oversight

Federal Retirement: Federal and Private Sector Retirement Program Benefits Vary

Published by the Government Accountability Office on 1997-04-07.

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

                United States General Accounting Office

GAO             Report to Congressional Requesters




April 1997
                FEDERAL
                RETIREMENT
                Federal and Private
                Sector Retirement
                Program Benefits Vary




GAO/GGD-97-40
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      General Government Division

      B-271057

      April 7, 1997

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

      The Honorable Fred Thompson
      Chairman, Committee on Governmental Affairs
      United States Senate

      The Honorable John L. Mica
      Chairman, Subcommittee on Civil Service
      Committee on Government Reform and Oversight
      House of Representatives

      This report is in response to requests by the Chairmen of the former Senate Subcommittee on
      Post Office and Civil Service and the House Subcommittee on Civil Service that we make a
      series of analyses of federal and nonfederal retirement programs. As part of the requests, we
      were asked to (1) update the reports on nonfederal retirement programs we completed for
      Congress when the Federal Employees Retirement System (FERS) was being designed and
      (2) compare current nonfederal programs with FERS and the Civil Service Retirement System
      (CSRS). As agreed with the Subcommittees, this report provides comparative information on the
      features and benefit levels of retirement programs offered by primarily large private sector
      employers, FERS, and CSRS. We are not making any recommendations in this report.

      As agreed with your representatives, unless you publicly announce its contents earlier, we plan
      no further distribution of this report until 30 days after its issue date. At that time, we will send
      copies of this report to (1) the Ranking Minority Members of the Senate Committees on
      Appropriations and Governmental Affairs and of the House Subcommittee on Civil Service,
      (2) other appropriate congressional committees, (3) the Director of the Office of Personnel
      Management, (4) the Executive Director of the Federal Retirement Thrift Investment Board,
      and (5) other interested parties. We will also make copies available to others on request.

      Major contributors to this report were Robert E. Shelton, Assistant Director, and Laura G.
      Shumway, Senior Evaluator. Please contact me at (202) 512-8676 if you or your staff have any
      questions concerning this report.




      L. Nye Stevens
      Director, Federal Management and
         Workforce Issues
Executive Summary


             Over the years, considerable debate has occurred over how retirement
Purpose      programs for federal employees compare with the programs available to
             other employees in the United States. The Chairmen of the former Senate
             Subcommittee on Post Office and Civil Service and the House
             Subcommittee on Civil Service asked GAO to compare the features and
             benefit levels of the federal government’s two largest retirement programs
             for its civilian employees—the Federal Employees Retirement System
             (FERS) and the Civil Service Retirement System (CSRS)—with those of
             private sector retirement programs.


             Thousands of private sector retirement programs exist, covering millions
Background   of employees. According to the Bureau of Labor Statistics, over 75 percent
             of the full-time employees in private establishments with 100 or more
             employees and about one-half of the full-time employees in private
             establishments with 99 or fewer employees are covered by at least one
             retirement program to which their employers contribute in addition to the
             Social Security program. The remaining employees are covered by Social
             Security, but not by retirement programs to which their employers
             contribute.

             The designs of private sector retirement programs vary greatly, although
             all have the Social Security program as their base. Some employers’
             programs have both defined benefit and defined contribution plans.
             Defined benefit plans specify formulas for computing benefit amounts
             payable at retirement typically based on an employee’s age, length of plan
             participation, and salary history. In contrast, defined contribution plans
             specify amounts that the employer (and employees, if required) will
             contribute to the plan. The accumulated contributions, plus investment
             earnings, constitute the source of employee retirement benefits from a
             defined contribution plan. Also, some employers’ programs have defined
             benefit plans only, and others have defined contribution plans only in
             addition to Social Security.

             Together, FERS and CSRS covered about 2.8 million federal employees at the
             beginning of fiscal year 1995. The design of FERS consists of three
             parts—Social Security; a defined benefit plan; and a defined contribution
             plan, the Thrift Savings Plan (TSP), to which the federal government and
             most of its employees contribute. CSRS is a stand-alone defined benefit
             plan. Employees in CSRS may contribute to the FERS defined contribution
             plan, but the government does not make any contributions to their
             accounts. Employees in CSRS are not covered by Social Security through



             Page 2                      GAO/GGD-97-40 Federal and Private Retirement Benefits
Executive Summary




their federal employment. In general, FERS covers employees who first
entered federal service after 1983, and CSRS covers employees who entered
earlier.

GAO  and the Congressional Budget Office (CBO) contracted at different
times with Watson Wyatt Worldwide, a company that collects benefits data
from a wide range of employers, to obtain information on the features and
benefit levels of the private sector retirement programs included in this
report. Watson Wyatt provided this information to GAO and CBO from its
1993 COMPARISON database, which was the latest database available at
the time the GAO contract was awarded. The database contained
information on the retirement programs of primarily large private sector
employers. About one-half of these employers were Watson Wyatt clients;
the remainder were from a survey of U.S. employers included in Fortune
magazine’s list of 1,000 top employers. Therefore, the features and benefit
levels developed from the database could not be generalized to the private
sector as a whole.

The database described the features of 661 employers’ retirement
programs. Of these programs, sufficient information was available to allow
the contractor to determine the benefit amounts provided by 435
employers’ programs. Of the 435 employers, 61 percent had 2,500 or more
employees, and 37 percent had fewer than 2,500 employees. The remaining
2 percent of the employers did not provide size information. About
70 percent of the 435 employers provided both defined benefit and defined
contribution plans, about 24 percent of the employers had defined
contribution plans only, and about 6 percent had defined benefit plans
only.

To see how employees with varying ages and years of service would fare
under FERS, CSRS, and private sector retirement programs, the contractor
calculated the benefit amounts potentially available to five illustrative
employees at three different salary levels. In making these calculations,
the contractor included the benefit amounts from the defined benefit and
defined contribution plans to which employers made contributions as well
as the amounts from Social Security. For private sector employers, the
contractor made and then averaged separate calculations for each of the
435 private sector retirement programs. Because defined contribution plan
benefits accumulate as individual account balances, the contractor
converted these balances to annuities so they could be compared with the
benefits provided by defined benefit plans. Also the benefit amounts
calculated were based on a single set of assumptions about salary



Page 3                      GAO/GGD-97-40 Federal and Private Retirement Benefits
                   Executive Summary




                   histories, return on investments, the conversion of defined contribution
                   plan amounts, and the rate of inflation after retirement.

                   GAO  believes the assumptions used are reasonable because they either
                   were those used by the Office of Personnel Management (OPM) in its latest
                   actuarial valuations, were based on standards used in the benefits field, or
                   were necessary to provide a common basis of comparison. However,
                   different assumptions would change the relative magnitude of results
                   between programs and the absolute magnitude over all programs. By
                   varying the assumptions, it could also be possible in some circumstances
                   to change the relative rankings between programs. For example, if the
                   salary histories included other types of compensation in addition to base
                   pay, the private sector benefit amounts could have been greater because at
                   least one-half of the 435 private sector retirement programs would include
                   overtime, bonuses, and commissions in their benefit calculations. Also, if
                   the rate of salary growth in the last years of employees’ careers had been
                   greater, the benefit amounts from FERS, CSRS, and the private sector
                   programs could have been smaller. However, because FERS and CSRS use
                   the average of the highest 3 years’ salaries in their benefit calculations and
                   about one-half of the 435 private sector programs use the highest 5 years’
                   salaries, the benefit amounts from FERS and CSRS would not decrease as
                   much as the private sector amounts.


                   The results of GAO’s review revealed that there is no clear, bottom-line
Results in Brief   answer to the question of whether FERS and CSRS offer greater benefits, or
                   smaller benefits, than private sector retirement programs. The benefits
                   available from FERS and CSRS can be smaller, similar, or greater than the
                   average of the programs in the contractor’s private sector employer
                   database, depending on a number of factors and how these factors interact
                   with the retirement programs’ designs. Chief among these factors are
                   (1) the ages at which employees retire and at which programs provide
                   unreduced benefits, (2) the extent to which employees and employers
                   contribute to the defined contribution plans that are integral components
                   of FERS and most private sector programs, and (3) the impact of
                   cost-of-living adjustment practices on benefit amounts over the long term
                   (see ch. 2). In fact, FERS and CSRS can provide quite different benefit
                   amounts because of their different designs. As a rule, greater benefits are
                   available from FERS than from CSRS, but FERS employees must contribute
                   higher percentages of their salaries to receive the greater benefit amounts.




                   Page 4                        GAO/GGD-97-40 Federal and Private Retirement Benefits
                          Executive Summary




Principal Findings

Comparative Benefits      One factor that exerts a major influence on the comparative benefit
Depend Greatly on the     amounts available from FERS, CSRS, and private sector programs is the age
Ages at Which Employees   at which employees retire. Both federal programs and virtually all of the
                          private sector programs in the contractor’s database allow employees to
Retire                    retire as early as age 55. However, FERS and CSRS were designed to provide
                          unreduced benefits at age 55 to employees who serve at least a 30-year
                          career in the federal service. In contrast, few of the private sector
                          programs provide unreduced benefits at age 55, regardless of length of
                          service. Because the private sector defined benefit plans generally impose
                          reductions in accrued benefits for employees who elect to retire at age 55,
                          greater benefits are generally available under the federal programs at age
                          55 with 30 years of service than the average of the benefits available under
                          the private sector programs in the database.

                          Benefits available from FERS could be 65 percent of an employee’s final
                          salary at age 55 with 30 years of service; CSRS benefits would be 53 percent
                          of final salary, which is also the equivalent of 56.25 percent of the average
                          of the highest 3 years’ salaries. Benefits available from the private sector
                          programs in the database averaged 19 percent of an employee’s final salary
                          at age 55 with 30 years of service for programs with defined benefit plans
                          only, 26 percent for programs with defined contribution plans only, and
                          45 percent for programs with both defined benefit and defined
                          contribution plans. Benefits available from FERS at age 55 are greater than
                          benefits available from CSRS primarily because the FERS defined benefit
                          plan adds a “Social Security supplement” to the benefits paid to employees
                          who retire before age 62. (See fig. 2.1.)

                          Although FERS and CSRS provide unreduced retirement benefits to
                          employees who retire at age 55 with 30 years of service, federal
                          employees, on average, have been considerably older than age 55 when
                          they retired. According to OPM, in 1995 employees who retired under CSRS
                          averaged about age 62 with 30 years of service, and employees who retired
                          under FERS averaged about age 63 with 14 years of service. The
                          contractor’s database did not include information on the ages at which
                          employees choose to retire in the private sector programs.

                          The relative benefit amounts available to federal and private sector
                          employees who elect to wait to retire at age 62 or older, or who are not




                          Page 5                       GAO/GGD-97-40 Federal and Private Retirement Benefits
                          Executive Summary




                          eligible to retire at earlier ages, change considerably from the age 55
                          comparisons. When employees retire at age 62 or older with 30 years of
                          service, which is the actual average for employees who retired under CSRS
                          in 1995, the relative benefit amounts available from CSRS are generally
                          comparable to those available from private sector programs that include
                          defined benefit or defined contribution plans only. However, the CSRS
                          benefit amounts available with 30 years of service are smaller than those
                          available from FERS and the average of the private sector programs that
                          include both defined benefit and defined contribution plans. The benefits
                          available from CSRS for employees who retire with 30 years of service are
                          about 53 percent of final salary.

                          Regardless of program design, the average benefits available at retirement
                          from the private sector programs in the contractor’s database were greater
                          than CSRS benefits for employees who retired at age 62 or older with 20
                          years of service. For example, CSRS benefits for employees who retired at
                          age 62 with 20 years of service were 36 percent of an employee’s final
                          salary, while the benefits available from private sector programs averaged
                          63 percent for programs with both defined benefit and defined
                          contribution plans, 43 percent for programs with defined contribution
                          plans only, and 40 percent for programs with defined benefit plans only.
                          This is the case because Social Security benefits are available to private
                          sector retirees at age 62, while CSRS retirees receive no Social Security
                          benefits from their federal employment. (See figs. 2.2 through 2.5.)

                          Benefits available from FERS for employees who retire at age 62 or older
                          are generally comparable to the average benefits available from private
                          sector programs that include both defined benefit and defined
                          contribution plans—as did about 70 percent of the employers in the
                          contractor’s database. The FERS benefits are greater than the average
                          benefits from private sector programs that include defined benefit or
                          defined contribution plans only. The benefits available from FERS for
                          employees who retire at age 62 with 20 years of service are about
                          66 percent of an employee’s final salary, and the benefits available from
                          FERS for those employees who retire at age 62 with 30 years of service are
                          about 81 percent. (See figs. 2.2 through 2.5.)


Benefit Amounts Vary by   A second factor that has a major influence on benefit amounts actually
How Much Employees        paid by FERS and the private sector programs that include defined
Contribute to Defined     contribution plans is the amounts employees elect to contribute to defined
                          contribution plans during their working years. The FERS defined
Contribution Plans


                          Page 6                       GAO/GGD-97-40 Federal and Private Retirement Benefits
Executive Summary




contribution plan and most private sector defined contribution plans
provide for employer-matching of some portion of employee
contributions. Therefore, employees who contribute the amounts
necessary to receive maximum employer contributions will receive greater
benefits at retirement than employees who elect not to contribute to the
defined contribution plan or who contribute smaller amounts to the plan.
GAO estimates that the average retirement benefits from the TSP component
of FERS and the defined contribution plan component of private sector
programs in the contractor’s database could be 10 times higher for
employees who contribute enough to receive maximum employer
contributions throughout their careers than the benefits earned by
employees who make no contributions to their defined contribution plans
(see table 2.1). For example, employees who retire under FERS at age 62
with 30 years of service and who contributed enough throughout their
careers to receive the maximum employer contributions to the FERS
defined contribution plan would receive about 80 percent of their final
salaries at retirement—30 percent would be from the defined contribution
plan, 31 percent from the defined benefit plan, and 19 percent from Social
Security. If those same employees made no contributions to the FERS
defined contribution plan, they would receive about 53 percent of final
salary at retirement—3 percent would be from the defined contribution
plan, 31 percent from the defined benefit plan, and 19 percent from Social
Security (see fig. 2.14).

CSRS requires most employees to contribute 7 percent of their salaries
toward program costs. In contrast, employees in FERS generally are
required to contribute 0.8 percent of their salaries to the defined benefit
portion of the program, and over 90 percent of the private sector defined
benefit plans in the contractor’s database required no employee
contributions. However, FERS participants and private sector employees
are required to contribute 6.2 percent of their salaries to Social Security,
up to the Social Security salary ceiling, which tends to make these
employees’ total required contributions to Social Security and defined
benefit plans generally comparable to the amounts most employees
contribute under CSRS. In addition, for employees to receive maximum
employer contributions to their defined contribution plans, FERS
employees would need to contribute 5 percent of their salaries and the
private sector employees covered by programs in the contractor’s
database would need to, on average, contribute 6 percent of their salaries
to receive maximum employer contributions to their defined contribution
plans. Accordingly, FERS and private sector employees in programs that
include both defined benefit and defined contribution plans must generally



Page 7                       GAO/GGD-97-40 Federal and Private Retirement Benefits
                            Executive Summary




                            contribute higher amounts to receive maximum employer contributions to
                            their retirement benefits than do CSRS employees.


Cost-of-Living Adjustment   The third and final factor GAO examined that exerts a major influence on
Practices Cause             the benefit amounts available to employees during their retirement under
Differences in Long-term    federal and private sector retirement programs is cost-of-living adjustment
                            practices. Significant differences exist within and among the federal and
Benefit Amounts             private sector programs regarding the adjustment practices. Social
                            Security benefits, which are part of the retirement programs for FERS and
                            private sector employees, are adjusted annually by the full increase in the
                            Consumer Price Index (CPI). This adjustment practice can provide greater
                            increases in benefits than the adjustment practices applicable to the FERS
                            defined benefit plan and private sector defined benefit plans, on average.
                            The CSRS statute requires benefit adjustments to maintain retirees’
                            purchasing power in the same manner as Social Security. However,
                            limitations on CSRS benefit adjustments over a 10-year period in the 1980s
                            and 1990s caused the adjustments actually given retirees to cover about
                            80 percent of the increase in the CPI during this same period. By their
                            nature, the FERS and private sector defined contribution plan benefits are
                            not subject to cost-of-living adjustments.

                            In private sector programs, wide variation exists in how cost-of-living
                            adjustments are provided. According to the contractor, available
                            cost-of-living adjustment information for private sector defined benefit
                            plans indicates that retirees have not received adjustments that cover the
                            full increase in the CPI. Retirees covered by the retirement programs of the
                            50 largest employers in the contractor’s database, on average, received
                            adjustments that offset less than 20 percent of the price increase over 20
                            years of retirement. Nevertheless, the total benefits available from FERS
                            and the average of the private sector programs that have both defined
                            benefit and defined contribution plans continued to exceed the benefit
                            amounts paid from CSRS 20 years after employees retired at age 62 or older
                            with 20 years of service, even though full CSRS adjustments were made
                            over the 20 years.

                            For example, with retirement at age 62 with 20 years of service, the private
                            sector employees covered by programs in the contractor’s database with
                            both defined benefit and defined contribution plans began retirement with
                            benefits that were 27 percent of final salary higher than the CSRS benefits
                            and that continued to be higher 20 years later by 3 percent of final salary.
                            The benefits available from FERS also continued to be higher than CSRS 20



                            Page 8                       GAO/GGD-97-40 Federal and Private Retirement Benefits
    Executive Summary




    years later by about 9 percent. With retirement at age 65 with 20 years of
    service, the private sector retiree began retirement with benefits that were
    35 percent of final salary higher than CSRS benefits and that continued to
    exceed CSRS by 8 percent of final salary after 20 years. The total benefits
    available after 20 years of retirement for FERS employees who retired at
    age 65 with 20 years of service were higher by about 8 percent of final
    salary than the benefits available to their private sector counterparts who
    were covered by programs in the database with both defined benefit and
    defined contribution plans. (See figs. 2.17 and 2.18.)

    For employees who retired at age 62 or older with 30 years of service, the
    benefits available at retirement were higher under FERS and the private
    sector programs that include both defined benefit and defined
    contribution plans than the benefits available under CSRS. However, the
    following data show that this higher benefit level was not maintained after
    10 and 20 years of retirement:

•   Ten years after employees retired at age 62 with 30 years of service, FERS
    benefits continued to exceed CSRS benefits by about 14 percent of final
    salary, while the benefits available from the private sector programs in the
    database were similar to the CSRS benefits.
•   Twenty years after employees retired at age 62 with 30 years of service,
    the benefits available from FERS and CSRS were similar, but both FERS and
    CSRS benefits exceeded the benefits available from the private sector
    programs with both defined benefit and defined contribution plans by
    about 10 percent of final salary.
•   Twenty years after employees retired at age 65 with 30 years of service,
    the benefits available from CSRS and the private sector programs with both
    defined benefit and defined contribution plans were similar at about
    50 percent of final salary, but FERS continued to exceed them at about
    60 percent. (See figs. 2.19 and 2.20.)

    For employees who retired before age 62, benefits available from FERS
    were again higher by nearly 10 percent of final salary than the average
    benefits available from private sector programs with defined benefit and
    defined contribution plans after 10 and 20 years of retirement, but these
    benefits were about 4 percent of final salary lower than the fully adjusted
    CSRS benefits by the 20-year point. However, if the limitations imposed on
    CSRS adjustments during much of the 1980s and 1990s continue to be made
    in the future, CSRS benefits for pre-age 62 retirees after 20 years of
    retirement (1) would be lower than benefits available from FERS by
    4 percent of final salary and (2) would exceed by 6 percent of final salary



    Page 9                       GAO/GGD-97-40 Federal and Private Retirement Benefits
                       Executive Summary




                       the average benefits available from private sector programs with defined
                       benefit and defined contribution plans. (See fig. 2.16.)


                       GAO   is not making any recommendations in this report.
Recommendations
                       Watson Wyatt Worldwide and the Federal Retirement Thrift Investment
Agency and             Board (the Thrift Board) provided oral comments on the draft of this
Contractor Comments    report, and OPM provided written comments. The Watson Wyatt official
and GAO’s Evaluation   said that GAO’s use and interpretations of their database and analyses were
                       accurate and appropriate. The officials of Watson Wyatt, the Thrift Board,
                       and OPM agreed with GAO’s conclusion that there is no definitive answer to
                       the question of whether federal retirement programs offer greater or
                       smaller benefits than private sector programs. The Thrift Board and OPM
                       officials noted that it is very difficult to compare varied federal and private
                       sector retirement programs. They said, and GAO agrees, that GAO’s analyses
                       and conclusions are dependent on (1) the database used; (2) the age and
                       service characteristics of the illustrative employees; and (3) the
                       assumptions made about salary histories, return on investments, the
                       conversion of defined contribution plan amounts at retirement to
                       annuities, and the rate of inflation.

                       GAO  believes that the database and illustrative employees used and the
                       assumptions made are reasonable because they either were those used by
                       OPM in its latest actuarial valuations, were based on standards used in the
                       benefits field, or were necessary to provide a common basis of
                       comparison. GAO made minor modifications to this report to clarify that
                       the use of different databases, illustrative employees, and assumptions
                       would have changed the relative magnitude of benefits available among
                       retirement programs as well as the levels of benefits provided by all
                       programs. Using such data could possibly, in some circumstances, change
                       the relative rankings between programs. However, while GAO believes that
                       no one database or set of assumptions could fully capture the range of
                       private sector programs and employees’ experiences, it also believes that
                       using different databases and assumptions would not have changed GAO’s
                       conclusion that no definitive answer exists to the question of whether
                       federal programs offer greater or smaller benefits than private sector
                       programs.

                       OPM also commented that the GAO analyses and conclusions might be
                       better understood if additional information on the database, illustrative




                       Page 10                       GAO/GGD-97-40 Federal and Private Retirement Benefits
Executive Summary




employees, and the assumptions were provided in the report ( i.e., the
executive summary and chapter 1 of the report). GAO agreed that
additional information would help the reader understand its analyses and
conclusions and provided more details in the executive summary and the
objective, scope, and methodology section of chapter 1.

Officials of Watson Wyatt and the Thrift Board provided editorial and
technical comments that GAO incorporated in the report as appropriate.




