oversight

Federal Pensions: Relationship Between Pensions and Final Salaries for Retired Former Members of Congress

Published by the Government Accountability Office on 1997-09-26.

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

      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      General Government Division

      B-277977

      September 26, 1997

      The Honorable Ted Stevens
      Chairman, Committee on Appropriations
      United States Senate

      Subject:    Federal Pensions: Relationshin Between Pensions and Final Salaries
                  for Retired Former Members of Congress

      Dear Mr. Chairman:

      At your request, we are responding to a series of questions about federal and
      nonfederal retirement. This letter supplements an earlier report on the
      relationship between pensions and final salaries for retired civilian general
      employees of the federal government.’ As agreed with your office, this letter
      addresses this same relationship in the case of retired former Members of
      Congress, a much smaller population. Our objectives were to (1) determine the
      number of former Members, if any, whose pensions have come to exceed the
      final salaries that they earned while working; (2) explain why these Members’
      pensions came to exceed their final salaries; and (3) determine the difference, if
      any, in these Members’ pension amounts had the current cost-of-living
      adjustment (COLA) policy-that is, the COLA policy enacted in 1984, which
      established the formula and schedule used today by the Office of Personnel
      Management (OPM)-been in effect without interruption since 1962, and also
      determine any difference in the number of retired Members whose pensions
      would have exceeded their Enal salaries. Also, consistent with your interest in
      these issues, we included some of the information provided inour earlier report
      on general employees when the results for Members were different.

      To meet our objectives, we collected data for the Civil Service Retirement
      System (CSRS) and the Federal Employees Retirement System (FERS) for all
      former Members of Congress who were retired and still living as of October 1,
      1995, using a computerized personnel database and case file information




      ‘Federal Pensions: Relation&m Between Retiree Pensions and Final Salaries
      (GAOIGGD-97-156,Aug. 11, 1997).
                    GAO/GGD-97478B   Re&&ion&ipBetween   Betired   Members’   Pensions   and Final   Salaries
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maintained by OPM.” As described in greater detail in enclosure III, we used a number of
different approaches, including simulation and statistical analyses of our final population
of former Members of Congress retired under CSRS.

We requested comments on a draft of this letter from the Director of OPM, and those
comments are discussed at the end of this letter. We did our work in Washington, D.C.,
and Dallas, Texas, between December 1995 and August 1997 in accordance with generally
accepted government auditing standards.

BACKGROUND

CSRS and PERS-the two largest retirement programs for federal civilian employees-also
apply to Members of Congress. As described in enclosure II, CSRS is a stand-alone
pension program that provides an annuity determined by a formula. In contrast, F’ERS is
a three-tiered retirement program that includes Social Security and a Thrift Savings Plan-
in addition to a basic pension.

Although all the Members of Congress we reviewed participated in either CSRS or F’ERS,
the retirement coverage and the benefit and contribution provisions that apply to
Members are different from those that apply to most general employees. With respect to
plan coverage, since 1984 all Members must participate in the Social Security system,
while only general employees who are covered by FERS or the CSRS-offset program
participate in this system through their federal service. As a result, four arrangements for
Member retirement coverage are possible, as shown in table 1. In reading table 1, it is
important to recognize that an individual Member’s retirement coverage will depend on
when the Member was frrst elected to Congress and on certain choices that he or she
made when Social Security coverage was extended to congressional service in 1983 and
when FERS began in 198’7. Table 1 is based on information in the Congressional
Research Service (CRS) Report for Congress, 94969 EPW, updated July 23, 1996.




‘Under the October 1, 1995, cutoff date, one former Member of Congress who had retired
under the FERS pension plan was excluded from our analysis because the Member did
not meet our criterion of receiving a pension that exceeded fjnal salary. Thus, no former
Members retired under PERS were included in our analysis.
2                    GAOIGGD-9%178It   Belationship   Between   Retired   Members’   Pensions   and Final Salaries
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Table 1: Four Possible Retirement Coverage Arrangements That Can ADD~V to Members
of Congress.

    Retirement   coverage
    arrangements                  Description          of pension       plan arrangements
    Dual coverage=                Covered in full by CSRS plus Social Security.
                                  Dual coverage only applies to Members elected
                                  before January 1, 1984. No Member elected to
                                  Congress after January 1, 1984, may have dual
                                  coverage, regardless of previous federal service.
    CSRS Offset”                  Covered by CSRS and Social Security, with CSRS
                                  contribution offset by Social Security
                                  contributions and CSRS benefits offset by Social
                                  Security benefitsb The Offset plan covers
                                  Members who were participating in_CSRS on
                                  December 31, 1983.
    FERS                          Defined benefit component, Social Security
                                  component, and Thrift Savings Plan component.
    Social Security only          No. additional pension plan coverage.

“Members are eligible to participate in the Thrift Savings Plan.

bThe amount of Social Security subtracted from the CSRS pension is the amount
attributable to congressional service only.

“The Offset plan also covers those rehired into federal service on or after January 1, 1984,
who have a break in service exceeding 1 year but who, as of the date of their last
separation from service, had at least 5 years of civilian service. For the first 6 months
from the date of rehire, such employees have the choice of remaining in the Offset plan
or transferring to FERS.

Source: CRS.

Members of Congress’ retirement benefits are greater than those provided to most general
employees and, in recognition, Members contribute slightly more to their pension plans.”



these differences are also described in Federal Retirement: Benefits for Members of
Congress. Congressional Staff. and Other Emnlovees (GAOIGGD-9578, May 15, 1995).

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Enclosure I compares in detail the CSRS and FERS eligibility, benefit, and contribution
provisions that apply to Members with those that apply to most general employees.

Although Member retirement benefits and contributions differ from those of general
employees, the CSRS and FERS COLA policies that apply to Members are the same as
those for general employees. As described in our earlier report on page 4 and in
enclosure II to this letter, these policies have been modified frequently since automatic
COLAS began in 1962. Under the current COLA policy, which has been in effect since
1984, COLAS for recipients of CSRS pensions are fully indexed to inflation as measured
by the consumer price index (CPI).” FERS pensions are primarily adjusted only for
retirees who are age 62 and older. Moreover, F”ERS COLAS are limited in years in which
inflation, as measured by the CPI, is over 2 percent.5

In addition, the survivor annuity benefit policies that apply to most general employee
retirees also apply to retired former Members of Congress. In particular, as stated in our
earlier report, if a survivor annuity benefit is chosen, pensions may be reduced by as
much as 10 percent. Pensions are reduced to provide for spousal benefits or insurable
interest benefits (i.e., in the case of a person designated by the retiree as expecting to
receive some financial benefit from the continuance of the life of the retiree), but not for
children’s benefits. Children’s benefits are provided by law and do not need to be elected

