tt ~ influence the direction of costs in these areas. We believe the lack of control by individual agencies over the retirement system's provisions is a separate ssue from cost recognition and allocation. All of the system's provisions are established in law, and if agency control were used as a criterion for determining retirement con- tributions, most agencies would be required to make no contribution to the retirement fund regardless of whether costs were calculated on a static or dynamic basis. It is true that most agencies have no voice in determining the amount of employee pay increases, and no agency has any involvement in establishing retiree cost-of-living ad- justments. Nevertheless, these factors have a direct ef- fect on retirement system costs, and we continue to believe that these costs should be recognized and allocated to participating agencies. 22 CHAPTER 4 INEQUITIES AND INCONSISTENCIES OF FEDERAL RETIREMENT PROGRAMS Different committees of the Congress have legislative jurisdiction over various retirement systems, and no overall Federal retirement policy to guide the there is develop- ment of Government retirement systems. In the absence a coherent, coordinated Federal policy, the benefit of struc- tures of Federal retirement programs have evolved continue to develop on a piecemeal basis. and Federal person- nel may be treated quite differently depending upon Government retirement system is applicable to their which ment. employ- RETIREMENT ELIGIBILITY Age and service requirements that Federal employees must meet to become eligible for a retirement annuity vary. systems have minimum age and service requirements, Some others have only a minimum service requirement. while Requirements range from no age restriction and 20 years' service 70 and 10 years' service. to age In addition to optional and disability retirement, systems provide for involuntary, deferred, and some mandatory tirements. The table on the following page summarizes re- the general eligibility provisions for various types of ment under each system. retire- SERVICE CREDITS AND PORTABILITY Generally, an employee is permitted to transfer credit from one Federal retirement system to another. However, several inconsistent practices exist. -- The military retirement system does not permit any credit for Federal civilian service. However, mili- tary service is generally creditable under Federal civilian retirement systems without ccntributions from the employee, with the following exceptions: (1) the TVA retirement system grants credit for military service only if it is performed between two contiguous periods of coverage under the TVA retirement system--the employee must make contribu- tions to cover such service; and (2) the Federal 23 LU a- L U~~~~~~~~~~~~~~~~~~~0~~~~~L -) -U - Ca , C z "U CD .LO LO -- - -.. 4u .U. 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UI -_a4c CO L Co _~ 0 24~~~~~~~~~~~ld judiciary and U.S. Tax Court judges retirement.sys- tems do not permit retirement credit for other Fed- eral civilian or military service; however. such service is creditable in computing survivorship benefits. -- Employees entering the service of the Board of Governors of the Federal Reserve System on or after January 1, 1944, are covered by the Federal Reserve Board retirement system unless they are members of the civil service system. However, a member who has had prior service with a Federal Reserve bank is permitted to withdraw his contributions from the civil service retirement system and become a member of the Federal Reserve Board retirement system. -- Employees covered by the civil service retirement system at the time of their transfer to TVA are re- quired to continue participating in the civil service retirement system, provided the break in service is 3 days or less. If the break is of more than 3 days. employees under the civil service retirement system transferring into TVA must join the TVA retirement system. These employees do not receive TVA retire- ment credit for civil service employment. However, an employee transferring from TVA to a position under the civil service retirement system receives credit for his TVA service provided he makes contri- butions to cover those years of service. -- Employees under the Foreign Service retirement system who perform duty at certain designated "un- healthful posts" may receive 1.5 years of retirement credit for each year of service at such posts unless the employee elects to receive the differential pay- able for that post of assignment. Employees under the civil service retirement system working at the same posts receive no extra retirement credit. They do. however, draw the differential payable for that post of assignment. -- Military service generally may not be used to earn retirement credit under both the uniformed service retirement system and a civilian retirement system. However, military reservists who receive credit for any active military service in their annuity calcula- tions are given credit for that same service toward annuities under civilian systems. 25 -- An employee in the civil service retirement system who is appointed as a U.S. Tax Court judge has the option of remaining in the civil service retirement system and crediting his service as a judge to system, or he may withdraw his contributions that the civil service retirement from system and e covered under the U.S. Tax Court judges retirement system. This decision, once miade, is irrevocable. -- Under the military retirement system, service credited on a yearly basis. That is, for any is service of 6 months or more up to a year, 1 year's service credited toward retirement. In contrast, the is service retirement system credits service on civil a monthly basis but does not give credit for periods of than 1 month. less BENEFIT FORMULAS The general benefit formula used to determine of a retiring employee's annuity (pension) varies the amount to system and within the civil service system. from system There ferent formulas for specific groups of employees. are dif- formulas for each system are shown below. The general Civil service: General formula 1.5 percent for each of the first 5 years of service, plus 1.75 per- cent for each of the next 5 years, plus 2 percent for each year there- after, multiplied by the employee's average salary for the 3 consecutive highest pay years ("high-3"). The maximum annuity is 80 percent of high-3 plus any additional percent produced by crediting unused sick leave. Members of Congress 2.5 percent of high-3 for each year and congressional of service. The maximum annuity for employees retired Members of Congress is 80 percent of final salary. For con- gressional employees, the maximum is 80 percent of high-3. Air traffic General benefit formula and maximum controllers but no less than 50 percent of high-3. 26 Law enforcement 2.5 percent of high-3 for each of and firefighter the first 20 years, and 2 percent personnel for each year thereafter. The maximum annuity is the same as under the general formula. Foreign Service 2 percent of high-3 for each year of service, with a maximum of 70 percent of high-3 plus the percent due to unused sick leave. Uniformed services 2.5 percent of basic pay 1/ being received at the time of retirement for each year of service. with a maximum of 75 percent. Federal judiciary Members retiring receive the cur- rent slary of their office. Mem- bers resigning receive the salary earned at the time of resignation. U.S. Tax Court Current salary of former position judges multiplied by the ratio of years of service to 10 years. The bene- fit may not exceed the current salary of the former position. TVA 1.3 percent of high-3 multiplied by years of service, with credit for unused sick leave; reduced by the social security offset plus annuity based on actuarial equivalent of member's contributions. There is no maximum on benefit amounts. Federal Reserve Same as civil service general Board formula. The differences are illustrated in the following table, which shows the benef t under each system for an employee who 1/Does not include nontaxable subsistence and quarters allow- ances ad the tax advantage thereon, which when added to basic pay represents Regular Military Cmpensation, con- sidered to be the equivalent of a civilian employee's salary. 27 retires with 30 years' service and meets the minimum age re- quirement. The benefits range from 56.25 percent of high-3 average salary up to the full salary of the position. System Benefit Civil service: Regular employee 56.25 percent of high-3 Congressional employee 75 " " " Member of Congress 75 " Law enforcement and firefighter personnel 70 " Foreign Service 60 " Uniformed services (note a) 75 percent of final basic pay Federal judiciary 100 percent of the salary of the office U.S. Tax Court judges 100 Federal Reserve Board 56.25 percent of high-3 TVA (note a) (b) a/Also covered under social security. b/Varies depending on the actuarial value of the employee's contributions. SURVIVOR BENEFITS While all Federal retirement systems provide for some form of survivor benefits, there is a wide variation in the benefits, the time required for vesting, and in the amount employees must contribute for those benefits. A few of these differences are as follows: -- In the TVA system, survivorship rights for new em- ployees begin immediately, while the civil service system requires 18 months' service and the military system requires 20 years. --The minimum annuity for he surviving spouse of a participant who dies in service ranges from a lump sum payment made up of the employer's and employee's contributions with interest, to an annuity amounting to 55 percent of the deceased employee's earned annuity. 28 -- The U.S. Tax Court judges system and the Federal judiciary system require a 3- and 4.5-percent ccntri- bution. respectively, from the member both before and after retirement in order to provide a survivor benefit. Other systems use a formula to reduce the annuity of a retired employee who elected survi- vorship coverage. -- While most systems provide for the adjustment of survivor benefits in line with increases in the CPI, the Federal judiciary system djusts such benefits on the basis of active judges' pay increase percent- ages, and the Tax Court judges system has no provi- sion for adjusting survivor benefits. The survivorship provisions under each system e out- lined in appendix II. REEMPLOYED ANNUITANTS Federal retirees reemployed by the Government are treated quite differently under the various retirement systems. The differences vary from a reduction in salary or annuity to a suspension of annuity to no reduction in either salary or annuity. Examples of some of these differences are discussed below. 