Page 11                     GAO/GGD-97-40 Federal and Private Retirement Benefits
Contents



Executive Summary                                                                                     2


Chapter 1                                                                                            20
                        Background                                                                   20
Introduction            Objective, Scope, and Methodology                                            23

Chapter 2                                                                                            30
                        Comparative Replacement Rates at Retirement                                  31
Comparative Benefit     Relationship of Employee Contributions to Retirement Program                 38
Levels Available From     Benefits
                        Impact of Cost-of-Living Adjustment Practices on Long-Term                   51
FERS, CSRS, and           Replacement Rates
Private Sector
Retirement Programs
Chapter 3                                                                                            59
                        Program Designs                                                              59
Comparative Features    Program Features                                                             60
of FERS, CSRS, and
Private Sector
Retirement Programs
Chapter 4                                                                                            63
                        Conclusions                                                                  63
Conclusions and         Agency and Contractor Comments and Our Evaluation                            65
Agency and
Contractor Comments
Appendixes              Appendix I: FERS, CSRS, and Watson Wyatt Worldwide Database                  68
                          Statistics
                        Appendix II: Salary Histories Used in Pension Plan and Social                71
                          Security Benefit Calculations
                        Appendix III: Results of the Replacement Rate Analysis                       76
                        Appendix IV: Features of Federal and Private Sector Defined                 106
                          Benefit Plans
                        Appendix V: Features of Federal and Private Sector Defined                  116
                          Contribution Plans
                        Appendix VI: Comments From the Office of Personnel                          128
                          Management




                        Page 12                    GAO/GGD-97-40 Federal and Private Retirement Benefits
         Contents




Tables   Table 2.1: Average Replacement Rates Available From the FERS’                  45
           TSP and the Private Sector DC Plans at Varying Amounts of
           Employee Contributions
         Table 3.1: Major Features of FERS, CSRS, and Private Sector                    61
           Retirement Programs in the Contractor’s Database
         Table I.1: Number of Participants in FERS and CSRS at the                      68
           Beginning of Fiscal Year 1995
         Table I.2: Sizes of the Private Sector Employers in the                        68
           Contractor’s Database as of October 1995
         Table I.3: Sizes in Percentiles, Median, and Mean for Private                  69
           Sector Employers in the Contractor’s Database as of
           October 1995
         Table I.4: Industry Classifications of Private Sector Employers in             69
           the Contractor’s Database as of October 1995
         Table I.5: Geographic Locations of Private Sector Employers in                 70
           the Contractor’s Database as of October 1995
         Table I.6: Retirement Program Designs of Private Sector                        70
           Employers in the Contractor’s Database as of October 1995
         Table II.1: Salary History With a Final Salary That Is Equivalent to           72
           a $25,000 Salary in 1995
         Table II.2: Salary History With a Final Salary That Is Equivalent to           73
           a $40,000 Salary in 1995
         Table II.3: Salary History With a Final Salary That Is Equivalent to           74
           a $60,000 Salary in 1995
         Table II.4: Percentage of Final Salary Replaced by Social Security             75
           Benefits in FERS and the Private Sector Programs
         Table III.1: Average Replacement Rates Available With Maximum                  76
           Employer Contributions to DC Plans - Age 55 and 30 Years of
           Service
         Table III.2: Average Replacement Rates Available With Maximum                  78
           Employer Contributions to DC Plans - Age 62 and 20 Years of
           Service
         Table III.3: Average Replacement Rates Available With Maximum                  80
           Employer Contributions to DC Plans - Age 65 and 20 Years of
           Service
         Table III.4: Average Replacement Rates Available With Maximum                  82
           Employer Contributions to DC Plans - Age 62 and 30 Years of
           Service
         Table III.5: Average Replacement Rates Available With Maximum                  84
           Employer Contributions to DC Plans - Age 65 and 30 Years of
           Service




         Page 13                      GAO/GGD-97-40 Federal and Private Retirement Benefits
Contents




Table III.6: Average Replacement Rates Available With One-half                 86
  of the Maximum Employer Contributions to DC Plans - Age 55
  and 30 Years of Service
Table III.7: Average Replacement Rates Available With One-half                 88
  of the Maximum Employer Contributions to DC Plans - Age 62
  and 20 Years of Service
Table III.8: Average Replacement Rates Available With One-half                 90
  of the Maximum Employer Contributions to DC Plans - Age 65
  and 20 Years of Service
Table III.9: Average Replacement Rates Available With One-half                 92
  of the Maximum Employer Contributions to DC Plans - Age 62
  and 30 Years of Service
Table III.10: Average Replacement Rates Available With One-half                94
  of the Maximum Employer Contributions to DC Plans - Age 65
  and 30 Years of Service
Table III.11: Average Replacement Rates Available With No                      96
  Employee Contributions to DC Plans - Age 55 and 30 Years of
  Service
Table III.12: Average Replacement Rates Available With No                      98
  Employee Contributions to DC Plans - Age 62 and 20 Years of
  Service
Table III.13: Average Replacement Rates Available With No                     100
  Employee Contributions to DC Plans - Age 65 and 20 Years of
  Service
Table III.14: Average Replacement Rates Available With No                     102
  Employee Contributions to DC Plans - Age 62 and 30 Years of
  Service
Table III.15: Average Replacement Rates Available With No                     104
  Employee Contributions to DC Plans - Age 65 and 30 Years of
  Service
Table IV.1: Eligibility Requirements to Participate in the Defined            107
  Benefit Plans
Table IV.2: Vesting Schedule                                                  107
Table IV.3: Employee Contribution Requirements                                108
Table IV.4: Compensation Elements Included in Benefit                         108
  Calculation Base
Table IV.5: Pay Base for Benefit Calculations                                 109
Table IV.6: Social Security Integration in Benefit Formulas                   110
Table IV.7: Age and Years of Service Requirements for Unreduced               111
  Retirement Benefits




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Contents




Table IV.8: Age and Years of Service Requirements for Reduced               112
  Retirement Benefits
Table IV.9: Supplemental Benefits Available for Retirees                    113
  Receiving Reduced Benefits
Table IV.10: Age at Which Retirement Supplement Ends                        113
Table IV.11: Program Provided at Least One Postretirement                   114
  Benefit Increase During 1983-92
Table IV.12: Years When Program Provided Postretirement                     114
  Increases During 1983-92
Table IV.13: Postretirement Increases in FERS and CSRS From                 115
  1983 to 1997
Table V.1: Eligibility Requirements to Participate in the Defined           117
  Contribution Plans
Table V.2: Vesting Schedules (Plans With Employer                           118
  Contributions)
Table V.3: Types of Employer Contributions (Plans With                      118
  Employer Contributions)
Table V.4: Amounts of Employer Contributions as a Percentage of             119
  Pay in 1992
Table V.5: Employer-Matching Contributions (Plans With                      119
  Employer Contributions)
Table V.6: Maximum Employee Contributions Matched by                        120
  Employer in 1993 (Plans With Matching Contributions)
Table V.7: Percentiles of Maximum Employee Contributions                    120
  Matched by Employer in 1993 (Plans With Matching
  Contributions)
Table V.8: Maximum Pretax Employee Contributions Allowed in                 121
  1993 (Plans With Employee Contributions)
Table V.9: Percentiles of Maximum Pretax Employee                           121
  Contributions Allowed in 1993 (Plans With Employee
  Contributions)
Table V.10: Amounts of Employer Match on a 3-Percent                        122
  Employee Contribution (Plans That Only Match Contributions up
  to 3 Percent)
Table V.11: Percentiles of Amounts of Employer Match on a                   122
  3-Percent Employee Contribution (Plans That Only Match
  Contributions up to 3 Percent)
Table V.12: Amounts of Employer Match on a 4-Percent                        123
  Employee Contribution (Plans That Only Match Contributions up
  to 4 Percent)




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          Table V.13: Percentiles of Amounts of Employer Match on a                    123
            4-Percent Employee Contribution (Plans That Only Match
            Contributions up to 4 Percent)
          Table V.14: Amounts of Employer Match on a 5-Percent                         124
            Employee Contribution (Plans That Only Match Contributions up
            to 5 Percent)
          Table V.15: Percentiles of Amounts of Employer Match on a                    124
            5-Percent Employee Contribution (Plans That Only Match
            Contributions up to 5 Percent)
          Table V.16: Amounts of Employer Match on a 6-Percent or More                 125
            Employee Contribution (Plans That Only Match Contributions up
            to 6 Percent or More)
          Table V.17: Percentiles of Amounts of Employer Match on a                    125
            6-Percent or More Employee Contribution (Plans That Only
            Match Contributions Up to 6 Percent or More)
          Table V.18: Employer-Set Dollar Limitation on                                126
            Employer-Matching Contributions
          Table V.19: Employer Contributions Not Based on a Match of                   126
            Employee Contributions (Plans With Employer Contributions)
          Table V.20: Employer-Nonmatching Contributions Based on                      126
            Profits
          Table V.21: Plan Loan Provisions                                             127
          Table V.22: In-Service Hardship Withdrawal Provisions                        127
          Table V.23: In-Service (Other Than Hardship) Withdrawals                     127
            Permitted Before Age 59-1/2


Figures   Figure 2.1: Average Replacement Rates Available for Employees                 32
            Who Retire at Age 55 With 30 Years of Service and a Final Salary
            of $40,000
          Figure 2.2: Average Replacement Rates Available for Employees                 33
            Who Retire at Age 62 With 20 Years of Service and a Final Salary
            of $40,000
          Figure 2.3: Average Replacement Rates Available for Employees                 35
            Who Retire at Age 65 With 20 Years of Service and a Final Salary
            of $40,000
          Figure 2.4: Average Replacement Rates Available for Employees                 36
            Who Retire at Age 62 With 30 Years of Service and a Final Salary
            of $40,000
          Figure 2.5: Average Replacement Rates Available for Employees                 37
            Who Retire at Age 65 With 30 Years of Service and a Final Salary
            of $40,000




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Figure 2.6: Comparative Average Replacement Rates Available                   40
  When Employees Contribute 12 Percent of Their Salaries and
  Retire at Age 55 With 30 Years of Service and a Final Salary of
  $40,000
Figure 2.7: Comparative Average Replacement Rates Available                   41
  When Employees Contribute 12 Percent of Their Salaries and
  Retire at Age 62 With 20 Years of Service and a Final Salary of
  $40,000
Figure 2.8: Comparative Average Replacement Rates Available                   42
  When Employees Contribute 12 Percent of Their Salaries and
  Retire at Age 65 With 20 Years of Service and a Final Salary of
  $40,000
Figure 2.9: Comparative Average Replacement Rates Available                   43
  When Employees Contribute 12 Percent of Their Salaries and
  Retire at Age 62 With 30 Years of Service and a Final Salary of
  $40,000
Figure 2.10: Comparative Average Replacement Rates Available                  44
  When Employees Contribute 12 Percent of Their Salaries and
  Retire at Age 65 With 30 Years of Service and a Final Salary of
  $40,000
Figure 2.11: Effect of Employee Contributions on Average                      47
  Replacement Rates Available When Employees Retire at Age 55
  With 30 Years of Service and a Final Salary of $40,000
Figure 2.12: Effect of Employee Contributions on Average                      48
  Replacement Rates Available When Employees Retire at Age 62
  With 20 Years of Service and a Final Salary of $40,000
Figure 2.13: Effect of Employee Contributions on Average                      49
  Replacement Rates Available When Employees Retire at Age 65
  With 20 Years of Service and a Final Salary of $40,000
Figure 2.14: Effect of Employee Contributions on Average                      50
  Replacement Rates Available When Employees Retire at Age 62
  With 30 Years of Service and a Final Salary of $40,000
Figure 2.15: Effect of Employee Contributions on Average                      51
  Replacement Rates Available When Employees Retire at Age 65
  With 30 Years of Service and a Final Salary of $40,000
Figure 2.16: Average Replacement Rates Available at Retirement                54
  and 10 and 20 Years After Retirement When Employees Retire at
  Age 55 With 30 Years of Service and a Final Salary of $40,000
Figure 2.17: Average Replacement Rates Available at Retirement                55
  and 10 and 20 Years After Retirement When Employees Retire at
  Age 62 With 20 Years of Service and a Final Salary of $40,000




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Figure 2.18: Average Replacement Rates Available at Retirement               56
  and 10 and 20 Years After Retirement When Employees Retire at
  Age 65 With 20 Years of Service and a Final Salary of $40,000
Figure 2.19: Average Replacement Rates Available at Retirement               57
  and 10 and 20 Years After Retirement When Employees Retire at
  Age 62 With 30 Years of Service and a Final Salary of $40,000
Figure 2.20: Average Replacement Rates Available at Retirement               58
  and 10 and 20 Years After Retirement When Employees Retire at
  Age 65 With 30 Years of Service and a Final Salary of $40,000
Figure 3.1: Federal and Private Sector Retirement Program                    60
  Designs




Abbreviations

BLS        Bureau of Labor Statistics
CBO        Congressional Budget Office
COLA       cost-of-living adjustment
CPI        Consumer Price Index
CSRS       Civil Service Retirement System
DB         defined benefit
DC         defined contribution
FERS       Federal Employees Retirement System
IRS        Internal Revenue Service
MRA        minimum optional retirement age
OPM        Office of Personnel Management
TSP        Thrift Savings Plan


Page 18                    GAO/GGD-97-40 Federal and Private Retirement Benefits
Page 19   GAO/GGD-97-40 Federal and Private Retirement Benefits
Chapter 1

Introduction


               Thousands of private sector retirement programs exist, and they cover
Background     millions of employees. According to information available from the Bureau
               of Labor Statistics (BLS), in 1992, 16.1 million full-time employees (47
               percent) in small private establishments with 99 or fewer employees were
               covered by at least one retirement program to which their employers
               contributed. BLS also reported that, in 1993, 22.4 million full-time
               employees (78 percent) in medium and large private establishments with
               100 or more employees were covered by retirement programs.1 The
               remaining employees are covered by Social Security, but not by retirement
               programs to which their employers contribute.

               The designs of private sector retirement programs and their individual
               plans vary greatly. All programs include Social Security, while some also
               include defined benefit (DB) plans only, some include defined contribution
               (DC) plans only, and others include a combination or variation of DB and DC
               plans.

               DB plans specify formulas for computing benefit amounts that are payable
               at retirement and are typically based on an employee’s age, length of plan
               participation, and salary history. In contrast, DC plans specify amounts the
               employer (and employees, if required) will contribute to the plan. The
               accumulated contributions, plus investment earnings, constitute the
               source of retirement benefits from a DC plan. In summary, a DB plan
               specifies benefit amounts, and a DC plan specifies contribution amounts.

               The Federal Employees Retirement System (FERS) and the Civil Service
               Retirement System (CSRS) are the two largest retirement programs for
               federal civilian employees. Together, they covered about 2.8 million
               employees at the beginning of fiscal year 1995.2 Several other retirement




               1
                See U.S. Department of Labor, Bureau of Labor Statistics, Employee Benefits in Medium and Large
               Private Establishments, 1993, Bulletin 2456 (November 1994) and Employee Benefits in Small Private
               Establishments, 1992, Bulletin 2441 (May 1994). According to BLS, the results presented in these
               bulletins are representative of employees in private nonagricultural industries (i.e., employees with
               public sector establishments, farms, and private households and the self-employed are excluded).
               Also, adjustments were not made to the results for some types of missing data. For example, if data
               had been supplied for all sampled occupations included in Bulletin 2456, the results would represent
               39.4 million full- and part-time employees instead of the 34.3 million actually represented; and in
               Bulletin 2441, the results would represent 47.9 million employees instead of the 44.1 million actually
               represented. BLS did not publish in either bulletin the percentages of part-time employees who were
               covered by retirement programs.
               2
               See United States Office of Personnel Management, Annual Report of the Civil Service Retirement and
               Disability Fund for Fiscal Year 1995 (May 1996).



               Page 20                                 GAO/GGD-97-40 Federal and Private Retirement Benefits
Chapter 1
Introduction




programs for specific groups of federal civilian employees exist, but these
programs are much smaller than FERS and CSRS.3

CSRS was established in 1920 and is a DB plan that predates the Social
Security system by several 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
provides employees the option to retire with unreduced benefits at age 55
with 30 years of service, at age 60 with 20 years of service, and at age 62
with 5 years of service.

At the beginning of fiscal year 1995, CSRS covered about 1.4 million
employees and, during that year, paid annuities of almost $38 billion to
about 2.3 million retired employees and survivor annuitants.4 CSRS was
closed to new entrants after December 31, 1983. When all covered
employees and annuitants are deceased, the program will end. According
to OPM actuaries, the program is projected to end about 2070.

FERS  was implemented in 1987 and generally covers those employees who
first entered federal service after 1983. The primary impetus for the new
program was the Social Security Amendments of 1983, which required all
federal employees hired after December 1983 to be covered by Social
Security.5 FERS is a three-part retirement program and includes the
following: (1) Social Security, (2) a DB plan, and (3) a DC plan—the Thrift
Savings Plan (TSP)—to which the government and most employees

3
  See Public Pensions: Summary of Federal Pension Plan Data (GAO/AIMD-96-6, Feb. 16, 1996). For
example, the Foreign Service has two retirement programs—the CSRS-like Foreign Service Retirement
and Disability System and the FERS-like Foreign Service Pension System. These two programs covered
about 12,000 employees in 1993. Another retirement program is the Judicial Retirement System, which
covered just over 700 employees in 1993.
4
 Another 26,000 former employees were covered by CSRS and will be eligible to receive benefits in the
future.
5
 CSRS was closed to new entrants after December 31, 1983. Most new federal employees hired after
that date, or employees who were rehired and had a break in CSRS coverage of more than 1 year, have
mandatory Social Security coverage. On January 1, 1987, the new FERS started and most federal
employees were covered by either CSRS or FERS. However, Congress, in the FERS legislation, created
the CSRS Offset plan. Typically, the Offset plan covers employees who (1) had a break in service that
exceeded 1 year and ended after 1983 and (2) had 5 years of creditable civilian service on January 1,
1987. The Offset plan also covers employees hired before January 1, 1984, who acquired CSRS
coverage for the first time after that date, and who had at least 5 years of creditable service by
January 1, 1987. Employees in the Offset plan are covered by both CSRS and Social Security. The
amounts they pay to CSRS are reduced, or offset, by the Social Security taxes they pay. When these
employees retire, their CSRS benefits will be calculated under the same rules as other CSRS retirees.
However, when the retirees in the Offset plan become eligible for Social Security benefits, their CSRS
benefits will be offset by the portion of their Social Security benefits earned during the years they were
covered by both CSRS and Social Security. At the beginning of fiscal year 1995, about 74,000 of the
1.4 million CSRS-covered employees were in the Offset plan.



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Chapter 1
Introduction




contribute. In FERS, the minimum optional retirement age (MRA) has been
increased from the CSRS’ age 55 to age 57 for FERS employees born after
1969.6 FERS provides employees with the option to retire with unreduced
benefits at their MRA with 30 years of service, at age 60 with 20 years of
service, and at age 62 with 5 years of service. FERS continued the CSRS
objective of encouraging employees to spend their working careers in
federal service by making unreduced benefits available at the MRA only to
employees who serve 30 or more years with the government. FERS has
another provision that is intended to serve as an incentive for employees
to extend their careers beyond the MRA. This provision allows FERS
employees who retire at age 62 or older and who have completed at least
20 years of service to receive retirement benefits calculated at a formula
that provides a 10-percent greater benefit amount than the formula applied
to employees who retire before age 62. However, FERS also provides
employees the option to retire with reduced benefits at their MRA with 10
years of service. This provision is not available to employees covered by
CSRS.


At the beginning of fiscal year 1995, FERS covered about 1.4 million
employees and, during that year, paid annuities of about $474 million to
48,000 retired employees and survivor annuitants.7 (See app. I for
additional details on CSRS and FERS participants.)

The government automatically contributes an amount equal to 1 percent of
salary each pay period to the TSP for each FERS-covered employee whether
or not the employee contributes to the TSP. In addition, FERS employees
may contribute up to 10 percent of their salaries and receive
government-matching contributions on the first 5 percent.8 CSRS-covered
employees may also contribute up to 5 percent of their salaries to the TSP,
but the government does not make matching contributions for them.9




6
 The FERS MRA is age 55 for employees born before January 1, 1948. The MRA gradually increases
until it reaches age 57 for employees born after December 31, 1969.
7
 Another 89,000 former employees were covered by FERS and will be eligible to receive benefits in the
future.
8
  The government will make matching contributions to the TSP accounts of FERS-covered employees in
the following manner: on the first 3 percent of salary that an employee contributes, the government
contributes $1.00 for each $1.00 the employee contributes; on the next 2 percent of salary, the
government contributes $0.50 for each $1.00 the employee contributes; and on the next 5 percent of
salary, the government contributes nothing.
9
 The contributions of FERS and CSRS employees to the TSP are limited by the Internal Revenue
Service (IRS). The IRS limit was $9,500 in 1997.



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                        Chapter 1
                        Introduction




                        Employees in FERS and the private sector paid 6.2 percent of their salaries
                        to the Social Security system (excluding Medicare) on earnings of up to
                        $65,400 in 1997. FERS-covered employees receive the same Social Security
                        benefits as private sector employees. Social Security benefits payable at
                        retirement are designed to replace a higher proportion of earnings for
                        lower-paid employees than for higher-paid employees (see table II.4).


                        In response to the requests of the Chairmen of the former Senate
Objective, Scope, and   Subcommittee on Post Office and Civil Service and the House
Methodology             Subcommittee on Civil Service, our objective in preparing this report was
                        to compare FERS, CSRS, and private sector retirement programs. These
                        retirement programs can be compared in a number of ways. One possible
                        way is to compare the average benefit amounts different programs paid to
                        their retirees in a given year. In this method, the “typical” benefits paid by
                        each program would be presumed to be indicative of the relative benefits
                        offered by the programs. However, such a comparison approach would
                        ignore differences in ages, salary levels, years of service, and other factors
                        that cause benefit amounts to differ for individual retirees under the
                        programs. Another possible comparison method is to compare program
                        features, such as age and service requirements for retirement eligibility,
                        benefit calculation formulas, salary amounts used in the benefit
                        calculations, and how pension plan benefits are integrated with Social
                        Security benefits. This method would provide useful information on how
                        the various programs are designed, but it would not compare the actual
                        benefit amounts available under the programs.

                        Although a number of other comparison methods exist, the method we
                        used in this report was to determine the benefit amounts federal and
                        private sector programs would pay to employees who retire at the same
                        ages with the same years of service and salary histories. In using this
                        method, we avoided the benefit differences that could be caused by
                        variances in individual employees’ circumstances. Also, this method
                        allowed us to (1) compare federal retirement benefits with the average
                        benefits available under private sector programs for employees in the
                        same circumstances and (2) provide a measure of the extent to which
                        differences in the features of federal and private sector retirement
                        programs cause differences in the relative benefit amounts available from
                        the programs. However, this method does not consider what portions of
                        the benefits are financed by the employee and the employer.




                        Page 23                       GAO/GGD-97-40 Federal and Private Retirement Benefits
Chapter 1
Introduction




We and the Congressional Budget Office (CBO) contracted, at different
times, with Watson Wyatt Worldwide, a company that collects benefits
data from a wide range of employers, to obtain the information on the
features and benefit levels of private sector retirement programs included
in this report. Watson Wyatt provided this information from its 1993
COMPARISON database, which was the latest database available at the
time our contract was awarded. The database contained information on
the retirement programs of primarily large private sector employers and
that, by design, excluded employers who had no retirement programs
other than Social Security. About one-half of the employers were Watson
Wyatt clients; the remainder were from a survey of U.S. employers
included in Fortune magazine’s list of 1,000 top employers. Therefore, the
features and benefit levels developed from the database could not be
generalized to the private sector as a whole.

The database described the features of 661 employers’ retirement
programs. Of these programs, sufficient information was available to allow
the contractor to determine the benefit amounts provided by 435
employers’ programs. Of the 435 employers, 61 percent had 2,500 or more
employees. Another 22 percent had 1,000 to 2,499 employees; about
15 percent had 999 or fewer employees. The remaining 2 percent of the
employers did not provide size information. About 70 percent of the 435
employers provided both defined benefit and defined contribution plans,
whereas about 24 percent of the employers had defined contribution plans
only and about 6 percent had defined benefit plans only. Appendix I
contains more detailed information on the sizes and program designs of
the employers in the contractor’s database as well as information on the
industries and geographical areas that the employers represented.

To show how employees with varying ages and years of service would fare
under FERS, CSRS, and private sector retirement programs, we asked the
contractor to calculate the benefit amounts potentially available to three
illustrative employees (i.e., age 55 with 30 years of service, age 62 with 20
years of service, and age 65 with 20 years of service) at three different final
salary levels (i.e., $25,000, $40,000, and $60,000). (See app. II for the salary
histories and the actual dollar amounts used to calculate the benefit
amounts.)

Because of limited contract funds, we were limited to three illustrative
employees. We chose the specific ages and years of service in the
following manner: (1) age 55 with 30 years of service since that is the




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Chapter 1
Introduction




earliest age at which general employees in CSRS can choose to retire,10
(2) age 62 with 20 years of service since reduced Social Security
retirement benefits are first available at that age, and (3) age 65 with 20
years of service since full Social Security benefits are available at this age.
We chose 20 years of service to reflect the shortening of federal careers
that may occur under FERS.11

Subsequently, CBO contracted with Watson Wyatt to obtain the benefit
amounts potentially available to an additional two illustrative
employees—age 62 with 30 years of service and age 65 with 30 years of
service. CBO chose age 62 with 30 years of service since that was the
average for employees who retired under CSRS’ optional retirement
provisions in fiscal year 1995; they chose age 65 with 30 years of service to
show the effect of the 30-year career on the age 65 comparisons. The
results provided under the CBO contract were based on the same
methodology and the same assumptions as the results provided under our
contract.12 We did not independently verify the accuracy of the Watson
Wyatt database or the benefit amounts calculated. However, the results
from its database and calculations were consistent with results we
reported in 1985 and with results reported more recently by others in the
benefits field.13 Also, Watson Wyatt’s calculations for FERS and CSRS were
consistent with FERS and CSRS calculations we had made.

The benefit amounts in this report are expressed as “replacement rates.” A
replacement rate is the annual retirement benefit amount divided by an
employee’s salary amount in the final year of employment. For example,
an employee who earned $40,000 in the final year of his or her
employment and received retirement benefits of $20,000 a year would have
a replacement rate of 50 percent.

10
 For this report, we assumed the FERS MRA was age 55, regardless of date of birth, to simplify the
comparisons with CSRS and private sector programs.
11
  We did not choose age 55 with 20 years of service because neither FERS nor CSRS provide
unreduced retirement benefits at this age with 20 years of service. However, FERS does provide
reduced benefits for employees who retire at their MRA (age 55 to 57) with 10 years of service. CSRS
does not have a similar provision. In the contractor’s database, about two-thirds of the private sector
retirement programs with DB plans provided reduced benefits for employees who retired at age 55 or
younger with 10 or less years of service.
12
  The contractor provided the results requested under our contract in October 1995 and the results
requested under the CBO contract in January 1997. The contractor used the same 435 employers in the
benefit calculations under both contracts. However, some employer values under the CBO contract
changed because the contractor had received updates on plan design since our contract. The effect of
these changes on the benefit calculations was very small. For example, in programs with both DB and
DC plans, the average of the benefit amounts available from the DB plan portion changed from
23.4 percent of final salary in October 1995 to 23.0 percent in January 1997 for employees who retired
at age 55 with 30 years of service with a final salary of $60,000.
13
  Benefit Levels of Nonfederal Retirement Programs (GAO/GGD-85-30, Feb. 26, 1985).


Page 25                                 GAO/GGD-97-40 Federal and Private Retirement Benefits
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Introduction




Because the amounts of benefits employees can receive from DC plans are
determined in large part by the amounts they and their employers
contribute to the plans, we calculated replacement rates for benefits from
the FERS and private sector DC plans using the following three levels of
assumed employee contributions: (1) employees contributed amounts
necessary to receive maximum employer contributions, (2) employees
contributed amounts necessary to receive one-half of the maximum
employer contributions available, and (3) employees made no
contributions to their DC plans.

To examine the effects of cost-of-living adjustment practices that the
retirement programs provide to restore lost purchasing power, we also
calculated, in constant dollars, the replacement rates that would be
available after 10 and 20 years of retirement.14

The replacement rates presented in chapter 2 of this report are for five
illustrative employees at a final salary of $40,000. Appendix III shows the
results of the replacement rate analyses for these five employees if they
retired at the final salaries of $25,000, $40,000, and $60,000.

While the relative replacement rates available from federal and private
sector retirement programs for the five illustrative employees and salary
levels used in our analyses are meaningful measures of how the various
programs compare, they do not necessarily represent employees’ actual
experiences under the programs. For example, employees in CSRS and
FERS, on the average, are considerably older than age 55 when they retire.
In fiscal year 1995, employees retiring under CSRS’ optional retirement
provisions averaged age 62 with 30 years of service. Employees retiring
under FERS’ optional retirement provisions averaged age 63 with 14 years
of service.15 The contractor’s database did not contain information on the
ages at which employees choose to retire in the private sector programs.