?Fhe CPI is compiled by the Bureau of Labor Statistics and is intended to measure the
average change in the prices paid by urban consumers for a fixed market basket of goods
and services. It is calculated monthly for two population groups, one consisting only of
wage earners and clerical workers and the other consisting of all urban families. The
wage earner index (CPI-w) is the index used for federal COLA purposes. Because it is a
national average, it affects retirees differently, depending on whether they live in areas
where the CPI-W differs from the national average. Also, because the CPI is a statistical
average, it may not reflect an individual’s experience, particularly an individual whose
expenditures differ greatly from the “average” consumer%. Moreover, whether the CPI
accurately estimates inflation is currently being debated. In a I996 report, the Advisory
Commission to Study the Consumer Price Index concluded that the CPI overstates
inflation. The Commission recommended that the market basket on which the CPI
depends be updated more frequently than is currently done and that adjustments be made
to correct any bias in the estimates.
51finflation is between 2.0 and 3.0 percent, the F’ERS COLA is 2.0 percent; if inflation is
3.0 percent or more, the COLA is the CPI minus 1 percent. If, however, inflation is less
than 2 percent, FERS COLAS are to be fully adjusted for inflation. FERS participants of
any age who retired on disability are to receive COLAS after their first year of retirement.
Also, for retirees who receive a pension that is based on both the CSRS and FERS benefit
formulas, the CSRS COLA formula applies to the CSRS part of the pension, and the FERS
COLA formula applies to the F’ERS part of the pension.
4                    GAOIGGD-97-178R   Relationship   Between   Retired   Members’   Pensions   and Final   Salaries
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by an employee or retiree. If a spousal survivor annuity is chosen and the spouse
predeceases the retiree, the annuity reduction is eliminated upon notification to OPM.6 At
the time of retirement, CSRS pensions may also be reduced for other reasons, including
reductions for age and unpaid deposits. FERS pensions may be reduced for age.

RESULTS IN BRIEF

Seventy-six, or about 19 percent, of the 404 former Members of Congress who were living
and on the federal retirement rolls as of October 1, 1995, were receiving pensions that
had come to exceed their final salaries when these salaries were not adjusted for
inflation. However, when final salaries were adjusted for inflation-i.e., expressed in
constant dollars-only one former Member, who had an unusual salary history, was
receiving a pension that was larger than the final sakuy7 As a general rule, using
constant dollars provides a more meaningful way to compare monetary values across
time, because the use of constant dollars corrects for the effects of inflation or deflation.

Although only one retired former Member’s pension exceeded his final salary in constant
dollar terms, our analysis confirmed that three factors played an important role in
explaining why Members’ pensions came to exceed their unadjusted final salaries-the
number and size of COLAS that former Members received, which is largely a function of
the number of years Members had been retired; the number of years of their federal
service; and whether Members had chosen survivor annuity benefits. The first factor
reflects retirement policies that are intended to maintain most or all of a pension’s
purchasing power. Although the COLAS that former Members received caused their
pensions to increase at rates that generally were to equal inflation during retirement, their
unadjusted final salaries remained the same. Thus, the longer the former Members had
been retired, the more COLAS they would have received and the more likely their
pensions would have come to exceed their unadjusted final salaries. The second factor-a
former Member’s years of federal service-also contributed, because years of service is a
major component in determinin g the amount of a Member’s initial pension. Specifically,
former Members with many years of service would have received initial pensions that
came closer to the amounts of their tinal salaries than did the pensions of Members with
fewer years of service, other factors being equal. Smaller beginning differences between

‘If a former Member is eligible for a deferred CSRS annuily but dies before it begins, the
survivor receives an immediate annuity. In contrast, in these same circumstances, the
survivor of a retired general employee receives only a refund of contributions.
‘In particular, the final government salary earned by this former Member was not a
Member of Congress’ salary, nor was this salary close to the amount of a Member’s
salary. Having retired from Congress in 1971, the former Member became reemployed by
the federal government and then retired in 1972 as a general employee at a middle grade
of the general pay schedule.
5                   GAOKGD-97-178R   Relationship   Between   Betired   Members’   Pensions   and Final Salaries
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initial pensions and final salaries, in turn, would have caused the pensions of the first
group of former Members to have exceeded the Members’ unadjusted final salaries sooner
than the second group’s pensions. The third factor-whether a Member had chosen a
survivor annuity benefit-contributed because a Member who chose a survivor annuity
benefit could have had his or her basic annuity reduced by as much as 10 percent. As a
consequence, if two former Members retired in the same year and had the same years of
service, but only one had chosen a survivor annuity benefit, the retiree who elected not to
take the benefit would have had a pension that exceeded his or her unadjusted final
salary sooner than the retiree who had chosen the survivor benefit.8

Our analysis of the effects that COLA policies have had on the pensions of retired former
Members of Congress and our prior analysis of general employees suggest that these
policies have played an important role in maintaining the purchasing power of retiree
pensions since automatic COLAS began. It also suggests that the effects COLA policies
actually have had on retiree pension amounts cannot be summarized easily because of the
numerous changes that have been made in COLA policies over the past 35 years. COLA
policy changes have affected individual retirees differently, depending on when their
retirements began. For example, because the effects of COLAs and COLA policy changes
compound over time, the more generous COLA policies of the late 1960s and 1970s will
continue to affect the pensions of those retirees who receive them as long as they are
alive, just as the suspensions of some COLAS in the 1980s wilI continue to be reflected in
the pensions of anyone who retired before the suspensions occurred.

If current COLA policy-that is, the COLA policy enacted in 1984, which established the
formula and schedule used today by OPM-had been in effect without interruption since
1962, the pensions of some former Members would have been larger than the pensions
that they actually received, and the pensions of other former Members would have been
smaller. The changes that would have occurred in the former Members’ pension amounts
under current policy were enough to cause about a two percentage point (2.0) increase in
the number of former Members whose pensions would have come to exceed their
unadjusted final salaries.

SOME FORMER MEMBERS’ PENSIONS EXCEEDED THEIR UNADJUSTED FINAL
SALARIES

As of October 1995,404 former Members of Congress (372 retired under CSRS and 32
retired under FERS) were on the federal retirement rolls. The number of retired former


‘Also, former Members who had chosen a survivor annuity benefit and who divorced or
whose spouses died during their retirement would have exceeded their final salaries
sooner than they otherwise would have because their pensions were increased by a
change of marital status.

6                   GAOIGGD-9%178E   Relationship   Between   Retired   Members’   Pensions   and Pinal Salaries
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Members whose 1995 pensions exceeded their final salaries differed, depending on
whether we adjusted the Members’ final salaries for inflation. When we did not adjust the
salaries for inflation, 76, or about 19 percent, of the 404 retired Members of Congress
received pensions that in nominal dollars exceeded their final salaries.g However, when
we adjusted the final salaries for inflation, only one former Member received a pension
that exceeded the final ~alary.‘~

Using constant-rather than nominal-dollars is generally more meaningful for examining
dollar values across time, because constant dollars correct for the effects of inflation or
deflation. In this case, constant dollars were especially appropriate for comparing current
pensions and finaI salaries since the number of years that the former Members had been
retired averaged 21 years and ranged from about 11 to 32 years. Table 2 compares the
1995 pensions and the nominal and inflation-adjusted final salaries for the average former
Members who retired in three selected years. The illustrative pensions shown in table 2
are the average amounts received by those former Members who had retired in the years
1963, 1968, and 1981.




