CIVIL SERVICE PENSION REFORM ACT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89-00066R000100120002-9
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 102
• Document Creation Date: December 22, 2016
• Document Release Date: March 1, 2010
• Sequence Number: 2
• Publication Date: December 1, 1982
• Content Type: REGULATION

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A REPORT
SUBCOMMITTEE ON CIVIL SERVICE, POST OFFICE,
AND GENERAL SERVICES
COMMITTEE ON GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
U.B. GOVBBNMXNT PRINTING OFFICE
12-U70 WASHINGTON : 1983
97th Conte j
2d Seulon J
COBEWT EE PRINT
CIVIL SERVICE PENSION REFORM ACT
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COIVIlMIIF EE ON GOVERNMENTAL AFFAIRS
WILLIAM V. ROTH, JR, Delaware, Chairman
CHARLES H. PERCY, Illinois THOMAS F. EAGLETON, Missouri
TED STEVENS, Alaska HENRY M. JACKSON, Washington
CHARLES M. MATHIAS, Ja, Maryland LAWTON CHILES, Florida
JOHN C. DANFORTH, Missouri SAM NUNN, Georgia
WILLIAM S. COHEN, Maine JOHN GLENN, Ohio
DAVID DURENBERGER, :Minnesota JIM SASSER. Tennessee
MACK MATTINGLY, Georgia DAVID PRYOR, Arkansas
WARREN B. RUDMAN, New Hampshire CARL LEVIN, Michigan
HARRISON "JACK" SCBMITT, New Maid
Joan M. McErrra, Staff Director
IRA S. SaArao, Minority Staff Director and Chief Cownel
SUBCOMMrrrU ON CIVIL S auks, Poer Orrics, AND GENIAL SJMVICBd
TED STEVENS, Alaska, Chairman
CHARLES McC. MATHIAS, Ja, Maryland DAVID PRYOR, Arkansas
WAYNZ A. Scam, Staff Director
JAMIE Cowan, Chief Counsel
Enwnc S. JAYNE, Mirwrity Staff j Director
PAT HALCOIm, Chief Clerk
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Dear fellow employee:
Our retirement system has come under increasing attack
in recent years. Many of the benefits we once enjoyed no
longer exist. I believe this attack will continue to the
point where the retirement system's benefits will be emasculated,
unless we come up with an alternative. Recall the past
benefits such as the 1% kicker, the look-back formula, the
twice-a-year cost-of-living adjustment, and the full adjustment
at any age of retirement. They have been either changed or
repealed. Note also that as of this month we will be paying
the Medicare tax.
We anticipate that federal employees will be placed
under Social Security soon, a move I have opposed. However,
when that occurs, I believe we should turn this loss into a
net gain for federal employees. For that reason, I have
suggested an alternative--to establish a new system for new
.workers, which current workers may join, while leaving the
current system intact for all current workers who prefer to
remain in it.
The new system should be less costly and more closely
patterned after private sector plans. In this way, the new
system will not be subjected to cost-cutting necessities.
Establishing such an alternative system may be the only way
to protect the current system from further substantive
change.
Until a majority of those affected by this proposal
support it, I will not pursue the passage of this legislation.
What follows is a detailed explanation of the proposal. I
hope you find the information helpful.
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LETTER OF TRANSMITTAL
U.S. SENATE,
COMMrrrEE ON GOVERNMENTAL AFFAIRS,
SUBCOMMITTEE ON CIVIL SERVICE,
PosT OFFICE, AND GENERE-L SERVICES,
Washington, D.C, December 9, 1982.
Hon. WILLIAM V. RoTm, Jr.,
Chairman, Committee on Governmental Affairs,
U.S. Senate, Washington, D.C.
Dawn MR. CHAnt w : The Subcommittee on Civil Service, Post
Office, and General Services transmits the following analysis of my
bill to establish a new federal employees retirement system.
Because of the recent changes and increasing future threat to
the current Civil Service Retirement System, we have formulated
an alternative pension system, closely related to the private sector,
to provide a more secure, stable, and financially rewarding pro-
gram for the federal worker. This new program would be for new
federal employees and for those in the current work force who
elect to participate.
Naturally, any proposed changes that at first glance appear
threatening are a cause for overwhelming concern. In presenting
these proposed changes to concerned federal employees, we have
developed a series of extremely informative position papers describ-
ing in detail the legislation's three tiers of retirement benefits.
This has been a critical factor in informing the federal employees
of these proposed changes.
The requests for information on this proposal have been tremen-
dous in volume. In order to respond to these requests, we have com-
piled an analysis to help inform the Members as well as other fed-
eral employees of information necessary for making a decision on
such an important matter.
Therefore, I request that the Committee on Governmental Af-
fairs issue a committee print of the enclosed analysis in order to
better and more economically disseminate this information.
Cordially,
TED STEVENS,
Chairman.
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CONTENTS
Letter of transmittal .......................................................................................................
v
I. Description of legislation .....................................................................................
1
Introduction .......................................................................................................
1
Social security coverage ..................................................................................
4
Defined contribution plan ...............................................................................
6
Thrift plan .........................................................................................................
10
Private investment of the civil service pension fund ................................
11
Protections and provisions for the current worker ....................................
19
Income protection in the event of illness or injury ...................................
23
IL Sectional analysis ..................................................................................................
27
M. Replacement rates as projected by the Library of Congress .........................
35
IV. Examples of survivor benefits .............................................................................
41
V. Replacement rates as projected by the General Accounting Office ............
43
VI. Cost analysis ...........................................................................................................
61
VU. Budgetary flow charts ..........................................................................................
89
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I. DESCRIPTION OF LEGISLATION
INTRODUCTION
Retirement spells drastic changes for individuals and families.
Income drops. Priorities change. A second life begins. Prior to re-
tirement an employee makes a variety of decisions affecting his
future. The most important questions are what will he do; when
will he retire; and how much income will be needed to meet the
needs of himself and his family.
Unlike 25 years ago, today an employer must offer a retirement
plan to attract quality employees. A good retirement plan offers to
resolve in part the questions of a reasonable retirement age and a
sufficient income level. To determine these and other specifics, an
employer must consider a number of factors, such as:
1. What can be profitably offered?
2. What benefits are competitive with counterpart businesses?
3. How much employee turnover is desirable?
4. What age range is necessary or desirable for the type of work
involved?
5. What requirements must be met under the Employee Retire-
ment Income Security Act of 1974?
The Federal Government as an employer, however, is faced with
a different set of circumstances. The government's provision of a
secure retirement for its employees is counter-balanced by its re-
sponsiveness to the taxpayers. While employee benefits in a busi-
ness are constrained by the profit margin, similar benefits in gover-
ment employment are constrained by the public's willingness to
pay. The government has a responsibility to both groups to provide
a good yet affordable retirement plan. The current Civil Service
Retirement System (CSRS) is clearly lacking in both respects. It is
an expensive plan which rewards a few at the expense of many.
The Congressional Budget Office reports that annual outlays of
CSRS are 17.3 billion and will rise to $30.1 billion in 1986. Total
retirement costs constitute 36.8 percent of payroll, of which 29.8
percent are government costs. This is to be compared to typical pri-
vate sector plan costs of 22.7 percent. Yet, these high costs reflect
benefit payments to a relatively small group of people. Studies
show that approximately 25 percent of new federal hires remain in
the government until retirement. The remaining 75 percent either
withdraw their contributions upon resignation with little or no in-
terest accrual or they remain vested in the system to receive a
marginally smaller retirement benefit upon reaching retirement
age. Hence, the exorbitant costs of the current system result from
the relatively few who take advantage of it.
We are convinced that the cost of the system can be significantly
reduced while redistributing the benefits to profit the most. In
order to do this in the most equitable manner, we have introduced
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a bill to establish a new retirement system to mandatorily cover all
federal employees hired after the date of enactment of this legisla.
tion with the option to current federal employees to elect coverage
under this new system. This legislation, the Civil Service Pension
Reform Act, will dramatically change the pension system for feder-
al employees.
It includes social security coverage for all new federal employees.
Social security will be the foundation for the rest of the system. It
will make the system comparable to pension plans in the private
sector. The public will no longer have reason to single out federal
workers as ones insulated from their concerns. All will be treated
equally here. Yet, even to the federal worker, the benefits of social
security coverage far outweigh the liabilities.
The basic pension plan will be a defined contribution plan requir-
ing government contributions only, eventually to be invested in the
private sector. One's retirement will depend upon the accumula-
tions of his contributions plus its investment earnings. Private in-
vestment provides a variety of heretofore unavailable options. Indi-
vidual employees will now participate in investment decisions.
When an employee feels his account is sufficiently large to support
him, he can leave at any time.
Most federal workers will actually benefit from this new system.
Actuarial estimates reveal that employees at all income levels who
work a full career will receive greater net replacement of their
income (after taxes) than under the current system. The new
system will provide employees with portabili ty between the federal
and private sector, non-existent now. An employee may leave after
five years, t~ with him his accumulated earnings and his social
security credit. This option heralds a new flexibility for federal em-
ployees. Retirement benefits will no longer direct the decisions for
mid-career federal employees who are considering other career al-
ternatives. The retirement plan will continue to reward full career
federal employees while freeing part career employees to move in
and out of the non-federal sector.
In addition, unfunded liabilities and spiralling government costs
will be problems of the past. The system will be fully funded. The
government's costs will be fixed. This system also achieves substan-
tial cost savings over the current system. The new system reduces
the cost of federal retirement to the government, and thus to the
taxpayer, by 20 percent. These savings are achieved primarily from
three places. First, coverage by social security precludes the gen-
eration of disproportionate benefits to those who work in covered
employment for short spans. Second, those who take advantage of
the current system by retiring with minimum age and service eligi-
bility will no longer receive benefits commensurate with the cur-
rent arrangement until age 62 when social security payments
begin. Third, cost-of-living increases are funded through private in-
vestment, rather than government largess.
Admittedly, the concepts contained in the legislation are some-
what revolutionary vis-a-vis the current system. However, such re-
tirement plans are fairly common in the private sector. The struc-
ture, the costs, and the benefits are comparable to many good pri-
vate sector retirement plans. The following describes the bill's gen-
eral provisions:
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1. The proposal mandatorily covers all federal and postal employ-
ees hired after the date of enactment.
2. There is an option for current workers to elect coverage in the
new m.
3. The government will buy an employee's current retirement
credit for the employee who elects coverage in the new system. The
new amount will be placed in the employee's account in the new
system. The employee will have two options:
(a) The worker's current retirement contributions will be
matched by the government with the total increased by a 5-
percent interest factor compounded for the number of years of
service, or
(b) The worker will be entitled to the present value of his ac-
cumulated benefits adjusted by a 6-percent inflation factor.
The following table illustrates the amounts involved for an em-
ployee who entered government service at age 25 with. a starting
salary of $10,000 and received annual pay increases of six percent.
'Option A is based on a 5-percent interest rate. Option B is based on
a 6-percent discount rate and an assumed 6 percent inflation rate.
30..._........ _........ .............. _................... _..._
$9,104
$4,421
23.806
17,219
40_._...__.
46,692
50,135
45
81,424
125,279
4. The first tier of the new system will be social security. Federal
employees will pay the same social security taxes as covered em-
ployees and will receive the same benefits. The government will
pay the employer tax and pay its portion into the social security
trust fund.
5. The second tier will be a defined contribution plan. The gov-
ernment will contribute to an employee's account 9 percent of the
first $20,000 (adjusted annually) and 16 percent for every dollar
thereafter. This is a government contribution plan only.
6. The third tier will be a voluntary thrift plan. The employee
may contribute any amount he wishes. The government will match
100 percent of the employee's contribution up to 3 percent of
salary. In other words, if the employee contributes 6 percent, the
government will contribute 3 percent; if the employee contributes 2
percent, the government will contribute 2 percent.
7. An employee will vest in the new system after five years of
participation. This includes newly-hired employees and current em-
ployees who transfer to the new system. After five years of partici-
pation, an employee may leave government with the entire amount
in his retirement account. This includes government contributions
plus interest. Alternatively, he can draw an actuarily-adjusted an-
nuity or he may defer drawing on the account until later in life. In
such a case, the account would continue to accrue interest. Survi-
vors will receive a social security benefit supplemented by the ac-
cumulated earnings in the employee's or annuitant's account.
8. The new system will contain a new pension fund. All govern-
ment contributions to an employee's account in the fund will be in-
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vested in special issues of the Treasury for the employee's first five
years of participation. The employees contributions to the thrift
plan will be available for private sector investment beginning the
second year. After an employee's fifth year of participation, all new
government contributions will be available for private investment.
During the first several years of the new system, however, govern-
ment contributions to an employee's account after the fifth year of
participation will be phased into private investment.
9. There is established an eleven person Federal Pension Board
composed of the Secretaries of Treasury, Commerce, and Labor, the
Chairman of the Federal Reserve Board, six appointments by the
President (nominated to him by employee organizations), and an
Executive Director appointed by the President with the advice and
consent of the Senate. All Board members will be subject to the fi-
duciary responsibilities spelled out in ERISA. The Board will gen-
erally oversee investments of the fund. The Board will also estab-
lish a variety of investment options to which employees may direct
their investments. Employees shall receive annual statements
showing their current accounts and providing them with an oppor-
tunity to choose investments. The presiding member of the Board,
one of the President's appointments, will be the Executive Director.
The Director will implement the investments, contract with private
investment firms, and perform general administrative functions.
10. A new sick leave and disability system is established. Each
employee will be granted seven days of non-accumulating annual
sick leave. Illnesses or injuries necessitating longer leave will trig-
ger short-term accident and illness insurance. Such insurance will
be preceded by a short waiting period and application for such pay-
ment must be accompanied by medical documentation. Depending
upon one's length of service and the duration of his absence, an
employee will receive 100 percent, 80 percent, and 60 percent of his
grow pay
If the absence will extend beyond six months, the employee may
apply for long-term disability. If he qualifies for disability under
social security, he will be guaranteed 60 percent of his gross pay
until restoration or death. If he does not qualify for social security,
he will remain covered for two years. After two years, he must
take a fitness for duty examination or be dropped from the rolls. If
he is considered capable of performing any federal"?ll ob, he must be
appointed to a position. If he refuses the position, a disability pay
meats cease. If he is not able to perform any federal job but is still
not eligible for social security, he will receive 40 percent of his
gross pay until restoration or death.
11. The unfunded liability of the current system is amortized
over a 40-year period by payments from the general Treasury. All
agencies will pay the full cost of the employees remaining in the
current system.
SOCIAL SECURrrY COVERAGE
In developing a proposal to restructure the Civil Service Retire-
ment System (CSRS), we decided that social security should form
the base of any new system. We recognized, of course, that cover-
age of even new federal employees under social security is an ex-
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tremely volatile issue. (Our proposal grandfathers current workers
and retirees in the current system.) Nevertheless, we believe social
security coverage is a necessary part of any restructuring proposal
and that most federal employees will find their overall benefit
package improved.
Much misinformation has circulated concerning the issue of
social security coverage for federal workers. Many employees ap-
parently believe that the entire effort is motivated by a desire on
the part of some officials to "bail out" a financially troubled social
security system by draining the reserves of a financially sound
CSRS into the social security trust fund. This is not true. While
coverage of federal workers does enhance the financial status of
the social security trust fund in the short run, the additional reve-
nue will belargely offset by increasing eligibility for social security
benefits as those individuals reach retirement age.
Besides, the reason the Civil Service Retirement Trust Fund is
considered financially sound is due to the fact that the general rev-
enues annually transferred to the fund from the Treasury subsidize
the system. This is not true for the social security system. Some
proposals for stabilizing the social security system include tapping
the general revenues of the Treasury.
There are, we think, some basic considerations involved in the
question of whether federal employees ought to be covered by
social security.
1. The social security benefit is portable. Currently, the vast ma-
jority of those individuals who come to work for the federal govern-
ment will leave federal employment and receive virtually no retire-
ment benefit from CSRS. Social security coverage will provide
these individuals with a continuity of service covered by a potential
retirement annuity. Such portability should actually enhance the
recruitment of some individuals who would hesitate to take federal
employment because no such protection was being afforded.
2. Additional protections are found in the area of disability and
survivor benefits. Those who currently leave federal employment
without vesting in CSRS or who voluntarily withdraw from CSRS
after vesting have no minimum disability or survivorship protec-
tion of any kind until they fulfill the basic requirements for social
security coverage. With a social security based plan, such income
protection will exist continuously regardless of job transfer. In ad-
dition, there is a greater dollar protection under the social security
disability and survivor programs than under CSRS. This greater
protection includes the family benefit attached to a wage earner's
basic social security benefit.
3. The social security benefit is tax free. Currently, CSRS bene-
fits are fully taxable once benefit payments equal the employee's
lifetime contributions. This usually takes 18 months to 2 years.
Social security benefits, however, are tax free from the first dollar.
This is especially significant for wage earners at the lower grade
levels, because a larger percentage of their retirement income will
come from social security.
4. Social security coverage of federal employment would diminish
resentment many citizens feel toward federal employees and retir-
ees. Two reasons are often cited by citizens writing to Members of
Congress about this issue. First, they do not understand why they
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must contribute to and participate in the social security system
while a substantial group of employees, including those who admin-
ister the social security programs and make decisions affecting it,
are allowed to remain exempt. Second, they resent the fact that
federal workers who acquire social security protection without
having worked an entire career under social security acquire their
social security benefits under especially advantageous circum-
stances. The social security formula enhances benefits for workers
with low career average wages because of either low paying jobs or
because of periods of time out of the work force. Federal workers
who work short careers under social security covered employment
receive the weighted benefit intended to provide the transient
worker with a base income. This advantage is paid for by payroll
taxes of all other workers.
5. Perhaps the most important benefit of social security coverage
is the political one. The current exclusion of federal emplovem
from social security coverage and the nonintegration of the gS S
with social security has left the CSRS open to political attacks.
These attacks have been quite successful in recent years as demon-
strated by changes in the cost-of-living increases. Currently, even
deeper cuts in the CSRS are being considered in virtually every
pro posal designed to reduce the federal deficit.
The coverage of federal employees under social security and the
concomitant integration with a civil service pension system will
put federal employees in a comparable position with their private
sector counterparts. They will become a part of a larger, more po-
litically powerful group; i.e., taxpayers covered by social security.
This political strength was demonstrated last year when significant
social security changes were proposed and were almost immediate-
ly and unanimously rejected by Congress. This comparability will
assuredly restrain the singling out of the civil service pension for
cost-cutting exercises.
Darnvru CONTRIBUTION PL"
Despite the news accounts of the extravagant retirement benefits
awarded to federal workers, for most, the federal retirement
system falls far short of true protection for the aged. Approximate-
ly 75 percent of a group of new federal hires receive little or no
benefit from the current system because the Civil Service Retire-
ment System is intended to provide adequate pro tection for only
those employees working long careers in the federal government.
Portability of benefits between the federal and non-federal sector is
nonexistent. Once vested, there is still no guarantee that the annu-
ity expected will be received. Federal retirement benefits are de-
pendent upon Congress' annual willingness to maintain the ever
increasing government funding of the system. In recent years, Con-
gress has continually pared the level of benefits. It is likely Con-
gress will continue to do so.