In making the replacement-rate calculations, the contractor included the
benefit amounts from the defined benefit and defined contribution plans
to which employers made contributions as well as the amounts from


14
  Social Security, CSRS, and FERS benefits are to be adjusted annually to reflect cost-of-living
increases as measured by the annual change in the Consumer Price Index (CPI). In December 1996,
debate over the accuracy of the CPI expanded when the Senate Finance Committee’s advisory
commission concluded that the CPI is biased and overstates actual cost of living. However, among
economists there is a lack of consensus regarding the size and direction of the bias in the CPI.
15
  Because the majority of employees covered by FERS were first hired after 1983, the average years of
service for those retiring under FERS may not be an accurate indicator of the average length of service
for future FERS retirees.



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Introduction




Social Security. For private sector employers, the contractor made and
then averaged separate calculations for each of the 435 private sector
retirement programs. Therefore, the replacement rates presented
represent averages of the benefits available from all programs of the same
design. They do not represent the actual benefits that are available from
any individual employer’s retirement program. Rather, some programs will
provide replacement rates that are higher than the average, and other
programs will provide replacement rates that are lower than the average.

The benefit amounts calculated were based on a single set of assumptions
about salary histories, return on investments, the conversion of defined
contribution plan amounts at retirement to annuities, and the rate of
inflation after retirement. We had the contractor assume 4.5 percent
annual increases in long-term inflation and the CPI and a 7-percent annual
return on investments. These are the same assumptions the Office of
Personnel Management (OPM) used in its latest actuarial valuation of FERS
and CSRS. Because defined contribution plan benefits accumulate as
individual account balances, the contractor converted these balances to
life annuities using the 1983 Group Annuity Mortality table with a 3-year
age setback so they could be compared with the benefits provided by
defined benefit plans. We had the contractor assume that all of an
employee’s years of service were with the same employer who was the last
employer before retirement; and that, for Social Security benefit
calculations, employees had no earnings in the years before hire and after
retirement.

We also had the contractor assume that the salary histories for the
illustrative employees included base pay only so that they would have a
common compensation structure. Although base pay is generally the only
type of compensation used in FERS and CSRS to calculate benefit amounts,
at least one-half of the 435 programs in the contractor’s database included
base pay and other types of compensation, such as overtime pay, bonuses,
and commissions, in their benefit calculations. We did not include these
other types of compensation in the salary histories because (1) benefit
calculations for FERS and CSRS do not include them and (2) the contractor
did not collect data on the amounts of compensation, by type, that are
typically provided to employees covered by the programs in the database.
However, had we assumed the illustrative employees had other types of
compensation in addition to the base pay represented in the salary
histories, the replacement rates available from FERS and CSRS would have
remained the same and the averages of the replacement rates available
from the private sector programs could have increased. Also, had we



Page 27                      GAO/GGD-97-40 Federal and Private Retirement Benefits
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Introduction




assumed that the rate of salary growth in the last years of employees’
careers had been greater, the replacement rates available from FERS, CSRS,
and the private sector programs could have been smaller. However,
because FERS and CSRS use the average of the highest 3 years’ salaries in
their benefit calculations, while about one-half of the 435 private sector
programs use the highest 5 years’ salaries, the replacement rates available
from FERS and CSRS would not decrease as much as the private sector
replacement rates.

We believe these assumptions are reasonable because they either were
those used by OPM in its latest actuarial valuations, were based on
standards used in the benefits field, or were necessary to provide a
common basis of comparison. However, different assumptions would
change the relative magnitude of results between programs and the
absolute magnitude over all programs. It could also be possible in some
circumstances to change the relative rankings between programs. For
example, an assumed annual return of 9.5 percent, rather than 7.0 percent,
on DC plan investments could mean that a 30-percent increase in
replacement rates would be available from DC plans after 20 years of
service. Over 30 years, a 9.5 percent annual return could generate a
50-percent increase in DC plan benefits.

To calculate the benefit amounts 10 and 20 years after retirement, the
contractor needed estimates of the cost-of-living adjustments (COLA)
provided in the DB plan portion of private sector employers’ programs.
Wide variation exists in how COLAs are provided. The adjustments tend to
be ad hoc, and their size and frequency tend to vary by employer size. The
contractor routinely tracks COLAs given by 50 large companies, but neither
we nor the contractor are aware of any data sources that accurately track
COLAs given by private sector DB plans, overall. In the absence of more
complete data on DB plan COLAs in the private sector, we had the
contractor use the 50 companies’ COLA experiences to represent all private
sector DB plans in calculating replacement rates available from private
sector programs 10 and 20 years after retirement.

We limited the federal and private sector benefit comparisons presented in
this report to the benefits available to career employees under the
“optional” or “regular” retirement provisions of employers’ retirement
programs. Accordingly, we did not include the following in our
comparisons:




Page 28                      GAO/GGD-97-40 Federal and Private Retirement Benefits
    Chapter 1
    Introduction




•   other program provisions, such as early involuntary retirement, disability
    retirement, or survivor benefits;
•   special benefits that are available in FERS and CSRS, such as the benefits
    that are provided to Members of Congress and congressional staff, law
    enforcement officers and firefighters, and air traffic controllers;
•   extra benefits that private sector programs may provide to top executives;
    and
•   spousal or children’s benefits that may be paid by Social Security in
    addition to benefit amounts paid to retirees.

    Our findings may have been different if another private sector database
    had been used in the benefit comparisons because our contractor’s
    database could not be generalized to the private sector as a whole. Over
    one-half of the employers in the contractor’s database have 2,500 or more
    employees. A number of small employers are in the database, but not in
    proportion to their overall representation among private sector employers
    with retirement programs in 1993. About 99 percent of the employers with
    retirement programs in 1993 had fewer than 2,500 employees. Also, about
    24 percent of the employers in the contractor’s database had retirement
    programs that included DC plans only. In an earlier report, we described
    the retirement program designs of all U.S. private sector employers who
    offered pensions in 1993.16 Overall, a higher proportion (88 percent) of
    these employers sponsored only DC plans than the employers in the
    contractor’s database. However, the percentage of all employers with
    2,500 or more employees that sponsored both DB and DC plans increased
    from 1984 to 1993, and nearly one-half of the employers with 2,500 or more
    employees sponsored DB plans in 1993.

    We did our review in Washington, D.C., from October 1995 to January 1997
    in accordance with generally accepted government auditing standards. We
    requested comments on a draft of this report from Watson Wyatt
    Worldwide and the heads of OPM and the Federal Retirement Thrift
    Investment Board (the Thrift Board) or their designees. The Research
    Actuary of Watson Wyatt’s Research and Information Center in
    Washington, D.C., and the Thrift Board’s Director of External Affairs
    provided us with oral comments. The Director of the Office of Personnel
    Management provided written comments. Both the oral and written
    comments are presented and evaluated in the executive summary and
    chapter 4. The OPM comments are reprinted in appendix VI.



    16
     Private Pensions: Most Employers That Offer Pensions Use Defined Contribution Plans
    (GAO/GGD-97-1, Oct. 3, 1996).



    Page 29                              GAO/GGD-97-40 Federal and Private Retirement Benefits
Chapter 2

Comparative Benefit Levels Available From
FERS, CSRS, and Private Sector Retirement
Programs
              The comparative benefit amounts available to employees in FERS and CSRS
              and the average benefit amounts available from the retirement programs in
              the contractor’s private sector database can differ considerably, depending
              on a number of factors and how these factors interact with the retirement
              programs’ designs. These factors include (1) the ages at which employees
              retire and at which programs provide unreduced benefits, (2) the extent to
              which employees and employers contribute to the DC plans that are
              integral components of FERS and most private sector programs, and (3) the
              impact of inflation and cost-of-living adjustments provided through the
              retirement programs. In general, when employees retire before age 62, the
              largest benefits are available from FERS and the smallest benefits are
              available from the private sector programs. The benefits available from
              CSRS fall between those available from FERS and the private sector
              programs.

              However, the comparative benefits are quite different for employees who
              retire at age 62 or older. For retirees at these older ages, FERS continues to
              make the largest benefits available, but these benefits are just slightly
              more than the average for private sector programs that, like FERS, include
              both DB and DC plans. The benefits that are available at age 62 or older
              from the private sector programs that include DB or DC plans only are quite
              similar, but these benefits are smaller than the benefits available from FERS
              and the average benefits available from the private sector programs that
              include both DB and DC plans.

              CSRS benefits for employees retiring at age 62 or older with 20 years of
              service are smaller than FERS benefits and the average benefits available
              from private sector programs, regardless of program design because
              (1) CSRS benefits are the same for specific years of service, regardless of
              age, and (2) CSRS-covered employees receive no Social Security benefits
              from their federal employment. For employees who retire at age 62 or
              older with 30 years of service, CSRS benefits are still smaller than the
              benefits available from FERS and the private sector programs that include
              both DB and DC plans, but the CSRS benefits become similar to the benefits
              available from private sector programs with DB or DC plans only.

              The level at which employees contribute to their DC plans is a significant
              factor in determining the benefits that are available from FERS and the
              private sector programs that incorporate DC plans. Considerably smaller
              benefits are available from such programs when employees contribute
              lesser amounts than are necessary to receive maximum employer
              contributions.



              Page 30                       GAO/GGD-97-40 Federal and Private Retirement Benefits
                       Chapter 2
                       Comparative Benefit Levels Available From
                       FERS, CSRS, and Private Sector Retirement
                       Programs




                       In this chapter, we present the replacement rates available from FERS, CSRS,
                       and private sector programs for five illustrative employees who are (1) age
                       55 with 30 years of service, (2) age 62 with 20 years of service, (3) age 65
                       with 20 years of service, (4) age 62 with 30 years of service, and (5) age 65
                       with 30 years of service and who retire with a final salary of $40,000.
                       Unless otherwise indicated, the replacement rates are calculated using the
                       assumption that employees in FERS and the private sector programs that
                       include DC plans contributed amounts that are necessary to receive
                       maximum employer contributions to their DC plans. However, separate
                       replacement-rate calculations are also presented for each illustrative
                       employee to show the effects of lower amounts of employee contributions
                       to DC plans. The effects of cost-of-living adjustment practices on
                       retirement program replacement rates after 10 and 20 years of retirement
                       are also analyzed in this chapter.


                       With a replacement rate of 65 percent, FERS ranks first in a comparison of
Comparative            available benefits for employees who retire at age 55 with 30 years of
Replacement Rates at   service. CSRS is second with a replacement rate of 53 percent for
Retirement             employees who retire at age 55 with 30 years of service, and the average of
                       private sector programs with both DB and DC plans in the contractor’s
                       database is third with a 45-percent replacement rate. The private sector
                       programs that have DB or DC plans only have available benefits averaging
                       less than 30 percent of final salary. (See fig. 2.1.)

                       The availability of unreduced DB plan benefits in FERS and CSRS for
                       employees retiring at age 55 with 30 years of service is an advantage over
                       most DB plans in the private sector because private sector plans usually
                       impose reductions in accrued benefits for employees retiring at age 55,
                       regardless of their number of years of service. Moreover, Social Security
                       retirement benefits are not available to private sector retirees until they
                       reach age 62, whereas the FERS’ DB plan provides an annuity supplement
                       equal to the estimated Social Security benefits that a retiree earned while
                       employed by the federal government and that the retiree could receive at
                       age 62.1




                       1
                        The FERS annuity supplement ends when the retiree reaches age 62 and his or her actual Social
                       Security payments can begin.



                       Page 31                               GAO/GGD-97-40 Federal and Private Retirement Benefits
                                        Chapter 2
                                        Comparative Benefit Levels Available From
                                        FERS, CSRS, and Private Sector Retirement
                                        Programs




Figure 2.1: Average Replacement
Rates Available for Employees Who       100 Percentage of final salary
Retire at Age 55 With 30 Years of
Service and a Final Salary of $40,000    90

                                         80

                                         70

                                         60

                                         50

                                         40

                                         30

                                         20

                                         10

                                          0


                                               DB plans       DC plans     DB and      FERS          CSRS
                                               only           only         DC plans
                                               Program design


                                                          DC plan or TSP

                                                          DB plan



                                        Note 1: Social Security retirement benefits are not available at age 55. Retirees may elect to begin
                                        benefits at age 62.

                                        Note 2: The FERS’ DB plan provides an annuity supplement until the retiree reaches age 62. The
                                        supplement equals the estimated Social Security benefits that are payable at age 62 and earned
                                        while the retiree was employed by the federal government.

                                        Note 3: The percentages shown were calculated using the assumption that the employee
                                        contributed the percentage of salary that is necessary to obtain the maximum employer-matching
                                        contributions.

                                        Source: Watson Wyatt Worldwide database (see table III.1).




                                        Because Social Security retirement benefits are available to retirees in
                                        FERS and the private sector programs at age 62 or older, the relative
                                        positions of the federal and private sector programs, in terms of
                                        replacement rates, change at age 62. Specifically, when the employee
                                        retires at age 62 with 20 years of service, FERS is no longer the dominant
                                        program, and CSRS drops from the second position to the last position. The
                                        FERS replacement rate of 66 percent is higher than the 63-percent average




                                        Page 32                                GAO/GGD-97-40 Federal and Private Retirement Benefits
                                        Chapter 2
                                        Comparative Benefit Levels Available From
                                        FERS, CSRS, and Private Sector Retirement
                                        Programs




                                        replacement rate of the private sector programs with both DB and DC plans.
                                        Private sector programs that include either a DB plan or a DC plan, but not
                                        both, have available replacement rates of about 40 percent, which is higher
                                        than the CSRS rate of 36 percent. (See fig. 2.2.)


Figure 2.2: Average Replacement
Rates Available for Employees Who         100 Percentage of final salary
Retire at Age 62 With 20 Years of
Service and a Final Salary of $40,000      90

                                           80

                                           70

                                           60

                                           50

                                           40

                                           30

                                           20

                                           10

                                            0


                                                  DB plans       DC plans      DB and     FERS       CSRS
                                                  only           only          DC plans
                                                  Program design


                                                             Social Security

                                                             DC plan or TSP

                                                             DB plan



                                        Note: The percentages shown were calculated using the assumption that the employee
                                        contributed the percentage of salary that is necessary to obtain the maximum employer-matching
                                        contributions.

                                        Source: Watson Wyatt Worldwide database (see table III.2).




                                        When an employee retires at age 65 with 20 years of service, the relative
                                        positions of the programs, in terms of replacement rates, are the same as
                                        at age 62, but the available replacement rates for all programs, except CSRS,
                                        are higher than at age 62. At age 65, replacement rates available to
                                        employees under FERS and the average of the private sector programs with



                                        Page 33                                   GAO/GGD-97-40 Federal and Private Retirement Benefits
Chapter 2
Comparative Benefit Levels Available From
FERS, CSRS, and Private Sector Retirement
Programs




both DB and DC plans are almost the same, 71.1 and 70.5 percent,
respectively. For private sector programs with either a DB or DC plan, the
average available replacement rate increases to almost 50 percent. The
CSRS replacement rate remains the same at 36 percent. (See fig. 2.3.)


Several factors cause replacement rates for FERS and private sector
programs, on average, to increase between the ages of 62 and 65. Social
Security benefits are reduced for employees who retire before age 65.
Similarly, some private sector DB plans impose reductions in accrued
benefits when employees retire before age 65. Finally, DC plan benefit
amounts are larger at age 65 because account balances are paid out over
shorter periods when employees retire at older ages. These factors do not
apply to CSRS because (1) CSRS benefit amounts are not determined by
employees’ ages upon retirement at age 55 or older, (2) CSRS employees
are not covered by Social Security through their federal employment, and
(3) CSRS employees do not receive any employer-paid DC plan benefits.
Therefore, after age 55, CSRS replacement rates are the same for all
employees with the same years of service, regardless of the ages at which
they retire.




Page 34                          GAO/GGD-97-40 Federal and Private Retirement Benefits
                                        Chapter 2
                                        Comparative Benefit Levels Available From
                                        FERS, CSRS, and Private Sector Retirement
                                        Programs




Figure 2.3: Average Replacement
Rates Available for Employees Who           100 Percentage of final salary
Retire at Age 65 With 20 Years of
Service and a Final Salary of $40,000        90

                                             80

                                             70

                                             60

                                             50

                                             40

                                             30

                                             20

                                             10

                                              0


                                                   DB plans       DC plans      DB and      FERS          CSRS
                                                   only           only          DC plans
                                                   Program design


                                                              Social Security

                                                              DC plan or TSP

                                                              DB plan



                                        Note: The percentages shown were calculated using the assumption that the employee
                                        contributed the percentage of salary that is necessary to obtain the maximum employer-matching
                                        contributions.

                                        Source: Watson Wyatt Worldwide database (see table III.3).




                                        When an employee retires at age 62 or older with 30 years of service, the
                                        relative positions of the federal and private sector programs, in terms of
                                        replacement rates, change again. FERS and the private sector programs that
                                        include both DB and DC plans remain in the top two positions, but CSRS is
                                        no longer in the last position. The CSRS replacement rate moves just ahead
                                        of the averages of the replacement rates available from programs with DB
                                        or DC plans only. Some of the change in the CSRS position is due to the
                                        graduated accrual rates used for calculating benefit amounts under CSRS.2


                                        2
                                         The accrual rates used to calculate the CSRS benefit amounts for general employees are 1.5 percent
                                        for each of the first 5 years of service, 1.75 percent for each of the next 5 years, and 2 percent for each
                                        year of service over 10 years.



                                        Page 35                                    GAO/GGD-97-40 Federal and Private Retirement Benefits
                                        Chapter 2
                                        Comparative Benefit Levels Available From
                                        FERS, CSRS, and Private Sector Retirement
                                        Programs




                                        For a 30-year career, 20 years are calculated at the highest rate; while for a
                                        20-year career, only 10 years are calculated at the highest rate. Therefore,
                                        a 30-year career under CSRS yields a greater benefit than does a 20-year
                                        career.

                                        When the employee retires at age 62 with 30 years of service, CSRS has a
                                        replacement rate of 53 percent; while the averages of the replacement
                                        rates for the DB and DC plans only programs are about 50 percent. The FERS’
                                        replacement rate and the averages of rates from the private sector
                                        programs that have both DB and DC plans are 81 and 75 percent,
                                        respectively, when the employee retires at age 62 with 30 years of service.
                                        (See fig 2.4.)


Figure 2.4: Average Replacement
Rates Available for Employees Who         100 Percentage of final salary
Retire at Age 62 With 30 Years of
Service and a Final Salary of $40,000      90

                                           80

                                           70

                                           60

                                           50

                                           40

                                           30

                                           20

                                           10

                                            0


                                                  DB plans       DC plans      DB and     FERS       CSRS
                                                  only           only          DC plans
                                                  Program design


                                                             Social Security

                                                             DC plan or TSP

                                                             DB plan



                                        Note: The percentages shown were calculated using the assumption that the employee
                                        contributed the percentage of salary that is necessary to obtain the maximum employer-matching
                                        contributions.

                                        Source: Watson Wyatt Worldwide database (see table III.4).




                                        Page 36                                   GAO/GGD-97-40 Federal and Private Retirement Benefits
                                        Chapter 2
                                        Comparative Benefit Levels Available From
                                        FERS, CSRS, and Private Sector Retirement
                                        Programs




                                        At age 65 with 30 years of service, the replacement rates available to
                                        employees under CSRS and the averages of the replacement rates for the
                                        private sector programs with DB or DC plans only are within 5 percentage
                                        points of each other, ranging from 53 to 58 percent. The replacement rate
                                        for employees retiring at age 65 with 30 years of service under FERS is
                                        87 percent, and the average of the rates for private sector programs that
                                        include both DB and DC plans is 82 percent. (See fig. 2.5.)


Figure 2.5: Average Replacement
Rates Available for Employees Who         100 Percentage of final salary
Retire at Age 65 With 30 Years of
Service and a Final Salary of $40,000      90

                                           80

                                           70

                                           60

                                           50

                                           40

                                           30

                                           20

                                           10

                                            0


                                                  DB plans       DC plans      DB and     FERS       CSRS
                                                  only           only          DC plans
                                                  Program design


                                                             Social Security

                                                             DC plan or TSP

                                                             DB plan



                                        Note: The percentages shown were calculated using the assumption that the employee
                                        contributed the percentage of salary that is necessary to obtain the maximum employer-matching
                                        contributions.

                                        Source: Watson Wyatt Worldwide database (see table III.5).




                                        Page 37                                   GAO/GGD-97-40 Federal and Private Retirement Benefits
                            Chapter 2
                            Comparative Benefit Levels Available From
                            FERS, CSRS, and Private Sector Retirement
                            Programs




                            Just as differences exist in the levels of benefits provided by various
Relationship of             retirement programs, differences also exist among programs in the
Employee                    amounts employees must contribute toward program costs. In general, to
Contributions to            receive the replacement rates discussed above, CSRS and the private sector
                            programs that include Social Security and DB plans only require the
Retirement Program          smallest employee contributions. FERS and the private sector programs
Benefits                    that include DC plans, regardless of whether a DB plan is also provided,
                            require the greatest employee contributions to receive maximum employer
                            contributions to their program benefits.

                            The amounts that employees contribute to the FERS and private sector DC
                            plans are critical factors in determining the benefit amounts employees
                            can receive from the overall retirement programs. Employees who
                            contribute the amounts that are necessary to receive maximum employer
                            contributions to DC plans will receive greater benefits at retirement than
                            those employees who elect not to contribute to the DC plan or those
                            employees who contribute smaller amounts.


Effects of Equalizing       Most employees in CSRS are required to contribute 7 percent of their
Employee Contributions to   salaries toward program costs. Employees in FERS also generally
FERS, CSRS, and Private     contribute a total of 7 percent of their salaries to Social Security and the
                            FERS’ DB plan (i.e., 6.2 percent to Social Security and 0.8 percent to the DB
Sector Retirement           plan). Private sector employees contribute 6.2 percent of their salaries to
Programs That Include       Social Security, but virtually all of the programs in the contractor’s
Both DB and DC Plans        database with DB plans did not require employee contributions toward DB
                            plan costs.

                            In the FERS’ DC plan—the TSP—employees must contribute 5 percent of
                            their salaries to receive the maximum available employer contributions to
                            their accounts. Accordingly, to obtain the greatest available benefits from
                            FERS, employees must contribute a total of 12 percent of their salaries.
                            Employees in private sector programs that include DC plans must also
                            generally contribute about 12 percent of their salaries to receive the
                            greatest benefits available from their programs. These employees must
                            contribute 6.2 percent of their salaries to Social Security, and, according to
                            the contractor, typically must contribute 6 percent of their salaries to
                            receive maximum employer contributions to their DC plans.

                            Employees in CSRS can, by law, contribute up to 5 percent of their salaries
                            to the TSP with no employer-matching contributions. Therefore, CSRS
                            employees who contribute 5 percent of their salaries to the TSP would



                            Page 38                          GAO/GGD-97-40 Federal and Private Retirement Benefits
Chapter 2
Comparative Benefit Levels Available From
FERS, CSRS, and Private Sector Retirement
Programs




contribute a total of 12 percent of salary to their retirement program, just
as the employees in FERS and private sector programs that include DC
plans. To show the effects of employee contributions on replacement rates
if employees in FERS, CSRS, and private sector programs that include both
DB and DC plans were all to contribute approximately 12 percent of their
salaries to their retirement programs, figures 2.6 through 2.10 reflect the
comparative replacement rates that would be available to these
employees.3 As the figures show, the replacement rate available to CSRS
employees who retire at age 55 with 30 years of service would be quite
similar to the FERS replacement rate, but considerably higher than the
average replacement rate available from private sector programs that
include both DC and DB plans. However, even with employee contributions
of 12 percent of salary, the CSRS replacement rates for employees who
retire at ages 62 and 65 with 20 or 30 years of service would be lower than
FERS and the private sector programs that include both DB and DC plans.




3
 The percentage of salary contributed is exactly 12 percent for FERS and CSRS employees and
averages 12.2 percent for private sector employees in programs with both DB and DC plans.



Page 39                               GAO/GGD-97-40 Federal and Private Retirement Benefits
                                       Chapter 2
                                       Comparative Benefit Levels Available From
                                       FERS, CSRS, and Private Sector Retirement
                                       Programs




Figure 2.6: Comparative Average
Replacement Rates Available When         100 Percentage of final salary
Employees Contribute 12 Percent of
Their Salaries and Retire at Age 55       90
With 30 Years of Service and a Final      80
Salary of $40,000
                                          70

                                          60

                                          50

                                          40

                                          30

                                          20

                                          10

                                           0


                                                 DB and         FERS         CSRS
                                                 DC plans
                                                 Program design


                                                            DC plan or TSP

                                                            DB plan



                                       Note 1: Social Security retirement benefits are not available at age 55. Retirees may elect to begin
                                       benefits at age 62.

                                       Note 2: The percentages shown were calculated using the assumption that the employee
                                       contributed the percentage of salary that is necessary to obtain the maximum employer-matching
                                       contributions.

                                       Sources: Watson Wyatt Worldwide database (see table III.1) and GAO analysis.




                                       Page 40                                 GAO/GGD-97-40 Federal and Private Retirement Benefits
                                       Chapter 2
                                       Comparative Benefit Levels Available From
                                       FERS, CSRS, and Private Sector Retirement
                                       Programs




Figure 2.7: Comparative Average
Replacement Rates Available When        100 Percentage of final salary
Employees Contribute 12 Percent of
Their Salaries and Retire at Age 62       90
With 20 Years of Service and a Final      80
Salary of $40,000
                                          70

                                          60

                                          50

                                          40

                                          30

                                          20

                                          10

                                           0


                                                 DB and         FERS          CSRS
                                                 DC plans
                                                 Program design


                                                            Social Security

                                                            DC plan or TSP

                                                            DB plan



                                       Note: The percentages shown were calculated using the assumption that the employee
                                       contributed the percentage of salary that is necessary to obtain the maximum employer-matching
                                       contributions.

                                       Sources: Watson Wyatt Worldwide database (see table III.2) and GAO analysis.