‘?I’h.ispercentage was lower than the percentage for general employees. As we noted in
our previous report, about 459,000, or 27 percent, of the 1.7 million general employee
retirees who were covered by the CSRS and/or FERS pension plans were receiving
pensions in 1995 that exceeded their final salaries when these salaries were not adjusted
for inflation as measured by the CPI.
“In our general employees’ report on pensions, no retiree received a pension that
exceeded his or her final salary when salaries were adjusted for inflation. A closer
inspection of the one former Member’s case file revealed some unusual facts. In
particular, the final government salary earned by this former Member-and the salary used
in our calculation-was not a Member of Congress’ salary, nor was this salary close to the
amount of a Member’s salary. As the case file showed, having retired from Congress in
1971, the former Member became reemployed by the federal government and then retired
in 1972 as a general employee at a middle grade of the general pay schedule. As a
consequence, the final salary we initially used in calculating the ratio of the individual’s
 1995 pension to the inflation-adjusted f&-J salary was a lower salary amount and an
amount that was below the individual’s high-3 average salary. When we recalculated the
ratio using the individual’s last salary as a Member of Congress, the pension no longer
exceeded the inflation-adjusted salary.
7                   GAOIGGD-97-178B   Relationship   Between   Retired   Members’   Pensions   and Pinal   Salaries
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Table 2. A Comwrison   of the 1995 Pensions and Final Salaries Presented in Nominal and
Constant Dollar Terms for the Average Former Members of Congress Who Retired in
Three Selected Years

                               Nominal dollar terms                    Constant dollar terms
                                          1995 pension                                    1995 pension
 Retirement     1995         Final        as a percent               Final                as a percent
 year           pension      salary       of final salary            SdarY                of final salary
 1963            $35,940     $22,500                  160            $109,312                        33
 1968          1 $37,464 1 $26,250 1                  143         1 $112,426 1
    1981         $65,013     $60,663 1                107         1 $99,369           1              65

Source: GAO analysis of OPM data.

THREE FACTORS HELP EXPLAIN WHY PENSIONS CAN COME TO EXCEED
UNADJUSTED FINAL SALARIES

Three factors help to explain why 68 former Members’ pensions came to exceed their
final salaries when their salaries were not adjusted for the effects of inflation-the number
and cumulative size of COLAS that Members received, which is largely a function of the
number of years Members had been retired; their number of years of federal service; and
whether Members had chosen survivor annuity benefits.” Our regression model showed
that these three factors were associated with about 6’7 percent of the variation in the
percentage by which the former Members’ pensions exceeded their unadjusted final




“In the analyses of both general employees’ pensions and Members’ pensions, we found
that the number of years that annuitants had been retired was very highly correlated with
the number and cumulative size of COLAS annuitants received. We discuss the nature of
this relationship when describing the frrst factor in the model. Our analysis to explain
why former Members’ pensions came to exceed their unadjusted final salaries included
only those Members (68) who retired directly from Congress and whose 1995 annuities
exceeded their unadjusted final salaries. We did this to focus the analysis on those
whose fmal salary was as a Member of Congress.
8                    GAO/GGD-97-178B   Belationship    Between   Retired   Members’       Pensions   and E’hl   !Saiaries
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salaries, which is a smaller percentage than the regression model explained for general
employees.‘”

During retirement, the former Members’ pensions increased because the COLAS that they
were scheduled to receive increased in number. The amount of the increase each year
fluctuated according to changes in the CPI-W. In contrast, unadjusted final salaries
remained unchanged. Thus, the longer the former Members had been retired, the more
COLAS they received, and the more likely it was that their pensions exceeded their
unadjusted final salaries. In fact, as of October 1, 1995, the average Member had been
retired about 21 years and had received 24 COLAS.

Generally, the likelihood that a former Member’s pension exceeded his or her unadjusted
final salary increased when the Member had been retired during periods of high inflation,
because larger COLAS were given during these periods.13 Our model showed that, on
average, a 1 percentage point increase in the total value of the COLAS that a retiree had
received would result in a 0.4 percentage point increase in the amount by which the




“?he factors in the model were associated with more of the differences in the extent to
which pensions exceeded unadjusted final salaries for general employees than for former
Members-82 percent for general employees compared to 67 percent for former Members.
There are a number of possible reasons why the factors in the model were associated
with a smaller percentage of these differences for former Members. First, the results are
based on very different numbers of annuitants. The Members’ regression results are
based on about a iTl?h as many cases as the general employees’ regression results.
Second, whenever populations differ in their compositions on key variables in the model
being tested (such as differences in the amount of variation in the key variables), it is
unlikely that the same analysis applied to each separate group will produce the same
results. And, in fact, Members of Congress and general employees difTer in their
composition on key variables. For example, as described in enclosure I, the provisions of
CSRS and FERS that apply to Members differ somewhat from those that apply to general
employees. In particular, Members receive a higher percentage of high-3 average salary
for the same number of years working for the government than general employees do.
Finally, the former Members had been retied for a somewhat shorter period of time than
general employees, and thus former Members received fewer COLAS and, consequently,
less compounding.
‘3Although CSRS and FERS COLA policies differ from each other and from COLA policies
of the past, these differences do not affect whether a pension would come to exceed an
unadjusted final salary, but rather, when.
9                  GAO/GGD-97-178B   Relationship   Between   Retired   Members’   Pensions   and Final   Salaries
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    retiree’s pension exceeded his or her final salary, other factors in the model being equal.”
    In fact, about 89 percent of the former Members had been retired during all or part of the
    1969 through 1980 period when the most frequent and largest COLAS were given. Over
    this 12-year period, pensions increased by 166 percent in nominal terms. Enclosure II
    provides a summary of COLA history since automatic COLAS were enacted in 1962.

    The number of years of federal service also contributed to the explanation of why some
    former Members’ pensions exceeded their unadjusted final salaries, because years of
    service is included in determining the percentage of high-3 average salary that a Member
    ultimately will receive as his or her initial pension. For example, under CSRS, a Member
    of Congress who had 32 years of service at retirement would have been entitled to
    receive 80 percent of his or her high-3 average salary-the maximum percentage allowed.‘”
    In short, the longer a retiree had worked for the federal government, the closer the
    retiree’s initial pension would have been to his or her unadjusted final salary. Twelve (16
    percent) of the retired former Members had worked 30 years or more for the federal
    government, and another 45 (59 percent) had worked 20 to 29 years. The remaining 19
    (25 percent) worked 10 to 19 years. Our model showed that, on average, a l-year
    increase in a former Member’s federal service time would result in about a 4.4 percentage
    point increase in the percentage by which the Member’s pension had exceeded his or her
    final salary, other factors in the model being equal.

    The third contributing factor in the explanation of why some former Members’ pensions
    exceeded their unadjusted final salaries was whether a former Member had chosen a
    survivor annuity benefit. As noted in the background section of this letter, a Member
    who chose a survivor annuity benefit could have had his or her basic annuity reduced by
    as much as 10 percent. As a consequence, if two former Members retired in the same
    year and had the same final salaries and years of service, but only one had chosen a
    survivor annuity benefit, the Member who elected not to take the benefit would have had
    a pension that exceeded his or her unadjusted final salary sooner than would the Member




*   141nconsidering these and the other regression results in this -letter, it is important to
    recognize that the results can be applied only to those former Members who retired
    directly from Congress and whose 1995 pensions had come to exceed their unadjusted
    final salaries.
    151ncontrast, a CSRS general employee would have been entitled to receive 80 percent of
    high-3 average salary after about 42 years of service. FERS does not have a maximum
    percentage base. The formula used to calculate initial annuities under FERS provides a
    lower annuity than the one used under CSRS. Thus, it is unlikely that someone who has
    government service solely under the FERS pension plan would receive as much as the
    maximum percentage base allowed under CSRS.
     10                  GAO/GGD-97-178R   Relationship   Between   Retired   Members’   Pensions   and Pinal Salaries
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who had chosen the survivor benefit.16 A Member who chose a survivor annuity benefit
would have reduced the initial pension and thus increased the gap between the initial
annuity and the final salary. As of October 1, 1995, about 26 percent of the former
Members were not having survivor benefits deducted from their pensions.17 Our model
showed that the percentage by which pensions exceeded unadjusted final salaries was 18
percent less on average for the former Members who chose survivor benefits, compared
with those who had not chosen this benefit.