Our proposed pension reform, however, resolves in large part
these problems. In addition to a first tier of fully portable social se-
curity credits, our approach provides for a supplemental pension
that vested employees would own and could take with them if they
left their federal jobs. It is this defined contribution plan, the
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second tier of the new system, that is the major vehicle to accom-
plish the desired changes. The defined contribution plan will pro-
vide a supplemental pension to an employee's social security retire-
ment benefit. Thus, a combination of social security and a defined
contribution plan will form the primary basis for the employee's
retirement income.
A defined contribution plan is significantly different from the
currently structured defined benefit plan. A defined benefit plan is
really a definition of eligibility together with a formula for the
computation of benefits an employee receives when eligibility is ac-
I uired. The definition is subject to change by Congress at any time.
defined contribution plan is one in which a fixed percentage of
salary is contributed by the employer to fund a worker's annuity,
the size of which would depend on the sums accumulated in an in-
dividual's account. Federal employees covered by the new system
would make no contribution to the defined contribution plan.
Under our proposal, the Government will contribute 9 percent of
the first $20,000 in salary and 16 percent for every dollar thereaf-
ter. The contribution rates are designed to provide a very good re-
tirement at age 65 with 40 years of service. For instance, under the
current system, an individual with the above age and service re-
ceives 85-90 percent of his net preretirement earnings five years
after retirement. Under our proposal, the same individual receives
90-100 percent of his net preretirement earnings by the combina-
tion of social security and the defined contribution plan. In addi-
tion, employees will have an opportunity to increase their net re-
placement rates by participating in a thrift plan (discussed fully in
the next section).
The percentage contribution variance at $20,000 is designed to
proportionately replace one's preretirement income at all income
levels. This variance is intended to somewhat offset the skew in
social security benefits. Social security, as a social insurance pro-
gram, tax receipts to provide greater proportional
benefits to lower income workers. By providing a variable contribu-
tion, the Civil Service Pension compensates for this social security
distributive bias to more closely achieve a level percentage of re-
placement income at all income levels.
The government contributions to an employee's account will
eventually be invested in the private sector. Thus, an annuity ar-
ranged with an individual will be dependent upon the contribu-
tions to his account plus the earnings. Another section discusses
the advantages of private investment. Suffice it to say that a whole
range of new opportunities are available to federal workers
through the private investment option.
NEW FLESEaU1TY
As mentioned previously, most federal workers receive little or
no benefit from the current system. The current system rewards
employees who work for the government most of their lives. For
those individuals, the retirement system is a great bonus. But for
those who leave government before retirement age, the system is
unrewarding. Employees who leave prior to retirement may choose
to withdraw their own contributions with little or no interest or
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leave the money in the system and draw a significantly lower an-
nuity at retirement since it's computed on the salary they were re-
ceiving at separation. This dilemma often constrains employees
from leaving government service, even though they may desire to.
This phenomenon, known as the "golden handcuffs", not only
hinders employee futures but builds a certain amount of unproduc-
tivity in the federal work force.
The new pension system alters this scenario. After five years of
participation, an employee may leave the government and receive
the entire value of all pension credits earned up to the point of sep-
aration. In effect, the employee will be able to choose one of three
options: (a) a lump sum payment of the full value of earned pen-
sion credits; (b) a deferred annuity which would be based on the
full value of credits earned up to the point of separation, plus any
additional interest on those credits earned between separation and
the date the annuity begins; and (c) an immediate annuity. Thus,
under this plan there would be no age requirement. Any worker
who stays for five years would reap a benefit earned under the re-
tirement system, and in addition, would retain all social security
credits earned through federal employment. The system is designed
to provide a good retirement for someone who works until age 65
with 40 years of service, and younger in some cases; yet, under our
plan, ones who choose to leave government earlier will no longer
be penalized.
LEGAL RIGHTS
Regardless of the claims by federal workers that once vested
their retirement benefit cannot be changed, it is clear that Con-
gress has the authority to make changes in the system applicable
not only to vested employees but also to current retirees. In the
past few years Congress has repealed the 1 percent kicker, the
look-back feature, twice-a-year cost-of living adjustments, full
cost-of-living adjustments at any age, and has changed the opportu-
nity to take full advantage of a new cost-of-living adjustment to a
method that prorates the first cost-of-living adjustment after retire-
ment to reflect only the months since the annuity commenced.
Congress will continue to consider other changes, further reducing
benefits under the current system.
The courts have consistently upheld Congress' authority to
modify government pensions. The Supreme Court has held that a
pension granted b the federal government confers no rights which
cannot be "revise modified, or recalled" by subsequent legislation.
Additionally, the court has ruled that until a pension is due, an
employee's right is not contractural but a mere expectancy which
can be revoked at any time. Hence, there is little certainty or secu-
rity in the current system. Our proposal, however, is structured to
remove the uncertainty of the current system and to actually es-
tablish currently vested property rights in the government's contri-
butions to the pension fund.
Once an employee begins participation in the new system, an in-
dividualized account is opened for the employee. Contributions
from the employing agency will flow through the employee's ac-
count into the directed investments. Those contributions will be
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pooled with other employees' contributions and invested into var-
ious private and public instruments. Earnings on those investments
will be continuously credited to employee accounts. Annually, the
employee will receive a statement showing the principal and inter-
est accrued in his account.
According to the legislation, an employee vests in the pension
system after five years of participation. But unlike the current
system, in which vesting simply means eligibility to receive an ex-
pected benefit, vesting in the new system means each employee
owns and therefore has a right to receive all monies in that em-
ployee's account upon leaving federal service. In effect, because the
employee's monies could be in part invested through private invest-
ment firms, the government would not be able to subsequently
withhold any monies credited to the employee's personal account.
Once contributed to an employee's account, the monies become
part of an investment portfolio administered under a quasi-
contractural relationship involving the employee, the Pension
Board, and the investors. The Congress, of course, could alter
future contributions by legislation but could not tamper with the
monies currently in the accounts. Therefore, an employee's pension
will have far greater protection than now.
REDUCED COST AND FULLY FUNDED
In recent years there has been much bantering about the term
"unfunded liability . Unfunded liability describes the difference be-
tween the expected obligations of the retirement system minus the
expected receipts. It has resulted from the lack of government
funding through the late 1960's, the cost of cost-of-living adjust-
ments that are not paid for, certain retirement credit recognized
for which no contributions are made, poor money management,
and other reasons too numerous to mention.
The current unfunded liability is estimated to be $500 billion. As
long as the government is willing to subsidize the system through
general revenues of the Treasury, the system is financially sound.
However, the cost is increasing annually as is reflected by this
growing unfunded liability. These facts jeopardize the continuation
of the current benefit level. The sheer immensity of these future
obligations guarantees political attention that can only harm the
financial integrity of the current program.
The cost of a current worker's expected future retirement benefit
has climbed to 36.8 percent of pay. The worker contributes 7 per-
cent matched by his employing agency. There maining 22.8 percent
is, in effect, an outstanding future cost. The only guarantee that
his benefits will be paid at the level promised is Congress' willing-
ness to allow this -ever increasing demand for a general revenue
subsidy to continue.
Our proposal resolves the issue of unfunded liabilities. The spi-
raling of CSRS will be brought under control. The govern-
ment s future costs will be fixed. The total cost to the government
will always re main a set percentage of salary which is easily recog-
nized and predictable. Unfunded liabilities will never exist since
the only government commitment will be the annual contributions
to employees' pensions. In addition, as part of our plan, the un-
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funded liability of the current system will be amortized over a 40-
year period. Hence, the current system will have adequate funding,
and the threat to benefits under that system will decline.
As a result of our restructuring proposal, the government's cost
for retirement for its employees will be reduced. Under the current
system, the government pays approximately 29.8 percent of payroll;
under the new system that cost will drop to approximately 22-23
percent, including the cost of social security. This reduced cost com-
pares favorably to good private sector plans.
In conclusion, our proposed defined contribution plan, although
transferring some investment risk to employees, contains a multi-
tude of advantages-legal, social, and monetary-over the current
defined benefit plan.
THRIFT PLAN
Using reasonable economic assumptions, an employee can retire
under the first two tiers of our proposal at age 65 with 40 years of
service with better benefits than under the current system. The
third and last tier of this new system, a thrift plan, can ensure
greater benefits, with the possibility of enabling an earlier retire-
ment. Participation in this thrift plan is optional. Inclusion of the
thrift plan in our proposal is designed to give the federal work force
maximum flexibility in its retirement planning.
Thrift plans are a growing, popular feature of compensation pro-
grams in both the public and private sector. In fact, currently at
least two federal agencies provide thrift plans to their employees-
the Federal Reserve Board and the Tennessee Valley Authority.
The plan proposed in this new system is comparable to those found
in the private sector. These plans have proven to be an attractive
addition from both the employer and employee perspective.
Under our system an employee may contribute up to 16 percent
of pay with the government matching the first 3 percent. For prac-
tical purposes, most employees who participate will contribute 1, 2,
or 3 percent of their pay which will be matched by the government.
These contributions will be comingled with contributions to the de-
fined contribution plan and will be invested in the private sector.
However, employee vesting in the government contributions will
occur more quickly than in the defined contribution plan.
In the basic pension, employees vest in five years. In the thrift
plan, employees vest in a portion of the government's contributions
after the first year. Vesting begins with 20 percent vesting after
the first year, increasing by 20 percent each year until it reaches
100 percent after the fifth year.
The advantages of earlier vesting are considerable. Approximate-
ly one-third of all employees entering federal service leave govern-
ment within the first five years. Because they have left prior to
vesting, they cannot be eligible for a benefit. Under the current
system, these employees receive refunds of all of their retirement
contributions. Under the new system, the five-year vesting require-
ment in the basic pension also precludes those who leave before
five years from receiving a retirement benefit. However, they have
earned and will carry with them social security credits based on
their federal employment, a refund of their own contributions to
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the thrift plan, with interest, plus the prorated vesting in govern-
ment contributions to the thrift plan.
The primary motive for the institution of a thrift plan is to en-
courage employees to save for their retirement. Traditionally, re-
tirement income flows from three sources, i.e., social security, em-
ployer pensions, and personal savings. During inflationary periods
it is difficult to save. A thrift plan is designed to attract reluctant
savers and to grant employees additional options for retirement
planning.
With the availability of IRAs, some may argue that the addition
of a thrift plan is superfluous. We disagree. An IRA is most helpful
as a limited tax shelter. Many, however, will find that the govern-
ment matching contribution will be more beneficial than an IRA.
This feature is not intended to dissuade the opening of IRAs but
rather as an additional option for federal workers' retirement plan-
~8
Funds in an IRA are tied up for many years. However, the Fed-
eral Pension Board (discussed in the next section), which manages
this new system, is given discretion to establish loan arrangements
with employees from their thrift accounts. A number of private
firms who utilize these plans have similar loan opportunities. Nor-
mally, such arrangements are restricted to illness or significant fi-
nancial commitments such as higher education. Thus, in general,
the loan arrangement and the early vesting of the thrift plan make
these funds more readily available to the participants.
Participation in the thrift plan significantly increases retirement
benefits. For example, an individual at age 65 with 40 years of
service would receive 90-100 percent of his net preretirement earn-
ings without participation in the thrift plan. An individual partici-
pating sufficiently to garner the government's maumum contribu-
tion (3 percent of pay), would receive 110-125 percent of those same
earnings.
In addition, participation in the thrift plan can afford earlier re-
tirement opportunities. Under the current system, an individual
who retires at age 55 with 30 years of service receives 65-70 per-
cent of his net preretirement earnings. Under the new system, the
same individual who does not participate in the thrift plan receives
20-35 percent of his net earnings at 55, and 55-67 percent with the
onset of the social security benefit at age 62. Employees participat-
ing in the thrift plan will receive 31-50 percent of their preretire-
ment earnings at age 55 and 67-81 percent at age 62. Thus, at age
62 the individual would be receiving greater benefits under the
new system than under the current system.
PRIVATE INVESTMENT OF THE CIVIL SERVICE PENSION FUND
One of the more significant changes brought about by the Pen-
sion Reform Act is in the use of private investment rather than
government securities for holding retirement assets. Private invest-
ment of retirement assets accomplishes several objectives we had
in mind when we first began to consider reform of the current Civil
Service Retirement System (CSRS).
Investing retirement assets outside government assures that the
accounts upon which projected benefit levels are based cannot
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become subject to budgetary restraint during economic hard times.
The money to pay benefits will not be an available target in a
period of budget cutting but will actually exist independent of the
budget. Employees will know that they can count on the money for
their benefits at retirement because they will actually own their
accounts. These accounts will be able to earn interest in the pri-
vate sector and will not be restricted to the low relative yields of
federal securities. Finally, this investment method not only places
the federal plan on a comparable footing with private sector plans,
it actually increases money for much needed capital formation
throughout the economy.
RATES OF RETURN AND INVESTMENT EXPERIENCE
Under the current system, all monies are required to be invested
in federal government securities. Most of the holdings are in spe-
cial issues of the Treasury which were purchased at the time at ap-
proximately the market rate of interest. Average yield on these se-
curities is relatively low because much of the retirement fund's
holdings consist of old, multiyear bonds which were issued at inter-
est rates far below current rates. It should be pointed out, however,
that the relatively low yield of the fund's holdings has no effect
upon the ability of the system to pay the current level of benefits.
In 1969, a law was enacted which allowed the general revenues
of the Treasury to be tapped in order to stabilize the retirement
fund. In general, the law required any future benefits not backed
up by trust fund assets to be endowed with interest payments to
the fund as if those missing assets were actually present in the
fund. This interest payment of the "unfunded liability" assured
that income would be entering the trust fund sufficient to cover all
benefits without further appropriations, and would continue to do
so indefinitely.
This continuing and increasing subsidy insures the financial
soundness of the retirement fund and does not depend upon the in-
terest earned on the securities actually present. Thus, under the
current system, because of the internal nature of the financing, it
is reasonable for the government to maintain ownership of any
assets actually present in the fund. In addition, because the cur-
rent plan is a defined benefit plan subsidized by government pay-
ments, there is no advantage to the plan of private investment be-
cause benefit levels are not dependent on investment performance
but upon the willingness of the federal government to continue to
pay the benefit levels required by the present benefit formula.
However, the design of the new system makes private invest-
ment an attractive device for reducing government cost while pro-
viding employees with some return on economic performance.
Since retirement income in the new system will in large part be
dependent upon investment performance, simply requiring the sys-
tem's contributions to be invested in special issues of the Treasury
would be denying an opportunity to employees of improving their
investment returns (and therefore their benefits) should the oppor-
tunity arise. Although interest earned on government securities is
presently high, the long term experience has been that the guaran-
teed nature of government securities has meant a much lower
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return than could be acquired through a more active and more
speculative investment strategy.
Projection3 for adequate retirement income under the new plan
are based on the assumption of a 2 percent rate of return (real
rate) after inflation. Historically, the real rate of return on all pri-
vate investments taken as a whole has been between 2 and 3 per-
cent. Hence, assuming a 2 percent rate of return is a very reason-
able expectation, given the size and diversity of federal retirement
asset investment in the private sector under the new plan. Mandat-
ing investments in historically low yielding government securities
would undermine the system and fail to provide the expected bene-
fit.
This is not to say that investments in government securities will
be prohibited. The Pension Board (the body which oversees invest-
ments in the new plan) will be given wide latitude in investments.
Investment decisions will be subjected to the same "prudent man"
and conflict of interest rules under ERISA, but the Board will have
the opportunity to invest in a variety of income producing assets
including high yielding government securities.
A we -rounded investment portfolio consisting of private and
public instruments can provide reasonably secure and growing
assets. A retirement fund accumulates contributions and invest-
ment earnings for 30-40 years and then continues to earn interest
as the principle declines during the 15-20 years of retirement.
Long term trends of the economy are more important to the experi-
ence of the fund and its participants than are short term fluctu-
ations.
Normally, investors seek a strong mix of long term investments
to assure stable growth in assets. In the past couple of years, how-
ever, pension investors have invested in shorter term securities to
gain substantial rates of return. Occasionally poor growth periods
could delay individual retirement decisions. On the other hand,
strong economic performance balances out the poor times and
could accelerate retirement decisions. In general, however, an earn-
inggs based plan will not interfere with rational retirement plan-
legislation gives the Pension Board wide latitude in provid-
ing alternative forms of annuities. Comparable pension plans offer
(1) a fixed annuity which in real terms declines in value over time;
(2) an indexed annuity which begins payments at a lower rate and
then increases them in monetary terms over time in order to hedge
against inflation; (3) a variable or participating annuity which re-
flects changes in market conditions. Under our plan, when an indi-
vidual retired, he could choose a form of an annuity that would be
fully protected from market fluctuations, or one which provides
both the advantages and disadvantages of greater risk.
Basically, when an individual decides to begin receiving his an-
nuity, he is selling his account to the retirement fund for an
income stream over the remainder of his life. If the economy does
better than projected, the individual with a fixed growth annuity
in a sense loses while the one with a risk annuity gains; if the
economy does worse, the circumstances are reversed. However,
unless an annuitant specifically chooses a variable annuity, market
conditions will not substantially affect retirement income.
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The general rule for the Pension Board is that investments
should balance risks and returns so that account growth will be
consistent with the need for dependable retirement planning. It is
expected that investments will flow to a variety of stocks, bonds,
money market instruments, real estate, and other income produc-
ing sources. Obviously, since the fund is for retirement, the vast
majority of investments will be conservative. However, employees
will have annual choices to direct their monies into general catego-
ries of investments. This will allow them greater opportunity to re-
alize their own retirement objectives.
PROJECTED BENEFIT LEVELS
The system is designed to provide a greater retirement benefit
than the current system for an individual retiring at age 65 after
working a full 40-year career in government. The system does not
require an employee to work that long to receive a benefit; in fact,
employees at any age could leave federal employment after five
years service and draw an annuity immediately. Of course, to
retire on a liveable income would require far more service than
five years, but as a practical matter, retirement at age 55 with 30
years of service would still be possible, although full benefits would
not be received until age 62 when the social security payments
Another point worth mentioning here is the change in tax status
of retirement benefits under our pro posal. CSRS benefits are fully
taxable as deferred compensation after an amount equal to the em-
ployee's total contributions to the system has been repaid in the
form of an annuity, a period usually about 14 to 16 months. Treat-
ing CSRS benefits as taxable income is consistent with the treat-
ment of private pensions, but not with the treatment of social secu-
rit , which is not taxable under any circumstances.
due Social old age, is considered a benefit for loss of earnings power
age, not as a pension benefit earned with each year of
service. Regardless of the extent to which it might be argued that
such distinctions are unfair or outdated, it remains unlikely that
this differing tax treatment will be changed. Under the new
system, a substantial part of each total retirement benefit would be
paid from the social security program, thereby assuring federal re-
tirees of the same advantageous tax treatment now afforded virtu-
all = der other employees.
Under the current system, once an employee's contributions are
exhausted, his benefits are taxed. An employee who retires at age
65 with 40 years of service receives, depending upon his
level, between 102 and 129 percent of his net preretirementearn-
ings. That percent replacement decreases to 85-89 percent after ap-
proximately three years. Thus, replacement of an employee's after
tax or net preretirement earnings decreases dramatically after the
third year before leveling off and remaining constant for the rest of
his life.
Under the new system, the same individual who chooses an in-
dexed annuity is projected to receive 110-125 percent of his net
preretirement earnings for the remainder of his life. An individual
who instead chooses a fixed annuity will receive 129-145 percent of
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his net preretirement earnings initially which gradually decreases
to 94-128 percent after 15 years. Thus, even those who choose fixed
annuities are in better shape than beneficiaries under the current
system.