                                       Page 41                                  GAO/GGD-97-40 Federal and Private Retirement Benefits
                                       Chapter 2
                                       Comparative Benefit Levels Available From
                                       FERS, CSRS, and Private Sector Retirement
                                       Programs




Figure 2.8: Comparative Average
Replacement Rates Available When        100 Percentage of final salary
Employees Contribute 12 Percent of
Their Salaries and Retire at Age 65       90

With 20 Years of Service and a Final      80
Salary of $40,000
                                          70

                                          60

                                          50

                                          40

                                          30

                                          20

                                          10

                                           0


                                                 DB and         FERS          CSRS
                                                 DC plans
                                                 Program design


                                                            Social Security

                                                            DC plan or TSP

                                                            DB plan



                                       Note: The percentages shown were calculated using the assumption that the employee
                                       contributed the percentage of salary that is necessary to obtain the maximum employer-matching
                                       contributions.

                                       Sources: Watson Wyatt Worldwide database (see table III.3) and GAO analysis.




                                       Page 42                                  GAO/GGD-97-40 Federal and Private Retirement Benefits
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                                       Comparative Benefit Levels Available From
                                       FERS, CSRS, and Private Sector Retirement
                                       Programs




Figure 2.9: Comparative Average
Replacement Rates Available When         100 Percentage of final salary
Employees Contribute 12 Percent of
Their Salaries and Retire at Age 62       90
With 30 Years of Service and a Final      80
Salary of $40,000
                                          70

                                          60

                                          50

                                          40

                                          30

                                          20

                                          10

                                           0


                                                 DB and         FERS          CSRS
                                                 DC plans
                                                 Program design


                                                            Social Security

                                                            DC plan or TSP

                                                            DB plan



                                       Note: The percentages shown were calculated using the assumption that the employee
                                       contributed the percentage of salary that is necessary to obtain the maximum employer-matching
                                       contributions.

                                       Sources: Watson Wyatt Worldwide database (see table III.4) and GAO analysis.




                                       Page 43                                  GAO/GGD-97-40 Federal and Private Retirement Benefits
                                       Chapter 2
                                       Comparative Benefit Levels Available From
                                       FERS, CSRS, and Private Sector Retirement
                                       Programs




Figure 2.10: Comparative Average
Replacement Rates Available When        100 Percentage of final salary
Employees Contribute 12 Percent of
Their Salaries and Retire at Age 65       90
With 30 Years of Service and a Final      80
Salary of $40,000
                                          70

                                          60

                                          50

                                          40

                                          30

                                          20

                                          10

                                           0


                                                 DB and         FERS          CSRS
                                                 DC plans
                                                 Program design


                                                            Social Security

                                                            DC plan or TSP

                                                            DB plan



                                       Note: The percentages shown were calculated using the assumption that the employee
                                       contributed the percentage of salary that is necessary to obtain the maximum employer-matching
                                       contributions.

                                       Sources: Watson Wyatt Worldwide database (see table III.5) and GAO analysis.




Effects of Employee                    Whether comparisons are made of the replacement rates available solely
Contribution Rates on DC               from DC plans or the replacement rates available from all plans that are
Plan Benefits                          part of the retirement programs (i.e., Social Security, DB plans, and/or DC
                                       plans), the amounts that employees contribute to DC plans significantly
                                       affect replacement rates and can affect which retirement program
                                       provides the highest replacement rate.

                                       Table 2.1 illustrates the effects of employee contribution amounts on DC
                                       plan benefits. The table shows the comparative average replacement rates
                                       that are available from FERS’ TSP and the private sector DC plans in the
                                       contractor’s database when employees (1) contribute amounts that are
                                       sufficient to receive maximum employer contributions, (2) contribute



                                       Page 44                                  GAO/GGD-97-40 Federal and Private Retirement Benefits
                                              Chapter 2
                                              Comparative Benefit Levels Available From
                                              FERS, CSRS, and Private Sector Retirement
                                              Programs




                                              amounts that are sufficient to receive one-half of the maximum employer
                                              contributions available, and (3) make no contributions to their DC plans.
                                              The amounts that employees contribute to their DC plans have a major
                                              influence on the benefits they could receive from their DC plans. For
                                              example, employees retiring at age 62 with 30 years of service under FERS
                                              could expect to receive annual benefits of about 30 percent of their final
                                              salary from their TSP accounts if they had received the maximum employer
                                              contributions by contributing 5 percent of their salary to the TSP
                                              throughout their 30-year career. This amount would be 10 times greater
                                              than the 3 percent of final salary they could expect to receive from TSP if
                                              they had made no contributions to their TSP accounts.


Table 2.1: Average Replacement Rates Available From the FERS’ TSP and the Private Sector DC Plans at Varying Amounts
of Employee Contributions
Numbers in percent
                                                                                    Average DC plan replacement rates
                                                                Employees contribute Employees contribute
                                                                  amounts to receive   amounts to receive
                                                                 maximum employer       one-half maximum                   Employees make no
Program design                                                                match       employer match                        contributions
Age 55 with 30 years of service and $40,000 final salary:
Private sector, DC plans only                                                         26.0                        16.3                    6.3
Private sector, both DB and DC plans                                                  24.1                        13.3                    2.1
FERS’ TSP                                                                             27.2                        16.3                    2.8
Age 62 with 20 years of service and $40,000 final salary:
Private sector, DC plans only                                                         23.7                        14.9                    5.7
Private sector, both DB and DC plans                                                  22.0                        12.2                    1.9
FERS’ TSP                                                                             24.8                        14.9                    2.5
Age 65 with 20 years of service and $40,000 final salary:
Private sector, DC plans only                                                         25.2                        15.8                    6.1
Private sector, both DB and DC plans                                                  23.5                        12.9                    2.0
FERS’ TSP                                                                             26.4                        15.9                    2.7
Age 62 with 30 years of service and $40,000 final salary:
Private sector, DC plans only                                                         29.8                        18.6                    7.3
Private sector, both DB and DC plans                                                  26.2                        14.3                    1.8
FERS’ TSP                                                                             30.4                        18.2                    3.1
Age 65 with 30 years of service and $40,000 final salary:
Private sector, DC plans only                                                         31.7                        19.8                    7.8
Private sector, both DB and DC plans                                                  27.9                        15.2                    1.9
FERS’ TSP                                                                             32.4                        19.4                    3.3
                                              Source: Watson Wyatt Worldwide database (see tables III.1 through III.15).




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To show the effects of employee contributions to DC plans on the total
replacement rates available from all parts (i.e., Social Security, DB plans,
and/or DC plans) of the federal and private sector retirement programs,
figures 2.11 through 2.15 show the total retirement program average
replacement rates available at each of the three levels of contributions to
DC plans.3 The replacement rates decline with reduced levels of employee
contributions in all programs that include DC plans.

When employees retire at age 55 with 30 years of service, CSRS’
replacement rate is higher than the replacement rates for all other
programs in the comparison, regardless of the amounts employees
contribute to the DC plans, except for FERS employees who contribute at
least one-half of the amount required to receive maximum employer
contributions to the TSP. (See fig. 2.11.)




3
 The comparisons shown in figures 2.11 through 2.15 do not include any employee contributions to the
FERS’ TSP for CSRS employees because the government does not match their TSP contributions. The
comparisons also do not include any additional contributions that FERS or private sector employees
could make to their DC plans and that would not be matched by their employers.



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                                         Programs




Figure 2.11: Effect of Employee
Contributions on Average                 100   Percentage of final salary
Replacement Rates Available When
                                          90
Employees Retire at Age 55 With 30
Years of Service and a Final Salary of    80
$40,000
                                          70

                                          60

                                          50

                                          40

                                          30

                                          20

                                          10

                                           0

                                                 DB plans only        DC plans only      DB and DC           FERS                CSRS
                                                                                         plans
                                                 Program design



                                                          Maximum match

                                                          One-half match

                                                          No employee contributions



                                         Note 1: Social Security retirement benefits are not available at age 55. Retirees may elect to begin
                                         benefits at age 62.

                                         Note 2: These bars include the benefits gained from any DB or DC plans to which the employer
                                         contributes.

                                         Source: Watson Wyatt Worldwide database (see tables III.1, III.6, and III.11).




                                         When employees retire at ages 62 and 65 with 20 years of service, the other
                                         programs, even if covered employees made no contributions to their DC
                                         plans, generally provide higher replacement rates than CSRS. The only
                                         average replacement rates when employees retire at ages 62 and 65 with
                                         20 years of service that are lower than the CSRS replacement rate are those
                                         rates that occur in private sector programs with DC plans only when
                                         employees did not make maximum contributions to their DC plans. FERS’
                                         replacement rates when employees retire at ages 62 and 65 with 20 years
                                         of service are comparable to the replacement rates available from private




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                                         Programs




                                         sector programs with both DB and DC plans at all three levels of employee
                                         contributions. However, employees in private sector programs with DC
                                         plans only must make maximum contributions to their plans to receive
                                         replacement rates at ages 62 and 65 that are comparable to the FERS’
                                         replacement rate with no employee contributions to the TSP. (See figs. 2.12
                                         and 2.13.)


Figure 2.12: Effect of Employee
Contributions on Average                 100   Percentage of final salary
Replacement Rates Available When
                                          90
Employees Retire at Age 62 With 20
Years of Service and a Final Salary of    80
$40,000
                                          70

                                          60

                                          50

                                          40

                                          30

                                          20

                                          10

                                           0

                                                 DB plans only        DC plans only      DB and DC           FERS            CSRS
                                                                                         plans
                                                 Program design



                                                          Maximum match

                                                          One-half match

                                                          No employee contributions



                                         Note: These bars include the benefits gained from Social Security and any DB or DC plans to
                                         which the employer contributes.

                                         Source: Watson Wyatt Worldwide database (see tables III.2, III.7, and III.12).




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                                         Programs




Figure 2.13: Effect of Employee
Contributions on Average                 100   Percentage of final salary
Replacement Rates Available When
                                          90
Employees Retire at Age 65 With 20
Years of Service and a Final Salary of    80
$40,000
                                          70

                                          60

                                          50

                                          40

                                          30

                                          20

                                          10

                                           0

                                                 DB plans only        DC plans only      DB and DC           FERS            CSRS
                                                                                         plans
                                                 Program design



                                                          Maximum match

                                                          One-half match

                                                          No employee contributions



                                         Note: These bars include the benefits gained from Social Security and any DB or DC plans to
                                         which the employer contributes.

                                         Source: Watson Wyatt Worldwide database (see tables III.3, III.8, and III.13).




                                         When employees retire at ages 62 and 65 with 30 years of service, the
                                         replacement rates available under FERS and the average of the private
                                         sector programs that have both DB and DC plans are similar at all three
                                         levels of employee contributions as they were with 20 years of service. The
                                         relative position of the CSRS replacement rate at 30 years of service has
                                         improved. CSRS now provides a replacement rate that is similar to (1) the
                                         averages of the replacement rates available from the private sector
                                         programs with DB plans only, (2) programs with DC plans only when
                                         employees make the contributions that are needed to receive the
                                         maximum employer match, and (3) FERS and private sector programs that
                                         have both DB and DC plans when the employees make no contributions to




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                                         Programs




                                         their plans. CSRS has a higher replacement rate than private sector DC plans
                                         only programs when employees contribute less than the amounts needed
                                         to get the maximum employer match. However, CSRS’ replacement rate
                                         remains behind the rates available from FERS and private sector programs
                                         that have DB and DC plans as long as the FERS and private sector employees
                                         make some contributions to their DC plans. (See figs. 2.14 and 2.15.)


Figure 2.14: Effect of Employee
Contributions on Average                 100   Percentage of final salary
Replacement Rates Available When
                                          90
Employees Retire at Age 62 With 30
Years of Service and a Final Salary of    80
$40,000
                                          70

                                          60

                                          50

                                          40

                                          30

                                          20

                                          10

                                           0

                                                 DB plans only        DC plans only      DB and DC           FERS            CSRS
                                                                                         plans
                                                 Program design



                                                          Maximum match

                                                          One-half match

                                                          No employee contributions



                                         Note: These bars include the benefits gained from Social Security and any DB or DC plans to
                                         which the employer contributes.

                                         Source: Watson Wyatt Worldwide database (see tables III.4, III.9, and III.14).




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Figure 2.15: Effect of Employee
Contributions on Average                 100      Percentage of final salary
Replacement Rates Available When
                                             90
Employees Retire at Age 65 With 30
Years of Service and a Final Salary of       80
$40,000
                                             70

                                             60

                                             50

                                             40

                                             30

                                             20

                                             10

                                              0

                                                    DB plans only        DC plans only     DB and DC           FERS                 CSRS
                                                                                           plans
                                                    Program design



                                                             Maximum match

                                                             One-half match

                                                             No employee contributions



                                         Note: These bars include the benefits gained from Social Security and any DB or DC plans to
                                         which the employer contributes.

                                         Source: Watson Wyatt Worldwide database (see tables III.5, III.10, and III.15).



                                         After retirement benefits begin, inflation will erode the purchasing power
Impact of                                of these benefits unless they are maintained by COLAs.5 By law, the Social
Cost-of-Living                           Security portion of FERS and private sector retirement programs is adjusted
Adjustment Practices                     each year. Social Security retirement benefits are increased each year by
                                         the percentage increase in the CPI, which is used for inflation adjustment
on Long-Term                             purposes. However, in the DB plan portion of private sector employers’
Replacement Rates                        programs, wide variation exists in how COLAs are provided. The
                                         adjustments tend to be ad hoc, and their size and frequency tend to vary by
                                         employer size. The contractor we used routinely tracks the COLAs given by
                                         50 large companies, but neither we nor the contractor are aware of any
                                         data sources that accurately track COLAs given by private sector DB plans,

                                         5
                                          By their nature, the TSP and private sector DC plan benefits are not subject to cost-of-living
                                         adjustments.



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overall. Using COLA data from the 50 companies, the contractor determined
that employees who retired from the companies in 1985, had received, on
average, a 4-percent benefit increase by 1994. These cumulative COLAs
offset about 10 percent of the CPI increase during the 10-year period. For
employees who retired in 1975, cumulative COLAs averaging 30 percent
were given, which was about 15 percent of the CPI increase during the
20-year period from 1975 to 1994. In the absence of more complete data on
DB plan COLAs, we used the 50 companies’ COLA experiences to represent all
private sector DB plans in calculating replacement rates available from
private sector programs 10 and 20 years after retirement.

FERS does not always provide full COLAs in its DB plan. COLAs for
nondisabled FERS retirees are not paid until retirees reach age 62. When
paid, the COLAs are equal to the annual increase in the CPI if the price
increase is 2 percent or less. The adjustment is 2 percent if the CPI increase
is between 2 and 3 percent. If the CPI increase is 3 percent or greater, the
adjustment is equal to the CPI increase minus 1 percent.

Like Social Security, the law calls for CSRS benefits to be adjusted annually
by the percentage increase in the CPI. However, since 1980, several
legislative provisions have often reduced, delayed, or skipped the
scheduled CSRS COLAs. For example, in 1983, the CSRS COLA was delayed 1
month and was less than the increase in the CPI for nondisabled retirees
under age 62; the 1984 COLA was delayed for 9 months; in 1986, the
President and Congress decided not to grant any COLAs to federal retirees
that year; and in fiscal years 1994, 1995, and 1996, the COLA payments were
delayed until April of each of those years instead of the scheduled January
payment dates.6 In 1995, we reported that the CSRS COLA delays and
reductions during the 10-year period from 1985 to 1994 had caused the
COLAs to cover about 80 percent of the CPI increase for the period.7 In
figures 2.16 through 2.20, the bars labeled CSRS I represent the statutory
policy of full adjustments for CSRS, and the bars labeled CSRS II represent
the actual COLA practices during 1985 through 1994 when 80 percent of the
CPI increase was covered.


Because of the full COLAs provided for CSRS I, its replacement rates remain
the same in constant dollars, regardless of the length of retirement. In
contrast, the replacement rates available from FERS and private sector
programs decline in constant dollars during retirement because only the
Social Security portion of these programs is fully adjusted. Similarly, the

6
 The COLA delays in 1994, 1995, and 1996 also applied to FERS retirees.
7
 Overview of Federal Retirement Programs (GAO/T-GGD-95-172, May 22, 1995).



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limitations on COLAs under CSRS II cause retirees to lose purchasing power,
or receive declining replacement rates, during their retirement years.

While FERS makes greater immediate benefits available than CSRS when
employees retire at age 55 with 30 years of service, FERS’ smaller COLAs8
cause its replacement rate to fall behind the CSRS I replacement rate after
20 years of retirement (i.e., the effective FERS replacement rate is
65 percent at retirement, declines to 57 percent after 10 years, and further
declines to 49 percent after 20 years in comparison to the constant CSRS I
replacement rate of 53 percent at retirement and thereafter). However, the
FERS replacement rates for age 55 retirees with 30 years of service continue
to exceed the average replacement rates for private sector programs in the
contractor’s database, with both DB and DC plans that start at 45 percent,
increase to 49 percent after 10 years (because of the addition of Social
Security retirement benefits at age 62), and decrease to 39 percent after 20
years of retirement.9 The FERS replacement rate does not show an increase
at 10 years after retirement because the FERS annuity supplement ceases at
age 62 when Social Security retirement benefits are available. The FERS
replacement rate for employees who retire at age 55 with 30 years of
service also exceeds the CSRS II replacement rate after 20 years of
retirement because, together, the FERS’ higher replacement rate at
retirement and the increases provided by COLAs in the FERS’ DB plan and
Social Security keep its replacement rate just above CSRS II with its COLA
that covers 80 percent of the increase in the CPI.




8
 In our analysis, we assumed the rate of inflation and increase in the CPI to be 4.5 percent each year,
so the FERS COLA is 3.5 percent, which is smaller than the CSRS COLA of 4.5 percent. If the rate of
inflation is 2 percent or less, then the FERS and CSRS COLAs would be the same.
9
 Because the private sector programs with DB plans only were so few in number, the contractor did
not calculate their effective replacement rates 10 and 20 years after retirement. Also, the COLA
information available to the contractor pertained largely to programs that included both DB and DC
plans.



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                                         Programs




Figure 2.16: Average Replacement
Rates Available at Retirement and 10     100   Percentage of final salary
and 20 Years After Retirement When
                                          90
Employees Retire at Age 55 With 30
Years of Service and a Final Salary of    80
$40,000
                                          70

                                          60

                                          50

                                          40

                                          30

                                          20

                                          10

                                           0

                                                 DB and DC            FERS               CSRS I              CSRS II
                                                 plans
                                                 Program design



                                                          At retirement

                                                          10 years after

                                                          20 years after



                                         Note 1: Social Security retirement benefits are not available at age 55. Retirees may elect to begin
                                         benefits at age 62.

                                         Note 2: The percentages shown were calculated using the assumption that the employee
                                         contributed the percentage of salary that is necessary to obtain the maximum employer-matching
                                         contributions.

                                         Source: Watson Wyatt Worldwide database (see table III.1).




                                         When retirement occurs at age 62 or older, Social Security retirement
                                         benefits are available immediately upon retirement for FERS and private
                                         sector retirees. Therefore, the changes in the relative replacement rates
                                         that occur within a particular program design after retirement at age 55 do
                                         not occur at the older retirement ages. For employees who retire at ages
                                         62 and 65 with 20 or 30 years of service, FERS starts with the highest
                                         replacement rates of all programs, and this advantage continues
                                         throughout the next 20 years. (See figs. 2.17 through 2.20.)




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                                         Programs




                                         When retirement occurs at age 62 or older with 20 years of service, the
                                         private sector programs in the contractor’s database that have both DB and
                                         DC plans rank in the second position for the full 20 years. CSRS I stays in the
                                         third position, but moves closer to the private sector program average by
                                         the 20-year point. CSRS II remains at the bottom for the full 20 years. (See
                                         figs. 2.17 and 2.18.)


Figure 2.17: Average Replacement
Rates Available at Retirement and 10     100   Percentage of final salary
and 20 Years After Retirement When
                                          90
Employees Retire at Age 62 With 20
Years of Service and a Final Salary of    80
$40,000
                                          70

                                          60

                                          50

                                          40

                                          30

                                          20

                                          10

                                           0

                                                 DB and DC            FERS             CSRS I            CSRS II
                                                 plans
                                                 Program design



                                                          At retirement

                                                          10 years after

                                                          20 years after



                                         Note: The percentages shown were calculated using the assumption that the employee
                                         contributed the percentage of salary that is necessary to obtain the maximum employer-matching
                                         contributions.

                                         Source: Watson Wyatt Worldwide database (see table III.2).




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Figure 2.18: Average Replacement
Rates Available at Retirement and 10     100   Percentage of final salary
and 20 Years After Retirement When
                                          90
Employees Retire at Age 65 With 20
Years of Service and a Final Salary of    80
$40,000
                                          70

                                          60

                                          50

                                          40

                                          30

                                          20

                                          10

                                           0

                                                 DB and DC            FERS             CSRS I            CSRS II
                                                 plans
                                                 Program design



                                                          At retirement

                                                          10 years after

                                                          20 years after



                                         Note: The percentages shown were calculated using the assumption that the employee
                                         contributed the percentage of salary that is necessary to obtain the maximum employer-matching
                                         contributions.

                                         Source: Watson Wyatt Worldwide database (see table III.3).




                                         When retirement occurs at age 62 or older with 30 years of service, the
                                         averages of the replacement rates for the private sector programs that
                                         have both DB and DC plans are higher than those for CSRS I at retirement
                                         and 10 years after retirement. However, by 20 years after retirement, the
                                         CSRS I replacement rate becomes higher than the private sector rate. The
                                         replacement rate for CSRS II remains lower than the rates for all other
                                         programs at the 10-year and 20-year points. (See figs. 2.19 and 2.20.)
                                         However, at the 20-year point, the replacement rates available are similar
                                         for employees who retire at age 62 with 30 years of service under CSRS II




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                                         Programs




                                         and the private sector programs that include both DB and DC plans. CSRS II’s
                                         replacement rate is 44 percent, and the private sector rate is 45 percent.


Figure 2.19: Average Replacement
Rates Available at Retirement and 10     100   Percentage of final salary
and 20 Years After Retirement When
                                          90
Employees Retire at Age 62 With 30
Years of Service and a Final Salary of    80
$40,000
                                          70

                                          60

                                          50

                                          40

                                          30

                                          20

                                          10

                                           0

                                                 DB and DC            FERS             CSRS I            CSRS II
                                                 plans
                                                 Program design



                                                          At retirement

                                                          10 years after

                                                          20 years after



                                         Note: The percentages shown were calculated using the assumption that the employee
                                         contributed the percentage of salary that is necessary to obtain the maximum employer-matching
                                         contributions.

                                         Source: Watson Wyatt Worldwide database (see table III.4).




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Figure 2.20: Average Replacement
Rates Available at Retirement and 10     100   Percentage of final salary
and 20 Years After Retirement When
                                          90
Employees Retire at Age 65 With 30
Years of Service and a Final Salary of    80
$40,000
                                          70

                                          60

                                          50

                                          40

                                          30

                                          20

                                          10

                                           0

                                                 DB and DC            FERS             CSRS I            CSRS II
                                                 plans
                                                 Program design



                                                          At retirement

                                                          10 years after

                                                          20 years after



                                         Note: The percentages shown were calculated using the assumption that the employee
                                         contributed the percentage of salary that is necessary to obtain the maximum employer-matching
                                         contributions.

                                         Source: Watson Wyatt Worldwide database (see table III.5).




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Chapter 3

Comparative Features of FERS, CSRS, and
Private Sector Retirement Programs

                  The designs of the private sector retirement programs in the contractor’s
                  database fall into the following three distinct groups: (1) programs with
                  Social Security, a DB plan, and a DC plan; (2) programs with Social Security
                  and DC plans only; and (3) programs with Social Security and DB plans
                  only. The FERS program design is the same as the first group, while CSRS is
                  different from all three groups. CSRS is solely a DB plan with no Social
                  Security coverage. Employees in CSRS may contribute to the TSP, but the
                  government makes no contribution to their accounts.

                  Along with the differing program designs, specific features of federal and
                  private sector DB and DC plans often vary considerably from plan to plan,
                  including the ages at which benefits are available, the formulas used to
                  calculate benefit amounts, the amounts of contributions employees are
                  required to pay toward plan costs, and the arrangements for determining
                  employer contributions to DC plans.

                  This chapter compares and contrasts the features of FERS, CSRS, and private
                  sector retirement programs in the contractor’s database.


                  DB plans are offered by 75 percent of the 661 private sector employers in
Program Designs   the contractor’s database, and DC plans are offered by 93 percent of the
                  employers. FERS includes both a DB plan and a DC plan—the TSP—to which
                  the government and most FERS employees contribute. CSRS includes a DB
                  plan only, but CSRS employees are allowed to contribute to the TSP. The
                  federal government does not contribute to CSRS employees’ TSP accounts.
                  All of the private sector programs and FERS provide Social Security
                  coverage. Employees in CSRS are not covered by Social Security through
                  their federal employment.

                  In the contractor’s database, 69 percent of the 661 private sector programs
                  consisted of three parts—Social Security, DB plans, and DC plans. Another
                  25 percent of the programs had Social Security and DC plans only. The
                  remaining 7 percent of the programs had Social Security and DB plans
                  only.1 Figure 3.1 shows the various designs of the federal and private
                  sector programs.




                  1
                   These percentages do not add to 100 percent or to the percentages cited in the previous paragraph
                  because of rounding.



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                                              Comparative Features of FERS, CSRS, and
                                              Private Sector Retirement Programs




Figure 3.1: Federal and Private Sector Retirement Program Designs




                      Private sector                                    Federal sector


                        Both DB & DC plans                                FERS
                         Three-part design:                                 Three-part design:
                           Social Security                                    Social Security
                           +DB plan                                           +DB plan
                            +DC plan                                           +DC plan



                                DC plan only                                        CSRS
                                  Two-part design:                                    One-part design:
                                    Social Security                                     DB plan
                                    +DC plan




                                              DB plan only
                                               Two-part design:
                                                 Social Security
                                                 +DB plan




                                              Source: GAO and the Watson Wyatt Worldwide database.