1. When a civil service retiree whose retirement was voluntary is reemployed by the Federal Government, his annuity continues but his salary is reduced by the amount of his annuity. However, Federal employees who retire under the District of Columbia's policemen and firemen retirement system (see p. 21), whether retired optionally or for dis- ability, may be reemployed in a position covered by the civil service retirement system without a reduction in either salary or annuity. For example, recently a former Federal employee who retired under the policemen and firemen system was reemployed in a position covered under the civil service system and is receiving a full salary of $43,923 and full annuity of about $18,000 a year. In contrast, the salary of a civil service retiree who is reemployed in a position covered by the District's system would be reduced by the amount of his civil service annuity. 2. An annuitant under the Foreign Service system who is recalled to duty in the Foreign Service receives the full salary of the position in which he is serving, but his annuity is suspended. If a Foreign Service annuitant is reemployed in another Federal agency, he receives the full 29 salary of his new position plus a portion of his annuity which when combined with his salary does not exceed in any one year the salary he was receiving on the date of his re- tirement from the oreign Service. 3. A retired regular military officer who is reemployed in a civilian position of the Federal Government receives a portion of his military retirement plus the full salary of his position. The retiree receives the first $4,045 of his military retirement plus one-half of any remainder. The amount of $4,045 became effective with the March 1, 1977, adjustment of 4.8 percent and will increase in direct pro- portion to each cost-of-living adjustment granted to all retirees. Retired enlisted personnel and retired reserve officers continue to receive their full military retirement plus the full salary of their new position when reemployed in a civilian capacity. The Civil Service Commission reported that as of June 30, 1975, approximately 142,000 uniformed services retirees were employed in the Federal civilian service, including 111,793 retired enlisted personnel and 27,662 re- tired officers of whom 2,641 retired as colonels or above. Of the former officers. 5,164 retired as regulars and 22,518 as nonregulars. The majority (66 percent) of the total reemployed uniformed services retirees had Federal civilian salaries of $10,000 to $18,000, as shown in the following table. Civilian Reemployed retirees salary Number Percent of total Under $6,000 1,505 1.06 $ 6,000 to $ 9,999 24,648 17.38 $10,000 to $17,999 93,309 65.79 $18,000 to $28,999 19,225 13.56 $29,000 to $35,999 2.154 1.52 $36,000 and over 796 .56 Unspecified 180 .13 Total 141,817 100.00 Approximately 8,000 retirees, or about 5 percent. were under age 40, while slightly more than 9,000, or about 6 percent, were 60 and over. Forty-six percent were between 40 and 50, and 41 percent were between the ages of 50 and 60. The average uniformed services retirement benefit being received was $9.701 for officers and $5,147 for enlisted personnel. 30 4. Federal judges and justices are entitled to receive their full salary in addition to any annuity they may have earned under the civil service retirement system. 5. Retirees under the civil service retirement system who become Tax Court judges may remain in the civil service system and receive no benefits under the Tax Court system. If they elect to be covered by the Tax Court system, they must waive their rights to future civil service retirement benefits. The law makes no provision regarding retirees from other Government retirement systems who may become Tax Court judges. 6. Annuitants under the TVA retirement system can be reemployed by TVA with no reduction in salary or annuity, provided their reemployment is for a predetermined period of not more than 6 months; if more than 6 months, retire- merit benefits are discontinued. TVA retirees who are hired by other Federal agencies are not subject to reduction in pay or annuity. However, the salaries of retirees from the civil service retirement system who are reemployed by TVA are reduced by the amount of their annuity. Retired regular military officers while reemployed by TVA forfeit a portion of their retired pay, as under the civil service retirement system, while enlisted personnel and reserve officers continue to receive their full retired pay and salary. DISABILITY RETIREMENT Each of the systems discussed in this report provides some form of benefits to employees who become disabled be- fore retirement. -- Definitions of disability: under the various retire- ment systems these definitions range from totally disabled or incapacitated for useful and efficient service to the inability to perform efficiently in the specific position occupied. -- Periods of coverage: all systems provide life-long benefits to individuals who remain disabled, al- though some impose earnings restrictions. --Benefit levels: benefits are computed on various bases such as salary at time of retirement, pay for the 3 highest paid years. or percentage of disability. 31 -- Establishment of disability: some programs require documentary evidence and medical examinations by designated physicians, and some allow the employee to provide his personal physician's report. However, some programs require only that the employee certify his own disability. The disability provisions for each system are contained in appendix III. SOCIAL SECURITY COVERAGE FOR FEDERAL EMPLOYEES As a general rule, Federal civilian employees are not covered by the social security program. As such. they are the only major group of employees in the United States who cannot participate in the program. However, active and re- serve military personnel and most employees of TVA are covered by social security in addition to their Government retirement systems. Military retirement benefits are paid in addition to social security; benefits paid to survivors of retired military personnel and to TVA retirees are re- duced by partial social security offsets. CONCLUSIONS Many inconsistences and inequities exist among Federal retirement systems. While there may be legitimate reasons for providing particular benefits to certain types of em- ployees, many of the differing benefit provisions are with- out apparent explanation. We believe that many of the dif- ferences are caused by the lack of an overall policy to guide the development and improvement of Federal retirement systems. The fact that different committees of the Congress have legislative jurisdiction over each of the systems has probably contributed to the situation. RECOMMENDATION TO THE CONGRESS We recommend that the Congress establish an overall Federal retirement policy to guide retirement system develop- ment. Centralization of committee jurisdiction over all Fed- eral employee retirement systems would facilitate the estaD- lishment and implementation of such a policy. AGENCY COMMENTS AND OUR EVALUATION The Department of Defense did not respond to our re- quest for comments, and most of the agencies responsible for administering the six other retirement systems discussed 32 in this report made no specific comments on whether the many different provisions and practices followed by the various systems were justified. The Civil Service Commission stated that it believed some of the differences were reasonable and suggested that any action by the Congress to establish an overall retire- ment policy and centralize committee jurisdiction should keep in mind the need for some differences in the systems. The Administrative Office of the U.S. Courts questioned the propriety of considering the Federal judiciary retirement system in the same context as other retirement systems be- cause "retired" judges continue to perform substantial judi- cial duties. Likewise, the U.S. Tax Court believed there must be a distinct retirement system for Federal judges and maintained that Tax Court judges should continue to receive retirement benefits comparable to the Federal judiciary. The Tax Court stated that its system's provision of paying full salary after retirement is needed to attract qualified persons to hold judicial positions and to induce retired judges to carry a substantial caseload. We are not suggesting in this report that there is no justification for providing differing retirement benefits to certain groups of employees when necessary. A determina- tion of whether differences are justified could be made only after careful and thorough study of the provisions of each system, identifying and evaluating the reasons for the dif- ferences, and ascertaining whether they serve legitimate pur- poses. In fact, as discussed on page 1. we are currently performing such a review at the request of three House com- mittee and subcommittee chairmen. It remains our opinion at this time, however, that many of the differing policies and pra tices of the various systems in areas such as dis- ability and survivor benefits, service credits and portabil- ity, reemployment of annuitants, and employee contribution rates are without apparent explanation and demonstrate the need for an overall Federal retirement policy. 33 APPENDIX I APPENDIX I FINANCING PROVISIONS Retirement Employee Agency Other Government Investment ystem contribution contribution contributions Pollcy Civil service 7 percent of base Matches employee Direct appropriations Required to invest in pay (note a) contribution for (1) interest on U.S. Treasury obliga- the unfunded liability. tions (2) the cost of credit- ing military service. and (3) amortization of certain increases in the unfunded liability over 30 years Foreign Service 7 percent of base Matches employee Same as civil service. Same as civil service pay contribution plus an additional amount to fund the difference between normal cost and agency and employee contribu- tions Uniformed services None Amount needed to None (c) (note b) pay benefits U.S. Tax Court: Judges None Amount needed to None (c) pay benefits Survivors 3 percent of pay Estimate of appro- None Required to invest in both before and priations necessary U.S. Treasury obliga- after retirement for maintenance and tions and Federal farm operation of fund loan bonds submitted annually to OMB Federal judiciary: Judges None Amount needed to None (c) pay benefits Survivors 4.5 percent of pay Matches employee None (note d) U.S. Treasury obliga- both before and contribution tions and Federal farm after retirement loan bonds Federal Reserve 7 percent of base Difference between None U.S. Treasury obliga- Board pay employee contribu- tions and private tions and normal sector investments cost (note e) TVA 6 percent (note f) Difference between None U.S. Treasury oblige- employee contribu- tions and private tions and normal cost sector investments (note e) plus annual amount necessary to amortize the unfunded liability and annuity cost-of-living adjust- ments a/Members of Congress contribute percent of their pay. Congressional employees and certain law enforcement and firefighter personnel contribute 7.5 percent of their pay. b/Also covered under social security. which currently requires employees and employers to contribute 5.85 percent of the first $16,500. c/Not applicable. d/Public Law 94-554. approved Oct. 19. 