oversight

The Federal Employees' Retirement System: Potential Changes in Agency Retirement Costs Following an Open Season

Published by the Government Accountability Office on 1997-11-05.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Civil Service Committee on
                          Government Reform and Oversight
                          House of Representatives


For Release on Delivery
Expected at
10:00 a.m., EST
                          THE FEDERAL EMPLOYEES’
Wednesday
November 5, 1997
                          RETIREMENT SYSTEM

                          Potential Changes in Agency
                          Retirement Costs Following an
                          Open Season

                          Statement by Michael Brostek
                          Associate Director, Federal Management and
                          Workforce Issues
                          General Government Division




GAO/T-GGD-98-27
Summary

The Federal Employees’ Retirement System:
Potential Changes in Agency Retirement
Costs Following an Open Season
                 The Federal Employees’ Retirement System (FERS) was implemented in
                 1987 and generally covers those employees who first entered federal
                 service after 1983. When FERS began, employees covered by the Civil
                 Service Retirement System (CSRS) were provided an opportunity to
                 transfer to FERS during a 6-month open season that ended in
                 December 1987. The Federal Employees’ Retirement Open Season Act of
                 1997, passed by Congress but vetoed by the President, would have allowed
                 employees currently enrolled in CSRS or the CSRS Offset program a second
                 chance to transfer. Transferees under the act would have received
                 substantially the same coverage and benefits that were provided to those
                 who transferred during the first open season.

                 GAO was asked to examine the potential impact of a new FERS open season
                 on agency retirement costs. GAO developed illustrations that estimated the
                 effect if differing proportions of about 500,000 permanent general
                 schedule CSRS and CSRS Offset Plan employees (excluding employees of the
                 Postal Service and certain other groups such as Wage Grade employees)
                 decided to switch. GAO used information on current retirement practices
                 and work it had performed on the early implementation of FERS to provide
                 perspective on the difficulty of predicting how many employees might
                 switch. GAO applied different assumptions about the portion of eligible
                 employees who might switch and their salary levels and calculated the
                 resulting differences in agency retirement costs.

                 GAO   found that:

             •   It is difficult to predict who among the eligible employees would switch.
                 GAO’s review of the first FERS transfer program in 1987 showed that
                 although eligible employees were provided the information and counseling
                 that they would need to make a decision, about 4 percent of the eligible
                 employees transferred to FERS. The review suggested that employee
                 decisions can be based on situational factors that are economic as well as
                 noneconomic.
             •   Assuming some employees opt to switch, agency retirement costs would
                 increase following an open season because of differences in the way CSRS
                 and FERS are funded. The amount of any cost increase would critically
                 depend on the number of employees who switch and their salary levels.
                 For example, assuming (1) a 10 percent switch rate—which would be
                 twice the largest percentage of employees who transferred in 1987 in the
                 agencies GAO reviewed—and (2) that employees earning higher salaries
                 would be most likely to switch, agency costs for the period January 1997
                 through December 1997 would have been an additional $332 million.



                 Page 1                                                     GAO/T-GGD-98-27
    Summary
    The Federal Employees’ Retirement System:
    Potential Changes in Agency Retirement
    Costs Following an Open Season




•   Given the uncertainty regarding how many employees might transfer, it is
    correspondingly difficult to estimate whether agencies would have a
    difficult time absorbing the cost increases. Although the largest increase in
    retirement costs GAO calculated—$332 million—would appear small in
    proportion to the cost of personnel benefits governmentwide, some
    agencies might find the costs difficult to absorb, depending on their
    different circumstances. Regardless of the size of the increases in costs,
    under the budget process discretionary spending is capped, and Congress
    may choose not to provide agencies extra funding to cover their increased
    retirement costs.




    Page 2                                                       GAO/T-GGD-98-27
Statement

The Federal Employees’ Retirement System:
Potential Changes in Agency Retirement
Costs Following an Open Season
              Dear Mr. Chairman and Members of the Subcommittee:

              I am pleased to be here today to discuss the potential impact on agency
              retirement costs of a retirement system open season in which anyone who
              is a general civilian employee of the federal government and is
              participating in the Civil Service Retirement System (CSRS) or the CSRS
              Offset plan would be allowed to transfer to the Federal Employees
              Retirement System (FERS).1 As you requested, the focus of my statement is
              on the potential changes in retirement costs charged to federal civilian
              agencies that might follow such a transfer program. Because agencies
              would be responsible for paying any additional costs, information about
              changes in retirement costs could be important for workforce planning
              and management.

              My statement has three main points. First, it is difficult to predict the
              number and salary levels of those eligible employees who would switch.
              Our review of the original FERS open season suggested that employee
              decisions can be based on situational factors that are economic as well as
              noneconomic. Second, assuming that some employees opt to switch,
              agency retirement costs would increase following an open season because
              of differences in the way CSRS and FERS are funded. The amount of any
              such increase in agency retirement costs would depend on the numbers of
              employees who switch and their salary levels. Finally, given the
              uncertainty regarding how many employees might transfer, it is
              correspondingly difficult to estimate whether agencies would have a
              difficult time absorbing such an increase. Although the largest increases in
              retirement costs that we calculated could appear small in proportion to
              the costs of personnel benefits governmentwide for the employees
              included in our analysis, some agencies might find the costs difficult to
              absorb, depending on their individual circumstances. Regardless of the
              size of the cost increase, under the budget process discretionary spending
              is capped, and Congress may choose not to provide agencies extra funding
              to cover their increased retirement costs.

              The Federal Employees’ Retirement Open Season Act of 1997, passed by
              Congress but vetoed by the President, would have allowed employees
              currently enrolled in CSRS or the CSRS Offset program to transfer to FERS.
              Under the act, an open season for transfers would have begun on July 1,
              1998, and run through December 31, 1998. Transferees under the act

              1
               Typically, the CSRS 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. CSRS Offset
              plan coverage is described in greater detail in Federal Retirement: Federal and Private Sector
              Retirement Program Benefits Vary (GAO/GGD-97-40, April 7, 1997).