                                              Table 3.1 shows that the major features of FERS and CSRS, as well as private
Program Features                              sector DB and DC plans, vary greatly. However, one specific feature alone
                                              does not reflect a retirement program’s overall generosity. Rather, it is the
                                              combination of all the features working together that determines benefit
                                              amounts. For example, one DB plan may use employees’ 5-year salary
                                              averages in benefit calculations, and a second DB plan may use employees’
                                              3-year salary averages. In this case, the salary average feature in the
                                              second plan appears better because it usually would produce higher salary
                                              averages. However, the first plan could produce greater benefit amounts if



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                                             its benefit formula provided a higher percentage of the salary average for
                                             each year of service than the second plan. But, the second plan could still
                                             provide greater benefit amounts for employees who retire at age 55 if the
                                             first plan had a feature calling for reductions in accrued benefits for
                                             employees who retire at that age and if the second plan had no such
                                             feature.

                                             Through a replacement rate analysis, as used in the retirement program
                                             comparisons presented in chapter 2, all of a program’s features are
                                             considered in calculating the benefit amounts the program provides at
                                             varying ages and years of service so that meaningful comparisons with
                                             other programs can be made.

                                             Additional details on the features of the FERS, CSRS, and private sector DB
                                             plans are presented in appendix IV. Appendix V presents details on the
                                             FERS and private sector DC plans.



Table 3.1: Major Features of FERS, CSRS, and Private Sector Retirement Programs in the Contractor’s Database
Program features                Private sectora                 FERS                         CSRS
Social Security                   Yes                              Yes                                 No
                                                                                    b
Require employee contributions    Yes, 7% of plans                 Yes, 0.8% of pay                    Yes, 7% of pay
to DB plan                        No, 92% of plans
Definition of pay for DB plan     Base pay, 97%                    Base pay only                       Base pay only
benefit calculation               Overtime, 61%
                                  Bonuses, 53%
                                  Commissions, 41%
                                  Other pay, 14%
Average pay for DB plan benefit   Final 3-year average, 14%        Average of highest 3                Average of highest 3
calculations                      Final 5-year average, 64%        consecutive years of base pay       consecutive years of base pay
                                  Career average, 11%              (“high 3”)
                                  Other, 8%
Formula for calculating DB plan   Formulas varied so widely that   1.1% of “high 3” for each year of   1.5% of “high 3” for each of the
benefit amounts                   they could not be meaningfully   service, if age 62 and 20 years     first 5 years of service, 1.75%
                                  summarized or a “typical”        of service; otherwise, 1% for       for each of the next 5 years,
                                  formula described                each year                           and 2% for each year over 10
                                                                                                       years
DB plan formula is integrated     Yes, 75% of plans                No                                  No Social Security coverage
with Social Security              No, 25% of plans
Unreduced DB plan benefits are    Usually with service             MRAd and 30 years of service        Age 55 and 30 years of service
available                         requirement,c                    Age 60 and 20 years                 Age 60 and 20 years
                                  Age 55, 10%                      Age 62 and 5 years                  Age 62 and 5 years
                                  Age 60, 14%
                                  Age 62, 27%
                                  Age 65, 43%
                                  Other, 4%
                                                                                                                            (continued)



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Program features                 Private sectora                     FERS                                   CSRS
Reduced DB plan benefits are     Less than age 55, 8%                MRA and 10 years of service            None
available at employee’s option   Age 55 and 10 years or less,
                                   69%
                                 Age 55 and more than 10
                                   years, 13%
                                 Other, 7%
Postretirement increases in DB   At least once during 1983-92,       Annual adjustments payable             Annual adjustments fully
plan amounts                     Yes, 43%                            only to retirees age 62 or older,      indexed to the CPI for all
                                 No, 44%                             unless they are disability or          annuitants, unless limited by law
                                                                     survivor annuitants.
                                                                     Adjustments, unless limited by
                                                                     law, are equal to (1) the
                                                                     increase in the CPI, if the CPI
                                                                     increases 2 percent or less; (2)
                                                                     2 percent, if the CPI increases
                                                                     between 2 and 3 percent; and
                                                                     (3) the CPI increase minus 1
                                                                     percent, if the CPI increases 3
                                                                     percent or more.
Tax advantages to employee in    Yes, 93% had employee               Yes, up to 10% of pay on a             Yes, up to 5% of pay on a
the DC plan                      contributions under a Section       pretax basis                           pretax basis
                                 401(k) or 403(b) feature
                                 No, 5%
Employer contributions to DC     Matching only,e 65%                 For all FERS employees, 1% of No employer contributions
plan                             Nonmatching only, 11%               pay. Plus, 100% matching on
                                 Both matching and                   the first 3% of pay that
                                   nonmatching,e 17%                 employee contributes and 50%
                                 Other, 2%                           matching on the next 2% of pay.

                                           a
                                             The percentages for some features may total less than 100 percent because of rounding or
                                           because some employers did not provide information on a particular feature. Percentages for
                                           other features may total more than 100 percent because multiple responses could be given.
                                           b
                                            The required contribution is 7 percent of pay minus the contribution of 6.2 percent of pay to
                                           Social Security.
                                           c
                                             Eighty-two percent of the programs had service requirements. These requirements ranged from
                                           5 to 35 years of service when the employee retires at age 55, from 1 to 40 years at ages 60 and
                                           62, and from 1 to 10 years at age 65.
                                           d
                                            MRA is the minimum optional retirement age, which ranges from age 55 to age 57 and is based
                                           on the employee’s date of birth.
                                           e
                                             For programs with employer-matching contributions, the median match was 50 percent of
                                           employee contributions up to 6 percent of pay.

                                           Source: Watson Wyatt Worldwide database (see apps. IV and V).




                                           Page 62                                GAO/GGD-97-40 Federal and Private Retirement Benefits
Chapter 4

Conclusions and Agency and Contractor
Comments

              There is no definitive answer to the question of whether federal retirement
Conclusions   programs offer greater or smaller benefits than private sector programs.
              Depending on individual retirees’ circumstances and how they interact
              with the retirement programs’ designs, the benefits available from FERS
              and CSRS can be smaller, similar, or greater than benefits available from the
              private sector programs in the contractor’s database.

              For example, CSRS benefits are greater than the benefits available from the
              private sector programs in the contractor’s database when employees
              retire before age 62. However, for employees who retire at age 62 or older
              with 20 years of service, CSRS benefits at retirement are smaller than the
              benefits available from private sector programs in the database of all
              designs. After 20 years of retirement, CSRS benefits for age 62 or older
              retirees who retired with 20 years of service are still behind the private
              sector programs that have both DB and DC plans, even though the COLA
              provision in CSRS provides greater increases in benefits over time than
              private sector programs.

              CSRS replacement rates are greater than those available in the private
              sector when employees retire at age 55 principally because private sector
              DB plans generally impose reductions in accrued benefits for employees
              who retire at that age. CSRS imposes no such reductions; but it does permit
              employees to retire at age 55 under regular retirement provisions only if
              they have 30 or more years of service. Therefore, CSRS limits age 55
              retirement eligibility to long-term, career employees. The average private
              sector program has no similar design feature, although the average
              program allows employees to retire on reduced benefits at age 55 with
              fewer than 30 years of service—a feature that does not exist in CSRS. Most
              federal employees do not have 30 years of service by the time they are age
              55, and, of those who do, many elect to retire later. As a result, the average
              CSRS retirement age is about 62.


              The lack of Social Security coverage for employees in CSRS is a major
              reason why the private sector programs in the contractor’s database can
              provide higher replacement rates to employees who retire at age 62 or
              older. Moreover, CSRS employees do not participate in a DC plan to which
              their employer contributes. As this report shows, most private sector
              programs in the contractor’s database included DC plans to which their
              employers contribute and from which employees can earn significant
              benefit amounts.




              Page 63                       GAO/GGD-97-40 Federal and Private Retirement Benefits
Chapter 4
Conclusions and Agency and Contractor
Comments




CSRS was closed to new entrants at the end of 1983 and was replaced by
FERS—a   completely restructured federal retirement program. FERS follows
the model used by most of the private sector employers in the contractor’s
database: a three-part retirement package that includes Social Security, a
DB plan, and a DC plan. As our findings illustrate, the FERS benefits from
Social Security, the DB plan, and the government’s automatic 1-percent
contribution to the TSP alone are smaller than CSRS benefits for employees
who retire at age 55. However, these FERS benefits can be greater than CSRS
benefits for employees who retire at age 62 or older, even though FERS
employees generally contribute the same total percentage of their salaries
toward the cost of these benefits as CSRS employees contribute. By
contributing to their DC plan, FERS employees can obtain greater benefits
than are available from CSRS at all ages, but they will pay more to receive
the greater benefit amounts.

FERS continued CSRS’ objective of encouraging employees to spend their
working careers in federal service by making unreduced benefits available
at age 55 only to employees who serve 30 or more years with the
government. Consistent with this objective, FERS also provides an annuity
supplement to career employees who retire before Social Security benefits
are otherwise available. This feature is not commonly found in private
sector programs and, along with the lack of reductions in accrued DB plan
benefits for age 55 retirees in federal programs, the feature causes FERS
replacement rates available at age 55 to exceed the replacement rates
available from the private sector programs of all designs in the
contractor’s database. However, as with CSRS, FERS employees generally
have been older than age 55 when they retired. FERS was designed to
encourage, but not to require, longer careers by raising the age of earliest
retirement eligibility to age 57 for employees born after 1969 and by
increasing the DB plan benefit formula for employees who continue
working to at least age 62.

For employees who retire at age 62 or older, the total benefits available at
retirement from all three parts of FERS are quite comparable to the average
benefits available from private sector programs in the contractor’s
database that also have DB and DC plans in addition to Social Security.
Because the COLA provision in the FERS’ DB plan provides greater increases
in benefits over time than do private sector DB plans on average, FERS
retirees will fare better in times of high inflation when increases in the CPI
will be greater. However, the FERS COLA does not fully maintain retirees’
purchasing power and, thereby, represents a reduction from the inflation
protection intended for CSRS retirees.



Page 64                          GAO/GGD-97-40 Federal and Private Retirement Benefits
                      Chapter 4
                      Conclusions and Agency and Contractor
                      Comments




                      Watson Wyatt Worldwide and the Federal Retirement Thrift Investment
Agency and            Board provided oral comments on the draft of this report, and OPM
Contractor Comments   provided written comments. All of the officials agreed with our conclusion
and Our Evaluation    that there is no definitive answer to the question of whether federal
                      retirement programs offer greater or smaller benefits than private sector
                      programs. The Thrift Board and OPM officials noted that it is very difficult
                      to compare varied federal and private sector retirement programs. They
                      said, and we agree, that our analyses and conclusions are dependent on
                      (1) the database used; (2) the age and service characteristics of the
                      illustrative employees; and (3) the assumptions made about salary
                      histories, return on investments, the conversion of defined contribution
                      plan amounts at retirement to annuities, and the rate of inflation.

                      We believe that the database and illustrative employees used and the
                      assumptions made are reasonable because they either were those used by
                      OPM in its latest actuarial valuations, were based on standards used in the
                      benefits field, or were necessary to provide a common basis of
                      comparison. We modified the executive summary and chapter 1 of this
                      report to clarify that the use of different databases, illustrative employees,
                      and assumptions would have changed the relative magnitude of benefits
                      available among retirement programs as well as the levels of benefits
                      provided by all programs. Using such data could possibly, in some
                      circumstances, change the relative rankings between programs. However,
                      while we believe that no one database or set of assumptions could fully
                      capture the range of private sector programs and employees’ experiences,
                      we also believe that using different databases and assumptions would not
                      have changed our conclusion that no definitive answer exists to the
                      question of whether federal programs offer greater or smaller benefits
                      than private sector programs.

                      OPM  also commented that our analyses and conclusions might be better
                      understood if additional information on the database, illustrative
                      employees, and the assumptions were provided in the report (i.e., the
                      executive summary and chapter 1 of the report). OPM expressed concern
                      that we had implied in the executive summary that variations in retirement
                      benefits result from employee decisions and situations, while the body of
                      the report made it clear that the variations result from the structural
                      differences between retirement programs. We agree that the variations in
                      benefits available did not result solely from employee choices and have
                      modified the executive summary to reflect that it is the interactions
                      between factors, such as employees’ ages, years of service, and DC plan




                      Page 65                          GAO/GGD-97-40 Federal and Private Retirement Benefits
Chapter 4
Conclusions and Agency and Contractor
Comments




contribution behavior, and the varying designs and provisions of the
retirement programs that affect the comparisons among programs.

OPM also said that while it is difficult to include every material item in the
executive summary, some significant information contained in the body of
the report was not included in the executive summary. OPM mentioned the
following: (1) that private sector salaries used in calculating retirement
benefits often include overtime and bonuses, (2) that a meaningful
“typical” retirement benefit formula does not exist for the private sector,
and (3) that retirement program designs vary considerably between large
and small private sector companies. We agree that it was difficult to
include all information in the executive summary and, as noted previously,
have modified the executive summary to clarify that the use of different
databases, illustrative employees, and assumptions would have changed
the relative magnitude of benefits available among retirement programs,
the levels of benefits provided by all programs, and could, in some
circumstances, change the relative rankings between programs. We have
modified the executive summary to specifically mention that many private
sector programs use overtime, bonuses, or commissions in their benefit
calculations. We have modified the objective, scope, and methodology
section of chapter 1 to include that (1) the salary histories include base
pay only, (2) benefit calculations in many of the private sector programs in
the contractor’s database would include other types of compensation in
addition to base pay, and (3) had we assumed other types of compensation
in addition to the base pay represented in the salary histories, the averages
of the replacement rates from the private sector programs would have
increased. We also deleted the footnote in chapter 2 to which OPM referred.

We agree that not being able to identify a typical benefit formula is
significant. It is one of the major reasons why we selected the replacement
rate analysis as our method of comparison and had the contractor
separately calculate and then average the benefits available from each of
the 435 retirement programs in the private sector database.

We agree with OPM that retirement program designs vary considerably and
say this in the executive summary. We also agree that program designs
vary by employer size and have discussed this in an earlier GAO report.1
Our methodology did not include analyses by employer size because the
contractor’s database included primarily large employers.



1
 GAO/GGD-97-1.



Page 66                          GAO/GGD-97-40 Federal and Private Retirement Benefits
Chapter 4
Conclusions and Agency and Contractor
Comments




The contractor and the Thrift Board also provided editorial and technical
comments that we incorporated in the report as appropriate.




Page 67                          GAO/GGD-97-40 Federal and Private Retirement Benefits
Appendix I

FERS, CSRS, and Watson Wyatt Worldwide
Database Statistics

Table I.1: Number of Participants in
FERS and CSRS at the Beginning of        Participants                                                  FERS          CSRS             Total
Fiscal Year 1995                         Employees:
                                             Activea                                               1,375,000     1,443,000      2,818,000
                                             Formerb                                                  89,000         26,000         115,000
                                         Total employees                                           1,464,000     1,469,000      2,933,000
                                         Annuitants:
                                             Retirees                                                 44,900     1,652,000      1,696,900
                                             Survivors                                                 3,100       610,000          613,100
                                         Total annuitants                                             48,000     2,262,000      2,310,000
                                         Total participants                                        1,512,000     3,731,000      5,243,000
                                         a
                                          Number of employees determined on a full-time equivalent basis. These numbers include
                                         employees on leave without pay who retain coverage.
                                         b
                                          Former employees are employees who separated before eligibility for immediate retirement
                                         benefits, but who are entitled to deferred benefits.

                                         Source: United States Office of Personnel Management, Annual Report of the Civil Service
                                         Retirement and Disability Fund for Fiscal Year 1995 (May 1996).



Table I.2: Sizes of the Private Sector
Employers in the Contractor’s                                                    Percentage        Percentage of employers whose
Database as of October 1995                                                             of all    program benefits could be valued
                                                                                  employers        DB plans       DC plans DB and DC
                                         Number of employees                     in database           only           only      plans
                                         499 or fewer                                        9             28              9              6
                                         500 to 999                                         10              4             12              6
                                         1,000 to 2,499                                     22             24             26             20
                                         2,500 to 4,999                                     16             24             19             13
                                         5,000 to 9,999                                     11              8             15             13
                                         10,000 or more                                     30             12             17             40
                                         No response                                         2              0              2              2
                                         Number of employers                               661             25           106              304
                                         Note: The Watson Wyatt Worldwide 1993 COMPARISON database had 661 employers. Of those
                                         661, 435 employers contributed to their plans and provided sufficient information so that the
                                         benefits could be valued.

                                         Source: Watson Wyatt Worldwide database.




                                         Page 68                              GAO/GGD-97-40 Federal and Private Retirement Benefits
                                           Appendix I
                                           FERS, CSRS, and Watson Wyatt Worldwide
                                           Database Statistics




Table I.3: Sizes in Percentiles, Median,
and Mean for Private Sector Employers                                                       All
in the Contractor’s Database as of                                                   employers Employers whose program benefits
                                                                                             in   could be valued (number of
October 1995                                                                                             employees)
                                                                                      database
                                                                                    (number of  DB plans    DC plans DB and DC
                                           Percentiles, median, and mean           employees)       only        only       plans
                                           25th percentile                                1,232            415          1,050             1,672
                                           50th percentile (median)                       3,500          2,020          2,700             6,000
                                           75th percentile                               13,000          3,925          6,000        18,724
                                           Mean                                          15,148          3,691          7,410        20,003
                                           Source: Watson Wyatt Worldwide database.



Table I.4: Industry Classifications of
Private Sector Employers in the                                                    Percentage         Percentage of employers whose
Contractor’s Database as of                                                               of all     program benefits could be valued
October 1995                                                                        employers        DB plans      DC plans DB and DC
                                           Industry                                in database           only          only      plans
                                           Manufacturing - durable goods                      27              4            32               28
                                           Manufacturing - nondurable goods                   18             16            19               21
                                           Financial services                                 15              4            12               20
                                           Insurance and real estate                          11              8              2              18
                                           Services                                           11              8            22                9
                                           Health care                                         8             52              8               4
                                           Nonprofit and public organizations                  8             24              8               2
                                           Retail and wholesale                                7             12            11                5
                                           Utilities                                           7              0              0               8
                                           Energy and natural resources                        5              4              2               7
                                           Transportation                                      2              0              1               2
                                                                                                 a                                            a
                                           Construction                                                       0              1
                                                                                                                                              a
                                           No response                                         1              0              2
                                           Number of employers                               661             25           106              304
                                           Note: Multiple responses were permitted. Therefore, percentages total more than 100 percent.
                                           a
                                               Less than 0.5 percent.

                                           Source: Watson Wyatt Worldwide database.




                                           Page 69                              GAO/GGD-97-40 Federal and Private Retirement Benefits
                                        Appendix I
                                        FERS, CSRS, and Watson Wyatt Worldwide
                                        Database Statistics




table I.5: Geographic Locations of
Private Sector Employers in the                                                   Percentage       Percentage of employers whose
Contractor’s Database as of                                                              of all   program benefits could be valued
October 1995                                                                       employers        DB plans        DC plans DB and DC
                                        Region                                    in database           only            only      plans
                                        Midwest                                             44              36             36            49
                                        Northeast                                           37              28             32            40
                                        Southeast                                           33              24             30            35
                                        Pacific                                             30                 8           44            27
                                        West south central                                  20              20             21            21
                                        Mountain                                            12                 4           16            11
                                        No response                                           2                0            1             2
                                        Number of employers                                661              25            106            304
                                        Note 1: Geographic locations refer to a region(s) in which the employer has at least 1,000
                                        employees or 10 percent of its workforce.

                                        Note 2: Multiple responses were permitted. Therefore, percentages total more than 100 percent.

                                        Source: Watson Wyatt Worldwide database.



table I.6: Retirement Program Designs
of Private Sector Employers in the                                                                                    Employers whose
Contractor’s Database as of                                                           All employers in             program benefits could
October 1995                                                                              database                       be valued
                                        Retirement plans offered                      Number        Percenta          Number         Percent
                                        DB plans only                                       44                 7           25             6
                                        DC plans only                                      164              25            106            24
                                        Both DB and DC plans                               453              69            304            70
                                        Number of employers                                661            100             435            100
                                        Note: The total number of employers whose program benefits could be valued remained the
                                        same between October 1995 and January 1997 when the additional replacement rate analyses
                                        were provided under the CBO contract. However, the numbers in each category changed. As of
                                        January 1997, 23 of the 435 employers had DB plans only, 109 of the employers had DC plans
                                        only, and 303 of the employers had both DB and DC plans.
                                        a
                                            These percentages do not add to 100 percent because of rounding.

                                        Source: Watson Wyatt Worldwide database.




                                        Page 70                                GAO/GGD-97-40 Federal and Private Retirement Benefits
Appendix II

Salary Histories Used in Pension Plan and
Social Security Benefit Calculations

               To calculate retirement benefit amounts available from Social Security and
               individual employers’ DB and DC plans, a number of factors must be taken
               into account. A primary factor is an employee’s salary history. Most DB
               plans base benefits on employees’ average annual salaries received in the
               final years of employment, such as the last 3 or 5 years. Some use the
               average of the annual salaries that employees received during their entire
               careers with an employer. Salary histories are also necessary to determine
               the total amounts that employees and employers could contribute to DC
               plans over employees’ working years, as well as to calculate the Social
               Security benefits earned while working for a particular employer.

               For all of the illustrative employees used in this report to show the relative
               benefit amounts available from FERS, CSRS, and private sector retirement
               programs, we assumed the employees began working in 1995 and worked
               throughout the specified periods (20 or 30 years) under each program used
               in the comparisons. We developed employee salary histories that resulted
               in final salaries equivalent in 1995 dollars to $25,000, $40,000, and $60,000.
               The $25,000 salary history has the slowest rate of growth and was selected
               to represent the experiences of employees at lower salary levels. The
               $40,000 salary history was selected to represent the experiences of the
               “typical” federal employee because employees retiring under the optional
               retirement provisions of CSRS and FERS in 1995 had final salaries averaging
               about $40,000. The $60,000 salary history has the fastest rate of growth and
               was selected to represent the experiences of higher-paid employees. The
               three salary histories are presented in tables II.1, II.2, and II.3.




               Page 71                       GAO/GGD-97-40 Federal and Private Retirement Benefits
                                          Appendix II
                                          Salary Histories Used in Pension Plan and
                                          Social Security Benefit Calculations




Table II.1: Salary History With a Final
Salary That Is Equivalent to a $25,000    Year                                                 30-year career      20-year career
Salary in 1995                            1                                                           $12,234             $21,572
                                          2                                                            15,322              23,179
                                          3                                                            16,562              25,703
                                          4                                                            18,327              27,198
                                          5                                                            20,834              30,132
                                          6                                                            22,879              33,148
                                          7                                                            25,099              35,843
                                          8                                                            26,997              37,337
                                          9                                                            29,216              38,403
                                          10                                                           30,917              40,003
                                          11                                                           33,500              41,454
                                          12                                                           35,996              42,606
                                          13                                                           39,915              43,923
                                          14                                                           42,238              44,820
                                          15                                                           46,793              47,999
                                          16                                                           51,478              49,791
                                          17                                                           55,663              51,920
                                          18                                                           57,982              55,620
                                          19                                                           59,639              57,697
                                          20                                                           62,124              57,697
                                          21                                                           64,377                  n/a
                                          22                                                           66,165                  n/a
                                          23                                                           68,211                  n/a
                                          24                                                           69,603                  n/a
                                          25                                                           74,540                  n/a
                                          26                                                           77,324                  n/a
                                          27                                                           80,630                  n/a
                                          28                                                           86,375                  n/a
                                          29                                                           89,601                  n/a
                                          30                                                           89,601                  n/a
                                          Legend: n/a = not applicable

                                          Source: GAO generated.




                                          Page 72                            GAO/GGD-97-40 Federal and Private Retirement Benefits
                                          Appendix II
                                          Salary Histories Used in Pension Plan and
                                          Social Security Benefit Calculations




Table II.2: Salary History With a Final
Salary That Is Equivalent to a $40,000    Year                                                 30-year career      20-year career
Salary in 1995                            1                                                           $16,809             $34,447
                                          2                                                            18,826              37,202
                                          3                                                            21,067              39,992
                                          4                                                            23,405              42,872
                                          5                                                            25,839              45,873
                                          6                                                            28,371              48,992
                                          7                                                            30,925              52,226
                                          8                                                            33,646              55,568
                                          9                                                            36,506              59,013
                                          10                                                           39,536              62,554
                                          11                                                           42,660              66,120
                                          12                                                           45,944              69,756
                                          13                                                           49,436              73,384
                                          14                                                           53,094              76,906
                                          15                                                           56,917              80,136
                                          16                                                           61,015              83,021
                                          17                                                           65,408              86,010
                                          18                                                           70,118              89,106
                                          19                                                           75,166              92,314
                                          20                                                           80,052              92,314
                                          21                                                           84,855                  n/a
                                          22                                                           89,946                  n/a
                                          23                                                           95,343                  n/a
                                          24                                                          101,064                  n/a
                                          25                                                          107,128                  n/a
                                          26                                                          113,555                  n/a
                                          27                                                          120,369                  n/a
                                          28                                                          127,591                  n/a
                                          29                                                          135,246                  n/a
                                          30                                                          143,361                  n/a
                                          Legend: n/a = not applicable

                                          Source: GAO generated.