SOME RETIRED MEMBERS’ PENSIONS WOULD HAVE BEEN LARGER, OTHERS
SMALLER. HAD CURRENT COLA POLICY BEEN IN EFFECT WITHOUT INTERRUPTION

Had current COLA policy-that is, the COLA policy enacted in 1984, which established the
formula and schedule used today by OPM-been in effect without interruption since 1962,
some former Members’ pensions would have been larger and others’ smaller. In
particular, our simulation of current COLA policy in effect without interruption for the 94
former Members showed that 61 would have had pensions that were larger than the
pensions they actually received, and 33 would have had smaller pensions.

The increases in the pensions of some former Members, had current policy been in effect
continuously, would have been enough to cause an increase of 2.0 percentage points in
the number of Members whose pensions exceeded their unadjusted final salaries. When
we calculated what the former Members’ pensions would have been if current policy had
been in effect without interruption, we found that 21 percent of the Members would have




r6AIso,former Members who had chosen a survivor annuity benefit and who divorced or
whose spouses died during their retirement would have exceeded their final salaries
sooner than they otherwise would have because their pensions were increased by the
change of marital status.

‘%I our general employees. report on pensions, 48 percent of our sample CSRS general
employees were not having survivor benefits deducted.
11                  GAOIGGD-97478B   Relationship   Between   Retired   Members’   Pensions   and Final   EMaries
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had annuities that exceeded their unadjusted final salaries, compared to about 19 percent
under the historical policy simulation.18

The two numbers differed by 2 percentage points in part because the effects of COLAS on
pension amounts are cumulative and compound. In particular, as described in enclosure
II, the suspensions of COLAS during the 1980s tended to offset the COLA policies of the
1960s and 1970s that overcompensated for inflation.

OBSERVATIONS

Our analyses of the effects that COLA policies have had on the pensions of retired former
Members of Congress and those of general employees show that these policies have
played an important role in maintaining the purchasing power of retiree pensions since
automatic COLAS began. Although COLA policies of the 1960s and 1970s were more
generous than necessary to compensate for the effects of inflation as measured by the
CPI, COLA policies of the 1980s sometimes under-compensated. And, although current
COLA policy would have tracked the CPI more closely had it been applied over the period
we reviewed compared to some past COLA policies, the numerous changes that have
been made in COLA policies over the past 35 years did not cause any general employee’s
pension and only one former Member’s pension to exceed his or her final salary when the
salaries were adjusted for inflation.

Our analyses also show that the effects that COLA policies actually have on retiree
pension amounts cannot be summarized easily. Generalization is difficult, in part because
no one COLA policy has ever been implemented for a sustained period. For example,
although the current underlying policy has been in effect since 1984, Congress has
modified its application several times for limited periods to help reduce the deficit. Also,


%.nce legislative changes made after 1984 did not permanently affect the COLA formula
or schedule, we did not include them in our analysis of current COLA policy. However,
these changes were included in our historical COLA policy analysis. Thus, because our
simulation of COLA policies used the initial annuity as the starting point for adding
COLAS, our simulation did not include any adjustments (e.g., loss of survivor annuity
benefit due to spouse’s death) to annuities subsequent to the calculation of the initial
annuity. When these adjustments are considered by using the actual annuity received by
the former Members in 1995, the percentage of those Members exceeding their final
salaries is 19 percent. Of the 94 cases for which data were available, 7 had pensions that
were below their final salaries under historical COLA policy but above their final salaries
under current COLA policy. None of the former Members whose pensions were higher
than their final salaries under historical COLA policy had pensions below their fmal
 salaries under current COLA policy. About 2 percent more of the pensions would have
 exceeded final salaries under current COLA policy as compared to historica COLA policy.
 12                  GAO/GGD-97478B   Relationship   Between   Retired   Members’   Pensions   and Pin~13 Salaries
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the effects of many individual COLAS and COLA policy changes are cumulative and
compound over time. As a consequence, COLA policy changes have affected individual
retirees differently, depending on when they retired. In particular, the effects of the more
generous COLA policies of the 1960s and 1970s will continue to have an effect on retiree
pensions for as long as those who received them are alive, just as not receiving scheduled
COLAS in 1984 and the suspension of COLAs in 1986 will continue to be reflected in the
pensions of anyone who retired before these years.

AGENCY COMMENTS AND OUR EVALUATION

We received oral comments on a draft of this letter from OPM on September 17, 1997.
The OPM official who provided comments was a Federal Retirement Benefits Specialist
from the Retirement Policy Division. This official generally concurred with the
information presented in our letter. She also provided several clarifying comments, which
we incorporated into this letter where appropriate.



We are sending copies of this letter to the Ranking Minority Member of your Committee
and to the Chairmen and Ranking Minority Members of the Subcommittee on
International Security, Proliferation, and Federal Services, Senate Committee on
Governmental Affairs, and the Subcommittee on Civil Service, House Committee on
Government Reform and Oversight. Copies of this letter are also being sent to the
Director of OPM and will be made available to others upon request.

The major contributors to this letter are listed in enclosure IV. Please contact me on
(202) 512-8676 if you have any questions about this letter.

Sincerely yours,




Michael Brostek
Associate Director
Federal Management
  and Workforce Issues

Enclosures




13                  GAO/GGD-97-178B   Belationsbip   Between   Retired   Members’   Pensions   and Pinal salaries
ENCLOSURE I                                                                                            ENCLOSURE I
        COMPARISON OF CSRS AND FERS PROVISIONS AS THEY APPLY TO
            GENERAL EMPLOYEES AND MEMBERS OF CONGRESS

Table 1.1: ComDarison of CSRS Provisions As Thev Am~lv to General EmDlovees and
Members of Congress

 CSRS provisions             General      employees                       Members        of Congress
 Age and service             Age 62, 5 years of service                   Age 62, 5 years of
 requirements for            (optional retirement)                        civilian service, including
 retirement                                                               Member service
                                                                          (optional/deferred
                                                                          retirement)

                             Age 60, 20 years of                          Age 60, 10 years of
                             service (optional                            Member service
                             retirement)                                  (optional/deferred
                                                                          retirement)

                             Age 55, 30 years of                          Age X%9,30 years of
                             service (optional                            service (optional
                             retirement)                                  retirement) (with
                                                                          reduction)

                             Age 50-59,20 years of                        Age 50-59, 20 years of
                             service (early retirement)                   service (optional/
                             (with     reduction)                         deferred retirement)
                                                                          (with   reduction)

                                                                          Age 50-59, service in
                                                                          nine Congresses
                                                                          (optional retirement)
                                                                          (with   reduction)

                              Any age, 25 years of                        Any age, 25 years of
                              service (early retirement)                  service (optional
                              (tith    reduction)                         retirement) (with
                                                                          reduction)