              Page 3                                                                             GAO/T-GGD-98-27
Statement
The Federal Employees’ Retirement System:
Potential Changes in Agency Retirement
Costs Following an Open Season




would have received substantially the same coverage and benefits that
were provided to those who transferred during the first FERS open season.
Those who transferred would have received a single annuity upon
retirement. That annuity would have included a CSRS component,
calculated on the basis of the employee’s final high-3 average salary and
his or her years of CSRS service, and a FERS component using the same
high-3 salary and based on the employee’s years of FERS service. In
addition, transferees would have received Thrift Savings Plan (TSP) and
Social Security benefits from their FERS service.

Because of the Committee’s interests, our analysis was only of the
potential changes in agency retirement costs that would affect agencies’
workforce and management decisions. We did not examine the change in
the total or the government’s share of normal costs of the CSRS and/or FERS
programs, which is OPM’s responsibility, or the budgetary effects on
discretionary and direct spending, which are the responsibility of the
Congressional Budget Office. It is worth noting that any comparison of the
total budgeted costs for CSRS and FERS is driven by the fact, as discussed
later in this statement, that the costs are recorded in the budget on a
different basis. Had we examined the costs on a governmentwide basis the
results may have been different.

To assess the potential impact on agency retirement costs of a new FERS
open season, we developed several illustrations that estimated the effect if
differing proportions of the eligible employees included in our analysis
decide to switch. We used information from work that we performed 10
years ago when we examined the early implementation of FERS, including
the first FERS open season and employee decisions related thereto, and our
knowledge of current retirement practices to provide perspective on the
difficulty of predicting how many employees might switch to FERS.2 In
developing our illustrations of the potential costs to agencies of a new
open season, we used benefit assumptions reflected in the recently vetoed
Federal Employees’ Retirement System Open Enrollment Act of
1997—that transferees would receive substantially the same coverage and
benefits as those provided to employees who transferred during the first
FERS open enrollment. To illustrate the range of changes in civilian agency
retirement costs that might occur, we applied different assumptions about
the portion of eligible employees who might switch and their salary levels,
and calculated the resulting differences in agency retirement costs. We
developed two sets of illustrative examples, each assuming that 1, 5, or 10

2
 Federal Personnel: Views From Two Agencies on Why More Employees Did Not Join the New
Retirement System (GAO/GGD-88-52FS, Mar. 11, 1988) and Federal Retirement: Implementation of the
Federal Employees Retirement System (GAO/GGD-88-107, Aug. 4, 1988).



Page 4                                                                       GAO/T-GGD-98-27
                      Statement
                      The Federal Employees’ Retirement System:
                      Potential Changes in Agency Retirement
                      Costs Following an Open Season




                      percent of the eligible employees would transfer.3 In making our
                      calculations, we used the most recent available data from the Federal
                      Retirement Thrift Investment Board on agency TSP payments, which were
                      1996 data. We used 1997 Office of Personnel Management (OPM) data on
                      the number of nonpostal permanent civilian employees of the federal
                      government at the various grade levels4 and 1996 OPM data on the share of
                      CSRS and FERS normal cost percentages charged to agencies for their CSRS
                      and FERS employees. As described in greater detail later in this statement,
                      normal cost is the term used to describe costs that are calculated to reflect
                      the cost of pension benefits as these benefits are earned, rather than as
                      they are paid. Our illustrations show how agencies’ retirement costs could
                      have changed for the period from January 1, 1997, through December 31,
                      1997, if all of the transferring employees in each illustration were in FERS
                      for the full year.


                      CSRS and FERS are the two largest retirement programs for federal civilian
CSRS and FERS Are     employees. At the beginning of fiscal year 1995, these programs covered
Designed and Funded   about 2.8 million federal employees, or 90 percent of the civilian
Differently           workforce, including postal employees. OPM administers CSRS and FERS.
                      CSRS and FERS pension benefits are financed partly by federal agency and
                      employee contributions and partly by other government payments to the
                      Civil Service Retirement and Disability Fund (CSRDF).5




                      3
                       We selected 1 percent because it was the percentage used by the Congressional Budget Office in
                      making its preliminary cost estimate of the vetoed Federal Employees’ Retirement System Open
                      Enrollment Act of 1997. We selected 5 percent because it represented about the largest percentage of
                      employees who actually transferred in the agencies we visited during our review of the first FERS
                      open enrollment. We added a 10-percent calculation to our analysis because some observers have
                      speculated that large numbers of eligible employees would switch.
                      4
                       OPM’s Central Personnel Data File (CPDF) contains general schedule employees, members of the
                      Senior Executive Service (SES), blue collar employees, and others. Of those employees in the CPDF,
                      about 1.3 million are covered by the general schedule pay plan. Because the methodology for our
                      calculations used general schedule salaries for calculating per employee increases in agency
                      retirement costs, we identified 1,042,112 permanent general schedule employees in Career,
                      Career-Conditional, Schedule A, and Schedule B appointments. Of the general schedule employees
                      who we used in our analysis, 548,377 were covered by FERS, 457,084 were covered by CSRS, and
                      36,651 employees were covered by the CSRS Offset plan. Had we analyzed changes in agency
                      retirement costs for non-general schedule employees (e.g., postal service employees, blue collar, and
                      SES), our combined estimate of these increases would have been higher.)
                      5
                       The Department of the Treasury also makes annual payments that are to cover interest on CSRS
                      unfunded liability, payments for spouse equity, and amortization payments to finance supplemental
                      liabilities for FERS, including those attributable to CSRS service for employees who elected FERS. The
                      Treasury Department’s FERS payments are quite small as a share of total normal costs. According to
                      OPM actuarial reports, in 1996 these payments were about $48 million, which represents $1 in
                      Treasury payments for each $138 in agency and employee contributions. Thus, for all practical
                      purposes, agency and employee contributions cover the full normal cost of FERS benefits.