1976. authorized a lump sum payment to fund the unfunded liability as of Jan. 1, 1977. e/A factor for future general pay increases is included in the normal cost calculation. f/Employees may choose to reduce their contributions by 3 percent on that part of their salary not in excess of the social security base (currently $16,500). 34 APPENDIX II APPENDIX II SURVIVOR BENEFITS CIVIL SERVICE RETIREMENT SYSTEM Survivors of deceased employe s Eligibility--18 months' service. Spouse's benefit--55 percent of the deceased earned annuity. employee's The law guarantees a minimum annuity equal cent of the smaller of (a) 40 percent of an to 55 per- high-3 or (b) the regular annuity obtained employee's creasing the deceased employee's service by after in- of time between is date of death and the the period date he would have reached age 60. Children's benefit, amount per child-- (i) If survived by a widow(er), lesser of (a) 60 percent of high-3 average salary divided by the number of children, (b) $4,860 divided by the number of children, or (c) $1,620. (ii) If no widow(er), lesser of (a) 75 percent of hign-3 average salary divided by the number of children, (b) $5,832 divided by number of children, or (c) $1,944. Survivors of deceased annuitants Eligibility--spouse receives an annuity if annuitant accepts a reduced annuity at retirement. Reduction is 2.5 percent of the amount, up to $3,600, retiree specifies as a base for the survivor the benefit, plus 10 percent of any amount over $3,600 fied. Eligible children receive an annuityso speci- in any event after death of annuitant. Spouse's benefit--55 percent of all or whatever of the retiree's annuity that the retiree portion as a base for the survivor benefit. specifies 35 APPENDIX II APPENDIX II Children's benefit--same as for children of a deceased employee. Other beneficiary--an unmarried annuitant in good health mey accept a reduced annuity and designate an individual with an insurable interest to re- ceive a benefit of 55 percent of the reduced amount. The annuity is reduced by 10 percent, and by an additional 5 percent for each full 5 years younger the beneficiary is than the retiring employee. The total reduction cannot exceed 40 percent. FOREIGN SERVICE RETIREMENT SYSTEM With enactment of Public Law 94-350 on October 1, 1976, survivor benefits under the Foreign Service system are sub- stantially the same as those of the civil service system. UNIFORMED SERVICES RETIREMENT SYSTEM Eligibility--20 years of service; if a member's death results from the performance of active duty or a service-connected disability, survivor benefits are payable from the Veterans Administration regardless f the member's length of service. Benefit--the benefits received under the Survivor Benefit Plan and the reduction in the retired pay of the member to provide these benefits are essentially the same as under the civil service retirement system except for the following: -- The ::u.vivur benefits are reduced by any Veterans Administration dependency and indemnity compensa- tion payments and social security survivor benefits attr ibutabl]e t military service. -- The rduction in retired pay to provide a survivor annuity that flows to the spouse until he or she becomi'p ineligible (death or remarriage before age 60) and then to the children is the same as for the spouse plus an actuarial charge. The charge depends on the age of the member, the spouse, and the youngest child. --The reduction in retired pay to provide an annuity for children only is based on an actuarial charge that depends on the age of the member and the youngest child. 36 APPENDIX II APPENDIX II FEDERAL JUDICIARY RETIREMENT SYSTEM Eligibility--18 months of creditable service contributions have been made. for which elective and those who choose toParticipation participate is must contribute 4.5 percent of salary both after retirement. before and Spouse's benefit--1.25 percent of the participant's high-3 average salary multiplied by the of judicial service, military service, total years service as a Member of Congress, and other Government service not exceeding 15 years, plus .75 employee percent of high-3 multiplied by any remaining years The annuity cannot exceed 40 percent of of service. high-3. Children's benefit, annual amount per child-- (i) If survived by a widow(er), lesser of (a) $1,548 or (b) $4,644 divided by the number of children. (ii) If no widow(er), lesser of (a) 100 percent of the annuity to which a surviving spouse would have been entitled, ('.vtied by the number of children; (b) $1,860; or (c) $5,580 divided by the number of children. U.S. TAX COURT JUDGES RETIREMENT SYSTEM Eligibility--5 years of creditable service for which contributions have been made. Participation elective, and those who choose to participate is must contribute 3 percent of salary both before and after retirement. Surviving widow's benefit with no dependent child--upon reaching age 50, the widow receives an annuity equal to the sum of (1) 1.25 percent of the participant's average annual salary for the 5 consecutive highest paid years of service ("high-5") multiplied by sum of his years of judicial service, military the 37 APPENDIX II APPENDIX II service, service as a Member of Congress, and congres- sional employee service not exceeding 15 years. and (2) .75 percent of the high-5 multiplied by all other creditable service. The annuity cannot exceed 37.5 percent of high-5. Surviving widow's benefit with a dependent child or children--an immediate annuity as determined above. Children's benefit, annual amount per child-- (i) If survived by a widow, lesser of (a) 50 percent of the amount of the widow's annuity, (b) $900 divided by the number of children, or (c) $360. (ii) If no widow(er), lesser of (a) the amount of the annuity to which a widow(er) would have been entitled or (b) $480. The survivor benefits under the U.S. Tax Court judges and Federal judiciary systems were substantially identical before the enactment of Public Law 94-554 (90 Stat. 2603) in October 1976 which made major improvements in the Federal judiciary system. Legislation was introduced in the 94th Congress to make similar changes to the U.S. Tax C-urt judges system. The Tax Court plans t have the sam, bill reintroduced in the 95th Congress. FEDERAL RESERVE BOARD RETIREMENT SYSTEM The survivor benefits and the amount the employee must pay for these benefits are the same as under the civil serv- ice retirement system. TVA RETIREMENT SYSTEM Eligibility--surviorship rights begin accruing im- mediately. Benefit--if death ccur, before retirement, a benefit is payable to the dsignated beneficiary. This 38 APPENDIX II APPENDIX II benefit may be in the form of (1) a lump sum pay- ment consisting of the employee's contributions, with full credited interest, plus (from TVA) a per- cent of final salary which is based on length of service including credit for unused sick leave; or (2) a life annuity which must be actuarially equiva- lent to the lump sum credit. There are several options available to the employee upon retirement to provide a survivor benefit to a designated bene- ficiary. These options, each of which is the actuarial equivalent of the maximum benefit, are as follows: 1. The retiring employee accepts a reduced benefit with the insurance that at death the designated beneficiary will receive the balance left from the employee's contribu- tions with interest at retirement after deducting the benefit payments the employee has received from his contributions. 2. The retiring employee accepts a reduced benefit and the designated beneficiary will continue to receive the same benefit at the death of the retired employee. The amount of the reduction depends on the assumed life of the retiring employee and his designated beneficiary. 3. The retiring employee accepts a reduced benefit with one-half of the reduced amount continuing to the surviving beneficiary. The reduction of course would be smaller than under option 2. 4. This option offers the retiring employee more flexibility than the other options. The retiring employee may specify the amount of the survivor benefit; however, the total value of the employee's reduced benefit plus the survi- vor benefit must be actuarially equivalent to the employee's earned benefit without reduction. Settlements under this option are subje:t to approval by the retirement system board. 39 APPENDIX III APPENDIX III DISABILITY RETIREMENT CIVIL SERVICE RETIREMENT SYSTEM Basic eligibility--5 years' creditable service. Definition of disability--inability to perform useful and efficient service in the specific position occupied at the time application for retirement is made. Establishment of disability--application by the employee or employing agency accompanied by a statement from the employee's superior officer showing how the em- ployee's condition affects job performance and a report from the employee's doctor fully describing the disability. The Civil Service Commission may also require the employee to undergo an additional medical examination by an approved physician. The employee's disability is rated either temporary or permanent. Periodic reexamination--for temporary disabilities, the Commission reviews the case annually until the retiree reaches age 60 or is reclassified permanently disabled. Payments for partial disability--none. Length of coverage--until death, medical recovery, or restored earning capacity before reaching age 60. If the retiree recovers, payment of the annuity countinues for 1 year. Earning capacity is deemed restored if in each of 2 succeeding calendar years the annuitant's income equals at least 80 percent of the current rate of pay of the postition oc- cupied immediately before retirement. However, the annuity is restored if the earnings fall below 80 percent in a later calendar year. Computation of annuity--the larger of amounts derived from the general formula or the guaranteed minimum. (1) General formula--larger of the following two amounts: (a) 1.5 percent of the hig 3 average pay for each of the first 5 years of creditable service, plus 1.75 percent for each of the second 5 years of service, plus 2 per- cent for each year over 10 years; or 40 APPENDIX III APPENDIX III (b) substitute 