An individual who works until age 55 with 30 years of service
under the current system receives 74-92 percent of his net salary
which after 3 years decreases to 64-70 percent for the remainder of
his life. Under the new system, the same individual would receive
32-50 percent of net salary at age 55, but the percent replacement
would climb to 67-82 percent at age 62 when social security bene-
fits began and would remain there for the rest of this life. While
the aim of the system is to fully compensate those who work full
careers in government, those who plan to retire early at age 55 will
still be well protected in their later years.
Recognizing that many individuals familiar with this entire issue
would want to be certain that we had projected benefit levels on
some reasonable basis, we have sought to verify the study done by
the Congressional Research Service (CRS) from which these figures
were drawn. Projections of future benefit levels are highly depend-
ent upon economic assumptions, and while the CRS study used a
commonly accepted best-estimate set, we believed it advisable to
select three other widely respected sets of long term assumptions,
those of Chase Manhattan Bank, Data Resources, Inc., and the
Wharton School of Finance.
We compared projected benefits for a worker retiring at age 65
with 40 years of service. Instead of using the net or after tax salary
replacement rate, we used gross or before tax replacement rates.
The gross replacement rates for the current system are 70.7 per-
cent of final salary for all pay levels. Under DRI's assumptions, the
same individual would receive an indexed annuity of 127-148 per-
cent of salary for the rest of his life; a non-indexed annuity would
initially yield 162-182 percent of preretirement salary, gradually
decreasing to 103-127 percent fifteen years later.
Under Chase's assumptions, the individual would receive an in-
dexed annuity of 126-144 percent of his salary for the rest of his
life. If he chose a fixed annuity, he would initially receive 163-182
percent of salary, again graduall y decreas' gg until it fell to 99-120
percent nfteen years later. Finally, undermWharton's assumptions,
he would receive an indexed annuity of 140-160 percent of his
salary for the rest of his life. If he chose a fixed annuity, initially
he would receive 193-204 percent, gradually decreasing to 107-128
percent after fifteen years.
The economic assumptions used to project retirement income
under this legislation are relatively conservative. Three alternative
assumptions reveal higher retirement income. No doubt, more pes-
simistic figures could have been used to show retirement rates that
were not as good as those projected. However, we thought it more
reasonable to analyze the assumptions of reputable forecasters
than to pull figures out of the air.
PROTECTION OF BENEFITS: EMPLOYEE CONTROL AND OWNERSHIP
The primary difference between the current plan and the new
one is the question of ownership. In other words, to what is an em-
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ployee entitled. We argued in the Defined Contribution section that
unlike the current system in which an employee's benefit is de-
pendent upon Congress' commitment to maintain the expected
benefit, the new system provides the vested employee with a prop-
erty right in the contributed monies and their earnings. Because
vested employees would own these contributions, they could be
granted the freedom to invest in instruments of their choice
through representatives on the Board. Undoubtedly, some retire-
ment assets would always remain invested in government securi-
ties. However, a quick analysis of large investors shows that an ex-
clusive portfolio of government investments is highly unlikely.
Any private investment would enhance the contractural nature
of the pension system. Although we argue that a property right de-
volves from the nature of a defined contribution plan, even if the
money is invested solely in government securities, distributing em-
ployee monies through various private firms and into the economy
strengthens the contractural and property concepts. The govern-
ment would no longer be guaranteeing a benefit: not only would
that be strong grounds for considering the employee's account sac-
rosanct, but any private investment would assure that accumulated
contributions plus investment earnings could not even be reached
by government action. Furthermore, because of varying portfolio
mixes resulting from employee investment options, it would be vir-
tually impossible to distinguish any government investment within
each separate employee account.
CAPITAL FORMATION
I. Private investment: Key to growth
The formation of new capital is considered critical to economic
growth. Currently, one of the most significant sources of this much
needed capital comes from pension funds. The nation's largest
1,000 funds hold over $500 billion worth of assets. During this
period of tight money and high interest rates, this source of
financing is indispensable to some industries. There is evidence,
for instance, that pension finds have kept the real estate industry
afloat during the industry's severe recessionary periods.
The Civil Service Pension Fund would constitute a large pool of
new capital. As mentioned previously, monies in the current retire-
ment fund are simply held in government securities. The new fund
would also contain substantial amounts of funds, but these funds
would have the potential of vastly increasing capital available for
revitalizing old industries, for beginning new businesses, and for all
other purposes to which otherwise idle investment potential could
be usefully put. The principle of investments is predicated upon re-
wards for the investor and the borrower. The investor increases his
net worth while the borrower has a ready source of funds for busi-
ness expansion. Under our plan, there would be available a greater
pool of money to plan and build for the future.
H. Market absorption of new funds
The current fund holds approximately $80 billion worth of assets.
If all of its benefit obligations were backed up by real assets, as the
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new system will be, the fund's size would be in the hundreds of bil-
lions of dollars. Whenever private investments of this magnitude
are contemplated, concerns arise as to whether markets could
absorb such amounts without serious consequences for the econo-
my.
Our legislation is designed to gradually wean the pension system
away from government securities and into private holdings. For
the new system's first five years, only employee contributions to
the thrift plan would be permitted outside of the government.
During the next five years, government contributions to the thrift
plan would begin to be invested privately. Thereafter, each year an
additional 10 percent of the new contributions toward the main
pension would be available to the entire variety of investments.
Thus, not until the twentieth year would 100 percent of the fund's
new contributions be invested in securities outside of the govern-
ment. Therefore, fears of flooding the markets with huge doses of
money are unfounded.
During this transition period, much of the money is obviously
held in government securities. To be equitable to participants
during this time, money required to be invested in government se-
curities would be guaranteed at a 2 percent real rate of return.
With this guarantee, participants are assured that they will receive
all the growth in their retirement accounts and thus benefit values
will be accumulating at at least the value as the projections upon
which the legislation is based.
III Unfounded fears that the fund will control the market
Another concern we have heard raised is the possibility that the
pension fund would eventually control the market. As previously
discussed, private and public pension funds now hold over $500 bil-
lion of assets. While the Civil Service Pension Fund would contain
significant sums of monies, as a proportion of the total investments
in the economy the amount would be small, particularly by the
time the transition period ends. In addition, the Pension Board
would not have the authority to make direct investment decisions.
The Board's Executive Director would be required to contract
with various private investment firms who would diversify the in-
vestments throughout the economyy. Many large pension funds al-
ready act in a similar fashion. Trustees of these funds contract
with various money managers, who then invest in a wide variety of
investment opportunities. Thus, the Civil Service Pension Fund
could not be in a position to control the market any more than
other large pension funds.
IV. Protection from political pressure on the use of the fund
Fears of political pressure to direct investments in various ways
are also unfounded. The Board members, composed of the Secretar-
ies of Treasury, Labor, and Commerce, the Chairman of the Feder-
al Reserve Board, and six members appointed by the President
from recommendations of federal labor and manager organizations,
would not have direct authority over investments. Such authority
would be vested in the Executive Director. This individual would be
appointed by the President for a seven-year term with the advice
and consent of the Senate. He would be a professional money man-
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ager from the private sector. He, as well as the Board members,
would be under the restrictions applied to private pension investors
that require the "prudent man" rule in the practice of investing.
V. No increase in Government borrowing
Arguments have been made that investing government contribu-
tions in the private sector would require the government to first
borrow the money from the private sector and then put it back in
at a net loss. It is then argued that the government investment in
the private sector would create upward pressure on interest rates
because of increased government borrowing. No mention is made of
the effect upon interest rates of having substantial amounts of new
capital available for private investment. Nor is it pointed out that
gradual increases in government outlays for investment will be
more than offset by the gradual decreases in government outlays
for benefit payments as the transition to the new retirement plan
gets underway.
The current system actually contributes to the deficit and thus to
government borrowing because every time benefits are paid, gov-
ernment outlays ensue. Thus, the difference between employee con-
tributions and benefit payments during the year contributes to that
year's deficit. By gradually investing the contributions in the pri-
vate sector, and by assuring that benefit payments will be drawn
from those contributions and not from annual general fund subsi-
dies, over the long-run our plan gradually reduces the effect on the
federal budget of federal employee retirement benefits.
The major difference in the im act on the federal budget of the
two systems is the point at which outlays will actual l In
the current system, outlays are delayed until the benefits are paid
and then are of the amount of the benefits. In the new system, out-
lays occur when the employee's account begins to be invested five
years after beginning employment. Government borrowing is not
increased by the new system; government payments in the form of
contributions are made earlier and earn income outside the govern-
ment, thereby reducing government costs. Thus, government costs
simply occur at a different point in the system's existence and at a
savings to the taxpayer.
The real question is what happens to the money when it leaves
the government's hands. In the current system, it goes directly to
an annuitant, in the form of a benefit payment, who then spends
most of it to meet his needs. In the new system, it goes through the
hands of investors into predominately long term investments. In a
sense, one could say the current system is economically biased to-
wards consumption, whereas the new system bolsters investment.
As was discussed earlier, the increased formation of new capital is
an important ingredient in any program to return the economy to
prosperity.
NEW OPPORTUNITIES
Private investment opens the door to a multitude of opportuni-
ties for plan participants and for the economy. The much publi-
cized IRAs with their promises of future wealth pale in comparison
with the real returns and opportunities afforded through private
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investment of the new Civil Service Pension Fund. Private invest-
ment is synonymous with economic wealth for the individual and
for the society. For the first time, federal workers will have availa-
ble to them this same wealth. In one sense, an investment-based
retirement plan earning investment income in the private sector
shifts some risk to employees. However, in light of almost certain
changes to the current system, the proposed system is far more
protective of employee benefits and certainly more flexible than
the current one.
PROTECTIONS AND PROVISIONS FOR THE CURRENT WORKER
As mentioned many times in prior sections, the new Civil Service
Pension Reform bill mandatorily applies to only new federal em-
ployees. Yet, often voiced and reasonable concerns are what will
happen to the current system as the number of beneficiaries dwin-
dle; what assurances do the current workers have that they will re-
ceive what they were promised; and, finally, what provisions apply
to current workers who elect to join the new system?
PROTECTIONS FOR THE CURRENT WORKER
The current system has come under increasing attack in recent
years due to its cost, its unfunded liability and its benefits superior
to those found in the private sector. Benefits such as the one per-
cent kicker, and "look-back" formula, the twice-a-year cost-of-living
adjustment and the full cost-of-living adjustment applied to retire-
ment benefits received at any age have been either repealed or
changed drastically. Yet, the attacks persist. Note the recent CBS
"Sixty Minutes" presentation of the retirement system.
Our new system is designed to protect and maintain the commit-
ments made to the current work force. We feel the only way to pre-
vent further changes is to establish a fully funded, less costly
system for new workers modeled after a good, typical private sector
plan. By doing so, however, it is with the recognition that the cur-
rent system becomes a closed system to which fewer employees will
contribute and, hence, income to it will dwindle. Many may see
that as a potential threat to the viability of the current system. It
is not.
Income to the current system comes from a variety of sources. In
Fiscal Year 1980, income to the trust fund was as follows:
CSR TRUST FUND FINANCING, BY SOURCE FISCAL YEAR 1980
M* n a eibns]
fane~rrhe
tae
Employee contributions
$3.6
14.9
Employing agerrcy contribution ..
2.8
11.6
01f.8udget agency contributions
1.5
6.2
E rued utiaest and odor m onre ._-.
5.0
20.7
Approp EOM from the general fund of the US. Treasury
11.2
46.5
Total trust fund income
24.2
100
0
.
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Since outlays in fiscal year 1980 were approximately $14 billion,
it appears the system is well funded. While the system is clearly
solvent, it is not fully funded. The system was intended to assure
that an employee's actual contributions matched by his agency's
would pay for the benefit he would later receive. In reality, today's
contributions pay for today's retirees. If the current system were
closed and the funding were not changed, the system would clearly
run out of money and be unable to pay the benefits for the current
work force.
Since our new proposal closes the current system, i.e., new em-
ployees will instead be under the new system, a mechanism to fully
fund the current system must be adopted. Our proposal remedies
this in two ways.
One, it requires the agencies to pay the full retirement costs of
their employees. Best projections reveal that the retirement cost of
a current worker is 36.8 percent of his salary. Since an employee
contributes 7 percent of his salary toward his retirement, to fully
fund a worker s account, our bill requires his employing agency to
contribute the remaining 29.8 percent.
Two, the unfunded liabilty of the retirement system which is ap-
proximately $500 billion is amortized over a forty-year period. The
combination of these two provisions assures that adequate money
will be in the fund as every worker retires.
The sole reason the solvency of the fund is jeopardized by the
cessation of new contributions is because the system is not current-
ly fully funded. B assuring that full contributions are made annu-
ally for a workersq benefit plus the forty-year amortization sched-
ule of the unfunded liability, there will be no need for new work-
ers' contributions to keep the system operating. There will be suffi-
cient sums in the trust fund to pay the last retiree's final dollar.
It would appear that increasing agency contributions to the re-
tirement system plus paying off the unfunded liabili %X uld have
an adverse impact on the federal budget. In fact, changes
have no impact on the budget. Agency accounts and the retirement
trust fund are part of the same federal budget. A debit to an
agency account in the form of increased contributions is an asset to
the retirement fund in the form of additional holdings. The overall
budget is not affected; it is simply an accounting transfer within
the budget.
The same is true for the amortization of the unfunded liability.
Paying off the unfunded liability will require that the current pay-
ments from the general revenues of the Treasury to the retirement
fund be increased. Again, however, there is no budgetary effect.
Both accounts are within the federal budget.
The only action in the retirement system that affects the budget
is the payment of benefits to retirees and contributions to the fund
from employees. All other transactions have no budgetary effect.
The mone is simply transferred from the general fund to the re-
tirement fd. Fully funding the current system will assure that
the level of benefits promised to the current work force will be paid.
As mentioned previously, our new proposal is predicated on the
fact that the current system will remain unchanged for those who
elect to remain in it. One of the purposes written into the new leg-
islation is to guarantee the right of all current workers to enjoy
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the current level of benefits of the system. In other words, as best
we can, Congress is making a commitment not to change the level
of benefits under the current system after the enactment of the
new legislation.
In addition, current workers will receive an annual statement
valuating their current level of benefits. Instead of knowing the
amount of their own contributions, workers will be apprised of the
current value of their benefits. This is designed to legally strength-
en their ties to a certain benefit. The courts have consistently held
that publicly provided retirement benefits are a statutory entitle-
ment which Congress or the legislature can change at any time, a
Congressional prerogative exercised with increasing frequency
during these years of severe budgetary restraint. Furthermore, the
courts have held that the employees under these systems do not
have any contractural rights to the benefits. In our plan, however,
the annual provision of a valuated benefit plus a statement guaran-
teeing an employee's rights to the current level of benefits
strengthens the legal ties to that benefit. While one Congress
cannot bind another, establishing these greater rights to existing
benefits would make them more protected than they are now.
OPTIONS TO CURRENT WORKERS WHO ELECT TO JOIN THE NEW SYSTEM
While the new system is designed for new workers, there are op-
tions allowing current workers to join. The new system contains a
number of advantages over the current system, i.e., increased por-
tability, greater flexibility, better survivor and disability protec-
tion, and better benefits for full career employees.
Most employees, when they join government, do not plan to
make it a career. However, the current retirement system inhibits
workers who have served for a number of years from leaving. If
they do, they lose virtually all of their benefits. Under this new
plan, an employee is not penalized for leaving government early to
pursue another career. As was discussed in other sections, an indi-
vidual can leave government after five years and take with him all
the government contributions, his own contributions, and any accu-
mulated earnings on those contributions. He could also draw an
immediate annuity, or defer it to a later date and allow it to con-
tinue to draw earnings. This will be a great attraction for current
workers.
In recent years, pay caps and benefit cuts have made govern-
ment work unappealing and at times discouraging. Government
workers, though, often cannot afford to switch jobs and lose their
retirement rights. In addition, and in some cases, more important,
they should not be unprotected for disability and survivor benefits
when they do separate from their government jobs. The new plan
protects workers from these situations. The more lenient vesting
requirement in the new plan described above provides alternatives
to workers who may wish to leave government early. Social secu-
rity coverage ensures continued disability and survivor protection
between jobs. We feel these benefits alone will attract a large
number of current workers to the new system. In addition, with
the recent imposition of the Medicare tax on the current work
force, current workers will find joining the new system to be finan-
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cially attractive. A current worker could have greater disposable
income by participating in the new system since the only manda-
tory contribution is the social security tax which is 6.7 percent of
the first $35,700. This compares to the 7 percent contribution under
the current retirement system, plus the 1.3 percent Medicare tax.
Alternatively, the additional income could be used to participate in
the thrift plan.
A current worker who joins the new system must participate in
it for five years (except for survivor benefits, which are earned gen-
erally after 18 months) to enjoy all its benefits. As an incentive to
join the new system, two buy-out options of his current retirement
credits are provided. In the first option, the government would
match dollar for dollar the employee's total contributions to the
current system, and apply a factor of five percent to represent in-
terest compounded for all of his years of employment. This sum
would be transferred to the new system.
In the second option, the present value of accumulated future
benefits is computed, using an inflation factor of six percent. As in
the first option, this new sum would be transferred to the new
system to the employee's account. The first option is more benefi-
cial to those with less than about thirteen years of service; the
second option is more beneficial to workers with service greater
than thirteeq years. Here's an example:
Assume an employee entered government at age 25 with a start-
ing salary of $10,000 and received annual pay increases of six per-
cent. At age 30 the first option would yield him $9,100; the second
option, $4,400. At age 45 the first option would yield him $81,400;
the second opti on, $125,000. Remember that these sums are in the
name of the employee and are available to him if he decides to
leave government after participating in the new system at least
five years.
Moreover, protections are afforded to those current workers who
join the new system but for some reason fail to meet the vesting
requirement of five years. In those cases, the current workers may
either withdraw their own contributions or their years of service
will be recredited to the current retirement system.
For example, assume an employee has worked fifteen years
under the current system. He then joins the new system, and he
chooses one of the buy-out options. He works for three more years
under the new system and then resigns. He may either withdraw
the contributions he originally made under the current system plus
any contributions to the new thrift plan, or he may have his full
eighteen years recredited to the current system. This arrangement
protects a current worker who joins the new system from unfore-
seen circumstances which could disrupt his working career and
cause him to lose everything.
While the new system is specifically designed for a new work
force, the aforementioned features make it very attractive for cur-
rent workers to join. The flexibility and portability of the benefits
in the new system would certainly lure those who have not et de-
cided that they want to make government work a career. The spe-
cial buy-out options provide a great incentive to a current worker
who desires to quickly build a substantial retirement fund for his
later years. Many current workers will find this new system very
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appealing. Those who do not will likely be protected from further
changes.
INCOME PROTECTION IN THE EVENT OF ILLNESS OR INJURY
Up until now, we have concentrated strictly on the retirement
part of our proposal to restructure the Civil Service Retirement
System. Another major improvement is in the protection a worker
would have upon becoming temporarily disabled, totally and per-
manently disabled, or sick for an extended period of time.
Contrary to popular opinion, the current sick leave and non-work
related disabling systems fail to adequately protect workers from
long illnesses or disabling injuries. (Work related injuries will con-
tinue to be covered under the Federal Employee Compensation Act
and are not affected by any changes in our proposal.) Long illnesses
or injuries requiring long recuperation periods can be financially
devastating.