                      Page 5                                                                            GAO/T-GGD-98-27
                         Statement
                         The Federal Employees’ Retirement System:
                         Potential Changes in Agency Retirement
                         Costs Following an Open Season




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

                         FERS was implemented in 1987, and generally covers those employees who
                         first entered federal service after 1983 as well as those who transferred
                         from CSRS to FERS. The primary impetus for the new program was the
                         Social Security Amendments of 1983, which required that all federal
                         employees hired after December 1983 be covered by Social Security. FERS
                         is a three-tiered retirement program that includes Social Security and TSP
                         benefits in addition to a pension. Like CSRS, FERS provides disability and
                         survivor benefits.


Differences in Program   CSRS and FERS also are funded differently. The costs of FERS retirement
Funding                  benefits are paid by agencies and participating employees as these benefits
                         are earned, but some of the government’s CSRS pension costs are deferred.

                         To better appreciate how this occurs and the impact that the two
                         programs’ different funding approaches have on agency retirement costs,
                         it is useful to understand differing methods for measuring retirement
                         program costs. The cost of a retirement plan is generally not well
                         measured by annual cash expenditures, because annual cash expenditures
                         simply cover the payments to existing beneficiaries in any given year. An
                         alternative measure of retirement costs assumes that funds are set aside in
                         roughly equal payments over the working life of the employee to cover
                         current and future liabilities for benefit payments. “Normal cost” is the
                         term used to describe costs calculated in this manner; it measures the
                         costs of pension benefits, which are earned during an employee’s working
                         years but paid during retirement, on an accrual rather than a cash basis. If
                         resources including interest amounts are set aside that are sufficient to
                         fully fund employees’ retirement benefits as measured by normal cost
                         (including the pay increases for employees and cost of living adjustments
                         for annuitants), the retirement plan is said to be fully funded on a dynamic
                         normal cost basis.



                         Page 6                                                       GAO/T-GGD-98-27
Statement
The Federal Employees’ Retirement System:
Potential Changes in Agency Retirement
Costs Following an Open Season




It has long been our position that the appropriate way to calculate and
fund retirement costs is as the benefits are accruing.6 When done properly,
recognizing retirement costs as they are being earned reflects the full cost
of providing these benefits to federal personnel at the time their service is
rendered. The annual normal cost of CSRS, which is a much older program
than FERS and predates modern financing methods (which attempt to
finance pension plans on an actuarial basis),7 is calculated for CSRS by OPM,
but these costs are not fully funded from agency and employee
contributions. According to OPM, when CSRS costs were estimated in this
way, the normal cost for fiscal year 1996 was 25.14 percent for CSRS. For
that year, the combined contributions of agencies and employees was
14 percent, or about 11 percent less than the full normal cost. Beginning in
fiscal year 1998, agencies will pay an additional 1.51 percent of pay
towards their CSRS employees’ retirement costs. Employees covered by
CSRS as well as those covered by FERS will also pay an additional
.25 percent in 1999, another 0.15 percent in 2000, and a final extra
0.1 percent in 2001. Payment of a portion of the difference between the full
normal cost and agency and employee contributions is funded through
various means, and the remainder is deferred.8 When Congress established
FERS in 1986, it adopted our recommendation to charge agencies for all
accruing retirement costs not covered by employee contributions.
6
 For example, see Federal Retirement Systems Unrecognized Costs, Inadequate Funding, Inconsistent
Benefits (GAO/FPCD-77-48, Aug. 3, 1977); The Design of a New Retirement Program for Federal
Employees Covered by Social Security (Apr. 12, 1985); Overview of Federal Retirement Programs
(GAO/T-GGD-95-172, May 22, 1995) ; and Federal Retirement System Financing (GAO/T-GGD-95-197,
Jun. 28, 1995).
7
 In establishing a defined benefit pension plan, an employer is promising to pay benefits that will come
due in the future. Generally the money used to pay these benefits is obtained in one of two ways, either
through pay-as-you-go financing or through reserve funding. The pay-as-you-go method would pay the
pension benefits to retired employees as these benefits come due out of appropriations. Under the
reserve funding method, contributions are made as benefits are earned based on actuarial estimates of
the value of the benefits. CSRS was originally funded on a pay-as-you-go basis, and as a consequence,
built up an actuarial unfunded liability. Regarding federal government pension plan liabilities, Public
Law 95-595, 31 U.S.C. 9501-9504, enacted in 1978, established financial and actuarial reporting
requirements to such plans and required the plans to report financial and actuarial information
regarding plan liabilities in annual reports. According to our summarization of these reports in 1996,
most of the 34 plans that we examined were underfunded on a dynamic cost basis. However, FERS is
fully funded, and statutory provisions for the future elimination of the unfunded benefit obligations of
CSRS and the Military Retirement System have already been enacted. See Public Pensions: Summary
of Federal Pension Plan Data (GAO/AIMD-96-6, Feb. 16, 1996).
8
 The funded portion is covered by other government contributions to the retirement fund. OPM makes
annual contributions to the fund from its appropriation to amortize the liabilities created by employee
pay raises, once enacted, and other benefit improvements when they are made; the Postal Service
makes contributions to the fund to cover retirement system liabilities resulting from collective
bargaining agreements with its employee unions and COLAS postal retirees receive; and the Treasury
pays the cost of benefits attributable to military service and interest on the system’s unfunded liability
as if it were funded. No provision exists to fund COLAs received by nonpostal retirees. The remainder
is addressed in the FERS statute (Public Law 93-335) approved June 6, 1986, which requires that when
the budget authority in the retirement fund for CSRS benefits is exhausted, automatic annual
appropriations will be made to amortize the shortfall over 30 years.