1 percent of the high-3 average pay plus 25 for any or all of the percent- ages in (a) where it will yield a larger amount, mutiplied by the years of service as shown in (a). (2) Guaranteed minimum--the lesser of the following two amounts: (a) 40 percent of the high-3 average pay or (b) the amount obtained under the general formula after increasing the employee's actual credit- able service by the time remaining between the date of separation and the date he at- tains age 60. FOREIGN SERVICE RETIREMENT AND DISABILITY SYSTEM Basic eligibility--5 years' c.ditable service. Definition of disability--totally disabled or incapacitated for useful and efficient service by reason of disease. illness, or injury not due to vicious habits, intem- perance, or willful misconduct on employee's part. Establishment of disability--application by employee ac- companied by a description of the disability and a full explanation of the manner in which it affects the performance of duties; must inform immediate supervisor of application for disability retirement and undergo meccal examination. Disability is determined by tile Secretary of State, or his dsig- nated representative, on the basis of advice pro- iided by one or more duly qualified physicians or surgeons designated to conduct examinations. The employee's disability is rated either temporary or permanent. Periodic reexamination--unless the disability is rated permanent at the time of retirement or at a later date, examinations by duly qualified physicians or surgeons designated by the Secretary are made annually until annuitants reach the mandatory re- tirement age for their class in the service. Payments for partial disability--none. Length of coverage--remainder of lifetime unless annui- tant recovers to the extent that he can return to 41 APPENDIX III APPENDIX III duty. If the retiree recovers, payment of the annuity continues 6 months after the date of examina- tion. Computation of annuity--2 percent of average basic salary for the high-3 consecutive years, times years of service not exceeding 35. The average high-3 years do not have to be consecutive for a Chief of Mission whose service in that capacity was interrupted. For retirees with less than 20 years' service, the annuity is computed as though the employee has 20 years' serv- ice; but the additional service credit may not exceed the difference between the employee's age at time of retirement and the mandatory retirement age. UNIFORMED SERVICES RETIREMENT SYSTEM Basic eligibility--20 years' service, or at least 30- percent disability and (1) 8 years' service, (2) dis- ability being the proximate result of performing active duty, or (3) disability being incurred in line of duty during war or national emergency. Definition of disability--unfit to perform the duties of office, grade, rank, or rating because of a physical disability which did not result from the member's intentional misconduct or willful neglect and was not incurred during a period of unauthorized absence. Establishment of disability--report to sick bay and request physical evaluation board's ruling on physical fitness to maintain duties in the military. Physical evaluation board makes decision on dis- ability on the basis of medical advice from military doctors. The disability is rated either temporary or permanent. Periodic reexamination--if the disability is temporary, the retiree must undergo a physical examination at least every 18 months. If the disability still exists after 5 years, it is considered permanent. Payments for partial disability--yes. If member has less than 20 years' service, disability must be at least 30 percent. 42 APPENDIX III APPLNDIX III Length of coverage--remainder of lifetime unless retiree recovers from disability or falls to report to an examination without just cause. Computation of retired pay--monthly basic pay on day before retirement multiplied by either (1) 2.5 per- cent times years of service or (2) the percentage of disability. The retired pay cannot exceed 75 percent of the monthly basic pay. Those tem- porarily disabled receive at least 50 percent of the monthly basic pay. FEDERAL JUDICIARY ETIREMENT SYSTEM Basic eligibility--judges and justices of the United States: appointment to position of judge or justice of the United States. Judges of the District Court of Guam, Canal Zone, and the Virgin Islands: 10 years' creditable service. Definition of disability--unable to discharge all duties efficiently because of permanent mental or physical disability. Establishment of disability--written certification to the President signed by the chief official of the court. The President may retire any judge or justice whom he finds to be mentally or physically incapable of dis- charging all the duties of his office. Periodic reexaminatlon--none. Payments for partial disability--no provisions. Length of coverage--remainder of lifetime. Computation of annuity--justices and judges of the United States: if 10 years' service, the salary of the office; if less than 10 years' service, one-half the salary of the office. Judges of the District ourt of the Canal Zone, Guam, and the Virgin Islands: if 16 years' service, salary of the office at the time of relinquishment; if 10-15 years' service, salary times years of service, divided by 16. U.S. TAX COURT JUDGES RETIREMENT SYSTEM Basic eligibility--appointment to a U.S. Tax Court judge position. 43 APPENDIX III APPENDIX III Definition of disability--unable to discharge efficiently all the duties of the office by reason of permanent mental or physical disability. Establishment of disability--written certification to the President. The President must concur with the Chief Judge's disability retirement. The Chief Judge must sign any other judge's disability certification. The President shall declare any judge retired if he finds the judge to be permanently disabled from per- forming duties. Periodic reexamination--none. Payments for partial disability--none. Length of coverage--same as Federal judiciary. Computation of annuity--if 10 or more years' judicial service, 100 percent of the salary payable to a judge; if less than 10 years' judicial service, 50 percent of the salary payable to a judge. TVA RETIREMENT SYSTEM Basic eligibility--5 years' creditable service. Definition of disability--inability to continue in present position because of a physical or mental disability that is likely to be permanent and a lack of another available TVA position for which the employee is qualified. The determination must be made by the TVA Retirement System Board of Directors on the basis of a report either by the medical board (three physicians independent of TVA) or by the director of the TVA division of medical services and information from the TVA employment branch. Establishment of disability--application by TVA or by employee, who authorizes the retirement system to obtain reports from his personal physician(s), the TVA physician, his supervisor, and the TVA division of personnel. The completed file is then reviewed by the Director of the TVA division of medical services and, if appropriate, by the medical board, and approved by the TVA retirement system board of directors. 44 APPENDIX III APPENDIX III Periodic reexaminations--as may be determined by the board of directors. Payments for partial disability--none. Length of overage--until death, reemployment in a position covered by TVA retirement system, or until earnings plus regular disability benefit exceed his prior position's salary, which initiates a reduction. Obligated upon request by the directors to file, within 30 days, a proper application for social security disability insurance benefits or, at age 65, a social security old-age benefit; if he does not, the TVA disability pension may be dis- continued. Computation of disability retired pay--disability benefit consists of two parts: (1) An annuity--the actuarial equivalent of the employee's accumulated contributions. (2) A pension from TVA's contributions to the system. The pension is equal to 1.1 percent of the member's average compensation for each year of creditable service. However, an alternative formula is used if this results in less than a 30-percent pension. Under the alternative formula a 30-percent minimum is provided, except for older employees with short service. If the member becomes entitled to social security dis- ability insurance or old-age benefits, the TVA pen- sion is subject to reduction. FEDERAL RESERVE BOARD RETIREMENT SYSTEM Basic eligibility--5 years' creditable civilian service. Definition of disability--inability to perform useful and efficient service in specific position occupied at the time application for retirement is made. Establishment of disability--application accompanied by a report from member's personal physician fully describing the disability. A medical examination is also made by a physician designated by the em- ployer. Decision of disability is made by the 45 APPENDIX III APPENDIX III medical board, based on the examination reports of the physicians. The disability is rated temporary or permanent. Periodic reexamination--if the disability is rated temporary or subject to improvement, a reexamination is required annually until retiree reaches age 60. Payments for partial disability--none. Length of coverage--same as civil service. Computation of annuity--same as civil service. 