                                          Page 73                            GAO/GGD-97-40 Federal and Private Retirement Benefits
                                          Appendix II
                                          Salary Histories Used in Pension Plan and
                                          Social Security Benefit Calculations




Table II.3: Salary History With a Final
Salary That Is Equivalent to a $60,000    Year                                                 30-year career      20-year career
Salary in 1995                            1                                                           $17,505             $48,407
                                          2                                                            22,330              52,389
                                          3                                                            28,602              56,332
                                          4                                                            31,079              61,364
                                          5                                                            40,034              65,982
                                          6                                                            44,010              73,988
                                          7                                                            54,303              80,309
                                          8                                                            60,355              86,352
                                          9                                                            65,443              89,051
                                          10                                                           71,416              92,761
                                          11                                                           75,174              99,037
                                          12                                                           81,358              99,037
                                          13                                                           87,481             105,103
                                          14                                                           95,295             107,248
                                          15                                                          102,468             115,027
                                          16                                                          114,900             119,323
                                          17                                                          124,717             124,424
                                          18                                                          134,102             133,487
                                          19                                                          138,293             138,472
                                          20                                                          144,055             138,472
                                          21                                                          153,801                  n/a
                                          22                                                          153,801                  n/a
                                          23                                                          163,222                  n/a
                                          24                                                          166,553                  n/a
                                          25                                                          178,633                  n/a
                                          26                                                          185,304                  n/a
                                          27                                                          193,226                  n/a
                                          28                                                          207,301                  n/a
                                          29                                                          215,042                  n/a
                                          30                                                          215,042                  n/a
                                          Legend: n/a = not applicable

                                          Source: GAO generated.




                                          Page 74                            GAO/GGD-97-40 Federal and Private Retirement Benefits
                                           Appendix II
                                           Salary Histories Used in Pension Plan and
                                           Social Security Benefit Calculations




                                           Table II.4 shows the Social Security benefit amounts earned by FERS and
Social Security                            private sector employees with the above salary histories and years of
Benefits Produced by                       service, assuming the employees had no Social Security-covered
Salary Histories                           employment with any other employer before or after retirement.


Table II.4: Percentage of Final Salary Replaced by Social Security Benefits in FERS and the Private Sector Programs
                                                                             Social Security replacement rates (percentage)
                                                                                $25,000 final           $40,000 final          $60,000 final
                                                                              average salary          average salary         average salary
Age and years of service at retirement                                        in 1995 dollars         in 1995 dollars        in 1995 dollars
Age 55 with 30 years of servicea                                                           25.3                   19.2                     16.9
Age 62 with 20 years of service                                                            22.5                   19.0                     16.3
Age 65 with 20 years of service                                                            27.1                   23.0                     19.6
Age 62 with 30 years of service                                                            25.3                   19.2                     16.9
Age 65 with 30 years of service                                                            30.3                   23.1                     20.6
                                           Note: The replacement rates were determined using an assumption that the Social Security salary
                                           ceiling (the amount of earnings to which Social Security contributions and benefit calculations
                                           apply) will increase by 4.5 percent each year—the same projected rate of salary growth that OPM
                                           used in its actuarial valuations of CSRS and FERS.
                                           a
                                             Social Security benefits were assumed to be payable at age 62 for retirements before age 62
                                           and were adjusted for the 7 years of 4.5-percent inflation between the ages of 55 and 62.

                                           Source: Watson Wyatt Worldwide database.




                                           Page 75                               GAO/GGD-97-40 Federal and Private Retirement Benefits
Appendix III

Results of the Replacement Rate Analysis


Table III.1: Average Replacement Rates
Available With Maximum Employer                                                                  At retirement
Contributions to DC Plans - Age 55                                                Private sector
and 30 Years of Service                                                                                           Federal
                                                                         DB plans DC plans  DB and
                                         Program component                   only     only DC plans              FERS       CSRS
                                         Average replacement rates at final salary of $25,000:
                                         DB plan                              20.0                      22.2      41.6       55.6
                                         DC plan                                          32.0          29.6      33.4
                                         Social Security
                                         Total                                20.0        32.0          51.8      75.0       55.6
                                         Average replacement rates at final salary of $40,000:
                                         DB plan                              19.0                      21.1      37.4       53.1
                                         DC plan                                          26.0          24.1      27.2
                                         Social Security
                                         Total                                19.0        26.0          45.2      64.6       53.1
                                         Average replacement rates at final salary of $60,000:
                                         DB plan                              20.8                      23.4      37.8       55.6
                                         DC plan                                          29.0          27.0      30.4
                                         Social Security
                                         Total                                20.8        29.0          50.4      68.2       55.6




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                                               Results of the Replacement Rate Analysis




                       10 years after retirement                                                 20 years after retirement
    Private sector                                                          Private sector
         DB and DC                        Federal                                 DB and DC                            Federal
S             plans            FERS         CSRS I             CSRS II                 plans              FERS           CSRS I              CSRS II


6               15.0            21.2           55.6                 51.0                  10.5              19.3             55.6                46.8
                19.1            21.5                                                      12.3              13.8
                25.3            25.3                                                      25.3              25.3
6               59.4            68.0           55.6                 51.0                  48.1              58.4             55.6                46.8


                14.2            20.2           53.1                 48.7                  10.0              18.4             53.1                44.7
                15.5            17.5                                                      10.0              11.3
                19.2            19.2                                                      19.2              19.2
                48.9            56.9           53.1                 48.7                  39.2              48.9             53.1                44.7


6               15.8            21.2           55.6                 51.0                  11.1              19.3             55.6                46.8
                17.4            19.6                                                      11.2              12.6
                16.9            16.9                                                      16.9              16.9
6               50.1            57.7           55.6                 51.0                  39.2              48.8             55.6                46.8
                                               Note 1: Because of differences in the annual rates of growth in the three salary histories, the
                                               replacement rates may differ somewhat for each salary history.

                                               Note 2: Some column cells show no data because all of the program components are not
                                               applicable to all of the retirement plans.




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                                         Results of the Replacement Rate Analysis




Table III.2: Average Replacement Rates
Available With Maximum Employer                                                                  At retirement
Contributions to DC Plans - Age 62                                                  Private sector
and 20 Years of Service                                                                                           Federal
                                                                         DB plans DC plans  DB and
                                         Program component                   only     only DC plans              FERS       CSRS
                                         Average replacement rates at final salary of $25,000:
                                         DB plan                              20.2                      21.0      21.7       35.8
                                         DC plan                                           24.1         22.3      25.2
                                         Social Security                      22.5         22.5         22.5      22.5
                                         Total                                42.7         46.6         65.8      69.4       35.8
                                         Average replacement rates at final salary of $40,000:
                                         DB plan                              21.0                      21.7      21.7       35.8
                                         DC plan                                           23.7         22.0      24.8
                                         Social Security                      19.0         19.0         19.0      19.0
                                         Total                                40.0         42.7         62.7      65.5       35.8
                                         Average replacement rates at final salary of $60,000:
                                         DB plan                              21.6                      23.1      21.8       35.8
                                         DC plan                                           23.0         21.4      24.2
                                         Social Security                      16.3         16.3         16.3      16.3
                                         Total                                37.9         39.3         60.8      62.3       35.8




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                       10 years after retirement                                                  20 years after retirement
    Private sector                                                          Private sector
         DB and DC                        Federal                                 DB and DC                            Federal
S             plans            FERS         CSRS I             CSRS II                 plans              FERS           CSRS I              CSRS II


8               14.1            19.7           35.8                 32.8                  10.0              17.9             35.8                30.1
                14.4            16.2                                                        9.2             10.4
                22.5            22.5                                                      22.5              22.5
8               51.0            58.4           35.8                 32.8                  41.7              50.8             35.8                30.1


8               14.6            19.7           35.8                 32.8                  10.3              17.9             35.8                30.1
                14.2            16.0                                                        9.1             10.3
                19.0            19.0                                                      19.0              19.0
8               47.8            54.7           35.8                 32.8                  38.4              47.2             35.8                30.1


8               15.6            19.8           35.8                 32.8                  11.0              18.0             35.8                30.1
                13.8            15.6                                                        8.9             10.0
                16.3            16.3                                                      16.3              16.3
8               45.7            51.7           35.8                 32.8                  36.2              44.3             35.8                30.1
                                               Note 1: Because of differences in the annual rates of growth in the three salary histories, the
                                               replacement rates may differ somewhat for each salary history.

                                               Note 2: Some columns show no data because all of the program components are not applicable
                                               to all of the retirement plans.




                                               Page 79                                 GAO/GGD-97-40 Federal and Private Retirement Benefits
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                                         Results of the Replacement Rate Analysis




Table III.3: Average Replacement Rates
Available With Maximum Employer                                                                  At retirement
Contributions to DC Plans - Age 65                                                  Private sector
and 20 Years of Service                                                                                           Federal
                                                                         DB plans DC plans  DB and
                                         Program component                   only     only DC plans              FERS       CSRS
                                         Average replacement rates at final salary of $25,000:
                                         DB plan                              23.0                      22.8      21.8       35.8
                                         DC plan                                           25.6         23.7      26.8
                                         Social Security                      27.1         27.1         27.1      27.1
                                         Total                                50.1         52.7         73.6      75.7       35.8
                                         Average replacement rates at final salary of $40,000:
                                         DB plan                              24.1                      24.0      21.7       35.8
                                         DC plan                                           25.2         23.5      26.4
                                         Social Security                      23.0         23.0         23.0      23.0
                                         Total                                47.1         48.2         70.5      71.1       35.8
                                         Average replacement rates at final salary of $60,000:
                                         DB plan                              25.0                      25.4      21.7       35.9
                                         DC plan                                           24.5         22.8      25.8
                                         Social Security                      19.6         19.6         19.6      19.6
                                         Total                                44.6         44.1         67.8      67.1       35.9




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                       10 years after retirement                                                  20 years after retirement
    Private sector                                                          Private sector
         DB and DC                        Federal                                 DB and DC                            Federal
S             plans            FERS         CSRS I             CSRS II                 plans              FERS           CSRS I              CSRS II


8               15.4            19.8           35.8                 32.8                  10.8              18.0             35.8                30.1
                15.3            17.3                                                        9.8             11.1
                27.1            27.1                                                      27.1              27.1
8               57.8            64.2           35.8                 32.8                  47.7              56.2             35.8                30.1


8               16.2            19.7           35.8                 32.8                  11.4              17.9             35.8                30.1
                15.1            17.0                                                        9.7             10.9
                23.0            23.0                                                      23.0              23.0
8               54.3            59.7           35.8                 32.8                  44.1              51.8             35.8                30.1


9               17.1            19.7           35.9                 32.9                  12.0              17.9             35.9                30.2
                14.7            16.6                                                        9.5             10.7
                19.6            19.6                                                      19.6              19.6
9               51.4            55.9           35.9                 32.9                  41.1              48.2             35.9                30.2
                                               Note 1: Because of differences in the annual rates of growth in the three salary histories, the
                                               replacement rates may differ somewhat for each salary history.

                                               Note 2: Some columns show no data because all of the program components are not applicable
                                               to all of the retirement plans.




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                                         Results of the Replacement Rate Analysis




Table III.4: Average Replacement Rates
Available With Maximum Employer                                                                  At retirement
Contributions to DC Plans - Age 62                                                  Private sector
and 30 Years of Service                                                                                           Federal
                                                                         DB plans DC plans  DB and
                                         Program component                   only     only DC plans              FERS       CSRS
                                         Average replacement rates at final salary of $25,000:
                                         DB plan                              32.3                      30.8      32.6       55.6
                                         DC plan                                           36.6         32.1      37.2
                                         Social Security                      25.3         25.3         25.3      25.3
                                         Total                                57.6         61.9         88.2      95.1       55.6
                                         Average replacement rates at final salary of $40,000:
                                         DB plan                              30.8                      29.3      31.2       53.2
                                         DC plan                                           29.8         26.2      30.4
                                         Social Security                      19.2         19.2         19.2      19.2
                                         Total                                50.0         49.0         74.7      80.8       53.2
                                         Average replacement rates at final salary of $60,000:
                                         DB plan                              34.2                      33.5      32.6       55.6
                                         DC plan                                           33.1         29.3      34.0
                                         Social Security                      16.9         16.9         16.9      16.9
                                         Total                                51.1         50.0         79.7      83.5       55.6




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                       10 years after retirement                                                 20 years after retirement
    Private sector                                                          Private sector
         DB and DC                        Federal                                 DB and DC                            Federal
S             plans            FERS         CSRS I             CSRS II                 plans              FERS           CSRS I              CSRS II


6               20.7            29.6           55.6                 51.0                  14.6              26.9             55.6                46.8
                20.7            24.0                                                      13.3              15.4
                25.3            25.3                                                      25.3              25.3
6               66.7            78.9           55.6                 51.0                  53.2              67.6             55.6                46.8


2               19.7            28.3           53.2                 48.8                  13.9              25.7             53.2                44.7
                16.9            19.6                                                      10.9              12.6
                19.2            19.2                                                      19.2              19.2
2               55.8            67.1           53.2                 48.8                  44.0              57.5             53.2                44.7


6               22.6            29.6           55.6                 51.0                  15.9              26.9             55.6                46.8
                18.9            21.9                                                      12.1              14.1
                16.9            16.9                                                      16.9              16.9
6               58.4            68.4           55.6                 51.0                  44.9              57.9             55.6                46.8
                                               Note 1: Because of differences in the annual rates of growth in the three salary histories, the
                                               replacement rates may differ somewhat for each salary history.

                                               Note 2: Some columns show no data because all of the program components are not applicable
                                               to all of the retirement plans.




                                               Page 83                                 GAO/GGD-97-40 Federal and Private Retirement Benefits
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                                         Results of the Replacement Rate Analysis




Table III.5: Average Replacement Rates
Available With Maximum Employer                                                                  At retirement
Contributions to DC Plans - Age 65                                                  Private sector
and 30 Years of Service                                                                                           Federal
                                                                         DB plans DC plans  DB and
                                         Program component                   only     only DC plans              FERS       CSRS
                                         Average replacement rates at final salary of $25,000:
                                         DB plan                              36.2                      32.7      32.6       55.6
                                         DC plan                                           38.9         34.2      39.6
                                         Social Security                      30.3         30.3         30.3      30.3
                                         Total                                66.5         69.2         97.2     102.5       55.6
                                         Average replacement rates at final salary of $40,000:
                                         DB plan                              34.7                      31.3      31.2       53.1
                                         DC plan                                           31.7         27.9      32.4
                                         Social Security                      23.1         23.1         23.1      23.1
                                         Total                                57.8         54.8         82.3      86.7       53.1
                                         Average replacement rates at final salary of $60,000:
                                         DB plan                              38.7                      36.1      32.6       55.6
                                         DC plan                                           35.3         31.2      36.2
                                         Social Security                      20.6         20.6         20.6      20.6
                                         Total                                59.3         55.9         87.9      89.4       55.6




                                         Page 84                           GAO/GGD-97-40 Federal and Private Retirement Benefits
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                       10 years after retirement                                                 20 years after retirement
    Private sector                                                          Private sector
         DB and DC                        Federal                                 DB and DC                            Federal
S             plans            FERS         CSRS I             CSRS II                 plans              FERS           CSRS I              CSRS II


6               22.0            29.6           55.6                 51.0                  15.5              26.9             55.6                46.8
                22.0            25.5                                                      14.2              16.4
                30.3            30.3                                                      30.3              30.3
6               74.3            85.4           55.6                 51.0                  60.0              73.6             55.6                46.8


                21.1            28.3           53.1                 48.7                  14.8              25.7             53.1                44.7
                18.0            20.9                                                      11.6              13.4
                23.1            23.1                                                      23.1              23.1
                62.2            72.3           53.1                 48.7                  49.5              62.2             53.1                44.7


6               24.3            29.6           55.6                 51.0                  17.1              26.9             55.6                46.8
                20.1            23.3                                                      12.9              15.0
                20.6            20.6                                                      20.6              20.6
6               65.0            73.5           55.6                 51.0                  50.6              62.5             55.6                46.8
                                               Note 1: Because of differences in the annual rates of growth in the three salary histories, the
                                               replacement rates may differ somewhat for each salary history.

                                               Note 2: Some columns show no data because all of the program components are not applicable
                                               to all of the retirement plans.




                                               Page 85                                 GAO/GGD-97-40 Federal and Private Retirement Benefits
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                                         Results of the Replacement Rate Analysis




Table III.6: Average Replacement Rates
Available With One-half of the                                                                   At retirement
Maximum Employer Contributions to                                                   Private sector
DC Plans - Age 55 and 30 Years of                                                                                 Federal
                                                                         DB plans DC plans  DB and
Service
                                         Program component                   only     only DC plans              FERS       CSRS
                                         Average replacement rates at final salary of $25,000:
                                         DB plan                              20.0                      22.2      41.6       55.6
                                         DC plan                                           20.0         16.3      20.0
                                         Social Security
                                         Total                                20.0         20.0         38.5      61.6       55.6
                                         Average replacement rates at final salary of $40,000:
                                         DB plan                              19.0                      21.1      37.4       53.1
                                         DC plan                                           16.3         13.3      16.3
                                         Social Security
                                         Total                                19.0         16.3         34.4      53.7       53.1
                                         Average replacement rates at final salary of $60,000:
                                         DB plan                              20.8                      23.4      37.8       55.6
                                         DC plan                                           18.2         14.8      18.3
                                         Social Security
                                         Total                                20.8         18.2         38.2      56.1       55.6




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                       10 years after retirement                                                  20 years after retirement
    Private sector                                                          Private sector
         DB and DC                        Federal                                 DB and DC                            Federal
S             plans            FERS         CSRS I             CSRS II                 plans              FERS           CSRS I              CSRS II


6               15.0            21.2           55.6                 51.0                  10.5              19.3             55.6                46.8
                10.5            12.9                                                        6.8              8.3
                25.3            25.3                                                      25.3              25.3
6               50.8            59.4           55.6                 51.0                  42.6              52.9             55.6                46.8


                14.2            20.2           53.1                 48.7                  10.0              18.4             53.1                44.7
                 8.6            10.5                                                        5.5              6.8
                19.2            19.2                                                      19.2              19.2
                42.0            49.9           53.1                 48.7                  34.7              44.4             53.1                44.7


6               15.8            21.2           55.6                 51.0                  11.1              19.3             55.6                46.8
                 9.5            11.8                                                        6.1              7.6
                16.9            16.9                                                      16.9              16.9
6               42.2            49.9           55.6                 51.0                  34.1              43.8             55.6                46.8
                                               Note 1: Because of differences in the annual rates of growth in the three salary histories, the
                                               replacement rates may differ somewhat for each salary history.

                                               Note 2: Some columns show no data because all of the program components are not applicable
                                               to all of the retirement plans.




                                               Page 87                                 GAO/GGD-97-40 Federal and Private Retirement Benefits
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                                         Results of the Replacement Rate Analysis




Table III.7: Average Replacement Rates
Available With One-half of the                                                                   At retirement
Maximum Employer Contributions to                                                   Private sector
DC Plans - Age 62 and 20 Years of                                                                                 Federal
                                                                         DB plans DC plans  DB and
Service
                                         Program component                   only     only DC plans              FERS       CSRS
                                         Average replacement rates at final salary of $25,000:
                                         DB plan                              20.2                      21.0      21.7       35.8
                                         DC plan                                           15.1         12.3      15.1
                                         Social Security                      22.5         22.5         22.5      22.5
                                         Total                                42.7         37.6         55.8      59.3       35.8
                                         Average replacement rates at final salary of $40,000:
                                         DB plan                              21.0                      21.7      21.7       35.8
                                         DC plan                                           14.9         12.2      14.9
                                         Social Security                      19.0         19.0         19.0      19.0
                                         Total                                40.0         33.9         52.9      55.6       35.8
                                         Average replacement rates at final salary of $60,000:
                                         DB plan                              21.6                      23.1      21.8       35.8
                                         DC plan                                           14.4         11.8      14.6
                                         Social Security                      16.3         16.3         16.3      16.3
                                         Total                                37.9         30.7         51.2      52.7       35.8




                                         Page 88                           GAO/GGD-97-40 Federal and Private Retirement Benefits
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                       10 years after retirement                                                  20 years after retirement
    Private sector                                                          Private sector
         DB and DC                        Federal                                 DB and DC                            Federal
S             plans            FERS         CSRS I             CSRS II                 plans              FERS           CSRS I              CSRS II


8               14.1            19.7           35.8                 32.8                  10.0              17.9             35.8                30.1
                 7.9              9.7                                                       5.1              6.3
                22.5            22.5                                                      22.5              22.5
8               44.5            51.9           35.8                 32.8                  37.6              46.7             35.8                30.1


8               14.6            19.7           35.8                 32.8                  10.3              17.9             35.8                30.1
                 7.9              9.6                                                       5.1              6.2
                19.0            19.0                                                      19.0              19.0
8               41.5            48.3           35.8                 32.8                  34.4              43.1             35.8                30.1


8               15.6            19.8           35.8                 32.8                  11.0              18.0             35.8                30.1
                 7.6              9.4                                                       4.9              6.1
                16.3            16.3                                                      16.3              16.3
8               39.5            45.5           35.8                 32.8                  32.2              40.4             35.8                30.1
                                               Note 1: Because of differences in the annual rates of growth in the three salary histories, the
                                               replacement rates may differ somewhat for each salary history.

                                               Note 2: Some columns show no data because all of the program components are not applicable
                                               to all of the retirement plans.




                                               Page 89                                 GAO/GGD-97-40 Federal and Private Retirement Benefits
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                                         Results of the Replacement Rate Analysis




Table III.8: Average Replacement Rates
Available With One-half of the                                                                   At retirement
Maximum Employer Contributions to                                                   Private sector
DC Plans - Age 65 and 20 Years of                                                                                 Federal
                                                                         DB plans DC plans  DB and
Service
                                         Program component                   only     only DC plans              FERS       CSRS
                                         Average replacement rates at final salary of $25,000:
                                         DB plan                              23.0                      22.8      21.8       35.8
                                         DC plan                                           16.0         13.1      16.1
                                         Social Security                      27.1         27.1         27.1      27.1
                                         Total                                50.1         43.1         63.0      65.0       35.8
                                         Average replacement rates at final salary of $40,000:
                                         DB plan                              24.1                      24.0      21.7       35.8
                                         DC plan                                           15.8         12.9      15.9
                                         Social Security                      23.0         23.0         23.0      23.0
                                         Total                                47.1         38.8         59.9      60.6       35.8
                                         Average replacement rates at final salary of $60,000:
                                         DB plan                              25.0                      25.4      21.7       35.9
                                         DC plan                                           15.4         12.6      15.5
                                         Social Security                      19.6         19.6         19.6      19.6
                                         Total                                44.6         35.0         57.6      56.8       35.9




                                         Page 90                           GAO/GGD-97-40 Federal and Private Retirement Benefits
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                       10 years after retirement                                                  20 years after retirement
    Private sector                                                          Private sector
         DB and DC                        Federal                                 DB and DC                            Federal
S             plans            FERS         CSRS I             CSRS II                 plans              FERS           CSRS I              CSRS II


8               15.4            19.8           35.8                 32.8                  10.8              18.0             35.8                30.1
                 8.4            10.4                                                        5.4              6.7
                27.1            27.1                                                      27.1              27.1
8               50.9            57.3           35.8                 32.8                  43.3              51.8             35.8                30.1


8               16.2            19.7           35.8                 32.8                  11.4              17.9             35.8                30.1
                 8.3            10.2                                                        5.3              6.6
                23.0            23.0                                                      23.0              23.0
8               47.5            52.9           35.8                 32.8                  39.7              47.5             35.8                30.1


9               17.1            19.7           35.9                 32.9                  12.0              17.9             35.9                30.2
                 8.1            10.0                                                        5.2              6.4
                19.6            19.6                                                      19.6              19.6
9               44.8            49.3           35.9                 32.9                  36.8              43.9             35.9                30.2
                                               Note 1: Because of differences in the annual rates of growth in the three salary histories, the
                                               replacement rates may differ somewhat for each salary history.

                                               Note 2: Some columns show no data because all of the program components are not applicable
                                               to all of the retirement plans.




                                               Page 91                                 GAO/GGD-97-40 Federal and Private Retirement Benefits
                                         Appendix III
                                         Results of the Replacement Rate Analysis




Table III.9: Average Replacement Rates
Available With One-half of the                                                                   At retirement
Maximum Employer Contributions to                                                   Private sector
DC Plans - Age 62 and 30 Years of                                                                                 Federal
                                                                         DB plans DC plans  DB and
Service
                                         Program component                   only     only DC plans              FERS       CSRS
                                         Average replacement rates at final salary of $25,000:
                                         DB plan                              32.3                      30.8      32.6       55.6
                                         DC plan                                           22.8         17.5      22.3
                                         Social Security                      25.3         25.3         25.3      25.3
                                         Total                                57.6         48.1         73.6      80.2       55.6
                                         Average replacement rates at final salary of $40,000:
                                         DB plan                              30.8                      29.3      31.2       53.2
                                         DC plan                                           18.6         14.3      18.2
                                         Social Security                      19.2         19.2         19.2      19.2
                                         Total                                50.0         37.8         62.8      68.6       53.2
                                         Average replacement rates at final salary of $60,000:
                                         DB plan                              34.2                      33.5      32.6       55.6
                                         DC plan                                           20.7         15.9      20.4
                                         Social Security                      16.9         16.9         16.9      16.9
                                         Total                                51.1         37.6         66.3      69.9       55.6




                                         Page 92                           GAO/GGD-97-40 Federal and Private Retirement Benefits
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                       10 years after retirement                                                  20 years after retirement
    Private sector                                                          Private sector
         DB and DC                        Federal                                 DB and DC                            Federal
S             plans            FERS         CSRS I             CSRS II                 plans              FERS           CSRS I              CSRS II


6               20.7            29.6           55.6                 51.0                  14.6              26.9             55.6                46.8
                11.3            14.4                                                        7.3              9.2
                25.3            25.3                                                      25.3              25.3
6               57.3            69.3           55.6                 51.0                  47.2              61.4             55.6                46.8


2               19.7            28.3           53.2                 48.8                  13.9              25.7             53.2                44.7
                 9.2            11.7                                                        5.9              7.5
                19.2            19.2                                                      19.2              19.2
2               48.1            59.2           53.2                 48.8                  39.0              52.4             53.2                44.7


6               22.6            29.6           55.6                 51.0                  15.9              26.9             55.6                46.8
                10.2            13.1                                                        6.6              8.5
                16.9            16.9                                                      16.9              16.9
6               49.7            59.6           55.6                 51.0                  39.4              52.3             55.6                46.8
                                               Note 1: Because of differences in the annual rates of growth in the three salary histories, the
                                               replacement rates may differ somewhat for each salary history.