Page 7                                                                               GAO/T-GGD-98-27
                        Statement
                        The Federal Employees’ Retirement System:
                        Potential Changes in Agency Retirement
                        Costs Following an Open Season




Agency Costs for CSRS   Because of these differences in the way in which CSRS and FERS are
and FERS Differ         designed and funded, agencies are charged more as a percentage of pay
                        for employees who are covered under FERS compared to their employees
                        who are covered under CSRS. As shown in table 1, when the three
                        components of the FERS benefit package are combined, beginning in 1999,
                        agencies could contribute a total of 20.9 percent of pay for their FERS
                        employees, compared with 8.5 percent for their CSRS employees.9 Under
                        these assumptions, agencies would pay a higher percentage of pay for
                        each employee who transfers from CSRS to FERS than is currently paid. This
                        is because agencies would need to contribute 2.2 percent more for the
                        FERS pension benefit, plus an additional 6.2 percent for the employer’s
                        share of the Social Security benefit up to a maximum salary of $65,400,
                        and about 4 percent for the TSP benefit.10 As the table also shows, the
                        percentage increase in agency costs per transferring employee would be
                        smaller in the case of employees under the CSRS Offset plan.




                        9
                         The CSRS Offset percentage is 14.7. The figures presented in figure 1 and used for our analysis are
                        only designed to illustrate the potential changes in agency retirement costs. As noted earlier in this
                        statement, in 1996, agencies actually contributed 7 percent for the CSRS defined benefit and will
                        continue to contribute this percentage through fiscal year 1997. Also in this regard, in 1996, agencies
                        contributed 11.4 percent for the FERS defined benefit, although as noted elsewhere in this statement
                        and as used by CBO in its cost estimate of the budgetary impacts of an open season, the most recent
                        OPM estimate of this cost is 10.7 percent.
                        10
                         With respect to the pension benefit, agencies are to pay the difference between employee
                        contributions of 0.8 percent and the full dynamic normal cost. According to the most recent OPM
                        actuarial estimates, this difference is 10.7 percent. With respect to TSP, the maximum employer
                        potential cost, or liability, for contributions for FERS-covered employees is 5 percent of pay—consisting
                        of up to 4 percent in matching contributions, plus 1 percent in nonmatching contributions. In 1996, the
                        most recent year for which data were available, the Thrift Board reported that agencies contributed
                        about $2 billion to FERS employees’ TSP accounts. According to OPM actuaries, the dynamic normal
                        cost of TSP benefits has been rising and is now estimated to be about 4 percent of pay.



                        Page 8                                                                              GAO/T-GGD-98-27
                                      Statement
                                      The Federal Employees’ Retirement System:
                                      Potential Changes in Agency Retirement
                                      Costs Following an Open Season




Table 1: Comparison of the
Percentages of Pay Agencies Could                                                                    Federal retirement plans
Contribute for Employees Covered by                                                               FERS           CSRS         CSRS Offset
the FERS, CSRS, and CSRS Offset
                                      Defined benefit                                               10.7%            8.5%                   8.5%
Retirement Plans
                                      Social Securitya                                               6.2%                                   6.2%
                                      TSP (average match)                                            4.0%


                                      Agencies’ total contribution percentages                      20.9%            8.5%               14.7%


                                      Percentage increase in agencies’ costs if
                                      employees transfer to FERS                                                   12.4%                    6.2%
                                      a
                                       As is true for private employers, this shows the employer contribution to Social Security, not the
                                      full actuarial cost of the system. See Retirement Income: Implications of Demographic Trends for
                                      Social Security and Pension Reform (GAO/HEHS-97-81, July 11, 1997).

                                      Source: 1997 OPM actuarial data.



                                      Although agency costs generally could rise by 12.4 percent of pay for each
                                      employee who transferred to FERS during the open season, the actual
                                      dollar impact of each such transfer would vary depending on employees’
                                      salaries, with the most highly compensated transferring employees
                                      causing the greatest increase in agency retirement costs. Table 2 provides
                                      the range of these dollar increases for general schedule (GS) employees
                                      and shows that the smallest increase would be $1,571 per employee, and
                                      the greatest would be about $9,769. Our results for the CSRS Offset plan
                                      participants ranged from a low of $785 to a high of $5,714 and are
                                      presented in appendix I.




                                      Page 9                                                                             GAO/T-GGD-98-27
                                        Statement
                                        The Federal Employees’ Retirement System:
                                        Potential Changes in Agency Retirement
                                        Costs Following an Open Season




Table 2: Comparison of Agency Cost Increases for Each CSRS General Schedule Employee Who Transfers to FERS, by
Grade and Step
                                                                             Steps
Grades                                            1      2        3         4       5      6       7       8          9     10
GS-1                                      $1,571 $1,623 $1,675 $1,728 $1,780 $1,811 $1,862 $1,914 $1,916 $1,965
GS-2                                       1,766      1,808   1,867    1,916    1,938   1,995   2,052   2,109     2,166   2,223
GS-3                                       1,927      1,991   2,056    2,120    2,184   2,248   2,313   2,377     2,441   2,505
GS-4                                       2,163      2,236   2,308    2,380    2,452   2,524   2,596   2,669     2,741   2,813
GS-5                                       2,420      2,501   2,582    2,663    2,743   2,824   2,905   2,986     3,066   3,147
GS-6                                       2,698      2,788   2,878    2,968    3,058   3,147   3,237   3,327     3,417   3,507
GS-7                                       2,998      3,098   3,198    3,298    3,398   3,498   3,598   3,698     3,798   3,898
GS-8                                       3,320      3,431   3,542    3,653    3,763   3,874   3,985   4,095     4,206   4,317
GS-9                                       3,668      3,790   3,912    4,034    4,157   4,279   4,401   4,523     4,646   4,768
GS-10                                      4,039      4,173   4,308    4,443    4,577   4,712   4,847   4,981     5,116   5,251
GS-11                                      4,437      4,585   4,733    4,881    5,029   5,177   5,325   5,473     5,621   5,769
GS-12                                      5,318      5,496   5,673    5,850    6,028   6,205   6,382   6,560     6,737   6,914
GS-13                                      6,324      6,535   6,746    6,957    7,168   7,378   7,589   7,800     8,011   8,166
GS-14                                      7,473      7,723   7,972    8,165    8,290   8,414   8,539   8,663     8,788   8,913
GS-15                                      8,450      8,597   8,743    8,890    9,036   9,183   9,329   9,476     9,622   9,769
                                        Source: GAO analysis of OPM data.