Federal sickness and disability protections pale in comparison to
typical private sector coverage. Good private sector coverage usual-
ly includes a combination of sick leave, accident and sickness insur-
ance, and long term disability protection. While the federal govern-
ment now offers fairly generous sick leave benefits, long term dis-
ability protection is inadequate, and protection is virtually non-
existent for individuals who exhaust their sick leave because of a
recurrent illness or the need to recuperate from sickness or injury.
Currently, each full time employee receives 13 days of sick leave
a year, or four hours every two weeks. Unused sick leave may be
accumulated for future use. These sick leave days are designed to
cover short term absences with accumulated unused leave intended
to provide protection against longer term absences. This arrange-
ment, for the most part, is the only financial protection the em-
ployee has for all illnesses or injuries, short and long.
The only other protection available to federal workers for long
illnesses or disabling injuries is that offered by the disability retire-
ment program. That protection is limited, however.
1. An employee is not vested for disabilitiy retirement until he
has served for five years or more in the federal government.
2. Until the employee serves in the government for 22 years, his
maximum benefit will be 40 percent of his high three average
salary.
Disability retirement is the only option for an employee who
exhausts his accumulated sick leave even if the illness or disabling
injury is of a temporary nature. Once an employee chooses to retire
on disability, he is no longer guaranteed the right to return to his
old job upon recovery.
Our proposal revamps the sick leave and disability systems for
those who come under the new retirement plan, namely all new
federal workers and those current workers who elect to join the
new system. Current workers who do join will be required to ex-
haust their accumulated sick leave before using the benefits under
the new system. Current workers who prefer to stay in the current
retirement system would not be affected by any of the proposed
changes to the sick leave and disability systems. Our proposal is
patterned after good private sector systems.
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SHORT TEEM PROTECTION
Our proposal provides for seven days of non-accumulating sick
leave. These days are designed to cover employees' medical ap-
pointments and minor illnesses. Over the years, average usage of
sick leave in the federal work force has approximated eight days a
year. However, that usage included time for both long and sort
term absences. Since long term absences will be covered by other
arrangements discussed below, the annual provision of seven days
of sick leave will be fully adequate for short term protection of fed-
eral workers.
INTERMEDIATE PROTECTION
The absence of adequate protection for long, but not necessarily
permanent, absences is the current system's greatest failing. This
is particularly true for employees early in their careers. The sole
way in which employees gain financial protection from long ill-
nesses and injuries is to refrain from using sick leave. If employees
use an average of eight days of sick leave per year, an average em-
ployee would need 25 years of service to be protected from a six-
month absence, certainly a not unheard of length of time for recu-
peration from a serious illness or injury. Even an employee who
uses absolutely no sick leave would require ten years to accumu-
late such time.
Our proposal fully protects an individual in such a situation
from the first day on the job. The provisions covering sickness and
accident insurance protect workers up to six months for each seri-
ous illness or accident. Coverage begins at 100 percent of gross pay
for a few weeks, declining to 80 percent and then to 60 percent
over a 26-week period, after which other longer term disability pro-
tection begins. Employees with more years of service have more
weeks of protection at 100 percent of pay, then 80 percent, etc.
For example, an employee with two years of service has two
weeks of coverage at 100 percent, six weeks at 80 percent and 18
weeks at 60 percent of pay. Someone with five years of service or
more has five weeks of coverage at 100 percent, nine weeks at 80
percent and 12 weeks at 60 percent of pay.
This schedule renews itself with each new occurrence of an ill-
ness or injury. Each illness or injury will have a generally pre-
scribed period of expected recovery established by the Pension
Board. Say a specific kind of back surgery may warrant 16 weeks
of recovery. If an employee of ten years has back surgery, he will
receive seven days of sick leave, plus five more weeks all at 100
percent of pay, nine weeks at 80 percent and the remaining week
at 60 percent. If that same employee returns to work and receives
a new injury with a scheduled four-week recovery period, those
four weeks are again insured at 100 percent of his pay.
LONG TERM DISABILITY PROTECTION
If a disabling sickness or injury causes an employee to exhaust
coverage under the sickness and accident insurance provisions, he
will be entitled to a short term disability benefit. This benefit ex-
tends up to 18 months and pays 60 percent of an employee's pay
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(offset by any social security disability benefits received). Compara-
ble protection under the current system is provided under the dis-
ability retirement provisions which generally only pay 40 percent
of the average of the high three years of pay. Moreover, entitle-
ment to disability protection available under the current system
does not vest until an employee works for five years in the govern-
ment. Vesting in the new system occurs after the first year of em-
ployment. In addition, because social security protection is earned,
and therefore carried to virtually all employment in society, em-
ployees leaving their federal jobs would not undergo periods with-
out any disability protection as they enter new employment.
Under our proposal, disability beyond two years will be covered
by long term disability provisions. To qualify for long term disabil-
ity, one must either be deemed disabled under the Social Security
Act, in which case the employee will receive 60 percent of his pay
until death or restoration, or be unable to work in any federal job
in his commuting area, in which case he will receive 40 percent of
pay. If the employee is capable of working in any federal job in his
area, he will be guaranteed the next available position for which
he is qualified. He will receive the greater of the pay of his new
position or 60 percent of the pay of his original position and will be
entitled to pay retention provisions in current law. This would
assure a gradual reduction of pay in the case where the individual
was disabled from a high paying position and was placed in a lower
paying job. This fairly complex arrangement is to be compared
with the current disability system's benefit of approximately 40
percent of pay, with no reemployment guarantee.
Taken together, our proposed redesign of the sick leave and dis-
ability systems provides for a more extensive coverage for sickness-
es and injuries. The five-year gap or vesting period in the current
law is closed. Protection for long but temporary disability is far
greater in the new plan. Even long term disability coverage is more
generous in the new system. Finally, an employee who leaves gov-
ernment before retirement will no longer face periods of no disabil-
ity protection due to the portable disability coverage provided for
in the social security benefit.
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H. SECTIONAL ANALYSIS
TITLE I--CIVIL SERVICE PENSION SYSTEM
SUBCHAPTER I-DEFINITIONS
? 8401. This section establishes various definitions for the new
pension system.
SUBCHAPTER II-CIVIL SERVICE PENSION SYSTEM
? 8411. Civil service pension system; participation
The bill establishes a new civil service pension system. The new
system consists of a defined contribution plan and a thrift or sav-
ings plan. This section provides that all employees who were hired
or rehired into federal service after the enactment date of this bill
will be covered by these new pension provisions. Employees under
the current Civil Service Retirement System have the option of
choosing coverage under the new system or continuing to partici-
pate in the current Civil Service Retirement System.
? 8412. Defined contribution plan
All employees in the new system are mandatorily covered under
the provisions of the defined contribution plan. Employees do not
contribute, however, to the contribution plan. Each agency must
contribute into the account of each covered employee an amount
equal to 9 percent of the first $20,000 of annual basic pay plus 16
percent for every dollar of basic pay over $20,000. The $20,000
figure will be indexed to rise at a rate equal to the percentage of
each year's pay adjustment under the General Schedule. Also, the
Secretaries of the adjustment Departments will have to contribute to
the fund at this rate for the years a participant served as a
member of the uniformed services. This requirement generally does
not apply to those who are entitled to military retired pay.
? 8413. Thrift savings plan
All employees in the new system may voluntarily participate in
the thrift or savings plan. If they choose, they may contribute as
much as 16 percent of their annual salary. The employing agency
must match that amount dollar for dollar up to a 3 percent of
salary maidmum. All government contributions to both the defined
contribution and thrift plans are paid by the agency out of appro.
priated salary and expense funds.
? 8414. Annuity: Vesting; payment method; amount
Employees participating in the new system are vested after five
full years of federal service under the system. After being vested,
the employee has the right upon separation from federal service to
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elect a monthly annuity based on all funds in his or her individual
account including all returns on investments, past and future. The
Board will prescribe the methods of payment of annuities. The
amount of the annuity will be based actuarily on the employee's
age at the time the employee separates or at a later date elected by
the employee. A reduced annuity will be available to provide survi-
vor benefits for the employee's spouse in the amount of 55 percent
of the monthly annuity payable on the day before the death of the
annuitant. Increasing annuities will also be available to hedge
against inflation.
? 8415. Deferred retirement; withdrawal in lieu of annuity
A vested employee who separates from federal service may elect
in writing to take an annuity at a date after separation. The annu-
ity amount will be based actuarily on the individual's age at the
date the individual is to begin receiving the annuity. The individu-
al may also elect to receive all the money in his or her account in
one lump sum payment.
? 8416. Death benefits
If a participant dies before receiving an annuity, a death benefit
in the term of a monthly annuity or lump sum payment based on
the balance of the deceased employee's account will be paid to his
or her survivor(s).
? 8417. Civil service pension fund
A new Civil Service Pension Fund is created consisting of all gov
ernment contributions to the defined contribution plan, all employ-
ee and government contributions to the thrift plan, and all returns
minus any losses on investments of these contributions. The sums
in the fund are to be used only for investment, the payment of
benefits and the payment of expenses incurred in the administra
tion of the fund. The sums in the fund are not subject to execution,
levy, attachment, garnishment or other legal process except for cer-
tain obligations to provide child support or alimony.
? 8418. Investment of the fund
The funds will be invested initially totally in government securi-
ties with the funds slowly being infused into private sector invest.
ments over several years. Investments of the contributions to the
defined contribution and thrift plans will be moved to the private
sector in varying ways. Investments mandated to be made in gov-
ernment securities are guaranteed a 2 percent real rate of return.
For the first ten years of the new system, all contributions to the
defined contribution plan must be invested only in government se-
curities. For the next ten years thereafter an additional 10 percent
per year of all new contributions will be transferred to private in-
vestments until the 21st year of the plan when all the then new
contributions will be invested through the private sector.
In the first year of each employee's participation in the thrift
plan, all contributions, government and employee, will be invested
only in rnment securities. The second through the fifth year,
the employee contributions will be invested through the private
sector and the government contribution will remain in government
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securities. From the sixth year on, all new contributions will be in-
vested through the private sector.
Once the twenty-year cycle is completed, the government contri-
butions fcr the first five years of each new participant will be in-
vested in government securities. Every year thereafter all new con-
tributions for that participant will be invested through the private
sector. Earnings on these investments from the defined contribu-
tion and thrift plans will be credited to the participating employ-
ee's account on a pro rata share basis. Each employee will deter-
mine what type of investment (private) and how much of their fund
to each investment shall be made.
? 8419. Administrative provisions
Each participating employee will have an individual record
maintained showing how much money has been contributed by the
employee and the government to both the defined contribution and
thrift plans, how much of each is maintained in both public and
private investments, the accumulated earnings from such invest-
ments, and disbursements from the individual's account upon sepa-
ration or death. Each year the employee will be given a copy of
this record of his or her account.
8420. Transition provisions
Employees under the current retirement system are given the
opportunity to join the new pension system. Such employees must
elect in writing to join the new system. Employees electing to "buy
into" the new system will have their credit in the old system satis-
fied by transferring money into an account in the new system.
The amount of money transferred to the new system will be the
greater of the following two formulas. The first formula is equal to
the employee's unrefunded contributions in the current system
matched by an equivalent amount of government contributions.
Each year's worth of contributions will receive five percent inter-
est, compounded annually up to the time of transfer to the new
system.
The second formula is equal to the present value of the accumu-
lated benefits the employee has earned as a result of the employee
and government contributions. This amount, actuarily determined,
will assume an average annual increase in cost of living of six per-
cent. The greater amount of these two formulas will be transferred
to an account in the new system for the electing employees.
An electing (transferring) employee must remain in federal serv-
ice for five years after transferring to receive the full benefit of
these amounts.
If an employee converts to the new system but separates before
vesting in the new system, that employee may revert to coverage
under the old system or be refunded his contributions to both sys-
tems.
? 8421. Payment of benefits; commencement, termination and
waiver of annuity
The payment of an annuity will be on a monthly schedule. Pay-
ment will begin upon separation or date after separation elected by
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su
the employee. The annuity terminates upon death of the annuitant
or survivor.
9 8422. Audit
The Comptroller General shall, not less frequently than every
two years, conduct such audits of the financial condition as he shall
deem necessary.
SUBCHAPTER III-1144 s AND ACCIDENT U SURANCE BENEFITS:
DISABILITY COMPENSATION
? 8451. Definitions
This section gives a few basic definitions for the new Illness and
Accident Insurance Program which will replace the existing sick
leave system for participants. The most important one is the basic
definition of "disabled.' A participant is disabled if he is unable,
because of disease or injury, to render useful and efficient service
in the participant's position, and is not qualified for reassignment,
under procedures to be established by OPM, to a vacant position.
9 8452. Illness and accident insurance benefits
A new benefit structure has been established to pay eligible em-
ployees for periods of incapacitation to perform the duties of their
position. Only those employees participating in the new pension
are covered. The illness and accident insurance portion of
e overall program covers incapacitation for periods of 26 weeks
or less. In such a situation where the employee is temporarily
unable to perform the duties of his or her position, the employee
100 percent percentages of his or her basic pay, decreasing
from percent to 60 percent, for specified numbers of weeks, up
to a maldmum of 26, depending upon length of service. Employees
must meet a waiting period of five work days to qualify for this
benefits terminates upon restoration of capacity of employee, expi-
without pay to fulfill this waiting period. Entitlement to these
benefits terminate upon restoration of ca ty of employee, expi-
ration of applicable recovery period provided in schedule of impair-
ments, expiration of prognosis period provided by authorized physi-
cian, or expiration of the 26-week period. These benefits are paid
from the agency's salary and expense appropriation account.
? 8453. Short term disability compensation
If an employee is determined to be disabled for federal service
based on a physical examination which will be required by- OPM,
the employee is entitled to receive a monthly short term disability
payment of 60 percent of basic pay for the period after accident
and sickness insurance terminates but no longer than 24 months
from date of disability. If the employee is also receiving social secu-
rity disability benefits, that amount is subtracted from the short
term disability benefit provided by this section.
? 8454. Long term disability compensation
An employee who, at the end of the 18 -months of short term dis-
ability is still determined to be disabled based upon an appropriate
physical examination, and who cannot be placed by OPM in an-
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other position for which physically qualified, must be separated
and is entitled to a long term disability payment. This payment is
40 percent of the monthly rate of basic pay if not considered dis-
abled by social security or 60 percent of his monthly salary minus
an amount equal to his social security monthly disability benefit if
he meets the social security disability test. If the social security
payment is equal to 60 percent of the employee's salary, he will re-
ceive, as a minimum, $50 a month in addition to his social security.
In either instance, the long term disability payment is reduced by
the amount of annuity which the employee is entitled to receive
from the Pension Fund.
? 8455. General provisions
Any participant receiving illness and injury benefits, short term
disability compensation, or long term disability compensation shall
be examined by a physician under the direction of OPM or the
Board, as appropriate, as the case may require. Any participant
who fails to submit to the examination shall not be entitled to the
benefits or compensation provided for. An employee who is deemed
physically qualified for a federal position must be placed by OPM
in any such vacant position in the employee's commuting area The
employee will receive the greater of his new salary or 60 percent of
his original salary. Also, any participant who is offered placement
to an appropriate position within a reasonable commuting area and
who re fuses placement is not entitled to such disability compensa-
tion.
SUBCHAPTER rV-CIVIL SERVICE PENSION BOARD
? 8491. Establishment of Civil Service Pension Board
An independent agency referred to as the "Civil Service Pension
Board" in the executive branch will oversee the new system. The
Board will consist of 11 trustees: the Secretaries of Treasury, Com-
merce and Labor, the Chairman of the Federal Reserve Board, and
six members appointed by the President. These six appointees will
come from individuals recommended by management and employee
organizations.
An additional Presidential appointee will be an Executive Direc-
tor for the Board whose experience must include management of
financial investments. The Director will be appointed for seven
years.
The Board will meet at least four times a year and at the call of
the Director to perform the functions of the Board.
? 8492. Functions
The duties of the Board consist primarily of oversight, of the
process for negotiating contracts with private investment firms and
of the performance of those investments. The Board will establish
policies for managing the fund. The Board will determine the types
of investment categories and number of options for investment
which will be offered to participating employees. Lastly, the Board
will oversee the actions of the Executive Director. The Executive
Director will be the chief operating officer of the Board and will
preside at the meetings of the trustees.
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? 8493. Powers and administrative provisions
The Board may disapprove any investment action of the Execu-
tive Director by obtaining seven votes of the trustees against.any
such action. A similar seven votes can direct the Executive Direc-
tor to take other actions, except with regard to investments, the
Board considers necessary to carry out the provisions of the new
system. The Board may prescribe rules to carry out the provisions
of the new system. The Executive Director has the authority to
staff and to pay the personnel of the agency. The Director's pri-
mary responsibility will be to negotiate contracts with private
sector firms for investing the money of the pension fund. The Di-
rector will also provide the information and procedure for employ-
ees to make the necessary investment decisions called for by regu-
lations.
The contracts for investing these funds will call for ma~dmum
return on the investments while using prudent financial investing
criteria.
? 8494. Fiduciary responsibilities
The members of the Board (trustees) and those individuals in a
private business with whom the Board negotiates a contract for in-
vestment purposes must meet fiduciary responsibilities similar to
those called for in ERISA. These requirements require prudent,
sound investment of the funds which balance mazrmizing returns
while minimizing risks.
TrrLE fl-MISCELLANEOUS AND CONFORMING AMENDMENTS
AMENDMENTS TO SECTION 5315 OF TITLE 5
SEC. 102. The Executive Director of the Civil Service Pension
Board will be paid at the Executive Level II rate of pay.
AMENDMENTS TO SECTION 5363 OF TITLE 5
SEC. 201. The pay retention provisions of this section are amend-
ed to include a special pay retention provision for those individuals
who take a lower . graded position under the new disability provi-
sions. The normal pay retention process would be followed except
that a floor of 60 percent of the pay of the employee's higher
graded position, held at the onset of disability, would be imposed.
AMENDMENTS TO SECTION 6307 OF TITLE 5
SEC. 202. Employees covered under the new pension system are
also covered under new sick leave provisions. They earn seven days
of sick leave a year immediately upon hiring and each anniversary
date after that. Any days unused at the end of the anniversary
year are lost and do not accumulate. This sick leave can be used
under the same conditions as current sick leave is used.
AMENDMENTS TO CHAPTER 83 OF TITLE 5
SEC. 203. This section requires each agency to contribute to the
current retirement fund the true cost of current employees' retire-
ment benefits. These costs are based on dynamic assumptions. This
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section also requires the Treasury to pay off the current unfunded
liability amortized over 40 years. The purpose of this section is to
fully fund the current retirement program.
Also, an individual covered by the current retirement provisions
who separated from the federal service, kept his money in the re-
tirement fund and is rehired under the new pension system will
upon retirement have the old retirement benefit computed on the
years of service and high three years pay in effect at the time of
initial separation. Additionally, all employees under the current
system will be given an annual statement of the value of the bene-
fits in their retirement account.
SEC. 204. This provides for court ordered survivors' annuities,
under chapter 83, makinng it comparable to the existing court or-
dered share of the normal annuity. It also provides that OPM will
reduce a full annuity to provide the appropriate survivor annuity,
unless notified to do otherwise.
ADDITIONS TO CHAPTER 83 OF TITLE 5
? 8349. Annual statement
Employees choosing to remain under the existing Civil Service
Retirement System will be provided with an annual statement of
the present value of the future benefits payable to the employee.