46 APPENDIX IV APPENDIX IV UNITED STATES CIVIL SERVICE COMMISSION ILV P"Wmno WASHINGTON, D.C. 20415 MAY 1 0 1977 Mr. H. L. Kreiger Director Federal Personnel and Compensation Division U. S. General Accounting Office Washington, D.C. 20548 Dear Mr. Kreiger: This i in response to your request for comments on the GAO draft report "Federal Retirement Systems: Unrecognized Cost, Inadequate Funding, and inconsistent Benefits". Cost of Retirement Programs: Understated and Underfunded This section of your report summarizes the financing of the Civil Service Retirement (CSR) system, and six other Federal systems. The current funding provisions of the CSR system were included in Public Law 91-93 passed in 1969. Funding before 1969 was on a sporadic basis with the government contri- bution limited to 6.f5 of payroll in the 1960s. Projections made then showed that the fund would be depleted if strong funding measures were not enacted. The law went a long way toward providing stable financing. Recently, however, there has been concern that the current funding is not adequate. We have undertaken an extensive study of the financing of the CSR system and have found that current law financing is adequate to assure continuation of the fund in the foreseeable future under any reasonable economic assumptions. As you point out, current financing measures do not directly show the long range cost of the CSR system or proposed amendments. Since the CSR fund is part of the total Federal budget there may be no real way to charge higher costs to current taxpayers and a change in the law to reflect dynamic costs may have little real effect. We do believe, however, that it is necessary to at least publicize the true long term cost of the system and alternatives whether or not the law is changed. THE MERIT SYSTEM-A GOOD INVESTMENT IN GOOD GOVERNMENT 47 APPENDIX IV APPENDIX IV Understated Civil Service Retirement costs results in hidden subsidies Except for the Postal Service, agency contributions are limited to 7% of payroll. The Postal Service is also required to pay the cost of retirement liabilities resulting from their union negotiations. All of the rest of the government contributions are paid from general revenues. This section of your report concludes that the full dynamic normal cost in excess of the employee contribution should be charged to the agencies. As administrators of the CSR system our primary concern is that adequate allowance be made for financing the benefits. Allocation of the govern- ment cost among various sources is primarily a consideration and decision for other agencies and the Congress. We note that the Office of Management and Budget has already suggested use of the dynamic normal cost, less the employee contribution, in comparing the cost of doing business between government sources and outside contracts. OMB has also stated that the balance of the dynamic cost should be charged to agencies beginning in 1979. These positions appear to be consistent with your conclusion. Inequities and Inconsistencies of Federal Retirement Programs As the report notes, there are many differences among the various Federal Retirement systems. Some of these differences are reasonable. For instance, a typical military career is much different than a typical civil service career and the retirement eligibility provisions need to reflect this. Other major differences are attributable to the fact that participants in some of the systems are covered by Social Security while participants in others are not. Your recommendation is that Congress establish overall policy on retire- ment systems and centralize committee jurisdiction. If this does happen, the committee(s) involved should keep in mind the need for some differences in the systems. We agree generally with the conclusions of your report. Our staff work on financing and advice received from consultants, however, indicate that there are other possible approaches to introducing dynamic cost measures into the financing of the CSR system. Our study is very near completion and should be available in the not too distant future. Your report, our study, and other comments should provide a good basis for Congressional consideration of CSR financing this year. Sincerely yours, Thomas A. Tinsley Director Bureau of Retirement, Insurance, and Occupational Health 48 APPENDIX V APPENDIX V DEPARTMENT OF STATE W$%hinltto, , C 520 April 28, 1977 Mr. J. . Fasick Director International Division U.S. General Accounting Office Washington, D. C. 20548 Dear Mr. Fasick: I am replying to your letter of April 6, 1977, which forwarded copies of the draft report: "Federal Retire- ment Systems: Unrecognized Cost, Inadequate Funding, and Inconsistent Benefits." The enclosed comments were prepared by the Deputy Assistant Secretary for Personnel. We appreciate having had the opportunity to review and comment on the draft repcrt. If I may be of further assistance, I trust you will let me know. Sincerely, Db4L± i11mmon, Jr. Deputy Assistant Secretary for Budget and Finance Enclosure: As stated 49 APPENDIX V APPENDIX V April 27, 1977 GAO DRAFT REPORT: "FEDERAL RETIREMENT SYSTEMS: Unrecognized Cost, Inadequate Funding, and Inconsistent Benefits" Thank you for the opportunity to review your draft report on the costs, benefits and funding of the Federal retirement systems. In the course of our review we discovered a few minor technical errors. Corrections and/or clari- fications have been made on pages 14, 31 and 32 and they are attached for your information. Arthur I. Wortzel Deputy Assistant Secretary for Personnel Attachments: Pages 14, 31 and 32 of draft report GAO notes: 1. Appropriate technical changes were made to the report as suggested. 2. Page references in appendixes V through XVI refer to the draft report and may not correspond to pages in this final report. 50 APPENDIX VI APPENDIX VI UNITED STATES TAX COURT WASHINGTON cour zcamUnvm April 27, 1977 Mr. Victor L. Lowe Director, General Government Division General Accounting Office Building Room 3866 441 'G' Street, N. W. Washington, DC 20548 Dear Mr. Lowe: Enclosed are the U. S. Tax Court's com- ments on your draft report on the costs, bne- fits, and funding of Federal retirement systems. Enclosure (1) contains general remarks justifying the need for a distinct retirement system for Federal judges. Enclosure (2) consists of commnents on specific references made in your report con- cerning the Tax Court judges' retirement and survivor benefit systems. Sincerely yours, CREWE Court Executive Enclosures GAO note: Enclosure 2 to this letter contained suggested technical changes to the report which have been made. APPENDIX VI APPENDIX VI Enclosure (1) NEED FOR DISTINCT RETIREMENT SYSTEM FOR FEDERAL JUDGES J..ihough there may be reasons for re-evaluating inconsistencies among many of the the Federal tems, it should be recognized that there retirement sys- tinct retirement system maintained for must be a dis- Federal judges. The judges who serve on courts created under Article III of the Constitution have the constitutional remain in office for life. The initial right to created for Federal judges applied only retirement system to the judges serving on Article III courts, and it is that such retirement system permitted such not surprising tinue to receive the pay of the office judges to con- after they retired. Since such judges could remain in office wished, it is clear that if they had been as long as they compelled to accept any substantial reduction in compensation result of retirement, many of them would as a not have elected to retire. Although the Tax Court is created cle I, not Article III, of the Constitution, under Arti- decided in 1969 that the judges the Congress of this Court should be treated in the same manner as those judges Article III courts, and for that reason, serving on provide a retirement plan for Tax Court it decided to judges which is substantially identical to the plan available III judges. to Article There are two additional reasons for providing ferent retirement plans for Federal judges: dif- In designing most retirement plans, it is assumed, or hoped, that em- ployees will commence working for the employer age and remain with the employer throughout at a young lifetime. Employees who do remain with their working such a substantial period are provided the employer for substantial retire- ment benefits. However, no similar period be expected of a Federal judge. Unlike of service can a person is not suitable to be selected other employees, as a judge until he has acquired extensive experience and narily, a person chosen as a judge has maturity. Ordi- the zenith of his professional career. already reached In the case of the Tax Court, most judges are in their appointed to the court. A person who has 40's or 50's when such an age cannot be expected to serve already reached 15, or 20 years, and if a retirement planfor more than 10, service than that to qualify for significantrequires more simply will not help judges and will not benefits, it ting the most qualified persons to hold assist in attrac- judicial positions. 52 APPENDIX VI APPENDIX VI The other reason for a different retirement plan for judges involves the nature and the extent of the judicial work. In all courts, including the Tax Court, the volume of judicial work has increased spectacularly in recent years. The number of cases commenced each year and the total number of cases pending before the court are both at all-time highs. The size of the Tax Court has not been increased since 1926, and it is hoped thatsuch size will not have to be increased. One significant method of coping with this increased workload is to call upon the retired judges tor continued judicial services. Since the judicial work involves mental efforts and calls for the exercise of judgment, mature persons can often continue to perform the work beyond the ages vwhen they might have to discontinue other types of work. Thus, retired judges are often capable of continuing to carry a substantial caseload, and by doing so, they can assist materially in the performance of the court's work. To provide a sufficient inducement for the retired judges to work, to the extent they are capable of doing so, it is appropriate and sound to continue to pay them the salary of the office. 53 APPENDIX VII APPENDIX VII BOARD OF GOVERNORS ofts 7 EDERAL RESERVF. SYSTEM WAAHINGTON, 0. C. 205B I May 20, 1977 Mr. H. L. Krieger, Director Federal Personnel and Compensation Division U.S. General Accounting Office Washington, D. C. 20548 Dear Mr. Krieger: As requested in your letter of April 4, 1977, members of the Board's staff have reviewed your proposed report to the Congress on the costs, benefits, and funding of Federal retirement systems. Messrs. Peter Lynn and Bud Santee met on May 17 with Mr. C. W. Wood, Assistant Director of Personnel for the Board, and Mr. Merritt Sherman, former Secretary of the Board and presently Consultant on benefits matters. I regret that we were not able to send you our comments by April 29, but your original letter apparently failed to reach the Board's offices, and it was not until May 10 that a duplicate with a copy of the draft report came into my hands. The reaction of our staff to your draft report is that its main thrust is very good and long overdue. A realistic valuation of the true costs and liabilities of a benefits program is a basic essential to a sound financing program. In our opinion, it is important to consider both present and prospective benefit levels and their costs, and out of such study to develop a funding program adequate to meet current and future liabilities. We are glad to know that serious reviews along these lines regarding all Federal retirement programs are currently underway, and we hope they will be pursued to a logical conclusion. Insofar as the report refers to the Federal Reserve Board Plan, Messrs. Wood and Sherman gave your representatives a few suggestions which we understand will be taken into account in preparation of your fina'. port. A copy of the suggested changes in the text of page 16 of your draft is enclosed for your convenient reference. You will note that : this revision we have suggested the use of 1976 cost data, which GAG note: The suggested technical changes were made to the report. 