                                        Because each transferring employee would add to an agency’s retirement
It Is Difficult to                      costs, assessing the effect of an open season on agencies’ retirement costs
Predict the Number or                   is critically dependent on the number of employees who would switch and
Salary Level of                         their salary levels. Exclusive of the Postal Service, about 457,000
                                        permanent civilian GS employees covered by CSRS and about 37,000
Employees Who                           covered by the CSRS Offset plan would be eligible and could transfer to
Would Transfer to                       FERS during a new open season. Given the potential range of impacts on
                                        agency retirement costs and the difficulty of making a precise estimate of
FERS                                    these costs, it is useful to consider what factors employees might consider
                                        in making their decisions and the salary levels of those who might be most
                                        likely to switch.

                                        When FERS was created, Congress asked us to evaluate the act’s initial
                                        implementation. During the course of our work, we developed information
                                        on the reasons why eligible employees chose not to transfer to FERS. One
                                        lesson from this work was that it is difficult to predict whether an
                                        individual employee will decide to change his or her retirement coverage.




                                        Page 10                                                                 GAO/T-GGD-98-27
    Statement
    The Federal Employees’ Retirement System:
    Potential Changes in Agency Retirement
    Costs Following an Open Season




    For example, at the time of the initial open season in 1987, the Office of
    Management and Budget estimated that as many as 40 percent of eligible
    employees would transfer to FERS, while after the open season ended in
    January 1988, OPM confirmed that about 86,000 CSRS employees (about
    4 percent) actually transferred..

    Also, transfer rates during the first FERS open season varied across the
    agencies that we reviewed. At sites we visited, we found that transfer rates
    ranged from less than 1 percent to more than 4 percent, which translates
    into a fourfold difference in the increases in the agencies’ retirement
    costs.11

    During our 1987 work, we also examined the manner in which agencies
    fulfilled their implementation responsibilities during the open season, in
    part to understand the role that information provided to employees may
    have played in their decisions. We found that although fewer eligible
    employees than expected actually transferred, there were no underlying
    deficiencies in the implementation of the transfer program that might have
    accounted for the low percentages. FERS information was widely available
    and distributed. Advisors who were to provide individual counseling were
    trained by OPM, and these advisors were available to assist employees.
    Computer models were also widely available, and analyses and estimates
    were generally provided to employees who requested them.
    Notwithstanding such agency efforts, briefings at the sites we visited were
    not well attended. Also, only a small percentage of employees requested
    computer estimates of their potential retirement benefits.

    We interviewed personnel officials and advisors who were responsible for
    counseling employees during 1987 on the advantages and disadvantages of
    transferring to FERS. On the basis of the views of advisors and personnel
    officials at the sites we visited, we identified four primary reasons why
    employees decided not to transfer to FERS. The reasons—both economic
    and noneconomic—were as follows:

•   Employees regarded FERS as too complex to understand.
•   Employees believed they could not afford to contribute to TSP.



    11
      We visited 23 Department of the Army and Veterans Administration field activities. We selected two
    large agencies, one military and one civilian. Both employed a large number of civilian employees and
    had numerous field activities widely dispersed throughout the country. However, because we did not
    randomly select the agencies or their field locations, the information we obtained could not be
    projected to portray the implementation of FERS throughout the Army, Veterans Administration, or
    the government.



    Page 11                                                                           GAO/T-GGD-98-27
    Statement
    The Federal Employees’ Retirement System:
    Potential Changes in Agency Retirement
    Costs Following an Open Season




•   Employees planned to make the federal government their career and
    believed that CSRS provided greater benefits for career employees than
    FERS.
•   Employees did not trust various aspects of the design or stability of FERS,
    including the viability of the Social Security system and potential for
    future changes in FERS benefit levels.

    In contemplating the relevance of employees’ 1987 reasoning for a new
    open season, it is worth noting that much has changed in the past decade.
    For instance, although the number of FERS retirees is still small relative to
    CSRS retirees, FERS is no longer an unknown or fledgling retirement
    program. The benefits available from participation in FERS likely are better
    understood today than in 1987 when the program was created. Of
    particular importance may be a general improvement in public
    understanding of 401(k) plans and the role that they now play in
    retirement savings. Although the growth of these plans may be due in part
    to their popularity with employers, the plans also enjoy increased
    employee popularity because they are seen as an important element of
    retirement income and as having the advantage of portability. Also,
    notwithstanding the recent volatility of stock markets worldwide,
    sustained economic growth has boosted plan earnings and increased total
    assets substantially over the past decade, including those of the TSP C fund.
    On the other hand, should the U.S. economy falter or market gains abate
    or turn to losses, TSP might seem less attractive to those employees who
    are considering whether to change their retirement coverage.

    As to the TSP affordability issue cited by employees, CSRS
    participants—who are allowed to contribute up to 5 percent of pay on a
    tax-deferred basis to their own TSP accounts—are doing so in large
    numbers. In 1996, more than half of the CSRS-covered employees in civilian
    agencies contributed to TSP. Participation rates ranged from a low of about
    42 percent at the Postal Service to a high of about 75 percent at the
    Education Department. Also, more than 70 percent of CSRS employees who
    were contributing to TSP in 1996 contributed the maximum allowed.

    In part, because 10 years have elapsed since the last open season,
    individual employees’ personal circumstances could be considerably
    different. In general, more CSRS employees would be closer to retirement
    eligibility, many may have moved to higher salary levels, and still others’
    family responsibilities may have changed—either by increasing or
    decreasing.