This present value will be determined actuarialy based on the cred-
itable service and average pay of the employee on the last day of
the fiscal year.
? 8350. Applicability
Unless otherwise specified, amendments made to Chapter 83 (by
this law or the new provisions of Chapter 84) are applicable only to
those employees who are covered by the new pension system.
AMENDMENTS TO CHAPTER 89 OF TITLE 5
SEC. 205. The Office of Personnel Management is authorized to
devise Medicare wraparound plans with the major carriers. That is
necessitated by the coverage under Medicare of federal employees
in the new retirement system.
CONFORMING PROVISIONS FOR OTHER RETIREMENT SYSTEMS
SEC. 206. Organizations whose employees are covered by the cur-
rent retirement system and which are considered "off budget" will
be required to pay the true dynamic cost of their employees' par-
ticipation in the current system.
TITLE III-SOCIAL SECURITY AMENDMENTS
SOCIAL SECURITY COVERAGE FOR NEW FEDERAL EMPLOYEES
SEC. 301. Employees who are mandatorily or voluntarily covered
by the provisions of the new pension system will begin paying the
social security old ate, survivors, disability and Medicare taxes as
of January 1, 1984. Federal service on and after that date will be
considered service creditable toward attaining social security cover-
age. Employees will have to meet the same quarters of coverage for
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attaining eligibility as private sector employees; i.e., up to 40 quar-
ters for retirement and 20 quarters for disability and survivors
benefits.
No current federal annuitants are affected by the provisions of
this section.
Tr= IV-AuTHoRzZATION AND EFFECTIVE DATE
FIRST YEAR EXPENSES OF THE SYSTEM
SEC. 401. Startup costs for the system will be met by appropri-
ated funds.
EFFECTIVE DATE
SEc. 402. January 1, 1984 is the effective date for Titles I and IL
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M. REPLACEMENT RATES BY THE CONCRESSIONAL
RESEARCH SERVICE, THE LIBRARY OF CONGRESS
SOCIAL SECURITY U-B ECONOMIC ASSUMPTIONS
The following tables compare an individual's retirement benefit
under our legislation versus the current system. The tables reflect
benefits at a variety of ages and salary levels. The non-bracketed
numbers reflect the percentage of one's gross preretirement earn-
ings of his final salary. In other words, the retirement benefit is
described as a percentage of his final salary. For example, 72.3
means a retiree will receive 72.3 percent of his final salary as a re-
tirement benefit. The bracketed numbers are a percentage of one's
net preretirement earnings, or after tax earnings. This is signifi-
cant because unlike civil service retirement benefits, social security
benefits are not taxed. Thus (101.9), means the value of one's after
tax retirement benefit versus his after tax salary.
Table I describes an individual who retires at age 65 with 40
years of service and who receives an indexed annuity of four per-
cent. Inflation is also assumed to be four percent.
Table II describes the same person who receives a fixed or non-
indexed annuity.
Table III describes someone retiring at age 55 with 30 years of
service and who receives an indexed annuity. Note at age 62 the
jump in benefits under our plan. This is due to the commencement
of the social security payment.
Table IV describes the same person who receives a fixed annuity.
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eurcentage of Grusu and Not Precatire ent Larnings Rapiaceu
by an Indexed Annuity For Emplcyees Retiring
at Age 65 with 40 years of service
(not in parenthesis)
(indexing - 4 percent annually)
Full value
Value of Value of of benefits
Selected benefits without benefits from including
general Current participating employer cos- employee
schedule CSRS in thrift tribucions only contributions
Low ...... 65
72.3
66.2
76.1
85.9
(102.5)
(90.9)
(101.9)
(113.2)
...... 70
72.3
66.2
76.1
85.9
(85.3)
(90.9)
(101.9)
(113.2)
...... 80
72.3
66.2
76.1
85.9
(85.1)
(90.9)
(101.9)
(113.2)
Mid ...... 65
72.3
58.0
67.2
76.3
(127.9)
(89.9)
(100.7)
(110.5)
...... 70
72.3
58.0
67.2
76.3
(89.3)
(89.9)
(100.7)
(110.5)
...... 80
72.3
58.0
67.2
76.3
(89.3)
(89.9)
(100.7)
(110.5)
High ..... 65
72.3
67.4
77.9
88.8
(129.1)
(100.4)
(112.0)
(122.6)
..... 70
72.3
67.4
77,9
88.8
(89.3)
(100.4)
(112.0)
(122.6)
..... 80
72.3
67.4
77.9
88.8
(89.3)
(100.4)
(112.0)
(122.6)
Postal ... 65
72.3
71.3
82.4
93.3
(105.8)
(98.7)
(211.7)
(124.1)
... 70
72.3
71.3
$2.4
93.3
(85.8)
(98.7)
(111.7)
(124.1)
... 80
72.3
71.3
82.4
93.3
(89.5)
(98.7)
(111.7)
(124.1)
Hots: Assunos thrift plan of 100 percent employer match of employes contri-
bution to 3 percent of salary. All economic assumptions. and documentation of
methodology and 'selected general schedule' career histories ate detailed in:
U. S. Congress. Senate. Committee on Governmental Affairs. Restructuring the
Civil Service Retirement System: Analysis of Options to Control Costs and Msia-
cain Retirement Income Security. Committee Print. 97d Cone.. 1st Sass. Washington,
U.S. Govt. Print. Off., 1982.
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Purcuatage of Gross and Net Preretirement F.araings tteplaced
by a Noniodexed Annuity For Employees Retiring
at Age 65 with 40 years of service
(net in parenthesis)
Selected
Current
Value of
benefits without
Value of
benefits from
Full value
of benefits
including
general
CSRS
participating
employer con-
employee
schedule
(indexed)
in thrift
tributions only
contributions
Low ...... 65
72.3
76.5
89.7
103.0
(102.5)
(102.4)
(117.5)
(132.0)
...... 70
72.3
69.4
80.3
91.2
(85.3)
(94.5)
(106.9)
(119.1)
...... 80
72.3
58.8
66.1
73.5
(85.1)
(82.3)
(90.8)
(99.1)
Mid ...... 65
72.3
71.2
83.5
95.8
(127.9)
(105.0)
(117.9)
(129.6)
...... 70
72.3
62.1
72.2
82.3
(89.5)
(94.7)
(106.2)
(116.7)
...... 80
72.3
48.3
55.3
62.1
(89.5)
(78.0)
(86.6)
(94.8)
High ..... 65
72.3
83.5
98.2
112.9
(129.1)
(117.8)
(131.4)
(145.0)
..... 70
72.3
72.1
84.2
96.2
(89.3)
(106.0)
(118.4)
(129.6)
..... 80
72.3
55.0
63.2
71.3
(89.5)
(86.4)
(96.1)
(105.1)
Postal ... 65
72.3
83.5
98.5
113.5
(105.8)
(113.0)
(129.6)
(145.1)
... 70
72.3
75.1
87.4
99.7
(85.8)
(103.2)
(117.4)
(130.8)
... 80
72.3
62.4
70.7
79.0
(89.5)
(88.3)
(98.0)
(127.8)
Notes Assumes thrift plan of 100 percent employer match of employee con-
tribution to 3 percent of salary. All economic assumptions, and documentation
of methodology and 'selected gsmeral schedule' career histories are detailed in:
U. S. Congress. Senate. Committee on Govermmental Affairs. Restructuring
the Civil Service Retirement Systess Analysis of Options to Control Costs
and Maintain Retirement Income Security. Committee Print, 97d Cong., 1st Sass.
Washington, U.S. Govt. Print. Off., 1982.
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Percentage of Cross and Net Pracutireaent Earnings Replaced
by an Indexed Annuity For Employees Retiring
at Age 55 with 30 years of service
(net in parenthesis)
(indexing ? 4 percent annually)
Selected
Value of
benefits without
Value of
benefits froe
Full value
of benefits
including
general
Current
participating
employer con-
-playa*
schedule
CSRS
is thrift
cribucions only
contributions
Low ...... 55
53.4
14.8
19.7
24.7
(73.9)
(20.3)
(26.1)
(31.7)
...... 62
53.4
43.0
48.0
52.9
(65.2)
(59.7)
(65.5)
(71.1)
...... 70
53.4
43.0
48.0
52.9
(64.2)
(60.1)
(66.4)
(72.2)
Mid ...... 55
52.3
18.1
22.5
27.0
(89.8)
(26.8)
(32.9)
(38.7)
...... 62
52.5
34.6
39.1
43.5
(69.5)
(35.4)
(61.5)
(67.3)
...... 70
52.5
34.6
39.1
43.5
(69.5)
(56.0)
(62.2)
(68.2)
Nish ..... 55
53.4
24.6
30.2
35.9
(92.3)
(35.9)
(43.1)
(50.0)
..... 62
53.4
41.0
46.6
52.3
(70.3)
(64.6)
(71.9)
(78.8)
..... 70
53.4
41.0
46.6
52.3
(70.6)
(65.3)
(72.7)
(79.7)
Postal ... 55
53.4
18.3
24.1
29.9
(76.0)
(24.6)
(31.7)
(38.0)
... 62
53.4
48.3
54.1
59.9
(65.8)
(67.8)
(74.5)
(81.1)
... 70
53.4
48.3
54.1
59.9
(65.0)
(68.6)
(73.4)
(82.1)
Notes Asanmes thrift plan of 100 percent employer patch of employes con-
cribetion to 3 percent of salary. All economic assumptions, and doeuaaneation
of methodology sad 'seiscced general schedule career' histories are detailed
ins U. S. Congress. Senate. Committee on Governmental Affairs. Restructuring
the Civil Service Retirement Syscros Analysis of Options to Control Costs
and Maintain Rmtiremeat Income Security. Committee Print, 97d Cong.. 1st Sass.
Weshingtoa, U.S. Govt. Print. Off., 1982.
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Pee rcuu-gu eel Gross and Wass Praruti.rumuut lLa risings Kuplacuu
by a Wonindexed Annuity For Employees Retiring
at Age 55 with 30 years of service
(net in parenthesis)
Selected
Current
Value of
benefits without
Val of
benefits from
Full value
of benefits
including
general
CSRS
participating
saployer con-
employee
schedule
(indexed)
in thrift
tributions only
contributions
Low ...... 55
53.4
22.0
29.3
36.6
(73.9)
(28.7)
(36.9)
(45.1)
...... 62
53.4
44.9
50.5
56.1
(65.2)
(62.0)
(68.4)
(74.7)
...... 70
53.4
40.4
44.5
48.6
(64.2)
(56.5)
(62.2)
(67.1)
Kid ...... 55
52.5
26.9
33.5
40.1
(89.8)
(38.6)
(46.9)
(54.9)
...... 62
52.5
36.9
42.0
47.0
(69.5)
(58.6)
(65.4)
(71.8)
...... 70
52.5
31.4
35.1
38.8
(69.5)
(51.7)
(56.7)
(61.43)
High ..... 55
53.4
36.5
44.9
53.3
(92.3)
(50.8)
(60.7)
(70.0)
..... 62
53.4
44.2
50.5
56.9
(70.5)
(68.7)
(76.6)
(84.4)
..... 70
53.4
36.7
41.4
46.0
(70.6)
(59.4)
(65.8)
(71.9)
Postal ... 55
53.4
27.3
35.9
44.5
(76.0)
(34.9)
(44.6)
(54.3)
... 62
53.4
50.7
57.2
63.8
(65.8)
(70.5)
(78.0)
(85.4)
... 70
53.4
45.1
49.9
54.7
(65.0)
(64.7)
(70.5)
(76.0)
Note: Assumes thrift plan of 100 percent match employer of employee con-
tribution to 3 percent of salary. All economic assumptions, and documentation
of methodology and selected general schedule' career histories are detailed in:
U. S. Congress. Senate. Committee on Governmental Affairs. Restructuring the
Civil Service Retirement System: Analysis of Options to Control Coact and Main-
tain Retirement Income Security. Committee Print, 974 Cong., let Seas. Washington,
U.S. Govt. Print. Off., 1982.
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IV. EXAMPLES OF SURVIVOR BENEFITS
Salary replacement rates for families of federal employees who
die while working or after retirement are better, in most instances,
under our plan than under the current system.
This is primarily because the survivor under social security re-
ceives from 72 percent to 100 percent of the annuitant's social se-
curity benefit after death. By contrast, the current Civil Service
Retirement System continues only about 55 percent of the annu-
itant's benefit.
The tables that follow illustrate the replacement incomes for the
survivors of federal employees who:
(1) Die while working (at age 35 after 10 years of service.)
(2) Die after retirement (at age 65 after 30 years of service.)
CASE 1.-INCOME FOR FAMILY OF EMPLOYEE DYING AT AGE 35 AFTER 10 YEARS OF SERVICE
pa P-41
Citm aRS
At-Oft
At spans ap 60
Plan
Tod
SOW
Phu
Tad
LOW-* WMIU a tepblsNtlettt
income (petcett of final
a7):
Spaae and 2 dii en...~.....
51.8
67.5
10.7
78.2
NA
NA
NA
Spotae 0nfy. ----
20.7 _
10.7
10.7
26.1
3.7
29.8
High.paid empbyee ie laMMent
income (peant of Final
may):
Spouse and 2 childmn
30.1
33.3
13.0
46.3
NA
NA
NA
Spouse 0*. _
21.0
13.0
13
0
7
13
3
0
16
7
.
.
.
.
CASE 2.-INCOME FOR SPOUSE OF EMPLOYEE DYING AT AGE 65 AFTER 30 YEARS OF SERVICE
[a WWI
d e OWN.-
High paid employee._..
QAt ME
29.4
29.3
At oath
A! spans ap 80
S0CW rP
Plan
Tod
sow
umnly
Nan
Teti
33.3
35.8
70.1
33.3
18.9
52.2
18.5
53.6
72.1
18.5
27.5
46.0
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V. REPLACEMENT RATES BY THE GENERAL ACCOUNTING
OFFICE
We asked the General Accounting Office to choose certain pri-
vate forecasters' economic assumptions and to use them to project
the retirement benefits under our plan and then to compare those
projections to the benefits earned under the current system. GAO
used three forecasters under four different age and service vari-
ations. Enclosure I describes the economic assumptions. Enclosure
II provides gross replacement rates for an employee retiring at age
65 with 40 years of service. It shows a fixed annuity and an annu-
ity indexed for the projected inflation rate. Enclosure III provides
for replacement rates for the same age and service periods as En-
closure II but reduced for survivor benefits. Enclosure 1V provides
for replacement rates for the same age and service periods but in-
dexes the annuity by four percent a year. Enclosure V provides for
a fixed annuity for an individual retiring at age 55 with 30 years of
service.
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UNITED STATES GENERAL ACCOUNTING OFFICE
WAi 4INGTON. D.D. 7a54S
NOV 191982
The Honorable Ted Stevens
Chairman, Subcommittee on Civil Service,
Post Office, and General Services
Committee on Governmental Affairs
United States Senate
At the request of your office, we calculated the estimated
retirement income replacement rates shown in the enclosures.
Our calculations were based on the provisions of S. 2905.
current social security provisions, and various assumptions
specified by your staff. Your staff asked that assumptions
regarding future rates of inflation, interest, and salary in-
creases be based on current economic forecasts by Data Resources,
Inc., Chase Econometric Models. and Wharton Econometric Fore-
casting Associates Models. The assumptions used in making our
calculations are included in the enclosures.
We trust this information is satisfactory to the needs of
your office.
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ASSUMPTIONS USED IN CALCULATING
ESTIMATED REPLACEMENT RATES
The estimated replacement rates were calculated under
three different sets of economic assumptions relating to future
long-term annual rates of inflation, interest income, and salary
increases. The assumptions were cased on economic forecasts by
Data Resources, Inc. (DRI), Chase Econometric Models, and Wharton
Econometric Forecasting Associates Models. Based on DRI's fore-
casts, it was assumed that the future rates of inflation, salary
increases, and interest would be 6.0 percent, 7.5 percent, and
8.5 percent, respectively. Based on Chase's forecasts, the same
rates were assumed to be 6.5, 8.5, and 9.5 percent, respectively.
Based on Wharton's forecasts, it was assumed the rates would be
7.5, 8.0, and 10.0 percent, respectively.
In determining the amount of the annual contribution under
each example, it was assumed that the Government contributed
9 percent of salary up to $20,000 and 16 percent of salary in
excess of $20,000. The $20,000 'break-point' was indexed to
annual salary increases. To avoid the complications of fore-
casting and timing promotions and within-grade increases, no
salary increases were assumed other than the level annual rates
mentioned above.
In the examples involving the thrift plan, it was assumed
that employees contriouted 3 percent of their annual salary to
the plan and the Government matched the contributions.
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Estimated social security benefits under each example are
approximate and were based on the Social Security Administration's
projections of ainiiAum, average, and maximum oeneiits in the next
40 years. We modified the projections to fit our illustrative
examples and economic assumptions.
in each example, annuity values were oased on the 1971 Group
Annuity Mortality Table.
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 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
46A
COMPARISON OF RETIREMENT INCOME REPLACEMENT RATES
UNDER CIVIL SERVICE RETIREMENT SYSTEM AND S. 2905
FOR A MALE EMPLOYEE RETIRING AT AGE 65 WITH
40 YEARS SERVICE a/
(Economic assumptions: Inflation 6.0 percent, Salary
increases 7.5 percent. Interest income 8.5 percent)
Civil Level annual
service annuity plus
Adjusted annual
annuity plus
system b/ social security social security
65
Without thrift plan
71.1
142.9
122.3
With thrift plan
1P2.6
148.2
70
Without thrift plan
71.1
130.6
122.3
with thrift plan
161.9
14P.2
109.7
122.3
127.3
148.2
122.0
101.4
161.7
127.3
109.7
101.4
141.1
127.3
88.9
101.4
106.4
127.3
$30.000 Starting Salary
65
Without thrift plan
71.1
127.5
101.6
With thrift plan
-
167.2
127.5
70
Without thrift plan
71.1
112.0
101.6
With thrift plan
-
143.4
127.5
80
Without thrift plan
71.1
85.8
101.6
With thrift plan
-
103.3
127.5
a/Replacement rates represent the ratio of retirement income.
including social security benefits where applicable, to the
employee's final year's gross salary. At ages beyond retirement,
final salary was adjusted to reflect the effect of the assumed
rate of inflation.
b/Under present law, both Civil service and social security benefits
are adjusted annually for inflation.
c/Represents rate of replacement if employee elected to have annuity
increased annually by the indicated, assumed rate of inflation.
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 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
48
COMPARISON OF RETIFEMENT INCOME REPLACEMENT RATES
UNDER CIVIL SERVICE RETIREMENT SYSTEM AND S. 2905
FOR A MALE EMPLOYEE RETIRING AT AGE 65 WITH
40 YEARS SERVICE a/
(Economic assumptions: Inflation 6.5 percent, Salary
increases 8.5 percent, Interest income 9.5 percent),
S. 2905
Civil Level annual Adjusted annual
service annuity plus annuity plus
system b/ social security social security
S10,000 Starting Salary
65
Without thrift plan
With thrift plan
70.4
140.1
117.5
70
Without thrift plan
With thrift plan
158.8
144.6
80
Without thrift plan
103.0
117.5
With thrift plan
120.5
144.6
$20.000 Starting Salary
65
Without thrift plan
70.4
121.n
98.8
With thrift plan
-
163.6
126.0
70
Without thrift plan
70.4
107.3
98.8
With thrift plan
-
140.1
126.0
80
Without thrift plan
70.4
84.3
98.8
With thrift plan
-
101.8
126.0
$30,000 Starting Salary
65
Without thrift plan
70.4
128.7
100.2
With thrift plan
170.9
127.4
70
Without thrift plan
70.4
110.9
100.2
With thrift plan
143.7
127.4
80
Without thrift plan
70.4
82.0
100.2
With thrift plan
99.5
127.4
a/Replacement rates represent the ratio of retirement income,
including social security benefits where applicable, to the
employee's final year's gross salary. At ages beyond retirement,
final salary was adjusted to reflect the effect of the assumed
rate of inflation.
b/Under present law, both civil service and social security benefits
are adjusted annually for inflation.
c/Represents rate of replacement if employee elected to have annuity
increased annually by the indicated. assumed rate cf inflation.