54 APPENDIX VII APPENDIX VII indicate realistically the current normal funding costs of the Board Plan on a dynamic basis, including terminal funding of the 5.4 per cent cost of living supplement granted rtirees and beneficiaries effective March 1, 1976. (As your draft report indicates, the Board Plan benefits are essentially the same as those of the Civil Service Retirement System except for one or two relatively minor ferences, and the contribution rate of the Board's roloyees isthe same as that for employees who are members of the Cv:l Service retirement fund) You may also wish to consider adding a footnote to Appendix I (pages 41 and 42 inour copy) which now describes Board contributions as the "difference between emplyee contributions and normal cost." The Board Plan normal cost has always included an economic assumption for a career salary progression rate, the level of that allowance for future cost increases being about 1-1/2 or 2 percentage points lower than the assumed rate of interest on invested reserves. We appreciate having had an opportunity to review your draft report and will be glad to receive several copies of the completed document when it isavailable. Sincerely yours, Theodore E.Allison Secretary of the Board Enclosure 55 APPENDIX VIII APPENDIX VIII ADMINISTRATIVE OFFICE OF THE UNITED STATES COURTS SUPREME COURT BUILDING WASHINGTON. D.C. 20544 ROWLAND F. KIRKS o RCTOR WILLIAM E. FOLEY DEFU, DIfCTOR May 10, 1977 Mr. Victor L. Lowe Director, General Government Division General Accounting Office Washington, D.C. 20548 Dear Mr. Lowe: Rcference is made to your letter of April 4, 1977, with which you enclosed copies of your proposed draft report to the Congress on the costs, benefits and funding of Federal retirement systems. I question the propriety of including in such a study :. compensation payable to a Federal justice or judge who takes senior status in accordance with the provisions of sections 371 and 372 of Title 28 of the United States Code. These sections provide that any justice or judge of the United appointed to hold office during good behavior, may retain his office States, but "retire" from regular active service. Under Article III of the Constitution, such justices and judges are appointed for life during good behavior and cannot be diminished. A justice or judge who "retires" from regular their salary service under subsections 371(b) or 372(a) may continue to perform active such judicial duties as he is willing and able to undertake under the provisions of section 294 of Title 28 of the United States Code. Therefore, a justice or judge does nnt "retire" as that term would be applied to other civilian officers or employees of the Federal Government. Actually, they continue to perform sub- stantial judicial services. It has been possible to meet the heavy caseload of the courts by the willingness of such senior justices or judges to continue to perform judicial duties. At this time, our records show that more than 90 percent of the judges who have "retired" are performing substantial services and accordingly are provided office space and staff. They may not engage the practice of law and are subject to the same restrictions as any active in Judge. It is therefore apparent that senior ustices or Judges should not be compared with other civilian officers and employoes of the Federal Government who are completely separated from their position upon retirement. The compen- sation paid to senior justices or judges is not a "pension"; it is subject to the same payroll deductions chat were made from their salary as an "active justice or judge." It should be stressed that any proposed legislation could be in conflict with Article III of the Constitution. This matter has not been referred to the Judicial Conference of the United States but I am certain there will be con- side-able opposition to any changes. I would like to transmit your final 56 APPENDIX VIII APPENbIX viII report to te members of the Judicial Conference for consideration event you liclude the senior Justices or judges in your in the study I have no problem with your references to the Judicial Annuity System but the Judicial Conference of the United Survivors' previousl) pproved the rtention of the administration States has of that system by this office. On page 17 of the report, you speak of liability of ths Judicial Survivors' Annuity System. the unfunded (Public Law 94-554, approved October 19, 1976) providesRecent legislation for direct appropriation to the Judicial Survivors' Annuities Fund unfunded liability as of January 1, 1977. In connection to cover the I am enclosing corrected page 42 (Appendix with this system, changes in the system hat were made by ioblic1)Lawn view of the recent 94-554. With kind regards, I am Since;:ly yours, Rowland F. Klrk Dirr,ctor Enclosure GAO note: Tile suggested technical change was made to the report. 57 APPENDIX IX APPENDIX IX TENNESSEE VALLEY AUTHORITY KNOXVILLE. TENNESSEE 37902 MaY l 2, 1977 Mr. H. L. Krieger, Director Federal Personnel and Compensation Division United States General Accounting Office 441 G Street, NW Washington, D.C. 20548 Dear Mr. Krieger: In response to your request of April 29, our comments on your draft report on the costs benefits and funding of Federal retirement systems are enclosed. We appreciate bing given the opportunity to express our views. If we may be of further assistance, please let us know. Very truly yours, Lynn Seeber General Manager Enclosure GAO note: The enclosure was a copy of our draft report with suggested wording changes. Appropriate changes were made. 58 APPENDIX X APPENDIX X 320 Flit 91iot N.W Wll.hltglon. D C. 20582 FidMial ome Loin nk Sytem Loan Moroag CoIIn Federal Home Loan Bank Board ,. WI..i FIK41l $1vlnl nd Ln InsurneL Copoflion April 29, 1977 Mr. H.L. rieger, Dlirector Federal Personnel nd Cowpensation Division United States General Accounting Office Washington, D.C. 20548 Dear ir. Krieger: Chairman narton asked that I respond to your April 4, 1977 letter concerning the dreft of a proposed report on Federal Retirement Systems. · We have no problem with the two recoemendations contained on pags 40. Our major concern is that if any changes are made in the required funding of the retirement system there must be appropriate changes to our Congressional and OM limitations to allow us to fund the change. Very truly yours, 3. Wolpert Director 'rt Accounting & Fiscal Operations cct Chairman Marston 59 APPENDIX XI APPENDIX XI OFFICE OF THE F DI CONTROLLER FEOERAL DEPOSIT INSURANCE CORPORATION, Whington. D.C. 20429 May 6, 1977 Mr. H. L. Krieger, Director Federal Personnel and Compensation Division General Accounting Office Washington, DC 20548 Dear Mr. Krieger: This is in response to your letter of April 4, 1977, with which you enclosed copies of your proposed report to the Congress on the costs, benefits, and funding of Federal retirement systems. We found your report interesting and, particularly, examined Chapter 3. This was natural in light of the fact t at the Corporation is and wishes to be ubstantially self-supporting. It contributes to the retirement system, as to any other employee benefit program, i the amounts which have been stated to be its obligation. If it is receiving large hidden subsidies, therefore, it is not because o' necessity or desire on the part of the Corporation. To say this, however, does not mean that the Corporation is searching out ways to add to its annual expenditures. Your draft report suggests OMB has recently recognized that the cost of the Civil Service Retirement Syster.l should be determined on a "dynamic" rather than "static" basis. Further, using economic assumptions derivrd from past pay and cost-of-living increase experience, OMB estimated the "dyramic" normal cost of the system to be 31.7 percent of pay. Thereafter, in October 1976, OMB issued a memorandum instructing Federal agencies to use a factor of 24. 7 percent of base pay (31.7 percent less 7 percent employee contribu- tions) when preparing cost analyses. The Corporation did not receive this memoran- dum and, as a self-supporting agency, would probably not be preparing such analyses. From this background, your report concludes that the FDIC may have received an estimated subsidy of $9 million in 1976. This presumably represents the difference in computing contributions on a "static" versus "dynamic" basis. Whether these estimates and arithmetic are valid is perhaps merely something to be proved out in due course. From the point of view of the Corporation, our conceptual position is that we want to pay our way wherever appropriate. If the Congress accepts the recommendation that the cost of Federal retirement systems be computed on a "dynamic" basis and the difference between currently accruing costs and employee 60 APPENDIX XI APENDIX XI contributions be charged to agency operations, the additional everal million dollars annually then we are quite willing to earmark which might be required, In fact, it may be that the burgeoning costs of Federal L pported by recomputations on a "dynamic" retirement systems can only be at all anxious to increase our expenditures basis, On the other hand, we are not merely because OMB has "estimated" the costs on a "dynamic" basslr and GAO has expenditure to be charged to the Corporation "estimated" the consequent increased e account. If w can be shown it is the sense of the Congress, therefore, to use the "dynamic" cost basis and if reasonably provable arithmetic contributions flows therefrom, we are as to the amount of increased FDIC entirely able and willing to pay our proper share. Sincerely, Edward F. Phelps, r. j\ Controller 61 APPENDIX XII APPENDIX XII CANAL ZON3 OOVMRNMZNT 6'! MAUIOA 0,PO 5r]c UOUTS, ONAL S01U or Ts GOVURNOR APR z 51977 Mr. H. L. Krieger Director Federal Personnel and Compensatils Division U.S. General Accounting Office Washington, D.C. 20548 Dear Mr. Krieger: This is in reply to your letter of April 4, 1977, to Mr. Thomas Constant, requesting comments on the draft report entitled, "Federal Retirement System: Unrecognized Cost, Inadequate Funding, and Inconsistent Benefits." The Panama Canal Company and the Canal Zone Government, commonly referred to as the Panama Canal enterprise, are separate and distinct Government entities. As prescribed by law (two Canal Zone Code sections, 62 and 412), the Panama Canal Company is designed to be self-sustaining. The Company finances its operations with revenue from its transit tolls and support services. The Canal Zone Government, on the other hand, receives annual appropriations to finance its operations. These appropriations are returned to the U.S. Treasury through recovery of