    Page 12                                                       GAO/T-GGD-98-27
    Statement
    The Federal Employees’ Retirement System:
    Potential Changes in Agency Retirement
    Costs Following an Open Season




    It is reasonable to expect that such economic considerations would play
    an important role in employees’ decisions about transferring to FERS. Given
    such changes, some employees might find a financial advantage in
    changing their retirement coverage now who did not in 1987. For example,
    some economic incentives to switch include the following:

•   Changes in personal circumstances such as advancing to higher salary
    levels could be contributing to the increased CSRS employee participation
    in TSP. For example, as shown in figure 1, about 80 percent of CSRS
    employees earning between $60,000 and $65,000 contributed the maximum
    5 percent of their salaries into TSP. Some of these employees might be
    attracted to FERS to take advantage of the opportunity to put up to
    10 percent of their salaries, which would result in a 5-percent contribution
    by the government.
•   After a 5-year period of FERS participation, any CSRS employee who
    switched would become eligible upon retirement for the full spousal
    benefit provided under Social Security. CSRS retirees have these benefits
    partially or entirely offset by their CSRS pensions.
•   The approximately 4,000 CSRS employees who have worked long enough to
    qualify for the maximum retirement benefit of 80 percent of their high-3
    average salary could earn greater retirement benefits by transferring to
    FERS, because they would qualify for agency matching contributions to TSP,
    Social Security, and other benefits. The pensions that they would receive
    as transferees would include the maximum allowable CSRS benefit, plus the
    additional FERS annuity.
•   Lower-salaried employees may fare well under FERS, because Social
    Security benefits are weighted toward lower income workers. Although
    employees who participate in CSRS do not receive Social Security benefits
    from their federal service, those participants who transfer to FERS would
    receive pensions combining CSRS and FERS benefits, and they would be
    eligible to receive Social Security benefits from their federal service.
    However, this advantage to low wage earners could be considerably
    reduced by the Windfall Elimination provision, which would significantly
    reduce Social Security benefits for transferees who do not have at least 21
    years of substantial Social Security coverage.




    Page 13                                                      GAO/T-GGD-98-27
                                         Statement
                                         The Federal Employees’ Retirement System:
                                         Potential Changes in Agency Retirement
                                         Costs Following an Open Season




Figure 1: Percent of CSRS Participants
Who Contributed 5 Percent of Income      100           Percentage of CSRS employees
in 1996, by Selected Salary Brackets

                                          80




                                          60




                                          40




                                          20




                                              0
                                                                                                        99
                                                        99



                                                                        99



                                                                                        99
                                                       9,9



                                                                       4,9



                                                                                       9,9



                                                                                                       4,9
                                                  -$1



                                                                  -$3



                                                                                  -$4



                                                                                                  -$6
                                                  00



                                                                  00



                                                                                  00



                                                                                                  00
                                              5,0



                                                             0,0



                                                                             5,0



                                                                                             0,0
                                          $1



                                                             $3



                                                                             $4



                                                                                             $6




                                         Selected income levels



                                         Source: Federal Retirement Thrift Investment Board data.




                                         On the other hand, concerns about economic risks or uncertainty could
                                         dissuade some employees from transferring. As noted above, concern
                                         about the reliability of Social Security benefits was an important factor in
                                         employee decisions during the first open enrollment season. Current
                                         opinion polls suggest that many Americans remain concerned about
                                         whether these benefits will be a reliable source of retirement income. Our
                                         review of the last open season also suggests that factors such as the
                                         perceived complexity of the FERS program and its attendant risks also can
                                         play important roles in employees’ decisions. For example, some
                                         employees have less than 40 years of service and thus have not reached
                                         the maximum CSRS benefit. These employees might not want to exchange
                                         the larger annuities that additional CSRS service would provide for smaller
                                         FERS annuities that are coupled with the risk of losses from TSP
                                         investments that could result an overall lower retirement income.12

                                         12
                                          The amount of the reduction in annuity benefits would depend on the number of years of FERS
                                         service that would be applied to the employee’s eventual annuity calculation.



                                         Page 14                                                                       GAO/T-GGD-98-27
                       Statement
                       The Federal Employees’ Retirement System:
                       Potential Changes in Agency Retirement
                       Costs Following an Open Season




                       Finally, although economic factors logically would play an important role
                       in employee decisions, noneconomic considerations could also play a
                       significant role. Choices about when is the right time to retire are very
                       personal and reflect individual values and circumstances as well as
                       economic considerations. Thus, these decisions could be based on factors
                       that are hard, if not impossible, to quantify. Upon transferring to FERS, for
                       example, employees would need to work an additional 5 years to avoid the
                       public pension offset rules that apply to CSRS employees. However,
                       working the additional 5 years might take some individuals beyond the
                       date at which they had planned to retire, and the trade-off between
                       additional retirement income and a shorter retirement would be a difficult
                       personal decision. In the final analysis, much like employee decisions to
                       take or forego recent early-out opportunities, it may be possible to
                       estimate who would benefit from a FERS open season transfer on economic
                       grounds, but the deciding factors might in fact be known only to the
                       employees.


                       Given the difficulty of predicting the number and characteristics of the
Agency Retirement      employees who ultimately might transfer to FERS, we developed two sets of
Cost Increases Would   examples to illustrate the range of increases in retirement costs that
Depend on the          agencies could face following a new FERS open season. Using two different
                       sets of assumptions, we calculated the increase in agency retirement costs
Number and Salary      if 1, 5, and 10 percent of the eligible employees transferred to FERS. For the
Levels of Employees    first set of calculations, we assumed that the distribution of transferring
                       employees for each GS pay grade matched their actual distribution,
Who Transfer           governmentwide. That is, if 2.2 percent of the eligible CSRS employees were
                       in grade GS-4, then 2.2 percent of the employees included in the 1-, 5-, and
                       10-percent calculations would also be in grade GS-4. For the second set of
                       calculations, we assumed that a larger proportion of the transferring
                       employees would be earning salaries at higher GS grades. This assumption
                       helps to illustrate the sensitivity of the agency retirement cost increases to
                       the salary level of transferring employees and may be especially pertinent
                       if employees nearing the end of their careers, or those who wish to take
                       advantage of the FERS TSP higher maximum contribution rate are most
                       likely to transfer.