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 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
COlnPARI50r OF RETIRFME1!T INCOME REPLACEMENT RATES
UNDER CIVIL SERVICE RETIREMENT SYSTEM AND S. 2905
FOP. A MALE EMPLOYEE RETIRING AT AGE 65 WITH
40 YEARS SERVICE a/
(Economic assumptions: Inflation 7.5 percent. Salary
increases 8.0 percent, Interest income 10.0 percent`
Civil Level annual
service annuity plus
Adjusted annual
annuity plus
a stem b/ social security social security
160.0
128.2
213.0
160.E
140.0
128.2
179.7
160.0
80
Without thrift plan
70.7
109.4
128.2
With thrift plan
-
128.7
160.0
65
Without thrift plan
70.7
140.4
108.6
with thrift plan
-
193.3
140.4
70
without thrift plan
70.7
120.4
108.6
With thrift plan
-
160.1
140.4
80
without thrift plan
70.7
89.8
100.6
With thrift plan
-
109.0
140.4
$30,000 Starting Salary
65
Without thrift plan
70.7
151.4
111.4
With thrift plan
-
204.4
143.2
70
Without thrift plan
70.7
126.3
111.4
With thrift plan
-
166.0
143.2
80
without thrift plan
70.7
87.7
111.4
With thrift plan
-
107.0
143.2
a/Replacement rates represent the ratio of retirement income,
including social security benefits where applicable, to the
employee's final year's gross salary. At ages beyond retirement.
final salary was adjusted to reflect the effect of the assumed
rate of inflation.
b/Under present law, both civil service and social security benefits
are adjusted annually for inflation.
c/Represents rate of replacement if employee elected to have annuity
increased annually by the indicated, assumed rate of inflation.
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 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
.. 50
COMPARISON OF RETIREMENT INCOME REPLACEMENT RATES
UNDER CIVIL SERVICE RETIREMENT SYSTEM AND S. 2905
FOR A MALE EMPLOYEE RETIRIVG AT AGE 65 WITH 40 YEARS
SERVICE, ADJUSTED TO PROVIDE SURVIVOR BENEFITS a/
(Economic assumptions: Irflation 6.0 percent, salary
increases 7.S percent, Interest income 8.5 percent)
$10.000 Starting Salary
65
Without thrift plan
64.1 134.8 114.8
With thrift plan
169.1 135.7
70
Without thrift plan
With thrift plan
64.1 121.8 114.8
80
Without thrift plan
With thrift plan
$20.000 Starting Salary
65
Without thrift plan
With thrift plan
64.0 114.0 94.0
70
Without thrift plan
With thrift plan
128.2 114.9
80
Without thrift plan
84.0 94.0
With thrift plan
99.1 114.9
$30,000 Starting Salary
65
Without thrift plan
With thrift plan
64.0
117.4
92.2
70
Without thrift plan
With thrift plan
128.2
113.1
80
Without thrift plan
79.7
92.2
With thrift plan
94.8
113.1
a/Replacement rates represent the ratio of retirement income.
including social security benefits where applicable, to the
employee's final year's gross salary. At ages beyond retirement,
final salary was adjusted to reflect the effect of the assumed
rats of inflation. The survivor benefit will be 35 percent of
the retiree's annuity provided by the defined contribution plan
and/or the thrift plan.
b/Under present law, both civil service and social security benefits
are adjusted annually for inflation.
c/Represents rate of replacement if employee elected to have annuity
increased annually by the indicated assumed rate of inflation.
S- 2905
Civil Level annual Adjusted annual
service annuity plus annuity plus
system b/ social security social security c/
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 Approved For Release 2010/03/01 : CIA-RDP89-00066R000100120002-9
COMPARISON OF RETIREMENT INCOME. REPLACEMENT RATES
UNDER CIVIL SERVICE RETIREMENT SYSTEM AND S. 2905
FOR A MALE EMPLOYEE RETIRING AT AGE 65 WITH 40 YEAPS
SERVICE. ADJUSTED TO PROVIDE SURVIVOR BENEFITS a/
(Economic assumptions: Inflation 6.5 percent, Salary
increases 8.5 percent, Interest income 9.5 percent:
Civil
service
system
Level annual
annuity plus
b/ social security
Adjusted annual
annuity plus
social security
132.0
109.9
169.9
131.9
117.1
109.9
145.7
131.9
98.3
109.9
113.6
131.9
113.4
91.2
150.2
113.2
98.4
91.2
127.0
113.2
79.6
91.2
94.9
113.2
$30,000 Starting Salary
65
Without thrift plan
63.4
118.5
90.7
With thrift plan
-
155.3
112.7
70
Without thrift plan
63.4
99.7
90.7
With thrift plan
-
120.3
112.7
80
Without thrift plan
63.4
76.0
90.7
With thrift plan
-
91.3
112.7
a/Replacement rates represent the ratio of retirement income,
including social security benefits where applicable, to the
employee's final year's gross salary. At ages beyond retirement,
final salary was adjusted to reflect the effect of the assumed
rate of inflation. The survivor benefit will be 55 percent of
the retiree's annuity provided by the defined contribution plan
and/or the thrift plan.
b/Under present law, both civil service and social security benefits
are adjusted annually for inflation.
c/Represents rate of replacement if employee elected to have annuity
increased annually by the indicated assumed rate of inflation.
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 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
52
COMPARISON OF RETIREMENT INCOME REPLACEMENT RATES
UNDER CIVIL SERVICE RETIREMENT SYSTEM AND S. 2905
FOR A MALE EMPLOYEE RETIRING AT AGE 65 WITH 40 YEARS
SERVICE, ADJUSTED TO PROVIDE SURVIVOR BENEFITS a/
(Economic assumptions: Inflation 7.5 percent, Salary
increases 8.0 percent, Interest income 10.0 percent)
5.
2905
Civil
service
system
Level annual
annuity plus
b/ social security
Adjusted annual
annuity plus
social security
65
Without thrift plan
150.2
119.1
With thrift plan
1%.6
144.P
70
Without thrift plan
129.0
119.1
With thrift plan
163.P
144.8
80
Without thrift plan
104.1
119.1
With thrift plan
121.0
144.8
65
Without thrift plan
130.5
99. 5
With thrift plan
176.9
125.2
70
Without thrift plan
109.4
99.5
With thrift plan
144.2
123.2
80
Without thrift plan
84.4
99.5
With thrift plan
101.2
125.2
65
Without thrift plan
139.0
100.0
With thrift plan
185.4
125.7
70
without thrift plan
112.4
100.0
With thrift plan
147.2
125.7
80
Without thrift plan
81.0
100.0
With thrift plan
97.9
125.7
a/Replacement rates represent the ratio of retirement income,
including social security benefits where applicable, to the
employee's final year's gross salary. At ages beyond retirement,
final salary was adjusted to reflect the effect of the assumed
rate of inflation. The survivor benefit will be 55 percent of
the retiree's annuity provided by the defined contribution plan
and/or the thrift plan.
b/Under present law, both civil service and social security benefits
are adjusted annually for inflation.
c/Represents rate of replacement if employee elected to have annuity
increased annually by the indicated assumed rate of inflation.
Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
COMPARISON OF RETIREMENT INCOME REPLACEN.EAT RATES
UNDER CIVIL SERVICE RETIREMENT SYSTEM AND S. 2905
FOR A MALE EMFLOYEE RETIRING AT AGE 65 WITH
40 YEARS SERVICE a/
(Economic assumptions: Inflation 6.0 percent. Salary
increases 7.5 percent, interest income 8.5 percent)
Civil Level annual
service annuity plus
Adjusted annual
annuity plus
s stew b/ social security social security
65
Without thrift plan
71.1
142.9
129.2
With thrift plan
182.6
159.7
70
Without thrift plan
71.1
130.6
1251
.
With thrift plan
161.9
152
.8
80
Without thrift plan
109.7
118.1
With thrift plan
127.3
141.2
122.0
108.3
161.7
138-e
109.7
104.2
141.1
131.9
88.9
97.2
106.4
120.3
$30,000 Starting Salary
65
Without thrift plan
71.1
127.5
110.2
With thrift plan
-
167.2
140.7
70
Without thrift plan
71.1
112.0
105.1
With thrift plan
-
143.4
132.8
80
Without thrift plan
71.1
85.8
96.3
With thrift plan
-
103.3
119.4
a/Replacement rates represent the ratio of retirement income,
including social security benefits where applicable, to the
employee's final year's gross salary. At ages beyond retirement,
final salary was adjusted to reflect the effect of the assumed
rate of inflation.
b/Under present law, both civil service and social security benefits
are adjusted annually for inflation.
c/Represents rate of replacement assuming employee elected to have
annuity increased annually by 4 percent.
- Approved For Release 2010/03/01 : CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
54
COMPARISON OF RETIREMENT INCOME REPLACEMENT RATES
UNDER CIVIL SERVICE RETIREMENT SYSTEN AND S. 2905
FOR A MALE EMPLOYEE RETIRING AT AGE 65 WITH
? 40 YEARS SERVICE a/
(Economic assumptionss Inflation 6.5 percent. Salary
increases 8.5 percent, Interest income 9.5 percent)
Civil
service
system h/
Level annual
annuity plus
social security
Adjusted annual
annuity plus
social security
E5
Without thrift plan
140.1
126.2
With thrift plan
182.3
159.1
70
Without thrift plan
126.0
120.8
With thrift plan
158.8
150.1
e0
Without thrift plan
103.0
111.9
With thrift plan
120.5
135.3
65
Without thrift plan
121.4
107.5
With thrift plan
163.6
140.5
70
Without thrift plan
107.3
102.1
With thrift plan
140.1
131.4
80
Without thrift plan
84.3
93.2
With thrift plan
101.e
116.7
65
Without thrift plan
128.7
111.2
With thrift plan
170.9
144.1
70
Without thrift plan
110.5k
104.3
With thrift plan
143.7
133.7
00
Without thrift plan
82.0
93.2
With thrift plan
99.5
116.7
a/Replacement rates represent the ratio of retirement income,
including social security benefits where applicable, to the
employee's final year's gross salary. At ages beye'nd retirement,
final salary was adjusted to reflect the effect of the assumed
rate of inflation.
b/Under present law, both civil service and social security benefits
are adjusted annually for inflation.
c/Represents rate of replacement assuming employee elected to have
annuity increased annually by 4 percent.
Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
COMPARISON OF RETIREMENT INCOME REPLACEMENT RATES
UNDER CIVIL SERVICI RETIREY.ETT SYSTEM AND S. 2905
FOR A MALE EMPLOYEE RETIRING AT AGE 65 WITH
4C YEAPS SERVICE a/
(Economic assumptions: Inflation 7.5 percent, Salary
increases 6.0 percent, Interest income 10.0 percent)
Civil
service
system b/
Level annual
annuity plus
social security
Adiusted annual
annuity plus
social security
65
Without thrift plan
160.0
143.0
With thrift plan
213.0
184.7
7C
Without thrift plan
140.C
133.7
With thrift plan
179.7
169.2
80
Without thrift plan
109.4
119.4
With thrift plar.
128.7
145.4
140.4
123.4
193.3
165.1
120.4
114.1
160.1
149.6
89.8
99.8
109.0
125.7
151.4
130.1
204.4
171.8
126.3
118.4
166.0
153.8
P7.7
100.3
107.0
126.3
a/Replacement rates represent the ratio of retirement income,
including social security benefits where applicable, to the
employee's final year's gross salary. At ages beyond retirement.
final salary was adjusted to reflect the effect of the assumed
rate of inflation.
b/Under present law, both civil service and social security benefits
are adjusted annually for inflation.
c/Represents rate of replacement assuming employee elected to have
annuity increased annually by 4 percent.
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 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
56
COMPARISON OF RETIREMENT INCOME REPLACE.{ aj' RATES
UNDER CIVIL SERVICE RETIREMENT SYSTEM AND S. 2905
FOR A MALE EMPLOYEE RETIRING AT AGE 55 WITH
30 YEARS SERVICE a/
(Economic assumptions: Inflation 6.0 percent, Salary
increases 7.5 percent, Interest income 8.5 percent)
Civil
service
system b/
Level annual
annuity p143
social security c/
55
Without thrift plan
34.9
With thrift plan
58.1
62
Without thrift plan
82.7
With thrift plan
98.1
65
Without thrift plan
78.9
With thrift plan
91.9
70
Without thrift plan
74.0
With thrift plan
83.7
80
Without thrift plan
67.6
With thrift plan
73.0
55
Without thrift plan
34.9
With thrift plan
58.1
62
Without thrift plan
69.9
With thrift plan
85.4
65
Without thrift plan
66.2
With thrift plan
79.2
70
Without thrift plan
61.3
With thrift plan
71.0
80
Without thrift plan
54.8
With thrift plan
60.3
55
Without thrift plan
52.4
43.9
With thrift plan
67.2
62
Without thrift plan
52.4
67.8
With thrift plan
83.3
65
Without thrift plan
52.4
63.1
With thrift plan
76.1
70
Without thrift plan
52.4
57.0
With thrift plan
66.7
80
Without thrift plan
52.4
48.9
With thrift plan
54.3
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 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
57
ENCLOSURE V
a/Replacement rates represent the ratio of retirement income,
including social security benefits where applicable, to the
employee's Sinai year's gross salary. At ages beyond retirement,
final salary was adjusted to reflect the effect of the assumed
rate of inflation.
b/Under present law, both civil service and social security benefits
are adjusted annually for inflation.
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 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
58
COMPARISON OF RETIREMENT INCOME REPLACEMENT RATeS
UNDER CIVIL SERVICE RETIREMENT SYSTEM AND S. 2905
FOR A MALE EMPLOYEE RETIRING AT AGE 55 WITH
30 YEARS SERVICE I/
(Economic assumptions: Inflation 6.5 percent, Salary
increases 8.5 percent, Interest income 9.5 percent)
Civil
service
system
Level annual
annuity plus
0/ social security c/
55
Without thrift plan
37.6
With thrift plan
62.7
62
Without thrift plan
78.8
With thrift plan
95.0
65
Without thrift plan
74.7
With thrift plan
88.0
70
Without thrift plan
69.2
With thrift plan
79.0
80
Without thrift plan
62.4
With thrift plan
67.6
55
Without thrift plan
52.0
37.6
With thrift plan
-
62.7
62
Without thrift plan
52.0
67.6
With thrift plan
-
83.7
65
Without thrift plan
52.0
63.4
With thrift plan
-
76.8
70
Without thrift plan
52.0
58.0
With thrift plan
-
67.8
80
Without thrift plan
52.0
51.2
With thrift plan
-
56.4
630.000 Starting salary
55
Without thrift plan
52.0
47.4
With thrift plan
-
72.5
62
Without thrift plan
52.0
66.1
With thrift plan
-
82.3
65
Without thrift plan
52.0
60.9
With thrift plan
-
74.2
70
Without thrift plan
52.0
54.1
With thrift plan
63.8
80
Without thrift plan
32.0
45.4
With thrift plan
-
50.6
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 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
59
a/Aeplacement rates represent the ratio of retirement income.
including social security benefits where applicable, to the
employee's find year's gross salary. At ages beyond retirement.
final salary was adjusted to reflect the effect of the assumed
rate of inflation.
la/Under present law, both civil service and social security benefits
are adjusted annually for inflation.
E/Social security benefits are assumed to begin at age 62.
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 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
60
ENCLOSURE V
COMPARISON-OF RETIREMENT INCOME REPLACL49NT aAtES
UNDER CIVIL SERVICE RETIREMENT SYSTEM AND S. 2905
FOR A MALE EMPLOYEE RETIRING AT AGE 55 WITH
30 YEAR SERVICE It/
(Economic assumptions Inflation 7.5 percent, Salary
increases 8.0 percent, Interest income 10.0 percent)
S. 2905
Civil
service
system b/
Level annual
annuity plus
social security c/
55
Without thrift plan
45.2
With thrift plan
73.2
62
Without thrift plan
84.5
With thrift plan
102.6
65
Without thrift plan
79.2
With thrift plan
93.8
70
Without thrift plan
72.6
With thrift plan
82.8
80
Without thrift plan
64.7
With thrift plan
69.7
55
Without thrift plan
52.2
45.2
With thrift plan
75.2
62
Without thrift plan
72.6
With thrift plan
90.7
65
Without thrift plan.
S2.2
67.3
With thrift plan
81.9
70
Without thrift plan
52.2
60.7
With thrift plan
70.8
80
Without thrift plan
52.2
52.8
With thrift plan
57.7
SS
Without thrift plan
52.2
56.8
With thrift plan
87.0
62
Without thrift plan
52.2
71.9
With thrift plan
90.0
65
Without thrift plan
52.2
65.2
With thrift plan
79.8
70
Without thrift plan
52.2
56.9
With thrift plan
67.0
80
Without thrift plan
52.2
47.0
With thrift plan
52.0
1/Replacement rates represent the ratio of retirement income.
including social security benefits where applicable, to the
employee's final year's gross salary. At ages beyond retirement.
final salary was adjusted to reflect the effect of the assumed
rate of inflation.
blunder present law, both civil service and social security benefits
are adjusted annually for inflation.
c/Social security benefits are assumed to begin at age 62.
Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
The following paper by Sylvester Schieber of the Employee Bene-
fit Research Institute compares in great detail the cost of the cur-
rent system versus our plan. It shows the overall impact on the fed-
eral budget as well as the various internal funding transactions.
The one major caveat to this paper is the omission of the impact of
private investment of the new trust fund on the federal budget.
Private investment of trust fund monies will require additional
government outlays in the earlier years. However, in later years
the private investment of these funds will significantly reduce the
government's cost. Following this paper is a section comprised of
budgetary flow charts. These charts show the additional budgetary
impact of private investment
THE OJST AND FINDING
IMPLICATIONS OF MODIFYING THE
CIVIL SERVICE RETIRB4ENT SYSTB4
Sylvester J. Schieber
Reseaich Director
Revised
December 2, 1982
The views presented here axe those of the author and do
not necessarily reflect the views of the Employee Benefit
Research Institute, its Trustees, members or other staff.
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TABLE OF CONTENTS PAGE
The Coordination Proposal ............................................. 1
The Current CSRS Program .............................................. 2
Budgeting Implications of Changing CSRS ............................... S
Guaranteeing the Viability of CSRS .................................... 11
TABLE
MMBER TITLE PAGE
1
Effect of Economic Assumptions on CSRS Cost Estimates......
3
2
Projections of Existing Civil Service Retirement System
Future Budgeting Costs for Selected Years .................
15
3
Projections of Future Costs fox Existing CSRS and Social
Security Windfalls for Federal Employees fox Selected
yea's .....................................................