                                               Note 2: Some columns show no data because all of the program components are not applicable
                                               to all of the retirement plans.




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                                       Results of the Replacement Rate Analysis




Table III.10: Average Replacement
Rates Available With One-half of the                                                           At retirement
Maximum Employer Contributions to                                                 Private sector
DC Plans - Age 65 and 30 Years of                                                                               Federal
                                                                       DB plans DC plans  DB and
Service
                                       Program component                   only     only DC plans              FERS       CSRS
                                       Average replacement rates at final salary of $25,000:
                                       DB plan                              36.2                      32.7      32.6       55.6
                                       DC plan                                           24.3         18.6      23.8
                                       Social Security                      30.3         30.3         30.3      30.3
                                       Total                                66.5         54.6         81.6      86.7       55.6
                                       Average replacement rates at final salary of $40,000:
                                       DB plan                              34.7                      31.3      31.2       53.1
                                       DC plan                                           19.8         15.2      19.4
                                       Social Security                      23.1         23.1         23.1      23.1
                                       Total                                57.8         42.9         69.6      73.7       53.1
                                       Average replacement rates at final salary of $60,000:
                                       DB plan                              38.7                      36.1      32.6       55.6
                                       DC plan                                           22.1         17.0      21.7
                                       Social Security                      20.6         20.6         20.6      20.6
                                       Total                                59.3         42.7         73.7      74.9       55.6




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                                               Results of the Replacement Rate Analysis




                       10 years after retirement                                                  20 years after retirement
    Private sector                                                          Private sector
         DB and DC                        Federal                                 DB and DC                            Federal
S             plans            FERS         CSRS I             CSRS II                 plans              FERS           CSRS I              CSRS II


6               22.0            29.6           55.6                 51.0                  15.5              26.9             55.6                46.8
                12.0            15.3                                                        7.7              9.9
                30.3            30.3                                                      30.3              30.3
6               64.3            75.2           55.6                 51.0                  53.5              67.1             55.6                46.8


                21.1            28.3           53.1                 48.7                  14.8              25.7             53.1                44.7
                 9.8            12.5                                                        6.3              8.0
                23.1            23.1                                                      23.1              23.1
                54.0            63.9           53.1                 48.7                  44.2              56.8             53.1                44.7


6               24.3            29.6           55.6                 51.0                  17.1              26.9             55.6                46.8
                10.9            14.0                                                        7.0              9.0
                20.6            20.6                                                      20.6              20.6
6               55.8            64.2           55.6                 51.0                  44.7              56.5             55.6                46.8
                                               Note 1: Because of differences in the annual rates of growth in the three salary histories, the
                                               replacement rates may differ somewhat for each salary history.

                                               Note 2: Some columns show no data because all of the program components are not applicable
                                               to all of the retirement plans.




                                               Page 95                                 GAO/GGD-97-40 Federal and Private Retirement Benefits
                                     Appendix III
                                     Results of the Replacement Rate Analysis




Table III.11: Average Replacement
Rates Available With No Employee                                                             At retirement
Contributions to DC Plans - Age 55                                              Private sector
and 30 Years of Service                                                                                       Federal
                                                                     DB plans DC plans  DB and
                                     Program component                   only     only DC plans              FERS       CSRS
                                     Average replacement rates at final salary of $25,000:
                                     DB plan                              20.0                      22.2      41.6       55.6
                                     DC plan                                             7.7         2.5       3.4
                                     Social Security
                                     Total                                20.0           7.7        24.7      45.0       55.6
                                     Average replacement rates at final salary of $40,000:
                                     DB plan                              19.0                      21.1      37.4       53.1
                                     DC plan                                             6.3         2.1       2.8
                                     Social Security
                                     Total                                19.0           6.3        23.2      40.2       53.1
                                     Average replacement rates at final salary of $60,000:
                                     DB plan                              20.8                      23.4      37.8       55.6
                                     DC plan                                             7.0         2.3       3.1
                                     Social Security
                                     Total                                20.8           7.0        25.7      40.9       55.6




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                                               Results of the Replacement Rate Analysis




                       10 years after retirement                                                  20 years after retirement
    Private sector                                                          Private sector
         DB and DC                        Federal                                 DB and DC                            Federal
S             plans            FERS         CSRS I             CSRS II                 plans              FERS           CSRS I              CSRS II


6               15.0            21.2           55.6                 51.0                  10.5              19.3             55.6                46.8
                 1.6              2.2                                                       1.0              1.4
                25.3            25.3                                                      25.3              25.3
6               41.9            48.7           55.6                 51.0                  36.8              46.0             55.6                46.8


                14.2            20.2           53.1                 48.7                  10.0              18.4             53.1                44.7
                 1.4              1.8                                                       0.9              1.2
                19.2            19.2                                                      19.2              19.2
                34.8            41.2           53.1                 48.7                  30.1              38.8             53.1                44.7


6               15.8            21.2           55.6                 51.0                  11.1              19.3             55.6                46.8
                 1.5              2.0                                                       1.0              1.3
                16.9            16.9                                                      16.9              16.9
6               34.2            40.1           55.6                 51.0                  29.0              37.5             55.6                46.8
                                               Note 1: Because of differences in the annual rates of growth in the three salary histories, the
                                               replacement rates may differ somewhat for each salary history.

                                               Note 2: Some columns show no data because all of the program components are not applicable
                                               to all of the retirement plans.




                                               Page 97                                 GAO/GGD-97-40 Federal and Private Retirement Benefits
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                                     Results of the Replacement Rate Analysis




Table III.12: Average Replacement
Rates Available With No Employee                                                             At retirement
Contributions to DC Plans - Age 62                                              Private sector
and 20 Years of Service                                                                                       Federal
                                                                     DB plans DC plans  DB and
                                     Program component                   only     only DC plans              FERS       CSRS
                                     Average replacement rates at final salary of $25,000:
                                     DB plan                              20.2                      21.0      21.7       35.8
                                     DC plan                                             5.8         1.9       2.5
                                     Social Security                      22.5         22.5         22.5      22.5
                                     Total                                42.7         28.3         45.4      46.7       35.8
                                     Average replacement rates at final salary of $40,000:
                                     DB plan                              21.0                      21.7      21.7       35.8
                                     DC plan                                             5.7         1.9       2.5
                                     Social Security                      19.0         19.0         19.0      19.0
                                     Total                                40.0         24.7         42.6      43.2       35.8
                                     Average replacement rates at final salary of $60,000:
                                     DB plan                              21.6                      23.1      21.8       35.8
                                     DC plan                                             5.6         1.8       2.4
                                     Social Security                      16.3         16.3         16.3      16.3
                                     Total                                37.9         21.9         41.2      40.5       35.8




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                       10 years after retirement                                                  20 years after retirement
    Private sector                                                          Private sector
         DB and DC                        Federal                                 DB and DC                            Federal
S             plans            FERS         CSRS I             CSRS II                 plans              FERS           CSRS I              CSRS II


8               14.1            19.7           35.8                 32.8                  10.0              17.9             35.8                30.1
                 1.2              1.6                                                       0.8              1.0
                22.5            22.5                                                      22.5              22.5
8               37.8            43.8           35.8                 32.8                  33.3              41.4             35.8                30.1


8               14.6            19.7           35.8                 32.8                  10.3              17.9             35.8                30.1
                 1.2              1.6                                                       0.8              1.0
                19.0            19.0                                                      19.0              19.0
8               34.8            40.3           35.8                 32.8                  30.1              37.9             35.8                30.1


8               15.6            19.8           35.8                 32.8                  11.0              18.0             35.8                30.1
                 1.2              1.5                                                       0.7              1.0
                16.3            16.3                                                      16.3              16.3
8               33.1            37.6           35.8                 32.8                  28.0              35.3             35.8                30.1
                                               Note 1: Because of differences in the annual rates of growth in the three salary histories, the
                                               replacement rates may differ somewhat for each salary history.

                                               Note 2: Some columns show no data because all of the program components are not applicable
                                               to all of the retirement plans.




                                               Page 99                                 GAO/GGD-97-40 Federal and Private Retirement Benefits
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                                     Results of the Replacement Rate Analysis




Table III.13: Average Replacement
Rates Available With No Employee                                                             At retirement
Contributions to DC Plans - Age 65                                              Private sector
and 20 Years of Service                                                                                       Federal
                                                                     DB plans DC plans  DB and
                                     Program component                   only     only DC plans              FERS       CSRS
                                     Average replacement rates at final salary of $25,000:
                                     DB plan                              23.0                      22.8      21.8       35.8
                                     DC plan                                             6.2         2.0       2.7
                                     Social Security                      27.1         27.1         27.1      27.1
                                     Total                                50.1         33.3         51.9      51.6       35.8
                                     Average replacement rates at final salary of $40,000:
                                     DB plan                              24.1                      24.0      21.7       35.8
                                     DC plan                                             6.1         2.0       2.7
                                     Social Security                      23.0         23.0         23.0      23.0
                                     Total                                47.1         29.1         49.0      47.4       35.8
                                     Average replacement rates at final salary of $60,000:
                                     DB plan                              25.0                      25.4      21.7       35.9
                                     DC plan                                             6.0         2.0       2.6
                                     Social Security                      19.6         19.6         19.6      19.6
                                     Total                                44.6         25.6         47.0      43.9       35.9




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                       10 years after retirement                                                  20 years after retirement
    Private sector                                                          Private sector
         DB and DC                        Federal                                 DB and DC                            Federal
S             plans            FERS         CSRS I             CSRS II                 plans              FERS           CSRS I              CSRS II


8               15.4            19.8           35.8                 32.8                  10.8              18.0             35.8                30.1
                 1.3              1.7                                                       0.8              1.1
                27.1            27.1                                                      27.1              27.1
8               43.8            48.6           35.8                 32.8                  38.7              46.2             35.8                30.1


8               16.2            19.7           35.8                 32.8                  11.4              17.9             35.8                30.1
                 1.3              1.7                                                       0.8              1.1
                23.0            23.0                                                      23.0              23.0
8               40.5            44.4           35.8                 32.8                  35.2              42.0             35.8                30.1


9               17.1            19.7           35.9                 32.9                  12.0              17.9             35.9                30.2
                 1.3              1.7                                                       0.8              1.1
                19.6            19.6                                                      19.6              19.6
9               38.0            41.0           35.9                 32.9                  32.4              38.6             35.9                30.2
                                               Note 1: Because of differences in the annual rates of growth in the three salary histories, the
                                               replacement rates may differ somewhat for each salary history.

                                               Note 2: Some columns show no data because all of the program components are not applicable
                                               to all of the retirement plans.




                                               Page 101                                GAO/GGD-97-40 Federal and Private Retirement Benefits
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                                     Results of the Replacement Rate Analysis




Table III.14: Average Replacement
Rates Available With No Employee                                                             At retirement
Contributions to DC Plans - Age 62                                              Private sector
and 30 Years of Service                                                                                       Federal
                                                                     DB plans DC plans  DB and
                                     Program component                   only     only DC plans              FERS       CSRS
                                     Average replacement rates at final salary of $25,000:
                                     DB plan                              32.3                      30.8      32.6       55.6
                                     DC plan                                             8.9         2.2       3.8
                                     Social Security                      25.3         25.3         25.3      25.3
                                     Total                                57.6         34.2         58.3      61.7       55.6
                                     Average replacement rates at final salary of $40,000:
                                     DB plan                              30.8                      29.3      31.2       53.2
                                     DC plan                                             7.3         1.8       3.1
                                     Social Security                      19.2         19.2         19.2      19.2
                                     Total                                50.0         26.5         50.3      53.5       53.2
                                     Average replacement rates at final salary of $60,000:
                                     DB plan                              34.2                      33.5      32.6       55.6
                                     DC plan                                             8.1         2.0       3.4
                                     Social Security                      16.9         16.9         16.9      16.9
                                     Total                                51.1         25.0         52.4      52.9       55.6




                                     Page 102                          GAO/GGD-97-40 Federal and Private Retirement Benefits
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                                               Results of the Replacement Rate Analysis




                       10 years after retirement                                                  20 years after retirement
    Private sector                                                          Private sector
         DB and DC                        Federal                                 DB and DC                            Federal
S             plans            FERS         CSRS I             CSRS II                 plans              FERS           CSRS I              CSRS II


6               20.7            29.6           55.6                 51.0                  14.6              26.9             55.6                46.8
                 1.4              2.4                                                       0.9              1.6
                25.3            25.3                                                      25.3              25.3
6               47.4            57.3           55.6                 51.0                  40.8              53.8             55.6                46.8


2               19.7            28.3           53.2                 48.8                  13.9              25.7             53.2                44.7
                 1.2              2.0                                                       0.7              1.3
                19.2            19.2                                                      19.2              19.2
2               40.1            49.5           53.2                 48.8                  33.8              46.2             53.2                44.7


6               22.6            29.6           55.6                 51.0                  15.9              26.9             55.6                46.8
                 1.3              2.2                                                       0.8              1.4
                16.9            16.9                                                      16.9              16.9
6               40.8            48.7           55.6                 51.0                  33.6              45.2             55.6                46.8
                                               Note 1: Because of differences in the annual rates of growth in the three salary histories, the
                                               replacement rates may differ somewhat for each salary history.

                                               Note 2: Some columns show no data because all of the program components are not applicable
                                               to all of the retirement plans.




                                               Page 103                                GAO/GGD-97-40 Federal and Private Retirement Benefits
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                                     Results of the Replacement Rate Analysis




Table III.15: Average Replacement
Rates Available With No Employee                                                             At retirement
Contributions to DC Plans - Age 65                                              Private sector
and 30 Years of Service                                                                                       Federal
                                                                     DB plans DC plans  DB and
                                     Program component                   only     only DC plans              FERS       CSRS
                                     Average replacement rates at final salary of $25,000:
                                     DB plan                              36.2                      32.7      32.6       55.6
                                     DC plan                                             9.5         2.3       4.0
                                     Social Security                      30.3         30.3         30.3      30.3
                                     Total                                66.5         39.8         65.3      66.9       55.6
                                     Average replacement rates at final salary of $40,000:
                                     DB plan                              34.7                      31.3      31.2       53.1
                                     DC plan                                             7.8         1.9       3.3
                                     Social Security                      23.1         23.1         23.1      23.1
                                     Total                                57.8         30.9         56.3      57.6       53.1
                                     Average replacement rates at final salary of $60,000:
                                     DB plan                              38.7                      36.1      32.6       55.6
                                     DC plan                                             8.7         2.1       3.7
                                     Social Security                      20.6         20.6         20.6      20.6
                                     Total                                59.3         29.3         58.8      56.9       55.6




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                                               Results of the Replacement Rate Analysis




                       10 years after retirement                                                  20 years after retirement
    Private sector                                                          Private sector
         DB and DC                        Federal                                 DB and DC                            Federal
S             plans            FERS         CSRS I             CSRS II                 plans              FERS           CSRS I              CSRS II


6               22.0            29.6           55.6                 51.0                  15.5              26.9             55.6                46.8
                 1.5              2.6                                                       1.0              1.7
                30.3            30.3                                                      30.3              30.3
6               53.8            62.5           55.6                 51.0                  46.8              58.9             55.6                46.8


                21.1            28.3           53.1                 48.7                  14.8              25.7             53.1                44.7
                 1.2              2.1                                                       0.8              1.4
                23.1            23.1                                                      23.1              23.1
                45.4            53.5           53.1                 48.7                  38.7              50.2             53.1                44.7


6               24.3            29.6           55.6                 51.0                  17.1              26.9             55.6                46.8
                 1.4              2.4                                                       0.9              1.5
                20.6            20.6                                                      20.6              20.6
6               46.3            52.6           55.6                 51.0                  38.6              49.0             55.6                46.8
                                               Note 1: Because of differences in the annual rates of growth in the three salary histories, the
                                               replacement rates may differ somewhat for each salary history.

                                               Note 2: Some columns show no data because all of the program components are not applicable
                                               to all of the retirement plans.




                                               Page 105                                GAO/GGD-97-40 Federal and Private Retirement Benefits
Appendix IV

Features of Federal and Private Sector
Defined Benefit Plans

               The Watson Wyatt database included information on the retirement
               programs of 661 employers of which 497 had DB plans. Sufficient
               information was available to enable Watson Wyatt to determine the benefit
               amounts provided by 435 of the 661 employers. Of the 435 employers
               whose program benefits could be valued, 329 had DB plans. Of these 329
               employers, 25 had retirement programs that included DB plans only and
               304 had programs that included both DB and DC plans.

               This appendix describes in detail the features of all 497 DB plans included
               in the 661 programs in Watson Wyatt’s database. It also describes
               separately the features of the 329 DB plans in the 435 programs that could
               be valued. The private sector DB plans are divided into three categories.
               The first category, “all employers in database,” contains data on all 497 DB
               plans. The second category, “DB plans only,” contains data on the 25
               programs with DB plans only whose benefits could be valued. The third
               category, “DB and DC plans,” contains data on the DB plans in the 304
               programs with DB and DC plans whose benefits could be valued. Therefore,
               the number of plans in the second and third categories will not total the
               number of plans in the first category.

               The number of plans in each table varies because plans are sometimes
               excluded when a particular feature is not applicable to them. For example,
               in table IV.1, the total number of plans in the “all employers in database”
               category is 497, but in table IV.5, the total number of plans in that category
               is 470. Twenty-seven plans were excluded because they were
               nontraditional plans that, by nature, do not use salary averages in benefit
               calculations.




               Page 106                      GAO/GGD-97-40 Federal and Private Retirement Benefits
                                             Appendix IV
                                             Features of Federal and Private Sector
                                             Defined Benefit Plans




Table IV.1: Eligibility Requirements to Participate in the Defined Benefit Plans
                                 Private sector (percentage of plans)
                                                     Employers whose
                                                     program benefits
                                                      could be valued
                                  All employers DB plans  DB and                                           Federal
Eligibility requirements            in database     only DC plans FERS                                           CSRS
Immediate (any age/any                       25           28           23 Immediate                              Immediate
service)
Any age/6 months service                         3         0             4
Any age/12 months service                    18            4           18
Any age/Other service                            2         4             2
requirement
Age 18                                           4        12             3
Age 21/12 months service                     36           44           39
Age 21/Service other than 12                     7         4             7
months
Other age/Service requirement                    2         4             2
No response                                      3         0             2
Number of plans                             497           25          304



Table IV.2: Vesting Schedule
                                  Private sector (percentage of plans)
                                                     Employers whose
                                                     program benefits
                                                      could be valued
                                  All employers DB plans  DB and                                           Federal
Vesting schedulea                   in database     only DC plans FERS                                           CSRS
Cliff vesting, 5 years service               91           92           95 Cliff vesting, 5 years service         Cliff vesting, 5 years service
Graded vesting, 7 years service                  3         4             3
Other vesting schedule                           5         4             2
No response                                      1         0             0
Number of plans                             497           25          304
                                             a
                                              If certain conditions are satisfied at the time an employee separates from an employer, the
                                             employee will have a vested interest in all or a portion of his or her accrued defined benefit plan
                                             benefits. Under cliff vesting, an employee must complete a set number of years of service before
                                             any benefits are guaranteed. Under graded vesting, an employee is guaranteed an increasing
                                             portion of plan benefits as his or her years of service increase.




                                             Page 107                               GAO/GGD-97-40 Federal and Private Retirement Benefits
                                           Appendix IV
                                           Features of Federal and Private Sector
                                           Defined Benefit Plans




Table IV.3: Employee Contribution Requirements
                               Private sector (percentage of plans)
                                                   Employers whose
                                                   program benefits
                                                    could be valued
                                All employers DB plans  DB and                                          Federal
Employee contributions            in database     only DC plans FERS                                         CSRS
Required                                       7            8             4 7% of base pay for general       7% of base pay for general
                                                                            employees minus                  employees
                                                                            contributions to Social
                                                                            Securityb
Not required                              92              92             96
                                                                           a
No response                                    1            0
Number of plans                          497              25            304
                                           a
                                               Less than 0.5 percent.
                                           b
                                            The Social Security contribution rate since 1990 has been 6.2 percent of pay up to the Social
                                           Security pay ceiling, meaning that employees in FERS contribute 0.8 percent of their pay to the
                                           DB plan.




Table IV.4: Compensation Elements Included in Benefit Calculation Base
                             Private sector (percentage of plans)
                                                   Employers whose
                                                   program benefits
                                                    could be valued
                                All employers DB plans  DB and                                          Federal
Compensation elements             in database     only DC plans FERS                                         CSRS
Base pay                                  97             100             99 Base pay only                    Base pay only
Overtime                                  61              68             63
Commissions                               41              20             47
Bonuses                                   53              48             56
401(k) or salary deferrals                59              48             62
Internal Revenue Code section             44              40             48
125 conversions
Other pay                                 14              16             15
No response                                    2            0             1
Number of plans                          497              25            304
                                           Note: Some employers defined compensation to include more than one element. Therefore,
                                           percentages total to more than 100 percent.




                                           Page 108                                GAO/GGD-97-40 Federal and Private Retirement Benefits
                                           Appendix IV
                                           Features of Federal and Private Sector
                                           Defined Benefit Plans




Table IV.5: Pay Base for Benefit Calculations
                                Private sector (percentage of plans)
                                                    Employers whose
                                                    program benefits
                                                     could be valued
Pay base for benefit             All employers DB plans  DB and                                        Federal
calculations                       in database     only DC plans FERS                                      CSRS
Career average only                        11              0            11 Average of highest 3            Average of highest 3
                                                                           consecutive years of base       consecutive years of base
                                                                           pay rate                        pay rate
Final average, 5-year                      64             77            70
averaging period
Final average, 3-year                      14              0            12
averaging period
Final average, other averaging                 5           9             3
period
More than one formula, career                  1           0             1
average and final average
(5-year averaging period)
                                                a
More than one formula, career                              0             1
average and final average
(3-year averaging period)
Other                                          2           0             2
                                                                          a
No response                                    3          14
Number of plans                           470             22           286
                                           a
                                               Less than 0.5 percent




                                           Page 109                               GAO/GGD-97-40 Federal and Private Retirement Benefits
                                            Appendix IV
                                            Features of Federal and Private Sector
                                            Defined Benefit Plans




Table IV.6: Social Security Integration in Benefit Formulas
                                 Private sector (percentage of plans)
                                                 Employers whose
                                                 program benefits
                                                  could be valued
Social Security integration in   All employers DB plans  DB and                                  Federal
benefit formulas                   in database     only DC plans FERS                                  CSRS
Offset integration formula(s)               21          9          24 No Social Security integration   No Social Security coverage
only
Excess integration formula(s)               47         45          53
only
No integration in any plan                  25         41          17
formula
More than one formula, one                   1          0           1
offset and one excess
More than one formula, one                   4          0           3
offset and one not integrated
More than one formula, one                   2          5           2
excess and one not integrated
No response                                  0          0           0
Number of plans                           470          22         286




                                            Page 110                          GAO/GGD-97-40 Federal and Private Retirement Benefits
                                           Appendix IV
                                           Features of Federal and Private Sector
                                           Defined Benefit Plans




Table IV.7: Age and Years of Service Requirements for Unreduced Retirement Benefits
                               Private sector (percentage of plans)
                                                    Employers whose
                                                    program benefits
Age and years of service                             could be valued
requirements for unreduced        All employers DB plans  DB and                                     Federal
benefits                            in database     only DC plans FERS                                     CSRS
                                                a
Less than age 55                                            0            0 Minimum retirement age and      Age 55 with 30 years of
                                                                           30 years of service, age 60     service, age 60 and 20 years
                                                                           and 20 years of service, or     of service, or age 62 and 5
                                                                           age 62 and 5 years of service   years of service
Age 55                                     10               8            8
Age 60, no years of service                    1            0            0
requirement
Age 60, with a years of service            13               4            16
requirement
Age 62, no years of service                    1            0            2
requirement
Age 62, with a years of service            26               4            28
requirement
Other age requirement, less                    2            0            2
than age 65
Years of service requirement,                  2            4            1
but no age requirement
Age 65                                     43             80             41
No response                                    2            0            2
Number of plans                           497             25            304
                                           a
                                               Less than 0.5 percent.




                                           Page 111                               GAO/GGD-97-40 Federal and Private Retirement Benefits
                                         Appendix IV
                                         Features of Federal and Private Sector
                                         Defined Benefit Plans




Table IV.8: Age and Years of Service Requirements for Reduced Retirement Benefits
                               Private sector (percentage of plans)
                                                  Employers whose
                                                  program benefits
Age and years service                              could be valued
requirements for reduced        All employers DB plans  DB and                                     Federal
benefits                          in database     only DC plans FERS                                   CSRS
Less than age 55                             8          12             7 Minimum retirement age        No provision
                                                                         (varying from ages 55 to 57
                                                                         based on year of birth) and
                                                                         10 years of service
Age 55, 10 years or less of              69             68             73
service
Age 55, more than 10 years of            13               8            13
service
Age 60                                       2            8            2
                                              a
Age 62                                                    0            0
Years of service requirement                 4            4            3
only
Other age requirement                        1            0            1
No response                                  3            0            1
Number of plans                         497             25            304
                                         a
                                             Less than 0.5 percent.