                       Table 3 illustrates the potential increases in agency retirement costs if 1, 5,
                       and 10 percent of the eligible employees covered by CSRS transferred to
                       FERS, assuming that the transfer rates across the GS grades would match
                       the current distribution of employees by grade and step. As the table
                       shows, under these assumptions the increase in agency costs for the full



                       Page 15                                                        GAO/T-GGD-98-27
                                       Statement
                                       The Federal Employees’ Retirement System:
                                       Potential Changes in Agency Retirement
                                       Costs Following an Open Season




                                       calendar year 1997 would have ranged from about $24 million more if 1
                                       percent of the employees transferred to about $244 million more if 10
                                       percent transferred. Our results for CSRS Offset plan participants ranged
                                       from less than $1 million to about $8 million and are presented in appendix
                                       I.

Table 3: Comparison of the Estimated
Increase in Agency Costs for General                                                    Total cost of selected rates of transfer
Schedule Employees Covered by          Grades                                            1 percent            5 percent          10 percent
CSRS
                                       GS-1                                                    $133a                $663              $1,326
                                       GS-2                                                   2,694               13,472              26,944
                                       GS-3                                                  39,971             199,856              399,711
                                       GS-4                                                268,896            1,344,478            2,688,957
                                       GS-5                                                850,251            4,251,255            8,502,510
                                       GS-6                                                806,650            4,033,250            8,066,499
                                       GS-7                                              1,389,418            6,947,090          13,894,179
                                       GS-8                                                687,775            3,438,877            6,877,753
                                       GS-9                                              2,017,484           10,087,421          20,174,842
                                       GS-10                                               319,857            1,599,285            3,198,569
                                       GS-11                                             4,321,219           21,606,095          43,212,189
                                       GS-12                                             6,483,941           32,419,705          64,839,410
                                       GS-13                                             4,273,407           21,367,034          42,734,067
                                       GS-14                                             1,985,738            9,928,692          19,857,384
                                       GS-15                                               945,820            4,729,099            9,458,198
                                       Total                                          $24,395,340         $121,965,721        $243,931,442
                                       Note 1: For this table, we estimated the total costs associated with each selected rate of transfer
                                       by assuming that the proportion of CSRS employees who transfer would match the actual
                                       distribution of these employees across GS grades governmentwide.

                                       Note 2: Due to rounding, totals may not equal the transfer rate percentages shown above.
                                       a
                                        Because only seven of the CSRS employees whom we included in our analyses were in grade
                                       GS-1, 1 percent of these seven represents the cost difference for less than one person.

                                       Source: GAO analysis of OPM data.



                                       Table 4 shows the increase in agency costs if 1, 5, or 10 percent of the
                                       eligible employees covered under CSRS transferred to FERS under the
                                       different assumption that transfer rates would be higher for employees in
                                       grades GS-13 through GS-15. Following this logic, the calculations assume
                                       that 75 percent of the total number of employees who would transfer
                                       would be in grades GS-13 through GS-15, and the remaining 25 percent of
                                       the transferring employees would be in grades GS-1 through GS-12. Under



                                       Page 16                                                                             GAO/T-GGD-98-27
                                        Statement
                                        The Federal Employees’ Retirement System:
                                        Potential Changes in Agency Retirement
                                        Costs Following an Open Season




                                        these assumptions, the 1 year agency costs would range from a low of
                                        about $32 million if 1 percent of the employees transferred to a high of
                                        $320 million if 10 percent transferred. Our results for CSRS Offset plan
                                        participants ranged from about $1 million to about $13 million and are
                                        presented in appendix I.

Table 4. Comparison of the Estimated
Increase in Agencies’ Costs for                                                          Total cost of selected rates of transfer
General Schedule Employees Covered      Grades                                            1 percent            5 percent          10 percent
by CSRS If the Concentration of Those
                                        GS-1 to GS-12                                 $ 5,393,886 $        26,964,573 $           53,934,002
Transferring to FERS Were at the
Higher Grade Levels.                    GS-13 to GS-15                                   26,585,497         132,919,510          265,831,044
                                        Total                                          $31,979,383         $159,884,083        $ 319,765,046
                                        Note 1: For this table, we estimated the total costs associated with each selected rate of transfer
                                        by assuming that 75 percent of CSRS employees who transfer would be in grades GS-13 through
                                        GS-15, and 25 percent of the employees would be in grades GS-1 through GS-12.

                                        Note 2: Due to rounding, totals may not equal the transfer rate shown.

                                        Source: GAO analysis of OPM data.




                                        Regardless of the size of the increase in agencies’ retirement costs may be,
Agencies Might Have                     the way in which agencies’ budget resources are controlled under the
to Pay Any Additional                   current budget process suggests that agencies might have to absorb any
Retirement Without                      increase. Agency spending to pay retirement costs is discretionary
                                        spending. Under the current process, discretionary spending is subject to
Additional Resources                    fixed-dollar caps that are implemented through the budget and
                                        appropriations processes.13 As a consequence, unless Congress chose to
                                        provide additional resources to fund the added retirement costs that
                                        agencies could be charged, agencies would need to absorb any increases,
                                        within the limits of their annual appropriations.14

                                        Given the uncertainty regarding how many employees might transfer to
                                        FERS during an open season, it is correspondingly difficult to estimate


                                        13
                                          In particular, as noted in Budget Policy: Issues in Capping Mandatory Spending (GAO/AIMD-94-155,
                                        July 18, 1994), congressional budget resolutions set totals by budget function and accompanying
                                        statements to the conference reports allocate funds to the appropriations committees for discretionary
                                        programs. House and Senate appropriations committees subsequently allocate these totals among
                                        their subcommittees. OMB keeps score by tracking congressional actions, and Congress has
                                        established spending levels in each congressional budget resolution. Should appropriations exceed the
                                        discretionary cap, the Budget Enforcement Act provides for eliminating the overage through the
                                        sequestration of discretionary spending. Policymakers vote annually on these discretionary program
                                        appropriations.
                                        14
                                         To provide additional appropriations for this purpose would likely require an increase in the
                                        discretionary caps.