14                  GAO/GGD-97-178R    Relationship   Between   Retired    Members’    Pensions   and Final Salaries
ENCLOSURE I                                                                                        ENCLOSURE I

 CSRS provisions             General     employees                     Members        of Congress
 Formula for                 - 1.5 percent of high 3                   If less than 5 years of
 determining the             average salary for each                   congressional service,
 pension amount              year and month for first                  same formula as for
                             5 years of service                        general employees

                             - 1.75 percent of high 3                  If 5 or more years of
                             for each year and month                   congressional service:
                             for next 5 years of
                             service                                   - 2.5 percent of high 3
                                                                       for each year and month
                             - 2.0 percent of high 3                   of congressional service
                             for each year and month                   and up to 5 years of
                             over 10 years                             military serviceb

                                                                       - 1.75,percent of high 3
                                                                       for each year and month
                                                                       of service not used
                                                                       above, up to 10 years of
                                                                       combined service

                                                                       - 2.0 percent of high 3
                                                                       for each year and month
                                                                       of federal service not
                                                                       used above
 Reduction for age’          Pension reduced by 1/6th                  Pension reduced by
                             of 1.0 percent for each                   i/12th of 1.0 percent for
                             fuIl month employee is                    each month Member is
                             under age 55 at time of                   between ages 55 and 60
                             separation (2.0 percent a                 (1.0 percent a year) and
                             year>                                     by i/6th of 1.0 percent
                                                                       for each month Member
                                                                       is under age 55 (2.0
                                                                       percent a year)




15                 GAO&GD-97-178R   Relationship   Between   Retired   Members’   Pensions   and Final Salaries
ENCLOSURE I                                                                                       ENCLOSURE I



 Sunivor annuity           Retiring employees may
 benefitd                  make one of three types
                           of spousal survivor
                           benefit elections:=

                            - fully reduced annuity’




 allowed
                            unused sick leave
                                                                       - final salary of the


                                                                       - high 3 of the Member,


                                                                       - final salary of the




16                 GAOKGD-97-178R   Relationship   Between   Retired    Members   Pensions   and Pinal Salaries
ENCLOSURE I                                                                                         ENCLOSURE I

 CSRS provisions             General     employees                     Members        of Congress
 Employee contribution       Maximum of 7.0 percent                    Dual coverage-
 rate                                                                  maximum of 14.2
                             CSRS Offset-maximum                       percent: 8.0 percent to
                             of 7.0 percent: 0.8                       CSRS and 6.2 percent to
                             percent to CSRS and 6.2                   Social Security on the
                             percent to Social Security                first $65,400 of salary.
                             for first $65,400 of salary               8.0 percent to CSRS on
                             and 7.0 percent to CSRS                   salary above $65,400’
                             on salary above $65,400’
                                                                       CSRS Offset-maximum
                                                                       of 8.0 percent: 1.8
                                                                       percent to CSRS and 6.2
                                                                       percent to Social
                                                                       Security for first $65,400
                                                                       of salary and 8.0 percent
                                                                       to CSRS on salary above
                                                                       $65,400’
 cost of living              COLAS are fully indexed                   Same as general
 adjustment (COLA)           to inflation as measured                  employees
                             by the CPI-W
 Reemployment of             Pension continues during                  Pension suspended upon
 annuitants                  reemployment,. and the                    reemployment when
                             salary is reduced (i.e.,                  Member’s annuity is
                             offset) by the amount of                  based on 5 or more
                             the annuityk                              years of congressional
                                                                       service

                                                                       Upon separation, the
                                                                       pension recommences
                                                                       and is either (1)
                                                                       recomputed with credit
                                                                       for additional service
                                                                       regardless of how long
                                                                       the Member was
                                                                       reemployed’ or (2)
                                                                       reinstated with the
                                                                       COLAS that occurred
                                                                       during reemployment



17                 GAO/GGD-97478R   Relationship   Between   Retired   Members’   Pensions   and Final   Salaries
ENCLOSURE I                                                                                          ENCLOSURE I
“Member cannot receive a pension under these age and service requirements if he or she
resigns or is expelled from Congress.

bIf Member is receiving military retirement pay, military service is computed using general
employees’ formula.

‘The age reduction does not apply to disability retirements. Pensions may also be
reduced for unpaid deposit service and survivor annuity benefits.

din addition, an employee may elect an insurable interest annuity. Eligible recipients
include current spouse, blood/adoptive relative closer than first cousin, former spouse,
and a person in a relationship that would constitute a common-law marriage in
jurisdictions that recognize common-law marriages. However, no contingent beneficiaries
 may be named. The insurable interest receives 55 percent of the retiree’s annuity after
reductions for age and unpaid deposits. Insurable interest elections are not available
 after retirement.

“If an employee defers his or her annuity and has chosen a survivor benefit, and dies
before the deferred pension begins, the spouse would be entitled to receive the lump sum
of the employee’s contribution to the retirement fund, including interest, rather than a
survivor annuity.

fThe maximum annuity payable to the spouse equals 55 percent of the rate of the self-only
annuity that would have been paid to the retiree. If a retiree who is married at the time
of retirement does not wish to provide the maximum current spouse survivor annuity, he
or she must obtain the spouse’s consent. The consent form must be completed before a
notary public or other official authorized to take oaths.

gThe partial annuity will be 55 percent of the amount chosen by the retiree as the base.
There is no minimum monthly survivor benefit.

hIf a former Member takes a deferred retirement and has chosen a survivor benefit, and
dies before the deferred pension begins, the spouse would be entitled to receive a
survivor annui@ benefit.

‘This provision, known as “swing around,” allows a Member who accepts an appointive
position after leaving office to have that service computed as if the reemployed service
had been performed prior to the Member’s separation, provided that the reemployment is
subject to CSRS. This benefit is also payable to a Member who separated with title to a
deferred Member annuity. As a consequence of this provision, it is possible that a former
Member who performed additional service after retirement as a Member could receive an



 18                  GAO/GGD-97-178R   Relationship   Between   Retired   Members’   Pensions   and Final Salaries
ENCLOSURE I                                                                                       ENCLOSURE I
initial, recomputed annuity that was higher than the final salary that he or she had
received as a Member. For those Members who accepted an appointive position prior to
 1994, their annuities would be recomputed using the new final average salary based on
the period of reemployment, the added years of federal service, and COLAS from the date
of retirement as a Member. For those Members who accepted an appointive position in
 1994 or after, COLAS on their annuities would begin after the recomputed annuity
becomes payable. For example, if a former Member retired as a Member in 1994,
accepted an appointive position, and subsequently retired from federal service in 1997,
COLAS would be applied to his or her annuity beginning in 1997 when the annuity became
payable. Also, for the purpose of determining limitations on COLAS established by Title 5
(see table II.l), the final average salary of a Member whose benefit has been recomputed
in this way is to be increased by adjustments in the rates of the General Schedule that are
effective after the commencing date of the annuity benefit.

j’lhis taxable wag e base is adjusted each year for wage growth in the economy.

kExceptions-pension terminated if based on disability and annuitant has recovered or
been restored to earning capacity prior to reemployment, and pension terminated if based
on an involuntary separation and reemployment would normally be subject to retirement
deductions. Reemployed annuitant may elect to have retirement deductions withheld
from pay during the period of reemployment to avoid the necessity of a later deposit.
Head of agency may request OPM to waive salary reduction on a case-by-case basis to
meet exceptional recruiting and retention needs.