                                         Page 112                               GAO/GGD-97-40 Federal and Private Retirement Benefits
                                           Appendix IV
                                           Features of Federal and Private Sector
                                           Defined Benefit Plans




Table IV.9: Supplemental Benefits Available for Retirees Receiving Reduced Benefits
                              Private sector (percentage of plans)
                                                   Employers whose
                                                   program benefits
                                                    could be valued
Supplemental benefits          All employers DB plans  DB and                                           Federal
available for retirees           in database     only DC plans FERS                                          CSRS
No                                        84              91           86 No supplemental benefits for No supplemental benefits
                                                                          retirees not eligible for
                                                                          unreduced benefits. If eligible
                                                                          for unreduced benefits, an
                                                                          annuity supplement is
                                                                          payable from the MRAa to age
                                                                          62. This supplement equals
                                                                          the portion of the Social
                                                                          Security benefit that was
                                                                          earned during federal service
                                                                          and would be payable at age
                                                                          62.
Yes                                       12               4           13
No response                                    4           5            1
Number of plans                          468              22         285
                                           a
                                             MRA is the minimum optional retirement age. The FERS MRA is age 55 for employees born
                                           before January 1, 1948. The MRA increases until it reaches age 57 for employees born after
                                           December 31, 1969.




Table IV.10: Age at Which Retirement Supplement Ends
                               Private sector (percentage of plans)
                                                   Employers whose
                                                   program benefits
                                                    could be valued
Age at which retirement        All employers DB plans  DB and                                           Federal
supplement ends                  in database     only DC plans FERS                                          CSRS
                                                             a
Age 62                                    87                           87 Age 62                             No supplement paid
                                                             a
Age 65                                         7                        8
                                                             a
Other                                          6                        5
No response                                    0           0            0
Number of plans                           55               1           37
                                           a
                                               Fewer than five employers/plans in column, and percentages were not determined.




                                           Page 113                                GAO/GGD-97-40 Federal and Private Retirement Benefits
                                          Appendix IV
                                          Features of Federal and Private Sector
                                          Defined Benefit Plans




Table IV.11: Program Provided at Least One Postretirement Benefit Increase During 1983-92
                              Private sector (percentage of plans)
                                                  Employers whose
                                                  program benefits
                                                   could be valued
Postretirement benefit        All employers DB plans  DB and                                           Federal
increases during 1983-92        in database     only DC plans FERS                                           CSRS
Yes                                      43              28          42 Yesa                                 Yes
No                                       44              68          43
No response                              13               4          15
Number of plans                         497              25         304
                                          Note: Data on private sector increases during 1983-92 were the latest available at the time the
                                          contract was awarded to Watson Wyatt Worldwide. The percentages include plans that provided
                                          at least one increase.
                                          a
                                              FERS became effective January 1, 1987. Therefore, COLA payments began in January 1988.




Table IV.12: Years When Program Provided Postretirement Increases During 1983-92
                              Private sector (percentage of plans)
                                                  Employers whose
                                                  program benefits
                                                   could be valued
Years when postretirement     All employers DB plans  DB and                                           Federal
increases were provided         in database     only DC plans FERS                                           CSRS
1983                                     25              29          19 See table IV.13 for actual     See table IV.13 for actual
                                                                        postretirement increases paid. postretirement increases paid.
1984                                     35              29          29
1985                                     38              29          32
1986                                     32              57          30
1987                                     34              43          32
1988                                     37              43          31
1989                                     33              43          27
1990                                     31              14          28
1991                                     27              29          22
1992                                     22              29          19
No response                                   2           0           2
Number of plans                         213               7         129
                                          Note: Data on private sector increases during 1983-92 were the latest available at the time the
                                          contract was awarded to Watson Wyatt Worldwide.
                                          a
                                            Employers in the Watson Wyatt database may have provided more than one increase during
                                          1983-92. Therefore, the percentages total more than 100 percent.




                                          Page 114                               GAO/GGD-97-40 Federal and Private Retirement Benefits
                                        Appendix IV
                                        Features of Federal and Private Sector
                                        Defined Benefit Plans




Table IV.13: Postretirement Increases
in FERS and CSRS From 1983 to 1997      Numbers in percent
                                        Month and year when postretirement increases were
                                        provided                                                                   FERS       CSRS
                                                                                                                         a
                                        May 1983                                                                                  3.9b
                                                                                                                         a
                                        January 1985                                                                              3.5
                                                                                                                         a
                                        January 1986                                                                              0.0
                                                                                                                         a
                                        January 1987                                                                              1.3
                                        January 1988                                                                  3.2         4.2
                                        January 1989                                                                  3.0         4.0
                                        January 1990                                                                  3.7         4.7
                                        January 1991                                                                  4.4         5.4
                                        January 1992                                                                  2.7         3.7
                                        January 1993                                                                  2.0         3.0
                                        April 1994                                                                    2.0         2.6
                                        April 1995                                                                    2.0         2.8
                                        April 1996                                                                    2.0         2.6
                                        January 1997                                                                  2.0         2.9
                                        a
                                            FERS became effective January 1, 1987, and COLA payments began in January 1988.
                                        b
                                         The CSRS COLA payment for May 1983 was 3.3 percent for nondisabled employee annuitants
                                        under age 62.




                                        Page 115                              GAO/GGD-97-40 Federal and Private Retirement Benefits
Appendix V

Features of Federal and Private Sector
Defined Contribution Plans

               The Watson Wyatt database included information on the retirement
               programs of 661 employers of which 617 had DC plans. Sufficient
               information was available to enable Watson Wyatt to determine the benefit
               amounts provided by 435 of the 661 employers. Of the 435 employers
               whose program benefits could be valued, 410 had DC plans. Of these 410
               employers, 106 had retirement programs that included a DC plan only and
               304 had programs that included both DB and DC plans.

               This appendix describes in detail the features of all 617 DC plans included
               in the 661 programs in Watson Wyatt’s database. It also describes
               separately the features of the 410 DC plans in the 435 programs that could
               be valued. The private sector DC plans are divided into three categories.
               The first category, “all employers in database,” contains data on all 617 DC
               plans. The second category, “DC plans only,” contains data on the 106
               programs with DC plans only whose benefits could be valued. The third
               category, “DB and DC plans,” contains data on the DC plans in the 304
               programs with DB and DC plans whose benefits could be valued. Thus, the
               number of plans in the second and third categories will not total the
               number of plans in the first category.

               The number of plans in each table varies because plans are sometimes
               excluded when a particular feature is not applicable to them. For example,
               in table V.1, the total number of plans in the “all employers in database”
               category is 617, but in table V.2, the total number of plans in that category
               is 530 because only 530 plans of the 617 plans include employer
               contributions.




               Page 116                     GAO/GGD-97-40 Federal and Private Retirement Benefits
                                            Appendix V
                                            Features of Federal and Private Sector
                                            Defined Contribution Plans




Table V.1: Eligibility Requirements to Participate in the Defined Contribution Plans
                                Private sector (percentage of plans)
                                                 Employers whose
                                                 program benefits
                                                  could be valued
                                All employers DC plans  DB and                                    Federal
Eligibility requirements          in database     only DC plans FERS                                     CSRS
Immediate (any age/any                     20           17         19 Open season every 6 months;        Open season every 6 months;
service)                                                              new hires may join during the      new hires may join during the
                                                                      second open season after           second open season after
                                                                      hire (6 to 12 months after hire)   hire (6 to 12 months after hire)
Any age/6 months service                     7          8           7
Any age/12 months service                  28           25         32
Any age/Other service                        7          6           7
requirement
Age 18                                       5          8           5
Age 21/12 months service                   19           23         18
Age 21/Service other than 12                 5          5           5
months
Other age/Service requirement                2          2           1
No response                                  7          6           6
Number of plans                           617          106        304




                                            Page 117                          GAO/GGD-97-40 Federal and Private Retirement Benefits
                                              Appendix V
                                              Features of Federal and Private Sector
                                              Defined Contribution Plans




Table V.2: Vesting Schedules (Plans With Employer Contributions)
                               Private sector (percentage of plans)
                                                   Employers whose
                                                   program benefits
                                                    could be valued
Vesting schedules (plans             All employers DC plans  DB and                                 Federal
with employer contributions)           in database     only DC plans FERS                                 CSRS
Immediate                                     32          26         29 Full and immediate vesting in     Full and immediate vesting in
                                                                        all contributions and earnings    employee contributions and
                                                                        except employer                   earnings (no employer
                                                                        nonmatching contributions         contributions are made)
                                                                        and earnings on the
                                                                        nonmatching contributions
                                                                        that vest at 3 years of service
Cliff vesting in less than 5 years             6          4           8
Cliff vesting with 5 years of                 18          13         20
service
Graded vesting, 100% vested                   28          33         31
in less than 7 years
Graded vesting, 100% vested                    7          16          4
in 7 years
Other                                          5          7           6
No response                                    4          1           2
Number of plans                              530         100        300



Table V.3: Types of Employer Contributions (Plans With Employer Contributions)
                              Private sector (percentage of plans)
                                                   Employers whose
                                                   program benefits
Types of employer                                   could be valued
contributions (plans with            All employers DC plans  DB and                                 Federal
employer contributions)                in database     only DC plans FERS                                 CSRS
Matching only                                 65          54         78 Nonmatching contribution of       No employer contributions
                                                                        1% of pay; 100% match on
                                                                        the first 3% of pay and 50%
                                                                        on the next 2% of pay that
                                                                        employee contributes
Nonmatching only                              11          11          5
Both matching and                             17          34         15
nonmatching
Other                                          2          0           2
No response                                    5          1           0
Number of plans                              530         100        300




                                              Page 118                          GAO/GGD-97-40 Federal and Private Retirement Benefits
                                         Appendix V
                                         Features of Federal and Private Sector
                                         Defined Contribution Plans




Table V.4: Amounts of Employer Contributions as a Percentage of Pay in 1992
                             Private sector (percentage of plans)
                                              Employers whose
                                              program benefits
Amounts of employer                            could be valued
contributions as a              All employers DC plans  DB and                                        Federal
percentage of pay                 in database     only DC plans FERS                                        CSRS
Less than 2.00%                          11            8           14 1994 employer contribution            Employer does not contribute
                                                                      was 3.9%a                             to the plan
2.00% to 3.99%                           16           16           19
4.00% to 7.99%                            9           20             6
8.00% to 9.99%                            3            6             1
10.00% or more                            4            8             3
No employer contributions                 1            0             1
Employer never contributes to            13            5             1
plan
No response                              43           37           55
Number of plans                         617         106           304
                                         Note: Information on contributions made in 1992 was the latest available at the time the contract
                                         was awarded to Watson Wyatt.
                                         a
                                           Total of all government contributions made to the TSP in 1994 as a percentage of all FERS
                                         employees’ salaries.




Table V.5: Employer-Matching Contributions (Plans With Employer Contributions)
                              Private sector (percentage of plans)
                                              Employers whose
                                              program benefits
Employer-matching                              could be valued
contributions (plans with       All employers DC plans  DB and                                        Federal
employer contributions)           in database     only DC plans FERS                                        CSRS
Only employee after-tax                   1            1             1 Employee pretax                      No employer contributions
contributions matched                                                  contributions matched
Only employee pretax                     43           59           39
contributions matched
Both after-tax and pretax                15            8           18
contributions matched
No matching employer                      9           10             5
contributions
No response                              32           22           37
Number of plans                         530         100           300




                                         Page 119                               GAO/GGD-97-40 Federal and Private Retirement Benefits
                                         Appendix V
                                         Features of Federal and Private Sector
                                         Defined Contribution Plans




Table V.6: Maximum Employee Contributions Matched by Employer in 1993 (Plans With Matching Contributions)
                            Private sector (percentage of plans)
                                                  Employers whose
Maximum employee                                  program benefits
contributions matched by                           could be valued
employer (plans with           All employers DC plans  DB and                                     Federal
matching contributions)          in database     only DC plans FERS                                   CSRS
2.00% or less                                3            2            2 5% of pay                    No employer contributions
2.01% to 4.00%                          21              27             22
4.01% to 6.00%                          64              56             66
6.01% to 8.00%                               7            6            6
8.01% to 10.00%                              1            2            1
10.01% or more                               4            7            3
                                              a
No response                                               0            0
Number of plans                        436              88            283
                                         a
                                             Less than 0.5 percent.




Table V.7: Percentiles of Maximum Employee Contributions Matched by Employer in 1993 (Plans With Matching
Contributions)
                               Private sector (maximum employee
                               contribution percentages matched)
                                                  Employers whose
Percentiles of maximum                            program benefits
employee contributions                             could be valued
matched by employer (plans     All employers DC plans  DB and                                       Federal
with matching contributions)     in database     only DC plans               FERS                     CSRS
25th percentile                              5%           4%           5%    5% of pay                No employer contributions
50th percentile (median)                     6%           6%           6%
75th percentile                              6%           6%           6%
Number of plans                        436              88            283




                                         Page 120                              GAO/GGD-97-40 Federal and Private Retirement Benefits
                                         Appendix V
                                         Features of Federal and Private Sector
                                         Defined Contribution Plans




Table V.8: Maximum Pretax Employee Contributions Allowed in 1993 (Plans With Employee Contributions)
                            Private sector (percentage of plans)
                                                  Employers whose
                                                  program benefits
Maximum pretax employee                            could be valued
contributions allowed (plans   All employers DC plans  DB and                                         Federal
with employee contributions)     in database     only DC plans FERS                                        CSRS
No maximum                                   1            2            1 10% of pay                        5% of pay
                                              a
3.00% or less                                             0            0
3.01% to 6.00%                               6            9            6
6.01% to 9.00%                               6            8            5
9.01% to 12.00%                          24             32             27
12.01% to 15.00%                         33             37             32
15.01% to 18.00%                         16               7            20
18.01% or more                               8            3            3
No response                                  6            2            6
Number of plans                        549              96            284
                                         Note: Employee pretax contribution amounts are limited by IRS. The limit in 1997 is $9,500.
                                         a
                                             Less than 0.5 percent.




Table V.9: Percentiles of Maximum Pretax Employee Contributions Allowed in 1993 (Plans With Employee Contributions)
                                Private sector (maximum pretax
                                employee contributions allowed)
                                                  Employers whose
Percentiles of maximum                            program benefits
pretax employee                                    could be valued
contributions allowed (plans   All employers DC plans  DB and                                           Federal
with employee contributions)     in database     only DC plans               FERS                          CSRS
25th percentile                          10%            10%            10%   10% of pay                    5% of pay
50th percentile (median)                 15%            12%            15%
75th percentile                          16%            15%            15%
Number of plans                        549              96            284
                                         Note: Employee pretax contribution amounts are limited by IRS. The limit in 1997 is $9,500.




                                         Page 121                              GAO/GGD-97-40 Federal and Private Retirement Benefits
                                         Appendix V
                                         Features of Federal and Private Sector
                                         Defined Contribution Plans




Table V.10: Amounts of Employer Match on a 3-Percent Employee Contribution (Plans That Only Match Contributions Up to
3 Percent)
                             Private sector (percentage of plans)
                                            Employers whose
Amounts of employer match                    program benefits
on a 3% employee                             could be valued
contribution (plans that only All employers DC plans    DB and                                Federal
match contributions up to 3%)   in database     only DC plans FERS                                CSRS
25% or less                               6          0           6 100% employer match on       No employer contributions
                                                                   employee contributions up to
                                                                   3% of pay and 50% employer
                                                                   match on employee
                                                                   contributions of next 2% of
                                                                   pay
26% to 50%                               31         43          29
51% to 75%                                3          0           4
76% to 100%                              50         57          50
Over 100%                                10          0          11
No response                               0          0           0
Number of plans                          36          7          28



Table V.11: Percentiles of Amounts of Employer Match on a 3-Percent Employee Contribution (Plans That Only Match
Contributions Up to 3 Percent)
                               Private sector (employer match on a
                                    3% employee contribution)

Percentiles of amounts of                   Employers whose
employer match on a 3%                       program benefits
employee contribution (plans                 could be valued
that only match contributions All employers DC plans    DB and                                Federal
up to 3%)                       in database     only DC plans         FERS                        CSRS
25th percentile                          50%        100%        50% 100% employer match on        No employer contributions
                                                                    employee contributions up
                                                                    to 3% of pay and 50%
                                                                    employer match on
                                                                    employee contributions of
                                                                    next 2% of pay
50th percentile (median)               100%         100%       100%
75th percentile                        100%         100%       100%
Number of plans                          36          7          28




                                         Page 122                          GAO/GGD-97-40 Federal and Private Retirement Benefits
                                         Appendix V
                                         Features of Federal and Private Sector
                                         Defined Contribution Plans




Table V.12: Amounts of Employer Match on a 4-Percent Employee Contribution (Plans That Only Match Contributions Up to
4 Percent)
                             Private sector (percentage of plans)
                                            Employers whose
Amounts of employer match                    program benefits
on a 4% employee                             could be valued
contribution (plans that only All employers DC plans    DB and                                Federal
match contributions up to 4%)   in database     only DC plans FERS                                CSRS
25% or less                              11         13          11 100% employer match on       No employer contributions
                                                                   employee contributions up to
                                                                   3% of pay and 50% match on
                                                                   employee contributions of
                                                                   next 2% of pay. At 4%
                                                                   employee contribution,
                                                                   employer match is 87.5%.
26% to 50%                               58         63          57
51% to 75%                                6          0           6
76% to 100%                              23         19          26
Over 100%                                 2          5           0
No response                               0          0           0
Number of plans                          57         16          35



Table V.13: Percentiles of Amounts of Employer Match on a 4-Percent Employee Contribution (Plans That Only Match
Contributions Up to 4 Percent)
                               Private sector (employer match on a
                                    4% employee contribution)

Percentages of amounts of                   Employers whose
employer match on a 4%                       program benefits
employee contribution (plans                 could be valued
that only match contributions All employers DC plans    DB and                                Federal
up to 4%)                       in database     only DC plans         FERS                        CSRS
25th percentile                          50%        50%         50% 100% employer match on        No employer contributions
                                                                    employee contributions up
                                                                    to 3% of pay and 50%
                                                                    match on employee
                                                                    contributions of next 2% of
                                                                    pay. At 4% employee
                                                                    contribution, employer
                                                                    match is 87.5%.
50th percentile (median)                 50%        50%         50%
75th percentile                          75%        50%        100%
Number of plans                          57         16          35




                                         Page 123                          GAO/GGD-97-40 Federal and Private Retirement Benefits
                                         Appendix V
                                         Features of Federal and Private Sector
                                         Defined Contribution Plans




Table V.14: Amounts of Employer Match on a 5-Percent Employee Contribution (Plans That Only Match Contributions Up to
5 Percent)
                             Private sector (percentage of plans)
                                            Employers whose
Amounts of employer match                    program benefits
on a 5% employee                             could be valued
contribution (plans that only All employers DC plans    DB and                                Federal
match contributions up to 5%)   in database     only DC plans FERS                                CSRS
25% or less                              19         33          17 100% employer match on         No employer contributions
                                                                   employee contributions up to
                                                                   3% and 50% match on
                                                                   employee contributions of
                                                                   next 2% of pay. At 5%
                                                                   employee contribution,
                                                                   employer match is 80%.
26% to 50%                               48         25          55
51% to 75%                                4          0           3
76% to 100%                              25         25          25
Over 100%                                 4         17           0
No response                               0          0           0
Number of plans                          53         12          36



Table V.15: Percentiles of Amounts of Employer Match on a 5-Percent Employee Contribution (Plans That Only Match
Contributions Up to 5 Percent)
                               Private sector (employer match on a
                                    5% employee contribution)

Percentages of amounts of                   Employers whose
employer match on a 5%                       program benefits
employee contribution (plans                 could be valued
that only match contributions All employers DC plans    DB and                                Federal
up to 5%)                       in database     only DC plans         FERS                        CSRS
25th percentile                          35%        25%         35% 100% employer match on        No employer contributions
                                                                    employee contributions up
                                                                    to 3% and 50% match on
                                                                    employee contributions of
                                                                    next 2% of pay. At 5%
                                                                    employee contribution,
                                                                    employer match is 80%.
50th percentile (median)                 50%        50%         50%
75th percentile                        100%         100%        66%
Number of plans                          53         12          36




                                         Page 124                          GAO/GGD-97-40 Federal and Private Retirement Benefits
                                         Appendix V
                                         Features of Federal and Private Sector
                                         Defined Contribution Plans




Table V.16: Amounts of Employer Match on a 6-Percent or More Employee Contribution (Plans That Only Match
Contributions Up to 6 Percent or More)
                               Private sector (percentage of plans)

Amounts of employer match                  Employers whose
on a 6% or more employee                    program benefits
contribution (plans that only               could be valued
match contributions up to 6% All employers DC plans    DB and                                       Federal
or more)                       in database     only DC plans FERS                                       CSRS
25% or less                              20             22             18 Employer does not match      No employer contributions
                                                                          employee contributions above
                                                                          5% of pay
26% to 50%                               53             54             54
51% to 75%                               14             10             14
76% to 100%                              13             14             13
                                              a
Over 100%                                                 0             0
                                              a
No response                                               0             1
Number of plans                         245             50            176
                                         a
                                             Less than 0.5 percent.




Table V.17: Percentiles of Amounts of Employer Match on a 6-Percent or More Employee Contribution (Plans That Only
Match Contributions Up to 6 Percent or More)
                              Private sector (employer match on a
                               6% or more employee contribution)
Percentages of amounts of
employer match on a 6% or                      Employers whose
more employee contribution                     program benefits
(plans that only match                          could be valued
contributions up to 6% or      All employers DC plans      DB and                          Federal
more)                            in database       only DC plans FERS                          CSRS
25th percentile                          40%            30%            40% Employer does not match      No employer contributions
                                                                           employee contributions
                                                                           above 5% of pay
50th percentile (median)                 50%            50%            50%
75th percentile                          60%            50%            60%
Number of plans                         245             50            176




                                         Page 125                                GAO/GGD-97-40 Federal and Private Retirement Benefits
                                         Appendix V
                                         Features of Federal and Private Sector
                                         Defined Contribution Plans




Table V.18: Employer-Set Dollar Limitation on Employer-Matching Contributions
                               Private sector (percentage of plans)
                                              Employers whose
Dollar limitation (other than                 program benefits
legal maximum) on                              could be valued
employer-matching               All employers DC plans  DB and                                        Federal
contributions                     in database     only DC plans FERS                                       CSRS
Yes                                       5          11             3 No employer-set limitation           No employer contributions
No                                       81          75            81
No response                              14          14            16
Number of plans                         436          88          283
                                         Note: Employer-matching contribution amounts are subject to statutory limitations.




Table V.19: Employer Contributions Not Based on a Match of Employee Contributions (Plans With Employer Contributions)
                              Private sector (percentage of plans)

Employer contributions not                    Employers whose
based on a match of                           program benefits
employee contributions                         could be valued
(plans with employer            All employers DC plans  DB and                                        Federal
contributions)                    in database     only DC plans FERS                                       CSRS
Yes                                      27          45            20 1% of pay                            No employer contributions
No                                       71          55            78
No response                               2            0            2
Number of plans                         530         100          300



Table V.20: Employer-Nonmatching Contributions Based on Profits
                            Private sector (percentage of plans)
                                              Employers whose
                                              program benefits
                                               could be valued
Employer-nonmatching           All employers DC plans  DB and                                         Federal
contributions based on profits   in database     only DC plans FERS                                        CSRS
Yes                                      50          58            49 No                                   No employer contributions
Partially                                10            9            8
No                                       34          31            35
No response                               6            2            8
Number of plans                         145          45            61




                                         Page 126                              GAO/GGD-97-40 Federal and Private Retirement Benefits
                                           Appendix V
                                           Features of Federal and Private Sector
                                           Defined Contribution Plans




Table V.21: Plan Loan Provisions
                               Private sector (percentage of plans)
                                                   Employers whose
                                                   program benefits
                                                    could be valued
                               All employers DC plans  DB and                                           Federal
Plan has a loan provision        in database     only DC plans FERS                                           CSRS
Yes                                       70            66           77 Yes                                   Yes
No                                        27            34           21
No response                                    3         0             2
Number of plans                          617           106          304



Table V.22: In-Service Hardship Withdrawal Provisions
                               Private sector (percentage of plans)
                                                   Employers whose
                                                   program benefits
                                                    could be valued
In-service hardship            All employers DC plans  DB and                                           Federal
withdrawal provisions            in database     only DC plans FERS                                           CSRS
                                                                             a
Yes                                       84            83           88 No                                    Noa
No                                        12            17           10
No response                                    4         0             2
Number of plans                          617           106          304
                                           a
                                            In late 1997, changes in the provisions of the federal DC plan, the TSP, will allow federal
                                           employees to make withdrawals if they are age 59-1/2 or older or if they have a financial hardship.




Table V.23: In-Service (Other Than Hardship) Withdrawals Permitted Before Age 59-1/2
                                Private sector (percentage of plans)
                                                   Employers whose
                                                   program benefits
In-service (other than                              could be valued
hardship) withdrawals          All employers DC plans  DB and                                           Federal
permitted before age 59-1/2      in database     only DC plans FERS                                           CSRS
Yes                                       25            17           30 No                                    No
No                                        33            51           21
No response                               42            32           49
Number of plans                          617           106          304
                                           Note: Under IRS code, such withdrawals are only permissible from after-tax accounts.




                                           Page 127                               GAO/GGD-97-40 Federal and Private Retirement Benefits
Appendix VI

Comments From the Office of Personnel
Management




See comments on pp. 65
to 67.




                         Page 128   GAO/GGD-97-40 Federal and Private Retirement Benefits
                         Appendix VI
                         Comments From the Office of Personnel
                         Management




See comments on pp. 65
to 67.




                         Page 129                        GAO/GGD-97-40 Federal and Private Retirement Benefits
           Appendix VI
           Comments From the Office of Personnel
           Management




(410014)   Page 130                        GAO/GGD-97-40 Federal and Private Retirement Benefits
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