charges for services rendered by the government and payments by the Company for the net cost of the Canal Zone Government, i.e., operating costs in excess of recoveries. With the above financing of the entities in mind, the following comments are made concerning the draft report. Your recoendation on page 21 to require . . . "the cost of Federal retirement systems to be computed on a dynamic basis and the difference between currently accruing cost and employee contributions be charged to agency operations", if adopted, would have a significant impact on the rates for services, including tolls for ue of the Panama Canal. The rates of tolls were increased an average of 19.7% in 1974, and 19.5% in 1976. In all probability, a similar increase in rates would be needed if additional retirement costs are rquired to be charged to the operations of the Panama Canal Company and the Canal Zone Government. We appreciate the opportunity to comment on the draft report. Sincerely yours, Richard L. Hunt Acting Governor of the Canal Zone Vice President, Panama Canal Company Enclosure 62 APPENDIX XIII APPENDIX XIII 40 L'ENFANT PLAZA, 8.W. WASHINGTON, D.C. 20576 May 4, 1977 Mr. Hnry Eschwege, Director Community and Economic Development Division General Accounting Office Washington, D.C. 20548 Dear Mr. Eschwege: We have reviewed the draft of your proposed report on Federal retirement systems. We believe that the report is based on fact and that the conclusions are essentially sound. We re in full agreement with the concept of dynamic funding and believe that Feoe-al retirement systems should operate on funding principles similar to those in the private sector under the requirements of the Employee Reti-ement Income Security Act. We have the following comments regarding those sections of the report which relate to coverage of Farm Credit Administration and Farm Credit System employees under the Civil Service Retirement System: 1. Your report accurately points out that our operations are established on a self-supporting basis with expenses assessed against the banks of the Farm Credit System, rather than from tax revenues. Because of the static basis used to compute the normal costs of the Civil Service Retirement System, the report estimates that the agency received a subsidy of $800,000 in 1976. This figure represents the difference between what is actually paid into the fund and the estimated normal cost calculated on a dynamic basis. However, when the normal costs of the Civil Service Retirement System are computed on a static basis as is currently the case, there is no subsidy at all. We do not think that a handful of agencies should be singled out for special treatment merely because they were intended to be self-supporting. The emplcees of Farm Credit Administration are competitively appointed from Civil Service registers and have the same pay and benefits as other employees el the Federal Government. We 63 APPENDIX XIII APPENDIX XIII believe it would be a gross inequity to calculate normal costs on a dynamic basis for Farm Credit Administration employees and on a static basis 'or other agencies. 2. As the report points out, the Farm Credit Banks are required by law to contribute the difference between their employees' contributions and the Civil Service Retirement System's normal cost as determined by the Civil Service Commission. What we stated above also applies to the Farm Credit Banks; there is no subsidy when normal costs are computed on a static basis and a dynamic calculation should be used uniformly or not at all. Additionally, we must point out that the number of bank employees covered by Civil Service Retirement is steadily declining. From approximately 1600 covered employees in 1959, the number has shrunk to approximately 270 emplo)ees today and will probably disappear within 20 years. This means that the liability for these employees and retired annuitants of the banks will continue to increase and that receipts for covered bank employees will continue to decrease. The significance of this "subsidy" will continue to decline as more of the bank employees reach retirement age. 3. Finally, we believe that the assets of the Civil Service Retirement fund should not be limited by law to invest- ment in Federal Government securities. During the 1976 calendar year, long-term Treasury bonds ranged in price between 6.38 percent and 7.01 percent, and long-term new corporate bonds ranged between 7.90 percent and 9.00 percent. During this same period, intermediate securities of the Farm Cedit System ranged from 7.10 to 7.45 percent, and long-term Farm Credit System securities ranged from 7.85 to 7.95 percent. When these rates are compared to the 5.75 percent rate paid on the Civil Service Retirement fund in 1976, we question if the fund is subsidizing the Federal Government with a cheap source of funds. We believe that if the Tennessee Valley Authority and Federal Reserve Board can diversify the investment of their retirement funds, the Civil Service Retirement fund should be allowed to do likewise. Health and life insurance benefits are handled by private carriers; perhaps a 64 APPENDIX XIII APPENDIX XIII consortium of private insurance companies and banks could act as trustee for a portion of the fund assets. As a minimum, the investment policy should be liberalizsed to permit investment in agency securities such as those issued by the Farm Credit Banks. In summary, while we agree with most of the conclusions of your draft report, we oppose using a dynamic basis for estimating normal costs for Farm Credit Administration and bank employees, while a static basis is used for all other agencies. We also believe that consideration should be given to diversification of the Civil Service Retirement fund assets. We appreciate the opportunity to comment on your draft and hope that these comments will be useful. Sincerely, Governor 65 APPENUIX XIV APPENDIX XIV FEDERAL NATIONAL MORTGAGE ASSOCIATION F. C GOSLING VICI PMIN4,*l FO A )IN1ITUTIO# April 29, 1977 Mr. Henry Eschwege Director, Community and Economic Development Division U. S. General Accounting Office Washington, DC 20548 Dear Mr. Eschwege: We appreciate the opportunity to comment on your proposed report, "Federal Retirement Systems: Unrecognized Cost, Inadequate Funding and Inconsistent Benefits." Our partial participation in the Civil Service Retirement System is with definite restrictions, and our contributions to the Civil Service Retirement and Disability Fund are as set forth in Section 309(d)(2) of the Federal National Mortgage Association Charter Act (12 U.S.C. 1723a(d)(2)). There are now only 215 of our 1260 employees who are subject to this provision. FNMA's own retirement plan supplements the regular social security coverage for the majority (1045) of our employees. We believe that your review is substantive and timely, but do not agree with the conclusions set forth in the proposed report. The concept of "dynamic cost" and the OMB estimate (emphasis added) is apparently based on federal agency experience, which should not include FNMA. The report incorrectly assumes that FNMA employees' wages are affected by or included in the General Schedule. However, since December 1, 1968, administrative adjustments for the GS schedules have increased 66% whereas FNMA adjustments have totalled 46%. This 43% difference would represent a potentially significant reduction in any actuarial computation of retirement liability. The OMB directed that the "dynamic" normal cost be used for cost accounting purposes under OMB Circular A076.1. It does not necessarily follow that the same calculation should be used in funding a retirement system. Cost accounting 1133 FIFTEINTH STREET, N W · WASHINOTON. D C 20005 · (202) 2S3-605O 66 APPENDIX XIV APPENDIX XIV for determlning whether or not agency functions should be contracted out is not the same as determining how many actual dollars should be contributed to a retirement fund, and there is no reason why they should be treated alike. The dynamic cost figure of 31.7%, which apparently did not come from any independent actuarial study by GAO, should not be applied to all agencies and all retirement systems. We were pleased to be able to review your draft report and thank you for considering our comments. We would appreciate your sending us a copy of the final report you will submit to Congress. Sincerely, 67 67 APPENDIX XV APPENDIX XV THE POSTMASTER GENERAL Wahlngqon, DC 2020 June 3, 1977 The Honorable Elmer B. Staats Comptroller General of the United States Room 7000 441 G. Street, N.W. Washington, D.C. 20548 Dear Elmer: Thank you for the opportunity to comment on the General Accounting Office's (GAO) proposed report to the Congress on Federal Retirement Systems. Perhaps more than any other agency, the Postal Service is aware that funding retirement benefits is an expensive under- taking. As pointed out in your report, we are presently the only agency that is required to amortize the increases in the unfunded liability resulting from pay increases. We believe our retirement financing procedures are more prudent than the financing procedures followed generally. We feel very strongly that our financing procedures are indeed proper. Since our total payments to the retirement system were just over $1 billion in Fiscal Year 1976, and we employ approxi- mately 25 percent of all persons covered by the Civil Service retirement system, we are necessarily concerned about the impact of any changes to the existing retirement ystem. Moreover, since Postal Reorganization, we have paid approxi- mately $6 billion into the retirement fund. During that same period, retired postal employees have received approximately $3 billion in benefits. Since P.L. 93-349 was enacted in July 1974, the Postal Service has been regularly paying into the Civil Service Retirement a.d Disability Fund substant:-l amounts over and above the 14 percent so-called static normal cost of the retirement system required to be paid by other agencies and their employees. The law makes the Postal Service liable for additional amounts sufficient to discharge any unfunded liability attributable to 68 APPENDIX XV APPENDIX XV actions of the Postal Service in increasing, either through collective bargaining or by administrative action, the pay of postal employees on which benefits are computed. It is quite clear from P.L. 93-349 itself, as well as from the legislative history, that the Postal Service was not to be made liable for any unfunded liability not caused by the Postal Service. As the Senate Committee on Post Office -and Civil Service stated in its report n the bill that was subse- quently enacted into law: "The Postal Service, however, would not be held responsible for unfunded liabilities which might be created by an Act