Source: OPM.




19                  GAOIGGD-97478R   RelatioWp   Between   Retired   Members’   Pensions   and Final   Salaries
ENCLOSURE I                                                                                           ENCLOSURE I
Table 1.2: Comwrison of FERS Provisions As Thev ADD~V to General EmDlovees and
Members of Congress

 FERS provisions            General      employees                   Members            of Congress
 Age and service            Age 62, 5 years of service               Age 62, 5 years of service
 requirements for           (optiontideferred                        (optional/deferred
 1<$irement                 retirement)                              retirement)

                            Age 60, 20 years of
                            service (optional/deferred
                            retirement)

                            MRA,” 30 years of service
                            (optional/deferred
                            retirement)

                            MRA, 10 to 29 years of                       MRA, 10 to 19 years of
                            service (option&deferred                     service (optionaVdeferred
                            retirement) (with                            retirement) (with
                            reduction)                                   reduction)

                             Age 50,20 years of                          Age 50,20 years of
                             service (early                              service (optional/deferred
                             retirement)b                                retirement)

                             Any age, 25 years of                        Any age, 25 years of
                             service (early                              service (optional/deferred
                             retirement)b                                retirement)




20                  GAOIGGD-97478R    Relationship   Between   Retired    Members’    Pensions   and Final   Salaries
ENCLOSURE I                                                                                          ENCLOSURE I

 FERS provisions             General     employees                      Members        of Congress
 Formula for                 Employees who are                          If less than 5 years of
 determining the             under age 62’ or age 62                    congressional service,
 pension amount              with less than 20 years of                 same formula as for
                             service:                                   general employees

                             - 1.0 percent of high 3                    If 5 or more years of
                             for each year and month                    congressional service:
                             of F’ERS service
                                                                        - 1.7 percent of high 3
                             Employees who .are age                     for each of the first 20
                             62 with 20 years or more                   years of congressional
                             of service:                                service (does not include
                                                                        military service)
                             - 1.1 percent of high 3
                             for each year and month                    - 1.0 percent of high 3
                             of FRRS service                            for each year of
                                                                        congressional service
                                                                        over 20 years and all
                                                                        other federal service
                                                                        (including military
                                                                        service)
 Reduction for aged         None at age 62 with 5                       None at age 62 with 5
                            years of service, age 60                    years of service, age 50
                            with 20 years, or MRA                       with 20 years, or any age
                            with 30 years”                              with 25 years of service

                            For employees retiring at                   For Members retiring at
                            MRA with 10 to 29 years                     MRA with 10 to 19 years
                            of service, pension                         of service, same as
                            reduced by fiv&welfths                      general employees
                            of 1.0 percent for each                      .
                            month employee is under
                            age 62 (5.0 percent a
                            Year)




21                 GAO/GGD-97-178R   Relationship   Between   Retired   Members’   Pensions   and Pinal Salaries
ENCLOSURE I                                                                                          ENCLOSURE I

 ?ERS provisions            General      employees                       Members       of Congress
 kvivor annuity            Retiring employees may                        Same as general
 )enefitf                  make one of three types                       employees
                           of spousal survivor
                           benefit elections at the
                           time of retirementzg

                            - fully reduced annuil$’

                            - one-half reduced
                            annuity’

                            - self-only annu.iQ (no
                            survivor benefits)’
 Retirement supplement!     MRA with 30 years of                         MRA but under age 62,
                            service; age 60 with 20                      with 20 years of service’
                            years of service
                            Age 50 with 20 years
                            service or any age with
                            25 years service and
                            eligible to take early
                            retirement, may draw the
                            supplement upon                                                                          ,
                            retirement or upon
                            reaching MRA

 Maximum benefit            None                                         None
 allowed
 Employee contribution      Maximum of 7.0 percent:                      Maximum of 7.5 percent:
 rate                       0.8 percent to FERS                          1.3 percent to FERS
                            basic annuity and 6.2                        basic annuity plus 6.2
                            percent to Social Security                   percent to Social SecuriQ
                            on the first $65,400 of                      on the first $65,400 of
                            salary and 0.8 percent to                    salary and 1.3 percent to
                            basic annuity on salary                      basic annuity on salary
                            above $65,400’                               above $65,4001

 Mandatory retirement       None                                         None
 age

22                 GAO/GGD-97-178R    Relationship   Between   Retired    Members’   Pensions   and Pinal Salaries
ENCLOSURE I                                                                                        ENCLOSURE I

 FERS provisions            General     employees                     Members       of Congress
 Cost of living             FERS pensions are                         Same as general
 adjustment (COLA)          primarily adjusted only                   employees
                            for retirees who are age
                            62 and older

                            If inflation is under 2.0
                            percent, same as CPI-W;
                            if inflation is between 2.0
                            and 3.0 percent, the
                            COLA is 2.0 percent; if
                            inflation is 3.0 percent or
                            more, the COLA is the
                            CPI minus 1 percent

                            FERS participants of any
                            age who retired on
                            disability are to receive
                            COLAS after their first
                            year of retirement

                            For those who receive a
                            pension that is based on
                            both the CSRS and FERS
                            benefit formulas, the
                            CSRS COLA formula
                            applies to the CSRS part
                            of the pension, and the
                            FERS COLA formula
                            applies to the FERS part
                            of the pension




23                 GAOIGGD-9%178B   Eel&ion&tip   Between   Retired   Members’   Pensions   and Final   Salaries
ENCLOSURE I                                                                                          ENCLOSURE I

 FERS provisions             General     employees                    Members          of Congress
 Reemployment of             Pension continues during                 Same as general
 annuitants                  reemployment, and the                    employees
                             salary is reduced (i.e.,
                             offset) by the amount of
                             the annuity”,”

                              Pension can be
                              recomputed based on
                              total service and a new
                              high 3 if annuitant
                              accrues at least 5 years
                              continuous years of full-
                              time reemployment
                              before separation

“MRA is the minimum retirement age. The MRA is age 55 for an individual born before
January 1, 1948, and gradually increases until it reaches age 57 for employees born after
December 31, 1969.

bThe early retirement option is available in certain involuntary separation cases and in
cases of voluntary separations during major reorganizations or reductions in force.

‘An annui@ (i.e., retirement) supplement may be payable in addition to the basic annuity
if under age 62. Like Social Security benefits, the supplement is not payable if the retiree
is employed and has earnings above a specified amount.

dThe age reduction does not apply to disability retirements. Pensions may also be
reduced for survivor annuity benefits.

“No reduction for age in cases of voluntary separations during major reorganizations or
reductions in force.

fin addition, the employee, if eligible, may elect an insurable interest annuity. Eligible
recipients include current spouse, blood/adoptive relative closer than first cousin, former
spouse, and a person in a relationship that would constitute a common-law marriage in
jurisdictions that recognize common-law marriages. However, no contingent beneficiaries
may be named. Ann&ants retired on disability are not eligible to elect an insurable
interest annuity.