                                        Page 17                                                                            GAO/T-GGD-98-27
Statement
The Federal Employees’ Retirement System:
Potential Changes in Agency Retirement
Costs Following an Open Season




whether agencies would have a difficult time absorbing such an increase.
By one measure—the percentage that the increase in retirement costs
might be of agencies’ total expenditures for salaries and benefits—the
increased retirement costs do not look imposing. For example, our highest
estimate of increased governmentwide costs, about $332 million, would
represent approximately 1 percent increase in expenditures for salaries
and benefits for the employees used in our analysis, based on fiscal year
1997 figures. Of course, depending on how “personnel-intensive” specific
agencies’ operations may be or what other cost increases may arise from
other sources, even such a small overall percentage increase could be
difficult to absorb in certain situations, and might, for example, result in
reductions in staff levels or capital spending. Finally, agencies would be
affected differently, depending on their particular grade structure. For
example, an agency with a relatively larger share of highly salaried
employees who opt to transfer would experience larger increases in its
retirement costs compared to an agency with a smaller share, assuming
that both agencies experienced the same transfer rates.


That concludes my prepared statement. I would be pleased to answer any
questions you or other Members of the Committee may have.




Page 18                                                      GAO/T-GGD-98-27
Page 19   GAO/T-GGD-98-27
Appendix I




Table I.1. Comparison of Agency Cost Increases for Each CSRS Offset Employee Who Transfers to FERS, by Grade and
Step
                                                                              Steps
Grades                                            1      2        3           4      5       6       7       8          9     10
GS-1                                         785       812     838          864    890     905     931     957        958    982
GS-2                                         883       904     933          958    969     997    1,026   1,054     1,083   1,112
GS-3                                         964       996    1,028    1,060      1,092   1,124   1,156   1,188     1,221   1,253
GS-4                                       1,082      1,118   1,154    1,190      1,226   1,262   1,298   1,334     1,370   1,406
GS-5                                       1,210      1,251   1,291    1,331      1,372   1,412   1,452   1,493     1,533   1,573
GS-6                                       1,349      1,394   1,439    1,484      1,529   1,574   1,619   1,664     1,709   1,754
GS-7                                       1,499      1,549   1,599    1,649      1,699   1,749   1,799   1,849     1,899   1,949
GS-8                                       1,660      1,716   1,771    1,826      1,882   1,937   1,992   2,048     2,103   2,158
GS-9                                       1,834      1,895   1,956    2,017      2,078   2,139   2,201   2,262     2,323   2,384
GS-10                                      2,019      2,087   2,154    2,221      2,289   2,356   2,423   2,491     2,558   2,625
GS-11                                      2,219      2,293   2,367    2,441      2,515   2,589   2,663   2,736     2,810   2,884
GS-12                                      2,659      2,748   2,837    2,925      3,014   3,102   3,191   3,280     3,368   3,457
GS-13                                      3,162      3,268   3,373    3,478      3,584   3,689   3,795   3,900     4,005   4,111
GS-14                                      3,737      3,861   3,986    4,110      4,235   4,360   4,484   4,609     4,733   4,858
GS-15                                      4,395      4,542   4,688    4,835      4,981   5,128   5,274   5,421     5,567   5,714
                                        Source: GAO analysis of OPM data.




                                        Page 20                                                                   GAO/T-GGD-98-27
                                         Appendix I




Table I.2. Comparison of the Estimated
Increase in Agency Costs for General                                                      Total cost of selected rates of transfer
Schedule Employees Covered by the        Grades                                            1 percent            5 percent          10 percent
CSRS Offset Plan                              a
                                         GS-1                                                       $0                   $0                    $0
                                         GS-2                                                     156                  779                1,558
                                         GS-3                                                   4,310               21,550              43,101
                                         GS-4                                                  29,292             146,459              292,919
                                         GS-5                                                  76,991             384,957              769,914
                                         GS-6                                                  68,269             341,346              682,692
                                         GS-7                                                  91,249             456,245              912,491
                                         GS-8                                                  32,855             164,273              328,547
                                         GS-9                                                  77,874             389,370              778,741
                                         GS-10                                                  8,232               41,160              82,321
                                         GS-11                                               118,355              591,774            1,183,547
                                         GS-12                                               144,041              720,203            1,440,406
                                         GS-13                                                 92,328             461,639              923,277
                                         GS-14                                                 39,548             197,742              395,484
                                         GS-15                                                 22,982             114,910              229,820
                                         Total                                              $806,661           $4,033,305          $8,064,370
                                         Note 1: For this table, we estimated the total costs associated with each selected rate of transfer
                                         by assuming that the proportion of CSRS Offset employees who transfer would match the actual
                                         distribution of these employees across GS grades governmentwide. That is, because 6.1 percent
                                         of the eligible CSRS employees were in grade GS-4, 6.1 percent of the CSRS Offset employees
                                         included in the 1-, 5-, and 10-percent cost estimates were also in grade GS-4.

                                         Note 2: Due to rounding, totals may not equal the transfer rate percentages shown above.
                                         a
                                         Because no CSRS Offset employees were in grade 1, the cost difference is $0.

                                         Source: GAO analysis of OPM data.



Table I.3. Comparison of the Increase
in Agency Costs for General Schedule                                                      Total cost of selected rates of transfer
Employees Covered by the CSRS            Grades                                            1 percent            5 percent          10 percent
Offset Plan If the Concentration of
                                         GS-1 to GS-12                                      $182,590             $912,951          $1,825,901
Those Transferring to FERS Were at
the Higher Grade Levels                  GS-13 to GS-15                                    1,079,569            5,397,844          10,791,690
                                         Total                                            $1,262,159           $6,310,795          12,617,591
                                         Note 1: For this table, we estimated the total costs associated with each selected rate of transfer
                                         by assuming that 75 percent of CSRS Offset employees who transfer would be in grades GS-13
                                         through GS-15, and 25 percent of the employees would be in grades GS-1 through GS-12.

                                         Note 2: Due to rounding, totals may not equal the transfer rate percentages shown.

                                         Source: GAO analysis of OPM data.




                                         Page 21                                                                              GAO/T-GGD-98-27
           Appendix I




(410225)   Page 22      GAO/T-GGD-98-27
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