of Congress". S. Rep. No. 93-947, 93d Cong., 2d Sess. 3 (1974). In the House report there is the following unequivocal statement: "The purpose of this legisla- tion is to clearly establish the responsibility of th U. S. Postal Service to finance the increases in tne unfunded liability of the Civil Service Retirement and Disability fund, caused by administrative action of the Postal Service, as apart frol, increases in unfunded liabilities which are incurred by Act of Congress". H. Rep. No. 93-120, 93d Cong., 1st Sess. 2 (1973) (Emphasis added.) Even though the Congress clearly and unmistakably limited the Postal Service's unfunded liability to that caused by the Service through pay increases, and even though Congress speci- fically recognized the fact that there is other unfunded liability caused by acts of Congress, which Congress would fund, the GAO draft report characterizes this liability as an "unrecogrized subsidy" to the Postal Service. This characterization is not really apposite. The unfunded liability, which GAO recommends we fund, is caused largely by cost-of-living increases granted to annuitants pursuant to a statutory formula enacted by Congress. It discharges no legal obligation of the Postal Service under existing law. We fully agree with the principle now embodied in the law tat postal ratepayers should be responsible for all unfunded liability costs attributable to the actions of the Postal Service. The Postal Service agrees in principle with the concept of using "dynamic" procedures in determining the amount of con- tributions it should make to the retirement fund. However, the latest draft of a Civil Service interagency task force report indicates that, under a dynamic funding approach, substantial 69 APPENDIX XV APPENDIX XV overfunding could be possible. Also, the to compute dynamic costs, particularly assumptions used are subject to significant changes which the inflation factors, tions highly ariable. 1/ Accordingly, could make contribu- we foresee major pro- blems in any funding arrangement that could in the postal ratemaking process. cause instability As pointed out on pages five and six of the draft report, there are a number of dynamic funding estimates been developed by both the Office of Management that have and the Civil Service Commission. It and Budget COMB) report uses te OMB's estimate of 24.7 appears that the draft the impact of dynamic funding. It wouldpercent to illustrate final GAO report were to state be helpful if the and assumptions are recommended exactsr- which funding estimates for adoption and explain clearly how the percentage figures were obviously important for the Postal Service,derived. This is to page 27 of the draft report, the Postal since, according dynamic funding "would have had to come up Service under $1.2 billion in 1976 to fund its share with" an additional of the retirement costs. We understand from discussions with GAO staff members that the $1.2 billion figure includes unfunded liabilities from cost-of-living annuity i-r !Ses granted resulting 5 U.S.C. 8340. by Congress under A discussed ve, such liabilities should under present law be funded by taxpayers funds rather than by postal ratepayers. out of appropriated the $1.2 billion tat would, under dynamic As to that part of be payable by the Postal Service because funding procedures, attributable to pay increases, it would help if the exact dimensions were calculated and published in the GAO of this amount neither the Congress nor the Postal Service report. Otherwise, informed position on the merits of dynamic can take a fully funding as it would affect the Postal Service. The GAO suggests that the difference between accruing cost of Federal retirement systems the currently dynamic basis and the employee contributions computed on a agency operations. We agree, but we also be charged to would be helpful if GAO would consider and believe that it incorporate into the report additional options to fund retirement liabilities. 1/ We assume that GAO hs independently verified of any actuarial data or assumptionr made the validity by the Service Commission and recognizes this potential Ci;il funding on a dynamic basis. for over- 70 APPENDIX XV APPENdIX XV The Postal Service shares the concern of the General Account- ing Office about the rising costs and inequities in Federal retirement programs. Our concern is that no new inequities be created as a result of your report, which would affect postal customers. But we strongly agree that more responsible practices in regard to adequate financing of retirement plans should be developed, agreed upon by the Congress, and placed into effect forthwith. Sincerely, Benjamin F. Bailar 71 APPENDIX XVI APPENDIX XVI THE DISTRICT OF COLUMBIA WALTER . WAGHINGTON MAYOR WASHINGTON, D. C. 20004 MAY 9 197 Mr. Victor L. Lowe, Director General Government Divisionz U. S. General Accounting Office Washington, D. C. 20548 Dear Mr. Lowe: Thank you for the opportunity to comment on your draft report entitled, "Federal Retirement Systems: Uniecognized Cost, Inadequate Funding, and Inconsistent Benefits. " The report examines a number of significant policy questions concerning the financing and benefit provisions of Federal pension plans. The District of Columbia is included in the study because about 60 percent of the District workforce -- employees hired unde- 'he General Schedule and Wage System -- are enrolled in the .feral Civil Service Retirement System. Thus, issues aris- ing from that retirement program also impact the District Govern- ment by virtue of City erployee membership in the Civil Service system. The report notes that existing statutes require the Federal Government to make multi-billion dollar payments to the Civil Service fund each year to finance pension liabilities that are not being met through the seven percent matching contributions from Federal agencies and their employees. Even with the additional payments, the Civil Service Retirement System faces massive un- funded liabilities, estimated at $107 billion during the last fiscal year alone. 72 APPENDIX XVI APPENDIX XVI While the unchecked growth in unfunded liabilities is the primary issue confronting the Civil Service program, the -eport questions whether current financing policies are fair, especially in the case of agencies like the District Government which derive a sub- stantial portion of operating revenues from sources outside the Federal budget. Since those agencies are generally intended to be self-sustaining, the : nort suggests they should contribute the full cost of annual liability accruals through employer and employee payments. When those payments do not cover all benefits earned, as at present, Federal taxpayers must make up the difference, a situation that could produce inequities in the incidence of pension financing burdens. As a result, Federal funds used to meet a porrtion of annual pension costs may constitute a "hidden subsidy" to self-supporting agencies. The .eport estimates District co. tributions in fiscal 1976 fell $72 million below the level required to cover all benefits earned by active employees. This issue came to our attention in June of last year in a report to the SenAte Committee on the District of Columbia prepared by the public accounting firm of Arthur Andersen and Company. That: study also estinrated the amount of Civil Service pension liabilities that are not being reflected in the normal matching contributions. However, the Andersen report cautioned against simply applying to the District the same actuarial factors developed for the entire Civil Service system. "To properly evaluate the actual normal cost for the District, " the report concluded, "a separate actuarial study must be performed so that only actual District employee ex- perience is considered" (Volume IX, page 45). Herein lies one of our concerns with the draft rLnort. Because employment and retirement practices are impactei by several factors resulting from inherent differences between he D'strict Government and Federal agencies, it is questic 'e to assume that District employees are earning pension benefits at the same average rate as all Federal Civil Service employees. As the Arthur Andersen study noted, a complete actuarial analysis would be neied to verify that assumption. Thus, I urge you to include in th,: eport a recommendation that separate actuarial statistics be developed for the District and other agencies in thie Federal Civil Service before they are charged the full amount of currently accruing pension costs. 73 APPENDIX XVI APPENLTX XVI Aside from actuarial considerations, there is a broader policy question regarding the appropriate division of financing responsi- bility between the Federal Government and the individu;l agencies whose employees subscribe to the Civil Service system. Whi'.e many provisions of the Civil Service retiremerit program should be financed entirely front employer and employee contributions, there are grounds for continuing to meet certain costs on a system-wide basis through direct Federal appropriations. One clear-cut ex- ample is the benefit giving employe es Civil Se' vice credit for prior military service. Since that beneit is for service to the nation as a whole, it is reasonable to pay for military service credits directly from the U.S. Treasury, rather than allocating those costs to individual agencies such as the District Government. More difficult issues mist be considered in dealing with the impact of pay raises, benefit liberalizations and cost- of-living pension ad- justments, none of which is currently included in the formula for employer and employee contributions. There i merit in the argu- ment that individual agencies, such as the District, can do little to influence the directon of costs in these areas. Since agencies typically do not have the option to accept or reject Congressionally approved pay and benefit improvements or the power to control in- flationary trends, the Federal Government might well choose to continue treating these liabilities as a system-wide expense, not charged to employing agencies as part of the contribution formula. Extending Civil Service eligibility to ne w groups of employees could also Le financed in this manner if it creates a substantial past service liability. In conclusion, I found the report a comprehensive and thoughtful treatment of rather complex issues in Feder.l re.,remnent policy. I appreciate the opportunity to comment on the draft report prior to its official release. Sincerely yours, Walter E. Washington C Mayor 74
Federal Retirement Systems: Unrecognized Costs, Inadequate Funding, Inconsistent Benefits
Published by the Government Accountability Office on 1977-08-03.
Below is a raw (and likely hideous) rendition of the original report. (PDF)