24                   GAOIGGD-97-178R   Relationship   Between   Retired   Members’   Pensions   and Final   Salaries
ENCLOSURE I                                                                                          ENCLOSURE I

% an employee defers his or her annuity and has chosen a survivor benefit, and dies
before the deferred pension begins, the survivor annuity begins on the day after the
former employee would have been age 62, if less than 20 years of service; age 60, if 20
through 29 years; or MRA, if 30 or more years of service. Alternatively, the annuity can
begin the day after death, but the annuity is computed to be actuarially equivalent to
waiting for the above age and service combinations.

hA married retiring employee will receive a reduced annuity to provide maximum (50
percent) survivor benefits.

iA married retiring employee may elect a reduced annuity to provide one-half of the
maximum (e.g., 25 percent) survivor benefits to a current spouse. These elections may be
made only if spousal consent is obtained or waived. No other partial survivor benefit is
available.

jThe supplement is an amount estimated to equal future Social Security benefits accrued
from all civilian service and is paid at or after the retiree’s MRA until age 62, when Social
Security payments may begin. No employee entitled to a disability, deferred, or MRA plus
 10 annuity is eligible for the supplement.

kA Member retiring before age 55 with 20 years of service may begin drawing the annuity
supplement upon reaching his or her MRA.

‘This taxable wage base is adjusted each year for wage growth in the economy.

“FERS retirement deductions are mandatory. Social Security deductions are withheld on
the amount of salary after the reduction for the pension payable.

“Exceptions-pension terminated if based on disability and annuitant has recovered or
been restored to earning capacity prior to reemployment, and pension terminated if based
on an involuntary separation and reemployment would normally be subject to retirement
deductions. Head of agency may request OPM to waive salary reduction on a case-by-
case basis to meet exceptional recruiting and retention needs.

Source: OPM.




25                  GAO/GGD-9%178R   lhlationsbip   Between   Retired   Members’   Pensions   and Final   Salaries
ENCLOSUREII                                                                                        ENCLOSURE II
            DESCRIPTION OF THE CSRS AND FERS PENSION PROGRAMS

BACKGROUND

CSRS and FERS are the two largest retirement programs for federal civilian employees.
At the beginning of fiscal year 1995, these programs covered about 2.8 million federal
employees, or 90 percent of the current civilian workforce. OPM administers CSRS and
FERS. CSRS and FERS pension benefits are financed partly by federal agency and
employee contributions and partly by other government payments to the Civil Service
Retirement and Disability Fund.”

Although CSRS and FERS both provide pensions, the programs are designed differently.
CSRS was established in 1920 and predates the Social Security system by 15 years. When
the Social Security system was established, Congress decided that employees in CSRS
would not be covered by Social Security through their federal employment. CSRS is a
stand-alone pension program that provides an annuity, determined by a formula, as well
as disability and survivor benefit.s.‘o The program was closed to new entrants after
December 31, 1983, and, according to OPM actuaries, is estimated to end in about 2070,




‘?‘he Department of the Treasury also makes annual payments that are to cover interest
on unfunded liabilities, payments for spouse equity, as well as amortization payments to
finance supplemental liabilities for FERS.
“?f a survivor annuity benefit is chosen, pensions may be reduced by as much as 10
percent. Pensions are reduced to provide for spousal benefits or insurable interest
benefits (i.e., a person designated by the retiree as expecting to receive some financial
benefit from the continuance of the life of the retiree), but not for children’s benefits.
Children’s benefits are provided by law and do not need to be elected by an employee or
retiree. If a spousal survivor annuity is chosen and the spouse predeceases the retiree,
the annuity reduction is eliminated upon notification to OPM. At the time of retirement,
CSRS pensions may also be reduced for other reasons, including reductions for age and
unpaid deposits. FERS pensions may be reduced for age.
26                  GAOKiGD-97-178R   Relationship   Between   Retired   Members’   Pensions   and Final   Salaries
ENCLOSURE II                                                                                        ENCLOSURE II

when all covered employees and sunivor annuitants are expected to have died.“’ FERS
was implemented in 1987 and generally covers those employees who first entered federal
service after 1983, as well as those who transferred from CSRS to F’ERS. The primary
impetus for the new program was the Social Security Amendments of 1983, which
required that all federal employees hired after December 1983 be covered by Social
Security.” FERS is a three-tiered retirement program that includes Social Security and a
Thrift Savings Plan-in addition to a basic pension. Like CSRS, FERS provides disability
and survivor benefits.

A distinctive feature of CSRS and FERS pensions is the annual COLAS they are to
provide. COLAS are post-retirement increases in pension amounts that generally are given
on either an ad hoc or automatic basis to offset increases in living costs due to inflation.
Congress enacted the first automatic COLA for CSRS annuitants in 1962 (effective January
1963). At that time, the automatic adjustment was viewed as a way of controlling pension
costs; prior ad hoc adjustments had been criticized as being unrelated to price increases
and subject to political manipulation.

Although COLAS generally have been provided on an automatic basis since 1962, COLA
policies have been modified numerous times over the years. As shown in table II.1, the
changes made during the 1960s and 1970s were intended to enhance pension purchasing
power with respect to inflation as measured by the CPI, but some of the changes made
during the 1980s had the effect of reducing purchasing power. Table II.1 is based on
information in the CRS Report for Congress, 94834 EPW, updated March 13, 1996.


“‘Members who were participating in CSRS on December 31, 1983, were given an
opportunity to elect to stay in CSRS, with their retirement plan contributions and benefits
reduced-that is, offset-by Social Security taxes and benefits. In addition, new Members
entering Congress with at least 5 years of previous federal civilian employment covered
under CSRS were given an opportunity to join the offset plan. Under the CSRS-Offset
plan, Members pay into the CSRS only the difference between the 8.0 percent CSRS
contribution required for Members and the 6.2 percent Social Security tax (or 1.8 percent)
on the first $65,400 (in 1997) of congressional salary, and 8.0 percent on salary above
$65,400. When Members covered under this plan retire, their CSRS pension is reduced at
age 62 by the amount of their Social Security benefit that is attributable to their
congressional service performed after 1983 (whether or not they actually begin to draw
Social Security at that time).
zAfter December 31, 1983, certain rehires participating in CSRS before 1984 could elect
either to stay in that plan under special rules that integrate CSRS and Social Security or
transfer to FERS. For a more detailed discussion of the transition from CSRS to FERS,
see Federal Retirement: Federal and Private Sector Retirement Program Benefits Varv
(GAO/GGD-97-40, Apr. 7, 1997).
27                  GAOKGD-97-178B   Relationship   Between   Retired   Members’   Pensions   vd   Final   Salaries
ENCLOSURE    II                                                                                    ENCLOSURE          II

Table 11.1: Maior Changes Made to COLA Policv Since Automatic                        Adiustments           Began



                          Provided the first automatic adjustments whenever the CPI in
                          a given year exceeded the CPI for the year of the.last
                          adjustment by 3 percent or more. This was later modified to
                          provide for adjustments whenever the CPI rose 3 percentage
                          points or more above the CPI in the month of the last
                                              ained at or above this level for 3


                               er-to offset the erosion in pension benefits due to the
                                lag between increases in living costs and benefit




                          the kicker with semiannual COLAS as another way to address




                          Added a restriction in certain cases to ensure that pensions
                                                                    pay for a General

                           Established the formula upon which
                           based and made COLAS effective in

                                                                                    in checks issued the
                                                                                    the month for which




                           otherwise be met.