16
4
Budgetary Flows for Closed CSR System Account ..............
17
5
Budgetary Flows for New Hires CRS Account .................
18
6
Federal Agency and General Revenue Expenditure Projections
for the Modified CSR System. ..............................
19.
7
Social Security Account Contribution and Benefit Payment
Increases and Budgetary Cost From Covering New Employees
Under Social Security .....................................
20
8
Federal Budget Flows Required to Meet Federal Civilian
Retirement Cost Under Proposed Restructuring of the
Current System ............................................
21
9
Federal Agency and General Revenue Expenditure Projections
for Current CSRS and Modified System in Conjunction with
Newly Hired Workers Under Social Security .................
22
10
CSRS Income and Fund Balances: Closed System fox Current
Workers Under Existing Financing Legislation for Selected
Years .....................................................
23
11
CSRS Income, Benefits and Fund Balances: Closed System for
Current Workers Under Financing Proposal in Stevens'
Legislative Proposal for Selected Yeats ....................
24
12
Employer Contributions to CSRS Under Current Legislation
and Stevens' Proposal: Closed System for Current Workers
for Selected Years .........................................
25
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The public discussion of mandatory Social Security coverage of federal
workers often focuses on the beneficial effects for Social Security. Mandatory
coverage critics, on the other hand, argue that covering Federal workers will
raise the cost of Federal civilian retirement programs and threaten the
viability of their retirement trust funds. This paper provides an analysis of
the potential effect that Social Security coverage of Federal workers would
have on the cost of the Federal Civil Service Retirement Program, the Federal
budgetary effect of such a measure and the long term implications for the trust
funds.
TilE COORDINATION PROPOSAL
In order for a discussion of this sort to be meaningful it has to be
concrete. This analysis focuses on an option discussed in a recent report
issued by the Congressional Research Service. 1/ The option used in the
analysis is Option IV-A from their report. This option was chosen because it
closely parallels the option included in draft legislation prepared by Senator
Ted Stevens of Alaska.
The analysis assumes that all workers hired into Federal Civilian jobs
after January 1, 1983 would be covered by Social Security. They would also be
covered by a defined contribution plan that would be financed solely by
employer contributions. This plan would provide contributions of 9 percent on
the first $20,000 of salary and 16 percent above that. The $20,000 would be
indexed by increases in the general wage schedule over time. In addition to
the basic benefit, a supplemental thrift plan would also be available for those
1 ngressional Research Service, Restructuring the Civil Service Retirement
system Analysis: Analysis of Options to Control Costs and Maintain Retirement
Income Security (Washington, D.C.: GPO, 1982).
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2
covered under the new plan. This would allow the employee to contribute up to
6 percent of salary into the plan and would be fully matched by the employer.
The Stevens' bill would fully match employee contributions up to 3 percent of
salary. This element of the Stevens' bill would reduce the cost estimates pre-
sented. On the other hand, the Stevens' bill would provide contributions based
on military service, raising costs compared to the option considered here. The
option discussed here and the Stevens' bill would also modify the Federal
employee sick leave and disability program to coordinate with Social Security.
THE QJRRBVT (SRS PROGRAM
The cost of CSRS can be considered from different perspectives. One
common way to estimate the cost of a retirement program is to use what
actuaries call the "entry age normal cost method." This method estimates the
percentage of a worker's salary that would have to be set aside each year to
fully fund benefit entitlements by retirement. Aggregating the normal cost of
all workers provides an estimate of the employer's total normal cost. As with
most estimates the normal cost estimate is sensitive to the assumptions on
which it is based. This is clear in Table 1, where two different sets of
economic assumptions are used to estimate the normal cost of the (SRS program.
The greatest variance in assumptions for the two estimates is in inflation,
although it is the inflation/interest differential that is most significant in
explaining the variance in the normal cost estimates. The real interest rate,
or return on assets under the II-B assumptions is twice that under the Board of
Actuaries' assumptions. Higher interest rates raise investment income over
time and increase the degree to which the trust fund supports benefits.
Since employees covered by (SRS contribute 7 percent of salary to the
retirement program this means the employer (i.e., the Govor--rent's) cost of the
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Effect of Economic Assumptions on CRS Cost Estimates
Interest
Wage
Growth
Inflation
Normal
Cost
CSRS Board of Actuaries
6.0
S.S
S
36.46
Social Security 1981,II-B
6.1
S.5
4
31.23
program is 29.46 or 24.23 percent of payroll depending on which set of assump-
tions are used. Since this discussion is focusing on Social Security coverage
costs the Social Security assumptions are used for the remainder of the dis-
cussion.
The normal cost measure is a useful concept because it gives a good
perspective on the generosity of the retirement program in comparison to
pensions established by other employers. For example, in the private sector.
employer normal costs for retirement programs generally run about 7 to 12 per-
cent of payroll on top of Social Security. The normal cost is also useful
because it is indicative of the portion of lifetime benefits paid to workers in
the form of deferred retirement income.
An alternative way to evaluate the cost of (SRS is to look at the
cost on a budget basis. This is useful because it reflects the relative cost
of Federal retirement for taxpayers and participants. Figure 1 pictorially
represents the operation of the CRS during fiscal 1980. The budget box
represents the total Federal budget components of the (SRS. It includes the
off-budget Postal Service. The first inner box represents the unified bud.,et.
The arrows represent the budgetary flows relevant to CSRS. All transactions
which cro$s the outermost box affect the total cost of CSRS. Transactions
crossing the largest interior box affect the unified budget.
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F1or of hnda R.lated to
-IM Civil Senriee Retireernt System
(1980 amounts in billions)
Annuities. Refunds. Expanaas
($14.7E
S000CLa Budget of the United States Covernrnt Risen Tear 1982. appends;
p.2-vlls.
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4
The implication of this depiction is that most of the funding of (RS
is internal to the unified budget. Even the Postal Service contributions fall
conceptually within the unified budget framework. If USPS increased their con-
tributions it could ultimately lead to higher postage rates or general revenue
support of that off-budget account. In either case the cost would be borne by
the public. In terms of total Federal outlays in 1980, benefits and refunds
amounted to $14.78 billion while employee contributions were $3.60 billion.
The 1980 USPS contribution was split between the normal 7 percent agency
contribution ($775 million) and the obligations ($714 million) vis-a-vis
unfunded liabilities. Since USPS is off budget their contributions do affect
the unified budget net costs of the program but not total outlays from the
taxpayers' perspective. In short the taxpayer cost of fSRS is equal to total
benefits plus contribution refunds minus employee contributions. In 1980 this
was ($14.78 billion minus $3.60 billion) $11.18 billion.
The example also raises another important point in regard to funding
CSRS liabilities. A great deal of concern has been voiced over the unfunded
liabilities of CSRS. The total liabilities of the system exist because of the
statutes that define the program. To the extent the system holds government
securities as its funding instruments it has a contractual promise from the
goverment (IOUs) that certain resources will be available to meet benefit
payments as required. The unfunded liabilities, on the other hand, are
statutory promises that have arisen because benefits accrued under the law have
not been matched by a comparable pool of assets (i.e., Government IOUs). If
the statutory liabilities were converted to contractual obligations, it would
not affect benefit levels because they are separately defined by statute. The
important point is that there be a funding mechanism available to meet these
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benefits as they come due. Even though the current system has sizeable
unfunded liabilities, the current funding method assures benefits for the
forseeable future.
However, the budgetary process would allow more rapid funding of CSRS
liabilities than now occurs without having an adverse affect on taxpayers. An
added annual contribution, say $20 billion, would be an increase in general
revenue expenditures but would be exactly offset by an increase in CSRS
income. The U.S. government would increase its bond issues by $20 billion but
these would be offset by a $20 billion increase in CSRS funds. There would be
no impact on the taxpayers.
This is not to suggest that CSRS should be funded instantaneously, or
that the unfunded liability should be ignored. The presence of a fully funded
system could well lead to pressure for benefit increases which would, in turn,
increase the taxpayers' cost. On the other hand, the unfunded liability is a
real cost that will eventually have to be covered.
There are three important variables to consider in the context of CSKS
reform. These are: First, what is the effect on the level and distribution of
benefits?; Second, what are the budgetary implications of the proposal -- both
long and short-term?; and third, what must be done to assure that benefit
promises to existing employees are met during a transition to the new system?
The first of these questions is analyzed in detail in the CRS study
cited in footnote 1. The latter two questions are analyzed below.
!UDGErARY IMPLICATIONS OF QiANGING CSRS
The above discussion suggests that CSRS budgetary effects could be
described by the following formula:
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Table 2 shows the long-term projected costs of the CSRS if the program is not
modified.
In addition to the basic MRS costs the budget is also affected by
Social Security windfall benefits paid to individuals covered by CSRS. The
annual magnitude of these windfalls for Federal workers and annuitants has been
estimated to have been roughly $1 billion in 1980. 2/ For the sake of this
analysis, this estimate is indexed by the CPI assumptions used to estimate the
future cost of CSR S benefits. There are several reasons to believe this is a
conservative estimate. First, the number of CSRS beneficiaries is growing
rapidly and will continue to do so throughout this decade. This will increase
the prevalence of windfalls. Second, initial Social Security benefits are
based on indexed wages and the benefit formula itself raises benefits over time
because the bend points in the formula are themselves indexed. In coming years
this should increase initial entitlements and windfalls for short-coverage
workers more rapidly than prices increase. Finally, once benefits commence
they are indexed by the CPI. This indexation also applies to windfalls.
Because the current system gives rise to these Social Security
windfalls they should be considered in any cost estimates of present policy.
This total cost can be derived mathematically as follows:
(2) Current System Total Cost - CSRS budgetary cost + SS windfalls
The combined CSRS cost plus the Social Security windfalls are shown in
2/ See Sylvester J. Schieber, Universal Social Security Coverage and
Alternatives: The Benefits and Costs (Washington, D.C.: EBRI, 1982).
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Table 3. 3/
The proposed modification to the system analyzed here calls for Social
Security coverage coordinated with a modified Federal pension for new Federal
employees beginning in 1983. That means that the ongoing costs of the total
system have to be estimated separately for the closed system that applies to
old hires, and for the new system covering future employees. The budgetary
costs of the separate systems can be aggregated to get the combined systems
cost.
The total budgetary impact of modifying MRS would be different than the
effect on the various accounts taken separately. Both CSRS and Social Security
axe now within the unified budget. Because the proposal analyzed here would
segregate the old and new systems the costs for the various accounts can be
considered as follows:
(3) Closed MRS Costs = benefits (old) ? refunds minus
employee contributions
(4) New CSRS Costs - benefits (new) ? refunds minus
employee contributions
(s) Social Security Costs - benefits (SS) minus employee contributions
While the costs of Social Security windfalls are added here to the current
system total cost they are not included in the current system, cost in
comparisons with the modified system. The Stevens' bill does not include any
explicit windfall reduction provisions so they are not considered. It should
be noted, however, that the Stevens' bill would gradually eliminate the wind-
fall phenomenon for Federal workers and result in zeal savings to taxpayers.
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? Social Security cost
Equation (3) is essentially the same as equation (1) discussed earlier
that applies to the current system. The difference is that equation (3)
applies only to those workers on the payroll or individuals entitled to CSRS
benefits (receivirg or deferred) on the assumed date the modified system would
be put into operation. Equation (1), on the other hand, assumed future new
workers would continue to be covered under the current system. Table 4
presents the annual budgetary flows specifically related to the closed CSRS
system under the proposal being analyzed.
Equation (4) represents the budgetary cost of the new Federal retirement
program. It is the counterpart of equation (3). The flows in this account axe
shown in Table S. The very sizeable refunds that develop under the modified
system axe the result of the improved vesting provisions in the Stevens'
proposal. Under the current CSRS more than 20 percent of today's Federal work
force, is now or will become vested but, will leave Federal employment and
withdraw their own contributions and receive no benefit from CSRS. While these
workers will be technically vested under the definitions of the plan at some
point they will ultimately have no practical vested right to an
employer-provided benefit. Under the modified system such employees would vest
in a teal sense. As they leave Federal employment they would be able to roll
their vested benefits out into an IRA or other retirement program. This would
represent a significant benefit improvement for workers who spend several years
in Federal employment but do not make it their full career.
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Equations (3) and (4) and Tables 4 and S are based on the assumption
that the new system's trust fund would be segregated from the cut rent
system's. This would not necessarily have to be the case. The reason the
Federal zetizement account is split in this analysis is that the Stevens' bill
provides that the new system would ultimately be funded through private
securities markets. The two funds could be combined fox either budgetary or
practical purposes, however. Even if this were done, the combined fund could
still hold a portion of its portfolio in private securities. Table 6 reflects
the budgetary flows requited if the funds were combined.
Equation (5) shows the budgetary effects of Social Security coverage of
new hires. Again the budgetary effect is different than the effect on the
ORStMI accounts. The difference is that the specific account would be credited
fox both employer and employee contributions. The affect on these accounts is
shown in Table 7 as the "Net Social Security Revenue Increase." Since Social
Security is in the unified budget the employer contribution would show up as an
expense in one section of the budget and as equal trust fund income at a
different place. The two would net each other out. The budgetary flows
reflected in equation (S) axe shown in the tight hand column of Table 7.
If Social Security is taken out of the unified budget it would change
the analysis conceptually without affecting the practical result. Fox example,
if Social Security were an off-budget account, the employer contribution would
then show up as a teal budget expense. The contribution would show up as
income to an off-budget account. The budgetary and off-budget accounts would
both still be Federal accounts, however. While taking Social Security
off-budget would change the bookkeeping it would not change the overall fiscal
position of the Federal government if coverage were extended to Federal
workers.
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The total budgetary cost, modifying MRS as considered here, can be
calculated according to equatiof (6). The budgetary flows are shown in Table 8
based on this calculation. They become meaningful in comparison to the
budgetary cost of the current system which was shown in Table 2.
The flows from the current system and the modified system axe shown in
Table 9. Based on these two projections, moving to the modified system on
January 1, 1983 would save $1 billion over the first five years. While the
cost savings during the early years would be moderate in relative terms they
would grow significantly after the turn of the century as the Federal work
force becomes predominantly coveted by the new system. Ultimately, the savings
would grow to nearly one-quarter of the current system's cost if it were to be
perpetuated. The net savings estimates of moving to the modified system do not
include any savings that could be realized if a Social Security windfall
reduction provision fox old hires were implemented. For example, Congressman
Pickle, Chairman of the Social Security Subcommittee of the House Ways and
Means Committee, has suggested legislation that would reduce windfalls in the
future for individuals not covered by Social Security for some portion of their
career. His proposal would reduce the benefit derived under the current
formula to that percentage of total lifetime earnings in covered employment.
If such a proposal were implemented in 1983 the total savings would be small.
Hiwever, if one assumed that windfalls estimated in Table 3 were reduced at a
rate of 2 percent per year the savings could be as much as $100 million by the
mid 1980s and rise to more than $1 billion by the turn of the century. The
Social Security actuaries have estimated similar savings. Tray estimated the
Pickle proposal would save $100 million in both 1985 and 1986 :.nd average .O5
percent of total Social Security covered payrolls over the next 75 years.
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Last year the Reagan Administration proposed a pension offset fox'
workers who accrued a public pension in employment not covered by Social
Security. This might reduce the windfalls for individuals retiring in the near
future somewhat more rapidly than the Pickle proposal. There is a precedent
now in the law that reduces Social Security spouse's benefits if they are
receiving a noncovered benefit. Such offsets, however, are unpopular because
people perceive them as a reduction in benefits to which they axe entitled.
The net cost increase in the proposed system around the turn of the
century shown in Table 9 is the result of modification to vesting provisions
under the new plan. By that time, significant numbers of terminating workers
will be tolling their vested benefits into alternative retirement vehicles as
they leave Federal service. If the proposed modification of the new system
were made in conjunction with a windfall reduction proposal the cost savings
that would result from modifications to the MRS would be significantly greater
than those shown in Table 7.
The bottom line is that modifying the (RS along the lines of the
option analyzed here, or the Stevens' proposal, would result in significant
budgetary savings over both the short and long run. Coverage of new hires
under Social Security will maintain the level of employee contributions for
retirement purposes. In a budgetary sense then, any proposal coupled with
Social Security coverage that just maintains or slightly reduces total Federal
retirement benefits cannot cost the taxpayers mote than the current system.
The actual numbers that would show up in the unified budget might be affected
by moving accounts in or out of the budget. This would not affect taxpayer
costs for Federal retirement, however.
GUARANrEEING THE VIABILITY OF CSRS
Current CSRS financing provisions assure that the retirement trust
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'/0
fund will be sufficient to meet benefit obligations fox the fozseeable future.
Modifying the system along the lines of the CSRS option discussed above, or the
nearly identical Stevens' proposal, would change the internal arithmetic of
CSRS funding. Both proposals would eliminate mandatory employee contributions
to (.'SRS by workers covered under the new system. Furthermore, as current
workers withdraw or retire the closed group contributions would also decline,
as long as the system is open (i.e., new workers come into the system as old
hires leave or retire). If the system is closed (i.e., new hires are not
covered by the system) the new workers' contributions, the agency contributions
and general revenue transfers on their behalf would dry up. Leaving the
current wox'ezs and beneficiaries isolated in the closed system without
contributions based on new workers' salaries would result in the depletion of
the CSRS trust fund. Table 10 shows how this process would work if, in fact,
CSRS were closed and current funding legislation were left in place. Some-
where around the turn of the century the CSRS trust fund would be depleted.
Technically this could be resolved very quickly by converting the
unfunded liabilities fox the closed group into formal debt. This would requite
the issuance of government IOUs (i.e., bonds or securities) in the amount of
the unfunded obligations. This would require taising the government's formal
debt limits while not changing its obligations. While the obligations are now
unfunded they ate defined by existing federal pension statutes. The issuance
of such IOUs would not change the current financial status (i.e., wealth) of
the Federal Government at all. Each dollar of new debt (i.e., liabilities)
that would result from such a transaction would also be a dollar of assets held
by a govexn:nental trust fund.
As a practical and political matter raising Federal debt limits at
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once by the magnitude that would be required would be impossible. The creation
of such a trust fund would certainly increase pressure for benefit liberaliza-
tions. It is also highly unlikely that the general public would acquiesce to
such an increase in the formal Federal debt at once.
Senator Stevens has proposed forty-year amortization of the unfunded
pension obligations for the workers who would continue to be covered by the old
CSRS system. The long-run projections of trust fund income, payments and
balances under this proposal are shown in Table 11. His proposal would provide
for an adequate trust fund to meet all benefit obligations of the old system.
Table 12 provides a calculation of increased funding requirements
under the Stevens' proposal. This funding modification would have different
effects on the unified budget and the level of Federal debt.
The amortization of unfunded liabilities would have a neutral effect
on the unified budget. Referring back to Figure 1, it is clear that this
occurs because the transaction is all internal to the unified budget. The
increased funding would show up as an increased expense in agency
contributions or direct appropriations. It would be exactly offset as
increased income to the internal CSRS account, however. The net effect is
zero.
Since the increased funding would be accomplished through the issuance
of new Federal securities, it would represent an increase in the formal Federal
debt over the forty year amortization period. It would not represent an
increase in actual liabilities, however. These liabilities already exist
because of the benefit provisions defined in Federal statutes. The
amortization of the statutory liabilities would merely recognize them as formal
debt obligations to the trust fund. This would in no way affect the actual
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'11
benefit obligations under the plan.