                           suspension un




28                  GAO/GGD-97-178B   Belationship   Between   Retired   Members’   Pensions   and Final   Salaries
ENCLOSUREII                                                                                          ENCLOSURE II

This formula and schedule are the same as those used for Social Security COLAS, which
were established for that program in P.L. 98-21. This law also eliminated the COLAs
scheduled for May 1984 and June 1985. Instead, COLAS were scheduled for December
1984, payable in January 1, 1985, checks.

bThe Balanced Budget and Emergency Deficit Control Reaffirmation Act of 1987 (P.L. 100-
119) permanently exempted federal pension COLAS from suspension under P.L. 99-177.

‘The COLAS were in checks payable the first business day of April rather than January.
This law did not change the CPI measuring period

Source: CRS.

One of these changes provides especially relevant background for considering the
relationship between current pensions and final salaries and requires a more complete
discussion. As noted in table II.1, P.L. 97-253 (the Omnibus Budget Reconciliation Act of
1982) restricted COLAS in relation to final salaries in certain cases. Under this restriction,
a pension may not be increased by a COLA to an amount that exceeds the greater of the
current maximum pay for a GS15 federal employee or the final pay of the employee (or
high-3 average pay, if greater), increased by the overall annual average percentage
adjustments (compounded) in rates of pay of the general schedule for the period
beginning on the retiree’s annuity starting date and ending on the effective date of the
adjustment. In effect, the statute requires that a retiree’s pension is to be capped at an
amount not to exceed the maximum pay of a general-schedule employee (i.e., GS-15) or
an amount that represents the value of the retiree’s final or average pay, adjusted for the
general schedule pay adjustments that had been provided since the annuitant retired.
According to OPM’s policy handbook, because the cap applies to COLA increases to
pensions, in no instance would a pension already exceeding the cap be reduced.=

As noted earlier, under current policy-enacted in 19&Q-COLASfor CSRS and F’ERS
retirees are based on increases in living costs as measured by the CPI-W between the
third quarter (July through September) of the current calendar year and the third quarter
of the previous year. Although the COLA formula and schedule are the same for F’ERS
and CSRS, F’ERS COLAS are limited if inflation is over 2.percent. If inflation is between
2.0 and 3.0 percent, the FERS COLA is 2.0 percent; if inflation is 3.0 percent or more, the
COLA is the CPI minus 1 percent. If, however, inflation is less than 2 percent, FERS
COLAS are to be fully adjusted for inflation. Also, CSRS benefits are to be fully indexed



BUnder CSRS, initial annuities are also capped. With certain exceptions, the maximum
initial annuity that a retiree can receive under CSRS is 80 percent of his or her high-3
average salary.
29                   GAOIGGD-97478E   Belationship   Between   Retired   Members’   Pensions   and Pinal   Salaries
ENCLOSURE II                                                                                      ENCLOSURE II
from the time of retirement, and F’ERS pensions are to be indexed beginning at age 62 for
regular retirees.”




‘me first FERS COLA was effective in December 1988 and payable in January 1989.
FERS participants of any age who retired on disability are to receive COLAS .after their
first year of disability.
30                  GAOIGGD-9%178R   Kelationship   Between   Retired   Members’   Pensions   and Pinal   Salaries
ENCLOSURE III                                                                                       ENCLOSURE III
                                  SCOPE AND METHODOLOGY

To respond to your request, we used a computerized database maintained by
OPM crntaining retirement-related information for all CSRS and F’ERS annuitants retired
as of October 1, 1995. OPM’s database did not include the individual’s final salary
amount, a key variable of interest. However, the database did contain the former
Member’s “high-3” average salary, which is one of the components used to calculate the
initial annuity amount. From this database, OPM identified the population of 94 former
Members of Congress who were retired in 1995 and whose annuities exceeded their high-
3 average salaries, and obtained their case files from OPM.25 Review of the case files
revealed that 17 of the former Members who had retired under CSRS and 1 Member who
had retired under F’ERS did not meet our criterion of pensions exceeding final salaries.
The 76 remaining case files were for former Members whose current (i.e., 1995) pensions
had come to exceed their final salaries.

The quantitative techniques used for our analysis of former Members were generally the
same as those for general employees. To determine the number of former Members
whose annuities exceeded their final salaries, we reviewed the annuitants’ case files,
extracted initial annuity and final salary amounts as well as other pertinent information,
and verified the data (e.g., retirement date, high-3 average salary) provided by OPM’s
database. We expressed the former Members’ 1995 pensions as a percentage of their final
salaries and tabulated the results. We also adjusted the former Members’ nominal final
salaries for inflation. In doing so, we used the 1995 CPI-W values as the base year and
retabulated the results.

To understand why the former Members’ pensions could come to exceed unadjusted final
salaries by as much as they did, we used regression analysis to model. the relationship
between the extent to which the pensions of the former Members had come to exceed
their unadjusted final salaries and key retirement policy variables and other factors, as
well as to isolate the independent effects of these factors. This analysis was based on the
68 retired former Members who had retired directly from Congress and whose 1995
pensions exceeded their final salaries.‘6 In contrast, eight former Members had additional
government service after leaving Congress, thus, their final salaries were different from
what their Members salaries had been.




‘5Ninety-three former Members retired under CSRS, and one retired under FERS.
“61nconsidering the regression results in this letter, it is important to recognize that the
results can be applied only to those retired former Members who retired directly from
Congress and whose 1995 pensions had come to exceed their unadjusted final salaries.


31                   GAO/GGD-97-178R   Belationship   Between   Retired   Members’   Pensions   and Final Salaries
ENCLOSURE III                                                                                    ENCLOSURE III

To compare the differences between historical and current COLA policies, we traced the
historical changes made to the policies since the inception of automatic COLAS. We then
calculated the pensions that former Members would have received from the start of their
retirement to 1995 had current COLA policy been in effect during the period and
compared the result to the pensions they would have received under historical policies
then in effect.

Our analysis has some limitations. The number of retirees whose pensions had come to
exceed their final unadjusted salaries could be somewhat higher than we estimated for
two reasons. As mentioned previously, since OPM’s database did not include information
on former Members’ final salary amounts, we used “high-3 average salary” as a proxy to
identify retired Members whose 1995 annuities had come to exceed their final unadjusted
salaries. Thus, our estimates do not include those retired Members whose pensions were
lower than their high-3 salaries but higher than their final salaries. Also, because OPM
records initial annuity information after reductions for survivor benefits, use of the OPM
annuity information likely leads to underestimating the number of retirees in the
aforementioned category. Although we did not independently verify the accuracy of
OPM’s database, we did verify the accuracy of the data for the specific cases we
reviewed.




 32                  GAOKGD-97-178B   Relationship   Between   Retired   Members’   Pensions   ,ad Final Salaries
ENCLOSURE IV                                                                                        ENCLOSURE IV
                        MAJOR CONTRIBUTORS TO THIS LETTER

GENERAL GOVERNMENT DMSION, WASHINGTON. D.C.

Margaret T. Wrightson, Assistant Director
Gregory H. Wilmoth, Senior Social Science Analyst

DALI&S FIELD OFFICE

Tyra J. DiPalma, Evaluator-in-Charge
Enemencio S. Sanchez, Evaluator

ACKNOWLEDGEMENT

In addition to those named above, Jerry T. Sandau, Social Science Analyst, GGD,
contributed through his development of the regression analysis results presented in this
letter.




(410185)

33                  GAO/GGD-97-178B   Belationship   Between   Retired   Members’   Pensions   and Pinal !Salaries
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