The provisions in the Stevens' bill do appear to assure the long-tein
promises made to current wozkexs and annuitants covered by CSRS. His proposal
ox a similar one would accomplish this without increasing the cost of Fedezal
retirement pzogiam foz the taxpayers.
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Projections of Existing Civil Service Retirement System
Future Budgetary Costs for Selected Years
(dollar amounts in billions)
CSRS
Payroll
CSRS Retirement
Disability and
Survivor Benefits
' Employee
Contributions
Minus Refunds
Federal Agency and
General Revenue
Expenditures
1983
~60.1
~21.5
43.6
417.9
1984
65.5
23.9
3.9
20.0
1985
67.3
26.4
4.0
22.4
1986
77.5
28.9
4.6
24.3
1987
83.4
31.3
S.0
26.3
1988
89.0
33.7
5.3
28.4
1989
94.5
35.9
5.6
30.3
1990
99.8
38.2
5.9
32.3
1991
104.7
40.3
6.1
34.2
1995
132.3
50.1
7.7
42.4
2000
172.3
64.5
10.0
54.5
2005
230.4
84.3
13.5
70.8
2010
301.5
110.9
17.7
93.2
2015
404.7
146.2
23.8
122.4
2020
533.9
193.2
31.4
161.8
2025
699.4
253.9
41.3
212.6
2030
914.6
331.7
54.0
277.7
2035
1,195.4
430.5
70.5
360.0
2040
1,562.3
SS7.9
92.2
465.7
2045
2,041.9
724.6
120.5
604.1
2050
2,668.7
944.2
157.5
786.7
SMM: se projections were developed by Edwin C. Hustead, FSA, former
Chief Actuary of the Civil Service Retirement System; he is now
Director, Actuarial Consulting Services, Hay Associates.
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Projections of Future Costs for au=sting MRS and Social Security
Windfalls for Federal Feployees for Selected Years
(dollar amounts in billions)
Agency and General 1/
Revenue Costs of C51fS
Social Security Windfall 2/
Benefits for MRS Participants
Total cost
1993
17
1,5
.L
1984
20.0
1.4
21.4
1985
22.4
1.S
23.9
1986
24.3
1.6
25.9
1987
26.3
1.7
28.0
1988
28.4
1.8
30.2
1989
30.3
1.9
32.2
1990
32.3
1.9
34.2
1991
34.2
2.0
36.2
1995
42.4
2.S
44.9
2000
54.5
3.0
57.5
2005
70.8
3.7
74.5
2010
93.2
4.4
97.6
2015
122.4
5.4
127.8
2020
161.8
6.6
168.4
2025
212.6
8.0
220.6
2030
277.7
9.7
287.4
2035
360.0
11.8
371.8
2040
465.7
14.4
480.1
2045
604.1
17.5
621.6
2050
786.7
21.3
808.0
From Table
2
l/ Estimated by the author; assumptions described in the text.
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Budgetary Flow? foz Closed CSR System Account 1/
(dollar amounts in billions)
Year
Retirement, Survivor
and Disability Benefits
-
Refunds
--
Employee
Contributions
Total Federal
Revenue and General
Expenditures
1983
S5.6
1984
24.0
0.6
4.1
20. S
1985
26.4
0.6
3.7
23.3
1986
28.9
0.6
4.1
25.4
1987
31.3
0.7
4.0
27.9
1988
33.7
0.7
3.9
30.4
1989
35.9
0.7
3.9
32.8
1990
38.0
0.7
3.6
35.1
1991
40.2
0.7
3.4
37.5
1995
49.5
0.6
2.2
47.9
2000
62.7
0.0
1.4
61.3
2005
78.1
0.0
1.2
76.8
2010
94.1
0.0
0.0
94.1
2015
104.6
0.0
0.0
104.6
2020
105.9
0.0
0.0
105.9
2025
99.4
0.0
0.0
99.4
2030
86.1
0.0
0.0
86.1
2035
67.3
0.0
0.0
67.3
2040
44.4
0.0
0.0
44.4
2045
25.0
0.0
0.0
25.0
2050
10.7
0.0
0.0
10.7
SWRCE: se projections were developed by Edwin C. Hustead, FSA, former Chief
Actuary of the Civil Service Retirement System; he is now Director,
Actuarial Consulting Services, Hay Associates.
1/ The system is described as "closed" because it is assumed that no new
Federal employees hired after January 1, 1983 would participate in, contribute to
or receive benefits from the current system. They would be participants in the
modified system.
Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
Budgetary F16ws for New Hires MRS Account
(dollar mounts in billions)
Retirement, Survivor
Year and Disabili Benefits
Employee
Refunds Contributions
Total Federal
Agency and Genezal
Revenue Ex enditures
1983 1984
0.0
0.1
0.2
7SU. Ii
(0.1)
1985
0.0
0.3
0.4
(0.1)
1986
0.0
0. S
0.6
(0.1)
1987
0.0
0.7
0.8
(0.1)
1988
0.0
0.9
1.0
(0.1)
1989
0.0
1.2
1.2
0.0
1990
0.0
1.6
1.3
0.1
1991
0.1
1.9
1.7
0.3
1995
0.1
3.5
3.0
0.6
2000
0.3
7.8
4.6
3.5
200S
1.1
10.1
6.4
4.8
2010
6.2
13.2
9.0
10.4
2015
16.1
17.4
12.1
21.4
2020
36.6
23.0
16.0
43.6
2025
67.2
29.5
21.0
75.7
2030
110.5
38.6
27.4
121.7
2035
165.9
50.4
35.9
180.4
2040
239.1
65.8
46.9
258.0
2045
330.6
86.0
61.3
355.3
2050
439.4
112.4
80.1
471.7
SOURCE: These projections were developed by Edwin C. Hustead, FSA, former
Chief Actuary of the Civil Service Retirement System; he is now
Director, Actuarial Consulting Services, Hay Associates.
Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
82
TABLE 6
Federal Agency and General Revenue Expenditures
Projections for the Modified (SR Syste.
(dollar amounts in billions)
Year
Combined CSRS
Benefits
Combined
Refunds
Combined Fwployee
Contributions
Federal Agency and
General Revenue
ftendituxes
1983
1b.6
--
44.Z
-
NIB
U
1984
24.0
0.7
4.3
I
.
20
4
1985
26.4
0.9
4.2
.
23
2
1986
28.9
1.1
4.7
.
25
4
1987
31.3
1.4
4.8
.
27
9
1988
33.7
1.6
4.9
.
30
3
1989
35.9
1.9
S.0
.
32
8
1990
38.0
2.3
5.0
.
35
3
1991
40.3
2.6
5.1
.
37
8
1995
49.6
4.1
5.2
.
48
5
2000
63.0
7.8
6.0
.
64
9
2005
79.2
10.1
7.6
.
81
6
2010
100.3
13.2
9.0
.
104
5
2015
120. 7
17.4
12.1
.
126
0
2020
142.5
23.0
16.0
.
149
5
2025
166.6
29.5
21.0
.
17S
1
2030
196.6
38.6
27.4
.
207
8
2035
233.2
50.4
35.9
.
247
7
2040
283.5
65.8
46.9
.
302
5
2045
355.6
86.0
61.3
.
380
3
2050
450.1
112.4
80.1
.
482.5
Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
Social Secuity Account Contribution and Benefit
Payment Increases and Budgetary Cost Fton
Coveting New Employees Under Social Security
(dollar amounts in billions)
Yea,
Contributions 1/
Employez Employ"
Increased
OASDHI
-
Net Social Security
Revenue Increases 2/
Net Budget
Cost ox (Gain)
1983
*U L
4ou L
TMT
1984
0.5
O.S
0.0
1.0
(0.5)
1985
1.0
1.0
0.0
2.0
(1.0)
1986
1.3
1.3
0.0
2.6
(1.3)
1987
1.8
1.8
0.0
3.6
(1.8)
1988
2.3
2.3
0.0
4.6
(2.3)
1989
2.8
2.8
0.0
S.6
-(2.8)
1990
3.6
3.6
0.1
7.1
(3.5)
1991
4.2
4.2
0.1
8.3
(4.1)
199S
7.3
7.3
0.4
14.2
(6.9)
2000
11.0
11.0
0.8
21.z
(10.2)
200S
15.5
15.5
2.0
29.0
(13.5)
2010
21.9
21.9
3.S
40.3
(18.4)
2015
29.4
29.4
6.3
52.5
(23.1)
2020
38.8
38.8
20.1
57.5
(18.7)
2025
50.8
50.8
43.0
58.6
(7.8)
2030
66.5
66.5
70.5
62.5
4.0
2035
86.9
86.9
112.3
61.0
25.9
2040
113.5
113.5
171.3
55.7
S7.8
2045
148.4
148.4
267.3
29.5
118.9
2050
193.9
193.9
395.0
(7.2)
201.1
suaes t atat 98 percent of total payroll of new bites is below Social
$ecutity maximum taxable eunings during first ten years, declining to 9S pet-
cent over next 3 years. Currently legislated tax rates mete used to calculate
the contributions. Estimated paytoil was provided by Edwin C. Hustead, FSA,
former Chief Actuary of the Civil Service Retirement System; be is now Director,
Actuarial Consulting Services, Hay Associates.
2/ Benefit estimates for 1983-1990, 2000, 2025 and 2050 are fro. the Social
3'ecurity Administration. Estimates fox remaining years were developed by the
author.
Approved For Release 2010/03/01 : CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
54
TABLE 8
Federal Budget Flows Required to Meet Federal Civilian
Retirement Cost Under Proposed Restructuring of
the Current System
(dollar amounts in billions)
Closed
Modified System Cost
Net Budgetary
Year S
-
rem Cost
Federal Retirement
Social Securi
Cost
TFU
OW-1)
0
;17.4
1984
20.5
(0.1)
(0.5)
19.9
1985
23.3
(0.1)
(1.0)
22.2
1986
25.4
(0.1)
(1.3)
24.1
1987
27.9
(0.1)
(1.8)
Z6.1
1988
30.4
(0.1)
(2.3)
28.0
1989
32.8
0.0
(2.8)
30.0
1990
35.1
0.1
(3.5)
31.7
1991
37.5
0.3
(4.1)
33.7
199S
47.9
0.6
(6.9)
41.6
2000
61.3
3.5
(10.2)
54.7
2005
76.8
4.8
(13.5)
68.1
2010
94.1
10.4
(18.4)
86.1
2015
104.6
21.4
(23.1)
102.9
2020
105.9
43.6
(18.7)
130.8
2025
99.4
75.7
(7.8)
167.3
2030
86.1
121.7
4.0
211.8
2035
67.3
180.4
25.9
273.6
2040
44.4
258.0
$7.8
360.3
2045
25.0
355.3
118.9
499.2
2050
10.7
471.7
201.1
683.6
Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01 : CIA-RDP89-00066R000100120002-9
Federal Agency and GFnetal Revenue Expenditure Projections
fox the Current CSRS and Modified System in Conjunction
with Newly Hired Workers Under Social Security
(dollar asumts in billions)
Current System
Modified System
Net Savings 1/
1993
S17.9
$17.7
0.2
1984
20.0
19.9
0.1
1985
22.4
22.2
0.2
1986
24.3
24.1
0.2
1987
26.3
26.1
0.2
1988
28.4
28.1
0.3
1989
30.3
30.0
0.3
1990
32.3
31.7
0.6
1991
34.2
33.7
0.5
1995
42.4
41.6
0.8
2000
54.5
54.7
(0.2)
2005
70.8
68.1
2.7
2010
93.Z
86.1
7.1
201S
122.4
102.9
19.5
2020
161.9
130.8
31.0
2025
212.6
167.3
45.3
2030
277.7
211.8
65.9
2035
360.0
273.6
86.4
2040
465.7
360.3
105.4
2045
604.1
499.2
104.9
2050
786.7
683.6
103.1
Amounts in parentheses axe negative.
SOURCES: Tables 2, 6, and 8.
Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
86
CSRS Income, Benefits and Fund Balances: Closed Systes
fox Current Wotkexs Under Existing Financing
Legislation fox Selected Yeats
(dollar ammmts in billions)
You
Eeployee
Contributions
Bsployet
Contributions
Investment
Incoas L
Benefits
Feud
Balance 1/
1984
4.1
22.1
7.2
24.6
112.0
1985
3.7
23.3
7.7
27.0
119.7
1986
4.1
ZS.O
8.1
29.5
127.5
1987?
4.0
26.3
8.5
32.0
134.4
1988
3.9
27.5
8.9
34.3
140.4
1989
3.8
28.5
9.1
36.5
145.2
1990
3.6
29.4
9.3
38.7
148.8
1991
3.4
30.4
9.4
40.9
151.1
1995
2.2
34.4
8.9
50.1
143.3
2000
1.4
41.1
6.5
62.7
94.1
200S
1.2
49.7
0.9
78.1
(10.7)
2010
0.0
58.9
(9.0)
94.1
(193.4)
2015
0.0
70.7
(23.7)
104.6
(453.2)
2020
0.0
83.1
(41.8)
105.9
(761.3)
2025
0.0
95.1
(61.3)
99.4
(1,087.1)
2030
0.0
105.8
(80.4)
86.1
(1,400.8)
2035
0.0
114.6
(97.4)
67.3
(1,673.4)
2040
0.0
120.7
(110.6)
44.4
(1,878.1)
2045
0.0
124.4
(119.3)
25.0
(2,007.6)
2050
0.0
126.1
(123.9)
10.7
(2,073.9)
SOURCE: These projections wets developed by Edwin C. Hustead, ESA, fon+ex
Chief Actuary of the Civil Service Reti:enent Systeu; be is now
Ditectot, Actuarial Consulting Services, Hay Associates.
Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
CSRS Income, Benefits and Fund Balances: Closed System
for Current Workers Under Financing Proposed in
Stevens' Legislative Proposal for Selected Years
(dollar amounts in billions)
Employee Employer Investment Fund
Year Contributions Contributions Income ?_enefits Balance
1983
4.0
Z9.6
6.7
zrr --- Tn7-.3
1984
4.1
31.2
7.9
24.6 130.8
1985
3.7
31.5
9.0
27.0 148.1
1986
4.1
34.2
10.1
29.5 166.9
1987
4.0
35.5
11.2
32.0 185.7
1988
3.9
36.7
12.3
34.3 204.3
1989
3.8
37.7
13.3
36.5 222.S
1990
3.6
38.5
14.2
38.7 240.2
1991
3.4
39.1
15.1
40.9 257.0
1995
2.2
41.7
18.0
50.1 311.6
2000
1.4
49.5
21.3
62.7 363.7
2005
1.2
62.5
24.1
78.1 411.2
2010
0.0
76.2
26.9
94.1 456.8
2015
0.0
99.S
31.4
104.6 549.7
2020
0.0
130.1
43.8
105.9 798.5
2025
0.0
0.0
53.1
99.4 838.0
2030
0.0
0.0
39.0
86.1 603.3
2035
0.0
0.0
25.4
67.3 381.9
2040
0.0
0.0
14.1
44.4 204.7
2045
0.0
0.0
6.2
25.0 85.4
2050
0.0
0.0
1.7
10.7 19.0
SOURCE: These projections were developed by Edwin C. Hustead, FSA, Former
Chief Actuary of the Civil Service Retirement System; he is now
Director, Actuarial Consulting Services, Hay Associates.
Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
88
Employez Contzibuti6ns to CSRS Undex Quzent legislation
and Stevens' Proposal: Closed System fox Current
Workers fox Selected Yeats
(dollax amounts in billions)
YOU
Cuzzent Financing
Contributions
Stevens' Proposal
Financing Contributions
Increased Punding
Requirements 1/
1983
*20.5
$29.6
49.1
1984
22.1
31.2
9.1
1985
23.3
31.5
8.2
1986
25.0
34.2
9.2
1987
26.3
35.5
9.2
1988
27.5
36.7
9.2
1989
28.5
37.7
9.2
1990
29.4
38.5
9.1
1991
30.4
39.1
8.7
1995
34.4
41.7
7.3
2000
41.1
45.9
8.4
2005
49.7
62.5
12.8
2010
58.9
76.2
17.3
2015
70.7
99.5
28.8
2020
83.1
130.1
47.0
2025
95.1
0.0
(95.1)
2030
105.8
0.0
(105.8)
2035
114.6
0.0
(114.6)
2040
120.7
0.0
(120.7)
2045
124.4
0.0
(124.4)
2050
126.1
0.0
(126.1)
SOURCE: These projections weze developed by Edwin C. Hustead, FSA, formex
Chief Actuazy of the Civil Sezvice Retizement System; he is now
Dizectoz, Actuazial Consulting Services, Hay Associates.
Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
VIL BUDGETARY FLOW CHARTS
The impact on the federal budget as a result of our legislation is
extremely complex. Sylvester Schieber of the Employee Benefit Re-
search Institute in concert with the Senate Special Committee on
Aging has diagrammed the budgetary impact of our legislation vis-
a-vis the continuation of the current system. They chose four years
to portray the various impacts on the budget, i.e. 1990, 2000, 2025,
and 2050. The numbers are in billions of dollars. Beginning in the
year 2000 and following, three diagrams are provided. The first
shows the budgetary impact of maintaining the Current System,
assuming no changes. The second portrays the impact of our legis-
lation if all monies were retained in the federal treasury. It is enti-
tled the Modified System-Internal Funding. The third diagram,
entitled the Modified System-External and Internal Funding-
portrays the budgetary impact of our legislation as currently
drafted.
Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
CSRS
TRUST
FUND
GENERAL
FUND
Mployor
3ontribution: $ 31.7
BUDGET EFFECT: Revenues: S 7.o
Outlays: 39.3
Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
MODIFIED SYSTEM -
INTERNAL FUNDING: 1990
CLOSED
CSRS
TRUST
FUND
EW CIVIL
ERVICE
ENSION
FUND
AND THRIFT
PLAN
FUND
SOCIAL
SECURITY
TRUST
FUNDS
BUDGET EFFECT: Revenues: $ 8.7
Outlays: 40.4
Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
CSRS
TRUST
FUND
GENERAL
FUND
Toyer
tribution: $ 56.8
BUDGET EFFECT: Revenues: $ 12.1
Outlays: 66.5
Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066ROO0100120002-9
MODIFIED SYSTEM -
INTERNAL FUNDING: 2000
CLOSED
CSRS
TRUST
FUND
CIVIL
ERVICE
)ENSIGN
UND
N
AND HRIFT
PLAN
FUND
9.1 Interes
SOCIAL
SECURITY
TRUST
FUNDS
GENERAL
FUND
BUDGET EFFECT: Revenues: $ 17,0
Outlays: 71.6
Approved For Release 2010/03/01: CIA-RDP89-00066ROO0100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066ROO0100120002-9
94
Approved For Release 2010/03/01: CIA-RDP89-00066ROO0100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
d
ti Y
o W .o
O N N
f m -
Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
96
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Zw
ca 0: 1
u I. ph
0
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4
Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
V-i
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wwwo
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Approved For Release 2010/03/01 : CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
98
Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
mI of
m r co
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4 N W 1
zZ
pnc z
Xi izaw
Approved For Release 2010/03/01: CIA-RDP89-00066R000100120002-9
 Approved For Release 2010/03/01: CIA-RDP89-00066ROO0100120002-9
100
wz
zo
ww
V > y 0 z
Is CZZ
WgWV
zv3 06N
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VI ~
Approved For Release 2010/03/01: CIA-RDP89-00066ROO0100120002-9