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CIVIL SERVICE PENSION REFORM ACT OF 1985 HEARING BEFORE THE COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE

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February 26, 2010
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Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 SIGINIVIDER SE'NVII REFORM ~~NTAL :TAT: 3627 PEEL OFF LABEL AND REUSE ENVELOPE Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 CIVIL SERVICE PENSION REFORM ACT OF 1985 HEARING COMMITTEE ON GOVERNMENTAL AFFAIRS TJNITED STATES SENATE NINETY-NINTH CONGRESS S. 1527 TO AMEND TITLE 5, UNITED STATES CODE, TO ESTABLISH A NEW RE- TIREMENT AND DISABILITY PLAN FOR FEDERAL EMPLOYEES, POSTAL EMPLOYEES, AND MEMBERS OF CONGRESS, AND FOR OTHER PUR- POSES For sale by the Superintendent of Documents, Congressional Sales Office U.S. Government Printing Office, Washington, DC 20402 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 COMMITTEE ON GOVERNMENTAL AFFAIRS WILLIAM V. ROTH, JR., Delaware, Chairman TED STEVENS, Alaska THOMAS F. EAGLETON, Missouri CHARLES McC. MATHIAS, JR., Maryland LAWTON CHILES, Florida WILLIAM S. COHEN, Maine SAM NUNN, Georgia DAVE DURENBERGER, Minnesota JOHN GLENN, Ohio WARREN B. RUDMAN, New Hampshire CARL LEVIN, Michigan THAD COCHRAN, Mississippi ALBERT GORE, JR., Tennessee JOHN M. DUNCAN, Staff Director MARGARET P. CRENSHAW, Minority Staff Director TERRY JOLLY, Chief Clerk Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 CONTENTS Opening statements: Page Senator Roth ............................................................................................................. 1 Senator Stevens ........................................................................................................ 3 Senator Gore ............................................................................................................. 33 Senator Glenn ........................................................................................................... 39 Senator Eagleton ...................................................................................................... 86 MONDAY, SEPTEMBER 9, 1985 Constance J. Horner, Director, Office of Personnel Management, accompanied by James W. Morrison, Jr., Associate Director for Compensation ..................... 3 David A. Charters, Assistant Postmaster General, Emplo ee Relations De- partment, U.S. Postal Service, accompanied by Thomas S. McCall, General Manager, Compensation Services Division ............................................................. 21 Charles A. Bowsher, Comptroller General of the United States, General Ac- counting Office, accompanied by William J. Anderson, Director, General Government Division, and Robert E. Shelton, Deputy Associate Director, General Government Division ................................................................................... 25 Donald N. Ledbetter, president, National Association of Postal Supervisors, accompanied by Andrew E. Ruddock, consultant .................................................. 42 John N. Erlenborn, representing the U.S. Chamber of Commerce, accompa- nied by James A. Klein, Manager of Pension and Employee Benefits .............. 62 George S. Vest, Director General of the Foreign Service and Director of Personnel, Department of State, accompanied by Torrey Whitman and Robert Hull, policy coordination staff ...................................................................... 87 Jon S. Fossel, senior vice president and director, Alliance Capital Manage- ment Corp ...................................................................................................................... 108 Moe Biller, president, American Postal Workers Union (AFL-CIO), accompa- nied by Patrick Nilan, legislative director and Roy Braunstein, legislative aide; and Kenneth T. Blaylock, president, American Federation of Govern- ment Employees (AFL-CIO), accompanied by Virgil Miller, regional vice president and Arnie Anderson, economist .............................................................. 146 TUESDAY, SEPTEMBER 10, 1985 Vincent R. Sombrotto, president, National Association of Letter Carriers (AFL-CIO); and Tom W. Griffith, president, National Rural Letter Carriers' Association ..................................................................................................................... 223 Paul S. Hewitt, president and executive director, Americans for Generational Equity, accompanied by Phillip Longman, director of research ......................... 258 Michael E. Minahan, president, Federal Managers Association, accompanied by Bun Bray, Jr., executive director, and Catherine Ball, legislative counsel; G. Jerry Shaw, general counsel, Senior Executives Association, accompa- nied by Blair Childs, executive director, Dr. Richard Strombotne, chair, SEA task force; and Stephen Bauer, president, national council, Social Security Management Associations, Inc ................... ............. ............ 275 Bruce B. Henry, president and executive director, National Association of Air Traffic Specialists, accompanied by Edward L. Huie, director of legislative affairs; and Lt. Gen. La Vern E. Weber (Ret.), executive director, National Guard Association of the United States .................................................................. 316 Arthur S. Flemming, cochair, Save Our Security Coalition .................................... 360 Marie Argana, national president, Federally Employed Women, accompanied by Chris deVries, legislative director ....................................................................... 364 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Helene A. Benson, secretary of the board, chair, Retirement Committee, Professional Managers Association, accompanied by Donald E. Gillis, chair- man of the board, Professional Managers Association ......................................... 384 Al Fowler, Postmaster, Columbia, MD, National Association of Postmasters of the United States, accompanied by Thomas R. Roth, consultant to NAPUS.. 409 James M. Peirce, president, National Federation of Federal Employees, ac- companied by Patricia Thomas, legislative director, NFFE; Robert M. Tobias, national president, National Treasury Employees Union; and Edward L. Murphy, legislative counsel, National Association of Government Employees ...................................................................................................................... 430 WEDNESDAY, SEPTEMBER 11, 1985 L.J. "Lud" Andolsek, president, National Association of Retired Federal Workers, accompanied by Tom Trabucco, associate legislative director, and James R. Storey, consultant ....................................................................................... 483 Dennis A. Tito, president, Wilshire Associates, Santa Monica, CA ....................... 505 J. Warren Gardner, Jr., treasurer, American Foreign Service Association, accompanied by Susan Z. Holik, general counsel, and Robert M. Beers, congressional liaison officer ....................................................................................... 510 Stanford G. Ross, Arnold & Porter ............................................................................... 519 John W. Macy, Jr., and Hastings Keith, cochairman, National Committee on Public Employee Pension Systems, accompanied by William O'Reilly, treas- urer, PEPS ..................................................................................................................... 541 ALPHABETICAL LIST OF WITNESSES Anderson, Arnie: Testimony .......................................................................................... Anderson, William J.: Testimony ................................................................................. Andolsek, L.J. "Lud": Testimony .................................................................................................................. Prepared statement ................................................................................................. Argana, Marie: Testimony .................................................................................................................. Prepared statement ................................................................................................. Ball, Catherine: Testimony ............................................................................................ Bauer, Stephen: Testimony .................................................................................................................. Prepared statement .................................................................................................. Beers, Robert M.: Testimony .......................................................................................... Benson, Helene A.: Testimony .................................................................................................................. Prepared statement ................................................................................................. Biller, Moe: Testimony .................................................................................................................. Prepared statement with an attachment ............................................................ Blaylock, Kenneth T.: Testimony .................................................................................................................. Prepared statement ................................................................................................. Bowsher, Charles A.: Testimony ................................................................................... Braunstein, Roy: Testimony ........................................................................................... Bray, Bun B., Jr.: Testimony ......................................................................................... Charters, David H.: Testimony ...................................................................................... Childs, Blair: Testimony ................................................................................................. deVries, Chris: Testimony .............................................................................................. Erlenborn, John N.: Testimony .................................................................................................................. Prepared statement ................................................................................................. Flemming, Arthur S.: Testimony .................................................................................. Testimony .................................................................................................................. Prepared statement ................................................................................................. Fowler, Al: Testimony .................................................................................................................. Prepared statement ................................................................................................. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066ROO0100150001-7 Gardner, J. Warren, Jr.: Testimony .................................................................................................................. Prepared statement ................................................................................................. Gillis, Donald E.: Testimony .......................................................................................... Griffith, Tom W.: Testimony .................................................................................................................. Prepared statement ................................................................................................. Henry, Bruce B.: Testimony .................................................................................................................. Prepared statement ................................................................................................. Hewitt, Paul S.: ................................................................................................................ Testimony .................................................................................................................. Prepared statement ................................................................................................. Holik, Susan Z.: Testimony ............................................................................................ Horner, Constance J.: Testimony .................................................................................................................. Prepared statement ................................................................................................. Huie, Edward L.: Testimony ............................................................ .............................. Hull, Robert: Testimony ................................................................................................. Keith, Hastings: Testimony .................................................................................................................. Prepared statement ................................................................................................. Klein, James A.: Testimony ........................................................................................... Ledbetter, Donald N.: Testimony .................................................................:................................................ Prepared statement ................................................................................................. Longman, Phillip: Testimony ........................................................................................ Macy, John W., Jr.: Testimony .................................................................................................................. Prepared statement ................................................................................................. McCall, Thomas S.: Testimony ...................................................................................... Miller, Virgil: Testimony ................................................................................................ Minahan, Michael E.: Testimony .................................................................................................................. Prepared statement ................................................................................................. Morrison, James W., Jr.: Testimony ............................................................................ Murphy, Edward L.: Testimony .................................................................................................................. Prepared statement ................................................................................................. Nilan, Patrick: Testimony .............................................................................................. Peirce, James M.: Testimony .................................................................................................................. Prepared statement ................................................................................................. O'Reilly, William: Testimony ......................................................................................... Ross, Stanford G.: Testimony .................................................................................................................. Prepared statement ................................................................................................. Roth, Thomas R.: Testimony .......................................................................................... Ruddock, Andrew E.: Testimony ................................................................................... Shaw, G. Jerry: Testimony .................................................................................................................. Prepared statement ................................................................................................. Shelton, Robert E.: Testimony ....................................................................................... Sombrotto, Vincent R.: Testimony .................................................................................................................. Prepared statement ................................................................................................. Storey, James R.: Testimony .......................................................................................... Strombotne, Richard: Testimony .................................................................................. Thomas, Patricia: Testimony ......................................................................................... Tito, Dennis A.: Testimony ............................................................................................ Tobias, Robert M.: Testimony .................................................................................................................. Prepared statement ................................................................................................. Trabucco, Tom: Testimony ............................................................................................. Vest, George S.: Testimony .................................................................................................................. Prepared statement ................................................................................................. Responses to written questions from Senator Eagleton .................................... Page 510 515 384 223 250 316 326 258 264 510 3 15 316 87 541 563 62 42 49 258 541 563 21 146 275 292 3 430 467 146 430 447 541 519 524 409 42 275 299 25 223 236 483 275 430 505 430 457 483 87 95 102 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066ROO0100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Weber, Lt. Gen. La Vern (Ret.): Testimony .................................................................................................................. 316 Prepared statement ................................................................................................. 355 Whitman, Torrey: Testimony ........................................................................................ 87 ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD Letter to Jamie Cowen, special counsel, Subcommittee on General Services, Post Office, and General Services, from James M. McGrath, director, Group Pension Research, the Prudential Asset Management Co. Inc., August 2, 1984 ................................................................................................................................. 175 Text of S. 1527 .................................................................................................................. 579 Comparison of S. 1527 and current Civil Service Retirement System ................... 706 Congressional Research Service analysis of the Stevens-Roth plan for a retire- ment system for Federal workers covered by Social Security ............................. 711 Background of S. 1527 ..................................................................................................... 755 Statement of Hon. Rod Chandler, Representative in Congress from the State of Washington .............................................................................................................. 774 Letter to Senator Roth, chairman, Governmental Affairs Committee, from William J. Casey, Director, Central Intelligence Agency, dated September 6, 1985 ................................................................................................................................. 790 Statement of Donald S. Grubb, Jr., Buck Consultants, Inc ..................................... 791 Letter to Senator Roth, chairman, Governmental Affairs Committee, from Kenneth K. Keene, senior vice president, Johnson & Higgins, dated Septem- ber 18, 1985 .................................................................................................................... 824 Statement of Kwasha Lipton, an independent employee benefit consulting firm ................................................................................................................................. 828 Responses to written questions from Nick Smith, second vice president and LTD actuary, Union Mutual Life Insurance Co., submitted by Dick Schreit- mueller, actuary, Senate Committee on Governmental Affairs ......................... 842 Statement of J. Peter Grace, chairman, President's Private Sector Survey on Cost Control ................................................................................................................... 854 Statement of R. Fain Hambright, president, National League of Postmasters... 868 Statement of Richard H. Hammond, Bismarck, ND ................................................. 883 Letter to John Duncan, staff director, Senator Committee on Governmental Affairs, from Ray Kline, president, National Academy of Public Adminis- tration, dated September 17, 1985 ............................................................................. 884 Statement of Herman B. Leonard, associate professor of public policy, John F. Kennedy School of Government, Harvard University .......................................... 886 Letter to Senator Stevens from John Thornton, Sterling, VA, with attach- ments, dated September 13, 1985 .............................................................................. 895 Statement of American Academy of Actuaries .......................................................... 897 Statement of American Association of Retired Persons ........................................... 900 Statement of American Society for Public Administration ..................................... 912 Statement of Enlisted Association of the National Guard of the United States. 913 Statement of Federal Executive and Professional Association ............................... 919 Statement of Federal Law Enforcement Officers Association, Thomas Doyle, executive vice president ........................ ........ ................................ 930 Statement of Fund for Assuring an Independent Retirement (FAIR) ................... 942 Statement of Public Employee Department (AFL-CIO) ........................................... 966 Statement of William G. Meeker .................................................................................. 971 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 CIVIL SERVICE PENSION REFORM ACT OF 1985 MONDAY, SEPTEMBER 9, 1985 U.S. SENATE, COMMITTEE ON GOVERNMENTAL AFFAIRS, Washington, DC. The committee met at 10 a.m., in room SD-106, Dirksen Senate Office Building, Hon. Ted Stevens presiding. Present: Senators Stevens, Eagleton, Glenn, and Gore. Senator STEVENS. Good morning. Before we proceed any further I would like to place Chairman Roth's opening statement in the record at this point. [Opening statement of Chairman Roth follows:] OPENING STATEMENT OF CHAIRMAN ROTH As the Committee on Governmental Affairs begins hearings on S. 1527, the new supplemental retirement plan for Federal workers, I would like to remind my col- leagues of the important task that we have before us and urge that we move quickly in our deliberations. This new retirement plan sponsored by Senator Stevens and myself is one of the major pieces of legislation that the 99th Congress will enact, and the system we en- vision may become a model for other pension systems, that provide supplemental benefits to Social Security. This bill is necessary because the Congress required that all Federal employees hired after December 1983 and all Members of Congress participate in the Social Security program. This decision makes it necessary that a new retirement plan be developed that will fit with social security. S. 1527 is the result of many months of research, and discussions by several mem- bers of the Governmental Affairs Committee and the administration in attempts to develop a bipartisan proposal for the new system. While we have not been able to achieve the goal of a bipartisan proposal, the legislation provides a solid retirement plan to supplement Social Security. It is important that we proceed quickly with its enactment. Time is running out. At the end of this year, the interim plan for work- ers hired since January 1984 will expire. If Congress fails to act, these people and the Government will be required to pay for both Social Security and the costs of the current retirement system. Costs to the employee would be staggering. Excessive costs-some 14 percent of a paycheck would go to retirement-resulting in overlap- ping and duplicative coverage. That is why Senator Stevens and I feel it is our responsibility to move this legisla- tion now. It is our good faith effort to keep our commitment to those workers, who are paying into Social Security under the 1983 act, and also contributing 1.3 percent of salary to the pension fund. Even if the Social Security Amendments of 1983 had not mandated a new retire- ment system for workers hired after December 1983, I believe it would be time for Congress to design a modern pension system for Federal employees. Why should the civil servant be locked into an archaic retirement plan while his counterpart in the private sector or State government participates in plans that provide both retire- ment security and career flexibility? The Federal worker competes in the job market with the rest of the labor force. It is unfair to have his or her career oppor- tunities limited by the conditions of the current pension system. We are all aware of the shortcomings of the present retirement system. It favors the older career employee over the younger one, it makes mobility between the Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066ROO0100150001-7 public and private sector difficult, it is poorly financed and it is too expensive. Our legislation eliminates the shortcomings of the current system, provides a sound basic benefit package similar to the private sector and allows employees to direct their income where it best suits their needs. Let me say at the very beginning that this plan, because it deals with people who will retire many years from now, does not reduce the deficit. Certainly costs were a major factor in our work. We did not, however, contain costs by simply looking at the old plan, taking out the expensive parts and then deciding that whatever was left should be the new retirement system. This plan reflects the best of current practice. It has a long-range cost, expressed as a percentage of payroll, of 20.8 per- cent, which is about the same as a private pension plan for a large private organiza- tion. Our thrift plan contains features that will put Federal employees' benefits on an equal basis with the best private pension plans. In fact, we think our new system will be so attractive to Federal workers that we have included a transfer provision allowing individuals in the current system to enter the new plan. Our new program is composed of three basic parts. The first is Social Security which workers will continue to pay into according to the payroll deduction sched- ules set out in the law. Supplementing the basic Social Security benefit is the Second tier of our plan, a defined benefit pension very similar in structure to the present retirement system. Employees, however, make no contributions to this plan. The full cost of the plan is borne by the employer as is done in private industry. Employees vest for a benefit after 5 years of service and are eligible to retire with unreduced benefits at age 62, the same age as Social Security and the typical age for private industry. This benefit is adjusted for inflation using an annual cost-of-living adjustment (COLA) based on the Consumer Price Index increase minus 2 percentage points. While this differs from the current plan, we must remember that most private pen- sions do not grant regular COLA's. By combining this partial automatic adjustment with the full COLA of Social Security and the investment opportunities under the thrift plan, the legislation provides inflation protection necessary to protect an em- ployee s- post-retirement standard of living. The early retirement provisions break important new ground by permitting em- ployees much wider choice about when they can retire with reduced benefits in a way that adds nothing to the long-range cost of the program, just as is done in pri- vate industry. We expect this feature to be especially popular with two-worker cou- ples who wish to coordinate their plans as to retirement and possible career changes. Disability benefits are coordinated with Social Security in our plan to provide income for the temporarily, as well as the long-termed disabled. Regardless of the type of impairment, entitlement for disability benefits begins after 18 months of service. Our objective here is to pay more adequate benefits to those who are truly disabled, and to encourge those able to return to work to do so. The plan's survivors benefits are patterned after the private sector-a combina- tion of Social Security, pension plan survivor benefits, thrift plan benefits and group life. However, here again we have borrowed on a better idea from private employ- ers. Most employee benefit experts would argue that life insurance best protects young families. So, using the current Federal Employees Group Life Insurance, the Federal Government will now pay for all the basic coverage, while also giving em- ployees the option to buy additional amounts. The third and most innovative tier of our plan is the one I think will prove the most appealing to the Federal work force. This is our thrift plan, a concept that lets the worker take an active part in investing his money and tailoring his pension funds. The funds set aside may be used for survivor and disability purposes as well as retirement. Of course, this will mean greater responsibility and increased atten- tion to changing investment patterns on the part of the worker. But private and State employees have managed these investments successfully for years, and we are aware of similar thrift options in the Federal Reserve Board pension system. Our savings plan places the Federal retirement plan at the forefront of pension investment. Through the thrift plan, we intend to offer the employee a tax deferred savings plan in which the participant can yearly set aside up to 10 percent of his pay, with the first 5 percent matched by the Government and invested among a gov- ernment bond fund, a fixed income fund or an equity fund. This triad approach to investment strategy offers workers the opportunity to choose the amount of risk and prospective return appropriate for them. What is im- portant is that this is the employee's choice. If, for financial or other reasons, the employee does not like the investments in one option, he or she may choose another. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066ROO0100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 This plan is fair and, except for a few technical occupations, it covers everyone the same including Congress and its employees. It is also solidly financed, with the money for benefits being set aside up front. Before closing my remarks, I would like to acknowledge the excellent work and leadership of Senator Stevens, Chairman of the Civil Service, Post Office, and Gen- eral Services Subcommittee, in bringing this proposal together. This legislation is a sophisticated proposal that represents many months of diligent and hard work. In addition, the administration supports the structure and basic p-ovisions of this bill. I am looking forward to their testimony along with the expert views of the wit- nesses that we will be hearing from in the coming days. It is my hope that after our examination, S. 1527 will have the support of all the Members so that we may pro- ceed quickly to mark-up and passage of the bill before our December deadline. It is our responsibility not to let the new year begin without a pension plan for those who dedicate their careers to public service. OPENING STATEMENT OF SENATOR STEVENS Senator STEVENS. Today we begin hearings on S. 1527, which is a bill establishing a new retirement program for the Federal Govern- ment. This bill as everyone knows, is the product of 4 years of work. Some of us foresaw the inevitability of Social Security coverage for Federal employees before it actually happened and though we really opposed that, we wanted to be ready with a plan if it oc- curred. That is water under the bridge now. Social Security cover- age of the new Federal work force forces us to redesign the retire- ment program of the Government to coordinate the Federal pen- sion with the intricacies of the Social Security Program. There is a time crunch now, whether we like it or not. Just prior to the date of the Social Security coverage of Federal employees, Congress enacted a 2-year interim retirement program to avoid having employees pay approximately 14 percent of salary and con- tributing to both Social Security and civil service retirement, and to afford us time to design a new retirement plan for the new em- ployees. The 2-year program expires at the end of this year. I do not feel it will be renewed. We are going to try and move this legislation out of the committee as quickly as possible. The bill before us es- tablishes a three-tier retirement plan, utilizing existing Social Se- curity as the base, with a defined benefit plan as the second tier and a tax deferred thrift plan serving as the final tier. We have scheduled 21/2 days of hearings-today, tomorrow, and Wednesday morning. Tuesday's and Wednesday's hearings will be in room 342 in this building. Our first witness today is the Director of the Office of Personnel Management, Hon. Constance J. Horner. TESTIMONY OF CONSTANCE J. HORNER, DIRECTOR, OFFICE OF PERSONNEL MANAGEMENT, ACCOMPANIED BY JAMES W. MOR- RISON, JR., ASSOCIATE DIRECTOR FOR COMPENSATION, OPM Mrs. HORNER. Good morning. Mr. Chairman, I want to thank you for the opportunity to appear today to present the administration's views on S. 1527. I am accom- panied by Mr. James Morrison, OPM's Associate Director for Com- pensation. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. Chairman, I would like to preface my prepared testimony, which in the interest of time I will summarize, with some remarks on retirement objectives, if I may. Very brief remarks. We face a momentous task here, to build a retirement system to take this Government and our employees into the next century. I can think of no better starting point than remarks by the Presi- dent recently on tax reform. The President said, "Our fair share tax plan bears within the promise of more justice, more equity." I believe that S. 1527 fits that bill, it brings more opportunity, more diversity to our work force. The President said that any tax reform package should keep our economy humming. Indeed, any Federal retirement system should keep our civil service humming, and most importantly, the Presi- dent said of tax reform, "We are not Republicans and Democrats on this, we're Americans and we have got something to do for America." I approach this task, as I know you do, with that sense of non- partisanship. The principal issue before us is neither the design nor cost of a new system but what kind of work force we want in the year 2030. My view is that we would be fortunate to have as fine a work force in the year 2030 as we do in 1985, but in order to do so, we need to recognize change. Our society is not only getting older, but more diverse, more mobile, and more financially literate. Our retirement plan should recognize these demographic facts of the future. Mr. Chairman, I would also like to compliment you and Senator Roth on the extraordinary, meticulous research, exhaustive consul- tation, and intellectual creativeness which went into the writing of this bill. Such an effort is reflective of the importance we all attach to it. The result is a bill which the administration can be very com- fortable with. With a few, primarily technical changes, we expect to support it. In the administration's view, the introduction of S. 1527 repre- sents the most important and most positive step forward to date in the discussions of an appropriate new retirement system for those Federal employees who are covered by Social Security. Those of us who have gotten into this issue at all are very much aware of how complicated it is and S. 1527 does a very impressive job of address- ing the myriad issues and concerns involved here. The civil service pension system that would be established by this plan would be very similar to the better pension plans in the private sector and would meet the administration's objective of pro- viding an appropriate level of retirement benefits for Federal em- ployees at a reasonable cost. This new system would be carefully balanced to meet the needs of full career Federal employees for a secure and adequate retirement income, yet would also provide fair treatment for employees who remain with the Government for only a portion of their working lives. We believe that a defined contribution element giving each em- ployee the opportunity to make provision for his or her own retire- ment is one of the most attractive features of this new system. The bill has been carefully crafted to address the special person- nel management and fiscal management needs of the Government, Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 yet brings to the Government the best practices of the private sector. A particularly good example of this is the long-term disabil- ity provision in the bill, where the benefit structure and careful meshing of the disability benefit with Social Security and with the rest of the pension plan will allow us to provide sound and ade- quate income protection for our disabled workers in a manner much more akin to the way other employers handle this sensitive issue. We do have a few reservations about various aspects of the bill. I would like to address them very briefly. One problem that we have to face in designing a government re- tirement system is the appropriate treatment for special categories of employees where a young and vigorous work force is needed, such as law enforcement officers, firefighters, and air traffic con- trollers. We believe certain important features of the current system meet these needs, and the bill needs to preserve these fea- tures by making retirement financially feasible at the current age and service requirements, by continuing mandatory retirement, and by continuing necessary coverage of supervisory and adminis- trative positions. Another provision that causes some concern is the requirement in the bill that the Department of Defense military retirement fund be liable for the cost of crediting military service under the civil service pension system. We think it would be administratively simpler to continue the current system of Treasury transfer pay- ments to fund the cost of crediting military service as the benefits are paid. We have strong reservations about the provision in the bill per- mitting crediting unused sick leave as service under the basic plan. Both the President's budget and the Grace Commission have called for eliminating this benefit from the current retirement system and we would hope that we can do so since this relatively minor benefit is quite costly and we believe this money could be used better to close some narrow and technical but serious gaps in the bill's disability and survivor protection. S. 1527's provisions permitting the transfer of employees from the current retirement system to Social Security and the new civil service pension system appear on the whole to be reasonable and workable. But we are concerned about completely waiving the offset for employees who transfer. The windfall offset provisions of the Social Security Act were designed to reduce Social Security benefits that would otherwise be payable to those who spent a sub- stantial portion of their working careers in employment that was sheltered from Social Security taxation, as Federal employment has been. By completely waiving the offset for employees who transfer, many long-service Federal employees who also qualify for Social Security benefits on the basis of minimal Social Security-cov- ered employment could experience a substantial windfall, receiving much greater total benefits as a result of transferring to the new system than they could receive if they stayed under the current system. We believe the windfall offset must be retained, at least to some degree, for these people. Finally, I would like to turn briefly to one of S. 1527's most inter- esting features, its thrift savings plan. This plan is very similar to, Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 though not quite identical with, a 401(k) plan. As you know, the President's Tax Reform proposals, as recently amended, call for eliminating 401(k) plans. While we, therefore, object to including this 401(k) plan in S. 1527, we remain very much committed to the objective the thrift savings plan was trying to meet; namely, to en- courage and assist employees to save for their own retirement in order to supplement their Social Security and basic plan benefits. We are examining alternatives and we hope to be able to propose to the committee shortly an approach that will both satisfy the im- portant objectives of S. 1527's thrift savings plan and be consistent with the President's tax reform proposals. Mr. Chairman, S. 1527 goes a long way toward meeting the needs of both the Federal work force of the future and the American tax- payer for a system that is cost conscious, that promotes the reten- tion of seasoned employees, and that allows Federal employees se- curity, mobility, and a major role in planning their own retire- ments. I thank you for the opportunity to present these views and I am available for any questions you or other members may have. Senator STEVENS. Thank you very much. I am pleased that we were able to make certain your appoint- ment was confirmed before the recess so that you were able to study this issue and be with us here today. It is a significant contri- bution. With regard to the decision of the administration on the 401(k), we had discussed that, and we look forward to your review. I am of the opinion that this is one portion of the President's tax reform proposal which is not going to meet with overwhelming support here on the Hill. Could you tell me, in and discussions that you have had with the administration, did they indicate any willingness to accept the con- cept of deferred compensation as an incentive to increase savings? Mrs. HORNER. Well, Senator, in our initial discussions within the administration, our view was that, whatever the administration's tax plan ultimately contained, and whatever plan ultimately passed, the retirement plan ought to be in conformity with it. Since that time, in order to generate an additional $11.1 billion in reve- nues over 5 years, we have had to look to the 401(k) plans. We are very committed to the notion of a thrift plan. There are some ideas we are looking at that would involve deferral of taxation on the earnings of employees' investments. This would involve section 401(a) of the Tax Code. But at this time, I must say the administra- tion is not accepting the concept of tax deferral for the basic invest- ment. Senator STEVENS. The difficulty that we were trying to avoid by virtue of the third tier was the ever-escalating demand for COLA payments in periods of high inflation. That third tier being invest- ed in the private sector under our plan would have given the em- ployees protection against the violent swings of the economy and, therefore, would have represented an advance payment of really an insurance policy against the escalation of COLA's in a period of high inflation, as I indicated. Are you looking at a similar solution for that problem? Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mrs. HORNER. Yes, Senator, we are. We haven't evaluated what degree of contribution the tax deferral on the employee contribu- tion actually makes to the total financial outcome for that employ- ee or for the system as a whole, but we are looking at a plan which would allow employee ownership which would allow tax deferral of earnings on contributions, and which would allow the employer match. I think that these provisions are the major provisions neces- sary, more important, perhaps, than tax deferral on the contribu- tions. Senator STEVENS. We expect testimony here today and tomorrow indicating that many people would rather have us not have the em- ployer contribution to the thrift plan and instead increase the con- tribution to the pension plan and increase other benefits for the employee now. If that occurred, then we would have COLA's apply- ing to the Social Security and COLA's applying to a larger pension plan and not have a third tier. Mrs. HORNER. We would oppose that most strenuously, and en- tirely support the design of your plan. We think that the COLA in- corporated in your plan is entirely appropriate and that it would be inappropriate to attempt to increase that COLA at the expense of the thrift plan. We would look forward to working with you to ensure that does not happen. Senator STEVENS. I look forward to the results of your review. I hope you have a better crystal ball and series of computers than we have. The thrift plan was the best that we could find that would meet the objectives but, of course, it was tied directly to the 401(k). I presume as the employer, the Federal Government would create something which would reach the objectives of the 401(k), even if the 401(k) were removed. Mrs. HORNER. That's our intention, Senator. Senator STEVENS. You stated that the pension system established by this bill would compare favorably to better private sector plans. Have your people worked out what is the average cost of the pri- vate sector plans that you compared this to? Mrs. HORNER. Yes, Mr. Chairman, we have, and if I may, I would like to have Mr. Morrison respond to that more fully, if you want a fuller response. Senator STEVENS. We are happy to have Mr. Morrison with us again. Mr. MORRISON. Mr. Chairman, on the average we find that the cost of private sector plan is about 17 percent and some of the better and richer plans are at 20 percent. So your proposal is clear- ly in that range and compares most favorably with even the better ones. Senator STEVENS. Has the administration determined yet its posi- tion on the aspect of the bill that deals with private investment? Mrs. HORNER. Senator, we support private investment unequivo- cally. We are still looking at the mechanics of the thrift investment board. We believe that the mechanics, as embodied in your bill, will achieve the goal of professionalism and investment detach- ment from political or other influence and a good rate of return for the Federal employee, thereby lessening the necessity of reliance on the defined benefit aspect of the plan. It is our view at this Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 point that your bill does meet those needs very well but we are still studying it. It is tricky and requires further attention. Senator STEVENS. Thank you. You oppose transferring money from the military retirement fund to the civil service fund for those who probably will never re- ceive a military pension. You want to have the Treasury subsidize the cost of crediting military service. I am one of those people who served for a period of time in the military and will use the service toward my civil service benefit. Why would we do it the way you want to do it when we can use the military service toward civil service retirement at no cost to the employee? Mrs. HORNER. Senator, for two reasons. First, is that many of those whose service is being credited would never have received military pensions, and second, because it is administratively much simpler to credit that service at the time of civilian employment retirement than to try to determine a lump sum for transfer at the time of entry into the civilian work force at the appropriate normal cost. It is just much simpler administratively and we think defensible theoretically to have the Treasury make the payments. Senator STEVENS. It creates an automatic unfunded liability for the new system. It is one of the substantial problems of the old system; namely, the tremendous number of people in this country who have military service who will never become eligible for a military retirement payment who automatically become eligible for increased civilian pension payments under the system that you mentioned. Our concept would be that at the time they become creditable, the military system would pay into the civilian system. You want it to be paid on an annual basis as to when it is needed, is that correct? Mrs. HORNER. That's correct, Mr. Chairman. Senator STEVENS. I hope you run some computers on that. With the number of people who have served in the military in this coun- try from World War II, Korea, and Vietnam, in particular, who are eligible for that credit, it seems to me that is a horrendous unfund- ed liability for a new system to absorb. Mrs. HORNER. Mr. Chairman, as you mentioned in your opening remarks, I am relatively new to this issue, and I will ascertain for my own sense of confidence in the administration's point of view what that liability might be. Senator STEVENS. Let's just use my own experience as an exam- ple for you. I served in World War II for 3 years. Those 3 years of service were a few years ago, obviously, and I don't expect to make any demands on the civil service system for still a few more years. What it shows is the service that people put in at very young years, the very early years of their lives, and yet the liability for it car- ries over and is not paid by the Federal Government until retire- ment. Unless there is a contribution that is made at the time they become eligible for that transfer-in other words, at the time I became vested in the civil service retirement system, there should have been a payment. When I had 5 years and vested, they auto- matically credited the 3 years to my retirement account; there should have been a payment at that time. If the payment had been Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 made at the point I vested in the civil service system, that money would have had increased earnings all through the period and would not have hit the Treasury with the heavy impact that it will if those 3 years are credited when I retire. We are just creating a problem for future generations by the administrations proposal to postpone accepting the liability for crediting that service. The li- ability occurs when you credit it after vesting occurs; and to do it at the time of retirement means that the unfunded liability for future generations is massive, whereas it's a liability that we can really handle under the current circumstances despite our finan- cial difficulties. It would be much less expensive. I would urge you to restudy that because in my opinion, that would be a real criti- cism of the plan if the military credits are not funded at the time they become fixed under the new system. I think most of the people who advised us felt very strongly about this, particularly now that we are crediting that portion to just one-third of the plan-not to Social Security, not to the third tier, but to the pension portion of the plan-and that pension por- tion of the plan will have a serious unfunded liability if we follow your recommendations. My next question concerns sick leave credit. One of the reasons we permitted crediting of the annual sick leave under the basic plan was to encourage people not to take the sick leave. Your sug- gestion would, unfortunately, lead to a restoration of the old days when people just took their sick leave in order to burn it up. I see your friend shaking his head. Have you done some studies on that? Mrs. HORNER. Perhaps I should respond first and perhaps Mr. Morrison can add to that. Mr. Chairman, perhaps in the old days, although I wouldn't want to say this for sure, attention to rigorous supervision of employees was not so heightened as it is now. I think that abuse of sick leave is a supervisory problem and it seems to me, because we are talk- ing about abuse here by an employee, that it is the responsibility of the Federal managers to ensure that that abuse is caught, doesn't occur, is actively discouraged. The crediting of sick leave, I think, would cost $140 million a year under the new system. That is a consequential sum of money over time, or perhaps even in 1 year, from a certain perspective, and we think it is definitely worth a try to see if we can't save that amount of money and take care of the abuse problem, which you correctly identify, through supervisory improvements. Senator STEVENS. My memory is we did study it back at the time we changed the basic law, and we found that people felt it was a benefit to be used and they used it in a manner which was really additional annual leave rather than for sick leave. Mr. Morrison, you disagree. Wasn't there a study back-- Mr. MORRISON. I think the Senator is correct. There was a study. At that time we found the sick leave usage was about 8.5 days per employee. Now that we looked at it after it has been credited to the pension system, it is still 8.5 days. It has not been terribly effective in curtailing usage of sick leave. That is why we would recommend eliminating that credit and using the resources thus derived in a more productive way. It may be that we are crediting too many days of sick leave because of the unlimited carryover and we ought Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 to perhaps work out some way to have a better accident and sick- ness benefit. That is a serious gap in the current system and not fully addressed in the Roth-Stevens-- Senator STEVENS. Are you studying those people only eligible for retirement benefits-- Mrs. HORNER. We looked at total sick leave usage for the Govern- ment and it is still 8.5 as it was before. Senator STEVENS. I think that would probably be the case with the tremendous increase in the annual hires and the other people who are not becoming eligible for retirement benefits. I would like to see you study just those people eligible for retirement benefits and see how much sick leave they are using under the circum- stances. Mr. MORRISON. We will certainly try to look at that and see if there is any way we can make that kind of comparison. At the time the original study was done it was on the total work force and it was an effort to try to trim sick leave usage and these compari- sons are basically comparable. We just find that overall sick leave usage has not been terribly affected by the inclusion of the credit in the retirement system. [The information referred to follows:] In 1969, sick leave usage per Federal employee was an average of 8.5 days. The sick leave credit for retirement took effect for retirements occurring on or after Oc- tober 20, 1969. In 1970, sick leave usage per Federal employee went up slightly to an average of 8.7 days, and then increased to an average of 9.6 days in 1971. After reaching a peak of 9.8 days in 1972, average sick leave usage generally declined. In 1984, average sick leave usage was 8.5 days. Thus, there is no support for the view that the credit has reduced overall sick leave usage. With respect to usage by employees nearing retirement, we do not have any data on which to make a comparison before and after enactment of the credit. We do have data for 1975, which shows that General Schedule employees used an average of 19.2 days of sick leave in the last 12 months before optional retirement. This com- pares to an average usage in 1975 of 11.9 days for General Schedule employees with at least 30 but not over 35 years of service, the length of service category with the highest average usage of sick leave, and to an average usage of 8.3 days for all Gen- eral Schedule employees. In addition, a 1979 Comptroller General report found that at 5 Defense Department installations, sick leave usage averaged 34 days per em- ployee in the 12 months preceding optional retirement. We believe that such figures indicate that sick leave usage is very high for employees nearing optional retire- ment, and while older employees might naturally be expected to use somewhat more sick leave than other employees, it does not appear that employees nearing optional retirement are making any special effort to conserve their sick leave. In sum, the sick leave credit appears to have had no significant effect on overall sick leave usage, and does not appear to induce employees nearing retirement to conserve their sick leave. Senator STEVENS. We raised everyone's retirement age and raised the law enforcement retirement age from 50 to 55. I happen to agree with your comment that law enforcement officers, fire- fighters, and air traffic controllers should be allowed to retire with 25 years of service at any age. I am not so sure about the 50 and 20 years. I think we will have to study that and make some compari- son there because the great difficulty is that the retirement age for other employees is 62. If we have a substantial group of employees who can retire at 50 with 20 years, I think-and that is without any penalty-I think that will strain the system. I do understand your point about having younger people involved. It seems to me that 25 years of service ought to be sufficient. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Most of these people do in fact enter the Federal service in their early 20's, so it should not be that much different. Again, do you have any statistics on what would be the average retirement age of those people who have 25 years of service? Mrs. HORNER. Mr. Chairman, I will have to supply that to you. Senator STEVENS. It should not be much in excess of 50. I think the 25-year requirement is the figure that we ought to stand by and defend, not the 20 and 50. I would urge you to take a look at that again and submit to us some statistics to support your ration- ale that you would like to see us incorporate the 20-50. Would you do that, please? Mrs. HORNER. Yes, Mr. Chairman. [The information referred to follows:] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 09-Sep-B5 Table 98 Special Provision Employee Annuitants On the Retirement Roll 1981 - 1984 ----"'------"?"'----------------------------"'----------------------------------------------------------------------------------------------------"'---------------------------------------- Aqe on Years Percent with 11 On Roll Monthly Annuity Contributions Mean Years of Service 10/OI/YEAR On Roll --------------------------11 -------?---------- Percent '-------?------ ---------------? ------------------------- ------------- -------------- Health Survivor 11 Retirement Category Number Percent Men Mean Median Mean Median Military Civilian Total Mean Median Mean Median FESLI Benefits Election 11 11------------------------------------------------------------------------------------------------------------------------------------------"'--------------------------------------------11 It ::Special Provision 1984 it it Law Enforce/Firefighters 19,506 1.4 98.0 2,005 1,853 18,417 16,878 2.2 27.2 29.4 63.9 63 9.1 8.1 98.4 95.4 85.8 1 Air Traffic Controllers 1,173 0.1 99.4 1,879 1,006 27,404 27,062 3,9 26.0 29.9 57.3 56 4.3 3.7 99.1 97.7 96.3 1 Members of Congress 313 .0 96.5 2,983 2,863 36,554 36,082 1.8 18.8 20.6 72.5 72 9.7 7.8 69.1 64.9 83.1 1 Other 5,218 0.4 17.0 849 687 11,199 7,759 0.8 27.1 21.9 65.8 62 5.0 4.3 87.8 86.3 60.5 .Special Provision 1983 Law Enforce/Firefighters 19,081 1.4 98.0 2,009 1,847 17,790 16,291 2.2 27.3 29.5 63.5 62 8.6 7.5 98.3 95.7 86.0 it Air Traffic Controllers 1,479 0.1 99.3 1,871 1,781 25,744 25,328 3.9 25.9 29.8 51.2 57 4.0 3.1 99.1 98.2 86.1 Members of Congress X 370 .0 95.2 2,991 2,881 35,678 35,836 1.7 19.0 20.7 71.9 71 9.0 7.6 72.0 67.7 81.5 11 Other 3,821 0.3 81.7 893 745 13,237 9,128 1.0 28.7 29.7 59.1 59 3.0 3.5 94.9 85.4 70.2 "Special Provision 1982 it Law Enfor/Fire Fighters 18,488 1.4 99.1 1,959 1,798 17,338 15,802 2.2 27.4 29.6 63.1 62 8.0 6.8 98.6 96.3 ;I 86.8 Air Traffic Controllers 1,259 0.1 99.3 1,823 1,720 24,254 23,797 3.8 25.7 29.5 51.2 57 3.6 2.8 99.1 98.3 86.1 11 Members of Congress 373 .0 93.8 2,904 2,789 33,598 32,412 1.6 19.0 20.6 71.9 72 9.8 7.7 1!.! 61.3 80.2 1 Other 4,915 0.4 74.4 774 624 9,591 5,998 0.1 26.7 21.4 68.5 62 4.5 2.7 82.6 90.4 55.7 it it :Special Provision 1901 Law Enfor/Fire Fighters 17,827 1.3 98.2 1,817 1,668 16,788 15,211 2.1 27.6 29.7 62.8 61 7.5 6.3 98.5 96.6 87.1 Air Traffic Controllers 987 0.1 99.1 1,740 1,627 22,918 22,369 3.9 25.8 29.7 57.4 58 3.4 2.7 99.2 98.4 81.9 11 Members of Congress 391 .0 94.1 2,665 2,550 33,198 32,362 1.6 18.9 20.5 71.1 71 B.0 6.7 72.1 67.8 81.1 other 4,658 0.4 14.7 689 552 8,320 5,079 0.5 76.3 26.8 70.8 63 4.6 2.0 78.3 93.4 52.3 11---------------------'?-------------------------------------------------------------------- - ---------------------------------------------------------------------------------- --------- Saurce: Annuity Roll As Of Oates: October I of Year Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 v9-Sep-d5 E.nibit 67 Special Fro,isior, Employee Annuitants Added to the Retirement Roll Ourina Fiscal Year 1961 - 1984 -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Percent with Added to Roll Monthly Annuity Contributions Mean Years of Service Age at ACD -------------------- ----------------- Percent ----------------' -'----------------- --------------------------- ------------- Health Survivor Retirement Category Number Percent Men Mean Median Mean Median Military Civilian Total Mean Median FE6LI Benefits Election -----------??--------"" ------------------------'--'-~I ::Special Provision 1984 Law EnforceiFireiigqhters 86B 1.0 99.0 1,739 1,714 29,312 28,220 2.5 25.3 27.8 53.1 53 98.3 94.5 87,9 Air Traffic Controllers 300 0.4 100,0 1,711 1,927 35,529 35,960 4.1 26.5 30.6 51.6 51 98.7 97.3 89.3 Members of Congress II .0 100,0 1,284 1,161 02,423 32,781 2.8 13.1 15.9 60.9 60 9.1 9.1 100.0 Other 457 0.5 90.3 1,023 921 19,036 17,462 1,4 27.2 28.6 56.3 57 94.5 85.8 70.0 !Special Provision 1983 1 Law EnforcelFirefighters 1,019 1.3 94.0 1,493 1,456 23,805 23,492 2.3 24.1 26.4 54.1 54 89.0 85.6 77.8 Air Traffic Controllers 243 0.3 94.6 1,777 1,181 32,931 33,072 4.0 26.7 30.7 51.7 50 98.8 98.8 84.8 1 I Members of Congress 29 .0 IOn.0 2,379 2,395 53,338 62,376 2.7 19,0 21,7 62.1 62 79.3 75.9 89.7 1 : Other 439 0.5 80.9 936 812 11,211 16,574 1.2 21.3 28.5 56.3 56 95.9 85.4 69.7 1 !:Special Provision 1982 Law Enfdr/Fire Fi hters 1 041 1 2 98 1 1 581 475 1 24 665 23 113 8 2 24 9 21 1 53 5 53 95 5 95 1 97 7 g 11 Air Traffic Controller , 286 . 0.3 . 100.0 , 1,575 , 1,570 , 28,837 , 29,226 . 3.9 . 25.1 . 29.0 . 552.1 50 . 98.6 . 98.2 . 84.6 : Members of Congress 5 .0 80,0 1,572 1,770 4(1,650 45,311 2.3 12.8 15.1 59.4 60 20.0 20.0 100.0 : Other 590 0.7 60.9 851 771 15,554 14,629 1.1 26.9 26.0 55.6 56 93.1 88.5 71.2 !Special Provision 1981 1 Law Enfor/Fire fighters 1,242 1.0 98.1 1,660 1,538 23,814 22,113 2.6 26.1 28.7 53.2 53 99.3 96.7 89.6 1 Air Traffic Controllers 294 0.2 99.0 1,535 11516 26,527 26,710 4.2 24.4 26.6 52.7 51 99.0 99.3 66.4 It Members of Congress 54 .0 96,3 2,652 2,611 54,571 57,974 2.9 20.8 23,7 62.4 61 92.6 87.0 88.9 1 Other 1,390 1.1 78.7 935 838 15,505 14,711 1.3 27.9 29.2 56.0 56 95,2 90.3 72.5 Source: Annuity Roll As Of Dates: October I of Year Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator STEVENS. Thank you very much. We appreciate your coming. I do appreciate your conversation with me about the other problems. Mrs. HONER. Thank you very much, Mr. Chairman. [Mrs. Horner's prepared statement follows:] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 STATEMENT OF HONORABLE ODNSTAN(E HDFNER DIRECTOR. OFFICE OF PERSONNEL MANAGEMENT OOMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE S. 1527. T CIVIL SERVICE PENSION REFORM ACT OF 1985 IN THE ADMINISTRATION'S VIEW, THE INTRODUCTION OF S. 1527 REPRESENTS THE MOST IMPORTANT, AND MOST POSITIVE, STEP FORWARD TO DATE IN THE DISCUSSIONS OF AN APPROPRIATE NEW RETIREMENT SYSTEM FOR THOSE FEDERAL EMPLOYEES WHO ARE CWERED BY SOCIAL SECURITY. THOSE OF US WHO HAVE GOTTEN INTO THIS ISSUE AT ALL ARE VERY MUCH AWARE OF HOW COMPLICATED IT IS, AND S. 1527 DOES A VERY IMPRESSIVE JOB OF ADDRESSING THE MYRIAD ISSUES AND CONCERNS INVOLVED HERE. THE CIVIL SERVICE PENSION SYSTEM THAT WOULD BE ESTABLISHED BY S. 1527 WOULD BE VERY SIMILAR TO THE BETTER PENSION PLANS IN THE PRIVATE SECTOR, AND WOULD MEET THE ADMINISTRATION'S OBJECTIVE OF PROVIDING AN APPROPRIATE LEVEL OF RETIREMENT BENEFITS FOR FEIERAL EMPLOYEES AT A REASONABLE COST. THIS NEW SYSTEM WOULD BE CAREFULLY BALANCED TO MEET THE NEEDS OF FULL-CAREER FEIERAL EMPLOYEES FOR A SECURE AND ADEQUATE RETIREMENT INCOME, Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 -2- YET WOULD ALSO PROVIDE FAIR TREAT T FOR EMPLOYEES WHO REMAIN WITH THE GOVERdhQ1T FOR ONLY A PORTION OF THEIR WORKING LIVES. BUILDING ON SOCIAL SECURITY AS A FriIIDATICN, S. 1527 WOULD PROVIDE A BASIC LEVEL OF BENEFITS THROIJON A DEFINED BENEFIT PLAN AND THEN, AS CALLED FOR IN THE PRESIDENT'S BUDGET, WOULD INCLUDE A DEFINED CONTRIBU- TION PLAN. WE BELIEVE THAT A DEFINED CONTRIBUTION ELEMENT, GIVING EACH EMPLOYEE THE OPPORTUNITY TO MAKE PROVISION FOR HIS OR HER OW RETIREMENT, IS ONE OF THE MST ATTRACTIVE FEATURES OF THE NEW SYSTEM. THE BILL HAS BEEN CAREFULLY CRAFTED TO ADDRESS THE SPECIAL PERSONNEL MANAGEMENT AND FISCAL MANAGEMENT NEEDS OF THE GOVEENP?NF, YET BRINGS TO THE GOVERNMENT THE BEST PRACTICES OF THE PRIVATE SECTOR. A PARTI- CULARLY GOOD EXAMPLE OF THIS IS THE LONG-TERM DISABILITY PROVISION IN THE BILL, WHERE THE BENEFIT STRUCTURE AND THE CAREFUL MESHING OF THE DISABILITY BENEFIT WITH SOCIAL SECURITY AND WITH THE REST OF THE PENSION PLAN WILL ALLCM US TO PROVIDE SOUND AND ADEQUATE INCOME PRO- TEL'TICN FOR OUR DISABLE WORKERS IN A MANNER MUCH EDRE ALAN TO THE WAY OTHER EMPLOYERS HANDLE THIS SENSITIVE ISSUE. OF COURSE, ONE OF OUR MAJOR CONCERNS HAS TO BE THE COST OF THE NEW SYSTEM. THE CONGRESSIONAL RESEARCH SERVICE, USING SOCIAL SECURITY II-B ACTUARIAL ASSUMPTIONS, HAS ESTIMATED THAT THE EMPLT'JYER SHARE OF THE NORMAL. COST OF THE CIVIL SERVICE PENSION SYSTEM WOULD BE 20.8 PERCENT OF PAYROLL. WE HAVE OUR (OW BOARD OF ACTUARIES ADVISING US AT OPM, AND THEY BELIEVE THAT SOMFFOHAT MORE CONSERVATIVE ASSUMPTIONS ARE LIKELY TO PROVE FORE ACCURATE OVER THE LCfl TERM, BUT EVEN USING Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 -3- THE BOARD OF ACTUARIES ASSUMPTIONS, THE COST IS -ESTIMATED TO BE ONLY A LITTLE HIGHER, 21 .1 PERCENT OF PAYROLL. WHILE WE BELIEVE THE BOARD OF ACTUARIES ASSUMPTIONS ARE PROBABLY SOUNDER, 'iHE COST BY EITHER MEASURE IS RFASCNABL.Y CLOSE TO THE PRESIDENT'S GOAL OF ABOUT 20 PERCENT OF PAYROLL, AND I HAVE NO OBJECTIONS TO USING THE CONGRESSIONAL RESEARCH SERVICE NUMBERS IN THESE DISCUSSIONS. I WOULD NOW LIKE TO TUI TO A FEW RESERVATIONS WE DO HAVE ABOUT VARIOUS ASPECTS OF THE BILL, BUT BEFORE I DO 90, 1 WOULD LIKE TO EMPHASIZE THAT OUR SUGGESTIONS FOR GANGES HERE SHOULD t r BE TAKEN AS CALLING INTO QUESTION OUR STRONG SUPPORT FOR THE OVERALL APPROACH OF S. 1527. AS IS INEVITABLE IN AN UNDERTAKING AS MASSIVE AND OO PI.F.}C AS THIS. THERE ARE A GREAT MANY TFEHNICAL DETAILS WHERE WE WOULD LIKE TO SEE MINOR CHANCES, AND I HOPE OUR STAFFS WILL BE ABLE TO WORK TOGETHER TO RESOLVE THESE MATTERS. I WOULD, HOWEVER, LIKE TO DISCUSS A FEW OF THE MORE SIG- NIFICANT ISSUES. ONE PROBLEM THAT WE HAVE TO FACE IN DESIGNING A GOVERNMENT RETIREMENN SYSTEM IS THE APPROPRIATE TREATMENT FOR CERTAIN SPECIAL CATEGORIES OF EMPLOYEES WHERE A YOUNG AND VIGOROUS WORK FORCE IS NEEDED, SUCH AS LAW ENFORCEMENT OFFICERS, FIREFIGHTERS, AND AIR TRAFFIC CONTROLLERS. S. 1527 HAS A NUMBER OF SPECIAL PROVISIONS DESIGNED TO PROVIDE FOR THESE EMPLOYEES. WE ARE PARTICULARLY PLEASED BY THE PROVISION THAT WILL CHARGE THE AGENCIES EMPLOYING THESE GROUPS FOR THEIR SPECIAL BENE- FITS, RATHER THAN SPREADING THIS COST ACROSS THE WHOLE SYSTEM. HOWEVER, AS I HAVE DISCUSSED THE TREATMENT OF THESE GROUPS WITH MY COLLEAGUES IN Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 -4- THE AGENCIES EMPLOYING THESE WORKERS, IT HAS BECOME APPARENT THAT THE BILL AS IT STANDS DOES NOT ADEQUATELY PRESERVE CERTAIN ESSENTIAL FEATURES OF THE CURRENT RETIREMENT SYSTEM FOR THESE EMPLOYEES. WE BELIEVE THE BILL MUST BE QIANGED TO PROVIDE A REASONABLE LEVEL OF BENEFITS THAT WILL ALLOW THESE WORMS TO RETIRE AT ANY AGE WITH 25 YEARS OF SERVICE, OR AT AGE 50 WITH 20 YEARS OF SERVICE. THE MANDATORY RETIRE- MENT PROVISIONS OF CURRENT LAW ARE ALSO ESSENTIAL TO THE MANAGEMENT OF THESE SPECIALIZED GROUPS, AND NEED TO BE RETAINED. FINALLY, THE COVERAGE DEFINITIONS HAVE CAUSED ODNCE1 AMONG THE EMPLOYING AGENCIES. WE RECOGNIZE THAT THESE DEFINITIONS WERE DRAWN FROM AN EARLIER DISCUSSION DRAFT PREPARED BY OPM, BUT WE BELIEVE THEY NEED TO BE REEXAMINED. UNDER S. 1527, A LAW ENFORCEMENT OFFICER OR FIREFIGHTER WHO MOVES INTO A MANAGEMENT OR ADMINISTRATIVE JOB WOULD LOSE SPECIAL RETIREMEMT COVERAGE. IT IS ESSENTIAL TO THE OPERATION OF THESE SPECIALIZED ACTIVITIES THAT WE CONTINUE TO BE ABLE TO RECRUIT MANAGERS FRCM AMONG THE LINE WORKERS. ACCORDINGLY, WE THINK THAT THESE DEFINITIONS NEED TO BE CHANGED TO PERMIT MOVEMENT INTO THE MANAGERIAL RANKS, ALTHOUGH IT MIGHT BE POSSIBLE TO RE- QUIRE SOME MINIMUM PERIOD OF WORK IN THE BASIC COVERED POSITIONS. ANOTHER PROVISION THAT CAUSES SOME CONCERN IS THE REQUIRII ENT IN THE BILL THAT THE DEPARTMENT OF DEFENSE MILITARY RETIREMENT FUND BE LIABLE FOR THE COST OF CREDITING MILITARY SERVICE UNDER THE CIVIL SERVICE PENSION SYSTEM. WE DO NOT THINK THIS IS AN APPROPRIATE SOURCE FOR THIS MONEY, SINCE WHAT IS INVOLVED HERE IS NOT REALLY ANY SORT OF TRANSFER OF LIABILITY FROM ONE RETIREMENT SYSTEM TO ANOTHER, BUT INSTEAD MERELY THE CREDITING UNDER Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 -5- OUR CIVILIAN SYSTEM OF MILITARY SERVICE OF PEOPLE WHO, FOR THE MOST PART. NEVER WOULD HAVE RECEIVED ANY PENSION FROM THE MILITARY SYSTEM ANYWAY. FURTHERMORE, IT WOULD BE VERY DIFFICULT TO DETERMINE THE SIZE OF THE LUMP-SUM NORMAL COST PAYMENTS THAT WOULD BE REQUIRED AT THE BEGINNING OF A VETERAN'S CIVILIAN CAREER. WE THINK IT WOULD BE MUCH PREFERABLE TO CONTINUE THE CURRENT SYSTEM OF TREASURY TRANSFER PAYMENTS TO FUND THE OAST OF CREDITING MILITARY SERVICE AS THE BENEFITS ARE PAID. WE HAVE STRONG RESERVATIONS ABOUT THE PROVISION IN THE BILL PERMITTING THE CREDITING OF UNUSED SICK LEAVE AS SERVICE UNTER THE BASIC PLAN. BOTH THE PRESIDENT'S BUDGET AND THE GRACE COMMISSION HAVE CALLED FUR ELIMINATING THIS ANOMALOUS AND ILLOGICAL BENEFIT FROM THE CURRENT RETIRE- MENT SYSTEM, AND WE WOULD HOPE THAT WE CAN AVOID SETTING THE NEW SYSTEM OFF ON THE WRONG FOOT IN THIS REGARD. THIS IS PARTICULARLY TRUE SINCE THIS RELATIVELY MINOR BENEFIT IS QUITE COSTLY, AND WE BELIEVE THIS M)NEY COULD BE USED MUCH BETTER TO CLOSE SOME NARROW AND TECHNICAL, BUT SERIOUS, GAPS IN THE BILL'S DISABILITY AND SURVIVOR PROTECTIONS. S. 1527'S PROVISIONS PERMITTING THE TRANSFER OF EMPLOYEES FROM THE CUR- RENT RETIREMENT SYSTEM TO SOCIAL SEICURITY AND THE NEW CIVIL SERVICE PENSION SYSTEM APPEAR, ON THE WHOLE, TO BE REASONABLE AND WORKABLE. BUT WE ARE CONCERNED BY ONE ASPECT OF THESE PROVISIONS, NAMELY THE COMPLETE WAIVER OF THE SOCIAL SECURITY WINDFALL OFFSET PROVISIONS FOR EMPLOYEES WHO TRANSFER. THE WINDFALL OFFSET PROVISIONS OF THE SOCIAL SECURITY ACT WERE DESIGNED TO REDUCE SOCIAL SECURITY BENEFITS THAT WOULD OTHERWISE BE PAYABLE IU THOSE WHO SPENT A SUBSTANTIAL PORTION OF THEIR WORKING Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 -6- CAREERS IN EMPLOYMENT THAT WAS SHELTERED FROM SOCIAL SECURITY TAXATION, AS FEDERAL EMPLOYMENT HAS BEEN. BY OOMIPIETELY WAIVING THE OFFSET FOR EMPLOYEES WHO TRANSFER, MANY LANG-SERVICE FEDERAL IITWYEES WHO ALSO QUALIFY FUR SOCIAL SECURITY BENEFITS ON THE BASIS OF MINIMAL SOCIAL SECURITY-COVERED EMPLOYMENT CO(JI.D EXPERIENCE A SUBSTANTIAL WINDFALL, RECEIVING MUCH GREATER TCEAL BENEFITS AS A RESULT OF TRANSFERRING TO THE NEW SYSTEM THAN THEY COULD RECEIVE IF THEY STAYED UNIER THE CURRENT SYSTEM. WE BELIEVE THE WINDFALL OFFSET MUST BE RETAINED, AT LEAST TO SOME DECREE. FOR THESE PEOPLE. FINALLY, I WOULD LIKE TO TURN BRIEFLY TO ONE OF S. 1527'S MOST INTEREST- ING FEATURES, ITS THRIFT SAVINGS PLAN. THIS PLAN IS VERY SIMILAR TO, TEIpUG( NOT QUITE IDENTICAL WITH, A 401 (K) PLAN. AS YOU KNOW, THE PRESI- twr'S TAX REFORM PROPOSALS, AS RECENTLY AMENDED, CALL FOR ELIMINATING 401 (K) PLANS. WtIIE WE, THEREFORE, OBJECT TO INCLUDING THIS 401(K) PLAN IN S. 1527, WE REMAIN VERY MUCH (XWITTED TO THE OBJECTIVE THE THRIFT SAVINGS PLAN WAS TRYING TO MEET, NAMELY TO ENCOURAGE AND ASSIST EMPLOYEES TO SAVE FOR THEIR OWN RETIREMENT, IN DRIER TO SUPPLEMENT THEIR SOCIAL SECURITY AND BASIC PLAN BENEFITS. WE ARE EXAMINING ALTERNATIVES AND WE HOPE TO BE ABLE TO PROPOSE TO THE (X IITFEE SHORTLY AN APPROACH THAT WILL BOTH SATISFY THE IMPORTANT OBJECTIVES OF S. 1527'S THRIFT SAVINGS PLAN AND BE CONSISTENT WITH THE PRESIDENT'S TAX REFORM PROPOSALS. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator STEVENS. Mr. Charters, we will proceed with you now. We are happy to have you with us, Mr. Charters. This is your first appearance as the Assistant Postmaster General for Employee Relations, and I understand you are accompanied by Thomas McCall, the General Manager for Compensation Services. Would you proceed, please? TESTIMONY OF DAVID H. CHARTERS, ASSISTANT POSTMASTER GENERAL, EMPLOYEE RELATIONS DEPARTMENT, U.S. POSTAL SERVICE, ACCOMPANIED BY THOMAS S. McCALL, GENERAL MANAGER, COMPENSATION SERVICES DIVISION Mr. CHARTERS. Thank you very much, Senator. I am here today representing Paul Carlin, the Postmaster Gener- al. We appreciate very much the opportunity to testify and would like to begin with what we consider the four major ingredients for a good retirement program for postal employees. The program must be fair and actuarially sound; must be reasonably economical and fair to the postal rate payers who help finance it; must help to attract and retain the high quality employees we need to serve the public; and must generate sufficient predictable income for retirees to enjoy a reasonable standard of living. The proposed bill, we believe, substantially contains the above in- gredients. We have estimated that the bill will cost the Postal Service almost 3.2 percent more than the Federal Employees Retirement Contribution Temporary Adjustment Act of 1983. For the first year following implementation, this will be approximately $114 million. We fully understand the reason for the additional expense, since this is a permanent solution replacing a temporary measure, but we feel it is necessary to highlight the financial impact this will have on our costs. Our overall reaction to the bill is that it is a sound, well-con- structed plan which should be attractive to new employees. While the bill offers the greatest benefits to long-term career employees, it will also provide retirement alternatives for employees seeking more flexibility. It provides portability through Social Security and the opportunity for a departing employee to withdraw his or her thrift account prior to retirement and roll it over into an IRA, thus never losing the value of that part of the plan. We believe that any retirement program should have a defined benefit to allow employees to project, in advance of retirement, the level of retirement income they can expect, thereby providing the opportunity for the employee to decide if he or she needs or wants a larger return than that provided. The basic plan provides this needed defined benefit. The replacement rate of an annuity should ideally be an amount sufficient to maintain the retiree's standard of living. The replacement rate varies depending on the employee's level of income. Normally it will be in the range of 65 to 75 percent with the higher rate applicable to lower incomes. The current civil serv- ice retirement system does not provide this level of replacement until an employee has 35 or more years of service. The proposed bill provides the opportunity for an employee to achieve or even Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 exceed the desired replacement rate through participation in a thrift savings plan. We believe that an employee has an obligation, indeed a respon- sibility, to become involved in preparation for eventual retirement. We understand that OPM, as was mentioned earlier, is now consid- ering various alternative approaches to the thrift plan provision of the bill, in view of the administration's recent recommendation to repeal 401(k). We are, nevertheless, committed to the thrift plan objective and believe some such plan must be an essential feature of the retirement package. We believe the long-term disability benefit provided employees who are unable, due to sickness or injury, to perform the duties of their job is an excellent benefit that is not currently available. While injury compensation provides for those injured on the job, there is currently no corresponding protection for those whose ill- ness or injury is not job related. This protection will be particularly beneficial to the short service employee who has an extended ill- ness and currently receives no income after expending his or her accrued sick leave. The provision to provide basic life insurance, at no cost to em- ployees, is one we support. As you know, the Postal Service has provided basic life insurance to all career employees, without charge, since July 1974. We find the transition provisions somewhat unclear with regard to participants in the current civil service system who may elect to participate in the new civil service pension system. While we have no recommendations as to entitlement, should an employee change systems, we strongly urge that all entitlements be very clearly and specifically spelled out. The decision whether to change systems will be a complicated and difficult one for most employees, and they will need complete details in order to make an intelligent de- cision. We are also concerned that the bill does not make provision for some adjustments to the unfunded liability payments, which the Postal Service must make under present law, to take into account the transfer out of the civil service retirement system of employees hired since 1983 and the transfer of those others who opt in to the new system. We assume the bill contemplates that the Postal Serv- ice and other agencies would be given credit in determining their liability under the new system for the employer contributions which they have been making for employees hired since 1983 whose retirement eligibility would move from the current to the new system. Each of these matters involves substantial sums of money and needs careful study. We are in agreement with the concept that the basic plan be ac- tuarially sound. We do, however, have one major concern with the bill in the area of funding. The bill, as proposed, will permit OPM to make a unilateral determination, without notice, of what will become a major element of cost to the Postal Service and a princi- pal component of postage rates. While other agencies will pay these costs from appropriations, the Postal Service must look to postage revenues for the necessary funding. The Postal Service does not have the authority to increase postage rates either unilaterally or immediately. Our ability to plan to meet our obligations and our Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 confidence in whatever billings we receive are dependent on receiv- ing sufficient advance notice of proposed changes and the opportu- nity for outside impartial review of underlying assumptions and data. These items are vital if we are to fulfill our obligations in the areas of postal rates and fiscal responsibility, as required by law. In addition to the cost aspects of the plan, there are certain bene- fit issues that concern us. The lack of any survivor annuity from the basic fund for dependent children of a deceased employee is one of our concerns. While we are aware that Social Security will provide some income in this situation, we believe that some annu- ity, even a small one, should be provided from the fund. The annu- ity could be calculated on the age of the child at the parent's death and the number of years it would be paid. Another area of concern we have is the absence of an immediate survivor annuity in those instances where the employee was not yet eligible to retire at the time of death. The effect of this lack of immediate annuity might be minimal in the case of a working spouse but is potentially devastating in the case of a nonworking spouse left with dependent children. In these cases, there would be no survivor annuity and no dependent child annuity for what could conceivably be a long period of time in the case of an employee who dies relatively young. We recommend that a survivor annuity begin on the first day of the first full month after the employee's death and that the amount be actuarially determined based on the surviving spouse's age. The bill does not contain any requirement for mandatory retire- ment for law enforcement officers, as is provided under the current retirement system. The increased years of service required for an immediate annuity for a law enforcement officer will result in an older work force in the Postal Inspection Service, an occurrence we do not believe suitable for vigorous law enforcement. This 5-year extension in eligibility makes it all the more imperative that this bill contain a provision similar to the current retirement system to provide for mandatory retirement at age 55 for law enforcement of- ficers. In conclusion, with the exception of the concerns expressed, we believe the bill will provide a retirement system for our employees which fulfills the major ingredients we believe make for a good re- tirement program. I would be happy to answer any questions you might have. Senator STEVENS. If we require OPM to use the Board of Actuar- ies normal cost estimates, would that allay your fears concerning OPM's misusing costs to increase your payments to the retirement fund? Mr. CHARTERS. We feel that that would certainly be a step in the right direction, but we prefer some third party to look at it on an independent basis. Senator STEVENS. You mentioned the problem of the mandatory retirement for your law enforcement officers and you want that to be 55. That would mean that the eligibility for retirement and mandatory retirement in your area would be the same. Mr. CHARTERS. Yes, Sir. Senator STEVENS. Why shouldn't you increase the mandatory re- tirement then to 60? Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. CHARTERS. I think the position most agencies that have a law enforcement component would take would be that it is in the inter- est of Government to have a youthful and vigorous law enforce- ment arm. This is not consistent with increasing and advancing age. Senator STEVENS. Yes, but the problem is eligibility for retire- ment, not mandatory retirement. I had that discussion with Mrs. Horner. We can accept retirement eligibility for one who has 25 years of service. Mr. CHARTERS. Yes. Senator STEVENS. None of us are addressing the question of man- datory retirement. Mr. CHARTERS. Well, we believe very strongly that we ought to retain the provision for mandatory retirement at 55. Senator STEVENS. You don't have mandatory retirement now, do you? Mr. CHARTERS. For law enforcement. Senator STEVENS. At what time? Mr. CHARTERS. Fifty-five. Senator STEVENS. After how many years of service? Mr. CHARTERS. Twenty years is the minimum for eligibility, but it is mandatory at 55. Senator STEVENS. What if you don't have retirement? What if a person has 18 years at 55? Mr. CHARTERS. I don't think that is possible, because I don't be- lieve they go into the Inspection Service after 35. Senator STEVENS. We will take a look at it. I think there has to be some general concept across the board as far as the Government is concerned. As I look at these various law enforcement agencies, there is no rhyme or reason in some of the provisions. Some have eligibility, some have mandatory concepts, some use 20 and 50, some use 25 years. It just seems to me there ought to be some uni- form provision. In effect, it is putting into the civil service system the provisions of the military system to be able to retire at 20 years. What would you do with them under this system? They are not eligible for Social Security; they would only get one tier, they would only get the pension under that system. They still would not be eligible for Social Security. Mr. CHARTERS. As I understand it, there is a supplemental pay- ment that would be made. The Postal Service would have to reim- burse OPM for this payment until they were eligible for Social Se- curity. Senator STEVENS. I think that is one of the provisions that needs some studying and we will be happy to work with you as we consid- er this. We hope to be able to get together the agencies that do have in fact substantial numbers of law enforcement people to see if we can get a comprehensive plan that would apply to law en- forcement throughout the Government. Thank you very much. We appreciate your being here. Our next witness is Charles A. Bowsher, the Comptroller General of the United States, accompanied by William J. Anderson, Direc- tor of the General Government Division, and Robert Shelton, Deputy Associate Director of the General Government Division. Do we call you General now? Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. BowSHER. Some people do. [Laughter.] Senator STEVENS. Well, General, we are happy to have you here. TESTIMONY OF CHARLES A. BOWSHER, COMPTROLLER GENER- AL OF THE UNITED STATES, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY WILLIAM J. ANDERSON, DIRECTOR, GENER- AL GOVERNMENT DIVISION, AND ROBERT E. SHELTON, DEPUTY ASSOCIATE DIRECTOR, GENERAL GOVERNMENT DIVI- SION Mr. BoWSHER. Thank you very much, Mr. Chairman. I am pleased to be here today to discuss S. 1527, a bill proposing a new retirement program for Federal employees covered by Social Security. The Social Security Amendments of 1983 required all Federal civilian employees hired after December 1983 to partici- pate in Social Security. The Congress has set January 1, 1986, as the target date for establishing new retirement programs for these employees. This bill applies to new employees who otherwise would have been in the civil service retirement system-the retirement plan covering most Federal civilian employees. The bill also would allow employees covered by the current retirement system to trans- fer to the new program. During the past 10 years, we have issued a series of reports cov- ering a number of issues related to basic policies, financing and benefits of the civil service and other Federal retirement programs. A common thread that ran throughout many of these reports was the need for the establishment of an overall policy to guide retire- ment system development and improvement. During these many years of reviewing Federal retirement mat- ters, we have become convinced that a reasonable standard on which to base Federal retirement benefits is the prevailing private sector practice. Heretofore, this has been a difficult standard to apply because Federal employees in the civil service retirement system were not under Social Security. Private sector retirement programs are constructed to supplement Social Security. Federal retirement programs could not be constructed in the same way. Now that new Federal employees are covered by Social Security, the Congress has the unique opportunity to take advantage of the experiences of private sector employers in designing their retire- ment programs to supplement Social Security benefits. Adoption of the policy that Federal retirement programs should be fairly com- parable with private sector programs would assure Federal employ- ees of equitable treatment with other employees in the Nation and would also assure the taxpayers that Federal retirement practices are reasonable. In this regard, we were pleased to note that one of the stated purposes of S. 1527 is to provide Federal employees with retirement benefits comparable with good private sector programs. To assist your committee in designing a new retirement program, we gathered and analyzed considerable information on non-Federal retirement programs. The detailed results of our analysis are in- cluded in three of our reports entitled, "Features of Non-Federal Retirement Programs" which we issued June 26, 1984, "Benefit Levels of Non-Federal Retirement Programs" which we issued in Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 February 26, 1985, and "Retirement Before Age 65 Is a Growing Trend in the Private Sector" in July 1985. We believe S. 1527 represents a comprehensive and thorough re- tirement program design. It combines a three-tiered approach to re- tirement-Social Security, a defined benefit pension plan, and a thrift plan-with free basic life insurance and a separate long-term disability plan. We found this approach to be typical among private sector employers also. Moreover, many of the specific provisions of the pension plan portion of the proposed program are completely consistent with prevailing pension plan provisions in the private sector. Other aspects of the pension plan and the thrift plan, how- ever, are somewhat different from what the private sector pro- grams we examined usually provided. The cost of the proposed retirement program is estimated to be slightly higher than the average private sector retirement pro- gram. Some private sector programs cost more. However, we be- lieve that maintenance of comparability with respect to the total compensation package is more important than is maintenance of exact comparability with respect to each element of the package. Since this bill deals with only two-retirement and life insurance- of the many elements such as pay, leave, health insurance et cetera, of total compensation and since the cost differential is small, we believe that this bill is entirely consistent with the objec- tive of achieving comparability of the total compensation package. We are not suggesting that, to be comparable, the Federal em- ployee retirement program should necessarily "mirror" private sector programs. In fact, we believe the retirement program pro- posed by S. 1527 is a reasonable one and would serve Federal em- ployees well. However, for your information as you consider the bill, I would like to briefly discuss the areas in which the bill does and does not reflect retirement program features typically found in the private sector. First would be retirement age. The bill provides for unreduced pension plan benefits to be paid at age 62. Employees with 30 years of service could retire as early as age 55, but their benefits would be reduced by 2 percent for each year they are under age 62. Em- ployees with at least 10 but fewer than 30 years of service could also retire by age 55, but would be subject to a benefit reduction of 5 percent for each year they are under age 62. Our analysis of private sector pension plans showed that age 62 is usually the earliest age at which employees can receive unre- duced pension benefits. Also, nearly all the private sector pension plans we examined provide for early retirement with reduced bene- fits at age 55. Some private sector plans, like the bill proposes, apply different reduction percentages for long- and short-service employees who retire early. More typically, however, the early retirement require- ment is age 55 with 10 years of service, and benefit reductions are about 4 percent a year for all retirees younger than age 62. When considering this aspect of S. 1527, the committee should be aware of the fact that, while it differs from typical private sector practices in the amount of the reduction, the proposed early retire- ment provision would continue the advantageous treatment of long-service employees that now exists in the current civil service Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 retirement system. In our opinion, this variance from private sector practices is defensible from a personnel policy standpoint be- cause it encourages and rewards career Federal service. The next area I would like to discuss is benefit amounts. The pension plan proposed by S. 1527 provides a benefit of 1 percent of high 5-year average annual salary for each year of service. Pension plan benefits would simply be added to Social Security benefits. Use of a 5-year salary average for benefit computation purposes is consistent with the overwhelming majority of private sector plans. However, the proposed "add on" of plan benefits to Social Security is not the typical private sector approach. Because Social Security benefits, as a percent of salary, decrease as income levels increase, private sector pension plans usually use some form of integration to compensate for Social Security's "tilt" to lower income employees. Between 64 and 96 percent of private sector pension plans included in the surveys we reviewed were in- tegrated with Social Security. For example, the average benefit for- mula in plans surveyed by the Bureau of Labor Statistics, which was the primary source of information on private sector plans we studied, provided for each year of service 1.5 percent of the high 5- year average salary, less 1.25 percent of the employee's Social Secu- rity benefit. The "add on" of plan benefits to Social Security causes benefit levels in the proposed plan to be generally lower for average and higher income employees and higher for lower income employees than in the typical private sector plan. The proposed plan would provide about 27 percent of final salary to employees at all income levels at age 62 and 30 years of service. In contrast, the plans in the Bureau of Labor Statistics survey averaged about 26 percent at the $20,000 salary level, 29 percent at the $30,000 salary level, 31 percent at the $40,000 salary level, and 32 percent at the $50,000 salary level. I would now like to turn to the cost-of-living adjustments. This bill calls for annuities to be adjusted each year by the increase in the Consumer Price Index less 2 percent. Our study of private sector practices showed that the average increase each year in an- nuities was approximately 40 percent of the change in the CPI while large employers of more than 10,000 employees granted in- creases averaging close to 60 percent. The appropriateness of the bill's provision in terms of private sector comparability obviously depends on future inflation rates and, consequently, cannot be ac- curately gauged. CPI increases above 4 percent would give the Fed- eral retiree at least 50 percent protection. The proposed pension plan provides for vesting-the point in time at which a participant has earned the right to a future bene- fits at 5 years of service. The typical private sector plan requires 10 years of service for vesting to occur, but the trend is toward earlier vesting. The proposed pension plan requires no employee contributions. This is consistent with the private sector approach. The studies of private sector plans we reviewed showed that very few plans re- quire employees to contribute toward the cost of pension benefits. For example, 93 percent of the employees covered by the Bureau of 61-219 0 - 86 - 2 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Labor Statistics survey were in plans that did not require employee contributions. S. 1527 provides that long-term disability benefits will come from a separate insurance plan rather than the pension plan. Our work has shown that the insurance approach is most often used by pri- vate sector employers for salaried employees. The proposed insurance plan would provide 60 percent of salary to employees who meet the Social Security Program's criteria for disability benefits, in other words, the inability to perform substan- tive gainful employment, less-any Social Security benefits they re- ceive. This arrangement is consistent with benefit levels in private sector insurance plans. Employees who do not meet the Social Security disability criteria but are disabled for useful and efficient service in the positions they occupy would also receive insurance benefits under S. 1527. They would receive 60 percent of salary in the first year and 40 percent thereafter. We believe this aspect of the proposal is a good one. It will provide benefits to employees who cannot perform their jobs but are not totally disabled for other work, while reserving greater benefit amounts for those employees who cannot perform and work at all. In general, the survivor benefit program proposed in S. 1527 closely parallels private sector practices. Social Security and free life insurance coverage would comprise the basic survivor benefit program, and the survivors of vested employees would receive addi- tional benefits from the pension plan at the time the deceased em- ployee would have been eligible to retire. Retiring employees could also elect survivor coverage. In all cases, actuarial reductions in benefit amounts would be required to pay for the survivor coverage as is the practice in the typical private sector plan. We did note one inequity in the proposed program. Employees who leave Government employment after 5 years of service would retain their vested rights to survivor coverage under the bill. Bene- fit payments to their survivors could begin when the former em- ployee would have reached 55. This would afford preferential treat- ment to some deferred annuitants over active employees. Benefits for survivors of active employees under the bill cannot begin until the employee would have been eligible to retire. A deferred annui- tant or employee with fewer than 10 years of service would not be eligible to receive a pension until age 62, but the deferred annu- itant's survivor could receive benefits when the deferred annuitant would have reached age 55. We suggest that this inconsistency in the bill be corrected. The bill provides free basic life insurance for employees during their working career, but upon retirement, they will be required to pay two-thirds of the annual insurance premium until they reach age 65. The Bureau of Labor Statistics survey, as well as other studies we reviewed, showed that 80 percent or more of the employ- ers surveyed provided free life insurance coverage both before and after retirement. The reason why the bill deviates from prevailing private sector practices is not apparent. Since employees covered by this bill would be expected to retire on the average at age 62, which is the norm in the private sector, they would be paying the life insurance premiums for only a few Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 years. Therefore, we suggest that the insurance coverage be provid- ed at no cost to the employee after retirement. The bill allows for employees to make tax-deferred contributions on a voluntary basis of up to 10 percent of their pay to a thrift sav- ings fund. Employing agencies would match 100 percent of partici- pant contributions up to 5 percent of pay. These contributions could eventually be invested in three funds that would be estab- lished and operated by the Government-a Government securities investment fund, a fixed income investment fund, and a common stock index investment fund. We found that few thrift plans in the private sector provide for the employer to match 100 percent of employee contributions. The most common practice in a private sector plan was for the employ- er to match 50 percent of employee contributions up to 6 percent of pay. The bill also differs from private sector thrift plans by prohibit- ing employees from withdrawing their funds upon separation before retirement except for transfer to an individual retirement account. We believe that this provision is sound in that it empha- sizes the purpose of the plan which is to provide retirement bene- fits. The thrift plan's three investment funds seem to provide an ap- propriate balance between the virtually risk-free Government secu- rities and fixed-income funds on one hand and the higher risk asso- ciated with the stock index fund on the other. The initial require- ment that all thrift plan funds be invested in Government securi- ties could have a positive impact on the budget by reducing outlays for at least the next 5 years when this requirement will be phased out. We suggest that the committee consider making investment in the Government securities fund more attractive by providing the same rate of return on these securities that the pension plan will receive on its investments in Government securities. The bill pro- vides for the thrift plan to purchase special issue Treasury notes having 2-year maturities and receiving an interest rate equal to the average market yield of all outstanding 2-year notes as of the end of the preceding month. Other Government funds including the civil service retirement fund also invest in special issue Gov- ernment securities but, by law, receive an interest rate equal to the average rate on all outstanding securities with maturities over 4 years as of the end of the preceding month. Generally, this rate should be higher than the rate on 2-year securities. The maturities of the special issue securities purchased by the other funds vary de- pending on the cash flow needs of the funds. In our opinion, the provisions for funding pension benefits in the bill are sound and represent a major improvement over the fund- ing requirements in the current civil service retirement system. The bill (first) calls for agencies to pay the full amount of accruing pension costs for their employees, (second) provides for funding of any supplemental liabilities that may arise, and (third) requires the Department of Defense to reimburse the retirement fund for the cost of military service credits granted to employees under the pension plan. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 We have long held the view that Federal retirement systems should be fully funded to enhance cost recognition and budgetary discipline as well as to promote sounder fiscal and legislative deci- sionmaking. S. 1527 accomplishes this objective for the new pension plan. However, it does not apply the same funding requirements to the currently underfunded civil service retirement system. We would urge the committee, either as part of this bill or as a sepa- rate action, to address the funding of the current system in a simi- lar manner. Unless this change is made, future benefits for retirees under the current system will eventually be paid from funds con- tributed for the new pension plan. In summary, I should reiterate that we see S. 1527 as presenting a responsible design of a new Federal retirement program. The pro- posal differs from private sector programs in that the pension plan is less generous at the time of retirement than the private sector norm for average and higher-paid employees, but the thrift plan is more generous than the plans typically found in the private sector. However, depending upon the level of employee contributions to the thrift plan, overall benefits available from the program, in total, can be very competitive with programs in the private sector. We have also suggested some changes that we believe would im- prove the design of the new program. Mr. Chairman, this concludes my prepared remarks. We will be pleased to answer any questions you and other members might have. Senator STEVENS. Thank you very much. We are very happy to have you with us. Thank you for your suggestions. Many of them have great merit, and we are examining in particular the survivor benefit concepts and also the payment of life insurance premiums after retirement. In order for the initial bill to be within some cost constraint as presented to us at the time by the budget resolution, we felt that we should treat those in the way we did. I think we now have some leeway, and we certainly will make some of the changes you suggest. Do you know what the cost of the average private sector retire- ment program is that you compared this program to? Mr. BoWSHER. It is about 19.3 percent. That is based on the study the Hay-Huggins Co. did for the House Post Office and Civil Serv- ice Committee, and we think that appears to be reasonable. Senator STEVENS. And this compares favorably with that at the present time? Mr. BowSHER. Yes; it does. Senator STEVENS. The suggestions that you make would all in- crease the cost of the system. Do you have a figure of how much it would increase the cost of this system, for instance, to have insur- ance payments after retirement? Mr. BOWSHER. We do not have that figure, but we think it would be a very minor amount. We could work on some of those estimates for you, Mr. Chairman. Senator STEVENS. We were using the figure of 0.4 percent of pay- roll. You were using a percentage of payroll for the cost of the pri- vate sector systems, right? Mr. BOWSHER. Right. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator STEVENS. What do you think of the option in the bill that would permit, after a transition period, the investment of these thrift funds in the private sector under employee manage- ment? Mr. BOWSHER. I think, Mr. Chairman, it makes a good deal of sense, and I think it gives the employees the options that they can try and work with. It allows them to take a little greater risk. At the same time it gives them the option to be in Government securi- ties and to have a very safe program. So I think it gives them flexi- bility. At one time people used to worry about whether this would be such a large amount as to have a great effect on the capital markets, the stock markets. From our calculations of what the amounts might be, it would not unduly influence the markets from the best we can tell. So I think it is a good option. I think the option should be there. Senator STEVENS. You commented about the tilt of the plan, the basic pension plan, and you are correct, it is tilted primarily toward the lower income employees; but I am sure you would agree the thrift plan is tilted the other way. Mr. BOWSHER. That is correct, Mr. Chairman. Senator STEVENS. So if you looked at the plan as a whole with Social Security as the base and the pension plan tilted toward the lower income employee and the thrift plan tilted toward the higher income employee, it has a balance we thought. Do you disagree there is a balance overall? Mr. BOWSHER. No; we do not disagree. In other words, the bal- ance is there, I believe, and it is only a question of whether people at the higher end will participate in the thrift plan to the extent we and you think they would. If that happens, I think it balances out pretty well. Senator STEVENS. It is my judgment that they will participate to a greater degree than anyone realizes if we can maintain the con- cept that it is deferred income. That is the real problem now after the administration's recent announcement. Have you studied whether there are any other options for achiev- ing the same concept we have, whether, for instance, we can use an IRA in the beginning rather than the thrift plan? Mr. BOWSHER. We have looked at some of those and we would be willing to share whatever work we have accomplished with the committee. I believe we already have provided some of it. I think one thing that should be pointed out is that if you took the 401(k) feature out, it removes one feature that I think is very favorable to the employees, both in the private sector and also in the proposed Federal program. I would hope that that would be done only after a great deal of thought because I really think when the Govern- ment changes the ground rules so quickly after we have gotten ev- erybody into these programs, if you come along and take that away, both in the private sector and in the Federal Government, it is a discouraging thing. But I also think the tax break is not the primary attraction for participation in your program. In other words, the key to your program is those matching funds. So I th ik that your program still might have a high degree of attractiveness even if the administration was to pursue and the Congress was to agree to eliminate the 401(k) feature. I think the Congress and Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 others should give a great deal of consideration to the whole issue before rescinding that feature. Senator STEVENS. I agree. Did the COLA figures you gave us-40 percent of CPI on the average and 60 percent for large firms in the private sector-did those include the Social Security factor? Mr. BOWSHER. No, Mr. Chairman. These numbers came from a study by North Carolina State University of defined benefit pen- sion plans. Social Security increases were in addition these pension plan adjustments. Mr. ANDERSON. The net result, Mr. Chairman, was that the people actually had about 70-percent inflation protection. If you take the 40-percent protection they had on the pension plan part of the retirement package, plus the 100-percent protection on the Social Security part, then the aggregate worked out to about 70 percent. Senator STEVENS. Were you able to compare this plan of ours with that kind of protection, taking into account that it has Social Security protection on the first tier, has a level of protection on the second tier, and is protected in the marketplace on the third tier? Mr. ANDERSON. If inflation, by some weird and hopeful aspects, remains the way it was in the last year, let's say about 3 percent or less, the Federal retiree after your 2-percent reduction is in effect only getting 33-percent protection. On the other hand, if inflation is, say, 5 percent, the Federal retiree would get the 5 percent less 2 percent or 60-percent protection under your plan. That compares very favorably with the private sector. Now that 40 percent is a private sector average. Small firms provided as low as 20-percent protection according to that North Carolina State study. Larger firms with as much as 60 percent. The bottom line is we feel the plan provides, under a reasonable scenario, something comparable to what the private sector is getting. Something fair. Senator STEVENS. The third tier has a higher level of protection. Mr. ANDERSON. Yes, sir; absolutely. The thrift plan tier, you mean. Senator STEVENS. So wouldn't the average be higher than that? Mr. ANDERSON. I am sorry, I have not worked in the thrift plan part of it. You are absolutely correct. We have 100 percent on Social Security; at 5-percent inflation, 60 percent on the pension plan; plus as much as 100 percent on the thrift plan. Senator STEVENS. That is the way I look at it. I hope we are right. General and gentlemen, GAO has contributed very heavily to the work that has gone into the studies that led to this plan. We have relied upon your agency and on the Congressional Research Service and on some private sector services, too. Your studies have been timely and most helpful. I want to thank you for the work you have done so far. As we proceed here, we are going to be bouncing off of you suggestions we are and will be getting on some changes. I don't know if you have had a chance to look at the OPM sugges- tions concerning the deferral of the impact of the military credit. You weren't here when I mentioned that, General. Mr. BOWSHER. We would much prefer what you have in the bill here. We haven't had a chance to look at it very carefully but our initial reaction is we would not agree with their concern here. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator STEVENS. I would appreciate your giving their sugges- tions consideration in terms of the financial impact on the plan. I note your comment about the civil service retirement system, and incorporating into it some of the changes we are making here. We want to do that but we want to get this plan through first. Then, hopefully, once we have this one through, we can go back and in- corporate into the civil service retirement system, with little con- troversy, the changes which we have agreed to with the House and which the President has agreed to. Mr. BowsHER. That might be a better approach. Senator STEVENS. I think we would be sort of opening up two Pandora's boxes at once if we start tinkering with the other plan. The other plan ought not to be tinkered with in any way that would reduce benefits because we made a commitment that the ex- isting plan will not be adversely affected by the creation of a new plan. I would hope you understand why we did not follow your sug- gestion there. Mr. BowSHER. Yes, we do. Senator STEVENS. Senator Gore. OPENING STATEMENT OF SENATOR GORE Senator GORE. Thank you, Mr. Chairman. I am sorry that my plane was late in taking off in Atlanta this morning; otherwise I would have been here for the first witness, as well as for this panel. Senator STEVENS. Do you have an opening statement you want to make, Senator? Senator GORE. I do have a prepared statement but I note the wit- ness list is a very long one. Rather than taking up everyone's time, I will just put it in the record and go straight to questions. It will be substantially similar to the statement I made on the occasion of your introducing the bill which brings us here today. [Prepared statement of Senator Gore follows:] PREPARED STATEMENT OF SENATOR GORE Thank you, Mr. Chairman. As I stated at the time of S. 1527's introduction, we face a complex and critical task in our efforts to redesign the Civil Service Retirement System for Federal em- ployees covered by Social Security. The Social Security Amendments of 1983 left Congress with a difficult responsibility in fashioning such a system. It is a duty that we must and should discharge by the end of this year. Congress' responsibility to develop a new retirement system is important. If we fail to act, tens of thousands of Federal employees who have started work since Jan- uary 1984, or who will be coming to the Federal Government in the future, can expect to contribute up to 14 percent of their hard-earned pay, for pension benefits which will be uncertain at best. Moreover, in designing a new retirement system, the Congress is in a unique position to influence the kind of Federal work force this country should have. The focus of our deliberations must be to ensure that Federal employees, at work and upon retirement, receive fair and reasonable compensation for their service. That compensation should be fair and reasonable in the eyes of the workers them- selves, whose efforts are vital to the varied functions of our Federal Government. It should be fair and reasonable, as well, in the eyes of the taxpayers who correctly insist that their tax dollars be spent sensibly and to good result. S. 1527 is a significant step in the right direction. The careful attention to details both of substance and of leadership which Senators Stevens and Roth have devoted to this challenge over the past several years has been evident in every aspect of the Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066ROO0100150001-7 process. That wisdom and leadership has left a positive imprint on the legislation which brings us here today. On my side of the aisle, the senior Senator from Missouri has done much to foster a spirit of cooperation and bipartisanship in our consideration of this issue. Prior to the introduction of the bill, potential differences were fully aired, without the rancor that often characterizes issues in which the stakes are so very high. Conse- quently, our task is to strike a proper balance within a narrow range of disagree- ment. As in many of these deliberations, we must take a close look at many highly tech- nical issues. A web of formulas, categories, and requirements must be woven into a coherent and sensible policy-a policy that is clear enough for those who will depend upon it for their economic security, and flexible enough to address the various situa- tions and needs that Federal workers may face during their careers. Several areas in the Stevens-Roth bill warrant careful scrutiny. How we decide these issues will shape the basic structure of the plan and its pattern of payments for decades to come. Each area of concern requires important choices; taken togeth- er, those decisions will form the heart of a sound and adequate system. First we must decide how much we should protect future pension benefits from dwindling in the face of rising prices. To be sure, this is a familiar and difficult issue for all of us. The fixed incomes of retirees must be accorded a measure of eco- nomic security. Because Social Security continues to be fully and automatically adjusted for changes in the cost of living, it serves as the basic component of income protection for all workers. But a pension must also serve as a dependable source of retirement income, which is possible only if its value is maintained. The Stevens-Roth bill de- pends primarily upon the inflation protection granted by the Social Security cost-of- living adjustment. While the expense of COLA's in benefit programs is of great con- cern to all of us, we must be careful not to schedule an erosion in benefit value that grows worse with each passing year. As they plan for their retirement years, Federal employees deserve to know with certainty at what age benefits begin. The current Civil Service Retirement System has been criticized for permitting employees to retire as early as age 55. This costly feature of the system will undoubtedly be a major focus of any new plan. It is important to note that many private sector employers, particularly those with a heavy concentration of physical labor, permit unreduced retirement at age 55 to workers with careers sparming 30 or more years. Virtualy all private sector pen- sions make some provision for retirement at that age. Furthermore, despite the range of jobs in the Federal Government and the private sector, the average retire- ment age is around 61-for workers inside or outside the Government. With 62 as its earliest age of eligibility, Social Security reduces the benefits Feder- al employees would receive at earlier ages. The Stevens-Roth bill goes further, by reducing the Federal pension benefit drawn before age 62. We must consider care- fully the impact this provision would have on Federal workers, particularly those who work long careers in difficult and demanding occupations. We cannot possibly guarantee every worker in every circumstance the same total benefits he or she would now receive. But we can put together a package of benefits from Social Security, from a supplemental Federal pension, and perhaps from an employee savings plan, that is generally comparable to the existing system. The issue thus becomes one of determining the appropriate mix of benefits to achieve this goal. An employee saving plan with government matching funds will give every worker the opportunity to supplement a defined and predictable pension amount. But many workers will not be in a financial position to participate in the savings plan fully and consistently throughout their careers. As we move toward a final mix of benefit components, we must be sure that the basic defined pension, along with Social Security, produces adequate retirement income on its own. Con- tributory savings plans should serve as a supplement available at the choice of the employee. During the Governmental Affairs Committee's deliberations, every aspect of this lengthy bill will have to undergo rigorous examination. A pension plan must not only meet the obvious and expected needs of its retirees, but must assure its partici- pants and their families adequate income protection in the event of death or disabil- ity. We can do no less than provide our employees a package of specific family pro- tections should such family disasters strike. The Stevens-Roth bill addresses these concerns with care. With that beginning, I am confident that Federal workers and their families can expect a final bill that combines compassion with confidence and good fiscal sense. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066ROO0100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 The testimony which the committee will receive this week comes from a diverse collection of interest-interest with important stakes in the outcome of our delibera- tions and interests which can all expected to make a contribution to that outcome. Senator GORE. Let me just ask a few questions here so we can move this hearing along. General Bowsher, in your statement you noted that the average private sector COLA is about 40 percent of CPI and then you quick- ly noted that the companies which have more than 10,000 employ- ees tend to provide COLA's at an average of 60 percent of CPI. I am curious that you were not similarly quick to point out, in dis- cussing system costs, that while the average is around 19 percent of payroll, the average for the larger companies with work forces more comparable in size to the one we are discussing here is con- siderably larger; isn't it? Mr. BOWSHER. It is about 25.1 percent, Senator Senator GORE. 25.1 percent? Mr. BOWSHER. Yes. Senator GORE. I didn't want that omission to go unnoticed be- cause I think it is a significant figure. Second, GAO has consistently recognized-before I go to the second point, the payroll cost of this proposal would then be quite a bit lower than the payroll cost of the typical private sector plan among those employers with larger work forces, correct? Mr. BOWSHER. Yes, and it is also the case generally with the larger corporations and the ones that are doing well-in other words, one of the things in the private sector you have to keep in mind is some of those larger companies all of a sudden hit a a period of not doing well--sometimes cannot do as well for their re- tired people. Senator GORE. It would be hard to assert that the Federal Gov- ernment should be equated with those that are doing well. [Laugh- ter.] That is another point. Second point. Isn't it true that GAO has consistently recognized in recent years that Federal benefits on a total compensation scale have lagged behind those in the private sector? In other words, when you add together salary, health benefits and pension benefits and look at the total compensation package the way any normal person looks at a package when making a decision on where to go to work, that the Federal package has lagged behind, correct? Mr. BOWSHER. Correct, Senator and it is one of the reasons I had so much trouble with some of the Grace Commission recommenda- tions on the pension plan where they thought you could just change the retirement age very quickly up to age 65. They were not looking at total compensation. I think the Government has to look at total compensation if you are going to attract the kind of people we need to run Government. Senator GORE. Traditionally, of the three components of that package I mentioned, the retirement component has been the most attractive relative to its counterparts in the private sector, correct? Mr. BOWSHER. Correct. Senator GORE. So if you have a total package for Government employees that is lower than in the private sector and you take the one part of that package which has in the past been the only one Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 that is relatively attractive and lower it to a level below the aver- age figure for the larger private firms, then the effect will be to reduce significantly, or to reduce the overall compensation package so that it lags even farther behind-would you agree with that? Mr. BOWSHER. It would be hard to argue against the logic of that but I think you get some features in this new plan that are really quite attractive. In other words, I think affordability will be much enhanced for people in Government. We have been watching this very carefully at GAO and we do believe that this is an attractive retirement package for future Government workers. This compo- nent of the compensation package, the retirement program, in other words, would be quite competitive. I still believe that the pay, salaries, is the basic problem in attracting qualified people into Government, especially at senior levels. Pay is certainly behind what I think is competitive. Senator GORE. Please don't misunderstand the architecture of the question as will be apparent from a reading of my prepared statement. I commend the chairman and the chairman of the full committee for moving this bill forward and our disagreements are within a relatively narrow range, but I do want to underscore the effect on the total Federal work force of simply equating the pay- roll cost of the Federal retirement plan with the payroll cost of the average payroll plan in the private sector, of both small and large firms, because if you look at that component as a part of the over- all compensation package, which is already behind those counter- parts in the private sector, then the net effect could be to reduce the attractiveness of Federal employment still further. What would GAO's reaction be to a thrift plan contribution level that is weighted toward the lower end of the income or contribu- tion scale, such that the first 1 or 2 percent of salary contributed to the plan would be matched dollar for dollar while the remaining portion would be only partially matched? Mr. BOWSHER. We would have to look at the figures on that. It would tend to make it more attractive for the lower-paid people. One of the question marks here and I think probably what you are getting at, Senator, is can the lower paid people come up with the money to go into the thrift plan and let's put some incentives for them in there. I think one thing, to go back, to the overall compensation ques- tion, if there is one thing that tends to be out of whack, you might say, it is the compensation for the more senior people in Govern- ment holding the more responsible positions. One of the things this retirement program ought to do is to have some kind of balancing, in the thrift plan, you might say, for the people holding the more senior positions because that is where, I think, the compensation, the salary part gets more out of whack with what is in the private sector. I think at the lower levels the Government pays pretty com- petitively. We would be willing to look, though, at any alternatives that you want us to look at. Senator GORE. I appreciate that offer and I will take you up on it. Do you agree that it is very difficult to predict or model the dis- tributional pattern that would result from these various combina- tions? Mr. BOWSHER. Yes, Senator, we do. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator GORE. So it could have a distributional impact more tilted to one end of the salary scale or the other compared to what we can now predict. But one question I have in that regard is whether or not you believe lower salaried employees will be able to participate. It's a subjective judgment, given the weakness of all of the models in this area, but do you think that lower salaried em- ployees would be able to afford to participate in the thrift plan to the extent necessary to provide an adequate retirement income? Mr. BowSHER. I think that is probably one of the biggest question marks about the program and one where I hope the answer is yes, but we're not as confident about the answer as some of the others that we can give. Bill, if you would like to add something. Mr. ANDERSON. I would like to comment on two things, sir. First, if the employees did no more than take that 1.3 percent that they would no longer be paying into the existing retirement plan and put it into the thrift plan, that 1.3 percent over the course of a 30- year career could provide them with around 12 percent of final pay as part of the retirement package. Studies have been conducted of thrift plan participation out in the private sector and it does vary, depending upon the amount of the employer contribution. However, with a 100-percent match, the studies we saw, discussed in one of the reports we put out, indicat- ed that participation ran up around 80 percent, and I would just assume when you are talking 80 percent, you are down into the lower-paid employees within the organizations that were studied. Senator GORE. You could use that as an argument in favor of the extra incentive for the first 1 or 2 percent, couldn't you? Mr. ANDERSON. Yes, sir. Senator GORE. I will be talking with GAO further about that pro- posal. Just three more questions. What is GAO's reaction to a so- called back-loaded accrual rate whereby the multiplier used to de- termine retirement benefits, rather than being a single percentage, is a gradually increasing amount which increases according to se- niority? Mr. SHELTON. That certainly is the way the civil service system is constructed currently. There is plenty of precedent for it in the Federal pension plan. Senator GORE. What is your reaction to it? Mr. SHELTON. Probably our reaction would be that the actual for- mula, how you get to that end result, is not as important as the end result itself. What is more important is what is the replace- ment rate, the amount of benefit compared to salary at the time of retirement. Mr. ANDERSON. Let me say, Senator, the standard really ought to be what is that overall level of retirement benefit that we believe the Federal worker is entitled to. Senator GORE. If you want to elaborate on that for the record, feel free to do so. You note in your testimony that the prevailing practice in the private sector regarding vesting of retirement bene- fits is a 10-year rule. Is GAO advocating changing the bill accord- ingly? Mr. BOWSHER. No; in other words, we think the 5-year rule is the right rule. As you notice also in our testimony, we say the trend is toward-- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator GORE [interposing]. The trend is toward 5-- Mr. BOWSHER [interposing]. That is correct, especially taking into account the role of women in the work force today, more and more companies are considering moving it from 10 down toward 5. Senator GORE. This is something we can't avoid, but I am inter- ested in your response to this: What problems or inequities might we anticipate as the consequence of having two such different pro- grams operating within the Federal work force simultaneously? Mr. BOWSHER. I think it is going to be very interesting to see how many of the existing employees convert into the new system, and it is very hard to predict. If the new system is viewed as being attrac- tive by a large number of present employees up to a certain age, let's say-because I think most people believe that what you will see is kind of a break point at some age, they are not quite sure what it will be-they may think it better to take the new system rather than the old because it gives them more flexibility and, as I say, more affordability. It is just hard to predict but it could happen that most people might be under this new plan, say, within 10 years. Senator GORE. Just one more question. Periodically, administra- tions have found it necessary to undergo major RIF's or reductions in force. One component of RIF policy which attempts to make it somewhat more humane is to provide for early retirement for workers with over 25 years of service, and for those over age 50 with 20 years of service. That sort of component appears to be a reasonable inducement to retire early, provided that the early re- tirement benefits are sufficient. Would you favor an early retirement component as an induce- ment and, if so, how would you seek to insure that those early re- tirement benefits are made sufficiently attractive to provide such an inducement? Mr. BOWSHER. Are you saying the early retirement you described is something in the private sector now or was in the old plan? Senator GORE. The old plan. Mr. BowsHER. I think the two criticisms that the existing plan has been subjected to by the people in the private sector, it seems to me, are the unlimited COLA protection in place during the 1970's during that high inflation period where most people in the rest of the economy were not given 100-percent protection, and the age 55 retirement. A lot of people in the private sector do not un- derstand why people in the Government sector should be able to retire and all too often in their view go out and get another job in the private sector. So I think this plan that brings the retirement age up closer to what it is in the private sector makes a lot of sense as far as getting the Federal workers away from the criticism that has been brought down upon the retirement plan, which I think primarily came down in the 1970's when you had the senior people frozen as far as pay level and you had COLA adjustments for the retired people so you ended up with the anomaly of retired people making more than persons working in Government. The problem is as much as anything the pay cap, not the retire- ment plan. I do believe if you had some kind of early out, at times it is one of the best ways to achieve a reduction in force. I agree with you there. Maybe it is something that ought to be considered. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 I think the proposed plan here, moving the average age up to 62, has a lot of features to gain public support in this country for the Federal workers. Senator GORE. Thank you very much. Thank you, Mr. Chairman. Senator STEVENS. Senator Glenn. OPENING STATEMENT OF SENATOR GLENN Senator GLENN. Thank you, Mr. Chairman. The objective of any changes for any system like this has to be to get good people in. No. 2, how are we going to keep them in, and three, are we going to be able to do this through their employment lifetime, and do it fairly without being excessive. Those are the bal- ances that we are trying to deal with here. We are dealing with hundreds and hundreds of billions of dollars here and so the com- petition to get good people is very intense. With all these changes here and whether we are going to be able to recruit good people with this new system, have you been able to run any studies or do you have any studies to indicate whether this is going to be attrac- tive enough so that we can really be competitive? I know it is a general question. It has to be asked because that is the objective of the new system. We wouldn't be dealing with a bill at all if it wasn't trying to make sure we get good people into Government. I think the bottom line has to be studies of some kind whether this is going to be sufficiently attractive. Mr. BoWSHER. We have not done a study as explicit as what you are asking us about, Senator, in regard to this new plan, where you can go out and show it to a number of people and ask whether they would find it attractive to come into the Government now. We did some studies in the private sector along those areas and we found those plans were attracting qualified people. Again, though, to get back to one thing Senator Gore pointed out, is it the overall total compensation or total package that most people will look at when they make a decision to come in, and I think as long as you have the Government people being paid less than a comparable rate, it will be difficult to attract qualified people even though you have a pretty good retirement program. We have not done the studies that you are asking us about. Mr. ANDERSON. The point was made earlier by Senator Gore-in fact, we are going to be cutting the size of the total Federal com- pensation package if in fact the bill were enacted essentially as written. Instead of that 24.7 percent of payroll we currently give to employees, or the equivalent, we would be giving them something over 20 percent. We make the point still that the private sector seems to be an appropriate standard to be used for all aspects of the Federal compensation package. But the Congress has to con- cern itself also with rectifying that shortfall Hay Huggins pointed out in the amount of the total compensation package whereby the Federal worker still lags behind the private sector across the board by 7 percent before this latest setback. Senator GLENN. The Federal Government is a very large institu- tion, of course. Have you compared the Federal Government em- ployment with only the largest companies, say IBM, AT&T, GM, Ford, employers like that? Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. ANDERSON. Some of the studies we have looked at, sir, re- stricted themselves to the very largest firms in the Nation and there is a real difference in the level of benefits afforded by that type of employer as contrasted with employers generally. The value of a retirement package might average 10 to 13 percent ac- cording to some of the studies for smaller employers. When you get up into the larger ones, you are talking 25 percent of payroll so there is an order of magnitude over two times as great out there in the private sector. The larger firms, the IBM's, the top 10 percent have a package that is even better than that much-maligned pack- age the Federal worker gets today. Senator GLENN. Should we be comparing our plan with the larger firms or should we be comparing our plan with national averages? I think when people sign on with the Federal Govern- ment, the size of this institution we are running here as the Feder- al Government, we should be competitive with those other very large institutions if we expect to recruit and retain qualified per- sonnel. Those companies are the ones dealing in the technologies and all of the things we have to deal with at the Federal level. Mr. BoWSHER. I think you are right, Senator, and I think we should be comparable to the better employees. I don't think we can be comparable probably to the very finest programs out there in the private sector. I think there are certain corporations, as Bill points out, that have outstanding programs for their employees and I am just not sure the Federal Government could afford to have that. I think you are right. I think when you are talking about, as I often say, the program in the Navy in the nuclear power area, the space program, some of the law enforcement areas, the IRS where we are trying to have people that can go toe to toe with the best accountants and lawyers in the private sector, you have to attract qualified people if you are going to have the Gov- ernment operate well. There is just no question about it. I think our program should be compared to the larger and the better run companies. Senator GLENN. That is who we are going to be in competition with. That's right. Regarding specifically the thrift plan provision, do we have any studies that will show who will probably take ad- vantage of it? The middle and higher income workers use the IRA's. Do you believe 100-percent Government match encourages lower salary workers to participate also? Is that the main factor on that? Mr. BOWSHER. Yes, that is the main factor. We think that will be the main reason why the lower income people may participate. As Bill pointed out, if they put in the amount they are currently con- tributing to the civil service system, they will have a very substan- tial amount when retirement age comes. I will say without ques- tion that one of the bigger question marks of the proposal is how much participation will you get in the thrift plan. There is no ques- tion that in the private sector, when we look at different plans in different companies, the higher income people tend to partake more than the lower income, just because they have more dispos- able income. Senator GLENN. I think that is going to be a problem if they are going to have a substantial chunk of their income now taken away. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 It is easy to say I need this now, maybe I can do this later and put it off and then you don't have participation. At the latter end of their careers participation would probably pick up. You said the proposal differs from private sector programs in that the pension plan is less generous at the time of retirement than the private sector norm for average and higher paid employ- ees. You say the thrift plan is more generous in the private sector. I am concerned that we get up here, half-way through a career, and we have very promising managers which we need, many in our Government these days; and the attractions are on the outside and we see that repeatedly. I don't really see that we are correcting that with this legislation. I frankly don't know how you correct it. That is of great concern to me-not only to attract good people but then when we do get people, just as they are about to move into very competitive management positions, we have the old revolving door bit all across the Government, not just in the military, and we lose people to industry who should be the top level of Government managers. How do we keep those people? Are we going to be able to do it with this? I don't see it is going to correct that problem. Mr. BowsHER. I think, again, it is the cast of the total compensa- tion package and I agree with your concern, Senator, I don't think at this point in time there is a total compensation package for the rising middle manager and then on into the senior management positions in the Federal Governement that is as attractive as the private sector can hold out, and we are having a very hard time, I think, holding onto our best people. I think the thrift plan is, again, one of the stronger features of the proposal. I think the atti- tude is also a factor. Right now a lot of Government people do not feel well appreciated and I think that contribute greatly to the fact that many of them are willing to leave. I think if you have a total compensation plan that allows your more successful people and the people you are really relying upon to live well, to educate their children, to take a decent vacation once a year, a lot of people will stay in Government because of the attractiveness of the work and the issues that they work on. When they come up and face the college education expenses and they have a compensation plan that does not allow them to send their children to the best universities and colleges, they start to think about the private sector. It's a real problem. So I share your con- cern. Senator GLENN. Just one other question. Women have some spe- cial problems in pension retirement income areas. Through some of the hearings on the Special Committee on Aging, we faced up to some of those and had testimony about gaps in pension protection due to breaks in services and changes in jobs. In the current Civil Service Program many women leave the Federal work force with no coverage for retirement at all. Will the new system help this sit- uation, portable social-- Mr. BOWSHER [interposing]. Yes; it will, since they are under Social Security and, therefore, can add that to any other Social Se- curity they have. I think the whole portability of this plan is quite a bit better than the previous plan. Senator GLENN. Thank you, Mr. Chairman. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator STEVENS. Thank you, Senator. I am pleased to have your comments. I would hope the review of this proposal would lead Congress to understand that the basic problem in attracting and retaining the better people for employment in our Government is the compensation system itself. We have not addressed the inequi- ties of the compensation system. I also believe the suggestions to decrease the match on the thrift plan would be counterproductive as far as retaining the higher-paid employees. Certainly if you look at this for someone who has a $60,000 income who can have what amounts to a $3,000-increase in compensation by virtue of initiat- ing a plan of deferring income tax on $3,000-in other words, have a deferred taxation on $6,000 of income, put together with the pro- vision for a loan to be made against that amount to help send chil- dren to school and what not, it seems to me that we have-I hope Senator Glenn will notice-we have tried to build into this plan facets that would enable us to keep those higher-paid people with some very attractive provisions. I hope everyone will study them. Mr. BoWSHER. Mr. Chairman, we would strongly support those features. Senator STEVENS. You did examine the loan provisions. Are those comparable in the private sector. Do they have loans against their thrift plan? Mr. BOWSHER. Yes. Senator STEVENS. I, particularly, think they are very good and wish we had had that provision when I had five children in college at the same time, I'll tell you. We do thank you very much and will be calling on you further for your help as we go along. Mr. BOWSHER. Thank you very much, Mr. Chairman. Senator STEVENS. Our next witness is Donald Ledbetter, presi- dent of the National Association of Postal Supervisors, accompa- nied by Andrew Ruddock, who is his consultant. Mr. Ledbetter. TESTIMONY OF DONALD N. LEDBETTER, PRESIDENT, NATIONAL ASSOCIATION OF POSTAL SUPERVISORS, ACCOMPANIED BY ANDREW E. RUDDOCK, CONSULTANT Mr. LEDBETTER. Mr. Chairman, members of the committee, my name is Donald Ledbetter. I am president of the National Associa- tion of Postal Supervisors, an organization representing some 44,000 midlevel managers in the U.S. Postal Service. With me today is Andrew Ruddock, an expert retirement consultant to our organization. In the interest of time, I will summarize my remarks, but re- quest that a copy of my full statement be printed in the record. We are pleased to be here today to offer our views on S. 1527, a bill to establish a new retirement system for postal and Federal employees hired after December 31, 1983. Mr. Chairman, we would like to congratulate you for the dili- gence, hard work and leadership in this area. You and Senator Roth, chairman of the full committee, and Senator Eagleton did an excellent job in insuring that all interested parties had an opportu- nity to express their views. The public policy forums in particular Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 held in late 1983 and 1984 gave a good, solid background on which to begin this debate. We agree the time to move ahead on development of a supple- mental plan is now. Because of the wealth of information that is available, we think it is possible to develop a plan this year that meets the needs of employees, the employer and, in our case, the taxpayer as well. In my testimony today, I would like to review some of the provi- sions of S. 1527 we support, some that we do not and some specific recommendations for changes. Despite our continued opposition to Social Security coverage for any postal or Federal employee, we recognize the reality of the situation and for that reason, do sup- port the three-tiered approach contained in your legislation. The combining of Social Security with a defined benefit supple- ment and a thrift plan is the best possible combination of prevail- ing practices in both the public and the private sectors. We strongly support the use of the present civil service retire- ment fund for the financing of both the old and new systems. As you will recall, one of our major concerns in the social security debate was the drain on the civil service retirement fund if new entrants were totally cut off. In general, we are also supportive of the disability provisions. The inclusion of Social Security disability benefits provides a higher replacement of predisability earnings if the employee meets the Social Security definition of disability. If the employee is re- garded as disabled only for his or her job in Government, the dis- ability benefits remain about the same as now provided by the cur- rent system. We do not, however, see the advantage in having a third party administer the disability program outside Government. Obviously, the required coordination with Social Security would add to the present administrative costs, but we think handling claims in-house would be less costly than contracting out that func- tion, and thereby paying profits to a private insurance company. As I mentioned, we do have problems with some of the present provisions of S. 1527. First and foremost, we are concerned with the overall level of benefits. From our perspective, there is no reason to adopt a plan that costs 17 percent less as a percentage of payroll than the present civil service retirement system. In light of the findings by the Hay Associates, as reported to the House Post Office and Civil Service Committee, there is no justification for the Federal Government to provide such a low-cost plan. As Hay noted, total Federal pay and benefits are already 7.2 percent less than those in private industry. Hay further found the present employer cost of civil service retirement benefits is less than the payroll cost of 25.1 percent or more for the top 10 percent of large employers in private industry. The average retirement cost for the private sector we hear most often is 18.5 percent of payroll. However, that percentage takes in the mediocre and those private companies that have little or no re- tirement benefits for their employees. We believe the Federal Government should be a leader because of its size and the nature and importance of its work. In order for the Federal Government to effectively compete for quality employ- ees, the Government must provide a benefits package similar to Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 that offered by the top companies in private industry, not the aver- age or mediocre. Second, although we support the concept of a thrift plan, we do not think Government's contribution should match 100 percent up to the first 5 percent of employee contributions. The prevailing practice in the private sector is to match 50 percent up to 6 percent of employee contributions. The costs for higher Government contri- butions in S. 1527 could be better used to improve the defined bene- fit portion of the plan. The thrift plan should be used to encourage employees to save and thereby provide extras during retirement, not as a primary source of retirement income. Our recommendation is for Government to match 50 percent of employee contributions to the thrift plan up to 6 percent. The tax- deferred component would encourage people to save at either the 100-percent match or our preferred 50-percent match. This as- sumes, of course, the President's proposal to eliminate the tax-de- ferred status of so-called 401(k) plans is not adopted in any tax reform measure. Removing the tax incentive from the thrift plan would make it considerably less attractive. There are several changes we would like to recommend that would, in our opinion, improve S. 1527 for the Government as an employer and also for the employee. First, we strongly recommend an elimination of the 2 percent per year penalty for optional retirement before age 62. The prevailing wisdom behind the adoption of the present unreduced benefit at age 55 with 30 years service still applies. It was adopted in part to keep the work force young and vigorous and to increase the oppor- tunity for younger workers to move up the promotional ladder. It improves employee morale and productivity and has served both employees and the employer well. It was reported as recently as September 4, 1985, in the Washing- ton Post that CBS, Inc., is encouraging 2,000 of its employees who are at least age 55 and have 10 or more years of service to retire by November 29 of this year. To make early retirement more attrac- tive, the benefits of employees who accept the offer will be comput- ed as if they were 5 years older and had completed an additional 5 years of service. Providing for an unreduced annuity at age 55 with 30 years serv- ice would cost in terms of percentage of payroll only .5 percent which is relatively small in relation to the benefits we believe it supplies. Second, we believe there should be full cost-of-living protection. As presently drafted, S. 1527 would provide annual COLA's equal to the change in the CPI minus 2 percent. Assuming inflation was at 4 percent a year, under this provision, the retiree would lose 15 percent of his or her purchasing power over 7 years. In 21 years, over half would be lost. The primary purpose of a retirement plan is to maintain a retired employee and his or her dependents in a standard of living that is reasonably consistent with the income they enjoyed during the preretirement years. While a thrift plan may help, it does not alleviate the need for COLA protection. We recognize providing full COLAs is costly and would add 3 percent of payroll to the cost of S. 1527, but we believe Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 it is necessary to protect retirees on fixed incomes from the damag- ing effects of inflation. Three, we recommend there be an improvement in the accrual rate contained in S. 1527. For a number of years, the present civil service retirement system has assured adequate retirement income after a full career of 30 to 35 years. S. 1527 would not do that for the new employees using the 1 percent accrual rate for each year of service. Social Security benefits plus the defined benefit supplement would be lower than current civil service annuities at all but the very lowest pay levels. A typical accrual rate in private industry is 1.5 percent. If for cost reasons a 1.5-percent accrual rate is too high, the Congressional Research Service estimates that the accru- al rate of S. 1527 could be increased to 1.2 percent for a cost of 2.3 percent of pay. To encourage career or long-term employment, a slightly more costly alternative would be 1 percent for the first 10 years of service and 1.5 percent for years after 10. Four, we recommend a retention of the high-3 average salary to determine annuities. Basing annuities on high-3 average salary as opposed to high-5 more closely reflects the economic conditions at the time of retirement. A high-5 average will reduce annuities by about 7 percent, yet retaining the high-3 average would only increase the cost of a sup- plemental plan by about .9 percent of pay. Again, this is a relative- ly minor cost considering the financial hardship the high-5 average would cause postal and Federal employees. Five, we strongly recommend the survivor benefit provisions of S. 1527 be improved. The inadequacy of this provision leaves many survivors nearly destitute as clearly shown in our exhibit 1.1 Under our example, a survivor benefit could be $73 a month and would not begin until 10 years after the death of an employee when he or she would have been eligible for retirement. We recognize under S. 1527 the survivor would receive a benefit from the thrift plan if the employee participated and would qualify for a Social Security survivor benefit at age 60. However, under the present system, in addition to the survivor annuity of $550 a month, that same survivor would have income from any savings that the employee laid aside. Last, the survivor would receive under S. 1527 a life insurance payment of $32,000, which is 1 year's salary plus $2,000, but this is no different than what the survivor would receive under the present system unless the employee was one of the few who elected to waive life insurance. Obviously, we have given a worst-case example, but it does clear- ly show that the survivor benefit provisions of S. 1527 are far below those of the current civil service retirement system. We urge that S. 1527 be revised to give a surviving spouse an immediate benefit equal to 50 percent of the unreduced earned annuity. We also recommend an elimination of the increase in the Gov- ernment's contribution to FEGLI-the Federal Employees Govern- ment Life Insurance Program. The costs for employees is relatively Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 minor and easily affordable and the Government's contribution could be better used to improve defined benefits. Finally, we recommend employees contribute 1.3 percent to the defined benefit supplement. This would make contributions of old and new employees nearly equal and would reduce Government's cost by 1.1 percent of pay. The 1.1 percent amount is less due to refunds given to employees who leave before retirement age. We recognize it would be impractical for employees in both the old and new systems to contribute exactly the same amount due to the nature of Social Security contributions. But we do believe the con- tributions, like benefits, should be as nearly' equal as possible. With all the changes we have suggested, the 20.8 percent Govern- ment cost of S. 1527 would be increased to 24.9 percent of pay. In exhibit 2, we detail those changes and the cost associated with each of them. The estimated costs for all the various items were sup- plied to this committee by the Congressional Research Service of the Library of Congress. The final cost we reached is relatively equal to the cost of the present civil service retirement system and is consistent with our policy of providing comparability and equity between old and new postal and Federal employees. It is still less than the 25.1-percent payroll cost for the top 10 percent of large employers in the private industry. We have additional recommendations which I will not at this time enumerate, but they are included in our full statement. In ad- dition, there are a number of technical problems we see in S. 1527 but they are relatively minor, and we would be happy to get to- gether with your staff to discuss them at a later date. Mr. Chairman, we appreciate the opportunity to offer our views on S. 1527 and want to reiterate our strong commitment to seeing a bill pass this year that is not only in the best interest of the people we represent, but the Government as an employer and the American taxpayer. We will be happy to respond to any questions. Senator STEVENS. We want to thank you very much, Mr. Ledbet- ter, for your very thorough comments. There are many we all dis- agree with. The problem is we must find a balance in terms of the budgetary restraints that are imposed upon us. We hope to make some changes as we go ahead now. The comment about insurance, for instance, that was in our original plan. We didn't have free in- surance. We had it in the defined contribution plan, which is a better plan, but there are people who wanted the insurance cover- age, so we negotiated out several of these provisions. I think we all have to keep in mind also that we hope to go to conference with the House and arrive at a bill to send to the Presi- dent before December. Since the House has some particular points they want to make, we more or less left them out knowing that they are going to add them in. I hope that everyone is aware of the process that we go through in order to get a workable relationship with our colleagues in the House. I know specifically some of the things they are very inter- ested in, and we are sort of light in those areas so they can make their contribution. Maybe that is being too direct in terms of how we are dealing with this proposal, but that is the way it is. Mr. LEDBETTER. We realize that, Mr. Chairman. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator STEVENS. We are going to work with you very closely. I think your comments are very good ones. We put a little more stress on the thrift plan and its value as part of the pension system. I, for one, believe that the estimates saying there will be a low participation in the thrift plan really are not realistic. I cannot think of anyone who would not be willing to put away a dollar in order to have an increased dollar of compensation, particularly if both dollars are not taxed during this current year. Mr. LEDBETTER. There has been a lot of emphasis on whether the higher paid employees would participate. I think the difference is in the age of the employee because the younger employee, regard- less of whether that person is in a lower paying job or higher paying job, has a lot more family responsibilities than a person with a few years down the road has. As you mentioned with your five children in college, once those kids are out of college, I think whether you are a letter carrier or supervisor, you will be more likely to participate in a thrift plan than you would when you still have kids in school. Senator STEVENS. You are right. We are looking at some of those things. We are looking at whether or not there should be some greater emphasis on the thrift plan in the later years of employ- ment and some higher rate of contribution from the employer, as you suggested, in order to retain those people who have some lon- gevity. All the suggestions you make, I think, have great merit, and we are thinking about the same things, if we can do so and stay within the financial constraints of the budget and the way we view those limitations with regard to this proposal. I do thank you very much. I do not have any questions. I think I understand your position and do not find myself too much in dis- agreement with it if we didn't have the financial limitations that we face. That is the real problem. Every one of those suggestions that you make, even though the increase is very small, continues to increase the percentage of payroll contribution. We are looking at all of these and will continue to work with you. Mr. LEDBETTER. Thank you. Senator STEVENS. Senator Gore. Senator GORE. Thank you, Mr. Chairman. I just want to under- score the chairman's comments about anticipating the conference that will be upcoming on the bill. I feel very strongly that it is in everyone's interest, particularly the interest of new Federal em- ployees, to get a bill this year, and to get a bill that comes out of the conference committee and can avoid a needless and destructive confrontation with the executive branch. To have a finished work product at the end of the year is a goal that I believe all members of this committee share. With that in mind, we have to look at some of these recommen- dations. I have worked closely with your group and appreciate the working relationship we have had. I know you understand that if you accepted the capital accumulation plan and then had a full COLA and full retirement at 55 and some of the other things men- tioned, the end result might be significantly more expensive as a percentage of payroll than the current plan, which would not lead us toward a bill as of the end of the year. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 I think everyone understands that, and it is hard to choose be- tween the different provisions. I find your testimony very helpful in outlining some of the reasons you feel the way you do. Your organization, because of its nature, doesn't have too many members who would be immediately affected by the bill right now, is that correct? Mr. LEDBETTER. Senator Gore, that is a very interesting question. I was talking with our consultant, Mr. Ruddock, the other day about that and I doubt very much if we have a single member right now who has come into the Postal Service since January 1984- most supervisors put in a few years in the business before they get promoted to supervisors. However, Mr. Ruddock tells me in 8 years, over half of all postal employees would be covered by the new system. I was surprised about that. I certainly have faith in Mr. Ruddock's-- Senator GORE [interposing]. You have a great big stake in making sure this new plan works well and efficiently. I may submit some other questions to you for your response in writing. I appreciate your appearance. Thank you, Mr. Chairman. Senator STEVENS. Thank you very much, gentlemen. We do ap- preciate your coming. We will get back in touch with you. [Mr. Ledbetter's prepared statement follows:] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 TESTIMONY BY DONALD N. LEDBETTER, PRESIDENT NATIONAL ASSOCIATION OP POSTAL SUPERVISORS Mr. Chairman, Members of the Committee: My name is Donald Ledbetter and I am President of the National Association of Postal Supervisors, an organization representing some 44,000 mid- level managers in the U.S. Postal Service. With me is Andrew E. Ruddock, a retirement consultant to our organization. We are pleased to be here today to offer our views on S. 1527, a bill to establish a new retirement system for postal and federal employ- ees hired after December 31, 1983. At the present time, we have very few members who would be immediately affected by S. 1527. The majority of supervisors are promoted from within the carrier and clerk craft unions in the Postal Service and not newly hired from outside industry. We are, however? deeply concerned about the new supplemental retire- ment program and not simply from the standpoint of future mem- bers. This retirement legislation will be the most important piece of pension legislation since the passage of the Employee Retirement Income Security Act in 1974 and will eventually create the largest retirement program in the country. We believe the federal government should be a leader in the development of sound personnel policies, particularly now since people are making career decisions based on more than just salary. Mr. Chairman, we would like to congratulate you and particularly Senator Stevens for your diligence, hard work and leadership in this area. I personally can remember no other issue, with the possible exception of the Postal Reorganization Act, over which so much time, effort, discussion and debate have been expended. We began this process nearly four years ago with Senator Stevens and appreciate the cooperation extended to us throughout that time by Senator Stevens and his staff. You, Senator Stevens and Senator Eagleton did an excellent job in insuring that all interested parties had the opportunity to express their views. The public policy forums in particular held in late 1983 and 1984 gave a good, solid background on which to begin this debate. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 We agree, Mr. Chairman, the time to move ahead on the development of a supplemental plan is now. Because of the wealth of information that is available, we think it is possible to develop a plan this year that meets the needs of employees, the employer and, in our case, the taxpayer as well. We have come a long way since those first meetings. Many of the concerns we expressed several years ago have been overcome by provisions of S. 1527. In my testimony today, I would like to review some of the provisions of S. 1527 we support, some we do not and some specif- ic recommendations for changes. Despite our continued opposition to Social pecurity coverage for any postal or federal employee, we recognize the reality of the situation and for that reason do support the three-tiered approach contained in your legislation. The combining of social security with a defined benefit supple- ment and a thrift plan is the best possible combination of pre- vailing practices in both the public and the private sectors. We strongly support the use of the present Civil Service Retirement Fund for the financing of both the old and new sys- tems. As you will recall, one of our major concerns in the Social Security debate was the drain on the Civil Service Retire- ment Fund if new entrants were totally cut off. That is not the case in S. 1527. In general, we are also supportive of the disability provisions. The inclusion of Social Security disability benefits provides a higher replacement of predisability earnings if the employee meets the Social Security definition of disability. If the employee is regarded as disabled only for his or her job in government, the disability benefits remains about the same as now provided by the current system. We do not, however, see the advantage in having a third party administer the disability program outside government. The framework for the payment and Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 51 3 distribution of disability benefits is already in place. Obvi- ously the required coordination with Social Security would add to present administrative costs, but we think handling claims in- house would be less costly than contracting out that function and thereby paying profits to a private insurance company. As I mentioned, we do have problems with some of the present provisions of S. 1527. First and foremost, we are concerned with the overall level of benefits. From our perspective, there is no reason to adopt a plan that costs 17% less, as a percentage of payroll, than the present Civil Service Retirement system. Social Security coverage has necessitated two different retire- ment programs, but in our opinion, the problems need not be exacerbated by making those differences so wide as to create sharp distinctions in what one employee receives over another. An employee under the new system would naturally resent the prospect of receiving less retirement benefits than an older employee working side by side doing the same job. This would create unnecessary and harmful morale problems. In light of the findings by Hay Associates, as reported to the House Post Office and Civil Service Committee, there is no justification for the federal government to provide such a low-cost plan. As Hay noted, total federal pay and benefits are already 7.2% less than those in private industry." Hay further found the present employ- er cost of Civil Service Retirement benefits is.less than the payroll cost of 25.1 percent or more for the top 10 percent of large employers in private industry. The average retirement cost for the private sector we hear most often is 18.5E of payroll. However, that percentage takes in the mediocre and those private companies that have little or no retirement benefits for their employees. This brings us back to the basic argument on the role of.the federal government. we believe the federal government should be a leader because of its size and the nature and importance of its work. The functions of Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 government, in one way or another, impact on every person in this country every day. The federal government cannot nor should not be compared to a small computer company for instance. That company may do important work, but its role is not anywhere as varied nor as widespread as the role of government. In order for the federal government to effectively compete for quality employ- ees, the government must provide a benefits package similar to that offered by the top companies in private industry not the average or mediocre. Secondly, although we support the concept of a thrift plan, we do not think government's contribution should match 100% up to the first 5% of employee contributions. We object to the match- ing provision for several reasons. First, the prevailing prac- tice in the private sector is to match 50% up to 6% of employee contributions. The costs for the higher government contribution in S. 1527 could be better used to improve the defined benefit portion of the plan. We recognise that one purpose of the thrift plan is to partially offset the tilt in Social Security since higher paid employees would undoubtedly participate to a greater extent than lower paid employees. However, we do not think higher paid and older employees should receive disproportionately higher share of the government's contribution through the use of the thrift plan than younger employees who are generally paid less. For instance, we believe the majority of postal supervi- sors could not afford to participate to any great extent in the thrift plan. The average salary for a supervisor is now about $30,000. In our opinion, it is difficult in today's society to have any additional income in which to invest at that salary level particularly if the supervisor is married and has a family. We believe the overall purpose of the thrift plan should be to provide the 'icing on the cake.' Employees should not have to depend on the thrift plan for a decent retirement income. The thrift plan should be used to encourage employees to save and thereby provide extras during retirement not as a primary source Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 of retirement income. Our recommendation is for government to match 500 employee contributions?to the thrift plan up to 6%. This would benefit higher paid employees who could participate at a greater rate and still encourage employees at all levels of government to save. The tax deferred component would encourage people to save at either the 1001 match or our preferred 50% match. This assumes the President's proposal to eliminate. the tax deferred status of so-called 401k plans is not adopted in any tax reform measure. Removing the tax incentive from the thrift plan would ask* it considerably less attractive. There are several changes we would like to recommend that would, in our opinion, improve S. 1527 for the government as an employer and for the employee. First, we strongly recommend an elimination of the 2% per year penalty for optional retirement before age 62. The prevailing wisdom behind the adoption of the present unreduced benefit at age 55 with 30 years service still applies. It was adopted, in part, to keep the workforce young and vigorous and to increase the opportunity for younger workers to move up the promotional ladder. It improves employee morale and productivity and has served both employees and the employer well. We support this policy. It was reported as recently as September 4, 1985 in The Washington Post that CBS, Inc. is encouraging 2,000 of its em- ployees who are at least age 55 and have 10 or more years of service to retire by November 29 of this year. To make early retirement more attractive, the benefits of employees who accept the offer will be computed as if they were five years older and had completed an additional five years of service. During the Senate policy forum of February 16, 1984, A. Dale Stratton of the E.I. du Pont de Nemours and Company noted, "De- spite the legislative trend which increases or eliminates a mandatory retirement age, employee choice continues moving in the other direction. Responding to employee requests, an unreduced Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066ROO0100150001-7 benefit is now available at age 58 after 27 years of service." What du Pont has found over the last 10 years is that the "major- ity of employees retire between the ages of 58 and 62." The average age of employees retiring under the present Civil Service Retirement system is about age 61. It is with companies such as du Pont that the federal government must compete. According to a recent article by Peter W. Stonebraker in Compensation Review, "Compensation, and more particularly, benefits -- are more dynam- ic, visible and competitive than ever before." The federal government cannot afford to ignore this trend. Providing for an unreduced annuity at age 55 with 30 years service would cost in terms of percentage of payroll only 0.51 which is relatively small in relation to the benefits we believe it supplies. Second, we believe there should be full cost-of-living protection. As presently drafted, S. 1527 would provide annual COLAs equal to the change in the CPI minus two percent. Assuming inflation was at 4% a year, under this provision, the retiree would lose 15% of his or her purchasing power over seven years. In 21 years over half would be lost. The primary purpose of a retirement plan is to maintain a retired employee and his or her dependents in a standard of living that is reasonably consistent with the income they enjoyed during pre-retirement years. While a thrift plan may help, it does not alleviate the need for full COLA protection. As noted by Dale B. Grant of the Martin E. Segal Company in the July 10, 1984 policy forum, "If inflation is high during the contribution period, the contributions made on early career salaries will have relatively little value in rela- tion to final earnings. Second, if inflation is high during retirement, the annuity will be inadequate." Again, I return to the competition the federal government faces. In a study conducted by Hewitt Associates of 577 small- to-large firms, 76% of the companies which granted a pension increase last year or which were considering granting one this year cited the cumulative effect of inflation as one reason and Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066ROO0100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 55 7 an effort to maintain a competitive position as another. we recognize providing full ODLAs is costly and would add 3% of payroll to the cost of S. 1527, but we believe it is necessary to protect retirees on fixed incomes from the damaging effects of inflation. Three, we recommend there be an improvement in the accrual rate contained in S. 1527. For a number of years, the present Civil Service Retirement system has assured adequate retirement income after a full career of 30 to 35 years. S. 1527 would not do that for new employees using the It accrual rate for each year of service. Social Security benefits plus the defined benefit supplement would be lower than current Civil Service annuites at all but the very lowest pay levels. In an example given by James A. Curtis of the actuarial consulting firm of Milliman & Robert- son during the May 30, 1984 policy forum, the accrual rate for a "typical defined benefit plan" was 1.5% of final average salary per year of service. If, for cost reasons, a 1.5% accrual rate is too high, the Congressional Research Service estimates the accrual rate of S. 1527 could be increased to 1.2% for a cost of 2.3% of pay. To encourage career or long term employment, a slightly more costly alternative would be It for the first 10 years of service and 1.5% for years after 10. Four, we recommend a retention of the high-three average salary to determine annuities. Robert D. Krinsky, President of the Martin E. Segal Company during the policy forum on December 13, 1983 gave an excellent reason why final average salary bene- fit formulas are advantageous. 'While other methods have been used to adjust the benefit structure of retirement plans to recognize economic changes up to the point of retirement, basing benefits on final average salary appears to be the most systemat- ic and equitable method of automatically protecting the real value of benefits in relation to rising salaries. Under this type of benefit formula the basic purpose of the retirement system -- to replace some portion of earnings, depending on Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066ROO0100150001-7 56 8 length of service, in the event of old age, disability and death -- is directly related to existing economic conditions.' Obviously, basing annuities on a high-three average salary as opposed to a high-five average more closely reflects economic conditions at the time of retirement. A high-five average would reduce annuities by about 7%, yet retaining the high-three aver- age would only increase the cost of the supplemental plan by about .9% of pay. Again, this is a relatively minor cost consid- ering the financial hardship the high-five average would cause postal and federal employees. Five, we strongly recommend the survivor benefit provisions of S. 1527 be improved. The inadequacy of this provision would leave many survivors nearly destitute as clearly shown in Exhibit 1. Assume a male employee dies at age 45 with 10 years of serv- ice and has a constant salary (average salary and final pay) of $30,000 a year. Be is survived by a widow and no children. Under the present Civil Service Retirement System, the widow would receive a survivor annuity of $550.00 per month beginning immediately (22% of the high-three). Under S. 1527, her defined benefit would be $73 a month and would not begin until ten years after the death of her spouse when the employee would have been eligible to retire. This is 50% of the earned benefit reduced by 35% for age and another 10% tb provide the survivor benefit. We recognize under S. 1527 the widow would receive a benefit from the thrift plan if the employee participated which could begin immediately or later at her election, and that she would qualify for a Social Security survivor benefit when she reached age 60. However, under the present system, in addition to the survivor annuity of $550 a month, that same survivor would have income from any savings the employee had laid aside. Also, since the employee did not enter government service until he was 35, in all probability he had at least 40 quarters of Social Security coverage in private employment needed to give his widow a Social Security survivor benefit beginning at age 60. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066ROO0100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066ROO0100150001-7 57 9 Last, the survivor would receive under S. 1527 a life insurance payment of $32,000 (one year's salary plus $2,000), but this is no different than what she would receive under the pre- sent system unless the employee was one of the few who elected to waive life insurance. Obviously, we have given a worst-case example. But, it does clearly show that the survivor benefit provisions of S. 1527 are far below those of the present Civil Service Retirement system. We urge that S. 1527 be revised to give a surviving spouse an immediate benefit equal to 50% of the unreduced earned annuity. We also recommend an elimination of the increase in the government's contribution to FBGLI, the Federal Employees Govern- ment Life Insurance program. The costs for employees is rela- tively minor and easily affordable and the government's contribu- tion could be better used to improve defined benefits. Finally, we recommend employees contribute 1.3% to the defined benefit supplement. This would make contributions of old and new employees nearly equal and would reduce government's cost by 1.1% of pay (the 1.1% amount is less due to refunds given to employees who leave before retirement age). We recognize it would be impractical for employees in both the old and new sys- tems to contribute exactly the same amount due to the nature of Social Security contributions. But, we do believe the contribu- tions, like benefits, should be as nearly equal as possible. With all the changes we have suggested, the 20.8% government cost of S. 1527 would be increased to 24.9% of pay. In Exhibit 2, we detail those changes and the cost associated with each of them. The estimated costs for all the various items were sup- plied to this Committee by the Congressional Research Service of the Library of Congress. The final cost we reached is roughly equal to the cost of the present Civil Service Retirement system and is consistent with our policy of providing comparability and Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066ROO0100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 58 10 equity between old and new postal and federal employees. It is still less than the 25.1% payroll cost for the top 10% of large employers in private industry. Before concluding our testimony, there are several issues that we would like to mention briefly. in a public hearing, it is impossible to discuss every aspect of such a complex piece of legislation, but we would like to draw your attention to several items. First, in regard to the question of election into the new system by pre-1984 employees, we recommed this decision be de- ferred for two to five years until the new plan is fully opera- tional. It is almost impossible to provide the employee with all the information needed to make an intelligent election. In any event, the election process would be much simpler after the new system has been operational for some period of time. In testimo- ny before the House Post Office and Civil Service Committee an Administrator of the Maryland State-retirement system, which did provide a voluntary election, noted most employees regardless of whether they stayed in the old system or elected into the new, later thought they had made the wrong decision. Consequently, to minimize any confusion and controversy, we recommend this waiting period. Second, we do not believe it would be wise for the thrift plan monies to be invested in the private sector. Taking money out of government and investing it in the private sector would add to the public debt. Also if private investments do poorly, the loss is borne entirely by the employee. This is unnecessary given the present 11% earnings rate of the Civil Service Retire- ment fund. Third, we are somewhat concerned about the requirement for payments to amortize any supplemental liability that may be created. It is our hope this will be clarified in such way that postal rates will not be affected. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 59 11 Four, in the case of a pre-1984 employee who separates from federal service but is later re-employed, we recommend that he or she remain in the old system. Five, we think it is wrong to include salaries above the pay cap in the average salary because it bases an annuity on income the employee never had. Retirement programs are for income replacement. They should not be designed or used to correct other inequities. Six, we urge the Committee to examine the administrative costs of S. 1527. The administrative costs of the present system are about 0.1% of pay, but given the complexities of coordination with not only Social Security, but outside entities as well (disability and thrift plan), the administrative costs of S. 1527 would be much higher than 0.1%. Seven, the comparisons of replacement rates for the old Civil Service Retirement system and for S. 1527 ignore the fact that old Civil Service Retirement employee income would be much higher if the employee had saved and invested at least 5% of pay. And, last, unvested amounts of government contributions to the thrift plan should not revert to miscellaneous receipts of the Treasury, but go back to the fund. There are a number of technical problems we see in S. 1527 but they are relatively minor and we would be happy to get to- gether with your staff to discuss them at a later date. Mr. Chairman, we appreciate the opportunity to offer our views on S. 1527 and want to reiterate our strong commitment to seeing a bill passed this year that is not only in the best interests of the people we represent, but the government as an employer and the American taxpayer, We would be happy to answer any ques- tions. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 male employee, dies at age 45 10 years service $30,000 Constant Pay $ 3,000.00 10% of $30,000, 1% accrual rate 1.050.00 35% reduction - 5t per year reduction (10 years service) $ 1,950.00 retirement before 62 195.00 10% reduction to provide survivor benefit $ 1,755.00 877.50 Sot reduction - survivor benefit is half $ 877.50 Divide by 12 months, benefit equals $73.00 per month Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 S. 1527 as introduced Age 55-30 retirement unreduced Pull COLAs Accural rate at 1.2% High-Three Average Improvements to Survivor Benefits Change thrift plan match to 50% of 6% Eliminate FEGLI increase Employees contribute 1.3% 20.8% + .5% + 3.Ot + 2.3% + .9% + _3% 27.8% 1.6% .2% I_lA Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator STEVENS. Our next witness is Hon. John Erlenborn who represents the Chamber of Commerce of the United States. Senator GORE. Mr. Chairman, I would like to welcome this wit- ness as a former colleague in the House, one whose voice was widely respected on both sides of the aisle in the House of Repre- sentatives' Although we disagreed from time to time, I and all of my colleagues recognize the enormous amount of study and effort that Congressman Erlenborn has put into these subjects. I certain- ly will find benefit in his comments here. TESTIMONY OF JOHN N. ERLENBORN, REPRESENTING THE U.S. CHAMBER OF COMMERCE, ACCOMPANIED BY JAMES A. KLEIN, MANAGER OF PENSION AND EMPLOYEE BENEFITS, U.S. CHAM- BER OF COMMERCE Mr. ERLENBORN. Thank you, Senator, for those kind comments. Thank you, Mr. Chairman, for the opportunity to appear here today and represent the U.S. Chamber of Commerce. Mr. Chairman and members of the committee, I will not read the entire statement. I hope the entire statement will be included in the record. For the purpose of saving time, I will read portions of it. My name is John Erlenborn. I am a partner in the law firm of Seyfarth, Shaw, Fairweather & Geraldson. I am pleased to appear here today on behalf of the U.S. Chamber of Commerce, the world's largest federation of businesses, chambers of commerce, and trade and professional associations. Accompanying me today is James A. Klein, manager of Pension and Employee Benefits for the chamber. As you may know, during my 20 years in the House of Repre- sentatives, I took a keen interest in developing a rational retire- ment policy for both the public and private sectors. That interest and involvement have continued since my retirement in January to practice law as a specialist in employee benefit issues. Because of my longstanding interest and involvement in these matters, it is a particular pleasure to share with you our perspective on reform of the civil service retirement system. Congress has quite a chal- lenge before it to enact by the end of this year a new retirement system for Federal employees hired after 1983. Senator Stevens and Senator Roth are both to be commended for developing a comprehensive and thoughtful bill, S. 1527. This bill seeks to address the important questions that should be decided by year-end in order to keep post-1983 Federal hirees from remaining in limbo regarding their retirement program. While it is important for Congress to act expeditiously, it is also crucial to develop a system that balances the need of Federal workers to be ensured adequate retirement coverage and the need of taxpayers to pay for an equitable and reasonably priced system. We wish to share our thoughts on the Stevens-Roth plan and on the development of a new retirement system for recently hired workers within the context of reform of the civil service retirement system. At the outset, I should state that the center of the chamber's po- sition on the Federal retirement system is the concept that it Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 should be modified to approximate more closely its private sector counterpart. As a leading supporter of the private pension system and a prin- cipal author of ERISA, I believe that much can be learned from the private system for constructing a reasonable and financially sound Federal retirement structure. In at least two respects, cost of living adjustments and early re- tirement, the CSRS differs substantially from the private sector re- tirement system. These are the two issues upon which my remarks will mainly focus. In large part due to the COLA and early retirement features of the civil service retirement system, most Federal retirees receive more generous benefits than those received by most private sector retirees whose tax dollars substantially support the Federal retire- ment system. COLA's were first authorized for Federal pensions in 1962. The original civil service pension COLA was triggered when inflation exceeded 3 percent. Since 1962, the Federal pension COLA has been on a veritable roller coaster. The COLA's in the Federal retirement system have been indexed fully to increases in the Consumer Price Index since 1966. By con- trast, the private pension system rarely pays cost-of-living in- creases. In the private sector, a defined benefit pension plan pro- vides exactly what its name suggests-a defined benefit amount- frequently with no adjustments for inflation. Some private plans do contain inflation adjustments and other companies increase benefits voluntarily. Social Security also ad- justs for inflation. However, a U.S. Department of Labor survey in- dicated that in 1982, only 3 percent of all private plans contained automatic inflation adjustments. Moreover, these adjustments were limited generally to 3 percent per year, rather than the open-ended adjustment that the Federal Government pays its retirees. There is no question that basic benefits should be increased during periods of inflation, but retired persons should not receive greater cost-of-living protection than working people. That is what has happened and will happen again this coming year as Federal pay is frozen. In 10 of the years from 1971 to 1983, persons drawing Federal re- tirement benefits received larger annual increases than wage earn- ers gained in union negotiations in private industry. While these working Americans realized an average annual gain of 60 percent of the CPI increases in their paychecks, the retired Federal worker gained 100 percent. The full CPI adjustments paid to Federal pensioners also result in the anomalous situation that some retirees can receive more in annual Federal retiree benefits than the salaries earned by the in- dividuals filling the positions formerly held by the retirees. We must restore economic equity between working and nonworking generations. How then should Congress deal with COLA's which in large part are responsible for the explosive growth in spending on all Federal pensions from $2.7 billion in fiscal year 1970 to over $23 billion this year? One way might be to consider something akin to the COLA stabilizer which I proposed in the FAIR-and that is an acronym Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 for Federal annuity and investment reform, civil service retirement legislation that I introduced in the 98th Congress. This proposal bases the COLA on the lesser of the increase in the General Sched- ule increase or the CPI. This reference amount is then applied to the first $10,000 of pension, an amount roughly equal to the maxi- mum benefit a new Social Security recipient would receive in 1985. A more limited COLA adjustment is then granted on pension amounts above $10,000. Another alternative is indicated in the Stevens-Roth plan where- by annual COLA's would be paid at 2 percent below the rate of in- flation as measured by the CPI. It should be noted that either proposal would help achieve the goal of bringing Federal employees to the level of private sector employees. Even with these changes from the current civil service retirement system, however, Federal retirees would have a more generous retirement plan than is found in the private sector. It is important when considering a COLA as part of the new Fed- eral retirement system, to compare the system with prevailing practices in the private sector, not with the current system, be- cause the participants of the new system will, like their private sector counterparts and unlike Federal employees hired prior to 1984, have Social Security COLA protection. The provision of the civil service system that permits an unre- duced annuity for Federal employees retiring at age 55 after 30 years of service often has been in the eye of the storm of controver- sy surrounding Federal pensions. Therefore, an explanation of the early retirement features of pri- vate pension systems is in order to develop a workable and fair early retirement feature. In the private pension system, early retirement is more common- ly available at age 62 than age 55 and even then, the retirement benefit generally is reduced for each year the retiree is under age 65. This also is the case with Social Security benefits. Phasing in reduced benefits for retirees between the ages of 55 and 65 would bring the Federal retirement system into closer align- ment with private sector retirement practices. The chamber sup- ports this reform and urges the Congress to do likewise. The Federal Government Service Task Force, the congressional caucus, claimed in a fall 1984 report that both private and Federal workers retire on average at age 61. The task force quoted Office of Personnel Management figures showing that in 1982, civil service retirees on the average left at age 60.7 with 28 years of service. Unfortunately, these figures do not tell the whole story, but let us not lose sight of the forest by looking at the trees, debating sta- tistics when the policy of unreduced early pensions is the problem. If the policy of early retirement is a privilege paid for mainly by taxpayers and yet not enjoyed by them, then where is the equity in continuing that policy? Indeed, if Federal retirees retire later than assumed, why oppose change? For the record, certain points should be made about the retire- ment age issue. First, the Bureau of Labor Statistics' Office of Em- ployment and Unemployment Statistics does not collect data on av- erage private sector retirement ages due to definitional problems. For example, is a rehired annuitant retired? Thus, there is no reli- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 able private sector average retirement age data published by the Government. Second, let us beware of averages that mask significant data. The average age of retiring Federal employees from 1973 to 1982 was 61.1 years, according to table 15 on page 31 of the Congressional Research Service report, "Background on Civil Service Retirement System." What this table does not state is that, according to OPM, about 39 percent of the retiring Federal employees retire within 1 year of attaining age 55 with at least 30 years of service. Further, the 61.1 age refers only to optional retirement, those with age-service of 55/30, 60/20 and 62/5. It does not include retire- ment ages for disability, involuntary, deferred, mandatory or spe- cial situations-hazardous employment, Members of Congress, and so forth. The figure quoted by the task force is only for optional retire- ment. It represents 69.3 percent of the 85,000 retirees in 1982. As a matter of fact, 25 percent of the 1982 civil service retirees left Fed- eral service at an average age of 52. Both my FAIR proposal of the 98th Congress and S. 1527 are directed at bringing the early retire- ment features of the new Federal system into closer conformity with private sector praetices. Under my FAIR proposal, current employees as well as future employees would be able to retire under the same age-service provi- sions as under present law, but the amount of benefits based on service after the year of enactment would be subject to a reduction factor of 2 percent for each year under normal retirement age. The 2-percent rule would not reduce the amount of an employ- ee's benefit which is accrued prior to the year of enactment. The Stevens-Roth plan also reduces an annuity for early retire- ment, reducing benefits for retirement before age 62. Earlier this year, the Reagan administration also proposed a phase-in of re- duced benefits for retirees between the ages of 55 and 65. I am not suggesting that the reduction factor must be 2 percent as it was proposed in the FAIR legislation. I am suggesting some reduction factor be considered. Social Security reduces benefits by 6% percent for every year under age 65. The Congressional Re- search Service reports on page 42 of its December 1984 study for the House Post Office and Civil Service Committee that a full actu- arial reduction would reduce payments by 6 or 7 percent per year. However, private pension plans often reduce employees' accrued pension benefits by about 4 or 5 percent a year if they retire early. Employees should not be prevented from retiring early, but nei- ther should they be encouraged to leave earlier by an excessively generous provision. I believe a proposal to moderate early retire- ment costs will work to the benefit of our Government and its em- ployees. The employer cost of the current civil service system is an unac- ceptably high percentage of the total Federal payroll. Congression- al Research Service estimates that the cost is 25 percent of pay. An independent study conducted for OPM found the cost to be 28 per- cent of payroll, as did the study by the Grace Commission. In the private sector, however, the employer costs are much less. The same study prepared for OPM, mentioned above, found that private pension costs were 18 percent of pay, while the Grace Com- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 mission placed the figure at 17 percent. These studies looked at the norms in medium and large companies that have pension plans. Other estimates, including the U.S. Chamber's annual Employee Benefits Survey and the U.S. Department of Commerce's Survey of Current Business, both of which look at the entire spectrum of business sizes across the economy including those with and without pension plans, revealed the cost of retirement plans at between 4 and 5 percent of payroll. The point is clear. By any measure, the cost of the present Feder- al retirement system is inordinately high. The new system must seek to bring the normal cost of the retirement plan into accord with normal costs in the private sector as a matter of fiscal respon- sibility toward the taxpayers who support the system, as a matter of equity between Federal and non-Federal workers and as a matter of honesty toward the Federal employees who are relying upon the ability of the Government to pay the benefits they are being promised. The GAO report found, among the surveys it used to compile its report, that between 64 and 69 percent of private sector plans were integrated with Social Security. The degree to which the Social Se- curity tilt is offset and the method by which it is done vary among different pension plans. However, the extensive data compiled by the studies which GAO analyzed clearly suggest that integration of Social Security and pension benefits is the predominant practice in the private sector. To the extent that the new system is not inte- grated with Social Security, it is departing from the typical private sector practice. Federal employees covered by the current civil service system are required to contribute to their pension plan. According to GAO data, this is clearly contrary to the common practice in the private sector, where between 78 and 93 percent of the pension plans are fully paid by the employer. Employer sponsorship, however, does not preclude the opportuni- ty for voluntary employee contributions. Capital accumulation plans are a typical feature of comprehensive retirement programs in the private sector. Whether it is in the form of a salary reduc- tion 401(k) plan, a thrift plan or other type of capital accumulation plan, the new system should encourage employees who wish to do so to help save for their retirement. This will provide Federal em- ployees the same opportunity which many private sector employees enjoy-to contribute toward their retirement income security-and will discourage the financial pressure on the Federal Government in determining its proper level of contributions. The Stevens-Roth plan, by not requiring the employee contribu- tions to the defined benefit plan but by establishing a voluntary capital accumulation plan, resembles common features of private sector retirement programs. In the civil service system, employees are vested after 5 years. The GAO report demonstrates that an overwhelming number of private sector pension plans provide for cliff vesting after 10 years. A small percentage of plans provide for either cliff vesting after a period other than 10 years or graduated vesting. The committee should be aware that the 5-year vesting feature of the defined benefit portion of the Stevens-Roth plan is not the Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 prevalent practice in the private sector. In the absence of any evi- dence showing that vesting rules should differ for the private sector and the Federal Government, the new Federal system should align itself more closely with the typical private practice. Our Nation's private sector pension system provides an ideal model for Congress to use in developing a pension system for newly hired Federal employees. The mandatory inclusion of Federal em- ployees in the Social Security system places them in the same posi- tion as private sector employees and adds further credence to the notion that a private sector type of retirement program should be developed. Several features of the Stevens-Roth plan resemble common fea- tures of private sector retirement plans. The chamber notes and appreciates that fact. In other respects, the chamber notes that features of the propos- al differ from common industry practices and encourages the com- mittee to bring the bill closer to conformity with private sector practices. Congress has before it a difficult challenge, but also a unique op- portunity to fashion a retirement system for newly hired workers. The challenge is to draft a balanced and reasonably priced system. The opportunity, however, is to create an entirely new system for post-1983 hired Federal employees and by emulating common fea- tures in the private sector system, avoid some of the troublesome aspects of the civil service system. I hope my comments will assist you in meeting that challenge and opportunity. Thank you. Senator STEVENS. Thank you very much. My only question would be: In reference to the private sector, you used the private sector as a whole, not just those major employers with whom the Federal Government competes in attracting and keeping its employees, isn't that true? Mr. ERLENBORN. I have used both, Senator. I quoted the cost as found for the medium and large size private sector businesses or private sector pension plans and then the overall cost, including all businesses, those that maintain pension plans, those that are small- er and less costly. So I actually used both figures. Senator STEVENS. But if you use total compensation in dealing with those larger employers, their total compensation package far exceeds that of the Federal Government today, including retire- ment. Mr. ERLENBORN. Senator, I don't know those figures, but I am fa- miliar with some that have been quoted. For instance, the U.S. Chamber's cost of fringe benefits or employee benefits in its latest report, which was several years ago, was about 36 percent, but you have to look at those figures. That 36 percent includes social securi- ty taxes, unemployment compensation, workers' compensation, paid vacation, and so forth. So to relate the figures, I think you better look at how they are composed. I think many people have a very incorrect attitude as to the level of employee benefits so they see that 36-percent figure and don't understand it includes things like workers' compensa- tion. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator STEVENS. I agree. I am looking at the average compensa- tion of Federal employees which is no longer comparable with the private sector. We are told that we must keep our retirement system comparable with the private sector. Let's say the cost is 20 percent. This is just assuming a fair comparison would be 20 per- cent if we ought to keep ours at 20 percent, well, that is 20 percent of a payroll which by definition is substantially less than the pay- roll, on the average,of the private sector. Members of Congress alone-I used to carry that little card with me-we were about 76 percent adjusted to the CPI since the period since 1970. The private sector is about 175 percent. Mr. ERLENBORN. Senator, I think it would be a mistake if we were to use the pension system as a substitute for current salary. I thoroughly agree with you. We are not paying Federal workers suf- ficiently, and in my 20 years in Congress, I can't recall ever voting against a pay increase bill. I came from a very safe district I was able to do that. [Laughter] I can tell you from personal experience, when I came to Congress in 1965, the pay was $30,000. It is now $75,000. It has gone up about 21/2 times. The house that I bought would now cost about six times what I paid for it in 1965. The pay for Members of Congress, and this is true as well for the Federal employees generally, just has not kept up. I don't think that is an excuse for fashioning a pension plan that is not in keeping with the norms in the private sector. I would say increase the pay. I think the employees would rather have the cash in their pocket than a promise for the future. Senator STEVENS. I agree with you. I think the retirement system is, in fact, an inducement for retention, even though there is this dissatisfaction with the current compensation. The chamber has made a substantial contribution in the past, and we will continue working with you in the future. We thank you, John, for your pres- ence. Senator Gore? Senator GORE. Thank you, Mr. Chairman. The Chairman really started the line of questioning that I wanted to pursue with you. He has made my job a little bit easier. I just want to follow up on a few loose ends here. You are speaking for the chamber here. Does the chamber dis- pute the findings of recognized authorities, such as Hay Associates, the General Accounting Office and other studies, that the total compensation package for Federal employees is significantly less than for their counterparts in the private sector? Mr. ERLENBORN. I cannot speak for the chamber on that because it is not included in the statement, but I would doubt very much that anyone would dispute that finding. Senator GORE. All right. You have said the logical basis of your position is that the design of the pension system should be aligned with that of the private sector. Would it be your position also that the pay of Federal employees should be significantly raised in order to align it, with the private sector? Mr. ERLENBORN. Very definitely. Senator GORE. Is that the chamber's position? Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. ERLENBORN. I don't know if that is the chamber's position, and I think that might be another committee that would have to meet and-- Senator GORE [interposing]. We don't have the luxury of looking at it in a vacuum. In considering the impact of these proposed changes on recruitment and retention, we have to look at it in its proper context. I am wondering if your associate there from the chamber-excuse me for not remembering your name. Mr. KLEIN. James Klein. Senator GORE. Thank you. You are the head of the Pension Bene- fit-- Mr. KLEiN [interposing]. Pension and Employee Benefits. Senator GORE [continuing]. For the chamber. So you look at the overall package, don't you? Mr. KLEIN. Mr. Erlenborn was correct in that pension issues move their way through the process in the chamber through the employee benefits committee structure to the board of directors. There is no other entity within the chamber, per se, that takes up the issue of Federal pay packages. Senator GORE. Just as a matter of common sense then, wouldn't you agree if you have an overall package that is lower in Govern- ment service than for the private sector, and then you take the one out of three components that is attractive and lower it down to the average in the private sector, the net effect would be to significant- ly increase the disparity and further lower the total compensation package for Federal employees compared to their counterparts in the private sector? That's logical, isn't it? Mr. ERLENBORN. Senator, let me repeat, in answer to your ques- tion, what I told Senator Stevens; that is, if you want the total compensation package to be comparable, the elements should be comparable. You shouldn't offset poor pay by putting in an exces- sively generous pension system. If you do that, and that is what we have done, you are following the worse practices of the State and local public pension systems, and that is to substitute benefit in- creases for pay increases, not funding them and passing that burden on to future generations. We have done that with our civil service retirement system. Over half a trillion dollars in unfunded past service liabilities. We didn't even know this until a few years ago when I was success- ful in getting a bill through that required all our Federal pension systems to make an annual, ERISA-type report of unfunded past service liabilities. Now we know our Federal pension systems as a whole, military, civil service-leaving Social Security out all to- gether, I don't count that as a Federal pension system-have un- funded past service liabliities far in excess of $1 trillion. I think you have to look at that past practice and say it was wrong and don't make that same mistake in the future by having a system that is too generous and is not properly funded. Senator GORE. I don't want to explore in depth disputes over ter- minology that characterize these comparisons, but I do want to note that S. 1527 provides for fully funded pension benefit, and I also want to note that the internal logic of your personal position, while subject to disagreement, is consistent with when your call for comparability in pay. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 I am not sure the internal logic of the chamber's position is con- sistent, simply because we don't have a presentation of the other essential elements, if one wishes to view the problem in its entirety and look at this part of it in its proper context. Since you call for alignment with the private sector in pension design, I find it surprising that you want to shift from 5-year vest- ing to 10 because we heard from GAO that the trend in the private sector is in the opposite direction. If that is the case, isn't S. 1527 designed appropriately on that point? Mr. ERLENBORN. First of all, I think the predominant practice in the private sector is still 10-year vesting. Senator GORE. At the current time. Mr. ERLENBORN. At the current time. I fully expect there is going to be legislation passed before too many years that will change that to 5-year cliff vesting. I should think you should conform the Feder- al civil service system with the private system at that time. But let me also warn-- Senator GORE [interposing]. Not until then? Should we just wait until a simple arithmetical majority of the private sector gets there or should we take a leadership position and see where the smart ones are going and design for the future or should we just wait until an arithmetical majority in the private sector get there? Mr. ERLENBORN. I am speaking personally now, not for the cham- ber. I think the move to earlier and earlier vesting, though very attractive, has some hazards. In many cases, what you are doing is providing severance pay. The earlier you have your vesting, the smaller the benefit; therefore, if you had, let's say, 5-year vesting or 2 or 3-year vesting, when someone leaves with that short term of service with a vested benefit, they are going to cash it out and they are going to spend it, and it no longer really becomes part of their pension planning. I think if you want to have a severance pay plan, install one in- stead of using your pension plan to provide severance pay. The ear- lier the vesting, the more chance that is what you are doing. Senator GORE. But you don't really feel strongly about the differ- ence between 5 and 10 year vesting? Mr. ERLENBORN. I think the trend is toward 5. I don't feel terri- bly strongly about it, no. Senator GORE. That is helpful to us. You indicated you have seri- ous questions about the studies indicating that the typical or aver- age retirement age in both the private and public sector is 61; but just for the record, neither you nor the chamber have any studies or any evidence to indicate otherwise, do you? Mr. ERLENBORN. Other than what was cited in the statement, I'm not aware of it. Senator GORE. In one of the excellent forums that our chairman put together last year before I was a member of this committee, I believe there was testimony from a representative of duPont that their average retirement age fell somewhere between 58 and 62. I can't disagree with you that the evidence is less than comprehen- sive in this area, but what evidence is available does seem to sup- port the study indicating a comparable figure in both the public and private sector. That surprises some people, but that is what Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 the evidence seems to indicate. Just a couple more questions, brief- ly. Senator Eagleton who is, of course, a student of these subjects, points out as the premise of a couple of questions he wants me to ask here that there are other reasons for closely examining the proposition that this plan ought to be exactly comparable to what exists in the private sector. One of them has to do with longevity. As a theoretical matter, if you have a pension plan in which length of service is a key factor in determining the level of retire- ment benefits, then the higher the average length of service is, the higher the retirement benefits would be, correct? Mr. ERLENBORN. Correct. Senator GORE. So if the cost of a particular plan is higher than average in part because its employees covered retire with higher than average length of service, then to the extent one places a sub- jective value on longevity, it is not quite fair to criticize the higher cost which is attributable to that factor, correct? Mr. ERLENBORN. Let me amend my rather hasty agreement as to your first comment. The cost would be higher for a pension system if you have average length of service that is longer only, I believe, if you have a formula like you have in civil service where you earned at a higher rate in your later years. If it is a level of 1 per- cent or 1.5 percent per year service regardless for every year, and if you have the same number of employees working, you are going to be accruing those benefits at the same rate regardless of the in- dividual's length of service. I think it is a function of formula for determining benefits that would make it more costly. Senator GORE. You do recognize that longevity-- Mr. ERLENBORN [interposing]. It's a factor in the current system. Senator GORE. And something to be desired, isn't it, generally speaking? Mr. ERLENBORN. It depends from what standpoint you are talk- ing. Senator GORE. From a standpoint of efficiency. Mr. ERLENBORN. I have had some experience, vicarious experi- ence, with the civil service system and the difficulty in getting rid of people who are maybe less than fully productive in the civil service system. So longevity in that case is not to be desired, no. Senator GORE. I understand what you are saying. Of course, that is clear. As a matter of general policy, most employers like to have longevity. Assuming careful and good choices in hiring and an abil- ity to attract quality employees, I am sure in your congressional office you certainly found the benefits of avoiding start-up training costs and high turnover and so forth-longevity is a virtue, gener- ally speaking, isn't it? Mr. ERLENBORN. As a matter of fact, in the pension field, it was the rationale for pension plans. Long service was rewarded with a pension. Senator GORE. So we want to promote longevity. To the extent you have a higher length of service in the Government and that affects the benefit levels, that is a mitigating factor in any criti- cism, or should be a mitigating factor in any criticism of a higher average cost associated with that higher longevity. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. ERLENBORN. I can endorse longevity, but I would like that to extend beyond age 55 with 30 years, because if we encourage those long-term employees who are still young enough to be useful, if we encourage them to leave the Federal Government with these early retirement benefits and then with the full COLA protection, we are making the system much more expensive than if we utilized these long service employees until they reached a normal retirement age. There is a feature in the current system that is working counter to the point that you make. Senator GORE. Again, the figures we cited earlier which you don't have evidence to dispute, indicate that the average retire- ment figure is roughly comparable in both the public and private sector. Mr. ERLENBORN. You may recall, I cited-- Senator GORE [interposing]. Thirty-nine percent. Mr. ERLENBORN. Thirty-nine percent of retiring employees retire within the age of 55-- Senator GORE [interposing]. I did hear that. I think that is worth noting. Can you tell me what the average length of service is for employees- retiring under private sector pension plans? Mr. ERLENBORN. I have no idea what that figure is. Senator GORE. I wonder if you or your colleague could provide that for the record? Mr. ERLENBORN. We will certainly try to. [The information referred to follows:] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 73 Table 111.6 The Cumulative Distribution of Years of Service by Age: "ERISA" Workforce" and Nonagricultural Wage and Salary Workers, May 1983 Years of Service with Employer 15 or 20 or 5 or one or All more more more more tenures Nonagricultural Wage and Salary Workers All Agee less than 25 25 to 34 years 35 to 44 years 45 to 54 years 55 to 59 years 60 to 64 years 65 years or more 15.6% b 1.2 18.9 36.1 45.5 46.5 35.6 26.8% b 10.8 36.9 51.5 60.1 64.2 52.3 45.4% 7.3 37.3 57.8 69.9 75.5 79.1 69.9 80.6% 59.3 80.2 86.6 91.6 91.7 94.4 92.5 100.0% 100.00 100.00 100.00 100.00 100.00 100.00 100.00 25 to 34 years 1.6 13.9 47.2 100.00 100.00 35 to'44 years 22.7 44.1 68.2 100.00 100.00 45 to 54 years 40.5 57.3 77.3 100.00 100.00 55 to 59 years 51.0 66.6 83.1 100.00 100.00 60 to 64 years 51.5 69.8 85.0 100.00 100.00 SOURCE: Employee Benefit Research Institute tabulations of -May 1963 EBRI/NHS CPS pension supplement. "The "ERISA" work force consists of workers are 25 to & working 1,000 hours or more per year with at least one year on the job. b1lumber of workers too small for rates to be calculated reliably. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator GORE. Thank you. Do you know whether or not it is pre- vailing policy in the private sector to grant retirement credit for military service? Mr. ERLENBORN. No; that is not a practice. Senator GORE. I am sure it is not. Would you recommend the Government discontinue that policy? Let me add quickly, I wouldn't. I am wondering what your recommendation would be. Mr. ERLENBORN. I don't know if this is still the law, but for a long time, there was double counting of some of those years of serv- ice. People who were in the active military reserve, that is, taking training-- Senator GORE. Let's get to the nub of the issue, though. What do you think about that, should that be discontinued? Mr. ERLENBORN. No; I don't think so. I am enjoying my pension today, including the 2 years credit I got for being in the Navy. Senator GORE. It is a good policy-- Mr. ERLENBORN [interposing]. I personally think so, yes. Senator GORE. It is good, as a matter of public policy, if you have military service and Government service. I am sure there are some people who disagree with that, but I think the overwhelming ma- jority of American citizens would say, yes, that seems to be appro- priate. Mr. ERLENBORN. As long as it doesn't result in what some people call double-dipping. Senator GORE. But, again, that is an assymetry and to the extent that adds to longevity, it should affect one's analysis of these pay- roll cost numbers to the extent they are affected by the higher lon- gevity. Do you support the administration's recently announced position against 401(k) plans-this is a premise for a followup. I assume you do, is that correct? Mr. ERLENBORN. No, the chamber, I think-- Mr. KLEIN [interposing]. The chamber is very much opposed to that. Mr. ERLENBORN. Speaking personally, I would be also. Again, also personally, I do believe, however, the maximum contribution payments could certainly be reduced below the $30,000 that they are today. That, of course, was in the President's plan, the $8,000 limitation on the voluntary contribution. Senator GORE. Do you differ with the chamber on this point? Mr. ERLENBORN. I probably differ with the chamber on the reduc- tion. I think the chamber position is probably to continue on 401(k) without any change. Senator GORE. Because of the foregone revenue flowing from the tax deferral aspect of such plans? Mr. ERLENBORN. Exactly. I think-- Senator GORE [interposing]. How would you balance those com- peting interests in S. 1527? Mr. ERLENBORN. You mean with the savings plan, 401(k) type plan? Senator GORE. Yes. Mr. ERLENBORN. You would have to have a contribution level that would be considerably lower than the current level of 401(k) today, which is $30,000. So I think you balance those considerations Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 by having a thrift plan, a savings plan, but with maximum contri- bution levels that are within our ability to afford. [Mr. Erlenborn's prepared statement follows:] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 STATEMENT on CIVIL SERVICE PENSION REFORM before the SENATE GOVERNMENTAL AFFAIRS COMMITTEE for the CHAMBER OF COMMERCE OF THE UNITED STATES by John N. Erlenborn September 9, 1985 Mr. Chairman and members of the Committee, my name is John N. Erlenborn and I am a partner in the law firm of Seyfarth, Shaw, Fairweather & Geraldson. I am pleased to appear here today on behalf of the U.S. Chamber of Commerce, the world's largest federation of businesses, chambers of commerce and trade and professional associations. Accompanying me today is James A. Klein, Manager of Pension and Employee Benefits for the Chamber. I serve on the Chamber's Labor and Employee Benefits Committee and on several of that Committee's councils and task forces which develop policy on labor and employee benefits matters. As you may know, during my 20 years in the House of Representatives, I took a keen interest in developing a rational retirement policy for both the public and private sectors. That interest and involvement have continued since my retirement in January to practice law as a specialist in employee benefit issues. Because of my long-standing interest and involvement in these matters, it is a particular pleasure to share with you our perspective on reform of the Civil Service Retirement System (CSRS). Congress has quite a challenge before it to enact by the end of this year a new retirement system for federal employees hired after 1983. Senator Stevens and Senator Roth are both to be commended for developing a comprehensive and thoughtful bill, S. 1527 (the "Stevens/Roth plan"). This bill seeks to address the important questions that should be decided by year-end in order to keep post-1983 federal hirees from remaining in limbo regarding their retirement program. While it is important for Congress to act expeditiously, it also is crucial to develop a system that balances the need of federal workers to be ensured adequate retirement coverage and the need of taxpayers to pay for an equitable and reasonably priced system. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 We wish to share our thoughts on the Stevens/Roth plan and on the development of a new retirement system for recently-hired workers within the context of reform of the CSRS. At the outset, I should state that the center of the Chamber's position on the federal retirement system is the concept that it should be modified to approximate more closely its private-sector counterpart. As a leading supporter of the private pension system and a principal author of RISA, the Employee Retirement Income Security Act of 1974, I believe much can be learned from the private system for constructing a reasonable and financially sound federal retirement structure. In at least two respects - cost-of-living adjustments (COLAs) and early retirement - the CSRS differs substantially from the private sector retirement system. These are the two issues upon which my remarks will mainly focus. In large part due to the COLA and early retirement features of the CSRS, most federal retirees receive more generous benefits than those received by most private sector retirees whose tax dollars substantially support the federal retirement system. COLAs were first authorized for federal pensions in 1962. The original civil service pension COLA was triggered when inflation exceeded three percent. Since 1962, the federal pension COLA has been on a veritable roller coaster. The COLAS in the federal retirement system have been indexed fully to increases in the Consumer Price Index (CPI) since 1966. By contrast, the private pension system does not match these cost-of-living increases. In the private sector, a defined benefit pension plan provides exactly what its name suggests-a definite benefit amount--frequently with no adjustments for inflation. Some private plans do contain inflation adjustments, and other companies increase benefits voluntarily. Social Security also adjusts for inflation. However, a U.S. Department of Labor survey indicated that in 1982 only three percent of all private plans contained automatic inflation adjustments. Moreover, these adjustments were limited generally to three percent per year, rather than the open-ended adjustment that the federal government pays its retirees. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 There is no question that basic benefits should be increased during periods of inflation, but retired persons should not receive greater cost-of-living protection than working people. Yet, that is what has happened and will happen again this coming year as federal pay is frozen and pension benefits rise. In 10 of the years from 1971-1983, persons drawing federal retirement benefits received larger annual increases than wage earners gained in union negotiations in private industry. While these working Americans realized an average annual gain of 60 percent of the CPI increases in their paychecks, the retired federal worker gained 100%. The full CPI adjustments paid to federal pensioners also result in the anomalous situation that some retirees can receive more in annual federal retiree benefits than the salaries earned by the individuals filling the positions formerly held by the retirees. We must restore economic equity between working and nonworking generations. How then should Congress deal with COLAs, which in large part are responsible for the explosive growth in spending on all federal pensions from $2.7 billion in Fiscal Year 1970 to over $23 billion this year? One way might be to consider something akin to the "COLA Stabilizer" which I proposed in the FAIR (Federal Annuity and Investment Reform) civil service retirement legislation I introduced in the 98th Congress. This proposal bases the COLA on the lesser of the increase in the general schedule increase or the CPI. This reference amount is then applied to the first $10,000 of pension, an amount roughly equal to the maximum benefit a new social security recipient would receive in 1985. A more limited COLA adjustment is then granted on pension amounts above $10,000. Another alternative is indicated in the Stevens/Roth plan whereby annual COLAs would be paid at two percent below the rate of inflation as measured by the CPI. It should be noted that either proposal would help achieve the goal of bringing federal employees to the level of private-sector employees. Even with these changes from the current CSRS, however, federal retirees would have a more generous retirement plan than is found in the private sector. For most private sector retirees, Social Security COLAs are the only inflation adjuster built into the retirement income formula. Benefit increases in private sector plans are typically on an ad hoc basis, depending largely on the available funds in the plan. Many private sector retirees have no private pension coverage at all. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 It is important when considering a COLA as part of the new federal retirement system, to compare the system with prevailing practices in the private sector -- not with the current CSRS -- because the participants of the new system will, like their private sector counterparts and unlike federal employees hired prior to 1984, have Social Security COLA protection. The provision of the CSRS that permits an unreduced annuity for federal employees retiring at age 55 after 30 years of service often has been in the eye of the storm of controversy surrounding federal pensions. Therefore, an explanation of the early retirement features of private pension systems is in order to develop a workable and fair early retirement feature. In the private pension system, early retirement is more commonly available at age 62 than at age 55, and even then, the retirement benefit generally is reduced for each year the retiree is under age 65. This also is the case with Social Security benefits. No one can argue reasonably that individuals who have worked hard and who have looked forward to the comfort and security of retirement years should be denied the benefits they have earned. However, the only adequate explanation for the discrepancy in retirement ages between federal and non-federal retirees is that the availability of full benefits at age 55 is a powerful incentive for federal employees to retire at this early age. This practice denies the federal government the services of some of its most capable and experienced workers and requires the taxpayers to subsidize pensions for lengthy periods. Phasing-in reduced benefits for retirees between the ages of 55 and 65 would bring the federal retirement system into closer alignment with private sector retirement practices. The Chamber supports this reform and urges the Congress to do likewise. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 At this point a discussion of some of the myths and facts of retirement age in the federal sector is in order so that the early retirement features may be understood better and put into proper perspective. Some dismiss the matter of early retirement as inconsequential since they believe that federal employees retire at close to the retiring age of private sector workers. The Federal Government Service Task Force, a congressional caucus, claimed in a Fall 1984 report that "both private and federal workers retire, on average, at age 61." The Task Force quoted Office of Personnel Management (OPM) figures showing that in 1982 CSRS retirees on the average left at age 60.7 with 28 years of service. Unfortunately, these figures do not tell the entire story. But let us not lose sight of the forest by looking at the trees, debating statistics when the policy of unreduced early pensions is the problem. If the policy of early retirement is a privilege paid-for mainly by taxpayers and yet not enjoyed by them, then where is the equity in continuing that policy? Indeed, if federal retirees retire later than assumed, why oppose change? For the record, certain points should be made about the retirement age issue. First, the Bureau of Labor Statistics' Office of Employment and Unemployment Statistics does not collect data on average private sector retirement ages due to definitional problems (for example, is a rehired annuitant retired?), thus, there is no reliable private sector average retirement age data published by the government. Secondly, let us beware of averages that mask significant data. The average age of retiring federal employees from 1973 to 1982 was 61.1 years, according to Table 15 on page 31 of the Congressional Research Service (CRS) report, "Background on the Civil Service Retirement System." What this Table does not state is that, according to OPM, about 39% of retiring federal employees retire within one year of attaining age 55 with at least 30 years of service. Further, the 61.1 age refers only to optional retirement (those with age/service of 55/30, 60/20, and 62/5). It does not include retirement ages for disability, involuntary, deferred, mandatory, or special retirement situations (hazardous, Member of Congress, etc.). The figure quoted by the Task Force is only for optional retirement. It represents 69.3% of the 85,000 retirees in 1982. As a matter of fact, 25% of the 1982 CSRS retirees left federal service at an average age of 52. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 81 - 6 - The question again, arises, how best do we correct the early retirement features of the civil service retirement system? Both my FAIR proposal of the 98th Congress and S. 1527 are directed at bringing the early retirement features of a new federal system into closer conformity with private-sector practices. Under my FAIR proposal, current employees as well as future employees would be able to retire under the same age-service provisions as under present law, but the amount of benefits based on service after the year of enactment would be subject to a reduction factor of two percent for each year under normal retirement age. The two percent rule would not reduce the amount of an employee's benefit which is accrued prior to the year of enactment. This change in the value of future benefits not yet earned is permissible under the law governing private pensions (ERISA) and responds to the arguments that changing the method of calculating benefits violates an implied contract between federal workers and their employer. The Stevens/Roth plan also reduces an annuity for early retirement -- reducing benefits for retirement before age 62. Earlier this year the Reagan Administration also proposed a phase-in of reduced benefits for retirees between the ages of 55 and 65. I am not suggesting that the reduction factor must be two percent as it was proposed in the FAIR legislation. I am suggesting that some reduction factor be considered. Social Security reduces benefits by 6-2/32 for every year under age 65. CRS reports, on page 42 of its December 1984 study for the House Post Office and Civil Service Committee, that a full actuarial reduction would reduce payments by six or seven percent per year. However, private pension plans often reduce employees' accrued pension benefits by about four or five percent a year if they retire early. Employees should not be prevented from retiring early, but neither should they be encouraged to leave early by an excessively generous provision. I believe that a proposal to moderate early retirement costs will work to the benefit of our government and its employees. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 82 - 7 - As the Committee considers the Stevens/Roth plan and the development of a new civil service retirement system, there are a number of features of the system apart from COLAs and early retirement that need to be determined. Consistent with our policy, the Chamber believes that those features should approximate common features of private sector as much as possible. In 1983, this Committee and the House Post Office and Civil Service Committee asked the U.S. General Accounting Office (GAO) to analyze information on prevailing features of retirement programs in the nonfederal- sector. In June 1984, GAO published its exhaustive study entitled Features of Nonfederal Retirement Programs. The GAO report used the Department of Labor's Bureau of Labor Statistics' 1982 study entitled "Fmployee Benefits in Medium and Large Firms." This study involved 976 pension plans covering 17 million participants. GAO also used extensive surveys conducted by four private firms and by the National Association of State Retirement Plan Administrators. The GAO report determined that retirement programs in the nonfederal- sector, where they exist, typically involve Social Security, a pension plan and a capital accumulation plan such as a thrift or deferred compensation plan. Within these broad components, specific features of private plans commonly are found. I would like to enumerate some of these items. The employer cost of the current CSRS is an unacceptably high percentage of the total federal payroll. CRS estimates the cost at 25% of pay. An independent study conducted for OPM found the cost to be 28% of payroll, as did the study by the President's "Private Sector Survey on Cost Control" (Grace Commission). In the private sector, however, the employer costs are much less. The same study prepared for OPM, mentioned above, found that private pension costs were 18% of pay, while the Grace Commission placed the figure at 17%. These studies looked at the norms in medium and large companies that have pension Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 plans. Other estimates, including the U.S. Chamber's annual Employee Benefits Survey and the U.S. Department of Commerce's Survey of Current Business, both of which look at the entire spectrum of business sizes across the economy, including those with and without pension plans, revealed the cost of retirement plans at between four and five percent of payroll. The point is clear. By any measure, the cost of the present federal retirement system is inordinately high. The new system must seek to bring the normal cost of the retirement plan into accord with normal costs in the private-sector as a matter of fiscal responsibility toward the taxpayers who support the system, as a matter of equity between federal and nonfederal workers, and as a matter of honesty toward the federal employees who are relying upon the ability of the government to pay the benefits they are being promised. The Social Security system replaces a higher proportion of earnings for people with lower average wages. The U.S. Chamber supports this "tilt" as a form of social insurance for lower-income earners. Because of this tilt, many pension plans are "integrated" with Social Security, in that a portion of the Social Security benefits is deducted from the benefits the pension plan would otherwise pay under its benefits formula. This deduction tends to equalize the proportional wage replacement among higher- and lower-paid workers when pension benefits and Social Security benefits are combined. The GAO report found, among the surveys it used to compile its report, that between 64% and 96% of private-sector plans were integrated with Social Security. The degree to which the Social Security tilt is offset and the method by which it is done vary among different pension plans. However, the extensive data compiled by the studies which GAO analyzed clearly suggest that the integration of Social Security and pension benefits is the predominant practice in the private sector. To the extent that the new system is not integrated with Social Security, it is departing from the typical private- sector practice. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Federal employees covered by the current CSRS are required to contribute to their pension plan. According to GAO data, this is clearly contrary to the common practice in the private sector, where between 782 and 93% of the pension plans are fully paid by the employer. Employer sponsorship, however, does not preclude the opportunity for voluntary employee contributions. As discussed above, capital accumulation plans are a typical feature of comprehensive retirement programs in the private sector. Whether it is in the form of a salary-reduction 401(k) plan, a thrift plan or other type of capital accumulation plan, the new system should encourage employees who can afford to do so to help save for their retirement. This will provide federal employees the same opportunity which many private-sector employees enjoy - to contribute toward their retirement income security - and will discourage the financial pressure on the federal government in determining its proper level of contributions. The Stevens/Roth plan, by not requiring employee contributions to the defined benefit plan but by establishing a voluntary capital accumulation plan, resembles common features of private-sector retirement programs. In the CSRS, employees are vested after five years. The GAO report demonstrates that an overwhelming number of private-sector pension plans provide for "cliff" vesting after 10 years. A small percentage of plans provide for either "cliff" vesting after a period other than 10 years or graduated vesting. The Committee should be aware that the five year vesting feature of the defined benefit portion of the Stevens/Roth plan is not the prevalent practice in the private sector. In the absence of any evidence showing that vesting rules should differ for the private sector and the federal government, the new federal system should align itself more closely with the typical private practice. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 85 - 10 - Our Nation's private-sector pension system provides an ideal model for Congress to use in developing a pension system for newly hired federal employees. The mandatory inclusion of federal employees in the Social Security system places them in the same position as private-sector employees and adds further credence to the notion that a private-sector type of retirement program should be developed. Several features of the Stevens/Roth plan resemble common features of private-sector retirement plans. The Chamber notes and appreciates that fact. In other respects, the Chamber notes that features of the proposal differ from common industry practices and encourages the Committee to bring the bill closer to conformity with private-sector practices. Congress has before it a difficult challenge -- but also a unique opportunity -- to fashion a retirement system for newly hired workers. The challenge is to draft a balanced and reasonably-priced system. The opportunity, however, is to create an entirely new system for post-1983 hired federal employees and, by emulating common features of the private-sector system, avoid some of the troublesome aspects of the CSRS. I hope my comments will assist you in meeting this challenge and opportunity. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator GORE. We may have additional questions in writing to which I hope you would be willing to respond for the record, and I would like to thank you for your appearance here today. Pursuant to the chairman's earlier statement, the committee will reconvene at 2 o'clock. [Whereupon, at 12:55 p.m., the committee recessed to reconvene at 2 p.m. the same day.] OPENING STATEMENT OF SENATOR EAGLETON Senator EAGLETON. Good afternoon, ladies and gentlemen. We continue our hearings. I have an opening statement which I would have made this morning had I been here and not unavoidably detained in Missou- ri. So I will take the opportunity to read it-it is short-before we continue with our witnesses. Today, we begin the second step in the process of establishing a new retirement program for Federal employees whose service with the Government, unlike that of their predecessors, will be covered by Social Security. The Congress set December 31 of this year as the deadline for providing a program for new employees who joined the Federal work force since January 1984. In the interest of sound personnel policy and in fairness to these employees, whose retire- ment benefits, you might say, have been in limbo, I believe it im- perative that we meet this deadline. The first step was concluded with the introduction by Senators Stevens and Roth of S. 1527, the proposed Civil Service Pension Reform Act of 1985. That bill represents the culmination of a con- siderable effort and significant contributions by many individuals and organizations, including the General Accounting Office, the Congressional Research Service, private sector experts, and both majority and minority staff members of this committee and its sub- committees. I especially want to compliment Senator Stevens and his staff for the enormous work that they have put into this complicated and mind-boggling matter. In all of my 16 years in the Senate, this is perhaps the single most complicated matter with which I have dealt. Dealing with actuarial detail is not my personal cup of tea. I am too impatient. Senator Stevens, I might add, is not the pillar of patience. [Laughter.] It is amazing that neither one of us hasn't exploded up to this point. If Senator Stevens hadn't persevered in this area, we wouldn't be having these hearings today. I thank him greatly, and I will have his staff member pass along my appreciation. The proposal does not reflect in every aspect the views and de- sires of all those who contributed to its design. It will, I am sure, see some modifications as it goes through the legislative process. However, I think the proposal does embody the overall intent to establish a system which, in combination with Social Security, pro- vides for a fair level of retirement income security. Once again, I would like to commend all of those who were in- volved for their excellent works. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 The next step is a very important one. It is to receive testimony on the strengths and weaknesses of the proposed program, testimo- ny which will serve to guide not only the members of this commit- tee, but the Members of the Congress as a whole in their delibera- tions over the merits of the proposal. I recognize that it is only natural to compare the provisions of any proposed new program to those of the existing civil service re- tirement system. However, in making such comparisons, particu- larly for the purpose of establishing a basis for suggesting changes in S. 1527, I caution that consideration must be given to the provi- sions of the total program; that is, the defined benefit plan, the thrift plan and Social Security, combined. It is also important to keep in mind that one basic reason a new program must be established is because Federal employees now have Social Security coverage. The existing civil service retirement system evolved to provide retirement, disability and survivor bene- fits for employees who were not covered by Social Security. Consequently, one cannot expect to find provisions in the pro- posed plan identical to those found in the current system. What we should expect, and what I intend to aim for, is a retire- ment program that, in total, is equitable and affordable to both em- ployees and to the Government. Finally, I want to make a fundamental point: It is not my intent nor do I believe it is the intent of any member of this committee that the new retirement system we are devising for new Federal employees will serve in any way as a basis for altering the existing civil service retirement system. We are not here engaged in any backdoor modifications of the existing system. We are here to devise a new system for new em- ployees-nothing more and nothing less. Now we will continue with our witnesses, and our first witness for this afternoon's session is Mr. George Vest, Director General of the Foreign Service and Director of Personnel for the Department of State. TESTIMONY OF GEORGE S. VEST, DIRECTOR GENERAL OF THE FOREIGN SERVICE AND DIRECTOR OF PERSONNEL, DEPART- MENT OF STATE, ACCOMPANIED BY TORREY WHITMAN AND ROBERT HULL, POLICY COORDINATION STAFF Senator STEVENS. Mr. Vest, we are delighted to have you with us. Mr. VEST. Thank you very much, Mr. Chairman. I have with me Mr. Robert Hull and Mr. Torrey Whitman for assistance. I would like to refer to my statement, not read the whole thing in the interest of time, but bring up what I consider to be the key points in it. The Secretary has asked me to represent him at these hearings on the design of a retirement system for Federal employees covered by Social Security, and we appreciate this opportunity very much. Retirement provisions are essential to any personnel system and are especially so for the Department of State, which has employees under two statutorially distinct retirement systems: civil service and Foreign Service. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 We believe that S. 1527, the Stevens-Roth bill, is a constructive effort to make the new Federal retirement system both fair and eq- uitable to participants and financially sound, as well. The three- tiered structure of benefits should accommodate the retirement planning goals of a wide variety of Federal employees with differ- ent career patterns. We understand that the bill's provisions for a thrift plan with employer matching of employee contributions may need to be re- vised in the light of the administration's recent proposal to repeal section 401(k) on which they are based. Nevertheless, we believe that thrift plans are a very attractive feature of the many private sector retirement plans, and we trust that some form of thrift plan will be retained as part of this retirement package. Our overall impression of this bill is thus very positive. In fact, my principal reason for being here today is to request that the committee consider including Foreign Service personnel under Ste- vens-Roth. The basic framework of the bill will be beneficial to both Foreign Service and civil service employees of the Department of State. Since we have appreciable numbers of employees who convert from civil service to the Foreign Service in midcareer and vice versa, the Department of State has a management interest in seeing a basi- cally similar retirement structure for each personnel system. In looking at the Stevens-Roth bill, we do believe that the For- eign Service should clearly be regarded as a special category of em- ployment, as are air traffic controllers, firefighters, and law en- forcement officers. I would note that the Foreign Service retirement system, like those of the other special groups, allows optional retirement earlier and with fewer years of service than the existing civil service system. In our case, Foreign Service employees may retire at age 50 with 20 or more years service. There are two overriding and related reasons for these existing special Foreign Service provisions. First, we need to retire manda- torially, as a result of the existence of the Foreign Service Act of 1980, the less competitive, as determined by management, to ensure that the highest standard of performance in foreign policy analysis and overseas representation is guaranteed. Foreign Serv- ice personnel today are subjected to increasingly vigorous competi- tion with their peers in the course of their careers, with the result that some employees are retired involuntarily each year for failure to be promoted to the next higher grade,or class within a specific time period. This time-in-class limitation sets up an up-or-out pro- motion system, and it requires officers who are performing compe- tently at their current grade level, but who are not sufficiently competitive to be advanced or promoted to higher levels, to be re- tired. Second, we must provide through early retirement an exit, other than for substandard performance, for those who are no longer able to serve abroad for such reasons as health. The Foreign Serv- ice is an arduous and increasingly dangerous life; those who, after a long and valued career, cannot continue to meet those challenges and cannot continue, for example, to get medical clearances, should Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 be able to retire voluntarily without being selected out for sub- standard performance. Our work force analyses indicate that an appreciable number of those potentially subject to retirement for time-in-class, both now and into the future, will be between the ages of 50 and 55. The Ste- vens-Roth special category rules would allow employees who have this approximate time to receive an immediate annuity, but the income replacement at time of separation would be quite small compared to what we would have in our present Foreign Service situation: An involuntary retiree aged 50 with 25 years of service would receive an annuity of about 18 percent of his salary under Stevens-Roth, as opposed to about 50 percent under the current system. I do not believe that we could continue to operate involuntary re- tirement for time-in-class to promote an up-or-out system under such conditions. Frankly speaking, such a small benefit would be perceived harsh and inequitable, would be uninteresting increas- ingly to young applicants, and would invite distortion in the man- agement area. It is necessary, in our view, then, to give some special attention to employees who retire before the age of 50. We believe that the Foreign Service should refine its existing retirement threshold, al- lowing retirement without an annuity reduction at age 50 with 20 years service. This age and service requirement is not inconsistent, I am told, with that which has been proposed by OPM Director Horner for other special categories of employees. The committee should also be aware that the Foreign Service system differs from the civil service system in several other re- spects, such as its treatment of the rights of former spouses to an- nuities, pay provisions for reemployed annuitants, and certain other benefits for foreign national employees, of which we have over 9,000 worldwide. Each of these existing differences would need to be addressed in the development of a final bill. I would draw your attention to one other feature of the Foreign Service retirement system: the Department of State currently ad- ministers the system, rather than the Office of Personnel Manage- ment, and a separate retirement trust fund is maintained for the Foreign Service by the Department of Treasury. Presumably, the separate fund will continue in existence for those pre-1984 Foreign Service employees who do not elect to transfer into the new system, and the Department will continue to administer the For- eign Service system at least for those employees. Such an arrange- ment will need to be made to ensure that the current fund contin- ues to be sufficient to pay benefits. I have dwelt at some length on special treatments needed to make the Stevens-Roth retirement structure mesh with the For- eign Service personnel structure. I felt it was necessary, but let me emphasize that I believe the effort was well worthwhile. We believe this bill will benefit the Government, the employees, and the tax- payers of this country, and we do support it. Thank you very much, Mr. Chairman. Senator EAGLETON. Thank you, Mr. Vest. You maintain that one of the two major reasons why special re- tirement benefits must be provided for Foreign Service personnel is Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 because they are subject to being selected out, either because of poor performance or time in grade, or they just didn't get promot- ed. Are all the employees covered by the Foreign Service retirement system subject to this selection out mechanism? Mr. VEST. All the employees in the Foreign Service portion of the State Department activity are covered by the selection out system. Senator EAGLETON. Which includes professional and clerical, as well? Mr. VEST. Professional and clerical, all but secretaries. Senator EAGLETON. Not secretaries. Mr. VEST. But all remaining categories in the Foreign Service system are covered by this system. Senator EAGLETON. You are emphasizing the Foreign Service system. Now, AID does not have the selection out process, is that correct? Mr. VEST. AID has its own system, and it does have a selection out portion. I'm not competent to talk about the details, I regret, of their system. Senator EAGLETON. OK. What about agriculture representatives serving abroad? Do they have selection out? Mr. VEST. I can't speak for the other agencies. Senator EAGLETON. We will get the answers. Mr. VEST. I can only make the distinction between our civil serv- ice component. I should, if I could put it in one sentence. The For- eign Service clientele in our group, we have over 9,000 who are in the Foreign Service, of which approximately two-thirds serve over- seas. We have approximately 4,000 who are in the State Depart- ment in the civil service, and we have over 9,000 who are Foreign Service nationals, alien local employees who help to service and support our positions in our embassies. Senator EAGLETON. Let me get those numbers. There are 9,000. Mr. VEST. Over 9,000 in the Foreign Service. Senator EAGLETON. In the Foreign Service. Is that both overseas and here in the Department? Mr. VEST. That is right, with approximately two-thirds of them, at any given time, overseas. Senator EAGLETON. All right. Does that exclude secretaries? Mr. VEST. That includes the secretaries. I am assured that AID, CIA, Foreign Agriculture Service and the Foreign Commercial Service all have selection out along the same basis. Senator EAGLETON. We have some old figures here, and we are going to ask you to get us some new ones, but we have figures back into the midseventies. For instance, in 1974, a total of 29 people were selected out, according to our figures; in 1975, 6; in 1976, 8; in 1977, 11; and then our figures cease. If those figures are right, the figures from 1974, 1975, 1976, and 1977, we are dealing with rather minescule numbers. If you elimi- nate the 29 year, you are dealing with a dozen or less per year out of 9,000. Maybe it was a smaller number back then. Say it was 7,000. For instance, do you, have with you or currently available select- ed out numbers for the years from 1978 onwards? Mr. VEST. I don't, but I have last year's, sir. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator EAGLETON. Give me last year's. Mr. VEST. I will have the other. Last year, the Department of State separated 66 Foreign Service employees for failure to be pro- moted to the next higher level within the specified time period. Senator EAGLETON. That would be about seven-tenths of 1 per- cent. Mr. VEST. Let us say less than 1 percent, but they constitute a significant portion of all retirements, and that 66 is a very signifi- cant figure in 1 year because it is on its way up. You are quite right to point to periods 29, 6, 8, 11 and so on. That was before the act of 1980. With the act of 1980, we institut- ed an up-or-out system, with the result that we now have, to the dismay of a lot of people, a very heavily increased percentage, and to move from 11 to 66 shows what has happened. Senator EAGLETON. All right. Here is what I would like to have you do for us for the record, if you could have one of your staff people come up after your testimony. The way we have this broken down year by year is, we have maximum time-in-class. For in- stance, going back to 1974, there were nine people who were select- ed out in that line; in the substandard performance line, 20, for a total of 29. We have this, as we say, year-by-year up until 1977. For the record, tell us whether what we have is accurate and then update for us through calendar year 1984, if you will. Mr. VEST. Certainly, sir. If I may reiterate once more, Mr. Chair- man, that with the arrival of the act of 1980, we are doing some- thing else very different in the management of our Foreign Serv- ice. The act of 1980 insisted that we should implement an up-or-out system, and this created a totally different way of managing our Foreign Service, and we are doing it. Senator EAGLETON. You maintain that the new program should retain the current retirement threshold for Foreign Service em- ployees at age 50 with 20 years of service. Is that your initiative? Mr. VEST. Yes. Senator EAGLETON. You also pointed out that this is consistent with what has been proposed by the Director of OPM. My question is, do you have any evidence to support that Foreign Service per- sonnel, on the average, cannot perform their jobs after age 50 or after completing 20 years of service? The reason I ask that is that a GAO report, a rather recent one dated January 7, 1985, shows that such personnel, on average, retire at about the age of 56 after 27 years of service. Mr. VEST. We have a very high percentage of our personnel who do retire at about the age of 56. I think the records, again, will show that that has been a rather consistent figure often. But what the new act mandated us to do was to implement an up-or-out system, which means, the people who authored the act designed it so explicitly that we would have people retiring more nearly at the level of a Navy captain and a fewer number would go on to be the equivalent, in our service, of the admirals. That means that we have reduced very heavily a number of people who get promoted to the senior Foreign Service. We have been accused throughout the years of having a large number of senior officers unemployed called walkers. We have set up to re- dress that balance. That does mean that you set up a system, 61-219 0 - 86 - 4 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 which is an adequate one, but which does have them retire at that time when they can no longer compete. The object is not to get someone who can do the Job, but to get what we consider the best and retain the best for the senior posi- tions. That is why we have this consequence. That is why we aim at 50 and hope to keep 50. Senator EAGLETON. I know many Senators who have visited ex- tensively abroad. I always touch base with the U.S. Embassy, et cetera, and I can say almost without exception that I have a uni- formly high opinion of the good quality and caliber of people that serve in the U.S. Foreign Service. I, for one-and I think I speak for Senator Stevens-want that same quality to continue and do not want that quality to be damaged by a neglectful intention to cause a problem in the retirement benefits. In my judgment, after talking with these folks, and I talked with them specifically about retirement, not on every occasion, but some, I think even a valid argument, rather than separating out, although the figures are preceding since the 1980 act, is burn out. I think the pressures of Foreign Service, serving overseas-and bear in mind, not everybody gets to serve in London-there are an awful lot of places where there is pressure on them, and the pres- sures of service are enormous. I think there is a burnout factor. I don't mean that everybody in the Foreign Service at age 50 is over and done with. I suspect you are getting close to 50 yourself. Mr. VEST. Thank you for the compliment. [Laughter.] Senator EAGLETON. I think Mr. Shultz has a few days to go. Not everyone is over and done with at 50, but I think the pressures, the strains, are very, very significant, and I think we have to take that into account. I just think they are there. They are inherent with the job. Mr. VEST. Senator, if I may say, I deeply appreciate what you have said, because in my remarks I referred to a voluntary group who, for one reason or another, really are not in a position to go on serving overseas. In many cases, they fall into exactly the category you are talking about, and they have given terrific service. At that point, they really need to be given a chance to change. Senator EAGLETON. Yes. You said in your testimony that under the current system a For- eign Service officer with 25 years at age 50, if I heard you correct- ly, would retire with 50 percent of pay. Is that right? Mr. VEST. Yes, sir. Senator EAGLETON. By the way, is that a high 3 or high what? Mr. VEST. It is a high 3 at the present time. Senator EAGLETON. High 3, all right. Then you said under Ste- vens-Roth, it would be 18 percent. Mr. VEST. Yes, sir. Senator EAGLETON. However, that did not take into account that they eventually will get Social Security. That will be added, right? Mr. VEST. Yes, sir. Senator EAGLETON. It also did not take into account what that individual might have put into the thrift plan. Mr. VEST. Yes. Senator EAGLETON. That is, speculating amounts that individuals might have put in. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. VEST. Yes. Senator EAGLETON. They amount to a little or some. How are we going to compare all of this, then, from my simple head? You have got to factor in Social Security. I guess you have heard that. How are we going to compare this 18 percent plus Social Security plus thrift vis-a-vis 50 percent? Mr. VEST. I don't have a comparative answer for you at the present time, sir. We are working on that, but I couldn t give it to you now. Senator EAGLETON. All right. If your actuaries and numbers guys over there want to give us something to rough up a comparison, it will be a difficult question toanswer, but I would like to have it. How much, in your opinion, are retirement and retirement bene- fits a factor in recruiting or in attracting a young Foreign Service applicant? In VEST. That is a very subjective question, Senator. I am going to make a guess at it. Senator EAGLETON. Think back to your first days. When did you start? How old were you when you went in? Mr. VEST. I was 28. I was a GLA, and it was 1946 when I took the exam. I think the situation is honestly not so different today. I don't meet every new class of young Foreign Service officers that come in. I don't think retirement is a major factor. That is not what draws and makes people take the plunge into this very chal- lenging Foreign Service life. It wasn't the case when I joined it in 1947, and I don't think it is today. In all candor, I think-- Senator EAGLETON. How big a factor is it in retention? Suppose the guy is in 5 years, 8 years. Mr. VEST. This is what I was going to get to. Looking at my expe- rience with a wide range of Foreign Service officers since 1947, I think as a person goes on in the Foreign Service, they are married, or they get married; they have children; they begin to think about costs, education, all the rest. And they begin to think about it rather more after they get into the career pattern. At that point, one of the great factors in keeping our best people is an attractive retirement system. Without that, there is a heavy impetus to say, "I have got two kids to educate. It is costing $11,000 or more a year. It is going to get worse. I have got a chance to go off now, right at this point, to a business, and maybe I better go." Attrition, I think, would be a factor. The attraction-and it is an attraction, the retirement system that we have had-makes it possible for somebody, when he and his wife sit down and argue out, "How do we look ahead," to say, OK, I have got a reasonably even projection here I can live with, and it will even out over the years; I will stick with it, be- cause I really prefer to stick with it. I think that is the way our Foreign Service works, today as earlier. Senator EAGLETON. I suspect you are right. I talked, as I say, to enough of these folks, and I suspect your analysis is pretty close to the mark. Now my final question: The General Accounting Office has issued reports and has also testified that a government is ill-served by maintaining totally different retirement programs and trust Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 funds. Would you accept an alternative to your desire to have sepa- rate funds by permitting a separate accounting within the civil service trust fund but allowing you to administer your part of the program? Mr. VEST. If I may, I would like to ask Mr. Whitman to comment on that. Senator EAGLETON. Yes, sure. Mr. WHITMAN. Senator, I think that from the Department of State Foreign Service's point of view, we feel that in the adminis- tration of our existing retirement system, we do a very good job. We have a small shop, but they service our employees very well. They get the benefits out very rapidly. We provide a lot of personal service to our employees, and I think particularly when our em- ployees are shuttled around the world as much as they are, being able to provide that personal face-to-face service is very important. It is that portion of the administration of a retirement system that we wish very much to preserve. I think the question of where the funds reside and how they are kept is very secondary to us. So in answer to your question, I believe yes, something that would allow us to make the administrative determination could be the key feature that we would like to keep. Mr. VEST. Could I make, Senator, just one point? Senator EAGLETON. Yes. Mr. VEST. When you travel around the world two-thirds of your career, you become extremely attached to those few people and those few offices that represent home base and who know who you are. That is why this whole system, as Mr. Whitman has described it, is so important. Senator EAGLETON. Fine. Thank you, Mr. Vest. Thank you, gen- tlemen. I appreciate it. [Mr. Vest's prepared statement and responses to written ques- tions from Senator Eagleton follow:] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 STATEMENT OF GEORGE S. VEST, DIRECTOR GENERAL OF THE FOREIGN SERVICE AND DIRECTOR OF PERSONNEL, DEPARTMENT OF STATE BEFORE THE SENATE GOVERNMENTAL AFFAIRS COMMITTEE ON S. 1527, THE CIVIL SERVICE PENSION REFORM ACT, SEPTEMBER 9, 1985 The Secretary of State has asked me to represent him at- these hearings on the design of a retirement system for Federal employees covered by Social Security. We appreciate this opportunity very much. Retirement provisions are essential to any personnel system, and are especially so for the Department of State which has employees under two statutorily distinct retirement systems--Civil Service and Foreign Service. We believe that S. 1527, the Stevens-Roth bill, is a constructive effort to make the new Federal retirement system both fair and equitable to participants and financially sound as well. The three-tiered structure of benefits should accommodate the retirement planning goals of a wide variety of Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Federal employees with different career patterns. We understand that the bill's provisions for a thrift plan with employer matching of employee contributions will need to be revised in light of the administration's recent proposal to repeal section 401(k) on which they are based. Nevertheless, we believe that thrift plans are attractive features of many private sector retirement plans. We trust that some form of thrift plan will be retained as part of the retirement package. It is our belief that offering access to a thrift plan may make Federal employees more mobile, and generally encourage more movement back and forth between private and public sector employment. Such a development would be beneficial to all concerned. Moreover, the thrift plan could give a boost to capital formation and thereby aid in maintaining and expanding the national economy. Our overall impression of the bill is thus very positive. In fact, my principal reason for being here today is to request that this Committee consider including Foreign Service personnel under Stevens-Roth. The basic framework of the bill will be beneficial to both Foreign Service and Civil Service employees of the Department of State. Since we have appreciable numbers of employees who convert from the Civil Service to the Foreign Service in Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 - 3 - mid-career, and vice-versa, the Department of state has a management interest in seeing a similar retirement structure for each personnel system. Employees currently can transfer either to or from the Foreign Service with no major effect on their entitlement to retirement benefits; we would not be well served by a Foreign Service system structured significantly differently from the general Civil Service system. In looking at the Stevens-Roth bill, we believe that the Foreign Service clearly s.;ould be regarded as a_."special category" of employment, as are air traffic controllers, firefighters, and law enforcement officers. I would note that the Foreign Service retirement system, like those of the other special groups, allows optional retirement earlier and with fewer years of service than the existing Civil Service system. In our case, Foreign Service employees may retire at age 50 with 20 or more years of service. There are two overriding and related reasons for these existing Foreign Service provisions. First, we need to retire mandatorily the less competitive, as determined by management, to ensure that the highest standard of performance in foreign policy analysis and overseas representation is guaranteed. Foreign Service personnel are subjected to increasingly rigorous competition with their peers in the course of their Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 - 4 - careers, with the result that some employees are retired involuntarily each year, for failure to be promoted to the next higher grade or class within a specified time period. This 'time-in-class' limitation requires officers who are performing competently at their current grade level, but who are not sufficiently competitive to advance to higher levels to be retired. Second, we must provide through early retirement an exit, other than for substandard performance, for those who are no longer able to serve abroad. The Foreign Service is an arduous and dangerous life; those who, after a long and valued career, cannot continue to meet those challenges should be able to retire voluntarily, without being selected out for substandard performance. Our workforce analyses indicate that an appreciable number of those potentially subject to retirement for "time-in-class", both now and into the future, will be between the ages of 50 and 55. These employees typically would have about 25 years of service. The Stevens-Roth special category rules would allow such employees to receive an immediate annuity, but the income replacement at time of separation would be quite small compared to the current situation: an involuntary retiree aged 50 with Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 - 5 - 25 years service would receive an annuity of about 18 percent of his salary under Stevens-Roth, as opposed to about 50 percent under the current system. I do not believe that we could continue to operate involuntary retirement for time-in-class under such conditions. Frankly speaking, such a small benefit would be perceived as harsh and inequitable, and managers and supervisors would be likely to change their personnel management decisions in order to shield employees from selection out, thereby defeating the basic purpose of the selection out mechanism. It is necessary in our view, then, to give some special attention to employees who retire before the age of 55. We believe that the Foreign Service should retain its existing retirement threshold, allowing retirement without annuity reduction at age 50 with 20 years service. This age and service requirement is not inconsistent with that which has been proposed by OPM Director Horner for other special categories of employees. It might also be desirable to consider allowing agencies to pay the supplemental payment in lieu of Social Security to all special category employees from the time of retirement, Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 - 6 - rather than solely from age 55 to age 62. I believe that the provision of one or more of these income supplements would allow the Foreign Service to harmonize the new retirement system with its existing selection-out system. I hope that we can work together on these special points of concern. The Committee should also be aware that the Foreign Service system differs from the Civil Service. system in several other respects, such as its treatment of the rights of former spouses to annuities, pay provisions for reemployed annuitants, and certain benefits for foreign national employees. Each of these existing differences would need to be addressed in development of a final bill. I would draw your attention to one other feature of the Foreign Service Retirement System: the Department of State currently administers the system, rather than the Office of Personnel Management, and a separate retirement trust fund is maintained for the Foreign Service by the Department of the Treasury. Presumably the separate fund will continue in existence for those pre-1984 Foreign Service employees who do not elect to transfer into the new system, and the Department will continue to administer the Foreign Service system at least for those employees. Some arrangement will need to be made to insure that the current fund continues to be sufficient to pay for benefits. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 I have dwelt at some length on special treatments needed to make the Stevens-Roth retirement structure mesh with the Foreign Service personnel structure. But let me emphasize that I believe the effort to be well worthwhile. The world has changed immeasurably since Federal retirement legislation was put in place; it is now time to bring our treatment of retirement in line with those changes in the world. We must recognize that our young employees of today, those after all who have the most to gain or lose from this legislation, have a different outlook, a different set of assumptions about career mobility and change than the employees of two generations ago for whom the existing systems were designed. The bill under consideration by this committee does recognize that important fact. We believe that the bill will'benefit the government, the employees, and the taxpayers of this country and we support it. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Question for the Record on S. 1527, The Civil Service Pension Reform Act submitted by Senator Eagleton Question: In his testimony, Director General Vest urged that early retirement without penalty at age 50 be retained for Foreign Service personnel. He cited a hypothetical example indicating that an FSO retired for time-in-class at age 50 with 25 years service would receive a pension equal to 50 percent of his final salary under the existing law, and stated that under Stevens-Roth that amount would fall to 18 percent. Wouldn't that hypothetical retiree actually receive more than 18 percent of his final salary, if the annuity supplement in lieu of Social Security and distributions from his thrift plan are taken into account? Answer: Yes, if the employee had a thrift plan and if the Social Security supplement were payable from moment of retirement. To begin with, the 18 percent figure assumes that a 25 percent reduction factor would be applied to the employee's defined benefit annuity, due to his being five years youngFr than the age 55 threshold for a 'special category' employee under Stevens-Roth. If there were no penalty applied to annuities of involuntary retirees, our hypothetical employee would receive his full 25 percent annuity. In addition, the age 50 employee might add anywhere from 7.5 to 12.5 percent to his income from thrift plan distributions, i.e, about 2.5 percent of income for each 1 percent contributed and matched over the 25 years of employment. If it were payable at age 50, a Social Security supplement would Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 replace about 10 to 12 percent of income for our hypothetical employee, assuming a normal salary curve for an FSO retired at the Class 1 level. Altogether, then, income replacement would range from 25.5 to 49.5 percent at age 50. The lowest figure would apply if the annuity were reduced, if no Social Security supplement were payable at age 50, and if the employee had contributed to his thrift plan at the rate of 3 percent per year. The highest figure assumes no annuity penalty, an immediately available Social Security supplement, and a 5 percent thrift plan contribution rate. We believe this example underlines the significance of waiving early retirement penalties for involuntary retirees and of making the supplement in lieu of Social Security payable from the time of retirement, rather than from age 55. With those provisions, total income replacement for the involuntary retiree is quite adequate; without them, we believe that retirement benefits for involuntary retirees would be perceived by managers as unequitably small. Such a perception would result in management decisions about assignment or evaluation of personnel being unduly influenced by attempts to avert the' possibility of an employee's being retired for time-in-class, to the detriment of the organization as a whole. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Question for the Record on S. 1527, the Civil Service Pension Reform Act, submitted by Senator Eagleton Question: In your testimony, you stated that the Foreign Service personnel system is an 'up or out' system, and that significant numbers of Foreign Service personnel are separated or selected out for 'time-in-class' each year. Can you explain how the selection out mechanism works? How many people have been separated involuntarily in each of the past ten years? Answer: Selection out of the Foreign Service is mandated by the Foreign Service Act of 1980 (reaffirming the Foreign Service Act of 1946), which authorizes the Secretary of State to regulate the maximum time in which a member of the Foreign Service may remain in class without being promoted. The Secretary is also required to set the standard of performance which any member must meet to remain in the Foreign Service. (Sections 607 and 608 of the Act.) Substandard performance: Selection out for failure to meet performance standards is a three step process. First, members of the Foreign Service are ranked annually by Selection Boards, consisting of their peers as well as public members. These Boards designate officers whose performance as compared to their peers appears to be substandard. Employees so designated are reviewed by a Performance Standard Board which may identify the employee as substandard, and which justifies such identifications in writing. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Officers so identified are involuntarily retired, unless such action is reversed through an appeal. Officers may appeal the determination of selection out through the grievance procedure, or by appealing to a Special Review Board, composed of three career members senior in class to the appelant. These remedies are exclusive; election of one precludes resort to the other. The SRB reviews all information considered by the PSB; affords the appellant a hearing at which he may be represented by counsel, present witnesses, interrogatories or other relevant information; and decides whether to uphold or reverse the selection out determination of the PSB. In the 1970's, employees ranked in the lowest percentiles of their class were automatically considered for selection out. The percentages typically varied between 7 and 10 percent of the class, but in most years very few employees were actually separated involuntarily. Since 1980, selection boards have not been required to designate any specific percentage of employees for selection out consideration. Time-in-class: Any Foreign Service Officer below the rank of Career Ambassador is subject to involuntary separation for failure to be promoted or Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 receive a Limited Career Extension (LCE's apply only to the Senior Foreign Service) within a specified time period. Prior to 1976, the time in class regulations limited the maximum time at the then highest classes of the service, Class 1 and Class 2, to 12 and 10 years respectively. Classes 3, 4, and 5 were subjected to a 20 year multi-class rule, with no more than 15 years in any one class. In 1976, the Class 1 and 2 limits were changed to 22 years cumulative in Classes 1 and 2, but not more than 10 years in Class 2. In 1978, time in multi class was extended to 22 years for mid-level Classes. Beginning in 1981, the time-in-class limits for the Senior Foreign Service which had replaced Classes 1 and 2 were changed to: Counselor(the old Class 2 equivalent) - 7 years; Minister-Counselor(the old Class 1 equivalent) - 5 years, and Career Minister(which previously had no time-in-class) - 4 years. For these senior classes, there is the possibility of receiving a Limited Career Extension, which effectively extends the time-in-class limit by 3 years. Numbers of separations: As can be seen, three major influences have acted on involuntary separations in the past 10 years. Institution of more elaborate due process reviews of selection out Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 for substandard performance has reduced the number of involuntary separations for substandard performance. Imposition of the time in multi class rule for mid-level officers(formerly Classes 3, 4, and 5, now Classes 1, 2, and 3) has begun to increase retirements for time-in-class. New, shorter time-in-class limits for senior officers brought into being by the 1980 Act has also increased time-in-class retirements in the senior ranks. Overall, involuntary retirement totals for the period 1974-1984 are as follows: 1974 - 29; 1975 - 6; 1976 - 10; 1977 - 16; 1978 - 21; 1979 - 23; 1980 - 21; 1981 - 25; 1982 - 22; 1983 - 28; 1984 - 66. The large increase in 1984 marks the first real impact of shorter time-in-class rules for senior employees. Workforce planning projections for the period 1985-2000 indicate that on average, about 60 employees per year will be involuntarily retired through the operations of the selection out system. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator EAGLETON. Our next witness is Mr. Fossel, senior vice president and director, Alliance Capital Management Corp., New York. You may proceed, Mr. Fossel. TESTIMONY OF JON S. FOSSEL, SENIOR VICE PRESIDENT AND DIRECTOR, ALLIANCE CAPITAL MANAGEMENT CORP. Mr. FOSSEL. Thank you, Senator. Let me introduce myself a little more thoroughly at the outset. I am, as you said, senior vice presi- dent and director of Alliance Capital Management, one of the world's largest investment management organizations. Presently, we manage slightly in excess of $23 billion of other people's money, the vast majority of which is for corporate pension plans and for State and local government retirement systems. Our clients include 31 of Fortune magazine's top 100 companies and approximately 50 government retirement systems across this country, all the way from Hawaii to the State of Maine and from the State of Minneso- ta to the State of Florida. Senator EAGLETON. How many States? Mr. FOSSEL. Twenty six. Senator EAGLETON. How about Missouri? Mr. FOSSEL. No, sir. Senator EAGLETON. Alaska? Mr. FossEL. Yes, sir. Senator EAGLETON. They have more money than we do. [Laugh- ter.] Go ahead. Mr. FossEL. Here in the Washington area, the District of Colum- bia Teachers, Police, Firefighters, and Judges Retirement Board is one of our clients, as is the State of Maryland. In addition to having spent 21 years in the investment business, I took 4 years off and served in the New York State Legislature, where I served on the Ways and Means Committee and on the Gov- ernment Operations Committee, and for the last 2 years, was the ranking member of Government Operations. Therefore, my judg- ment from not only on my professional career side, but also on my political career, however brief it was, side with the fiscal budget and retirement issues that you are dealing with was quite consider- able. I think it gave me a far better understanding of some of the pros and cons of different steps that could be taken. I might also add, the State of New York is one of our clients. In the next 10 or 15 minutes, what I would like to do is share with you my thoughts on the investment implications of the pro- posed changes in the Federal retirement system and specifically, the establishment of the thrift savings plan. I should point out that the testimony I am about to give does not necessarily represent the views of my firm, but I think it does represent a fairly broad con- sensus of professional investment thinking today. I would like first to look at the investment implications from two very different perspectives. First, what are the implications for each of the proposed act's major elements? Then second, what are the ramifications of some of those acts on the major interested parties. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 The private sector investment certainly, in the proposed thrift plan, is something very new to the Federal Government. I would like to take a considerable amount of time addressing myself to whether or not the thrift plan or savings plan, or whatever name it ends up with, is a sensible approach or rather, does the approach that has been used for the Federal system over the years of invest- ing in special Treasury issues make more sense. I think, first, the question should not be whether or not the pri- vate sector investments ought to be made or not made versus public sector investments, but rather, what investment approach is best suited to providing appropriate retirement benefits or a sav- ings plan to Federal retirees at the least cost to the employer and the current participants and at an acceptable level of risk to future and existing participants, as well. In my opinion, the answer to that question is that most invest- ments in a proper mix for a retirement system as large and with as long a term a perspective as the Federal Government's-or, for that matter, almost any other retirement system-make sense, the mix of investments depending on the change and mix of the work force, their age; depending on what actuarial assumptions one wants to use; depending on the nature of the plan or the combina- tion of plans available; depending on the preference of the employ- ee; and then depending also on changing economic and investment directions and the prospective real returns and risks associated with each alternative. The chart 1 in my testimony which I hope you have copies of im- mediately following page 5, is entitled slide I and look likes this. Senator EAGLETON. I have it. Mr. FOSSEL. It shows through 1983 the changing mix of different investment vehicles used by pension plans administered by State and local government retirement systems in this country. The source was the Federal Reserve Board, and you will note in there have been substantial secular changes in the mix of investment ve- hicles. You will note that the light gray-shaded area, State and local government bonds have declined substantially, for maybe all the obvious reasons of lack of tax deductibility, or where it makes no difference in the case of a tax-free pension plan. At the same time, you will note that corporate bonds and corpo- rate stocks, corporate equities, the white area, have grown very substantially as a share of those assets. Some of those trends undoubtedly are cyclical, as investment managers tailor the portfolio as they see changing trends in the fi- nancial markets. But many of them are secular. I might note parenthetically that the total assets in those plans as of the end of 1983 was in excess of $300 billion. Those are only State and local government retirement plans. A similar chart, if I had one, for corporate pension plans would show a very different asset mix but would show very similar long- term trends. The difference in the asset mix primarily would be that it would be a much higher percentage in corporate stocks and a lower percentage in other fixed-income vehicles. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator EAGLETON. Give me a guess what would be corporate stocks in the private sector; 28.1, is it? Mr. FoSSEL. Probably roughly twice that, something in excess of 50 percent would be in stocks. That is a development that has occurred over a period of years as professional investment managers have become more familiar with the alternative risk and reward characteristics, which we will talk about in a minute. Senator EAGLETON. What do you guys say when we have the next crash? Mr. FOSSEL. The crystal ball is never perfectly clear, Senator Eagleton. All we can do is go by past trends, which we will come to in a minute, and make some prognostications of the future, for which we get paid. By definition, in my mind, I think most profes- sionals in the pension and investment management business be- lieve a retirement system should have a very long-term perspec- tive. The employees and/or the employers make contributions gen- erally over a very long number of years, and if they don't, those contributions are typically invested, anyway, for a very long number of years. The beneficiaries usually receive benefits for many, many years, hopefully a very long number of years. Therefore, in order to im- prove benefits and/or to reduce costs through the attainment of re- turns, the assumption of some shorter term volatility, which is tra- ditionally called risk in our business, is not only appropriate, but it is also entirely prudent. If you will turn to the graph 1 past page 6, and I apologize for not actually having slides. If the Eastern shuttle hadn't stayed on the ground for 2 hours, I would have had the screen up and the slides up, but note the graph following page 6, which looks like that. Senator EAGLETON. Thank you. Mr. FossEL. This illustrates the compounding returns that have been achieved by the four major investment assets over the past 591/2 years. This is the work that is best known in the industry as the work of Professor Ibbotsen from the University of Chicago and Professor Sinquefeld. What they have done is taken all the invest- ments in those categories and tracked them back from 1926 to the present. What it shows is pretty clear. That was a period that we could say was an abnormal period. All periods are abnormal periods. It had two declared wars, it had one depression, more than a dozen recessions, an industry crisis, one Presidential assassination and a near miss, inflation, deflation, stagflation, and now disinflation, in other words, hardly a placid and predictable period. Yet as you can see, the most risky asset, common stocks, achieved the highest return by three times as much per year in nominal terms as did Treasury bills, ostensibly a risk-free invest- ment, which is also virtually a return-free investment in real terms. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 That is to say that common stocks as measured by the Standard and Poors 500 returned, over that 591/2-year period, 9.7 percent per year, and long-term corporate bonds, 4.6; long-term Government bonds, 3.9; Treasury bills, 3.4, and all that was against inflation that averaged 3.1 percent over that period. Senator EAGLETON. What would the professor tell us that this period had been from 1926 to 1936? Mr. FOSSEL. We will come to that period shortly. Your questions are very good, and I think I have anticipated at least that one. The next chart, which is just following page 7, entitled slide No. III, shows the cumulative effect and is particularly dramatic. Obvi- ously, the longer term that investment has been in place, of a dollar invested at the end of 1925 in each one of those investment alternatives, you would see that a dollar left in and compounding and reinvesting dividends today, on June 30 of this year, would have been worth $248.25. The same dollar invested in long-term corporate bonds would be worth $14.51; $9.68 had it been invested in long-term Government bonds, and $7.20 if it had been invested in Treasury bills. Obviously, the impact of high returns for the employer and the employee over a long period of time is particularly dramatic, espe- cially when you realize the value of your dollar in that period has gone down by 85 cents. That is, the dollar is worth 15 cents today stated in 1925 terms. The graph, however, shows something else, and this is the point you just began to raise. That is, how much more volatile the short term, shorter term anyway, return from stocks has been when com- pared to the less risky or less volatile investment alternatives. Over this period, the annual return for stocks ranged froma plus 54 percent in 1933-surprisingly, I think to a lot of us, that was the best year ever-and then to a minus 43 percent in 1931. Long-term Government bond returns ranged from a plus 30 percent in 1932 to a minus 1 percent in 1946. Treasury bill returns, while much lower, also have shown by far and away the least fluctuation. Interesting point: When all assets are looked at, every one of them, with the exception of short-term Treasury bills, on a 10-year period, any 10-year period within that 591/2 years, had at least one 10-year period when both nominal and real returns were negative. That is for a 10-year period. I don't remember exactly which 10-year period it was, whether it was 1936 to 1946 or 1926 to 1936. However, a different picture emerges when you look at 20-year periods, 1926 to 1946 or 1947 or whatever right up to the present. If you examine those, you will see on the chart that follows page 8, the chart entitled slide IV, which looks like that, entitled "Com- pound Annual Rates of Return Over the Best and Worst 20-Year Periods, 1926 through 1983." I don't have the updated numbers, but the 20-year periods did not change. The best ones are still the best and the worst is still the worst. You will find, if you look there, that there was no one class of asset in that entire period, any 20-year period in there, that actual- ly had a negative nominal return. That is, every single class of asset for any 20-year period that you looked at had a positive nomi- nal return, and common stocks, both Standard and Poors 500 and Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 then another series called small stocks, the riskier ones, in the worst 20-year period in that 60 years in both cases had positive real returns as well. That was not true of corporate bonds; that was not true of long- term government bonds, and that was not even true of Treasury bills. That is to say, even though the volatility of stocks is much more dramatic on a short-term basis than it is for bonds or Treasury bills, over a long period of time, that volatility is dampened signifi- cantly and returns, once again, rise above the other assets, in both real and nominal terms. I think a 20-year period is not an unrea- sonable period to look at at all, particularly in retirement terms, during the contributing life and then during the retired life. Senator EAGLETON. In analyzing the investment of retirement funds, should we be focusing on nominal return or real return or what? Mr. FOSSEL. My suggestion would be that since all of us must live, save and retire and then live while we are retired, in the real world, that is, the world of real costs, I would look at real returns. Because nominal doesn't mean anything if inflation is double digit kind of inflation and you have retirement benefits rising at 5 per- cent. It just doesn't help. I think we all know that. You certainly know it, and all of us know it; in my own experiences, as well, over the last 10 or 15 years. Senator EAGLETON. I am not trying to be offensive. This is excel- lent. Let me ask something this way: Suppose we, the Government, had invested the retirement funds of the civil service system about the way slide 1 depicts, with 28 percent the equity. For the private corporations, it is 50 percent plus. Mr. FossEL. Right. Senator EAGLETON. In 1933, let's pick, 1934 or 1937, would the funds have been able to pay the retirement benefits coming due in those tragic years? Mr. FOSSEL. Presuming that the contributions had been paid in for a significant number of years preceding any 1 bad year, the answer would be yes. That is, presuming that there had been 20 years' worth, at least 20 years' worth of contributions, the answer should have unqualifiedly been yes, because money is still coming in. Even though there might have been 1 bad year, there might have been 15 out of the preceding 20 that were particularly good years. I think the real key is to look at the long-term results of one in- vestment and one investment versus another. If you are willing-and a retirement system should be willing, most systems in this country are willing and understand that- willing to accept the shorter term volatility, that is to say, to have the beneficiaries not get terribly nervous because they saw a head- line on the evening news that said that the market hit a new low or something like that, but rather, were to take the approach of looking at the value of their contributions over the years, and now that they have put in for 10 or 15 or 20 years, and they see that value is higher, significantly higher, most likely, than it was in the beginning, then clearly the ability to meet any obligations in an ac- tuarial sense is totally unhampered. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator EAGLETON. What about a series of bad news? Mr. FOSSEL. That was the point of chart number IV, and that is that even if you took the worst conceivable 20-year period that ex- isted from 1926 up to the present, which included all of the Great Depression of the 1930's, even if you took the worst 20-year period there, you would see that common stocks, in a real sense-and the worst period, interestingly, was 1962 to 1981, not some other period we might have guessed it would be-in a real sense, common stocks provided eight-tenths of 1 percent positive real return. Where I think you would have to worry is-- Senator EAGLETON. That means benefits would have been paid all through then? Mr. FossEL. They would have been paid all through that entire period, no question about that. Where someone would get hurt is if I retired today, and I took all my money out of my thrift plan, and I put it all in, for example, the common stock index fund-one ver- sion of the three alternatives that you are proposing-and if in that first year after I had invested in just that one vehicle, the stock market crashed, that wouldn't have been real smart of me, but I suppose I could have done that. More normally, what you see as one begins to approach retire- ment age, they begin to shift more of their assets toward more secure, less volatile kind of assets. When you are younger, you are willing to take on a little more risk, and you want more returns, so you begin to move slowly as you go through one class of invest- ments. That is a very normal pattern of investors, in general, whether they be pension fund investors or mutual fund investors or whatever. Everything we have talked about so far is historical. I don't pre- tend to have, as I said earlier, a clear crystal ball about the future. It might be interesting to see what 126 of the country's State and local pension fund officials say, or at least they said last year. This is not current, not current in the sense that it is not this year. This is slide number V. It is headed "Rate of Return Expectations by State and Local Pension Fund Officials." What you will see is that by and large-and I guess they were wrong, thankfully, on their view of inflation, they were a little high-but by and large, what has happened in the past, they ex- pected to happen in the future. That is, the historical relationship between risk, as defined as volatility, and return, will be main- tained. That is, in their view, at least, stocks will outperform bonds; bonds will out perform Treasury bills, and there are a couple of other classes of assets thrown in there, as well; small stocks will outperform big stocks, et cetera. That was a 5- to 10-year look done at the time by the Greenwich Research Associates which does a lot of market research in the pension field. I see personally no reason over the long term to expect that to change at all. The typical relationship has held up not only in this country, but in most countries around the world for a long, long period of time, which makes common sense. The more the volatili- ty, the more the return that you are going to require as an inves- tor. I don't see any reason that that should change. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 The significance of all this, I think, as far as your committee and Congress is concerned is as follows: One, common stocks and corpo- rate bonds in the past have and most likely will in the future offer higher long-term returns than Treasury bills or Government bonds. They are higher risk, by every definition. Two, short-term volatility of stocks is significantly greater than bonds of all types, and the volatility of corporate bonds is greater than it is of long-term Government bonds, which, in turn, is great- er than it is of Treasury bills. Three, all investment alternatives have achieved positive, nomi- nal returns over any 20-year period. However, only stocks have shown positive real returns for every 20-year period since 1925. Only common stocks have done that. As someone retiring, I would like to know that I could have a positive real return for maybe the 20 years that I am going to be retired. And four, the vast majority of all 20-year periods have shown positive, nominal and real returns for all investment alternatives. So to offer a defined contribution plan or a savings plan, which is, in essence, what this is, should not frighten an employee, a contrib- utor, or a retiree. Because even though the benefits are not guaran- teed, any long-term historical analysis will show that the opportu- nities to achieve well-above-average returns are very high. As I said earlier, there was one key question to ask, and that was, in essence, what was in the best interests of the employee, the retiree, and the employer? It is my strongly held opinion that the properly diversified investment portfolio or portfolios which offer a full array or a reasonably full array-you have proposed three-of prudent investment alternatives will achieve much higher invest- ment returns than any other approach. Additionally, the higher return can and should be attained with minimal increase in long-term volatility, obviously, some increase in shorter term volatility. The conclusions that I come to there assume a passive invest- ment approach or an index fund approach, if you will. An active management of retirement system assets has the po- tential to enhance overall returns even further. I will concede a bias. We are by and large an active manager of pension assets and have proved to attain superior returns over time. I think all of that is the major reason why most major corporate, union, and public sector pension plans have moved to such an ap- proach over the last 20 years or so. When I say such an approach, I mean both diversifying their investments into not only Govern- ment bonds and corporate bonds, but stocks and, more recently, real estate and a variety of other investment alternatives. The second trend we have seen very clearly is a move in all of those sectors to thrift plans of one form or another as an adjunct to their own defined benefit pension plan. I would like to comment on the thrift plan itself. It is the second, or maybe it is the first, major element of the proposed act that has very clear investment implications. Whether you fall into the cap- ital accumulation plan or a thrift plan or a savings plan, they are all the same thing. The important investment consideration here is the recognition that in a defined benefit plan, the assets or the li- abilities, in essence, are owned by the employer-or in the case of Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 the Government's system, by the taxpayers-who, ultimately there- fore, will realize, that is, the employer will realize, the benefits of superior investment. returns and also will bear the cost of inad- equate or inferior returns or contributions. In a thrift plan, on the other hand, the employee owns the assets, and the employer assumes the risk and the rewards of in- vestment returns that are realized. The major investment implica- tion of including a thrift plan is that employees normally-and this proposed legislation does it very well-are offered a choice of in- vestment alternatives and may tailor their own investment mix to suit their personal financial situation and their own risk toler- ances. My wife prefers to keep it under the mattress. That is her risk tolerance. A younger employee with high potential for career and earnings advancement may very well wish, in fact, I would recom- mend, to put a higher proportion of their assets in common stocks or some other higher risk, higher return investment, whereas an- other employee, who is very risk adverse, may be older and close to retirement, may wish to have those plan assets put into an assured Government bond or investment portfolio. Either individual-and I think this is one of the real pluses of this proposal-either individ- ual has the freedom to be able to change the mix of investments as their own personal financial situation changes as they go through life. Since the employee and the retiree have this flexibility, there ob- viously is a need, as you have done, to provide a series or a variety of investment choices. In my opinion, the three choices provided, at least at the outset, are entirely appropriate. That is to say, there is a very low-risk special Treasury issue fund; there is a fixed-income fund, presumably a little longer term orientation; and there is a stock index fund. As I said earlier, while I personally believe that the common stock fund should contain both a passively managed portion and an actively managed portion, I can certainly fully un- derstand, both for cost and maybe political reasons, the reasons for only doing it on an indexed basis. Senator EAGLETON. Do the State programs have a passive and an active fund separation such as you have described it? Mr. FoSSEL. Most of the very large sophisticated funds these days, State and corporate, have a mix of both. That is, they have determined that the core of their investment portfolio, the pension portfolio, or a major portion of it at least, should be indexed. Senator EAGLETON. This is a choice made by the employee or a choice made by the managers? Mr. FOSSEL. So far, in the main, made by the manager. Senator EAGLETON. Are you suggesting that we put into law, though, a fourth choice; that is, the first two you have mentioned and then you have corporate equity and then "fill in the box," pas- sive funds or a high roller? Mr. FoSSEL. I guess if you are asking me my personal opinion, I think in time you will find that employees will demand a wider va- riety of alternatives than merely three, and one of those might be a common stock fund that performs just like the stock market; that is, an index fund much like you have described here. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 One of those alternatives that might be demanded-we found this where other employers have offered alternatives-might have something that is a little more aggressive. I wouldn't call it high roller, but high returner, how about that? Senator EAGLETON. Of the Fortune 500 companies, you represent 30, did you say? Mr. FOSSEL. We have as clients 31 out of the top 100. Senator EAGLETON. Of those 31, do they have, as a choice of the employee, an active, volatile fund choice? Mr. FOSSEL. Yes. Senator EAGLETON. All 31 do? Mr. FOSSEL. I wouldn't say that all 31 do, but a majority do, and the trend is clearly toward offering that as one investment alterna- tive in a profitsharing fund. This is another version of it. Senator EAGLETON. More employee are opting in that direction? Mr. FossEL. What you find is at the outset, an employee is going to be very cautious, and usually in the early stages of a plan like that, a 401(k) plan, which is similar in many ways as well, they opt for the most conservative, or they opt for the company stock, and that is another favorite. Then as time goes by and maybe they get better educated or more sophisticated or understand better what the alternatives are, they tend to move from one place to the other. But they start out very conservative, typically. There all always exceptions to that. Beyond the investment issues, the narrow investment return issues, there are fairly major structural investment issues that remain. Clearly, maybe not clearly, clearly in my mind-one of the most crucial things that Congress could do in setting up a plan like this is to provide the most professional understanding and manage- ment in an investment sense of a plan that they could. My view is that the combination of the establishment of the thrift advisory committee and the other structural steps that have been taken address very well the issues that could be of great con- cern relative to political involvements of the fund or conflicts and that kind of thing. I would say with no equivocation that the struc- ture is well done at this point. One of the other issues that comes to mind, particularly recently, but comes to mind all the time in a different form, is sort of the political influences on investing. In order for the thrift fund or funds to be best able to achieve their long-term objectives or the objectives for their participants and retirees, it is paramount that the executive director and the professional staff and the managers, the hired outside managers or internal managers, be as far re- moved from those issues as possible. There are too many examples, even in very recent years. Maybe you have read some of it in the State of California, only 1 year ago, where board members or other groups that regard them- selves as having something to say there have intruded themselves into the investment process of public funds and, unfortunately, often with very negative results. That is not to say that such political or policy issues as social in- vesting issues, whether it be to stimulate housing in rundown areas or urban revitalization or South Africa free investments or what- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 ever they may be at a given point in time, are not legitimate con- siderations for the board to consider. Senator EAGLETON. Should we insulate any such fund against such political whims? Mr. FOSSEL. No; I don't think you can. I had the experience of being the investment manager of the U.N. Pension Fund for the years 1973, 1974, and 1975. However political you think this one could get to be, I can assure you, that one was vastly more politi- cal. What you can do, though, and what I think is important to do is to ensure that you have the most professional management you can and then, when there is an issue that comes up, that it can be studied in terms of the investment implications of it, if those that are the owners of the assets-in this case, in the savings plan, those that are contributing, both the employer and the employee- understand that a shift toward not investing at all in any company involved in South Africa, take the current hot button, that that has definite investment implications. I can tell you that it does. It doesn't mean they are all bad, but it has definite investment implications, and they understand those, and they are willing to accept whatever those implications are that might be suggested. I don't think you can divorce them in any way. You have got geo- graphical ones. I don't think they can be divorced, but I think they ought to be studied professionally as opposed to whatever ways we might respond. Senator EAGLETON. I know it is an issue Senator Stevens covered greater than I. We will get from you some of the analyses that have been done about-as you have said, maybe your experience with the United Nations-about the implications in South Africa and also this housing business. I have heard it said, "Well, we have got all this money floating around these funds." My God, we could house the entire Nation and everybody could have two houses if we put the total of the re- tirement funds in housing. Could you get for me and maybe for the record, as well, some of the analyses that have been done of this, that you have done or that your company has done or what have you? Mr. FoSSEL. I know I can provide you some material on South Africa, because we happen to offer a South Africa free index fund. In fact, the DC Retirement Board is the one that has invested in that very recently. Some of the other ones I will have to look at. If I can, I will. I can say to you, and your own common sense would lead you to the same conclusion, the investment business is a supply-demand busi- ness. For some reason, we think we should not invest any money in this country, anywhere in companies that are investing or doing business in South Africa. You know what will happen. The price of those securities will fall relative to the prices of other securities. I don't know where the equilibrium is. Maybe we are past it, maybe we are not. At some point in time, the value for an investor's point of view, re- gardless of anything else, is going to be in companies that are doing business in South Africa. The same thing would be true of Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 mortgages on inner cities versus mortgages on farm lands. The same kinds of things would happen. I think that the key here is to look where the value is relative to the returns and risks that are otherwise influenced by some of these shorter term trends. We don't tend to think of them when they are happening as short-term trends, but they are short-term trends in a 20-year, 25-year or 50-year time horizon. But I will look and see if I can find them for you. One thing I feel strongly about is that no board members, in any way, shape or form, should have any ability to make specific in- vestment decisions, the advisory board that is proposed and the oversight board as well. That ought to be left up to the profession- als. They regularly ought to set policy, but not decide do we buy stock A or stock X or bond A or bond X. I think the proposed act addresses that issue very professionally. Another concern that I have heard earlier, and I don't know if it has been a current one on this issue, is what would be the impact of even the savings plan funds investing in certain sectors of the market? Wouldn't that have a tremendous impact on the market- place? In my professional opinion, those fears are wholly unfounded. In the first place, the proposed act provides for a very gradual phase in to the private sector investments. Second, the current and prospective growing size and liquidity of the United States, not to mention the worldwide financial markets, makes it highly unlikely that that impact is going to be felt in any meaningful way. I just think that is not an issue. I think at this point, in my view, the act is in the kind of shape from an investment point of view that it ought to be in. I would make no significant revisions, and I think that all those who have worked on it, and some of them I see up there with you, have done a tremendous job. I think it is the kind of job that when it is fin- ished and the Federal Government has in place the same kind of retirement alternatives that most of the private sector and much of the Government sector today have, it will be something that will be very attractive to those entering at age 28 in the Foreign Serv- ice, those that are in there for a long time, and those that are leav- ing Government service and retiring-a very beneficial long-range plus for their own retirement security. Senator EAGLETON. My final question: Do we have any obliga- tion-we, 100 Senators and 435 House Members-to take into ac- count what the impact of what we may do here will have on the Federal budget? In all our districts, we were all back there in August and told everybody, time and again, how worried we are about the budget. We are concerned; we will do things about it. And people are anxious about it. We say all those things. Do we take that into account in this deliberation? Mr. FossEL. It seems to me, and I will speak now as a taxpayer and a voter in Congressman Fish's congressional district, that yes, you ought to take those factors into consideration, but you ought to do so in a very long-term sense, and you ought to do so in a sense that everything that is done, whether it be spendingwise or reven- uewise, has a long-term strategy to it. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 119 As an investment professional, I would argue that by providing retirement benefits, even though part of it is a defined benefit and part is the saving plan or thrift plan, the total of which provides a higher return on those invested assets-that is, the 5 percent that the Federal Government will match, plus the 5 and up to 10 per- cent that the employee will contribute-than would otherwise be, and therefore, in the long run provides a savings to the Federal Government, en toto, then you have done your job. Whether or not there is a-and I don't know if the answer is yes or no, because I am not the budget expert-but if there is a small, immediate cost in the first couple of years in beginning to put such a plan in place, which will be offset by substantially better benefits for the retirees and, therefore, lower costs to the taxpayers and to the Government, then as a voter, I applaud you. Senator STEVENS [presiding]. I have been delighted to hear this exchange between you two. I appreciate your assisting me, Tommy, in starting the hearing. Would you have any suggestions for us now that it appears the 401(k) is in jeopardy? Do you know of any similar plans in effect that use another thrift mechanism which would be equally effec- tive? Mr. FossEL. No; that is to say, if what you mean in the broad sense of the word is, do I know of or do I think there should be in place for the private sector an opportunity to stimulate savings and therefore provide for our own retirements by tax deferring some contribution which is then matched by the employer, do I think that ought to be a part of your system. Yes, I do, because I think that is in all of our best interests long run, whether we be taxpay- ers or anything else. I, on the one hand, would hate to see 401(k) go away, because it does very clearly stimulate savings, and this country, as you all well know probably better than I, lags on a worldwide basis in our personal savings rates compared to most Europeans and certainly to Japan in terms of what they save. Senator STEVENS. Do most of the private funds have a plan for hardship loans as this one does? Mr. FOSSEL. I noticed that, and I don't know the answer to that question. It is the first. I haven't seen it, but I have not dug into the legal and administrative nuances of the private plans,. I really know them more from an investment point of view. So I don t know the answer to that, Senator Stevens. Senator STEVENS. There is a considerable demand now for money to be available for short-term loans. They pay pretty high premi- ums for them. Do you think we should grant additional discretion to the managers to establish different types of investment portfo- lios such as real estate investments, short-term loans, and mort- gages. Mr. FOSSEL. You could do any of a number of things, and clearly, the trend in the pension industry, both State and local government and corporate, is to invest in a wider array of investment alterna- tives than used to be the case. Equally clearly, a trend on the part of the investor is to demand a wider array of investment vehicles to suit their own particular personal financial needs. In this particular case, whatever the Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 moneys are that are there are moneys that are owned by, ultimate- ly owned in their entirety by the contributor; that is, the employee. I fear a little bit, I guess, knowing how so many of us take credit cards and think we are going to pay them off and then we end up paying 18 or 20 percent and not realizing we are doing it-I kind of fear, unless it was very tightly controlled, that a loan program could be self defeating; that is, if the ultimate objective is to pro- vide an enhanced level of retirement safety in invested assets, and then early on in the program, as those contributions were building up, an employee said, "Well, I must just have this loan against those assets" to do whatever it was that they felt like doing-hope- fully, it was a well-intended purpose-but then it didn't work, and they got to retirement time and the assets they had were fully loaned and they ended up having nothing. Senator STEVENS. I don't mean a direct loan against the assets. I mean, suppose a portion of this money were made available to Fed- eral employee credit unions for loan capital on a commercial basis? Are there other areas of investment in which the earnings have been equal or greater to the ones that you have told me about? Mr. FOSSEL. I would say there have been some very long-term studies on real estate-and I don't mean rural land development now, but apartments and office buildings and warehouses and in- vestable real estate-there have been some very long-term studies that show returns, by and large, on real estate have been superior to certainly fixed-income investment, whether they be bonds or Treasury bills or whatever. But there again, it must be a long-term return. If the fund in- vests in a new office building, it is many, many years before that building might be sold. Those returns, that is, both the apprecia- tion in value plus the rentals from shopping centers and office buildings, in total, have been very, very attractive over the years. I would suggest-in my more complete testimony I said that I think under consideration should be broadening the investment al- ternatives beyond what you have now proposed. As a first step, however, and particularly in the formative stages, those three particular funds in the mix that I understand is intend- ed are totally appropriate as the first step. I hope it will be thought of as a first step. I would hope that the board and the advisory committee and the professional managers would take it upon them- selves to look at all terms that satisfy the needs and the objectives and meet the risk tolerances of the investors. Senator STEVENS. My last question: In the private sector, when an employee leaves prior to the vesting of a pension plan and it is not a plan to which he or she has contributed, what happens to the employer contribution to the plan? Mr. FossEL. Upon retirement, you mean? Senator STEVENS. No; if they leave before vesting. Mr. FOSSEL. Oh, before vesting? The employer contributions to the plan remain part of the plan in its entirety and, therefore, I guess you could argue, either benefit those that are still part of it and ultimately do retire, because then the assets are higher than they would have been otherwise and/or benefit the employer. If they had not vested, very clearly, the employee contributor has no call on those assets. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 121 I have been working for 21 years, and I have never worked long enough in any one place to have vested in a pension plan. I will have to start thinking about that one of these days. Senator STEVENS. You do very well, and we thank you very much for appearing before us. We will be back in touch with you again as we go along. Thank you very much. Mr. FOSSEL. Thank you. [Mr. Fossel's prepared statement follows:] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 122 INVESTMENT IMPLICATIONS DE JON S. FOSSEL SENIOR VICE PRESIDENT - DIRECTOR ALLIANCE CAPITAL MANAGEMENT CORPORATION Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 FIRST, LET ME INTRODUCE MYSELF. I AM JON FOSSEL, SENIOR VICE PRESIDENT OF ALLIANCE CAPITAL MANAGEMENT. ONE OF THE WORLD'S LARGEST INVESTMENT MANAGEMENT ORGANIZATIONS. AT ALLIANCE. WE MANAGE OVER $23 BILLION OF OTHER PEOPLE'S MONEY. THE VAST MAJORITY OF WHICH. SOME $16 BILLION IS FOR CORPORATE PENSION PLANS AND FOR STATE AND LOCAL GOVERNMENT RETIREMENT SYSTEMS. OUR CLIENTS INCLUDE 31 OF FORTUNE MAGAZINE'S TOP 100 COMPANIES. RANGING FROM AMERICAN BRANDS TO WARNER LAMBERT AND 50 GOVERNMENT RETIREMENT SYSTEMS FROM THE HAWAII EMPLOYEES RETIREMENT SYSTEM TO THE MAINE STATE RETIREMENT SYSTEM. AND HERE IN THE WASHINGTON AREA. THE DISTRICT OF COLUMBIA TEACHERS, POLICE AND FIREFIGHTERS AND JUDGES RETIREMENT BOARD AND THE STATE OF MARYLAND. OUR LIST OF CLIENTS AND THE ASSETS THEY ENTRUST TO OUR MANAGEMENT HAVE GROWN SUBSTANTIALLY OVER THE YEARS, IN LARGE PART BECAUSE OUR LONG-TERM INVESTMENT RESULTS HAVE CONSISTENTLY MET OR EXCEEDED OUR CLIENTS EXPECTATIONS. FOR EXAMPLE. DURING THE PAST TEN YEARS. OUR EQUITY ACCOUNTS ACHIEVED A COMPOUND ANNUAL RETURN OF 17.3%. THESE RESULTS COMPARE VERY FAVORABLY WITH THE CPI WHICH INCREASED 7.3% PER YEAR DURING THE SAME PERIOD, AND THE S 6 P "500" INDEX WHICH RETURNED 14.8% ANNUALLY. IN ADDITION TO MY 21 YEAR INVESTMENT CAREER. I SPENT TWO TERMS IN THE NEW YORK STATE ASSEMBLY WHERE I SERVED ON THE WAYS & MEANS COMMITTEE AND THE GOVERNMENT OPERATIONS COMMITTEE, TWO YEARS AS ITS RANKING MEMBER. MY INTIMATE INVOLVEMENT WITH FISCAL. BUDGET AND RETIREMENT ISSUES IN THE NEW YORK STATE LEGISLATURE HAS GIVEN ME A FAR DEEPER UNDERSTANDING OF THE COMPLEXITY OF THE RETIREMENT ISSUES FACING CONGRESS TODAY. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 MY ASSIGNMENT FOR THE REMAINING 15 MINUTES IS TO SHARE WITH YOU MY THOUGHTS ON THE INVESTMENT IMPLICATIONS OF CERTAIN PROPOSED CHANGES IN THE FEDERAL RETIREMENT SYSTEM REQUIRED BY THE SOCIAL SECURITY ACT AMENDMENTS OF 1983. I SHOULD POINT OUT THAT MY VIEWS DO NOT NECESSARILY REPRESENT THE VIEWS OF MY FIRM. BUT THEY DO PROBABLY REFLECT A BROAD CONSENSUS OF INVESTMENT THINKING TODAY. THE NEED FOR CONGRESS TO ADDRESS ITSELF TO ALTERNATIVES TO THE CURRENT CIVIL SERVICE RETIREMENT SYSTEMS IS ABUNDANTLY CLEAR TO NEARLY EVERY INTERESTED PARTY. THE ACTIONS TAKEN BY CONGRESS PRIOR TO JANUARY 1ST 1986 COULD HAVE A VERY MAJOR IMPACT ON: CURRENT AND FUTURE PARTICIPANTS. CURRENT AND FUTURE BENEFICIARIES. THE ATTRACTIVENESS OF FEDERAL EMPLOYMENT FOR EXISTING AND NEW WORKERS. THE FEDERAL BUDGET AND TAXES. THE U. S. FINANCIAL MARKETS. GROWTH IN THE U. S. ECONOMY. IN OTHER WORDS. THE STEVEN'S-ROTH PROPOSAL. OR WHATEVER ALTERNATIVE IS FINALLY ADOPTED. WILL HAVE A VERY BROAD AND LONG-LASTING EFFECT ON EACH AND EVERY AMERICAN. NOT ONLY FOR TODAY. BUT FOR GENERATIONS TO COME. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 I WOULD LIKE TO LOOK AT THE INVESTMENT IMPLICATIONS FROM TWO QUITE DIFFERENT PERSPECTIVES. FIRST. WHAT ARE THE IMPLICATIONS OF EACH OF THE PROPOSED ACT'S MAJOR ELEMENTS. PRIVATE SECTOR INVESTMENTS. AND I WOULD ADD. EXPANDED PUBLIC SECTOR INVESTMENTS VS. THE PRESENT SOLE USE OF SPECIAL TREASURY ISSUES. DEFINED BENEFIT AND THRIFT PLAN VS. THE CURRENT DEFINED BENEFIT PLAN. STRUCTURAL ISSUES SUCH AS THE ROLE OF THE PENSION BOARD OF TRUSTEES. POLITICAL AND POLICY ISSUES SUCH AS INVESTING FOR "SOCIAL" PURPOSES.. SECONDLY. I WOULD LIKE TO COMMENT ON THE INVESTMENT IMPLICATIONS OF THE PROPOSED ACT IN TERMS OF ITS EFFECT ON THE MAJOR INTERESTED PARTIES. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 THE FEDERAL EMPLOYEE, ESPECIALLY THE NEW EMPLOYEE. THE FEDERAL GOVERNMENT AS THE EMPLOYER. THE ECONOMY AND THE FINANCIAL MARKETS. LET ME GO BACK NOW TO THE MAJOR ELEMENTS OF THE ACT AND EXAMINE THE INVESTMENT IMPLICATIONS OF UTILIZING PRIVATE SECTOR INVESTMENTS INSTEAD OF THE CURRENT PRACTICE OF ONLY BUYING AND HOLDING SPECIAL TREASURY SECURITIES. FIRST. LET ME SAY THAT PRIVATE VS. PUBLIC INVESTMENTS IS IQI THE RIGHT ISSUE. THE RIGHT ISSUE IS: "WHAT INVESTMENT POLICY IS BEST SUITED TO PROVIDING APPROPRIATE RETIREMENT BENEFITS TO FEDERAL RETIREES AT THE LEAST COST TO THE EMPLOYER AND CURRENT PARTICIPANTS. AT AN ACCEPTABLE LEVEL OF RISK". IN MY OPINION. THE ANSWER TO THAT QUESTION IS THAT MOST INVESTMENTS INCLUDING: SPECIAL ISSUES. PUBLICLY TRADED TREASURY ISSUES. OTHER FEDERAL AGENCY ISSUES. CORPORATE BONDS. COMMON STOCKS. REAL ESTATE. VENTURE CAPITAL AND PROBABLY OTHER ALTERNATIVES. ARE APPROPRIATE HOLDINGS Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 FOR A RETIREMENT SYSTEM AS LARGE AND WITH AS LONG TERM A PERSPECTIVE AS THE FEDERAL GOVERNMENT'S. THE PROPER MIX OF THE VARIOUS INVESTMENTS WILL DEPEND ON THE CHANGING MIX OF THE WORKFORCE. ACTUARIAL ASSUMPTIONS. THE NATURE OF THE PLAN OR PLANS. THE PREFERENCE OF THE EMPLOYEES. CHANGING ECONOMIC AND INVESTMENT TRENDS. AND THE PROSPECTIVE REAL RETURNS AND RISK ASSOCIATED WITH EACH ALTERNATIVE. THE FOLLOWING CHART (SLIDE I) SHOWS HOW THE INVESTMENT MIX OF AMERICA'S STATE AND LOCAL GOVERNMENT PENSION PLANS HAVE CHANGED OVER THE PAST 33 YEARS. MUCH OF THE CHANGE IS SECULAR IN NATURE SUCH AS THE DECLINE IN STATE AND LOCAL GOVERNMENT BONDS BUT MUCH IS ALSO UNDOUBTEDLY IN RESPONSE TO CHANGING MARKET AND INVESTMENT RETURN CONDITIONS. I MIGHT NOTE THAT THE TOTAL ASSETS HELD BY THESE PUBLIC PENSION PLANS CURRENTLY EXCEEDS $300 BILLION. A SIMILAR CHART FOR CORPORATE PENSION PLANS WOULD SHOW A VERY DIFFERENT ASSET MIX BUT SIMILAR LONG-TERM TRENDS. AS THE COST OF PROVIDING APPROPRIATE RETIREMENT BENEFITS HAS ESCALATED. PLAN St-ONSORS AND THEIR INVESTMENT MANAGERS HAVE BECOME MORE SENSITIVE TO ENHANCING RETURNS WHILE AT THE SAME TIME MAINTAINING RISK AT ACCEPTABLE LEVELS. I SAY ACCEPTABLE LEVELS INSTEAD OF SAYING "MINIMIZING RISK" BECAUSE BY DEFINITION A RETIREMENT SYSTEM SHOULD HAVE A LONG-TERM INVESTMENT PERSPECTIVE. EMPLOYEES AND/OR EMPLOYERS MAKE CONTRIBUTIONS OVER A VERY LONG NUMBER OF Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 128 61-219 265 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 YEARS AND BENEFICIARIES USUALLY RECEIVE BENEFITS FOR MANY YEARS. THEREFORE. IN ORDER TO IMPROVE BENEFITS AND/OR REDUCE COSTS THROUGH ATTAINMENT OF HIGHER RETURNS THE ASSUMPTION OF SOME SHORTER-TERM VOLATILITY (OR RISK) IS PERFECTLY APPROPRIATE (AND PRUDENT). THE FOLLOWING TABLE (SLIDE II) ILLUSTRATES THE COMPOUND ANNUAL RETURN ACHIEVED FROM THE FOUR MAJOR CLASSES OF INVESTMENT ASSETS OVER THE PAST 59 YEARS. 2 DECLARED WARS 1 DEPRESSION MORE THAN A DOZEN RECESSIONS AN ENERGY CRISIS 1 PRESIDENTIAL ASSASSINATION AND I NEAR MISS DEFLATION. INFLATION. STAGFLATION AND NOW DISINFLATION Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 t6TOCK, BONDS, RISK FR ASSETS, & INFLATION COMPOUND GROWT RATES, 1926-IOW 61'A0 Ica NOMINAL REAL COMMON STOCKS (S&P 500) ggam.,~ 9.7 6.6% LONG-TERM CORPORATE BONDS h!i'1o 14 .6670 S,90 LONG-TERM GOVERNMENT BONDS 499'o 3.9670 JOAO% 0.8670 TREASURY BILLS -3.E?lo 3.y 9. -0341ft, 0.3Q7e INFLATION -3ew 3.1690 - Alliance A Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 AND YET THE RISKIEST (OR MOST VOLATILE) ASSET, COMMON STOCKS. ACHIEVED THE HIGHEST RETURN BY THREE TIMES AS MUCH PER YEAR AS U. S. TREASURY BILLS. AN OSTENSIBLY RISK-FREE INVESTMENT. WHICH IS ALSO A VIRTUALLY RETURN FREE INVESTMENT. IN REAL TERMS. THE NEXT CHART (SLIDE III) SHOWS DRAMATICALLY THE LONG-TERM IMPACT OF COMPOUNDING A GIVEN DOLLAR OF INVESTMENT AT A HIGH RATE. THE CHART SHOWS THAT ONE DOLLAR INVESTED IN COMMON STOCKS AT THE END OF 1925 WOULD HAVE BEEN WORTH $248.25 BY JUNE 30TH 1985 WHEREAS THAT SAME DOLLAR INVESTED IN LONG-TERM CORPORATE BONDS WOULD BE WORTH $14.51. $9.68 IF IN LONG-TERM GOVERNMENT BONDS AND $7.20 IF IN TREASURY BILLS. OBVIOUSLY. THE IMPACT OF HIGHER RETURNS HAS SIGNIFICANT POSITIVE IMPLICATIONS FOR EMPLOYEE AND EMPLOYER ALIKE. ESPECIALLY SINCE THE PURCHASING POWER OF THE DOLLAR WAS CUT BY NEARLY 85%. THE GRAPH. HOWEVER. SHOWS SOMETHING ELSE AS WELL. AND THAT IS HOW MUCH MORE VOLATILE THE SHORTER-TERM RETURN FROM STOCKS HAS BEEN WHEN COMPARED TO LESS RISKY INVESTMENT ALTERNATIVES. OVER THIS PERIOD. THE ANNUAL RETURN FOR STOCKS RANGED FROM ?541 IN 1933 TO -431 IN 1931. WHEREAS LONG-TERM GOVERNMENT BOND RETURNS RANGED FROM ?301 IN 1932 TO -161 IN 1946. ALL CLASSES OF ASSETS EXCEPT SHORT-TERM TREASURY BILLS HAD AT LEAST ONE Imo, YEAR PERIOD WHEN BOTH NOMINAL AND REAL RETURNS WERE NEGATIVE. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 r O e : 4 ? n N N Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 HOWEVER, A DIFFERENT PICTURE EMERGES WHEN TWENTY YEAR HOLDING PERIODS ARE EXAMINED. AS THE FOLLOWING TABLE (SLIDE IV) SHOWS, EVERY CLASS OF ASSET HAD A POSITIVE NOMINAL RETURN FOR ANY TWENTY YEAR PERIOD. THIS TABLE IS DRAMATIC EVIDENCE OF THE HIGHER LONG-TERM RETURNS THAT IS LIKELY TO BE FOUND IN MORE RISKY (THAT IS MORE VOLATILE ASSETS) AND ALSO SHOWS THAT OVER LONGER TIME PERIODS THE RISK OF NEGATIVE RETURNS FROM COMMON STOCKS. THE MOST VOLATILE ASSETS. HAS BEEN WELL WITHIN ACCEPTABLE AND PRUDENT LIMITS IN FACT. THERE HAVE BEEN 20 YEAR PERIODS WHEN THE ALLEGEDLY SAFEST INVESTMENTS, TREASURY BILLS. HAVE LOST MONEY IN REAL TERMS. THIS HAS NOT BEEN THE CASE WITH STOCKS. WHILE THE PRECEDING ANALYSIS IS HISTORICAL. IT MIGHT BE INSTRUCTIVE TO TAKE A LOOK INTO THE FUTURE THROUGH THE EYES OF 126 OF THE COUNTRY'S LARGEST STATE AND LOCAL GOVERNMENT PENSION FUND OFFICIALS. THE TABLE (SLIDE V) SHOWS THAT FOR THE NEXT 5-10 YEARS, THESE FUNDS EXPECT THE HISTORICAL RELATIONSHIP BETWEEN RISK AND RETURN TO BE MAINTAINED. WITH THE MORE VOLATILE INVESTMENTS. EMERGING GROWTH STOCKS. TO OFFER FAR HIGHER RETURNS THAN LOW RISK INVESTMENTS SUCH AS TREASURY BILLS. I MIGHT ADD A PERSONAL OPINION HERE. WHICH IS THAT I BELIEVE THE TOTAL RETURN REALIZED BY LONG-TERM HIGH YIELDING. HIGH QUALITY BONDS WILL EXCEED RETURNS FROM COMMON STOCKS OVER THE NEXT SEVERAL YEARS ON A RISK Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 COMPOUND ANNUAL RATES OF RETURN OVER BEST/WORST 20 YEAR PERIODS (1926-1983) Small Stocks 21.1% 17.2% 5.7% 4.0% (1942-61) (1942-61) (1929-48) (1929-48) Common Stocks 16.9% 13.0% 3.1% 0.8% (1942-61) (1942-61) (1929-48) (1962-81) Long Term Corporate Bonds 5.5% 5.4% 1.3% -2.7% (1926-45) (1926-45) (1950-69) (1962-81) Long Term Government Bonds 4.7% 4.6% 0.7% -3.1% (1926-45) (1926-45) (1950-69) (1962-81) Treasury Bills 6.1% 1.0% 0.4% -3.1% (1962-81) (1952-71) (1931-50) (1933-52) 5.9% 0.1% (1962-81) (1926-45) Alliance it Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 o ~ !V O r r i i V Ilf Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 ADJUSTED BASIS. THAT IS TO SAY. AS AN ACTIVE MANAGER OR A BOARD MEMBER OF THE NEW CIVIL SERVICE RETIREMENT SYSTEM. I WOULD HAVE A VERY LARGE PORTION OF THE FUND INVESTED IN BONDS TODAY. BUT WOULD ARGUE STRONGLY FOR THE FLEXIBILITY TO CHANGE ASSET MIX AS INVESTMENT OPPORTUNITIES CHANGE. THE SIGNIFICANCE OF THE HISTORICAL AND PROSPECTIVE RETURNS REALIZED BY VARIOUS INVESTMENT ALTERNATIVES ARE THE FOLLOWINGS 1. COMMON STOCKS AND CORPORATE BONDS HAVE IN THE PAST. AND WILL PROBABLY IN THE FUTURE. OFFER HIGHER LONG-TERM RETURNS THAN TREASURY BILLS OR LONG-TERM GOVERNMENT BONDS. 2. THE SHORT-TERM VOLATILITY OF STOCKS IS SIGNIFICANTLY GREATER THAN BONDS OF ALL TYPES. 3. ALL INVESTMENT ALTERNATIVES HAVE ACHIEVED POSITIVE NOMINAL RETURNS OVER ANY TWENTY-YEAR PERIOD. HOWEVER. ONLY STOCKS HAVE SHOWN POSITIVE REAL RETURNS FOR EVERY TWENTY-YEAR PERIOD SINCE 1925. 4. THE VAST MAJORITY OF TWENTY-YEAR PERIODS SHOWED POSITIVE NOMINAL AND REAL RETURNS FOR ALL INVESTMENT ALTERNATIVES. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 SINCE. AS MENTIONED EARLIER. A LONG-TERM TIME HORIZON IS APPROPRIATE FOR THE FEDERAL RETIREMENT SYSTEM. IT IS MY STRONGLY HELD OPINION THAT A PROPERLY DIVERSIFIED INVESTMENT PORTFOLIO UTILIZING A FULL ARRAY OF PRUDENT INVESTMENT ALTERNATIVES WILL ACHIEVE MUCH HIGHER INVESTMENT RETURNS THAN ANY OTHER APPROACH. ADDITIONALLY, THE HIGHER RETURN CAN AND SHOULD BE ATTAINED WITH MINIMAL INCREASE IN LONG-TERM VOLATILITY. THE ABOVE CONCLUSIONS ASSUME A PASSIVE INVESTMENT APPROACH. OBVIOUSLY ACTIVE MANAGEMENT OF THE RETIREMENT SYSTEMS ASSETS HAS THE POTENTIAL TO ENHANCE OVERALL RETURNS EVEN FURTHER. AN ACTIVELY MANAGED INVESTMENT APPROACH UTILIZING ALL INVESTMENT ALTERNATIVES. FROM TREASURY BILLS AND BONDS. TO GOVERNMENT AGENCY AND CORPORATE BONDS. TO MORTGAGES AND REAL ESTATE TO THE FULL ARRAY COMMON STOCKS IS THE APPROACH THAT BEST ANSWERS THE QUESTION I POSED EARLIER WHICH WAS "WHAT INVESTMENT POLICY IS BEST SUITED TO PROVIDING APPROPRIATE RETIREMENT BENEFITS TO FEDERAL RETIREES AT THE LEAST COST TO THEIR EMPLOYER AND CURRENT PARTICIPANTS. AT AN ACCEPTABLE LEVEL OF RISK" THIS IS WHY MOST MAJOR CORPORATE UNION AND PUBLIC SECTOR PENSION PLANS HAVE MOVED TO SUCH AN APPROACH OVER THE PAST TWENTY YEARS OR SO. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 THE SECOND MAJOR ELEMENT OF THE PROPOSED ACT THAT HAS INVESTMENT IMPLICATIONS IS THE CREATION OF A CAPITAL ACCUMULATION OR THRIFT PLAN AS AN ADJUNCT TO A DEFINED BENEFIT PLAN. THE IMPORTANT INVESTMENT CONSIDERATION IS THE RECOGNITION THAT IN A DEFINED BENEFIT PLAN THE ASSETS OR LIABILITIES ARE, IN ESSENCE, OWNED BY THE EMPLOYER (OR IN THE CASE OF GOVERNMENT SYSTEMS, THE TAXPAYERS) WHO THEREFORE WILL REALIZE THE BENEFITS OF SUPERIOR INVESTMENT RETURNS AND ALSO BEAR THE COST OF INADEQUATE RESULTS AND/OR INSUFFICIENT CONTRIBUTIONS. IN THRIFT PLANS, ON THE OTHER HAND, THE EMPLOYEE OWNS THE ASSETS AND ASSUMES PHE RISK AND REWARDS OF THE INVESTMENT RETURNS REALIZED. THE MAJOR INVESTMENT IMPLICATION OF INCLUDING A THRIFT PLAN IS THAT USUALLY EMPLOYEES ARE OFFERED A CHOICE OF INVESTMENT ALTERNATIVES AND MAY TAILOR THEIR INVESTMENT MIX TO SUIT THEIR PERSONAL FINANCIAL SITUATION AND RISK TOLERANCE. A YOUNGER EMPLOYEE. WITH HIGH POTENTIAL FOR CAREER ADVANCEMENT. MAY WISH TO HAVE A HIGHER PORTION OF ASSETS INVESTED IN COMMON STOCKS OR REAL ESTATE. WHEREAS. ANOTHER EMPLOYEE WHO IS CLOSER TO RETIREMENT. MAY WISH TO HAVE PLAN ASSETS INVESTED IN MORE CONSERVATIVE GOVERNMENT BONDS OR TREASURY BILLS. EITHER INDIVIDUAL COULD HAVE THE FREEDOM TO CHANGE THE MIX OF ASSETS IN THEIR PLAN AS PERSONAL FINANCIAL SITUATIONS CHANGE. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 SINCE THE EMPLOYEE AND RETIREE HAS THIS FLEXIBILITY. THERE WILL OBVIOUSLY BE A NEED TO PROVIDE A VARIETY OF INVESTMENT CHOICES AND THE PROPOSED LEGISLATION DOES SO. THE THREE CHOICES PROVIDED ARE ENTIRELY APPROPRIATE - AT LEAST AT THE OUTSET. WHILE I PERSONALLY BELIEVE THAT THE COMMON STOCK FUND SHOULD CONTAIN BOTH A PASSIVELY MANAGED OR INDEXED PORTION AND AN ACTIVELY MANAGED SEGMENT. I CAN FULLY APPRECIATE THE POLITICAL AND COST REASONS TO UTILIZE ONLY AN INDEX FUND. IN THIS CASE. I WOULD STRONGLY SUGGEST THAT FIXED INCOME FUND FOLLOW A SIMILAR APPROACH. ONCE THE MAJOR ISSUES OF INVESTMENT APPROACH AND PLAN STRUCTURE ARE RESOLVED. SOME OF THE TOUGHEST HURDLES STILL REMAIN. THESE ARE WHAT I CALL THE STRUCTURAL, POLITICAL AND POLICY ISSUES. TAKING THE STRUCTURAL ISSUES FIRST. IT IS CLEARLY IN THE BEST INTEREST OF ALL CONCERNED TO SET UP THE CIVIL SERVICE THRIFT INVESTMENT BOARD IN SUCH A WAY AS TO PROVIDE THE MOST PROFESSIONAL UNDERSTANDING OF PENSION AND INVESTMENT ISSUES. THERE IS AMPLE PRECEDENT FOR THE ESTABLISHMENT OF SUCH A BOARD TO BE FOUND IN MANY OF THE STATE SYSTEMS IN THIS COUNTRY. AS WELL AS A NUMBER OF MULTI-NATIONAL EMPLOYERS SUCH AS THE UNITED NATIONS. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 MY VIEW THAT THE BOARD SHOULD CONSIST OF EMPLOYEE. EMPLOYER AND POLITICAL REPRESENTATIVES AND SHOULD ASSUME BROAD POLICY MAKING AND OVERSIGHT RESPONSIBILITIES INCLUDING, INVESTMENT POLICY FORMULATION. ASSET ALLOCATION. LEGAL AND CONTRACTUAL OVERSIGHT. HIRING THE EXECUTIVE DIRECTOR. AT THAT TIME. I FELT THAT CONTRARY TO THE PROVISIONS OF THE PROPOSED ACT. THE EXECUTIVE DIRECTOR SHOULD BE HIRED BY THE BOARD AND THAT EMPLOYEES. BOTH CURRENT AND RETIRED, SHOULD HAVE BROADER REPRESENTATION ON THE BOARD. THE CURRENT LEGISLATION FULLY ADDRESSES THESE CONCERNS. ONE OF THE MOST IMPORTANT STRUCTURAL ISSUES TO BE FACED IS WHETHER THE FUND'S ASSETS SHOULD BE MANAGED BY A PROFESSIONAL. INTERNAL STAFF OR BY EXTERNAL INVESTMENT MANAGERS. THERE ARE PRO'S AND CON'S IN EACH APPROACH. AND AS YOU CAN SEE IN THE FOLLOWING TABLE (SLIDE VI). PUBLIC FUNDS IN THE U. S. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 HOW MANAGEMENT OF PUBLIC FUNDS VARIES WITH FUND CHARACTERISTICS Bass Internal Management Advisory Management Discretionary Management Type of Fund State funds ( 70) 70% 49% 46% Municipal funds (170) 42% 32% 66% Large municipal (36) 47% 56% 61% Plan Assets I-- Over $500 million (68) 69'/0 50% 49% 0- Type of Management Internal (32) 100Y0 0% 0% Advisory (26) 0% 100% 0% Discretionary (79) 00/0 0% 100% Number of Employees Over 20,000 ( 63) 65% 44% 52% Alliance t Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 USE BOTH INTERNAL AND EXTERNAL MANAGEMENT ON BOTH AN ADVISORY AND DISCRETIONARY BASIS. MANY MAJOR FUNDS CONTRACT OUT MANAGEMENT OF CERTAIN ASSETS ESPECIALLY THE MORE COMPLEX INVESTMENTS SUCH AS STOCKS AND REAL ESTATE. WHILE RETAINING INTERNAL MANAGEMENT FOR SHORT-TERM INVESTMENTS AND PERMANENT LONG-TERM INVESTMENTS. EVEN THOUGH I HAVE A BIAS TOWARD PROFESSIONAL. EXTERNAL MANAGEMENT BECAUSE OF THE CRITICAL IMPORTANCE OF ATTRACTING AND RETAINING AN OUTSTANDING INVESTMENT STAFF, I BELIEVE THAT A FUND AS LARGE AS THE FEDERAL GOVERNMENT RETIREMENT SYSTEM COULD VERY WELL FIND IT COST EFFECTIVE TO PERFORM CERTAIN INVESTMENT FUNCTIONS ITSELF. AND IN ANY EVENT, SHOULD HAVE A HIGHLY COMPETENT INVESTMENT PROFESSIONAL AS EXECUTIVE DIRECTOR. YOUR LEGISLATION PROVIDES FOR THIS. IN ORDER FOR THE FUND TO BE BEST ABLE TO ACHIEVE ITS LONG RANGE OBJECTIVES FOR ITS PARTICIPANTS. IT IS PARAMOUNT THAT THE EXECUTIVE DIRECTOR, THE PROFESSIONAL STAFF AND EXTERNAL MANAGERS BE AS FAR REMOVED FROM POLITICAL INFLUENCE AND INTERFERENCE AS POSSIBLE. THERE ARE TOO MANY EXAMPLES. EVEN IN THE VERY RECENT PAST WHERE BOARD MEMBERS OR OTHER OUTSIDE GROUPS INTRUDED INTO THE INVESTMENT PROCESS OF PUBLIC FUNDS WITH QUITE NEGATIVE RESULTS. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 THIS IS NOT TO SAY THAT SUCH POLICY/POLITICAL ISSUES SUCH AS "SOCIAL INVESTING". I.E. HOUSING STIMULUS. URBAN REVITALIZATION. SOUTH AFRICA ETC. ARE NOT LEGITIMATE CONSIDERATIONS FOR THE BOARD. THEY ARE. HOWEVER. IT MUST BE RECOGNIZED THAT VIRTUALLY EVERY INVESTMENT POLICY DECISION HAS THE POTENTIAL TO IMPACT THE RETURN AND/OR RISK REALIZED ON THE FUND'S INVESTMENTS. AND THEREFORE. THE BOARD MUST ADDRESS THESE ISSUES WITH THE INTEREST OF THE RETIREMENT SYSTEM'S CONTRIBUTORS AND BENEFICIARIES CLEARLY IN MIND. IN NO EVENT SHOULD THE BOARD MEMBERS OR ANYONE ELSE OTHER THAN THOSE SPECIFICALLY VESTED WITH THE PROPER AUTHORITY HAVE THE ABILITY TO MAKE INVESTMENT DECISIONS. THE PROPOSED ACT HAS ADDRESSED THIS ISSUE QUITE PROPERLY. IN MY OPINION, THESE FEARS ARE WHOLLY UNFOUNDED. IN THE FIRST PLACE, THE PROPOSED ACT PROVIDES FOR A VERY GRADUAL PHASE IN THE PRIVATE SECTOR INVESTMENTS. SECONDLY. THE CURRENT AND PROSPECTIVE SIZE AND LIQUIDITY OF THE U. S. FINANCIAL MARKETS MAKE IT HIGHLY UNLIKELY THAT ANY RESPONSIBLY MANAGED FUND, EVEN ONE OF THIS SIZE COULD HAVE UNDUE INFLUENCE ON THE MARKET. THIRDLY, IT IS HIGHLY LIKELY THAT THE FUND'S ASSETS WILL BE Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 WIDELY DIVERSIFIED AMONG GOVERNMENT AND CORPORATE BONDS. REAL ESTATE. MORTGAGES AND A LARGE NUMBER OF COMMON STOCKS. NOT. CONCENTRATED IN ANY ONE SEGMENT. ON THE SURFACE. IT APPEARS THAT THE MULTIPLICITY OF STRUCTURAL. POLITICAL AND POLICY ISSUES AFFECTING THE FUND'S INVESTMENT APPROACH ARE SO COMPLEX AND CONTROVERSIAL THAT IT WOULD BE EASY TO CONCLUDE THAT IT'S JUST NOT WORTH UNDERTAKING MAJOR CHANGE. WE MUST REMEMBER. HOWEVER. THAT THERE IS A RESPONSIBILITY TO CURRENT AND FUTURE RETIREES THAT IS PARAMOUNT. MOST OF AMERICA'S MAJOR CORPORATIONS. OUR 50 STATES, MOST OTHER MAJOR POLITICAL SUBDIVISIONS AND OUR LARGEST LABOR UNIONS HAVE ALREADY CHOSEN A COURSE THAT UTILIZES MODERN INVESTMENT MANAGEMENT APPROACHES AND PRIVATE SECTOR INVESTMENTS. THEY HAVE DONE SO BECAUSE IT IS IN THE LONG-TERM BEST INTEREST OF THEIR CURRENT. FUTURE AND RETIRED EMPLOYEES. YOUR PROPOSAL PROVISION OF A THRIFT PLAN WITH A CHOICE OF INVESTMENT ALTERNATIVES IS A VERY BENEFICIAL PROVISION FOR FEDERAL WORKERS--CURRENT AND FUTURE. FOR THE EMPLOYEE. IT PROVIDES THE OPPORTUNITY TO TAILOR THEIR RETIREMENT PROGRAMS TO THEIR INDIVIDUAL NEEDS. AND TO ADJUST THE INVESTMENT MIX IN THEIR ACCOUNT TO REFLECT CHANGING PERSONAL FINANCIAL CIRCUMSTANCES. ADDITIONALLY. THE CONTRIBUTIONS TO EACH EMPLOYEE'S Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 INDIVIDUAL THRIFT ACCOUNT WILL BE OWNED BY THE EMPLOYEE, WILL BE PORTABLE IN THE EVENT THE EMPLOYEE CHANGES JOBS, AND WILL THEREFORE BE INSULATED FROM POLITICAL OR BUDGETARY UNDERMINING. WHILE IT 1S TRUE THAT THE INVESTMENT RISK AS WELL AS THE REWARD OF THE INVESTMENT RESULTS ARE BORNE BY THE EMPLOYEE IN THE THRIFT PLAN. IT IS ALSO TRUE THAT THE PLAN PROVIDES A LOW RISK INVESTMENT ALTERNATIVE. FURTHERMORE. AS DISCUSSED EARLIER. IT IS HIGHLY LIKELY THAT THE LONG-TERM RETURNS FROM A PROFESSIONALLY MANAGED, WELL DIVERSIFIED FUND WILL EXCEED THE RETURNS FROM AN UNMANAGED FUND INVESTING ONLY IN SPECIAL TREASURY ISSUES. THIS IS NOT ONLY BECAUSE RETURNS FROM OTHER INVESTMENTS WILL. IN ALL LIKELIHOOD CONTINUE TO BE HIGHER OVER LONG TIME PERIODS. BUT EQUALLY IMPORTANT. BECAUSE ASSET MIX CAN BE ALTERED TO REFLECT ECONOMIC. MARKET. INFLATIONARY AND INTEREST EXPECTATIONS. IN CONCLUSION. THE PROPOSED CIVIL SERVICE PENSION REFORM ACT IS AN IDEA WHOSE TIME IS LONG OVERDUE. IT WILL 60 A LONG WAYS TOWARD BRINGING THE FEDERAL RETIREMENT SYSTEM INTO THE MODERN AGE. SOME OF THE SHORT-TERM POLITICAL HURDLES WILL BE TOUGH TO OVERCOME. BUT A GOOD START IS BEING MADE AND THE LONG-TERM BENEFITS SHOULD BE OBVIOUS TO ALL CONCERNED. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 [Short recess.] Senator STEVENS. We apologize for the delay. As I indicated, it looks like there will be a series of votes. Senator Eagleton and I are going to try to work it out so that we can keep the hearings going. We hope you will understand our situation. The next witnesses are our good friends, Ken Blaylock and Moe Biller. Did you flip a coin? Who is going to go first? TESTIMONY OF MOE BILLER, PRESIDENT, AMERICAN POSTAL WORKERS UNION (AFL-CIO), ACCOMPANIED BY PATRICK J. NILAN, LEGISLATIVE DIRECTOR, AND ROY BRAUNSTEIN, LEG- ISLATIVE AIDE; AND KENNETH T. BLAYLOCK, PRESIDENT, AMERICAN FEDERATION OF GOVERNMENT EMPLOYEES (AFL- CIO), ACCOMPANIED BY VIRGIL MILLER, REGIONAL VICE PRESIDENT, AND ARNIE ANDERSON, ECONOMIST Mr. BLAYLOCK. Mr. Biller is going to go first. My mama taught me the respect of age. Mr. BILLER. I appreciate that. Senator STEVENS. Thank you very much. Mr. BILLER. Thank you Mr. Chairman. Thank you for inviting me to testify before you today on behalf of the 325,000 members of the American Postal Workers Union. "Union" means we stand together. Therefore, I am here to speak on behalf of all our members, the new hires in the good system and the pre-1984 employees who do not want their current system un- dermined. The American Postal Workers Union supports action in this Con- gress on a supplemental plan. Most of this spring and summer, postal and Federal employees and retirees have felt that their re- tirement program was in the hands of budget hijackers who were threatening to do it harm. Enactment of the budget resolution has set the hostage free, at least temporarily. We can now consider this legislation without a budget gun at the head of the retirement pro- gram. If a supplemental plan is not enacted, new hires will eventually have to pay the full payroll deductions for both civil service retire- ment and Social Security. We don't want to see that happen any more than Members of Congress do. However, we will not accept a stingy, inadequate plan. It is the duty of this committee to stand up with us and oppose the far right's demagoguery of our Federal and postal compensation. The Reagan administration has been no help in developing an adequate retirement plan for new hires. Mr. Devine and Mr. Grace may have high-sounding names, but they took the low road on poli- cies for public service workers. Hiding behind the mantle of au- thority and respectability given to them through appointment by this administration, Mr. Devine and Mr. Grace continue to spread confusion and falsehoods about the civil service retirement pro- gram. One of their most frequent charges is that an unfunded liability in civil service retirement means the program is overly expensive Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 or unsound. A recent article in the National Journal clearly dem- onstrated how much baloney there is in that false charge. The former OPM Director floated a proposal a few months ago that meant there would have been severe reductions in the civil service retirement benefit. I am glad the Congress has not given it serious consideration. The only legislation from the administration that has been intro- duced in either House is their long list of budget cuts. They are radical, right wing, and not worthy of consideration. Congress should continue to look the other way when it comes to considering this administration's destructive proposals. Peter Grace and the so-called Grace Commission constitute an- other arm for this administration's attacks on Federal and postal workers and retirees. A joint study by the General Accounting Office and the Congres- sional Budget Office found that the Commission greatly overstated the cost savings attainable under its recommendations. Even with- out considering the merits of the proposals, the CBO-GAO review found that the savings Grace claimed were three times the level of savings actually possible. GAO further stated, and I quote, that it "does not find the package of the PPSSCC recommendations a sound basis for restructuring civil service retirement," end of quote. I am appalled that, despite these findings by nonpartisan ex- perts, Grace is still flying around the country with a taxpayer sub- sidy spreading his misinformation and sowing seeds of prejudice against public service employees. The CBO-GAO report made an additional recommendation that the Senate Budget and Governmental Affairs Committees appar- ently chose to ignore this year. The report stated that changes in retirement would be "consistent and complementary * * * if the Congress deferred action until the legislative committees acted on the changes for newly hired workers." Despite this recommendation, some members of both the Budget Committee and this committee worked actively to use the budget process to force large cuts in civil service retirement. Postal work- ers are thankful that the conferees saw the wisdom of agreeing with the House position in this area. With respect to the supplemental retirement plan for new hires, the APWU has been preparing itself to participate fully in the de- velopment of a supplemental plan. We participated fully in this committee's policy forums and were pleased with one of the main results: namely, that the Stevens-Roth legislation incorporates a defined benefit as an important, integral part of the supplemental plan. Earlier this year, it was rumored in the press that Senator Ste- vens had a bill that was going to be introduced. However, that leg- islation was never introduced, so we were not able to offer our re- actions through testimony. We are pleased that the process is now finally underway. I want to begin my remarks on the specifics of the Stevens-Roth bill by asking a fundamental question: Why would you want to cut civil service retirement? It is a good program. It is not the best in Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 the country, and if Congress keeps chipping away at it, it will get worse. The Hay-Huggins study conducted for the House Post Office and Civil Service Committee brings out two facts that we believe are definitive in answering the question of whether the new hire sup- plemental program should be made better or worse than the exist- ing retirement program. The Hay-Huggins study found that total average Federal com- pensation lagged behind the average for private firms by 7.2 per- cent. The greatest contributing factor to this lag is Federal pay, which the study found to be 10.3 percent behind the private sector. This lag in pay was made up partially by the fact that the civil service retirement and other benefits are worth 2.8 percent of pay more than the average fringe benefits in the private sector. That is 2.8 percentage points above average. That is not overly generous or way out of line like Peter Grace would have us believe. Members of this committee should be aware that when Hay-Hug- gins looked at the retirement plans of the 854 companies in its study, it found that over 10 percent of the group had retirement benefits that were better than civil service retirement. That means that there are at least 85 companies out there with a better retire- ment program than civil service retirement. The Federal and Postal Services are large organizations. They have to compete for good employees like any other organization. The President has frozen Federal pay for 1986, so that the salary lag identified by Hay-Huggins will grow larger. Now is not the time for the Congress to make retirement cuts and further under- mine the competitive position of the Federal employer. The Stevens-Roth bill offers a framework on which to draft a good supplemental plan. However, the bill proposes a system that is inadequate in several important ways. The estimated cost of 20.8 percent of payroll implies that the plan's value will be one-sixth less than that of the current system. We favor a supplemental that has a total value comparable to the current program, or 25 percent of payroll. The proposed COLA of CPI minus 2 will work a serious financial hardship on retirees. For example, if you retired on a CPI minus 2 COLA and lived 20 more years, the real value of your retirement pension would be one-third less. A pension should be as good at age 82 as it was at age 62. I'm well on the road. COLA cuts of this type have been tried repeatedly in recent years, and all of them ulti- mately have been defeated. This proposal should meet the same fate. We cannot accept the proposal to reduce the benefit for the 30- year employee who is eligible to retire at age 55. The average em ployee retires at age 61. This proposal would affect only the minori- ty who began Government careers at early ages and loyally re- mained in their jobs. An adequate retirement after such a long career is essential to our members. Continued full benefits at age 55 would add little to the cost of S. 1527. The Congressional Re- search Service estimates a cost at only one-half of 1 percent of pay- roll. The proposed matching rate on employee contributions to the capital accumulation plan is far in excess of typical private sector Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 practice. We favor less matching for the CAP. Instead, a higher ac- crual rate for the defined benefit supplemental should be offered so that the average worker can be assured of a decent retirement whether or not he or she has been able to put money into the CAP. We are particularly concerned that the CAP not be overempha- sized in light of the tax reform suggestion last week by Secretary Baker that the 401(k) capital accumulation plan in the private sector be eliminated. Mr. Chairman, I noted your concern today over Secretary Baker's suggestion during questioning of the previous speaker. We also favor maintaining the high 3 rather than the high 5 wage base in the defined benefit formula so as not to undermine the current retirement program. The defined benefit plan, as proposed, would be totally financed by the agencies. We favor an employee contribution, as well, that would maintain parity between the new hires and other employees. Another problem of the funding proposal is that the cost to the Postal Service could be excessive. A contribution from USPS should be specified that will not exceed a financially acceptable level. The disability and survivor benefits proposed need several im- provements. S. 1527 will allow employees now covered by civil service retire- ment to opt into the supplemental and Social Security. We are troubled by this proposal and feel that no election period should be allowed until considerable analysis of the possible problems it might create has been completed. The proposed CAP would permit employee funds to be invested in a broad range of securities. We favor limiting the investment to Government or Government-guarantee securities to better protect the employee's assets and to avoid some serious political and ad- ministrative problems. I would like to submit a complete discussion of these issues and APWU's recommendations for the hearing record. Thank you again for inviting me to present the views of the American Postal Workers Union on this legislation. The union stands ready to work closely with the committee to formulate a good and a fair plan. Thank you. Senator STEVENS. Thank you very much, Mr. Biller. If you want to proceed next, Mr. Blaylock, we will then have questions at the end. Mr. BLAYLOCK. Thank you, Mr. Chairman. I have with me today my national vice president from the eighth district, Mr. Miller, on my immediate left and our economist, Arne Anderson, who has been working with your staff and members of the committee on this very important issue. Senator STEVENS. Are you still on the payroll? Mr. ANDERSON. At this time, at this time. Mr. BLAYLOCK. Sure. On behalf of the 750,000 Federal workers and the District of Co- lumbia workers that we represent, Mr. Chairman, I would like to express our appreciation to the committee for the manner in which you have approached a very important subject that is important to the long-term career service and is important to a lot of the future Federal workers. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 We have covered a lot of ground since we first started this issue a couple or 3 years ago. There have been a lot of changes and a lot of improvements. We have identified collectively a lot of problems, and we found solutions on problems. And I do congratulate both you and your staff and the committee for the way you are going about this thing. I think before it is all over, we will have resolved the problems and will move on with a continuing ability to build career service. There has been a lot of agreement reached in this process. I would like, Mr. Chairman, to submit my complete statement for the record. I don't have to tell anybody in this room it is a compli- cated subject, but I would like to work from about a nine-page oral statement that pretty much summarizes our position in the com- prehensive statement. As I already pointed out, there has been a lot of agreement reached gradually on the different elements of building a new sup- plemental retirement plan for the Federal workers that come on the payroll after January 1, 1984. However, these points of agree- ments should not obscure the fundamental differences which still remain. Our major disagreement with the plan stems from a funda- mental disagreement over the objectives upon which the plan rests. Nowhere in the bill's purposes and likewise, nowhere in the body, is there a clear recognition of the personnel role the retire- ment plan plays in fostering an experienced career work force, nor a solid commitment to it. Nowhere in the bill's purpose, nor in its body, is there a commitment to equity between the current and future employees. And nowhere in the purposes, nor in the body of the bill, is there a clear recognition of the role that retirement plans play in our society and a commitment to economic security for the retired, the disabled, and to surviving spouses and children of deceased workers. Consequently, the plan, as designed, provides inadequate bene- fits. The benefits which are provided favor the short-term, higher paid managers at the expense of the majority of the Federal work force, the career Federal employee. In some ways, this plan can be interpreted as a plan tailormade for political appointees. Perhaps this is understandable. There has been much written and considerable concern expressed by knowledgeable experts on Federal management regarding the brain drain in Federal service and the Government's inability to recruit and retain the best and the brightest into the managerial ranks. This bill would seem to try to address this problem by creating a retirement plan that is most attractive to the highest paid professionals or executives. The retirement system of the U.S. Government should not be distorted by attempting to make it a recruitment tool for a small percentage of the total work force. Virtually all employers recognize the value of a stable, experi- enced, and dedicated work force. Congress clearly recognized this objective when it designed the current civil service retirement system by designing the plan to encourage persons to establish a career in the Government service. To now design a plan which favors short-term, higher paid em- ployees is a radical departure from this basic objective. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 If Congress is to establish a just retirement system for new Fed- eral employees, it must reinforce these three objectives. One, to promote equity between the employees; two, to give incentives for a career work force; and three, to ensure economic security for the majority of the work force, those employees in the lower and middle salary ranges. We have long held that the existing employer cost to the civil service retirement system, which is about 24.7 percent of payroll, should be the employer cost of the new system. A plan which costs 20.8 percent of payroll cannot meet the major objectives of a just retirement plan for Federal employees and their employer. We urge this committee to invest as much in the future employ- ees as the Government has seen fit to invest in employees of the past. To do otherwise does not make good business sense. AFGE supports the concept of the three-tier plan, but because we are of the opinion that the long-term career employees in the middle and lower salary brackets dominate the work force, we be- lieve an adequate amount should be spent first to provide for a strong defined benefit component, and then on a smaller scale for the capital accumulation plan. Other mechanisms which will shift benefits to the long-term career employee should be introduced. The present system utilizes a salary base of averaging the high- est 3 years of salary multiplied by 1.5 percent of the first 5 years of service, 1.75 percent for years 6 through 10, and 2 percent for all years over 10. We support a similar seniority-weighted accrual rate because it benefits long-term employees. On eligibility, we believe and recommend that employees should be permitted to retire without a penalty at age 55 with 30 years of service. AFGE has consistently advocated special positions for fire- fighters, law enforcement officers, and air traffic controllers. The bill does have a special eligibility provision, but the definition of these employees is narrower than that which presently exists. The proposed penalties for the statutorily earlier retirement age appear unduly harsh. In addition, National Guard technicians and mili- tary Reserve technicians also require special provisions. National Guard technician should be specifically referenced in the definition of military Reserve technician. While the bill addresses some of the disability concerns of these employees, it does not address the problem of selection out and mandatory retirements at age 60. We believe and recommend that all employees, permanent, temporary, part time, and intermittent in career condition, should be governed by this plan, and that the D.C. employees should be covered until such time as the expiration of their current collective-bargaining agreements, wherein they will have an opportunity to negotiate their own plan. On funding, AFGE contends that old and new employees, high- and low-salaried employees should be treated as equal, if possible, under the old and new retirement systems. Therefore, we recom- mend the new plan require a level of contribution from which the required Social Security contribution will be made first and the balance utilized upon the basic plan and increased benefits. Contri- butions should be matched by agency contributions made from their appropriations. The balance of the annual cost should be paid Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 by way of a direct transfer from U.S. general funds to civil service retirement funds. On the replacement rate, AFGE believes a strong basic plan is essential to meet the retirement needs of the majority of the work- ers. Therefore, we believe the replacement rate should be high. Ob- viously, this would increase the cost of the proposed plan, which is estimated to be 20.8 percent of payroll. We contend that if the Government continued to pay for the new system what it pays for the present system, 24.7 percent of payroll, then the replacement rate would be improved. A higher replace- ment rate could also be achieved by making certain changes in the basic plan design. On COLA, we recognize that the cost-of-living adjustment fea- tured in the present CSRS is the most expensive component of the plan. Therefore, we are willing to explore alternatives, particularly if the result would be to strengthen the basic benefit plan. In any event, the COLA should be linked to that provided to Social Securi- ty recipients. The capital accumulation plan. This proposal is very generous. However, such a plan favors higher paid, short-term employees. Therefore, this provision is not consistent with the goal of design- ing a plan for long-term career employees, the majority of whom are in the middle and lower salary brackets. For this reason, AFGE supports a smaller thrift plan and a longer vesting for the Govern- ment's contribution with the cost savings used to enrich the de- fined benefit component of the plan. The formula most commonly utilized in the private sector of 50 percent match up to 6 percent of payroll would achieve this goal. The management of the capital accumulation plan. The bill pro- poses that the plan be managed by a board comprised of five mem- bers who are advised by an advisory committee, with specific day- to-day operations to be supervised by an executive director. This three-tiered structure would not be necessary if the board was com- posed of representative employees and money is being invested in experts in the investment field. I would also point out at this point, Mr. Chairman, that we are talking about a large amount of money-and I'm not sure that enough attention has been given to the large amount of money that is going to accumulate in this capital accumulation plan. I think the public has an interest here. I think we should think seriously about public representatives involved in developing in- vestment policies of this particular fund. On investment policy, we commend the committee for attempt- ing to provide employees with the investment choices and for at- tempting to ensure that investment can be neutrally handled. How- ever, as a general premise, it is our opinion that strict fiduciary standards should be initiated under ERISA as well as a directive to address social issues investment objectives. In the investment op- tions, the stock funds and compilation of index and essentially all listed stocks do not take into account factors such as companies currently involved in bankruptcy proceedings and so forth. It would appear a better list would be the top 500 mutual funds and their performance over the last 2 or 5 years. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 In Government securities, the interest on investment in Govern- ment securities is tied to 2-year securities. This unrealistically lowers the employees' earnings from this source and would force them to withdraw their funds from Government securities. We urge the interest be determined from longer term securities, as is the current practice. On fixed-income investment opportunity, again, this is an area where: One, social concerns could be addressed; two, specific guide- lines for investments need to be clarified; and three, a mechanism needs to be devised which would work to avoid favoring any one company, any one market in the economy in general. The disability benefits AFGE is of the opinion that the disability proposal in the bill is intended to adequately provide for disabled workers as it does in the present plan. We would recommend, how- ever, that the time period for payment of disability at the rate of 60 percent of salary be increased from 1 to 2 years; more impor- tantly, that the proposed disability benefit continue until the annu- itant is eligible for an unreduced retirement benefit under Social Security or civil service, whichever is applicable. General section 8461 of the bill, which permits unrestricted con- tracting-out for administration of the retirement program, should be deleted in its entirety. The opportunity provided to pre-1984 employees to transfer to the new plan is restricted to 1 year. This is inadequate, particular- ly since the implementation regulations may not be completed until well into that 1-year period, and there simply is not enough time for employees to weigh their options and trade-offs. We would recommend at least a 2-year period in which pre-1984 employees could make this selection. A major step forward in the debate over civil service retirement has been accomplished in the effort to design the system. Namely, everyone is singing from the same song book. The model was devel- oped by the Congressional Research Service with assistance from the General Accounting Office, Congressional Budget Office and outside experts. For this reason, we urge consideration viewed of this model in the annual calculation of the dynamic normal cost of the system. Furthermore, we urge that the legislation require this cost to be the operating cost for all Government decisions, which include retirement as a factor, such as A-76 contracting out stud- ies. Again, Mr. Chairman, we express our appreciation to the com- mittee and to the staff for the work that you have done on this, and we look forward to working with you and seeing it concluded. I would be glad to answer any questions at this time. Senator STEVENS. I thank you both very much. I have got to say at the outset, I opposed including new civil servants under social security. I really don't think that the attacks on the administration as the originator of this bill are warranted. Actually, as you know, I started this bill before the decision was made on social security, because we thought it was coming, and it did come. Had the plan we approved 4 years ago been put into effect, it would have been a better plan than this one, there is no question about it. If this plan we have before us now is not approved, some- one else will be leading the fight for it next year, because I will not Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 lead the fight again. This is my last term in the barrel. I have made everyone aware of that. This will be the third Congress that I have tried to get this settled, and if I cannot do it, then someone else ought to take it on. I want you all to know that I will not lead another fight for an- other retirement bill. I am going to do it through this 2-year period, but if I don't succeed, someone else will have to take it on. Under the circumstances, as I see it, you have made a lot of sug- gestions. Some of them have a great deal of merit. But I have a basic problem with one suggestion. That is, you basically say, "Do away with the thrift concept and compare this plan to the private sector," where, if I am properly informed, the overwhelming number of plans are integrated. They are integrated with Social Security, and therefore, the pension plan is tilted more toward the higher income people in the private sector than is the more gener- ous thrift plan under this proposal. As a consequence, that tilt makes the comparison between the pension plan in this proposal and the pension plan in the private sector very unfair. Suppose we do away with the thrift plan? Would you support an integrated pension plan that would tilt the pension plan against the tilt that is built into the social security? Mr. BILLER. On the first one, Mr. Chairman, I don't believe any- body here has said they were unalterably opposed to any thrift plan. The concerns continue to be the tilt, and the concerns are for the average or lower paid employee. In the final analysis, and incidentally, we accept the social secu- rity concept. It has been done. The fight is over, that is it. We are attempting to adjust. What we are seeking is a plan that overall is going to give our employees, the new employees, no less than parity with those of us who are under the present plan. Now, the concerns of the thrift plan are: One, that perhaps too much is taken away from the defined benefit plan and will be tilted toward people with $40,000 or more. The second one, as I said before-and I m not trying to put anything on you-is a concern that you registered today, and understandably so, toward the ad- ministration speaking of removing 401(k) protection under its tax reform proposals, and with the tax legislation still pending, not knowing where we are going. We have registered what we believe are appropriate concerns rather than total opposition. Senator STEVENS. I don't disagree with you, Moe. If you look at the current system, the tilt of the current civil service retirement system is far more towards the higher income employees than this bill today. There is a definite tilt under the civil service retirement system to the higher bracket employees now. This new system is not tilted that way. That has been the criti- cism of this plan from other people who appeared here, that it is tilted the other way. The pension plan portion is tilted to the lower-paid employees, no question about it. If you look at the thrift portion, it is tilted towards the higher- paid employees, mainly because it is expected that higher income employees will utilize more extensively. But it is voluntary. Again, I seriously question the estimate-I am going to have to leave for a vote-I seriously question the estimate as to the number of people who are going to participate in this plan, knowing full well that Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 the plan gives an opportunity for loans against the thrift plan during a person's employment. I mean, you can have your cake and eat it too under this plan. You can put away up to 10 percent of your salary, which would be free of taxes, matched 5 percent by the Federal Government, free of taxes, and borrow against it during the period of your need and during your employment, and still not have to pay taxes until you retire. I, frankly, think it goes much further than a 401(k) and is about the best system you could possibly devise for lower income employ- ees to increase the leverage of their own salaries by virtue of a small savings. I think most of them are smart enough to figure that out. Mr. BLAYLOCK. Mr. Chairman, if I might, as far as you moving the bill this year, I think you have got total support of the Federal employee unions as far as we know. We all need to move it this year. You will have our help. Senator STEVENS. Good. I appreciate it. I will be right back. Mr. BLAYLOCK. Nobody that I know of, surely not at this table, has advocated eliminating the thrift portion of the proposal. It is a question of degree and how much, because you do put the higher- paid workers in conflict with the lower-paid workers and that is different from the current plan. Because here, the larger you make the thrift plan, the larger you make the employer contribution to that thrift plan; then the more you have to take away from the de- signed benefits. That doesn't exist in the current plan. I think the short-term portability bothers us as much as the amount of payroll that you are putting into the thrift plan. When we look at the private sector practice, as you pointed out, and Moe did too, about 6 percent of payroll out there with 50 percent match is the norm in the private sector. If you look at that and you transfer that difference from what is proposed in this bill, then it would definitely allow us to raise that replacement rate from about 30 percent, from those lower paid workers, to 34 percent. That is a little bit closer to when people ac- tually retire and they think about the amount of money they are going to have to live on. The other point that we take on that, we don't think the lower- paid Federal worker is going to be able to participate in the thrift plan, especially if our continued attack on the pay system goes on. They are just not going to be able to. The break point is going to be about $30,000. A worker who makes over $30,000 is going to be able to take advantage of it. The ones who make lower than that are not going to be able to take advantage of what we consider a very generous thrift plan. Mr. BILLER. Senator, I might add that under the current retire- ment plan, according to the figures I hear from the Congressional Research Service report, in the year 2030 an individual retiring at age 55 with 30 years of service gets 53 percent of salary. Even with inflation and making projections through the year 2030, whether the individual had earned $15,000, $30,000, $45,000, $60,000, $75,000, it would be worth the same 53 percent of that annual salary. So the present system is not tilted. I have to repeat, nobody kicked around the thrift plan as if to say "throw the baby out the window, whatever it is." Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 What we are attempting to say is that: A, too much, we think, has gone out of the defined benefit, and as Mr. Blaylock pointed out, we have serious doubts as to the people in the lower categories being able to afford the voluntary contribution to the CAP. By the way, for the record, I forgot on my right is my esteemed legislative director, Mr. Patrick Nilan, and legislative aide, Roy Braunstein. Senator EAGLETON [presiding]. Both of you have completed your initial statements, have you? Mr. BILLER. Yes, sir. Mr. BLAYLOCx. Yes. Senator EAGLETON. Good. Senator Stevens and I are doing this voting relay business. Mr. BILLER. We understand. Senator EAGLETON. Mr. Biller, let me ask you this: As far as you are concerned, speaking on behalf of your postal workers, the new plan must have the full 100-percent COLA, is that correct? Mr. BILLER. We think so. Senator EAGLETON. Cost-wise, that adds 3 percent to the Stevens figure. So if the Stevens figure is 20.8 and we go the full COLA, that has Stevens up to 23.8. Mr. Biller, do you believe the new plan must have the same re- tirement age, no reduction, at age 55, 30 years of service? Mr. BILLER. Yes, we do. Senator EAGLETON. That adds another 0.5, so we are up to 24.3. Now, with respect to the accrual rate, what is your position on the accrual rate? The Stevens bill is 1.0. Mr. BILLER. Yes. Senator EAGLETON. Do you have a position on the accrual rate? Mr. BILLER. Yes. We would like it considerably larger. Senator EAGLETON. Considerably higher? Mr. BILLER. You are talking about the defined benefit, is that right? Did I misunderstand you? The 1-percent benefit? Senator EAGLETON. Yes; the accrual rate benefit, the defined ben- efit. Mr. BILLER. That is right. We would like people to be much more certain of what they can get. Senator EAGLETON. Do you have a figure? 1.2? 1.25? 1.3? Mr. BILLER. I would have to look at that in relation to other pro- visions, but I think it should be higher than the 1.3. Senator EAGLETON. Higher than 1.3? Mr. BILLER. Yes. Senator EAGLETON. At the moment-we have the figures-let's stay at 1.3. That would add 3.9 to the cost. That would bring us up to 28.2. How about the disability provisions of the Stevens bill? Do you think they are satisfactory? Mr. BILLER. There are some problems there, and we have made them in my main report. There are some technical concerns. It is a complicated issue. We have outlined our views in detail in the writ- ten testimony. Senator EAGLETON. That whole subject matter, of course, is very complicated. I agree with you on that. But we are already at 28.2. If we add another one-tenth or two-tenths for enhanced disability, we are up to 28.3 or 28.4. Of course, we are at a veto. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. BILLER. Let me only say this, Senator: I am not going to sit here and question all of those figures. I think there is room for an appropriate and decent plan of parity, and we believe, for example, that in discussing Social Security, we are not going backward, and there is no move to look looking back from the future. I am not doing that. The realities are, we are not supportive of repealing Social Secu- rity for new hires. It is a fact now. We don't have a problem in that regard. However, what is important is we recall being told, perhaps not in this House, anyway, but there seemed to have been a gener- al commitment that that would not adversely affect the overall supplemental retirement, and we are not looking, frankly, for a dif- ferent retirement plan, but rather one of parity between the new employees coming in and those in the present plan. We think it is divisive not to have parity. We don't think it is good for either the Postal Service or for the Federal employee or for any employer. That is really what we are seeking. Senator EAGLETON. We are certain there is going to be some dif- ference. It is absolutely certain there is going to be some difference, because old employees are not under Social Security; new employ- ees are. To that extent, there is going to be a difference. You have got two workers, side-by-side at a desk or on a postal route or whatever. One is an old employee who has been there before 1984. The other one is a new hire since 1984. To a certain extent, since one is in Social Security and one is not, there is going to be that difference. Mr. BILLER. Absolutely. There will be variations. What we are discussing is the overall concept. For example, right now, you are starting over with a 5 percent capital accumulation plan. I don't have actuarial figures with me, but overall, we are told that costs 3 percent of payrol. If you cut that 3 percent down and put that into defined benefits, I think there are ways of working this around. I don't think I have to assume that we have come in for ideas. During a time when we get through all of this, we hope we will be able to come up with a com- prehensive plan that will be satisfactory to everybody. We are not looking for any pennies more, nor do we want any pennies less. We do understand that there will be variations, particularly with Social Security rates changing and so on. But if, overall, our people can look at it and say, "Hey, we ain't doing any worse than those people who are here now," or the other way around, I think that is good for everybody. Senator EAGLETON. Do you have a specific modification to recom- mend with respect to the CAP plan? For instance, here is one. We pumped a lot of these into a computer. Here is one, 50 cents for every dollar up to 3 percent of salary. Mr. BILLER. I would say we will give you one, OK. We will give you one. Senator EAGLETON. That one that I just mentioned cut the cost back to 2.2. That is one of various alternatives that we have pumped into the computer and would cut back the most, and we have all kinds of variations. Mr. BILLER. Just a question on that. Do I misunderstand it? Would it not appear presently, as was stated earlier, that if the ad- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 ministration stands by its proposed change in tax reform and the Congress does move out of the 401(k), would not that have the same effect on our capital accumulation plan? Senator EAGLETON. Quite obviously, if the administration and the Congress-- Mr. BILLER. And the Congress, that is correct. Senator EAGLETON [continuing]. Move out of the 401(k), it will have an impact on what we are doing here. Mr. BILLER. So you can recognize our concerns at this time, too, when we don't know whether or not tax reform is going to elimi- nate 401(k) capital accumulation plans. We would have come up with something and then would have the heart cut out of it. We have seen that in the health plans, too, you know. Senator EAGLETON. Yes. Mr. BILLER. We will give you something on that CAP. Senator EAGLETON. You will give us something on the CAP plan that is fair and equitable, and you would like to have that? Mr. BILLER. Yes. [The information referred to follows:] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 159 ALTERNATIVE CAPITAL ACCUMULATION PLAN (CAP) APWU favors a defined benefit supplemental that, in combination with Social Security, provides a total benefit at least equal to that available from the current Civil Service Retirement System (CSRS) for the employee with average or below- average pay. The main role of the CAP should be to give highly paid employees an opportunity to offset the lower wage replacement rate available to them from Social Security. The CAP will, of course, benefit all who choose to participate, but the deferred taxation on contributions and investment earnings makes it much more valuable to the highly paid employees. This group will also have greater disposable incomes from which to make CAP contributions. Since we view the proper role of the CAP as being more limited than that envisioned in S. 1527 as introduced, we propose less federal matching. The federal government should match employee contributions at 50 cents on the dollar up to 5 percent of salary, a matching rate comparable to or better than that used in over one third of private sector plans. Employees should be able to make unmatched contributions on a tax-deferred basis up to the limits this Congress determines for 401(k) plans in the pending tax reform legislation. The employer share of the Stevens-Roth plan totals 20.8 percent of payroll, which includes 11.7 percent for the defined benefit, 5.9 percent for Social Security, 0.2 percent for life insurance, and 3.0 percent for the CAP. A major advantage of the lower matching for the CAP is that it frees up resources that can be used for needed improvements in the defined benefit. We propose that the cost of the supplemental plan be 7.1 percentage points greater than the 11.7 percent of payroll estimated for S. 1527. The funding sources for this cost increase are as follows: Reduced matching for CAP 1.8 Mandatory employee contribution equal to that for CSRS 1.1 Parity with employer cost of CSRS 4.2 Total 7.1 Based on the analysis conducted by the Congressional Research Service (CRS), this additional funding, equal to 7.1 percent of pay, can be used to cover the costs of the following improvements in the defined benefit supplemental: Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Full COLA 3.0 Unreduced age-55 benefit 0.5 Benefit accrual rate of 1.17* 2.0 High-3 salary base 0.9 Improved disability and survivor benefits 0.7 Total 7.1 These changes to S. 1527 are summarized in the attached table, which shows CRS estimates of employee and employer costs for CSRS, S. 1527, and a modified version of S. 1527. In summary, the type of defined benefit system APWU regards as necessary is within reach if three principles are followed: (1) parity with CSRS in cost to employer (25.0 percent of pay); (2) parity in employee contributions; and (3) a CAP that is more in line with private-sector practice. *--An accrual rate of 1.17 percent of average salary times years of service will supplement Social Security up to the current CSRS benefit level for an age-62 retiree with 30 years of service. APWU prefers that this accrual rate be attained through a backloaded formula that rewards the long-term employee. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 161 IV I co 0o N 1O i co I -W -4-1 1-4 O m m dP .i in N m co O N I c! r-1 r-1 O ~O rI r1 N rn o rn I in I m op N C. N dP N m dP 9 N I I I N 0 co ri o I I N N Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator EAGLETON. Let me switch to Mr. Blaylock here. Mr. Blaylock, is it your position that the COLA should be 100 percent? Mr. BLAYLOCK. Mr. Chairman, as we pointed out in our testimo- ny, we recognize that the COLA is one of the most expensive com- ponents. We also recognize, though, that the COLA was initiated to help people living on a fixed income during periods of high infla- tion. We recognize that this employer, the Government, and their policy generally is the leading cause of the inflationary problem be- cause whatever happens in the country economically, the Govern- ment finally has to take responsibility for the policy of generating that situation. But we have pointed out in our testimony, and in talking with your staff and other staff on the committee, we think that is an area where we remain flexible. We don't have final answers, but we are flexible. A basic position with the AFL-CIO is that all COLA's should be the same. Most COLA's do not start until age 62 under Social Security, obviously, and I think railroad COLA's, I be- lieve, are the same. I am not sure. So we think it is an area that could be explored and should be explored, and we are willing to explore that area. Senator EAGLETON. OK. What about the no reduction at age 55 with 30 years of service? Mr. BLAYLOCK. As an example, the previous statement I just made. If there was a half COLA between 55 and 62-and you prob- ably have the numbers right there in front of you-that would pro- vide enough money to pay for an unreduced benefit retirement at age 55. If that be the situation and that proved to be true, then we are very much interested in discussing that idea. But we are basically supporting and urging that we go with a 55- year retirement with an unreduced pension. Senator EAGLETON. A half COLA before 62 with full COLA after 62. That adds 2.5 to the Stevens cost as opposed to the full COLA, which would add 3.0. It saves, in essence, 0.5 in contrast to the 2. Do you folks have a recommendation on the CAP plan? Mr. BLAYLOCK. Yes, sir; we will settle on the norm in the private sector, which is a 50-percent match, 6 percent of payroll. Senator EAGLETON. Fifty percent up to 6? Mr. BLAYLOCK. Right. Senator EAGLETON. That would take off 1.6. That would reduce the cost 1.6 from the Stevens level. What about the disability benefits, Mr. Blaylock? How do they read to you? Mr. BLAYLOCK. I believe, Mr. Chairman, that we have basically accepted the disability provisions. There was one point in there, and I don't find it right now. We had one concern, but I think basi- cally, in concept, we have accepted that. Let me check this a moment. On the disability benefit, we point- ed out that we would propose that the disability benefit continue until the annuitant is eligible for an unreduced benefit under Social Security or civil service retirement. That was the one point we had to make. I think as it is presently written, the time period for payment of disability at the rate of 60 percent of salary be in- creased from 1 to 2 years, and more importantly, we propose that the disability benefit continue until the annuitant is eligible for an Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 unreduced retirement under Social Security or civil service retire- ment. Senator EAGLETON. That is page 18 of your full statement. Thank you. Mr. BLAYLOCK. Yes, sir; I also mentioned it before. Senator EAGLETON. Well, I am right in that? Mr. BLAYLOCK. Yes, sir. Senator EAGLETON. Mr. Biller, do you think that there ought to be what is sometimes termed as level contributions? That is, to set the backdrop for it so that we can all follow it, under the present civil service system, an employee pays in 7 percent of salary plus he pays in 1.3 percent for Medicare. Mr. BILLER. That is correct. Senator EAGLETON. So out of his pocket comes a total of 8.3. Under the Stevens bill, it is 7.0. All the employee pays in is Social Security, 7.1, and he pays in no more. Do you think there ought to be level contributions? That is, should the new employees pay in another 1.3? Mr. BILLER. We would look at that, yes. Senator EAGLETON. How about you, Mr. Blaylock? Mr. BLAYLOCK. Yes, sir; we advocate that in our testimony. That other 1.3 percent would be used, obviously, to help finance the total retirement package, yes, sir. Senator EAGLETON. This surprises me a bit. I think in my years here, this is the first time I have heard representatives of the em- ployee groups advocating that their members pay more out of their pocket. Mr. BILLER. The point is that we are seeking equitable treatment for both sides, and if it means that the new people would feel short- changed, even though they would have to pay something out, we think they would approve. We are not doing it to tax them. Senator EAGLETON. You think the new employees are going to come to you and say, "Moe, I feel shortchanged. The guy over here is paying 8.3 out of his pocket; I'm only paying 7.0 out of my pocket. Moe, I have just got to pay more." Mr. BILLER. Well, he is going to take a look that he is getting less. That is what is far more important. These are efforts to pro- tect him in his old age, whether it is COLA or anything else, and including the retirement at 55 and 30 years. There is a lot to be weighed there. Senator EAGLETON. So you have to sell it to these new fellows that we are advocating should pay more and we are advocating that the Congress at least up the Stevens ante, because you are going to, we think, get more in the long run in terms of retirement benefits by so doing? Mr. BILLER. Well, moreover, they are presently paying the 8.3. They understand that. Senator EAGLETON. That is the old guys. Mr. BILLER. No, no, the ones that are in since 1984 are paying the same as those covered. by Social Security because Congress was wishing to prolong that. Senator EAGLETON. You are right. Mr. BILLER. They understand all this. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator EAGLETON. You are correct. In this hiatus period, they are paying. Mr. BILLER. That is OK. All they are looking for and all they are missing is parity. Senator EAGLETON. What are your comments? Mr. BLAYLOCK. Mr. Chairman, I think, the same point Moe made. First, equity between the two groups. Second, we are as concerned as you and all the members of the committee about the long-term financial security of this plan, and we recognize this money contri- bution has to be fair. And I would say third, if I was before you at a bargaining table with full rights and the right to negotiate behind me, I might take a different position. Senator EAGLETON. I wonder if you set up a debate of just new members, you lock the room and only admitted new members, and you had a debate between Stevens and yourself, Mr. Blaylock, and the proposition before the audience was resolved, shall the employ- ees here present pay 7 percent out of their pocket or shall they pay 8.3 percent out of their pocket, and you take the affirmative posi- tion that it ought to be 8.3; Stevens takes the other position, it ought to be 7. If you have a vote on it, I would bet you that Stevens would win hands down amongst those new employees. Mr. BLAYLOCK. I don't know. I would take you on on that bet be- cause I tell you, as we traveled around the country in the last 3 years debating with our people on this whole issue-and as you know, the level of concern has been very high, probably the most controversial issue of Federal workers-time after time, we found that the groups would say that even if they had to pay more money, they wanted to know that the benefit level was going to be there and that the security of the plan was going to be there and that they could depend on it. I am sure Moe had some of the same experiences. They didn't tell us to run up here and advocate more money, but when the bill started shaking down and the 1983 amendments passed and every- body had to pay Medicare, that is one point that is free, everybody had to pay anywhere. When we talk about financing the long-term career work force and the staff requirements for that work force, I found no opposition out there. So I don t know. I might take you on on that bet. Mr. BILLER. The same thing. This is the bet we would win. I be- lieve we would win that bet. Try it, Senator. Give them overall the same benefits, parity, and let's see what they say, if you give them the choice. Senator STEVENS. I will take the challenge. Mr. BILLER. OK. Senator STEVENS. If Tommy would let me interrupt-under our plan, they don't have to pay for insurance any longer. They make one 7-percent contribution, and they have insurance, Social Securi- ty, a pension plan; and with the same amount they are contribut- ing now, they would have 3.4 percent in their thrift plan without any increased payment, because currently they are paying 1.3 for their Medicare, and they are paying an average of 0.4 for insur- ance. Mr. BLAYLOCK. Currently, Senator, they have a 56-percent re- placement rate, and under your proposal, they will have about a Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 48-percent replacement rate. That benefit level will be lower, and you know that. Senator STEVENS. We are talking about the younger employees. I will bet they understand that if the thrift plan is invested in the private sector in stocks and bonds, it is worth more over a 20-to 30- year period than the civil service retirement compensation alone today. Mr. BLAYLOCK. I doubt that. Mr. BILLER. That is not so. Senator STEVENS. It is. It is. It just depends upon the investment pattern and the business cycle ahead, but they are insured against the business cycle by virtue of the thrift plan. Without any additional contribution out of their pockets today, they can participate in the thrift plan to the extent of 1.7 percent and the Government will match that 1.7 percent of payroll. Now, 1.7 percent of the payroll, almost 2 percent, that would be matched by the Federal Government with almost 2 percent. That is a substantial amount of payroll. And that would go in now and be worth something 20 to 30 years from now. I think the younger people understand that. I have gone around the country, too, and the difference is that most of the people we talk about are under the old plan. Mr. BLAYLOCK. No; you have got about 300,000 under the new plan. Senator STEVENS. Listen to the younger people under the new plan. They are very skeptical even of Social Security, let alone civil service retirement. They want that private sector investment, and that is where the support is going to be. Mr. BILLER. Congress has done the job to make sure they are not skeptical of Social Security 3 years ago, so we put the plan of Social Security in order for 50 years. Senator STEVENS. You won't find very many young people to be- lieve that, Moe. Mr. BILLER. No, but that is what the Congress said. Senator STEVENS. I understand. I understand it. Senator EAGLETON When you are dealing with actuarial esti- mates, projecting investment figures, what-have-you, you are look- ing into the future. Stocks can go down, stocks can go up; costs can go down, costs can go up. More than likely, costs are going to go up, especially when you get into this health care business. I think it is safe to estimate somewhere along the line that Con- gress is going to have to raise that 1.3 in the Medicare. When that year is going to come, I don't know, but I can just see the projec- tions on Medicare. I have looked at some, and they are mind-bog- gling when you look out to the year 1995, 2000, even earlier. For new employees, we are talking about a system that is going to run from now well into the 21st century. We have got an older system that is going to, by attrition, and acts of God, decline. I just wonder if it wouldn't be prudent to save that 1.3 for the members, for the participants, for that future rainy day, the rainy day that I think most certainly is going to come, as these medical bills soar and soar and Government costs in connection with that are going to rise. I wonder if we shouldn't say to the workers, "Look, we could have tapped you up to 7 plus 1.3, put you on an equal par Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 with the old system. We decided to make it just 7.0, because we know somewhere along the line, we are going to have to tap you, maybe up to that 1.3." I don't know what the future will be, be- cause medical costs are going through the roof. What do you say about that, Mr. Biller. Mr. BILLER. Well, the counter is the other side of the coin when the Congress-so we make sure it isn't personalized-when the Congress decided several years ago to tack on the 1.3 to the Federal workers for Medicare. We had our own health benefit system, and we weren't complaining about our system, it covered retirees, and we thought the Congress did reasonably well until OPM began to manipulate it. Senator EAGLETON. Do you have a comment, Mr. Blaylock? Mr. BLAYLOCK. Well, the only comment I have, Senator, is you reach that far out in the future; God only knows what is going to be happening. Every time we think we have solved a problem, maybe we have in the short term, but long term, we don't solve it. I think a Congress and a union or unions representing the workers at that time will have to deal with that problem. My hope is by the time we reach that point, the Congress will have dealt with one element of the Social Security program as it was intended in 1935, as you well know, and that is a national health care system for everybody, including, and I hope, Federal workers who will get the same treatment as everybody else in the country at that time. Right now, I have a concern: One, of equity between the groups; two, we have a concern that the replacement rate as proposed by this plan will not be as high; and we are more concerned about the lower paid workers that will never be able to put any money into this thrift plan. You can project all you want about how they are going to participate, but I can tell you, workers below grades 7, and they work for the Federal Government, and nonappropriated work- ers or temporary or probationary workers, hell, they can't even make house payments and buy a refrigerator, let alone think about a savings plan that may, in 30 years, produce them some money. I am not concerned about those that make over $30,000. They might be able to put a little bit aside. But our major role is to pro- tect those that can't afford to, and the replacement rate for those workers is so low, when they wind up out of this proposal getting $500 and $700 and $800 a month to try to live on, I am concerned about those people. I would like to see that basic benefit as good as we could make it. Mr. BILLER. Perhaps it would be good to take a quick look at the replacement rates in the CRS study, particularly pages 19 through 26. You will find that they are less, much less. As I pointed out before, under the current retirement system, you have got 53 per- cent all along. Senator EAGLETON. Let me follow up on that. GAO, this morn- ing-I wasn't here, but I heard other testimony-testified that if that 1.3 went into the thrift plan, focusing on this 1.3, it would amount to, at retirement, 12 percent of the retiree's final salary. What about, if we are going to have this equal fee, equal pay- ments, equity or something, why not put the 1.3 into the thrift plan? Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. BILLER. Our concerns are-we are glad that we had at least some role in getting the Senate, particularly, and the Congress to look at a defined benefit plan. We are not chopping up a thrift plan. We have our concerns, and people who come into Govern- ment come in also for a sense of security, and we believe that they believe they would like to know what is down the pike 30 years from then in having better benefits in a defined plan. If they can afford a thrift plan, they would add to it. Senator EAGLETON. You haven't answered my question. What about putting the 1.3 percent for the new workers-that is the extra amount to make them level with the old workers-what about putting it in the thrift plan? They know they have got the thrift plan. Mr. BILLER. I understand what you are saying. We would have to look and see what that gives them. I am not an actuary, and I am not being sarcastic. Senator EAGLETON. Would you take a look at that? Mr. BILLER. We will take a look at this. [The information referred to follows:] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 During the hearings on S.1527, Senator Eagleton argued that employees would receive a better deal if a mandatory contribution of 1.3 percent of pay were invested in the capital accumulation plan (CAP) instead of being used to fund a better defined benefit supplemental. This conclusion was drawn by comparing a computation made by the General Accounting Office (GAO) of what the contribution would buy in the CAP with estimates by the Congressional Research Service (CRS) of the cost of various defined benefit plan improvements. However, the comparison was wrongly made, as explained below. A correct comparison of the two estimates shows that there is little difference in the worth of the two alternate uses of the contributions. GAO estimated that a 1.3-percent employee contribution to the CAP for 30 years will generate a retirement income worth 12 percent of final salary at time of retirement. This calculation is based on three assumptions that make a comparison to the CRS figures on defined benefit improvements invalid. These assumptions are: (1) That the employee contribution is matched dollar for dollar, thus turning the comparison into a 2.6- percent CAP contribution vs. a 1.3-percent defined benefit improvement; (2) That the funds will be invested in savings bonds paying 7.5 percent, a return that is available today but is much too high relative to inflation to be sustainable over the long run and is inconsistent with interest rate assumptions underlying the CRS estimates; (3) That the retiree uses the CAP funds to buy a fixed annuity, which will decline in real value each year, whereas a defined benefit improvement will be partially indexed for inflation (by CPI minus 2) under S.1527. The comparison can be put on a proper basis by disallowing the federal match, using an appropriate real interest rate, and taking inflation into account. Making these adjustments results in the following: Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Increase in wage replacement after 30 years' service if 1.3% contributed to: CAP Defined Benefit Step 2: Disallow federal match for purposes of comparison 6.0 Step 3: Use historically valid real interest rate for long-term government bonds(0.8%) instead 3.75 of 3.5% Step 4: Adjust to real values for 4% annual inflation over 20 years 3.75 (at age 62) 3.25 1.7 (at age 82) 2.2 After adjustment, this retiree would be a little better off under the CAP at age 62 but a little better off under the defined benefit supplemental at age 82. Thus, the decision on where to put a 1.3-percent employee contribution comes down to a judgment on which return is the more dependable rather than which one is higher at age 62. APWU members feel more comfortable relying on a statutory entitlement than on an expectation of investment performance. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. BILLER. Let's get one thing clear here, and I think we have said it before. Nobody is here to rake up old coals. The unions are just as anxious to get a supplemental plan in place this year, we hope, as the Congress is, because the realities are whether it is today, tomorrow or next year, it has got to be dealt with. And surely, we are not interested in prolonging the agony for anybody. We are here to work with the Congress of the United States to try to get something satisfactory. Senator EAGLETON. I agree with that, and I appreciate it, and I know that is the fact. Mr. Blaylock, what is your answer? What about if we put the 1.3 into the thrift plan? Mr. BLAYLOCK. Senator, I don't know that we would necessarily object to that. I think we are open for discussions on it. The only negative that comes to my mind immediately, and again, our concern, is that the portability of the thrift plan accom- modates the short-term worker and whether or not we want to design into a retirement system provisions that actually encourage rapid turnover of the work force. It is an area that we are hoping to explore, and we just have not explored it. Senator EAGLETON. I hope you will explore it. I can vividly recall hearings in a different context and in a different committee, Labor and Public Welfare, and union organization after union organiza- tion came in front of our committee and embraced portability; said that portability was an absolute necessity in today's modern indus- trialized world. You could move from city to city, job to job, place to place, et cetera, et cetera, and I thought it was a plank in the AFL-CIO annual statement back at that point in time. Senator Javits was on the committee working on various kinds of reforms on pension security legislation, and portability was a sacred word; somebody would have something he or she could take with him from one job to another. We had all kinds of statistics. How many times did people change jobs in their lifetime? I can't remember. That was many years ago. Why suddenly has this portability become unsacred? Mr. BLAYLOCK. I don't know about that, Senator, but when we asked you to look at the overall objective of building a Federal plan for the Federal service, I would just ask you, do you think setting up a system that encourages turnover in the work force at a very rapid rate is in the best interests of a good career system? I guess we can debate either side of that issue. Senator EAGLETON. I think setting up a system-- Mr. BLAYLOCK. We have a responsible concern for the long-term service for the American public. Senator EAGLETON. If a person worked as a secretary in the civil service system, worked diligently, effectively, et cetera, worked 10 years, then got a better job offer with with private industry and worked 20 years, I think 10 years with the civil service system ought to count for something. Mr. BLAYLOCK. I would totally agree with your example, but the bill allows them to take that money after 1 year. Senator EAGLETON. We can start at 10 and go to 9, go to 8, and get to 1 year and say that is hit and run. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. BLAYLOCK. The example you use, I would agree with you 100 percent. Senator EAGLETON. All right. Would you all consider the notion or the concept of putting the 1.3 in the thrift plan? Mr. Biller said they would take a look at it. Mr. BLAYLOCK. Oh, yes. Mr. BILLER. I will take a look at it. Senator EAGLETON. I am not trying to tie you up on it today. Mr. BILLER. A number of questions you ask appear in my com- plete testimony. However, we are going to respond to every one of them specifically anyway. Senator EAGLETON. Thank you. Mr. BILLER. Thank you. Senator STEVENS. We would like to try to get the bill before the committee by the first of next month, if we can-by the end of Sep- tember or the first of the next month. Just for the guidance of other witnesses, this hearing has gone on longer than we anticipated. It is not anyone's fault but is be- cause of the problems on the floor. We will pick up the balance of the witnesses in the morning, when we start, in SD-342. If anyone has problems and needs to reschedule, let us know. Senator EAGLETON. Does anybody have a travel problem, any- body that we are putting off today? Mr. BILLER. We hope there are good things going on in the Con- gress with the relay system. Senator STEVENS. Let me just ask you one last question. The Social Security age was just raised. GAO has found that the Gov- ernment plan, the existing one, was excessively costly in terms of age 55 and a full COLA. Private industry doesn't have automatic COLA's at all. We are comparing systems here. We are proceeding in a climate which you yourself mentioned where we have got af- fects from the right, very heavily affects from the right. How are we going to get together on a system that you all are going to support by the end of the month? Mr. BILLER. You know, you are talking about the private sector as if it is sacrosanct, but the private sector has an awful lot of free- dom and, invariably, will account for cost-of-living adjustments anyway, just by doing it. We are here bound by a law. As you know, we started out with a kicker. That was wiped out. It came down to twice a year, what- ever it is. It is reduced all along the way. Senator STEVENS. The kicker was quite similar to what we have here. When it got to be 3 percent, you got a cost-of-living allow- ance, plus you got 1 percent extra. Mr. BILLER. We are not looking to beat the Government, but we are not looking to fall prey to the right-wing all the way, and I am sure you are not, either. Senator STEVENS. Under the political climate that exists today, the proposal that I have in will have tough sledding in the Senate even with your support. We will have a tough time getting this bill through the Senate, even with your full support, because of its budgetary impact. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. Grace has been very open about his objections to it, as have others. You heard the chamber's testimony. I would invite you to read it in full. Mr. BILLER. Mr. Grace, if I may-and I'm not here for debate or colloquy-he ought to be a little concerned about the $400 million pollution dumps he left up in Buffalo. He ought to be concerned about being a tax welfare client and all of those things, instead of running away from it and riding around the country not giving fac- tual information. So we are not going to be moved by the right-wing. We have a concern, of course. Senator STEVENS. You may not be, but some people on the floor are. As a practical problem, again, I hope that you will have some people who will listen to this testimony in the next couple of days and that we can find the time to work this out. I am talking about coming together within the next 10 days to 2 weeks on a proposal we can submit to the committee. Otherwise, this legislation is doomed for this year. Mr. BILLER. We do appreciate your efforts, and it is not to butter you up. We have said that publicly. Senator STEVENS. I understand, and you are my great friends, and I appreciate that. Mr. BILLER. We are your friend, too, but we are not going to let the right-wing move you off either, Senator. Senator STEVENS. No; but we are still far apart. We are still far apart in terms of trying to get a bill that we can mark up. I am more than willing to consider a percentage reduction in the match- ing, if that is required. I will tell you what: I don't think anybody is going to end up by putting it on the pension plan, though, in the long run. It will come off. In the long run, the amount we take out of that will not stay hooked onto the pension portion. I do think that at present we show too low an estimate of the participation rate in the thrift plan. Where is that book? Prudential estimates almost 75 percent of the people who earn under $15,000 contribute and participate in private sector thrift plans. Did you know that? 75 percent? Mr. BLAYLOCK. In most cases, that is all they have available, too. Senator STEVENS. And their average participation rate is 7.7 per- cent at all income levels compared to 8.4 percent for those who are who are earning $30,000 to $50,000. Those who earned less than $15,000, 7; those who earned between $30,000 and $50,000, 8.4. The difference is only 1.4 percent in terms of contribution. The partici- pation rate increase is much higher in the $30,000 to $50,000 brack- et, up to 96 percent. CRS has coated this thrift plan at only 3 per- cent of payroll. I think it approaches 5 percent. Mr. BILLER. Senator, we took a survey-and we will make it available-for the House Ways and Means Committee in terms of the tax reform, and our tax survey shows that the lowest salary postal workers don't contribute to IRA's. [The information referred to follows:] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 173 PARTICIPATION IN RETIREMENT SAVINGS PLANS Senator Stevens argues that lower-salary workers will benefit from the Capital Accumulation Plan (CAP) in the same proportions as their higher-salary coworkers. During the hearings on 5.1527, the Senator cited a study by the Prudential Asset Management Company which indicated "almost 75 percent of the people who receive under $15,000 contribute and participate in private salary thrift plans." The APWU does not believe that the proportion of postal workers who would contribute to the CAP would be this high. We have come to this conclusion on the basis of several sources of information. The first is a July 1985 survey of APWU members which reveals the IRA participation rate by income. Because the IRA is a tax-deferred retirement savings plan, it is reasonable to use this survey information to estimate a lower bound on the CAP participation rate. APWU arranged for a survey of 750 union members to identify their tax filing characteristics. One of the items in the survey questioned whet r the APWU member contributed to an IRA from 1984 earnings. . The results of the survey indicate that only 36 percent of all APWU members contributed to an IRA in 1984. The results also revealed that IRA participation was directly related to income; only 12 percent of postal workers earning less than $10,000 contributed to an IRA, whereas 63 percent of postal workers with a combined family income of $50,000 or more contributed to an IRA. The table below provides the rate of participation by income for postal worker families. It is clear that IRA participation at all income levels, and particularly below $50,000, is significantly less than the 75-percent thrift plan participation rate cited by Senator Stevens. Percent of APWU Members with IRAs by Family Income All Up to $10,000- $20,000- $30,000- $40,000- $50,000 Members $10,000 $19,999 $29,999 $39,999 $49,999 & Uu 36% 12% 23% 37% 40% 47% 63% J The survey was a telephone survey of a randomly selected sample of APWU members. The survey was conducted by Market Facts Inc. during July 1985. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Another survey by the Employee Benefit Research Institute (EBRI) found 3~ percent of eligible workers participated in a 401(k) plan- V This study also found that employee parti- cipation was related to the income of the employee. For individ- uals earning less than $10,000, the participation rate was 20 percent, while for individuals earning $50,000 and over the participation rate was 59 percent. In contrast to the infor- mationcited by Senator Stevens, EBRI found that only 25 percent of the eligible individuals earning under $15,000 made contribu- tions to a 401(k) plan. Again this figure is considerably lower than the numbers cited by Senator Stevens. What the two studies indicate is that income is a signifi- cant factor in tax-deferred retirement savings plans. Although the employer's matching contribution rate may be a significant factor in increasing the participation rates of lower-income employees, the APWU does not believe that the 100-percent matching of the supplemental plan will increase participation by 50 percentage points. J The Employee Benefit Research Institute tabulation of results of a joint EBRI and HHS Current Population Survey Pension Supple- ment prepared May 1983. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator STEVENS. This is not an IRA. Mr. BILLER. I understand. Senator STEVENS. This is the means to increase your income by virtue of savings. Mr. BILLER. I understand. Senator STEVENS. On a deferred basis. Mr. BILLER. I understand. I do understand. Mr. BLAYLOCK. Senator, I hope that all of your projections about all the workers being able to participate in a thrift plan and volun- tarily doing so, I hope they do. I am not sure at this point, though, from what we know about the lower grade Federal workers, that they will or can, and this is our concern. If you take exception to us having a concern for those workers, then I am sorry. Senator STEVENS. No; I am not taking exception. What I am taking exception to is the fact that you don't think we will have the money since we devised a plan that reduces their present cost from 8.7 to 7 and gives them, to start with, 1.7 percent of their pay- roll to contribute to a thrift plan, which would be matched by the Government with 1.7, which would give them 3.4 percent, actually increasing their retirement plan at the same cost they have today. Our bill pays the insurance; our bill pays the medicare contribu- tion. The maximum contribution for the new employees is 7 per- cent. We built into this plan a means to fund the thrift plan for those people who are in those lower financial brackets. I don't think anyone appreciates it, but I do believe that they will participate to a greater extent than you can possibly imagine. The record shows they participate-three-fourths of them earning under $15,000 dol- lars in the private sector participate now. Mr. BLAYLOCK. Is that thrift all they have after their retirement in those companies that you showed me? Senator STEVENS. Oh, no. No; that is not so. Mr. BLAYLOCK. They have got Social Security, and they have a thrift plan retirement. Senator STEVENS. No; this is the whole pension. The letter is on page 200 from the Prudential Asset Management Co., and it has a whole series of different plans that they participate in, but the av- erage contribution by an employee earning less than $15,000 is 7 percent. That is in addition to Social Security, mind you. [The letter referred to follows:] FROM "FORUMS ON FEDERAL PENSIONS," PART 5, JULY 10, 1984, SUBCOMMITTEE ON CIVIL SERVICE, POST OFFICE, AND GENERAL SERVICES, COMMITTEE ON GOVERNMEN- TAL AFFAIRS THE PRUDENTIAL ASSET MANAGEMENT CO., INC., Florham Park, NJ, August 2, 1984. Special Counsel, Subcommittee on Civil Service, Post Office and General Services, Washington, DC. DEAR MR. COWEN: At the July 10, 1984 Federal Pension Policy Forum you ex- pressed interest in the extent to which employees across all income levels partici- pate in an employer sponsored savings and investment plan. I am pleased to furnish you with the following information concerning Prudential's savings plan for its em- ployees. The plan is intended to meet the requirements for a qualified profit-sharing plan under Internal Revenue Code section 401(a). A copy of the booklet describing the plan is attached. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Eligible participants are employees with at least 12 months service. The plan re- quires that an employee contribute 3% of salary in order to participate. The Compa- ny matches 100% of that contribution. In addition, participants may contribute an- other 10% of their pay to the plan. The participant contributions are not tax de- ductible. Prudential s contributions are tax deferred compensation for the partici- pants. The plan enjoys an 85% participation rate among eligible employees. Moreover, contribution rates are approximately the same at all compensation levels. A full one-third of our participants at all compensation levels use the plan to save 3% of their compensation. Another one-third contribute the maximum of 13% of their compensation. The remaining participants at all compensation levels save between 4 and 12% of their compensation. The average employee saves between 7 and 9% of his compensation. The plan data, by salary brackets, follows: Percent Participation rate ........................................................................................................... 85 (a) participants who earn less than $15,000 ...................................................... 74 (b) participants who earn between $15-20,000 ................................................... 87 (c) participants who earn between $20-30,000 ................................................... 92 (d) participants who earn between $30-50,000 ................................................... 96 (e) participants who earn over $50,000 ............................................................... 98 Average participant contribution rate ....................................................................... 7.7 (a) participants who earn less than $15,000 ...................................................... 7.7 (b) participants who earn between $15-20,000 ................................................... 7.0 (c) participants who earn between $20-30,000 ................................................... 7.9 (d) participants who earn between $30-50,000 ................................................... 8.4 (e) participants who earn over $50,000 ............................................................... 9.1 A number of persons at the forums expressed concerns about the possible adverse results of giving employees choices among investment accounts for their plan bal- ances. Page 4 of the booklet describes the investment accounts. The "VCA-6" and "VCA-IF" accounts are invested primarily in common stocks. The Fixed Dollar Ac- count guarantees the principal of an employee's plan balance placed in that ac- count, that is, no adjustments for market value are made upon an employee's with- drawal of funds or transfer of funds from this account. Also, the Fixed Dollar Ac- count guarantees the interest rate to be credited during each calendar year. The interest rate credited to this account for 1984 is 11.50%; for 1983 it was 11.25%. The following is a distribution of current contributions among accounts for the 1973 cal- endar year to the latest available date. Note that after 1974 there was a shift away from the common stock accounts toward the Fixed Dollar Account, and that after 1978 the ratio of current contributions to the Fixed Dollar Account has remained very stable at 86-87%. PRUDENTIAL INVESTMENT PLAN EMPLOYEE (INCLUDES MAKE-UPS) AND EMPLOYER CONTRIBUTIONS [In millions] 1984 (through March) .............................................. 25.9 87 1.3 4 2.7 9 29.9 1983 .......................................................................... 100.2 87 4.8 4 10.0 9 115.0 1982 .......................................................................... 91.7 86 4.9 5 10.2 9 106.8 1981 .......................................................................... 81.2 86 4.5 5 8.9 9 94.6 1980 .......................................................................... 75.8 87 4.0 5 7.7 8 87,5 1979 .......................................................................... 75.2 86 4.3 5 8.1 9 87.6 1978 .......................................................................... 63.5 81 4.9 6 9.9 13 78.3 1977 .......................................................................... 52.8 75 5.6 8 12.0 17 70.4 1976 .......................................................................... 42.9 68 6.2 10 13.8 22 62.9 1975 .......................................................................... 30.2 56 7.2 14 16.3 30 53.7 1974 .......................................................................... 22.4 45 8.4 17 18.8 38 49.6 1913 .......................................................................... 12.6 31 6.5 19 15.1 44 34.2 I hope this information will be of use to your Committee. JAMES M. McGiATH, Director, Group Pension Research. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. BLAYLOCK. Oh, I understand that. Senator STEVENS. They are contributing to Social Security. Those people are contributing 14 percent of payroll to savings, and we are looking to contribute only 8.7, which is what they are currently doing, and they would have insurance, Social Security, Medicare, a thrift plan, and a noncontributed-to pension plan. I really think, you know, if you analyze what we did-I am surprised we won the battle at OMB, but we did. I hope we can get together in the next few weeks. Mr. BILLER. We can get together. And we are going to help you fight the radical right and the radical left. We aren't relying on a label, but we will be there. We will take care of all of them. Senator STEVENS. I remember what my good friend Nelson Rockefeller said, "You know, you can have the ball go down the gully on the right or go down the gully on the left, but you don't score any points. The ball has to go down the middle." Mr. BILLER. We want to go down the middle. Senator STEVENS. Thank you. We will see everyone at 10 o'clock tomorrow. Mr. BLAYLOCK. Thank you, Senator. [Mr. Biller's prepared statement, with an attachment, and Mr. Blaylock's prepared statement follows:] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Testimony of Moe Biller, President American Postal Workers Union, AFL-CIO Mr. Chairman, thank you for inviting me to testify before you today on behalf of the 325,000 members of the American Postal Workers Union. The subject of the hearing today, the design of a retirement program for postal and federal workers hired since December 31, 1983, is of fundamental importance to all our members. Enrollees in the current retirement plan are concerned because they believe that there should be comparable benefits for all employees and that the current system should not be undermined. New employees are concerned because they should have a good retirement plan as part of their total compensation and they have been kept in the dark as to what that plan will be. 'Union' means we stand together. That's why I'm here to speak on behalf of all our members. .The American Postal Workers Union supports action in this Congress on a supplemental plan. We believe it is time to end the uncertainty for the new hires. Most of this spring and summer, postal and federal employees and retirees have felt that their retirement program was in the hands of budget hijackers who were threatening, over and over, to do it harm. The completion of action on this year's budget resolution has set the hostage free--at least temporarily. Cooler heads now have an opportunity to consider this legislation without the presence of a budget gun at the head of employee benefit programs. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 179 2 If a supplemental plan is not enacted, new hires will eventually have to pay the full payroll deductions for both Civil Service Retirement and Social Security. we don't want to see that happen any more than Members of Congress do. However, we will not accept a stingy, inadequate plan. It is the duty of this Committee to stand up with us and oppose the shrill demagoguery of the far right about the compensation of federal and postal employees. Administration's Hindrance of the Legislative Process The Reagan Administration has been no help in developing an adequate retirement plan for new hires. Mr. Devine and Mr. Grace may have high-sounding names but they took the low road on policies for public service workers. Hiding behind the mantle of authority and respectability given to them through appointment by this Administration as the former Director of the Office of Personnel Management and the former head of the President's Private Sector Survey on Cost Control, Mr. Devine and Mr. Grace continue to spread confusion and falsehoods about the Civil Service Retirement program. One of their most commonly made charges is that an unfunded liability in Civil Service Retirement means the program is overly expensive or unsound. A recent article in the National Journal clearly demonstrated how much baloney there is in that false charge. "Red herring" is the term used in the article to describe the CSRS unfunded liability. Both Grace and Devine have been throwing into the debate on Civil Service Retirement as many red herrings as they can lay their hands on. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 180 3 The former. OPM Director floated a proposal a few months ago that would have meant severe reductions in the Civil Service Retirement benefit. I an glad that Congress has not given it serious consideration. It was a very unbalanced approach that ignored the three-part approach of Social Security, a defined benefit, and a thrift plan that is generally accepted as the direction to take. This Administration's input has not been constructive. The only legislation from the Administration that has been introduced in either house of Congress is the long list of budget cuts drafted for the sole purpose of cutting the current program. These are not mainstream proposals. They are radical, right-wing and not worthy of consideration. Congress should continue to look the other way when it comes to considering this Administration's destructive proposals. Peter Grace constitutes another arm for this Administra- tion's attacks on federal and postal workers and retirees. The so-called Grace Commission, otherwise known as the President's Private Sector Survey on Cost Control (PPSSCC), operated between June 1982 and January 1984. Shortly after its reports were released, the quality and credibility of many of the Grace recommendations came under question. A joint study by the non-partisan General Accounting Office and the Congressional Budget Office found that the Commission greatly overstated the cost savings attainable under its recommendations. Even without considering the merits of the proposals, the CBO-GAO review found that the savings Grace Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 181 4 claimed were three times the level of savings actually possible. GAO further stated that it "does not find the package of PPSSCC recommendations a sound basis for restructuring Civil Service Retirement." I am appalled that, despite these findings by non-partisan experts, he is still flying around the country with a taxpayer subsidy spreading his misinformation and sowing seeds of prejudice against public service employees. The CBO-GAO report made an additional recommendation that the Senate Budget and Governmental Affairs Committees apparently chose to ignore this year. The report stated that changes in retirement would be "consistent and complementary" ... "if the Congress deferred action until the legislative committees acted on the changes for newly hired workers." Despite this recommendation, some members of both the Budget Committee and this committee worked actively during this year's budget negotiations to try to use the budget process to force large cuts in Civil Service Retirement. Postal workers are thankful that, in the end, the conferees saw the wisdom of agreeing with the House position in this area.- APWU Participation in Supplemental Plan Design The APWU has been preparing itself to participate fully in the development of a supplemental plan. That preparation dates all the way back to the first proposal by Senator Stevens for a new defined contribution plan in 1982. We opposed the Stevens proposal at that time because we felt strongly that a federal retirement system based solely on a defined contribution plan was Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 the wrong route to go and would provide an inferior retirement plan for our members. We shared our views with the Committee even though formal hearings were not held. Last year, this Committee sponsored a series of policy forums on Civil Service Retirement. We participated fully in each of those seminars. We were pleased with the educational process that resulted from the forums and are especially pleased with one of the main results: namely, that the Stevens/Roth legislation incorporates a defined benefit as an important, integral part of the supplemental plan. Earlier this year, it was rumored in the press that Senator Stevens had a bill that was going to be introduced. Draft legislation was in fact circulated by staff, and we began to prepare ourselves to comment on that plan. We expected to testify in favor of certain aspects of the plan and to offer recommendations for improvement of other aspects. However, that legislation was never introduced, so we were not able to offer our reactions through testimony on its specifics. We are pleased that the process is now finally underway. Cost of Civil Service Retirement I want to begin my specific testimony on the Stevens/Roth bill by asking a fundamental question. Why do you want to cut Civil Service Retirement? It is a good program. We'll be the first to admit that. But it's definitely not the best in the country, and if Congress keeps chipping at it, it will get worse. The Hay/Huggins study conducted for the House Post Office and Civil Service Committee brings out two facts that we believe Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 183 6 are definitive in answering the question of whether the new hire supplemental program should be made better or worse than the existing retirement program. The Hay/Huggins study looked at the cash compensation of 1,249 medium and large companies and the benefits compensation of 854 of the same organizations. It found that total average federal compensation lagged behind the average for those companies by 7.2 percent. The greatest contributing factor to this lag is federal pay, which the study found to be 10.3 percent behind the private sector. This lag in pay was made up partially by the fact that Civil Service Retirement and other benefits are worth 2.8 percent of pay more than the average fringe benefits in the private sector. That's 2.8 percentage points above average. That's not overly generous, or way out of line like Peter Grace would have us believe. It's just a little above average. The retirement plan is a good plan; it should not be trimmed down every time the budget season rolls around. Members of this Committee should be aware that, when Hay/Huggins looked at the retirement plans of the 854 companies in its study, it found that over 10 percent of the group had retirement benefits that were better than Civil Service Retirement. That means that there are at least 85 companies out there that have a better retirement program than Civil Service Retirement. Let me repeat that. There are at least 85 companies out there that have a better retirement program than Civil Service Retirement. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 184 7 The federal and postal services are large organizations. They have to compete for good employees like any other organiza- tion. The Congressional budget has recommended a freeze on federal pay for 1986, so the 10.3 percent salary lag identified by Hay/Huggins will grow larger. The APWU believes that now is not the time for the Congress to make any cuts in retirement and thereby further undermine the competitive position of the federal employer. Major Issues in the Stevens/Roth Bill The APWU believes that the Stevens/Roth bill, S. 1527, offers a framework on which to draft a supplemental plan. However, the APWU also believes that the bill proposes a system that is inadequate in several important ways: 0 The estimated cost of 20.8 percent of payroll implies that the value of the retirement plan to the employee will be one-sixth less than that of the current system. We favor a supplemental that has a total value comparable to the current Civil Service Retirement program or 25.0 percent of payroll. 0 The proposed COLA of CPI minus 2 will work a serious financial hardship on retirees. For example, if you retired on a CPI minus 2 COLA and lived 20 more years-- not an unrealistic expectation--the real value of your retirement pension would be one third less. A pension should be as good at age 82 as it was at age 62. COLA Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 185 8 cuts of this type have been tried repeatedly in recent years, and all of them have ultimately been defeated. This proposal should meet the same fate. o We cannot accept the proposal to reduce the benefit for the 30-year employee who is eligible to retire at age 55. The average employee retires at age 61. This proposal would affect only the minority who began government careers at early ages and loyally remained in their jobs. An adequate retirement after such a long career is essential to our members. Furthermore, the analysis of the Congressional Research Service shows that continued full benefits at age 55 would add little to the cost of S.1527. 0 The proposed matching rate on'employee contributions to the capital accumulation plan (or CAP) is far in excess of typical private sector practice. We favor less matching for the CAP. Instead, a higher accrual rate for the defined benefit supplemental should be offered so that the average worker can be assured of a decent retirement whether or not he or she has been able to put money into the CAP. 0 The defined benefit plan as proposed would be totally financed by the agencies. We favor keeping the same total employee contribution that new hires now pay. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 186 9 0 The disability and survivor benefits proposed need several improvements to prevent situations in which those in need of these benefits would find themselves in dire straits financially. o The proposal would allow employees now covered by Civil Service Retirement to opt into the supplemental and Social Security. We are troubled by this proposal and feel that no election period should be allowed until considerable analysis of the possible problems have been completed. Considerable testimony was presented last spring before the House committee on the problems which have been experienced when similar elections were allowed by new state retirement plans for enrollees in a former plan. Those mistakes should not be repeated in this legislation. 0 The proposed CAP would permit employee funds to be invested in a broad range of securities. We favor limiting the investment to government or government- guaranteed securities to better protect the employee's assets and to avoid some serious political and administrative problems. A complete discussion of these issues and APWU's recommendations is attached to this testimony as Appendix A. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 187 10 Thank you again for inviting me to present to the Committee the American Postal Workers Union's views on this complicated but crucial legislation. The Union stands ready to work closely with the Committee to formulate a good and fair plan for recent and future federal and postal hires. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Appendix A: Comments of American Postal Workers Union on issues Raised by Stevens-Roth Bill (S.1527) The American Postal Workers Union supports the basic 3-part structure for the supplemental retirement plan proposed in 5.1527. After reviewing the details of the plan, we have three major recommendations for change: (1) The cost of the system should be close to that of the Civil Service Retirement system; (2) The added cost is justified by needed improvements in the defined benefit supplement; (3) A part of this added cost can be funded by reducing an overly generous government matching of employee savings that S.1527 proposes. These three issue areas are discussed below. 1. Cost The entry-age normal cost of the Civil Service Retirement system has been estimated at 32.0 percent of payroll in a recent Congressional Research Service (CRS) analysis. The employees contribute 7.0 percent for this plan, with government paying the remaining 25.0 percent. The CRS cost analysis of 5.1527 shows its total cost as 29.7 percent of payroll, of which 8.9 percent is paid by the employees and 20.8 percent by government. The 8.9-percent employee share consists of 5.9 percent for the Social Security tax and an Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 2-A estimated 3.0-percent average contribution to a capital accumulation plan (CAP). Using these CRS figures, we see that the average employee would pay 1.9 percentage points more under S.1527 than under the current system,'an increase in retirement contributions of over one fourth. The value of the program S.1527 would establish is worth 2.3 percentage points less than the current plan, or a 7- percent cut in plan value. This treatment of new hires would be wrong for two reasons. First, it would establish a serious inequity between the new hires and their fellow employees. Second, it is grounded in an unsupported theory that the current federal retirement program is unreasonably generous. Retirement, together with cash wages, health insurance, and several other fringe benefits, make up the compensation package an employer offers to attract the quality and quantity of labor needed. The federal government competes with private sector employers in both national and local labor markets to hire and retain its staff. Since there is little differentiation of wages and benefits by type of employee within the U.S. Civil Service, the government's compensation package must be designed to compete in the toughest labor markets. Otherwise, the government could wind up with an adequate supply of some types of labor but fall far short of needed labor in positions that require skills in short supply. Fortunately, an excellent study was completed last year for the House Post Office and Civil Service Committee that compares Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 3-A federal compensation with that in a large number of private firms. Thus, we know whether or not federal pay and benefits are out of line compared to the compensation offered by private competitors. The study, by Hay/Huggins, compared federal compensation to the pay levels of 1,249 medium and large firms and the benefit plans of 854 firms. Comparing federal compensation to the average figures for the firms disclosed the following: Amount Federal Compensation is Component of over (+)/Under (-) Average for Compensation Private Firms (Percent of Payroll) Pay -10.3 Retirement +6.4 Health -2.2 Other benefits -1.4 A 7.2 percent increase in federal compensation would be needed to equate the federal package to that of the average firm. This comparison shows that Civil Service Retirement is the only program keeping the federal government reasonably competi- tive in compensation with the average firm. However, even the retirement program lags when the comparison is drawn with only the top firms. The Hay/Huggins study found that all of the top one-tenth of the 854 firms had retirement plans that are more valuable than the federal plan as a percent of payroll. In summary, a cheap plan for new hires will hurt government personnel policy in two ways. It will drive a wedge of inequity between employee groups based on hiring date, and it will harm Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 191 4-A the government's ability to compete for a properly skilled workforce. 2. The Defined Benefit Plan The defined benefit supplemental proposed in 5.1527 would be an add-on to Social Security for retirees. We support the general structure of the proposed plan. However, the supplement to Social Security would not be adequate for the employee with an average or below-average salary. There are a number of factors that lead us to this conclusion, which we discuss below. a. The Benefit Formula. The proposed plan would accrue benefits at a rate of 1.0 percent of the base salary per year of service. The base salary would be the average annual salary for the highest five years. We estimate that this formula, when applied to an age-62 employee with 30 years of service, would produce a total benefit, including Social Security, that is equivalent to what the current system provides for a person earning less than $20,000. Everyone over this "breakeven' salary would be better off under the current system. We feel that this breakeven level is too low. An employee with below-average pay should not have to rely on his or her ability to save substantial sums and invest wisely to maintain the level of retirement income now provided to those hired before 1984. Also, use of the high-5 average salary instead of the current high-3 would create a difference in treatment of new hires vs. pre-1984 employees that should be avoided. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 5-A b. The COLA. The Stevens-Roth bill would limit cost- of-living adjustments (COLAs) to the annual increase in the Consumer Price Index (CPI) less two percentage points. Congress has considered such COLA reduction proposals over the past few years and has refused to approve permanent reductions. The reason for this refusal is simply that COLA reductions are bad policy. The longer a retiree lives, the smaller the real value of the benefit becomes and the lower the standard of living falls if a partial COLA is used. The supplement for a person who lives 20 years in retirement would fall by one third in real value under the "CPI minus 2" provision. This COLA reduction would work a particular hardship on those with average and below- average pay who would start out with inadequate benefits at retirement. c. Retirement Age. S.1527 proposes a penalty (a 2 percent reduction per year) for retirement prior to age 62. It would permit retirement at age 55 with as few as 10 years of service, but with a larger penalty applied (5 percent per year). This latter liberalization of current law would provide benefit amounts that would be quite small and, thus, of little consequence to the overall system. The proposed early retirement penalty for the career employee is a serious matter, however; such a penalty would save little in plan cost and would be a disservice to career workers and to the government's workforce management. Government needs both career employees and shorter-term workers. A solid cadre of career staff is necessary to provide Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 6-A agencies with the stability, institutional memory and non- partisan staff loyalty that government administration requires. A major attraction to the government employee to make government a career has been the opportunity to take full retirement and take up other pursuits after 30 years of service and attainment of age 55. A reduction of the supplemental benefit by as much as 14 percent compared to current practice would place a major obstacle in the path of 30-year retirement for the most devoted members of the government workforce. This penalty would lead to an older government workforce over time as some career employees delayed their retirement until such time as their benefit entitlements reached adequate levels. while later retirements can be justified based on national policy on total withdrawal from the U.S. labor force, there is no just- ification for delayed withdrawal from the federal government's workforce. Total government employment has changed little since the late 1960's. It is unlikely to change much over the fore- seeable future. Private firms, when faced with such trends, often take steps to encourage early retirement. Such actions are needed to allow room for hiring new personnel and promoting existing employees. Failure to make such allowances will ultimately lead to a lower quality workforce and serious morale problems. The U.S. government should not follow such a course anymore than a private firm should. d. Disability Benefits. We agree with the overall structure and benefit levels proposed for the long-term Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 7-A disability plan. There are two technical problems with the bill that we want to see corrected. First, the method proposed to calculate retirement benefits when a disabled beneficiary reaches age 62 is inadequate. The high-5 salary base would be adjusted forward from time of disability to age 62 by the 'CPI minus 2' formula. We favor a full CPI adjustment. Employees disabled for more than a few years would have a major erosion of their salary bases if they are not fully adjusted for inflation each year. Second, the proposed definition of disability requires that an.employee disabled more than one year must be unable to perform any federal job at the same grade level within the same commuting area. This broadening of the current-law definition should not be applied to postal workers who are subject to the labor contract negotiated with the U.S. Postal Service. e. Survivor Benefits. The survivor benefits proposed by S.1527 would be inadequate in a number of circumstances and should be redesigned. The most serious problems are discussed below. The bill proposes government-paid group life insurance worth two times annual salary for employees under age 35, phasing down to one times salary at age 45. This phasedown occurs too early, as people in their 40s usually need significant insurance protec tion. We favor carrying the higher level of protection out to a later age (e.g., to age 50). For surviving spouses of active employees, S.1527 would authorize commencement of the annuity only when the deceased Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 195 8-A employee would have attained retirement age. We favor commence- ment of survivor annuities at time of death, subject to current- law policies regarding remarriage. f. Employee Contributions. S.1527 does not require an employee contribution to the supplemental retirement plan. We favor requiring a.contribution from the new hires that would be equal to the contribution required of pre-1984 employees. Such a policy would mean that new hires initially contribute 1.3 percent of salary to the defined benefit plan. This contribution rate could be lowered automatically in future years as the Social Security payroll tax rate rises in order to maintain equity between the two employee groups. We recognize that exact equality would not exist for employees with salaries above the Social Security taxable wage ceiling. However, these highly paid employees would need to make contributions to the CAP to obtain total retirement benefits comparable to those available to their counterparts under the existing system. 3. The Capital Accumulation Plan (CAP) The CAP proposed in 5.1527 is too generous and should be scaled back. The proposal also raises issues of investment policy and management that should be considered. Generosity of CAP. 5.1527 proposes that the federal government match employee contributions dollar for dollar up to 5 percent of salary. The contributions and the matching funds would be exempt from current income taxation, and employees could contribute another 5 percent of salary on a tax-deferred basis as well. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 196 9-A This plan would be much more generous than the typical private-sector plan. The data reported by the GAO in their 1984 study ('Features of Nonfederal Retirement Programs") showed.that the most common private plan matches employee contributions at 50 cents on the dollar up to 6 percent of pay. Even among the 50 largest firms, only one third offer dollar for dollar matching. There are two problems with this level of generosity. The first is that a deficient defined benefit plan coupled with a generous CAP would make up a retirement system that treats high- salaried employees very well but leaves the average and below- average employees worse off than they would be if under the current system. Also, it would make the variable, unpredictable portion of retirement income a rather large part of the total.' For example, a 30-year, age-62 retiree who participated fully in the CAP would receive benefits in the proportions shown below according to the CRS analysis of 5.1527: Proportion of Total Benefit by Source if Final Salary Is: $15,000 3$ 0,000 $45,000 6$ 0,000 Social Security 33% 30% 228 18% Defined Benefit 39 42 45 48 CAP 28 28 30 32 34 A system that requires a $15,000 employee to depend on an ability to save regularly and on financial market performance for over a fourth of his/her retirement income is clearly unbalanced. A second problem is that the Administration's tax policies are now directed at limiting tax-deferred saving, and Congress Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 197 10-A may decide this year to accept some of these proposals. The most stringent proposal would limit an individual's combined contribu- tions to a 401(k) plan and an IRA to $8,000 per year. Under S.1527, this limit could be breached by anyone making at least $40,000 a year and making a maximum contribution to the CAP. (A $40,000 employee could have a total contribution of $6,000 to the CAP and $2,000 to an IRA.) It would be unwise to rest a key plan design feature on a policy that might well be changed before the CAP could be started. Investment Policy. The bill permits individuals to choose from among several investment funds, includipg a fund based on a major stock market index and other funds that the CAP Board may establish. The Governmental Affairs Committee should review this policy carefully and consider as an alternative that funds be invested only in government or government guaranteed securities. Allowing private-sector investing raises several potential problems. First, it may be politically impossible to limit the investment options to a manageable number, and the program may wind up with a large number of private vendors'and inadequate oversight by the government. Second, permitting risky invest- ments will create a greater divergence in the retirement income available to federal and postal employees and increase the chances that some employees will suffer capital losses. Third, taxpayers may resent their tax money being used for federal workers to invest on Wall Street, a resentment that would Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 198 11-A probably not arise if the funds were used instead to purchase government debt. Management of the CAP. S.1527 proposes a Thrift Investment Board consisting of the Federal Reserve Board Chairman, the Treasury Secretary, the OPM Director, and two federal employee representatives appointed by the President, one from labor and one from management. We believe the mix of the Board should be changed, perhaps by expanding the membership, to allow majority representation by professional investment experts. The members who are not officials should be named by the President with the advice and consent of the Senate. 4. Summary The Stevens-Roth bill is a starting point for the Senate's debate on the supplemental retirement plan for new hires. The defined benefit portion of the system must be strengthened, lowever. The cost of the needed improvement can be covered by: (1) requiring employee contributions; (2) reducing the generosity of the federal matching for the CAP; and (3) accepting the notion that federal retirement benefits should not be cut below those of the present system in terms of long-run cost. These changes will yield a plan that gives the average employee the security needed in old age and gives the government the tools it needs to compete for a well-qualified workforce. A final issue raised by S.1527 is whether to allow employees now covered by Civil Service Retirement to elect coverage under the new system. We feel that enactment of the proposed option to Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 12-A elect such coverage would be a mistake. Congress would have to amend the Social Security Act to allow voluntary election of coverage, and the whole issue of universal coverage may again arise. The election process itself would require complex choices by individuals who are not prepared with the information needed to make such decisions. If large numbers of employees did choose the new system, the political support for the existing system would be threatened, and the livelihood of current retirees could be placed in jeopardy. If the decision to switch corresponded with employee ages and income levels, a corrosive split between management and labor and between older and younger employees might result. Those who chose the new system might later regret their decisions should Congress change the CAP unfavorably as a result of shifts in overall tax policy. For all of these reasons, it would be foolish to write an option to switch into the new plan. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 KENNETH T. BLAYLOCK NATIONAL PRESIDENT AMERICAN FEDERATION OF GOVERNMENT EMPLOYEES (AFL-CIO) SUBCOMMITTEE ON CIVIL SERVICE, POST OFFICE AND GENERAL SERVICES COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE ON S. 1527, "CIVIL SERVICE PENSION REFORM ACT OF 1985" SEPTEMBER 9, 1985 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 201 On behalf of the 750,000 Federal and District of Columbia employees we represent, the American Federation of Government Employees, AFL-CIO, appreciates this opportunity to testify before the Senate Government Affairs Committee on S. 1527 and the design of a staff retirement plan for employees hired after December 31, 1983. The issues surrounding the design of a new retirement plan are technical and complex. The committee members and their staffs are to be congratulated for their careful and deliberative approach and subsequent mastery of the technicalities of the issues. Because of this process, near consensus on several major issues has been reached, including: o The plan should be composed of three tiers; Social Security, a defined benefit component, and a Capital Accumulation Plan. o The "add-on" approach is the preferred method of integration. o The special job requirements of law enforcement, firefighters, National Guard technicians, and air traffic controllers require special retirement treatment. o The existing Trust Fund arrangement should be integrated with the new plan. Certainly much ground has been covered since the introduction of Senator Stevens' first proposal several years ago. AFGE is appreciative of the recognition of many of our concerns. However, these points of agreement should not obscure the fundemental philosophical differences which remain. It has always been our view that the correct and appropriate Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 method for addressing the design of a Supplemental Retirement System was first to clearly identify the objectives of the system. Then, once the objectives were defined, to design the best possible system to fulfill those objectives. In our view, S. 1527 attempts to do this. The objectives of the bill are plainly stated and the design clearly follows from those purposes. Thus, our major disagreement with this plan stems from a fundemental disagreement over the objectives upon which the plan rests. Nowhere in the bill's purposes (and likewise, nowhere in the body of the bill) is there a clear recognition of the personnel role a retirement plan plays in fostering an experienced, career work force, nor a solid commitment to it. Nowhere in the bill's purposes (nor in its body) is there a commitment to equity between current and future employees. And, nowhere in the purposes (nor in the body of the bill) is there a clear recognition of the role that retirement plans play in our society, and a commitment to economic security for the retired, the disabled and to surviving spouses and children of deceased workers. Consequently, the plan, as designed, provides inadequate benefits overall. The benefits which are provided favor the short-term, higher paid managers at the expense of the majority of the Federal workforce -- the career federal employee. In some ways this plan could be interpreted as a plan tailor-made for political appointees. Perhaps this is understandable. There has been much written and Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 203 considerable concern expressed by knowledgeable experts on Federal management regarding the "brain drain" in Federal service and the government's inability to recruit and retain the best and the brightest into its managerial ranks. This bill would seem to try to address this problem by creating a retirement plan that is most attractive to the highest-paid executive or professional. Not only is this unfair to a majority of the workforce, but we do not think this will work. The retirement system of the United States government should not be distorted by attempting to make it a recruitment tool for a small percentage of the total workforce. The personnel problems of the Federal government are larger than one component of the total compensation package. Therefore, solutions must be sought in analyzing all of the components of the total compensation package. Virtually all employers recognize the value of a stable, experienced and dedicated workforce. Congress clearly recognized this objective when it designed the Civil Service Retirement System by designing the plan to encourage persons to establish a career in the government service. To now design a plan which favors short- term, high paid employees is a radical departure from this basic objective. The Federal government with its constant political turmoil at the top of its management has a special and crucial need for such a work force to keep the basic systems of government effectively operating in a consistent manner. A retirement plan Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 which neglects this fundemental objective -- that of weighing benefits for the long-term career employee whose salary is in the lower to middle income bracket -- is deeply flawed. From the viewpoint of the employees, the retirement plan must be fair and equitable. This concern is especially important here. For many years to come we will be dealing with two separate retirement plans for Federal employees who, in many cases, will be working side- by-side in the same job category. Our current members in the existing Civil Service Retirement System (CSRS) are worried that the new plan will drive down the benefits in their retirement plan. This concern is particularly verified when one recalls the many statements made by Congressional members advocating universal coverage that it would not impact on the Federal Retirement System. Yet here we are, two years later drafting a new plan and faced with a general recognition that the total retirement program will offer less benefits. Our new members are asking that this new plan not be inferior. Certainly there will be differences between these two plans. But the wider the differences between them, the more unfair and the more threatening those differences will appear to be. We must seek to minimize those differences and inequities. This, in our view, must be one of the objectives in the design of the new plan. The final test of the worth of any retirement system is whether it not only protects the workers and their families from indigence and calamity but that it provides the ability to retire with security and dignity in old age and security in the case of dis- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 ability and death. In this century there has developed a social mandate that in exchange for productive labor, society and employers are obligated to provide such security and dignity, as part and parcel of fair and decent wages and as a right of citizenship. In President Roosevelt's words in his June 8, 1934, Message to Congress: 11 . . . Among our objectives, I place the security of the men, women, and children of the nation first . . .Fear and worry based on unknown danger contribute to social unrest and economic demoralization. If, as our Constitution tells us, our Federal Gov- ernment was established among other things, 'to promote the general welfare,' it is our plain duty to provide for that security upon which welfare depends." Thus began the American system of Social Security whose 50th anniversary we celebrate this year. Since then, virtually every major employer has bolstered that system with additional pensions and benefits, making the two inseparable and interdependent, a baseline for the value of labor and a floor of social insurance. The Civil Service Retirement System predates Social Security and it not only embraced the Social Security objectives but specifically recognized the Government's obligation to meet its social responsibility to provide its employees with security and dignity in their retirement. If Congress is to establish a just retirement system for new Federal employees, it must reinforce these three objectives--to promote equity between employees, to give incentives for a career work force, and to insure economic security for the majority of the workforce -- those employees in the lower and middle salary ranges. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 I. EQUITY BETWEEN CURRENT AND FUTURE EMPLOYEES EQUITY IN BENEFITS We have long held that the existing employer cost of the Civil Service Retirement System (about 25% of payroll) should be the employer cost of the new system. It is important to recognize the reasonableness of this number. Even with an employer cost of 25% of payroll, the current civil service retirement system (CSRS) cannot be duplicated because Social Security provides benefits which are not provided under the existing CSRS. In addition, the new plan is a diminution of the potential retirement benefits available to Federal employees because Federal workers will never again be able to draw independently from both Social Security and Civil Service Retirement. Finally, given the fact that all parties agree that a Capital Accumulation Plan (CAP), based on voluntary employee contributions will be a component of the retirement system, employees generally will be contributing a larger portion of their pay for retirement purposes than current employees in order to maintain the same amount of employer benefits. We and our prospective new members can live with all three of these facts, which are part of the price that we pay for this new plan. But to reduce benefits further because the employer wants to cut his share of the costs would be punitive and will jeopardize the basic principle of fairness and equity. Quite frankly, a plan which costs 20.8% payroll cannot meet the major objectives of a just retirement plan for Federal employees and their employer. We urge this Committee to invest as much in the future employee as the Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 207 government has seen fit to invest in employees of the past. It is EQUITY IN CONTRIBUTIONS When we testified before this Committee on the Federal Employees' Retirement Contribution Temporary Adjustment Act, we argued strenuously for the principle that pre and post-1984 should make equal mandatory retirement contributions. We still endorse this principle and therefore urge this Committee to adopt a provision for level contributions. From such contributions, the employees' Social Security obligations would be met and the balance could then be used to improve the defined benefit portion of the plan. EQUITY FOR SPECIAL RETIREMENT CATEGORIES S. 1527 severely and unwisely restricts the definition for law enforcement and firefighter personnel by limiting coverage, applying a new standard of "rigorous" work, and eliminating some positions in these occupations. In discussions with Committee staff, they explained that the current CSRS covers positions which they think do not deserve coverage and they cited as an example kitchen employees in the Bureau of Prisons (BOP). Yet BOP kitchen employees spend every day working side-by-side with hardened criminals who have access to kitchen utensils--knives and meat cleavers. Inmate attacks upon all prison personnel, not only correctional officers, have dramatically increased over the last decade. The positions are filled with danger and stress. Turnover within virtually all personnel in the BOP is at alarmingly high rates. Eliminating Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 208 coverage for the full range of BOP personnel would be a very serious mistake for the government and would unfairly compensate many employees who are exposed to constant danger. Eliminating coverage for certain managerial and office positions when "line" law enforcement officers and firefighters are promoted into those positions also makes little sense. Basically, you penalize an employee for a promotion. The government would likely lose many valuable and capable people for such positions. Obviously, no definition for these special occupations will be perfect. If there are undeserving positions, we will work with the Committee to address these problems. However, the proposed language is a case of throwing out the baby with the bath water. The current retirement system for these special occupations permit retirement at age 50 with 20 years' service, with mandatory retirement at age 55. It provides for increased contributions (7.5A), a higher accrual rate, and full indexation. S. 1527 calls for a normal retirement at age 55, with 25 years' service, no mandatory retirement, no contributions, an undifferentiated accrual rate, a Social Security supplement indexed by wage movement, a CPI-2 COLA, and optional participation in the thrift. The differences are far too wide. Under the current system an employee with a final salary of $30,000 at age 50, with 20 years' service, retires with a fully indexed annuity of about $14,200. Under the new system the same employee's annuity would be only 53,450. Even at age 55, when the Social Security supplement became Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 effective, the new employee's annuity would be only $7,450 compared to $17,298 under the existing system. We believe that special retirement provisions for these occupations have been driven by the unique demands and requirements of these jobs. These demands and requirements have not changed and need to be accommodated in this new retirement plan. Although this plan does provide some recognition of the special nature of these occupations, we think the proposed provisions are inadequate. We urge the committee to maintain an unreduced pension (with a Social Security supplement) at age 50, with 20 years' service. We further urge that the accrual rate be bolstered for these categories to provide for an adequate replacement rate. (This could be coupled with a higher contribution rate for these employees.) Finally, we think that, for the sake of consistency, the Social Security supplement should be indexed by the Consumer Price Index rather than the Average Indexed Monthly Earnings, as proposed. II. INCENTIVES FOR A CAREER WORK FORCE There are many ways to define retirement benefits so as to encourage and reward long-term, career employment. THE SIZE OF THE CAP AND THE NEED FOR INCENTIVES FOR A R WORK FORCE In reference to S.1527, perhaps foremost among these would be the weight of the CAP as it relates to the defined benefit. The CAP, as it is proposed, favors high income and short-term employees. The risk of the poor economic performance of investments becomes a burden on the employee, one that the average employee is less able to bear. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Although we have agreed to include a CAP in the plan, we think this plan makes employees far too dependent upon it for their economic security, and because the lower and average wage-earners are least likely to use it, it will mostly benefit the highly paid. In addition, unlike the private sector norm, this plan allows vesting for employer-paid matching contributions after only one year. Clearly this is intended to benefit the short-term employee, especially the high-paid political appointee. We do not object to this per se--if that is a benefit Congress wants to provide--but we do object to providing such a benefit at the expense of reducing the defined benefit portion of the plan which is most heavily relied on for retirement purposes by rank and file employees who, unlike the political appointee, are committed to a lifelong career in government. Since a CAP shifts the burden for a decent retirement from the employer to the employee, the defined benefit plan must be large enough to ensure economic security. If the CAP is as large as in the proposed legislation, it threatens the adequacy of the defined benefit plan. We urge the committee to redefine the CAP, to reduce the relative weight of it-- perhaps to a formula more like a 50% match up to 6% of pay. The cost savings of changing the formula should be used to bolster the, defined benefit portion of the plan. VESTING IN THE CAP AND A CAREER WORK FORCE Another proposal to offset how the CAP favors short-term workers Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 would be to increase the vesting period for the government's match. The current proposal would provide partial vesting of the government's match after just one year, increasing by 20% per year until fully vested in the government's match by the end of five years. We would suggest that the government matching contribution not begin to be vested until five years, and not fully until the end of ten years of Government service. There are many alternative vesting schedules which are feasible such as eliminating the vesting schedule and vesting the entire government's contribution at five years. The resulting cost savings should be used to bolster the defined benefit portion of the plan. THE ACCRUAL RATE AND A CAREER WORK FORCE The existing CSRS rewards and encourages employees to make a career of Federal service by a seniority weighted accrual rate which pays higher benefits for many years of service. The existing accrual rate is 1.5% for the first five years, 1.75% for the following five years, and 2% thereafter. S. 1527 proposes a flat 1% accrual rate. There is no reward for long-term service. As part of the objective to promote a career work force, we urge the Committee to adopt a seniority weighted accrual rate, such as the following: 1) .5% for the first 10 years of service 2) 1% for the next 10 years of service 3) 1.75% thereafter Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 With 30 years of service this would provide a replacement rate of 32.5% compared to 30. under the proposed accrual rate. This proposal would not necessarily add to the cost of the plan. In fact we believe this specific proposal does not add to the cost. And while we do not believe that a 32.5% replacement rate is adequate, this would be a move in the right direction. Indeed, as we have said elsewhere, we believe the defined benefit is not adequate and must be improved. Fundamentally that means some increase in the benefit formula. But for the sake of illustrating the issue of how a "stepped" accrual rate provides an incentive for career employees, we have suggested this "no-cost" option to the proposed bill. III. ECONOMIC SECURITY IN RETIREMENT PLANS COLA'S With the onset of persistent inflation during the 60'9, it became increasingly obvious that retirement programs which are solely defined without regard to inflation would fail in their goals of providing for retirement with security and dignity. Inflation cruelly punishes those on fixed incomes who have no ability to engage in paid employment. As a result, in the 60's and 70's many retirement plans, including Social Security and CSRS, began making provisions for cost-of-living adjustments. It is also important to note that unlike any other employer, the Federal government through its fiscal and monetary policies is directly responsible for inflation. Thus, the Federal government has a unique responsibility to protect its elderly retirees from the Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 213 consequences of its own action. And, it is only fair that COLA provisions between government programs designed to ensure economic security are all treated equally. For this reason, we urge the committee to reject the proposed CPI minus two and provide for a COLA for the CSRS which is the same provided to Social Security recipients. THE RETIREMENT AGE One of the major advances for working people in the history of this country was achieved by enactment of the Social Security program and the spread of employer pension plans. This allowed workers to retire as a reward of lifelong labor and to enjoy his or her remaining life with economic security. To penalize the long-term career employees for wanting to enjoy that reward while their health is good and they have many years to live is wrong. A penalty for early retirement is not fair in such cases. We could understand a penalty for early retirement if this benefit were very large and costly, but it is not. Under most circumstances, retirees will wait until 62 to retire so that they will receive all retirement benefits - - Social Security and CSRS because otherwise they would not have sufficient retirement income. THE SOCIAL ROLE OF RETIREMENT AND THE PLAN'S COVERAGE A premise upon which all parties in this debate can concur is that all employees who work for the Federal government are entitled to a retirement plan. Therefore, the proposal should specifically include intermittent or seasonal employees, temporary employees, as Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 well as non-appropriated fund employees. Perhaps, in the past, the exclusion of these groups could be overlooked insofar as they could. be seen as unlikely to vest and unlikely to benefit from inclusion. This is no longer the case because: 1) OPM has recently pushed agencies to substitute temporary and intermittent employees for permanent employees. 2) OPM has granted agencies new authority to make and extend temporary appointments up to 4 years and longer with OPM approval. 3) Because of tightening agency budgets, agencies are abus- ing these powers by substituting non-covered employees for permanent employees for the sole purpose of avoiding benefit costs. The Exchange Services in DOD have been prime violators of this practice. 4) Certain agencies such as the Forest Service and Social Security have undertaken employment practices where individuals work for recurring periods over many years of time in the same position. These employees are basically permanent, intermittent employees and should be able to participate in the retirement plan. For the above reasons, the GAO has already recommended making all Federal employees eligible for the full range of Federal compensation, including Civil Service Retirement (see GAO,'Part-Time and Other Federal Employment: Compensation and Personnel Management Reforms Needed, (FPCD-78-19, June 5, 1979), and we urge the committee to include this recommendation in this bill. SURVIVOR BENEFITS AND SOCIAL POLICY The family as a social institution is the bedrock upon which our civilization rests. Although the family structure has undergone profound changes over the years and every so often pop-theorists Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 predict its demise, marriage and families with children continue to demonstrate the American way of life. The family is reflected in Social Security spousal benefits; tax treatment of the two-wage earner family; poverty definitions; and virtually every public policy. As a matter of fact, public policies often turn on whether the issue is seen as pro-family for anti-family. The survivor provisions in this bill are anti-family. By requiring an actuarial reduction, to provide a survivor benefit, most employees could not afford to retire and provide for a survivor annuity. Therefore, the economic security of the surviving spouse and children in the families is threatened. These provisions are among the most disappointing in the bill. Take the example of the $30,000 per year employee who dies at age 50 with 30 years of service and a 45 year old spouse. First, the spouse would not be eligible for any finding an adequate income at age 45 with school-age children to support, employee's annuity, if he was age 62 annuity for 5 years. Obviously for a widow or widower, possibly is not a good prospect. The would have been $8,100. Applying the 2% penalty per year for age 55 retirement, leaves $6,960. Applying the actuarial reduction for providing the survivor annuity leaves about $6,100--the reduction would be larger if the spouse was younger. The surviving spouse would then receive half that, or $3,050, when she reached age 50, five years later. No Social Security benefits may be forthcoming until age 60, and since this survivor's benefit is not fully indexed, the survivor would be Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 216 effectively diminished by inflation to about $2,600 (in constant dollars) by age 60. While the plan would also provide a group term life insurance at no cost to the employee--and we do endorse that provision--the final benefit amount clearly is not enough to replace the loss of income felt by death of the wage-earner. We urge the committee to: 1) Substitute a reasonable flat reduction to "purchase" the survivor's annuity instead of an actuarial reduction. 2) Provide the survivor annuity immediately and without restriction upon the death of the employee. 3) Calculate the survivor benefit on the employee's unreduced annuity. Finally, we urge the Committee to continue benefits for children under the new survivor provisions, similar to the current CSRS. Since Social Security does provide sufficient benefits for children before age 18, we do not seek any supplement except for those between age 18 and 22 who are in full-time attendance at school. We note especially that this benefit is so small in cost that for all the security it provides to families, it is more than a thousand fold worth the investment. IV. OTHER MAJOR ISSUES There are two major non-design issues with which we strongly disagree. The first involves the funding mechanism. The second concerns the administration of disability program. The bill would provide dynamic normal cost financing which would eliminate future scare mongering around the unfunded liability Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 issue. We have no basic problems with this approach. However, we do take strong exception to providing this financing out of agency appropriations. Forcing agencies to take this money out of salary and expense accounts would make budgetary planning much more difficult because it would crucially depend upon the ratio of current to new employees, the rate of turnover, and the transfers into the new system. Furthermore, appropriation committee members and staff would need to understand that although greater appropriations are required for a given number of employees, these greater appropriations in no way affect the deficit, but only relates to a bookkeeping innovation to account for retirement obligations as they are earned rather than finacing them by direct transfer mechanisms from the general Treasury to pay benefits as they are due. These concepts can befuddle even the intelligent, who are intentioned. In the hands of those with less insight and understanding or less honorable intentions, they can create intellectual chaos. In all likelihood, these analytical niceties would fall by the wayside in these years of budget crisis. Freezes on agency appropriations, where dynamic normal retirement costs were not explicitly recognized in the past, would translate unthinkingly into large personnel cuts once these costs were explicitly accounted for. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 retirement plan is not new. Historically the Trust Fund was dependent upon annual appropriations until 1969. Its financing ran into trouble because of it. For this reason, employees do not have faith in a system dependent upon annual agency appropriations. We urge the committee to avoid these problems by using a direct transfer mechanism between the Treasury and the Civil Service Retirement Fund. The other non-design issue which is of concern to us is the proposal to contract for disability insurance with private insurance companies who would administer the program and pay out the benefits. The government already has (within OPM) the ability to administer the program. It makes no sense to try and duplicate (and pay additionally for) such functions by private sector contracts. It would create a situation where employees would inevitably be treated differently by different insurance companies. Accordingly, we recommend that the Disability Trust Fund and program continue to be managed by OPM. There are numerous other issues about which we also are concerned, and we have itemized here for reference and are prepared to explain them in greater detail as needed: 1) The disability provisions, in general, are well conceived and ably designed. However, the period of the long-term disability (LTD) should be increased from 1 year to 2 years in order to provide a more realistic opportunity for rehabilitation. This would not preclude medical reevaluations during such period of course, on account of which the benefit period may be terminated. - 18 - Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 219 Additionally, we would propose that disability benefits continue until the annuitant is eligible for an unreduced retirement benefit under Social Security or the Civil Service, as appropriate. We note that Social Security disability benefits continue until the wage-earner is eligible for a full retirement and we think this practice should be paralleled. 2) Because of potential ambiguity in the proposed definition of military service technician, we suggest that National Guard technicians be specifically referenced. Also, because these civilian technicians have a mandatory retirement age of 60, they should be provided with a supplement equal to their Social Security benefit at age 62 until they are eligible for Social Security. This would be similar to the provision for fire fighters, law enforcement, and air traffic controllers. Finally, those technicians who lose their civilian job as a result of losing their military status for non-disability reasons should be eligible for an unreduced annuity at the time of separation. 3) There is currently a provision to allow individuals on leave-without-pay for union activities to continue in the retirement plan. Such individuals pay the equivalent of agency and employee contributions (14% of pay). S. 1527 should be amended to include a similar provision. - 19 - Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 220 4) The interest on the investments of the CAP in government securities is tied to 2-year securities. This, unrealistically, lowers the employees' interest from this source and would encourage them to withdraw their funds from government securities. We urge the interest be determined from longer-term securities, as is the current practice, or from a favorable index of the range of government securities. 5) Section 8461 permitting unrestricted contracting-out of the administration of the retirement program should be deleted. 6) We think the one-year period for the transfer option is too restrictive. It simply is not enough time for employees to weigh their options and trade-offs. Regulations implementing this provision may not be complete until well into that one-year period. We urge the one-year period be extended to two years. 7) District of Columbia employees will not be covered by this plan and new D.C. employees will be severed from the Civil Service Retirement System effective January 1, 1987. In order to provide for an orderly transition and to allow D.C. employees (and their representatives) and the D.C. Government time to adequately prepare and negotiate over this major change, we urge that this date be moved to January 1, 1989. 8) A major step forward in the debate over Civil Service retirement has been accomplished in the effort to design - 20 - Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 this system; namely, everyone is singing from the same song book--the model developed by the Congressional Research Service with assistance from the General Accounting Office, Congressional Budget Office, and outside experts. For this reason, we urge consideration of using this model in calculating the dynamic normal cost of the system. Furthermore, we strongly urge that the legislation require this cost be the operative cost for all government decisions which include retirement as a factor (such as A-76 contracting-out studies). 9) One way to increase portability would be to allow service transfer between retirement systems in the Federal government such as between railroad retirement and Civil Service retirement. 10) Care must be taken in this new plan not to unthinkingly disrupt the unique requirements and personnel system in the Foreign Service. We would hope that this committee would carefully deliberate before any such precedents were introduced. 11) The definition of basic pay should be clarified to insure that it means pay established pursuant to law and subject to any applicable pay ceilings. Finally, we would like to touch on one of the most complex areas in this whole issue -- the management and investment of the funds in the CAP. Because of this complexity, we are still investigating the range of options and still evaluating the proposal in the bill. Our investigations will be based on several principles. - 21 - Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 First, these monies are the employees' money and must be invested in their best interest. Second, because of the size of this fund, the public interest must be represented and guarded. Third, once again, because of the fund's size, the danger of disrupting markets, inadvertently or for political purposes, must be guarded against. Fourth, the use of this fund must be socially responsible and such responsibility should be a feature of its investment strategy. Finally, ERISA standards should serve as guidelines to the administration of the fund in order to protect the integrity of the investments. We will continue our research and discussions along these lines, and look forward to working with the Committee soon on these challenging and procactive issues. We wish to add in closing that we agree with the Committee that a good part of these funds should be invested in the private sector. Employees deserve the greatest available return for their dollar. We do not believe the currently proposed investment strategies would do that, and that is one of the reasons we are looking deeper into the issues. Thank you. Senator STEVENS. The committee will be in recess until 10 a.m. tomorrow. [Whereupon, at 5:10 p.m., the hearing was recessed to reconvene at 10 a.m. the following day.] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 CIVIL SERVICE PENSION REFORM ACT OF 1985 TUESDAY, SEPTEMBER 10, 1985 U.S. SENATE, COMMITTEE ON GOVERNMENTAL AFFAIRS, Washington, DC. The committee met at 10:05 a.m. in room SD-342, Dirksen Senate Office Building, Hon. Ted Stevens presiding. Present: Senators Stevens, Eagleton, Glenn, and Gore. Senator STEVENS. Good morning. We will first hear from Vincent Sombrotto, president of the Na- tional Association of Letter Carriers, and Tom Griffith, president of the National Rural Letter Carriers' Association. Let me just say, it is our intention to run through the day with the hearing. Senator Eagleton will come in just before noon, and he will hear witnesses during the period between 12 and 2, and then I will come back at 2 and continue through until 5. So we are going to try our best to hear all the people who are on the witness list today. There will be Senators coming and going all day long because of other meetings. I say that so people will know in advance that there probably will be a necessity for some people to be here through the noon hour. It is Senator Eagleton's desire to be here durinq that period. Good morning. It is nice to have both of you here. Go ahead. TESTIMONY OF VINCENT R. SOMBROTTO, PRESIDENT, NATIONAL ASSOCIATION OF LETTER CARRIERS (AFL-CIO); AND TOM W. GRIFFITH, PRESIDENT, NATIONAL RURAL LETTER CARRIERS' ASSOCIATION Mr. SOMBROTTO. Mr. Chairman, my name is Vincent R. Som- brotto. I am president of the National Association of Letter Carri- ers, a labor organization representing over 271,000 members who are either presently employed as city delivery carriers by the U.S. Postal Service or who are retired from such employment. This morning I would like to summarize my testimony and submit the full testimony for the record. Senator STEVENS. I might say for all the witnesses, all statements will be printed in full in the record. We do appreciate your summa- rizing it. Thank you. Mr. SoMBROTTO. I would like to submit an additional statement from FAIR, the Fund for Assuring an Independent Retirement.' Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 The NALC welcomes this opportunity to testify on S. 1527. We appreciate your support of the present civil service retirement system. As you know, an adequate retirement system is a small price to pay for qualified personnel. The bill reflects the hard work and thoughtful approach of you and your staff. You have shown good faith and we support your ef- forts to reach an accord by involving all parties. We also support the three-tiered approach to a new retirement plan. I would like to start by focusing on some of the defined benefits of this bill. NALC members are committed to maintaining age 55 with 30 years service as a feature of retirement. Letter carriers perform physically gruelling work-back and foot problems plague both active and retired carriers. Age 55 has become more than an im- portant symbol for us. It represents the substance of our job: hard work. The savings for the Government in this area are minor, particu- larly compared to the importance it holds for our members. According to the April 1985 Hay-Huggins Co. report, overall com- pensation for Federal employees is 7.3 percent behind the private sector. The report concluded that retirement age and a full COLA are vital in order to be competitive with the private sector. The 55 retirement age with 30 years service provides two addi- tional advantages. First, it encourages workers who have expertise to stay until full retirement, which benefits the Postal Service. Second, it is an incentive that enables retirement at 55 and 30, making room for new, younger employees. E.I. DuPont and other companies recently opened their policy for early retirement and found that it had the added benefit ofboosting employee morale. The 2-percent per year penalty for early retirement would have several negative effects: It deters qualified applicants from seeking Postal Service employment and imperils the standard of living of retirees. A similar circumstance results from section 8414, which provides for a 5-percent penalty. Section 8413 of this title affects retirement by establishing a for- mula for computing the annuity as 1 percent of the average of the highest 5 consecutive years multiplied by the number of years of service. The combination of these two factors would reduce annu- ities considerably. Moreover, it has a multiplying effect over the years compounded by its negative effect on the COLA. The average high-3 years for a 55-year old letter carrier today with 30 years of service is $22,801. Minus survivor annuity and health insurance, it is a modest $10,949/year. That amount is fur- ther reduced by taxes. That same person retiring at the same age under S. 1527 would receive a basic annuity of $8,740/year only if he could afford to contribute a full 10 percent of salary to the thrift plan. The annu- ity is $5,290/year which is close to the Government poverty level if the letter carrier is unable to contribute to the thrift plan. At $8,740/year, the carrier is receiving 32 percent less than a CSRS retiree despite contributing 126 percent more toward retirement. Neither the $8,740 nor the $5,290 includes deductions for health in- surance or survivor annuity, approximately $1,900/year. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator STEVENS. Mr. Sombrotto, I don't understand those fig- ures. Contributing 126 percent more to retirement? Currently they are contributing 8.3 percent, and under this bill, 7 percent. How could they be contributing more? Mr. SOMBROVro. When you add the Social Security element to it and the thrift plan, particularly if they go to the max under the thrift plan as outlined in the present bill, they would contribute 10 percent of their salary. If they only contributed 5 percent of their salary, it still would be significantly more, when you factor in the Social Security. Senator STEVENS. They don't contribute to the pension at all. They contribute 7 percent which is less than others contribute to Social Security now. I don't see how it would be more even if they contribute the full 10 percent to the thrift plan. Our computations don't bear that out. We are going to have to get together on the numbers. These numbers and ours don't jive. Mr. SOMBROTTO. We will be very happy to furnish our source for the numbers we have provided. Senator STEVENS. We will be glad to have it. You are not figuring in Social Security. You are saying 55 and 30 and you are assuming the person is retiring early and you are taking the return for the 5 years before they get Social Security. Mr. SoMBRorro. That will be 7 years before they would be eligi- ble for Social Security. Senator STEVENS. That's right. Mr. SOMBROTTO. And they would have a drastically reduced an- nuity during that period of time. Senator STEVENS. You are talking about 20 percent of the people who currently retire early under the age 55 concept. Mr. SOMBROTTO. Yes. At age 62, 30 years of experience, 19 percent of the retirees annu- ity comes from the thrift plan. I must make an additional point here. There is nothing to prevent Congress from reducing the thrift plan like it has done with the COLA s. Judging from the last few years, such a change will be tempting for deficit reduction. Mr. Chairman, those annuities are subject to taxes. They amount to a retirement that is too low for such dedicated, productive serv- ice. Most carriers have salaries in the $20-30,000 range. Yet this plan is tilted to either those who make much more-since they can uti- lize the entire thrift plan-or those under $20,000, due to the Social Security replacement rate. With this modest annuity, a full COLA becomes critical to our retirees. Subchapter VI, section 8462 establishes a CPI minus 2 per- cent formula, which is used for those on retirement, disability and survivor annuities. According to the administration's inflation projection for the next 3 years, there will be 12.6-percent inflation. Using CPI minus 2 percent, retirees' purchasing power for food, clothing, et cetera would be cut by almost 50 percent. For some retirees, this results in a tragic `heat or eat' situation. We support full inflation protection in the new supplemental to prevent what has happened over the last 5 years when our COLA's were cut severely. Retirees received just one COLA in the past 25 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 months. Between February 1981 and May 1984, our COLA was re- duced by more than 9 percent. Since the vast majority of our retir- ees live on fixed incomes, COLA changes are a sword over their heads. Section 8418 discusses agency contributions but it is ambiguous. We would like a clarification on the role of OPM as well as USPS contributions. Since I have been emphasizing parity with the current civil serv- ice retirement system, the same is true in the employee contribu- tion area. Pre-1984 employees contribute 7 percent to their retirement pro- gram, CSRS. According to the statistics by the Congressional Re- search Service, if new hires contributed 7 percent of pay minus the amount paid for OASDI, the entire retirement system becomes 1.1 percent less expensive for the Federal Government. This additional revenue from employees would enable increased defined benefits with no additional cost to the Government. In addressing subchapter III of title I, the thrift plan, I would like to reiterate that I support the concept. However, Treasury De- partment's statistics for the spring of 1985 show that IRA's mainly are utilized by households with real income levels of more than $40,000. The average letter carrier earns $23,000/year. Therefore, a supplemental which uses thrift savings to make it attractive is fine. But one which counterposes a thrift to important defined benefits will mainly benefit the minority of higher paid em- ployees at the expense of the majority. We support cutting back on that portion of the cost to the Government, which would be consist- ent with the private sector and President Reagan's Treasury II pro- posal. We would like more money in defined benefits. The well-being of a spouse is important to letter carriers. In order to receive survivor benefits, retirees pay approximately 10 percent of their annuity yearly. S. 1527 changes the benefits for a preretirement surviving spouse. Furthermore, benefits cannot be collected before the date at which the letter carrier could have retired. In the case of a 42-year old widow whose husband died at age 45, she would not be able to collect supplemental benefits until she reached age 52. This is a drastic change from the current civil serv- ice retirement system which has no age requirement. She would collect Social Security if her husband qualified, but her combined annuity would be below the poverty line. Senator STEVENS. You are right and we are going to take care of that. We understand that. As I said, we made some modifications but we intend to do what you just said. We agree with you. Mr. SOMBRorro. We are happy to hear that. In monetary terms, S. 1527-then I won't read that if you are going to take care of it. [Laughter.] I would like to discuss the topic of disability retirement. Section 8446 allows the USPS to offer other craft employment in lieu of re- tirement. We wrestled with this problem in 1969 and 1970 during discussion of the Postal Reorganization Act. Congress decided that it would be a bad policy. It came up again in 1981 as part of the "Gramm-Latta" budget. Once again, House-Senate conferees agreed Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 that it was disruptive to the Postal Service because it blurs job dis- tinctions in the Postal Service and would create havoc. I can foresee from the experience of other unions a situation of endless, costly grievances and lawsuits and disgruntled employees who see better paying jobs or chances for advancement taken away. Section 8450 establishes an Employees' Disability Insurance Fund in the U.S. Treasury and requires agencies to make pay- ments to the fund from salary appropriations. However, a third party would administer payments. This would add expensive, pri- vate-sector participation rather than continuing the current OPM operation. The potential for confusion and entangled paperwork is enhanced. In the Stevens-Roth bill, letter carriers covered under the present civil service retirement system can transfer to the new system. We agree that both systems need to be financially sound and under one roof. However, when a system as complex as this supplemental is started, it seems prudent to wait for a couple of years to see what problems appear. No matter how much we try to head-off trouble, we know that we cannot predict all possible prob- lems. In addition, there would be legislative considerations involved in opening up the Social Security Act. Transfers raise the possibility of the Senate Finance Committee sharing jurisdiction with Govern- mental Affairs on S. 1527. I don't know, maybe that is what you want to do. One omission from the bill: How to handle the problem of re- hires. How does the supplemental plan handle someone who has previous service in the Government and has contributed to the civil service retirement plan but has been rehired as a new employee and will be covered by the new supplemental plan? The bill does not address this issue and it will be an important issue for a large number of Government employees, some of whom are already in the employ of the Government. In certain cases, some of these indi- viduals are vested in the CSRS. As you can see, Mr. Chairman, there are areas where we believe benefits must be restored to current levels and improved. And there are areas where we think letter carriers can give more. If you have any questions, I will be glad to answer them. Senator STEVENS. On your last point, I thought we handled that. We treated a rehire as a transfer and the rehire can keep his or her credit under the old system and then build up credit under the new system. So upon retirement you really have computations under two systems. I don't see any problem with that. Mr. SOMBRoTro. We don't have any problem with that aspect of it. You will have to excuse us for not being more precise in our tes- timony. We are talking about folks that take their money out and leave the employ, take their contributions out and then get re- hired. It creates a different problem. Senator STEVENS. They would have to redeposit under the old fund. Under the new fund they wouldn't have to redeposit. The pension plan would be the same and the Social Security plan would be the same, if they are a new hire and were never covered under civil service. If you are under civil service and took your Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 money out, as some of us have in the past, you have to put it back in when you are rehired. It is just like a transfer. Senator Gore, do you have any questions? Senator GORE. Why don't we hear from Mr. Griffith? Mr. GRIFFITH. Thank you, Mr. Chairman, I have submitted some prepared testimony for the record and I will offer a brief summary. My name is Tom Griffith. I am president of the 66,000-member National Rural Letter Carriers' Association. We are honored to appear before the Committee on Governmental Affairs and to offer our testimony on your bill. We compliment you on the series of pension forums. They were unique and educational. They provided a good opportunity to bring forth diverse information. Let us for the record say that it is our desire to see a bill passed into law this year. But if it takes slightly longer, then let's not sac- rifice quality for haste. We see merit in the basic design and appreciate the effort that you and your staff have put into it, but we would like to see im- provements or modifications made to some areas. I will attempt to outline those areas of the plan which we are particularly pleased with, and those areas in which we believe some fine-tuning will improve the bill. We view the program as consisting of three tiers, the first of which is Social Security. There is a tilt to the Social Security tier in favor of the lower-income employee. The second tier is a defined benefit plan. We are pleased with your add-on approach. Higher salaried employees have more dis- posable income and, therefore, have the ability, through their own savings initiative, to compensate for the Social Security tilt. The employee contribution level should roughly equal current contributions to the civil service retirement system. We recom- mend that employees contribute to the defined benefit program in an amount which will provide equal contributions between the ex- isting retirement plan and the proposed plan. A plan in which the employees have a direct stake in funding should discourage legislative tampering in the future. We recommend that the accrual rate in the defined benefit plan be increased in later years of employment. There should be incen- tive and reward for longer service. We approve of most of the vesting and age schedule, with the ex- ception of the penalty for early retirement. We would like to see the bill changed so employees would have the ability to retire after 30 years of service at 55 years of age without any penalty. We pro- pose that employees who would be interested in an early retire- ment option could contribute an additional amount to an optional program, which would also be matched by an equal amount from the employer. We support a high-3-year average salary instead of a high-5-year salary base for annuity computation. We appreciate the fact that in your bill all funds from the de- fined benefit program would flow into the existing civil service re- tirement fund, which will protect the assets of that fund in perpe- tuity for all those who will be retiring under the old system. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 The cost-of-living adjustments should be fully indexed. When Government uses a fully indexed COLA, it often becomes a model for retirement plans in the private sector. The third tier is the savings portion. We compliment you on your innovation and flexibility in the design of this section. Our particu- lar membership would prefer slightly less emphasis on savings and a little more on the defined benefit. Voluntary contributions by an employee should be allowed up to 10 percent of their salary. We recommend that the Government's dollar-for-dollar match should be limited to 3 percent of salary. The 5-percent Government matching contribution proposed in the bill is too costly. We would prefer shifting part of that benefit to the second tier of the plan. Recently, the President amended his tax reform proposal to urge repeal of the 401(k) tax-shelter capability. His proposal gives us cause for concern about the saving section contained in this bill. A loss of any tax deferral provisions would be a significant loss to em- ployees who will be covered by the new plan. We certainly urge re- tention of this tax benefit. If a modest reduction is made in the capital accumulation sec- tion, together with an employee contribution, the COLA program would continue as it exists in the current system with virtually no added expense to the employer. Mr. Chairman, again, we offer our appreciation to you and your staff for the care and concern you have shown in developing this very fine piece of legislation. With the fine-tuning we have suggest- ed, we could support the bill. We look forward to continuing to work with you on this complicated issue and appreciate your inter- est and concern about an adequate retirement program for new rural carriers. Thank you. Senator STEVENS. Thank you very much. We are going to do what we can to restore the 55-30. We are checking the figures that CRS gave us. Those haven't been con- firmed yet. You realize, the problem with the 55-30 is that Social Security is payable at age 62, so the problems you mentioned stem from the retirement age of Social Security, not from the retirement age of our plan. It would be very costly to, in effect, take insurance to pay the equivalent of Social Security until eligible for Social Se- curity for those people who retire after 30 years. The gap in there is one that was created by the congressional action to cover Federal employees by Social Security, not by our plan. CRS tells us we could have 55 and 30 retirement for a 1/2 percent of payroll. As I said, we are checking that. I would like to restore that but it won't restore the gap between 55 and 62 with regard to Social Security. That is the real problem as far as the person aged 55 who has 30 years. They could be 57, but at least 55 with 30 years. That little gap in there is the one we are looking at. If we go to 55 and 30, it wouldn't quite be retirement unless we can actually make up for the lost Social Security too. We would like to work with you on it. I agree with you. I don't think we are wedded to the 5-percent matching, although I would rather yield that to my friend, Mr. Ford, in conference than to you here. Mr. GRIFFITH. I understand. [Laughter.] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator STEVENS. We are going to have to deal with this adjust- ment as we go on. You both make very good points. I don't have any questions. I just hope you understand our basic problem as far as the age 55 retirement. It won't be full retirement for civil serv- ice because we can't amend Social Security and say for Federal em- ployees you pay them at 55, notwithstanding the age 62 concept that applies to everybody else. I just don't think you can do it. I hope you can help us find some way to bridge that gap. Gentlemen, do you have any questions? Senator GORE. I think he wanted to comment. Mr. SOMBROTTO. Sitting next to me is my legislative and political assistant, George Gould. I neglected to identify him earlier. I assure you, we are exploring every possibility of how to narrow that gap you rightfully pinpointed, that period between age 55 and 62 under the present bill. So we are working on something and I am sure as soon as we come up with a solution, we will be glad to give it to you. Senator STEVENS. Thank you very much. Senator GORE. Thank you. You really didn't need to introduce George. We all know him and Ken for that matter. Mr. SOMBROTTO. That's what he just told me. [Laughter.] Senator GORE. How long does it typically take letter carriers to top out or reach the upper levels of promotion and compensation? Mr. SOMBROTTO. You say promotion; 96 percent of letter carriers don't get promoted. They come in at one level and they retire at one level. That is a level 5. Very, very few get promoted. The only upward mobility is into management. Very few go into manage- ment. It varies. Those that do go into management could do it after 2 years or 20 years. There is no specific timeframe. Senator GORE. Do you have anything to add to that? Mr. GRIFFITH. No, we are under the same program. Senator GORE. What is your position on the later retirement age proposed in the legislation? Mr. SOMBROTTO. I speak for myself here, but I listened to Tom's testimony and we are both opposed to any increase in the age for retirement particularly in our cases. Both of us do the same type of work and 30 years of carrying mail, whether they are rural carri- ers or city delivery carriers, is physically debilitating and we see no reason why anybody should have to work beyond 30 years or 55 years of age. Senator GORE. You mentioned your support for the full indexing for inflation. Would you have any objection to trying the COLA provisions in the bill to the Social Security COLA? Mr. SOMBROTTO. No. Senator GORE. Mr. Griffith. Mr. GRIFFITH. I would like to add the fully indexed COLA; if that's the way the Social Security COLA is going to be indexed now and in the future, that will be fine, provided it remains fully in- dexed. Senator GORE. Of course, if you can imagine the time when the Social Security COLA was not allowed and yours was, that's hard to imagine. I understand your statement. Mr. SOMBROTTO. We are depending on your wisdom to figure that out. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator GORE. Thanks. Mr. Griffith, you indicated in your prepared statement that you would favor increasing the accrual rate from the 1-percent level currently employed in the Stevens-Roth plan. Given the cost con- siderations that we are confronted with, would you be willing to consider a back-loaded or step-rate accrual as a cost-neutral change which would favor those employees with more seniority? Mr. GRIFFITH. Such as we have in effect now, yes. Senator GORE. All right, fine. And you would favor that, if you couldn't get the 1 percent? Mr. GRIFFITH. If we couldn't get that increase across the board. Senator GORE. You also advocated level contributions as a means of providing a sense of equality among employees and providing a degree of political security. Although that amounts to a 1.1-percent decrease in the overall system cost, why wouldn't it be more benefi- cial to forgo the contribution requirement and allow the employees the option of putting that money into the thrift plan? Mr. GRIFFITH. We would prefer that benefit to be put in the de- fined benefit portion rather than the savings-that the defined benefit portion be stronger or more significant. Senator GORE. Presumably that would have more of an impact on what you referred to as political security concerns also. Mr. GRIFFITH. Yes, sir. Senator GORE. I may submit some additional questions to both of you in writing for the record, if you would be willing to respond. I just wanted to say, in closing, that I share the concern that Senator Eagleton expressed yesterday that our deliberations on this bill not be construed or used in any way to recast the current civil service retirement system, and I am wondering if either of you have any suggestions on how to foreclose that from taking place? Mr. GRIFFITH. No, sir; quite frankly, at the present time. Mr. SOMBROTTO. No, sir. Senator GORE. Well, think about it. And if you have any ideas, please let us know. Those are all the questions that I have. I am sure Senator Eagleton has some. Senator EAGLETON. I would like to pursue a little further with both of the witnesses the next to the last question that Senator Gore pursued, this 1.3 percent. Some of you were perhaps in the audience yesterday when Mr. Blaylock and Mr. Biller were here. We pursued this, just to put it in context. A civil service worker under the old system puts 7 percent into the system and 1.3 per- cent into medicare for a total out-of-pocket expenditure to him of 8.3 percent. The Stevens bill before us has 7 percent. That is all that comes out of the employee's pocket, 7 percent into Social Secu- rity. That's it. So in terms of what comes out of the employee's pocket, just looking at that, at the Stevens bill as written, it is more beneficial to the employee than what some previous witnesses have proposed, in terms of out-of-pocket to the employee; it is 1.3 percent more beneficial. Mr. Sombrotto, why is it that you support taking more money out of the pocket of the new employee than Senator Stevens pro- poses in his bill? Mr. SOMBROTTO. Well, because the 7-percent contribution derives less benefit to the employee. If you take the 1.3 and turn it into Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 defined benefits, we think it brings us closer to the parity that we are striving for between those employees who are covered under the present CSRS and those new employees who came onboard after January 1, 1984. Senator EAGLETON. Putting it in other figures, the cost of the Stevens bill as a percent of payroll is 20.8 percent. If we used the 1.3 in computing benefits, of course the cost as a percent of payroll would still be the same, 20.8 percent, but we could use the 1.3 per- cent to juice up the benefits more. We could use it to juice up COLA, to juice up the retirement age, to juice up the accrual figure, to juice up the disability figure, or however. So is the thrust of your testimony with respect to this item that you would be able to persuade your new employees just focusing on them-that it is better for them to pay more money now out of their pocket to get more benefits later when they retire? That's about the bottom line. Mr. SOMBROTTO. That is absolutely correct. If I am allowed, they are not our employees, they are our members. Senator EAGLETON. Call them members. Mr. SOMBROTTO. We have a little problem with that as a union. Senator EAGLETON. Your members-that is correct. I stand cor- rected. Mr. SOMBROTro. Yes; I go on record challenging anybody-if any- body wanted to do a poll, or a test, or have a vote on it-I guaran- tee you those new members would rather invest a little more so that they can have more when they are ready to retire. We have done our own informal poll. Senator EAGLETON. Let me take you a step further. Suppose, starting with the Stevens bill, we, this committee, did somewhat better-and I won't define what somewhat better is because this is debatable-we did somewhat better on COLA, we did somewhat better on the 55 retirement age and we did somewhat better on the accrual figure, and then we decided to throw the 1.3 percent into the thrift plan with the consequence that everybody, every new employee, thus every new member of your union, would automati- cally have 1.3 put into the thrift plan and that would be matched by another 1.3 from the Government, and the new member would have this as long as he worked, portable to take with him or her when they left, wouldn't that be a pretty good deal? Mr. SoMBROTro. Well, if you are asking for a choice between the two situations, we would opt for the former, which would put it into defined benefits rather than the thrift plan. Senator EAGL.ETON. The new employee can't take the defined benefit with him or her. Mr. SOMBROTTO. That is why they invest in it because they look-it's an investment in your future, that is all it is. We see it as something that is much more desirable than the question of the thrift plan. Senator EAGLETON. What is the dropout rate of letter carriers? What figures can you supply us, how many people leave after 1 year, 3 years, 5 years, 10 years? Mr. SOMBROTrO. That's a hard figure-it's an elusive figure. Let me say this, Senator. It is based on what is happening in the econo- my or happening in our country at a particular period of time. Right now the quit rate or dropout rate is very low, but 5 years Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 ago, 8 years ago it was very high. It might shift and change. There is an ebb and flow to that figure. If you are asking me at the present time, it is low. Senator EAGLETON. Why shouldn't a person, say, put in 5 years, pick 5, pick 10, 3, whatever-serves as a letter carrier, decides he can get a better opportunity with company X, and takes that op- portunity; why shouldn't he have something portable to take with him which the thrift plan provides? Mr. SOMBROTTO. Under the present system, he would have Social Security to take with him. Senator EAGLETON. Yes; but why shouldn't he have something else? You can't take that defined benefit with you. He can take the thrift plan with him. Why isn't that a better deal? Mr. SOMBxoTro. It may be; I am not prepared to argue for or against that proposition. Our union's thrust is not for the person who leaves after 5 years, 7 years, or 10 years; it is to protect the interest of the person who goes the whole route. That is the over- whelming majority of people who come to work in the Postal Serv- ice. They stay until they retire, particularly letter carriers and Tom can speak for rurals in that regard. That is who we want to protect, the people who will stay the whole route. Senator EAGLETON. That has not always been in a generic sense the position of the AFL-CIO. I was on another committee just yes- terday and we had a series of hearings on pensions and pension reform and pension protection, and portability was a key issue and something the AFL-CIO very much wanted. Indeed there are some unions where there is great movement in that. They like as a ge- neric proposition portable pension plans. Mr. SOMBxoTro. I am a vice president as you may or may not know on the AFL-CIO executive council. I assure you there are po- sitions we take or don't take in our executive sessions which I agree with or disagree with. This is one. I agree people in the pri- vate sector should have that portability. They have a different setup. But I would point out that in terms of letter carriers, a letter carrier that came to work 20 years ago, or 10 years ago, or is coming to work today, has a 90-percent chance of staying in the same job at the same level for 30 years and be eligible for retire- ment. There are very, very few industries or very, very few jobs where people have that kind of commitment to long-term employment. That's the difference. Senator EAGLETON. I think you are right. I suspect yours tends to be the most continuous employee before us. Mr. Griffith, just to shorten this up, do you agree in whole with the comments made by Mr. Sombrotto, and if you do not agree, please point out the areas wherein you disagree? Mr. GRIFFITH. Substantially I agree, Senator. I think we see bene- fit or reason for employees to make this kind of an investment in the future. We feel if the employee has an investment or contribu- tion, it may tend to do away with some tampering in the future by future Congresses. We would like to help pay for this system and perhaps trade it in for a full COLA. Senator EAGLETON. I read this into the record. This comes from GAO: "If you put the 1.3 that we've been discussing into the thrift Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 plan, that will increase the benefits for the employee when he or she retires by 12 percent; if you put that same 1.3 into the defined benefit it will translate into 3 percent enhancement of the employ- ee's benefits." This is what the General Accounting Office tells us. If you think they are all wet, I wish you would get us some material that tells us that because if they are right, you simply cannot sustain your position. I would be willing and Senator Stevens would be willing. to debate the issue in front of your new members. If you are going to get up and tell your new members: "New members, we are de- manding that the Congress take more money out of your pocket, they aren't taking enough out of your pocket. I as your leader am insisting they take more out of your pocket and when they take more out of your pocket you are going to get less benefits when you retire." And Stevens gets up or Eagleton says: "Members, I am just a little outsider who has been invited here. What I am humbly sug- gesting is we take less out of your pocket an alternative, we will match the same as you take out of your pocket and we'll give you a lot more benefits in the end." Now, if the house ain't rigged, I got a chance on that debate. [Laughter.] Mr. SOMBROTTO. Let me make a few comments. Who are you in- vited by? Senator EAGLETON. I am hoping you might invite me. [Laughter.] I only want to talk to your new members. Mr. SOMBROTPO. I understand. Senator EAGLETON. I have a suspicion that the old members, and there are more of them right now, want to force the new members to pay more to protect the old members. We are writing a plan for the new members-for the new members. I think when you tell those new members for that 1.3 we can get them 12-percent en- hancement in benefits if they want to pay, vis-a-vis a 3-percent en- hancement, if the GAO is right on those figures, they have to opt for the 12. Mr. SOMBROTro. If that were the choice, it would be an options choice, wouldn't it? If somebody could support those figures. Let me point out the 12 percent you are talking about is built on the presumption of certain factors in the economy which no one could absolutely guarantee. And so I would suspect if you went before those very members and we debated the issue, they would say-and not meaning to be disrespectful because I certainly could not ever be disrespectful to Senator Eagleton-but they would say it's the same old story, politicians say pay less, get more, until the time the payroll comes. I don't question what you are trying to say if there was a guaran- tee. If you told me and if you told Tom and you told all of us who represent our members-I might also point out all of us get elected by those members, so we don't want to make the wrong decisions- if you guaranteed absolutely to a moral certainty that if you invest- ed 1.3 you were going to get 12 percent in benefits as opposed to getting less, I suspect we would have to take a harder look at it. But I don't think you can guarantee that and I don't think the people that develop these numbers can guarantee that. It is based Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 on assumptions on an economy that generates x amount of interest on investment and I don't know that that can be relied on. Senator EAGLETON. I have one more question that Senator Ste- vens wanted to ask, Mr. Sombrotto. What would be your position on cutting the Postal Service out of this bill and making retire- ment subject to bargaining? Mr. SOMBROTTO. Cutting it out of the bill and use bargaining with the Postal Service for retirement? I would favor that. Senator EAGLETON. You would favor that? Mr. SOMBROTTO. Yes. Senator EAGLETON. I don't have anything else. Mr. GRIFFITH. Senator. Senator EAGLETON. Mr. Griffith. Mr. GRIFFITH. I would like to reserve my judgment on that. I have not taken a position on it. Senator EAGLETON. OK. Thank you both very much. Senator GORE [presiding]. Thank you both very much. I believe Senator Stevens may have some additional questions in writing for the record also. We certainly appreciate your presence here. Mr. SoMBRO1TO. Let me say for myself and certainly for the members that I represent, we respect the work that you are doing. We recognize how difficult the task is and we know you are trying to come up with a supplemental retirement for those new employ- ees that is going to be fair, and equitable, and meets the test that is necessary. So we appreciate all of what you have done and I say that sincerely. Senator GORE. Thank you, we will continue working closely with you. [The prepared statements of Messers. Sombrotto and Griffith follow:] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 VINCENT R. SOMBROTTO PRESIDENT TESTIMONY OF PRESIDENT VINCENT R. SOMBROTTO OF THE 100 INDIANA AVENUE, N.W. WASHINGTON, D.C. 20001 202/393-4695 NATIONAL ASSOCIATION OF LETTER CARRIERS BEFORE THE SENATE GOVERNMENTAL AFFAIRS COMMITTEE Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 MR. CHAIRMAN. MY NAME IS VINCENT R. SOMBROTTO. I AM THE PRESIDENT OF THE NATIONAL ASSOCIATION OF LETTER CARRIERS (NALC), A LABOR ORGANIZATION REPRESENTING OVER 271,000 MEMBERS WHO ARE EITHER PRESENTLY EMPLOYED AS CITY DELIVERY CARRIERS BY THE U.S. POSTAL SERVICE OR WHO ARE RETIRED FROM SUCH EMPLOYMENT. THIS MORNING I WOULD LIKE TO SUMMARIZE MY TESTIMONY AND SUBMIT THE FULL TESTIMONY FOR THE RECORD. ALSO, I WOULD LIKE TO SUBMIT AN ADDITIONAL STATEMENT FROM FAIR, THE FUND FOR ASSURING AN INDEPENDENT RETIREMENT. THE NALC WELCOMES THIS OPPORTUNITY TO TESTIFY ON S. 1527. WE APPRECIATE YOUR SUPPORT OF THE PRESENT CIVIL SERVICE RETIREMENT SYSTEM, WHICH IS A MODEST EXPRESSION OF APPRECIATION FROM THE GOVERNMENT TO ITS EMPLOYEES. As YOU KNOW, AN ADEQUATE RETIREMENT SYSTEM IS A SMALL PRICE TO PAY FOR QUALIFIED PERSONNEL. THE BILL REFLECTS THE HARD WORK AND THOUGHTFUL APPROACH OF YOU AND YOUR STAFF. YOU HAVE SHOWN GOOD FAITH AND WE SUPPORT YOUR EFFORTS TO REACH AN ACCORD BY INVOLVING ALL PARTIES. SUCH A PROCESS IS CRUCIAL TO SUCCESS. THIS BILL IS A FRAMEWORK FROM WHICH TO WORK. SINCE POST-1983 HIRES FACE THE PROSPECT OF PAYING OVER 14% TO RETIREMENT STARTING NEXT YEAR,'I HOPE WE CAN EXPEDITE THIS PROJECT. WE SUPPORT THE THREE-TIERED APPROACH TO A NEW RETIREMENT PLAN CONSISTING OF SUPPLEMENTAL DEFINED BENEFITS, A VOLUNTARY THRIFT PLAN AND SOCIAL SECURITY. THERE ARE SOME AREAS WHERE OUR UNION WOULD MAKE SOME CHANGES. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 PAGE 2 I WOULD LIKE TO START BY FOCUSING ON SOME OF THE DEFINED BENEFITS OF THIS BILL, WHICH IS TITLE I, SUBCHAPTER II, AFTER WHICH I WILL PROJECT ANNUITIES FOR OUR MEMBERS. NALC MEMBERS ARE COMMITTED TO MAINTAINING AGE 55 WITH 30 YEARS SERVICE AS A FEATURE OF RETIREMENT. LETTER CARRIERS PERFORM PHYSICALLY GRUELLING WORK -- BACK AND FOOT PROBLEMS PLAGUE BOTH ACTIVE AND RETIRED CARRIERS. AGE 55 HAS BECOME MORE THAN AN IMPORTANT SYMBOL FOR US. IT REPRESENTS THE SUBSTANCE OF OUR JOB: HARD WORK. WHILE MANY LETTER CARRIERS DO NOT HAVE 30 YEARS SERVICE AT AGE 55 AND STAY ON THE JOB, OTHERS TAKE ADVANTAGE OF THE RETIREMENT AVAILABLE. CONSEQUENTLY, THE SAVINGS FOR THE GOVERNMENT IN THIS AREA UNDER S. 1527 ARE MINOR, PARTICULARLY COMPARED TO THE IMPORTANCE IT HOLDS FOR OUR MEMBERS. ACCORDING TO CONGRESSIONAL RESEARCH SERVICE FIGURES, MAINTAINING AGE 55 RETIREMENT WITH 30 YEARS SERVICE REPRESENTS ONLY A 0.5% ADDITION TO THE PAYROLL COST TO THE GOVERNMENT. BUT TO OUR MEMBERS IT REPRESENTS AN IMPORTANT COMMITMENT TO THEIR WELL-BEING. ACCORDING TO THE APRIL, 1985 HAY/HUGGINS COMPANY REPORT, OVERALL COMPENSATION FOR FEDERAL EMPLOYEES IS 7.3% BEHIND THE PRIVATE SECTOR. THE REPORT CONCLUDED THAT RETIREMENT AGE AND A FULL COLA ARE VITAL IN ORDER TO BE COMPETITIVE WITH THE PRIVATE SECTOR. THE 55 RETIREMENT AGE WITH 30 YEARS SERVICE PROVIDES TWO ADDITIONAL ADVANTAGES. FIRST, IT ENCOURAGES WORKERS WHO Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 PAGE 3 HAVE EXPERTISE TO STAY UNTIL FULL RETIREMENT, WHICH BENEFITS THE POSTAL SERVICE. SECOND, IT IS AN INCENTIVE THAT ENABLES RETIREMENT AT 55 & 30, MAKING ROOM FOR NEW, YOUNGER EMPLOYEES. AS A RESULT, LETTER CARRIERS REPRESENT A GOOD MIX OF EXPERIENCE AND YOUTH. MANY ADMINISTRATORS RECOGNIZE THAT AN AGE 55 RETIREMENT POLICY CUTS BOTH WAYS AND SUPPORT IT. FOR EXAMPLE, E.I. DUPONT AND OTHER COMPANIES RECENTLY OPENED THEIR POLICY FOR EARLY RETIREMENT AND FOUND THAT IT HAD THE ADDED BENEFIT OF BOOSTING EMPLOYEE MORALE. THE 2% PER YEAR PENALTY FOR EARLY RETIREMENT WOULD HAVE SEVERAL NEGATIVE EFFECTS: IT DETERS QUALIFIED APPLICANTS FROM SEEKING POSTAL SERVICE EMPLOYMENT AND IMPERILS THE STANDARD OF LIVING OF RETIREES. A SIMILAR CIRCUMSTANCE RESULTS FROM SECTION 8414, WHICH PROVIDES FOR A 5% PENALTY FOR EACH YEAR THE PARTICIPANT IS UNDER AGE 62 FOR THOSE WHO HAVE LESS THAN 30 YEARS SERVICE BUT MORE THAN 10. SECTION 8413 OF THIS TITLE AFFECTS RETIREMENT BY ESTABLISHING A FORMULA FOR COMPUTING THE ANNUITY AS 1% OF THE AVERAGE OF THE HIGHEST FIVE CONSECUTIVE YEARS MULTIPLIED BY THE NUMBER OF YEARS OF SERVICE. THE COMBINATION OF THESE TWO FACTORS WOULD REDUCE ANNUITIES CONSIDERABLY. FOR THE AVERAGE LETTER CARRIER, A HIGH-FIVE DETERMINATION ALONE REDUCES THE SALARY LEVEL APPROXIMATELY 9%. MOREOVER, IT HAS A MULTIPLYING EFFECT OVER THE YEARS COMPOUNDED BY ITS NEGATIVE EFFECT ON THE COLA. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 PAGE 4 I WOULD LIKE TO DEMONSTRATE THE EFFECTS OF THESE CHANGES ON OUR MEMBERS. THE AVERAGE HIGH-THREE YEARS FOR A 55-YEAR OLD LETTER CARRIER TODAY WITH 30 YEARS SERVICE IS $22,801. UNDER THE CURRENT SYSTEM THAT PERSON'S BASIC ANNUITY IS $12,928; MINUS SURVIVOR ANNUITY AND HEALTH INSURANCE IT IS A MODEST $912.43/MONTH OR $10,949/YEAR. THAT AMOUNT IS FURTHER REDUCED BY TAXES. THAT SAME PERSON RETIRING AT THE SAME AGE UNDER S. 1527 WOULD RECEIVE A BASIC ANNUITY OF $8,740/YEAR (OR $728/MO.) ONLY IF HE COULD AFFORD TO CONTRIBUTE A FULL 10% OF SALARY TO THE THRIFT PLAN. THE ANNUITY IS $5,290/YEAR ($440/MO.), WHICH IS CLOSE TO THE GOVERNMENT POVERTY LEVEL IF THE LETTER CARRIER IS UNABLE TO CONTRIBUTE TO THE THRIFT PLAN. AT $8,740/YEAR, THE CARRIER IS RECEIVING-32% IFSS THAN A CSRS RETIREE DESPITE CONTRIBUTING 126% MQB. TOWARD RETIREMENT. NEITHER THE $8,740 NOR THE $5,290 INCLUDES DEDUCTIONS FOR HEALTH INSURANCE OR SURVIVOR ANNUITY, APPROXIMATELY $1,900/YEAR. THAT RETIREE'S PROBLEMS ARE FURTHER COMPOUNDED BY NOT RECEIVING ANY SOCIAL SECURITY BEFORE AGE 62. MR. CHAIRMAN, THOSE ANNUITIES ARE SUBJECT TO TAXES. THEY AMOUNT TO A RETIREMENT THAT IS TOO LOW FOR SUCH DEDICATED, PRODUCTIVE SERVICE. AND IF THE CARRIER PAYS A 5% PENALTY FOR LESS THAN 30 YEARS SERVICE, IT IS MUCH WORSE. WITH NO SOCIAL SECURITY BENEFITS BEFORE AGE 62, WE'RE FACED Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 PAGE 5 WITH A SYSTEM THAT PLACES MANY RETIREES NEAR THE POVERTY LINE AND WILL RESULT IN INCREASED EXPENSES BY THE GOVERNMENT IN THE FUTURE TO COVER FOR BASIC NECESSITIES. OTHER EXAMPLES ARE AT AGE 62 WITH 37 YEARS SERVICE. UNDER CSRS A RETIREE WOULD RECEIVE $15,180. IF A LETTER CARRIER WERE A NEW HIRE COVERED BY THIS SUPPLEMENTAL, THE BASIC ANNUITY LEVEL WOULD BE $19,550 JE A FULL 10% THRIFT CONTRIBUTION WAS MADE FOR ALL 37 YEARS. IF NO CONTRIBUTION TO THE THRIFT IS MADE THE ANNUITY IS $11,960. WHILE THE RETIREMENT OF $19,550 LOOKS BETTER, REMEMBER THAT IT IS THE RESULT OF 37 YEARS OF CONTRIBUTIONS AT 15.8% TO RETIREMENT AS OPPOSED TO 7% UNDER CSRS. AGAIN, HEALTH INSURANCE, SURVIVOR ANNUITY AND TAXES ARE NOT INCLUDED. AT AGE 62 WITH 30 YEARS EXPERIENCE, 19% OF THE RETIREE'S ANNUITY COMES FROM THE THRIFT PLAN, WHICH IS WHY THERE IS SUCH A DRASTIC DIFFERENCE FROM THE PERSON NOT CONTRIBUTING TO A THRIFT. I MUST MAKE AN ADDITIONAL POINT HERE: THERE IS NOTHING TO PREVENT CONGRESS FROM REDUCING THE THRIFT PLAN LIKE IT HAS DONE WITH COLAS. JUDGING FROM THE LAST FEW YEARS, SUCH A REDUCTION WILL BE TEMPTING FOR "DEFICIT REDUCTION." THE 19% OF THE 62/30 RETIREE CAN CHANGE QUICKLY. MOST CARRIERS HAVE SALARIES IN THE $20-30,000 RANGE. YET THIS PLAN IS TILTED TO EITHER THOSE WHO MAKE MUCH MORE (SINCE THEY CAN UTILIZE THE ENTIRE THRIFT PLAN) OR THOSE UNDER $20,000 (DUE TO THE SOCIAL SECURITY REPLACEMENT RATE). THE SITUATION FOR SOMEONE WITH LESS THAN 30 YEARS EXPERIENCE (BUT MORE THAN 10 YEARS) IS MUCH WORSE BECAUSE OF Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 PAGE 6 THE 5% PENALTY FOR RETIREMENT BEFORE AGE 62. AS THE HAY STUDY POINTEDLY STATED: THE 5% PENALTY WOULD PUT OUR RETIREMENT BEHIND THE PRIVATE SECTOR, WITH THIS MODEST ANNUITY, A FULL COLA BECOMES CRITICAL TO OUR RETIREES. SUBCHAPTER VI, SECTION 8462 ESTABLISHES A CPI MINUS 2% FORMULA, WHICH IS USED FOR THOSE ON RETIREMENT, DISABILITY AND SURVIVOR ANNUITIES. ACCORDING TO THE ADMINISTRATION'S INFLATION PROJECTION FOR THE NEXT THREE YEARS, THERE WILL BE 12.6% INFLATION. USING CPI MINUS 2%, RETIREES' PURCHASING POWER FOR FOOD, CLOTHING, ET CETERA WOULD BE CUT BY ALMOST 50%. FOR SOME RETIREES, THIS RESULTS IN A TRAGIC "HEAT OR EAT" SITUATION. WE SUPPORT FULL INFLATION PROTECTION IN THE NEW SUPPLEMENTAL TO PREVENT WHAT HAS HAPPENED OVER THE LAST FIVE YEARS WHEN OUR COLAS WERE CUT SEVERELY. RETIREES RECEIVED JUST ONE COLA IN THE PAST 25 MONTHS. BETWEEN FEBRUARY, 1981 AND MAY, 1984 OUR COLA WAS REDUCED BY MORE THAN 9%. SINCE THE VAST MAJORITY OF OUR RETIREES LIVE ON FIXED INCOMES, COLA CHANGES ARE A SWORD OVER THEIR HEADS. As I POINTED OUT, THE HAY REPORT UNEQUIVOCALLY STATED THAT TOTAL FEDERAL EMPLOYEE COMPENSATION IS BELOW THAT OF PRIVATE SECTOR EMPLOYERS IN VIRTUALLY EVERY ASPECT EXCEPT RETIREMENT AGE AND THE COLA, WHICH ARE THE PRIMARY REASONS THAT OUR COMPENSATION DOESN'T FALL DRASTICALLY BEHIND PRIVATE SECTOR PLANS. FOR SOMEONE WHO IS LIVING ON A FIXED INCOME AND FACES Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 PAGE 7 THE PHYSICAL PROBLEMS OF THE ELDERLY, CPI MINUS 2 IS A MAJOR HARDSHIP. WE SEEK A DIGNIFIED RETIREMENT COMMENSURATE WITH THE JOB WE PERFORM. SECTION 8418 DISCUSSES AGENCY CONTRIBUTIONS BUT IT IS AMBIGUOUS. WE WOULD LIKE A CLARIFICATION ON THE ROLE OF OPM AS WELL AS USPS CONTRIBUTIONS. SINCE I HAVE BEEN EMPHASIZING PARITY WITH THE CURRENT CIVIL SERVICE RETIREMENT SYSTEM, THE SAME IS TRUE IN THE EMPLOYEE CONTRIBUTION AREA. PRE-1984 EMPLOYEES CONTRIBUTE 7% TO THEIR RETIREMENT PROGRAM (CSRS). UNDER THE PROPOSED SUPPLEMENTAL, NEW HIRES WOULD CONTRIBUTE 5.8% AS OF 1986 TO RETIREMENT. To BE CONSISTENT, THE PAYMENT BY NEW HIRES SHOULD REMAIN ON A PAR WITH CSR. ACCORDING THE STATISTICS BY THE CONGRESSIONAL RESEARCH SERVICE, IF NEW HIRES CONTRIBUTED 7% OF PAY MINUS THE AMOUNT PAID FOR OASDI THE ENTIRE RETIREMENT SYSTEM BECOMES 1.1% LESS EXPENSIVE FOR THE FEDERAL GOVERNMENT. THIS ADDITIONAL REVENUE FROM EMPLOYEES WOULD ENABLE INCREASED DEFINED BENEFITS WITH NO ADDITIONAL COST TO THE GOVERNMENT. IN ADDRESSING SUBCHAPTER III OF TITLE I, THE THRIFT PLAN, I WOULD LIKE TO REITERATE THAT I SUPPORT THE CONCEPT, IT'S AN IDEA WHICH MODERNIZES OUR RETIREMENT SYSTEM TO KEEP US COMPETITIVE. HOWEVER, TREASURY DEPARTMENT'S STATISTICS FOR THE SPRING OF 1985 SHOW THAT IRAS MAINLY ARE UTILIZED BY HOUSEHOLDS WITH REAL INCOME LEVELS OF MORE THAN $40,000. THE AVERAGE LETTER CARRIER EARNS,,423,000/YEAR. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 PAGE 8. THEREFORE, A SUPPLEMENTAL WHICH USES THRIFT SAVINGS TO MAKE IT ATTRACTIVE IS FINE. BUT ONE WHICH COUNTERPOSES A THRIFT TO IMPORTANT DEFINED BENEFITS WILL MAINLY BENEFIT THE MINORITY OF HIGHER PAID EMPLOYEES AT THE EXPENSE OF THE MAJORITY. AS I POINTED OUT EARLIER, LETTER CARRIERS CONTRIBUTING THE MAXIMUM TO THE THRIFT COULD WIND UP PAYING 15.8% OF PAY FOR RETIREMENT. IF WE DON'T PASS ANY SUPPLEMENTAL, THEY WOULD BE PAYING 12.8% (COMBINING SOCIAL SECURITY WITH CSRS PAYMENTS) AND RECEIVING MM THAN THEY WOULD FROM THE SUPPLEMENTAL! IN THE CASE OF S. 1527, CRS ESTIMATES THAT THE THRIFT PLAN AMOUNTS TO 6% OF THE ENTRY AGE NORMAL COST AS PERCENT OF PAYROLL. THAT MONEY COMES FROM THE POSTAL SERVICE. WE SUPPORT CUTTING-BACK ON THAT PORTION OF THE COST TO THE GOVERNMENT, WHICH WOULD BE CONSISTENT WITH THE PRIVATE SECTOR AND PRESIDENT REAGAN'S TREASURY II PROPOSAL. WE WOULD LIKE MORE MONEY IN DEFINED BENEFITS AND ARE EXAMINING AVAILABLE OPTIONS, SUCH AS A 50% MATCH ON CONTRIBUTIONS UP TO 6% OR A 100% MATCH ON 3% CONTRIBUTION. SUBCHAPTER IV1 TITLE I DESCRIBES THE BENEFITS AVAILABLE TO SURVIVORS OF DECEASED PARTICIPANTS AND FORMER PARTICIPANTS. THE WELL-BEING OF A SPOUSE IS IMPORTANT TO LETTER CARRIERS. IN ORDER TO RECEIVE SURVIVOR BENEFITS, RETIREES PAY APPROXIMATELY 10% OF THEIR ANNUITY YEARLY. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 PAGE 9 S. 1527 CHANGES THE BENEFITS FOR PRERETIREMENT SURVIVING SPOUSE FROM 55% OF THE UNREDUCED ANNUITY TO 50% OF THE REDUCED ANNUITY OF THE EMPLOYEE'S PENSION (PLUS ANY SOCIAL SECURITY BENEFITS PAYABLE). FURTHERMORE, BENEFITS CAN NOT BE COLLECTED BEFORE THE DATE AT WHICH THE LETTER CARRIER COULD HAVE RETIRED. IN THE CASE OF A 42-YEAR OLD WIDOW WHOSE HUSBAND DIED AT AGE 45, SHE WOULD NOT BE ABLE TO COLLECT SUPPLEMENTAL AGE 52. THIS IS A DRASTIC CHANGE FROM CURRENT CIVIL SERVICE RETIREMENT SYSTEM WHICH HAS NO AGE REQUIREMENT. SHE WOULD COLLECT SOCIAL SECURITY IF HER HUSBAND QUALIFIED, BUT HER COMBINED ANNUITY WOULD BE BELOW THE POVERTY LINE. FOR SURVIVING SPOUSES OF RETIRED CARRIERS, S. 1527 DIMINISHES THE ANNUITY FROM THE CURRENT CSRS LEVEL OF 55% OF THE UNREDUCED ANNUITY TO 50% OF THE REDUCED ANNUITY MINUS ANY SOCIAL SECURITY PAYMENTS. IN MONETARY TERMS, S. 1527 PROVIDES THE SPOUSE SURVIVOR OF A LETTER CARRIER WITH 10 YEARS SERVICE WHO DIED AT AGE 45 $56/MONTH, AND IT WOULD NOT BE PAID FOR 10 YEARS. WE CAN NOT SUPPORT THIS CHANGE OR THE TOTAL ELIMINATION OF CHILDREN AND STUDENT SURVIVOR BENEFITS. THE MAJORITY OF SPOUSE SURVIVORS ARE WOMEN OVER AGE 45. IT PUTS THEM BELOW THE FAMILY POVERTY LEVEL AND IN AN ALMOST IMPOSSIBLE POSITION: THEY MUST FIND WORK, AT AN AGE WHEN MANY EMPLOYERS WILL NOT EVEN GIVE THEM A Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 PAGE 10 FAIR CHANCE. IT INSTITUTIONALIZES THE ABYSMAL SITUATION TERMED THE "FEMINIZATION OF POVERTY" WHEREIN ONE OF THE POOREST STATISTICAL GROUPINGS IN AMERICA TODAY IS ELDERLY WOMEN. THE SAVINGS FOR THE GOVERNMENT HERE ARE MINIMAL, YET THE HARDSHIPS CREATED ARE MAXIMUM. IN EITHER THE PRE-RETIREMENT OR RETIREMENT CASE, IT WOULD BE MORE ACCEPTABLE TO REINSTATE THE FORMULA USED BY THE CSRS. ON THE TOPIC OF DISABILITY RETIREMENT (SUBCHAPTER V, TITLE I), WE FULLY CONCUR WITH THE ELIGIBILITY PERIOD OF 18 MONTHS. HOWEVER, THERE ARE AREAS WHERE WE HAVE DIFFERENCES, ONE OF THOSE IS SECTION 8446, WHICH ALLOWS THE USPS TO OFFER OTHER CRAFT EMPLOYMENT IN LIEU OF RETIREMENT. WE WRESTLED WITH THIS PROBLEM IN 1969 AND 1970 DURING DISCUSSION OF THE POSTAL REORGANIZATION ACT. CONGRESS DECIDED THAT IT WOULD BE A BAD POLICY. IT CAME UP AGAIN IN 1981 AS PART OF THE "GRAMM-LATTA" BUDGET. ONCE AGAIN, HOUSE-SENATE CONFEREES AGREED THAT IT WAS DISRUPTIVE TO THE POSTAL SERVICE BECAUSE IT BLURS JOB DISTINCTIONS IN THE POSTAL SERVICE AND WOULD CREATE HAVOC. FOR EXAMPLE, A LETTER CARRIER WHO IS IMMOBILIZED IS PUT INTO A CLERK'S POSITION. WHO HAS SENIORITY AND WHAT Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 PAGE 11 LEVEL/STEP RATE IS USED? WHAT IS THE WAGE RATE? DOES THE CARRIER NEED TO TAKE AN EXAMINATION? I CAN FORESEE FROM THE EXPERIENCE OF OTHER UNIONS A SITUATION OF ENDLESS, COSTLY GRIEVANCES AND LAWSUITS AND DISGRUNTLED EMPLOYEES WHO SEE BETTER PAYING JOBS OR CHANCES FOR ADVANCEMENT TAKEN AWAY. OR, YOU MAY PUT LETTER CARRIERS IN THE POSITION OF DOING CLERKS' WORK, A SITUATION WHICH IS DETRIMENTAL TO THE EFFICIENCY OF THE EMPLOYEE AND THE POSTAL SERVICE. THE COMPULSORY MEDICAL EVALUATION SECTION IS NOT CLEAR. SHOULD A RETIREE BE FOUND TO BE NO LONGER DISABLED, WHAT RESPONSIBILITIES DOES THE USPS HAVE IN FINDING A JOB, FOR EXAMPLE. SECTION 8450 ESTABLISHES AN EMPLOYEES' DISABILITY INSURANCE FUND IN THE U.S. TREASURY AND REQUIRES AGENCIES TO MAKE PAYMENTS TO THE FUND FROM SALARY APPROPRIATIONS. HOWEVER, A THIRD PARTY WOULD ADMINISTER PAYMENTS. THIS WOULD ADD EXPENSIVE, PRIVATE-SECTOR PARTICIPATION RATHER THAN CONTINUING THE CURRENT OPM OPERATION. THE POTENTIAL FOR CONFUSION AND ENTANGLED PAPERWORK IS ENHANCED. IN THE STEVENS-ROTH BILL, LETTER CARRIERS COVERED UNDER THE PRESENT CIVIL SERVICE RETIREMENT SYSTEM CAN TRANSFER TO THE NEW SYSTEM. WE AGREE THAT BOTH SYSTEMS NEED TO BE FINANCIALLY SOUND AND UNDER ONE ROOF. HOWEVER, WHEN A SYSTEM AS COMPLEX AS THIS SUPPLEMENTAL IS STARTED, IT SEEMS PRUDENT TO WAIT FOR A COUPLE YEARS TO SEE WHAT PROBLEMS Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 PAGE 12 APPEAR. NO MATTER HOW MUCH WE TRY TO HEAD-OFF TROUBLE, WE KNOW THAT WE CAN NOT PREDICT ALL POSSIBLE PROBLEMS. I'D LIKE TO CITE AN EXAMPLE FOR YOU. RECENTLY THE STATE OF MARYLAND ADOPTED A NEW RETIREMENT SYSTEM FOR ITS EMPLOYEES. MARYLAND ALLOWED EMPLOYEES COVERED UNDER THE PREVIOUS SYSTEM THE OPTION OF TRANSFERRING. THERE WAS AN IMMEDIATE RUSH TO TRANSFER, WHICH IN ITSELF CAUSED PANIC AND CONFUSION. THEN, WHEN PEOPLE REALIZED WHAT THE "SMALL PRINT" CHANGES WERE, THEY RUSHED TO CHANGE BACK. THE RESULT WAS A NIGHTMARE. IN ADDITION, THERE WOULD BE LEGISLATIVE CONSIDERATIONS INVOLVED IN OPENING UP THE SOCIAL SECURITY ACT. TRANSFERS RAISES THE POSSIBILITY OF THE SENATE FINANCE COMMITTEE SHARING JURISDICTION WITH GOVERNMENTAL AFFAIRS ON S. 1527. WE SHOULD WAIT A COUPLE YEARS, EXAMINE THE MYRIAD OF PROBLEMS INVOLVED IN TRANSFERS, AND THEN PROCEED CAUTIOUSLY. ONE OMISSION FROM THIS BILL: HOW TO HANDLE THE PROBLEM OF RE-HIRES. HOW DOES THE SUPPLEMENTAL PLAN HANDLE SOMEONE WHO HAS PREVIOUS SERVICE IN THE GOVERNMENT AND HAS CONTRIBUTED TO THE CIVIL SERVICE RETIREMENT PLAN BUT HAS BEEN REHIRED AS A NEW EMPLOYEE AND WILL BE COVERED BY THE NEW SUPPLEMENTAL PLAN? THE BILL DOES NOT ADDRESS THIS ISSUE AND IT WILL BE AN IMPORTANT ISSUE FOR A LARGE NUMBER OF GOVERNMENT EMPLOYEES, SOME OF WHOM ARE ALREADY IN THE EMPLOY OF THE GOVERNMENT. IN CERTAIN CASES, SOME OF THESE INDIVIDUALS ARE VESTED IN THE CSRS. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 PAGE 13 As YOU CAN SEE MR. CHAIRMAN, THERE ARE AREAS WHERE WE BELIEVE BENEFITS MUST BE RESTORED TO CURRENT LEVELS AND IMPROVED. AND THERE ARE AREAS WHERE WE THINK LETTER CARRIERS CAN GIVE MORE. IF YOU HAVE ANY QUESTIONS, I WILL BE GLAD TO ANSWER THEM. THANK YOU. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 250 TESTIMONY OF TOM W. GRIFFITH, PRESIDENT NATIONAL RURAL LETTER CARRIERS' ASSOCIATION BEFORE THE COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE ON S. 1527 THE CIVIL SERVICE PENSION REFORM ACT Mr. Chairman and Members of the Committee: My name is Tom W. Griffith. I am the President of the 66,000-member National Rural Letter Carriers' Association. Rural letter carriers serve fifteen million American families by daily traveling 2,387,951 miles over 38,925 rural routes throughout these United States. We are honored to appear before the Committee on Governmental Affairs and to offer our testimony on your bill. We are grateful for your dedication and diligence in mastering the complexities of developing a new retirement Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 251 -2- We compliment you on the series of pension forums. They were unique and educational. They provided a good opportunity to bring forth diverse information. We appreciate you and your staff's great effort and continuing work on this subject as you and the Members of this Committee attempt to write legislation for our new retirement system. Let us, for the record, say that it is our desire to see a bill passed into law this year. But, if it takes slightly longer, then let's not sacrifice quality for haste. We think your basic design is a good one, and you are to be commended for it. It is like an automobile. And, like even a fine automobile, from time to time, they require some fine tuning. In no way do we think that the basic design must be scrapped at all. We like the basic design and appreciate the effort that you and your staff have put into it, but we would like to see it fine-tuned. I will attempt to outline those areas of the plan which we are particularly pleased with, and those areas in which we think there could be some fine-tuning to improve your bill. We view the program as consisting of three tiers, the first of which is Social Security. As we all know, there is a tilt to Social Security. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 252 -3- The second tier is the defined benefit portion. We are pleased with your add-on approach, because the tilt favors lower salaried employees and can be offset by a voluntary supplemental capital accumulation plan. Any offset would concentrate benefits on the higher paid workers in the system and lesser benefits to the lower paid employees. By your simple add-on plan, the Federal Government would be setting a good example for private employers. Higher paid employees have much greater disposable income and, therefore, have the ability, through their own savings initiative, to compensate for the Social Security tilt. Employee Contributions - We think the employee contribution level should roughly equal current contributions to the Civil Service Retirement System. Currently, employees pay 7% of their salary, plus 1.35% for Medicare. Employees, under the system which the Committee is now designing, will pay, by 1990, 6.2% Social Security. We recommend that employees contribute to the defined benefit program in an amount which will provide equal contributions between the existing plan and the proposed plan. There is historical precedence for public employees' participation in contributory staff retirement systems. We realize that in the forums, it was pointed out that private sector retirement systems are largely non-contributory. However, Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 253 -4- those corporations have an entirely different mission compared to the Government. They are organized for, and have a responsibility to their shareholders to make a profit. That is not our Government's function. Private business also receives a tax deduction for their contributions to a retirement plan. The Government obviously cannot. We believe employee contributions give a certain amount of budgetary flexibility to the rest of the Federal Budget and may prevent the temptation of a future Congress to alter the plan, after you have adopted it. Simply stated, a plan in which the employees have a direct stake in funding will discourage legislative tampering in the future. The accrual rate in the defined benefit plan should be increased and be more generous. There should be a reward for longer service at a higher accrual rate than for early employment. We approve of most of the vesting schedule, with the exception of the penalty for early retirement. We would like to see the bill changed so employees would have the ability to retire after 30 years of service at 55 years of age without any penalty. We propose that employees who would be interested in that early retirement option could contribute an additional amount to this optional program. The program would be a portion of the defined benefit plan and the employee would have to opt Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 early in their service career to pay an additional contribution, with a Government match, to the defined benefit plan and have the ability to retire at 55 years of age with 30 years of service without penalty. In effect, the employee would have the option to purchase the right for early retirement. Computation - We support High-3 instead of High-5 salary base for benefit computation. We believe in the funding adequacy of the current system. And, we would hope that the funding mechanism in this new system protects it from political manipulations. We appreciate the fact that, in your bill, all funds from the defined benefit program would flow into the existing Civil Service Retirement Fund, which will protect its assets in perpetuity for all who will be retiring under the old system. Cost Of Living Adjustments should be fully indexed. The formula should be the same as now exists under the current Civil Service Retirement law. We noted from the charts done by Congressional Research Service that a retiree, even with a capital accumulation plan, looking at the amount of wages that his pension replaces, has that go down as much as 20 points from the time of their retirement until approximately age 75. Frankly, we find that a difficult concept to accept. The Federal Government Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 has been, and should continue to be, a morale force in the work place - a precedent setter. When Government has a fully indexed COLA, it sets an example. The testimony at the forums pointed out that most private employers do not have a cost-of-living adjustment provision. However, most of them, at least make ad hoc adjustments every three to five years. We feel the reason for those ad hoc adjustments is the pressure that the Federal Government has brought in the work place by having fully indexed COLAs. It is a very positive example that the Federal Government has set and it should continue. When there is a modest reduction in the capital accumulation section, along with an employee contribution, then the COLA program should continue as it exists in the current system with virtually no increase in cost. Recently, the President amended his tax reform plan to urge repeal of the (401)-K tax-shelter capability. His proposal gives us cause for concern about the capital accumulation plan in this bill. Loss of tax deferral would be a significant loss to employees. We certainly urge retention of this tax benefit. With regard to the savings portion, we compliment you for your innovation and flexibility in the design of this section. From the standpoint of our particular membership, however, we would like to point out to the Chairman and Members of this Committee several reasons why we prefer slightly less emphasis Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 on savings and a little more on defined benefit. A rural letter carrier starts out at about $17,000.00 a year. The average rural carrier, at the top of their career, is making about $26,000.00 a year. In those pay ranges, few of our members will be financially able to participate in a voluntary savings program early in their lives as they buy their first residence, as they have the first additions to their families, and, as their children grow up, the expenses of a family will come first. Savings, unfortunately, will probably take a back seat to these things for most rural carriers. r10 However, when the children are finally out of the nest, then our suspect is that they will begin to consider retirement. We would suspect that they will participate in the capital accumulation plan. However, when it is done later in life, rather than consistently throughout a career, the total benefit is much smaller compared to that when the employee has participated throughout an entire career. For in a savings capital accumulation plan, compounding is what really builds it. A relatively short period of savings will simply not build a large nest egg going into retirement. Voluntary savings by an employee should be allowed up to 10% of their pay. The Government's one-for-one match should Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 257 -8- Mr. Chairman, again, we offer our appreciation to you and your hard-working staff for the care and concern you have shown in the process of developing this very fine piece of legislation, which, with the fine-tuning we have suggested, we could easily support. We look forward to continuing to work with you on this complicated issue and appreciate your interest and concern about an adequate retirement program for new rural carriers. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator GORE. Our next witness is Paul S. Hewitt, president and executive director of Americans for Generational Equity, accompa- nied by Phillip Longman, director of research. Let me say before we begin that Senator Durenberger has made a special point of advising this committee to listen carefully and closely to your testimony, Mr. Hewitt. You are from Minnesota, if I am not mistaken, is that correct? Mr. HEwrrr. Senator, as a matter of fact, I am from California, but I did work for the Senator from Minnesota. Senator GORE. That is the connection, and I also believe he had a hand in helping to get this effort started. Anyway, I wanted to note for the record that he has a special interest in this and had wanted to be here to introduce you but other obligations at the last moment prevented that. Your prepared statement will be included in full in the record. If you could summarize where appropriate, that would be most appre- ciated. Please proceed. TESTIMONY OF PAUL S. HEWITT, PRESIDENT AND EXECUTIVE DIRECTOR, AMERICANS FOR GENERATIONAL EQUITY, ACCOM- PANIED BY PHILLIP LONGMAN, DIRECTOR OF RESEARCH Mr. HEwirr. Thank you. My name is Paul Hewitt and I am president and executive direc- tor for Americans for Generational Equity. Seated next to me is Phillip Longman, director of research. Americans for Generational Equity was recently formed under the bipartisan leadership of Senator Dave Durenberger and Repre- sentative James R. Jones to speak out on issues affecting the eco- nomic prospects of younger and future generations of Americans. I am particularly pleased to be able to testify on this bill, Mr. Chairman, which I regard as probably one of the most important bills the committee will take up in this decade. My purpose today is to outline the long-term public interest in the design of this and other Federal retirement programs; to cast the committee's efforts in the broadest possible perspectives and to encourage policy devel- opment in terms of what we now know about the future. I will start by articulating two principles of generational equity that should guide the design of any new Federal pension system. First, the Congress should seek to minimize any unfunded liabil- ities under this system and, second, that it adopt compensation policies that efficiently attract competent employees to Govern- ment. With regard to the first principle, I would point out that the only difference between increasing an unfunded liability and increasing the national debt is that the Constitution permits future taxpayers to break our retirement promises to future retirees, whereas the Constitution requires the future Congresses to pay off the national debt. However, assuming our retirement promises are honored, then there is no difference. Both unfunded liabilities and the na- tional debt constitute IOU's that must be repaid by future taxpay- ers. Accordingly both should be viewed with caution. Mr. Chairman, few realize that under the civil service retirement system, the unfunded liability right now totals almost a third of Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 the national debt. Last year the Office of Personnel Management estimated the unfunded liability at $542 billion, even though the civil servants who are going to be covered in this legislation were not included in that computation. This bill as it stands will signifi- cantly increase the system's unfunded liability once enacted. The question before this committee is how much should we in- crease the debt of future taxpayers. In deciding this question, the committee should consider the fact that future taxpayers may not be able to keep the promises that this committee makes. When CSRS was last overhauled in the 1960's, great optimism prevailed about the future taxpayers' ability to absorb growth in the CSRS trust fund liabilities. Incomes and living standards had been going up for about two decades. This fact probably helps to explain the richness in the current system. Legislative history shows the debate in 1969 was over how to stem short-term budget surpluses. Future income growth was taken for granted. Today it is clear that we probably should have been more prudent. We now have great reason to be pessimistic about the economic prospect of future taxpayers. For example, consider that today we are leaving our children with a national debt that is 10 times that which existed following World War II. Representative John Porter, working with the Con- gressional Research Service, recently estimated that the average worker entering the workforce in the year 1990 will end up paying $100,000 in taxes over his or her lifetime to pay the interest on the material debt in existence in that year. Mind you, this is a conserv- ative estimate. It assumes only 6-percent interest rate and no growth in the debt after the year 1990. Similarly we have estimat- ed today's young workers each stand to pay an additional $10,000 in interest just to service this year's deficit. Future taxpayers are also going to have to pay off a gigantic un- funded liability in the Social Security System which now totals 3.5 times the amount of the national debt. This system is supposed to be accumulating a cash surplus that will fund the baby-boom gen- eration's retirement. In fact, the money is not going to be there be- cause the Treasury is borrowing it and using it to pay for current expenses. Consequently, we are leaving the trust fund with a sur- plus that consists only of IOU's between future taxpayers and retir- ees. So, as it now stands, future taxpayers will be stuck with the baby boom's entire Medicare and Social Security bill which will have to be funded probably through a series of future tax increases beginning, under optimistic scenarios, around the year 2020. Moreover, Mr. Chairman, unlike during the 1960's, the trend in personal income in this country is downward. Upward mobility is no longer the general rule in American society. Since 1972, work- ers' incomes have declined across the board. And they have de- clined the most for the young who will inherit our debts and un- funded liabilities. Between 1972 and 1983, for example, households headed by persons age 25 to 34 suffered a 19-percent decline in their real, after-tax income. Finally, an examination of the poverty rate for children suggests that downward mobility is only in its infancy stages. Demographers now estimate one out of three children born today will experience poverty before reaching the age of 18. Poor youths tend to grow Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 into poor adults. This suggests there will be a large underclass in the early 21st century and, at the very least, we can anticipate that a very large segment of future workers in this country will not be able to afford the kind of taxes that will be needed to finance the rapidly accumulating debts and unfunded liabilities that will be coming due at that time. All of this serves to point out we should indeed be very cautious in creating new unfunded liabilities for which future taxpayers will be billed. My second principle-that is, efficiently attracting competent Federal employees to the work force-relates to a basic CSRS goal. Yet, the current Federal compensation structure is a failure in this regard, and CSRS is part of the problem. High retirement benefits are, in fact, a very inefficient and uneconomical way to attract top quality employees. The evidence is overwhelming that employees are attracted to high pay not high retirement benefits. But, for obvious reasons, Congress prefers paying later than today. Future taxpayers are always more compliant than present ones. The consequence of all this is the Congress has saddled the Government with a compensation structure that is increasingly skewed toward what we call deferred compensation. Studies show that total Federal compensation, including retirement benefits, health benefits, and pay, is roughly on par with that paid by the better private-sector firms. Yet pay is significantly lower, while re- tirement benefits are significantly higher in order to compensate. This suggests that Federal policy is geared more toward retaining than attracting employees. And the result is the employees we are retaining may not be the best ones available. The result may also be that as a legacy for our children, we are systematically creating a less efficient, less creative work force. The result will be more heavy handed regulation, more $9,000 Allen wrenches, and fewer imaginative solutions to the many chal- lenges facing Government. Unfortunately, S. 1527 is far from satisfying these principles. Yet it represents a major and perhaps historic step in the direction of intergenerational fairness and fiscal responsibility. Its main princi- pal innovation is the thrift plan under subchapter III. This plan en- visions that up to 22 percent of the employer's total retirement contributions will be deposited in employee-owned accounts in the private sector, when matched by a like amount of employee sav- ings. This will lead us toward the funding of a large portion of the Federal Government's pension liability in advance. We will move away from the practice of financing all retirement benefits with unfunded liabilities. In addition, by encouraging employee savings, the plan would stimulate capital formation and investments in the kind of com- petitive technologies that future workers are going to need to be able to generate the wealth to finance the baby boom's retirement. My major criticism of the bill is that it only creates modest sav- ings-16.8 percent under the cost of the current system. At 20.8 percent of payroll, the plan is still about 2 percent of payroll higher than the richer private sector plans and in fact these may leave retirement benefits too high to permit the Government to afford the kind of meaningful pay reform that may be needed to Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 eventually get the Government back into competition with the pri- vate sector for the best potential employees. By itself, S. 1527 is not enough to restore generational equity to the Federal pension system. We must solve the deficit problem first and foremost, for it is certainly not fair or wise to advance fund one segment of Government with borrowing from another. Accord- ingly, I commend, the sponsors for their 10-year transition period for phasing in the advance funding of the savings plan. This period will allow the Federal Government to get its fiscal house in order. This bill creates a much fairer compensation structure. Once the Federal budget is finally balanced, it may serve as a guide to the later reform of military and Social Security programs. In conclusion, while a number of changes may be necessary to the bill, the thrift plan in S. 1527 is a long overdue idea and should be expanded not curtailed. Employees should embrace the plan. Their benefits will be safer and place less of a burden on their chil- dren. It may cost taxpayers more in the short run, but will lend fiscal discipline to the compensation structure and make paying later somewhat less attractive. Thank you, Mr. Chairman, this concludes my comments. Senator GORE. Thank you very much for your statement. It is a real contribution to our deliberations here. You said toward the end of your statement that the Stevens-Roth plan is still about 2 percent of payroll higher than the better private sector plans. I be- lieve it might be accurate to say it's 2 percent higher than the av- erage of all private sector plans, but the larger employers, with whom many believe the Federal work force should be compared, have plans significantly higher in payroll costs than the Stevens- Roth plan. So I am a little unclear as to what you mean by saying that it's 2 percent higher than the better private sector plans. Mr. HEWITT. I assume the average is probably an average of the Fortune 500 companies. Senator GORE. It is the average of all. It is average of medium and large-size firms. Mr. HEWITr. Yes. Senator GORE. Should we change that in your statement? Mr. HEWITT. Fine. Senator GORE. You can comment further on it for the record. You don't disagree with the findings of the GAO or Hay Associates that I referred to a moment ago about the larger employers? Mr. HEwITr. No; I was mistaken in my testimony. Senator GORE. Has your group addressed the question of Federal wages? Mr. HEWITT. No, but I think eventually we are going to have to get around to putting the Federal Government in the position where it can compete with the private sector for the best employ- ees. My sense is that this is most economically done through pay rather than retirement benefits. Senator GORE. You wish to be intellectually consistent and sup- port higher wages for the Federal workforce? Mr. HEWITT. Certainly, in some though not all cases. The freez- ing of pay over a period of years has decreased Federal salaries sig- nificantly over time. Some Federal employers are underpaid. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator GORE. Incidentally, I think your organization's voice is one that plays a very useful role in articulating a set of concerns that need to be voiced. Some of the statements that you made, I was looking for one here where you say-oh, yes, you refer to the Social Security System, and I will digress here briefly because you did raise this-saying, "Although Social Security is supposed to be accumulating a surplus that will finance the baby boom genera- tion's retirement, the money is not going to be there." Are you sure about that? Mr. HEWITT. I suppose Congress can change the law, but under current law, it is not going to be there. We are pretty much con- strained to investing the surpluses in Treasury debt obligation. Senator GORE. You are leaping to the conclusion that when the government borrows that money, it is going to refuse to pay it back. Mr. HEWITT. No; I'm not saying that. I am saying when we take the surpluses that we put in there so that they are not cash sur- pluses but exist only in forms of IOU's for future taxpayers and re- tirees, the future taxpayers are going to have to pay them. Around the year 2020, under the optimistic scenario, Social Security is going to stop running a surplus. The contributions will be less than the payouts under the system. In that case, we have to turn to the taxpayer at that time and say, OK, pay up. The Treasury has four options. It can cut the benefits and say the taxpayers can't pay up. It can raise taxes. It can spend less money on other things. There are a number of options. Eventually under a pay-as-you-go system, the taxpayers at that point in time pick up the bill. The problem under Social Security, and the reason it is going to stop running a surplus, is the demographic factors. There are about three and a half workers-- Senator GORE [interposing]. Three point two. Mr. HEWITT. I understand it is a little bit higher. It is going to shrink down in 2035 to 1.9 and this will cause us to go back to the existing tax base and have to raise more money because we did not accumulate x surplus. Senator GORE. I understand your logic, but the basic problem you are getting at there is the deficit and the practice of the Govern- ment of borrowing $500 million a day at the present time, which I certainly agree with you is ridiculous. But the Government is going to borrow that money from somewhere and if it borrows from the Social Security surplus, it is going to pay it back to the Social Secu- rity surplus. It is a kind of a technical point, but I do think that we need to be careful, particularly an organization like yours which is a needed voice in this debate. I think you have got to be very care- ful in making the flat statement to members of our generation that the money is not going to be there for Social Security. I think the statement is false. Mr. HEWITT. The cash won't be there, Senator. Maybe the money will-I think the point I am trying to make is that these future taxpayers who are coming along are going to have to bear signifi- cant tax increases in order to fund these unfunded liabilities. Senator GORE. As I say, I appreciate the voice you bring to this debate. I may submit some additional questions in writing. I appre- ciate the chance to hear you. Thank you, Mr. Chairman. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator STEVENS [presiding]. I regret I had to be called to a meet- ing over in the leader's office while you were presenting your state- ment. I have looked through it and my staff tells me it is a very interesting analysis of the problems that we have. The problem I have with the analysis is that I don't think it looks at the tradeoffs. Congress has, in fact, done what you have suggested. It has traded off commitments for security upon retire- ment for cash payments in terms of trading Government salaries to the marketplace now. If we accept your advice, we would have no alternative, would we, but to try to raise the salaries immediately and that would offset the savings, wouldn't it? Mr. HEwITT. I am not saying you just plain raise salaries, but I think there are certain cases where we are going to have to need to take a look at what good people are being paid in the private sector and compensate our employees accordingly. My point is, if you are going to try to attract good people to the Federal Government, the least efficient way to do it is by offering them retirement benefits. If you are going to attract good people to Government, what you want to do is spend your money most efficiently. That may be on pay. That puts you in the tradeoff with the deficit. From a broader standpoint, Senator, there is a real question about the competence of the civil service. In the educational system, we all heard something about the baby boom coming through and there was a teacher glut for a number of years and the market system forced down wages of teachers for a long time. One consequence of that was promising young students stayed away from the teaching profession. Today the average teacher has a SAT score 104 points below the average of all other college grad- uates. If you want that to happen in the Federal Government, the consequence may be more heavyhanded, unimaginative Govern- ment action and less creative solutions. I just point that out as one of the legacies we can be leaving the next generation if we systematically allow pay to erode while trying to attract people with high retirement benefits. Senator STEVENS. What do you think of our investment plan to put the money in the private sector? Mr. HEwITT. I think it sets the system itself on a much fairer course from the standpoint of future versus present taxpayers. Right now our compensation system is heavily skewed toward re- tirement benefits. That means we are asking future taxpayers to pick up the bill. I think it would be fair and make us a little more indifferent between pay and retirement benefits if we started fund- ing some of the retirement benefits today. Senator STEVENS. As Senator Gore says, here is a voice I am sure we are going to hear again and again. We appreciate your articu- lating the position you represent. Thank you very much. [Mr. Hewitt's prepared statement follows:] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 TESTIMONY OF PAUL S. HEWITT PRESIDENT, AMERICANS FOR GENERATIONAL EQUITY ON S. 1527, THE CIVIL SERVICE PENSION REFORM ACT BEFORE THE SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS SEPTERMBER 9, 1985 My name is Paul Hewitt, and I am the President and Executive Director of Americans for Generational Equity. I appreciate this opportunity to testify before the Governmental Affairs Committee on the Civil Service Pension Reform Act, a bill with major long-term consequences for the economy. Accompanying me is Phillip Longman, AGE's Director of Research. Americans for Generational Equity was recently formed under the bipartisan leadership of Senator Dave Durenberger and Representative James R. Jones to speak out on issues affecting the economic prospects of younger and future generations of Americans. Our concern is that many of the policies and decisions made today have ramifications far into the future. But, invariably, the young people who are most affected by them go largely unrepresented in the policy making process. The legislation now before this Committee is an excellent case in point. The vast majority of those whose future benefits are being established through the Committee's efforts will have little say in their definition. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 I am here today primarily to speak for the second of these two groups. While I will touch upon issues of special interest to future civil service retirees, my principal goal is to provide an assessment of the long-term public interest in the design of this and other government retirement programs, and to frame the Committee's efforts in the broadest possible perspective. Mr. Chairman, I would like to begin by outlining two basic principles that I believe should guide the design of a new Civil Service Retirement System: (1) minimizing the system's unfunded liabilities; and (2) efficiently attracting and retaining competent employees. The first, and most important principle is that new unfunded liabilities under the Civil Service Retirement System should be minimized. As the Chairman has observed many times in the past, creating an unfunded liability is tantamount to expanding the national debt. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 In fact, the only real distinction between adding to CSRS' unfunded liability and increasing the national debt is that the Constitution obliges future congresses to honor the nation's debts; whereas, it prevents the promises of this congress from binding future congresses. However, assuming that future taxpayers do keep today's promises to future retirees, both unfunded liabilities and the national debt comprise money that must come out of the pockets of future taxpayers. Accordingly, both should be viewed with an equal degree of caution. While the issue of federal borrowing crowds the nation's headlines, few realize that the unfunded liability of the CSRS trust fund alone is equal to almost a third of the official national debt. The Office of Personnel Management estimated last year that the system's unfunded liability as of September 30, 1984, was $542 billion. Its rate of increase -- $13 billion in the year since September 30, 1983 -- had slowed from prior years, because federal workers hired after December 31, 1983 were not covered under CSRS. However, when Congress defines the entitlements of these new workers, the unfunded liability will jump significantly. The only question is by how much. In deciding this question, the Committee should consider the fact that future taxpayers may not be able to keep our promises. In the early 1960's, when CSRS was last overhauled, Americans were very optimistic about the income prospects of future taxpayers. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 267 4 That in large part explains why we now have such a generous federal retirement system. But today, we have every reason to be prudent in assessing future taxpayers' prospects. Consider that we are leaving today's children with a national debt that, after adjusting for inflation, is ten times the amount that existed following World War II. Working with the Congressional Research Service, Representative John Porter recentl% estimated that a person entering the workforce in 1990 will pay an average of $100,000 in taxes over his or her lifetime to service the interest on the national debt--a conservative estimate that assumes only 6 percent interest rates and no further growth in the debt. Similarly, we estimate that today's average young workers each stand to pay an extra $10,000 in taxes over their lives to service the interest on just this year's deficit. Consider also that future taxpayers will have to pay off the gigantic unfunded liability of the Social Security system, which totals almost three and one-half times the national debt. Although Social Security is supposed to be accumulating a surplus that will finance the Baby Boom generation's retirement, the money is not going to be there. The Treasury is borrowing it to meet current expenses, leaving only IOU's between future taxpayers and future retirees. As a result, future workers -- whose ratio to the the retired population will be much lower than it is now -- must foot the full bill for the Baby Boom's Social Security and Medicare Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. Chairman, unlike the 1960's, the current trend in personal income is downward; upward mobility is no longer a general phenomenon. Since 1972, the incomes of U.S. workers have declined across the board. But the drop has been greatest among the young, who will inherit today's unfunded liabilities. Between 1973 and 1983, for example, the real, after-tax incomes of households headed by persons age 25-34 declined almost 19 percent. Finally, an examination of the poverty rate among today's young children suggests that the trend toward downward mobility is only beginning. Demographers estimate that one in three children born this year will experience poverty at some time before reaching the age of 18. Because poor youths tend, to become poor adults, we can anticipate that a very large underclass will compete for the tax dollars of working Americans well into the next century. At the very least, we can expect that many future taxpayers will not be wealthy enough to afford the high tax rates needed to pay the nation's rapidly accumulating bills. The upshot, Mr. Chairman, is that the consciencious development of federal pension policy must anticipate the distinct possibility that future taxpayers will either be unable, or unwilling to support large unfunded federal pension liabilities. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Indeed, the bigger the unfunded liabilities we create, the greater is the liklihood that our promises will be broken. Clearly, such apparent generosity would be neither compassionate to civil servants nor consistent with the long-term public interest. My second principle relates to the efficient accomplishment of a basic CSRS goal: to attract and retain competent employees. The current federal compensation structure is a failure in this regard. and current retirement policies are part of the problem. Today's high retirement benefits are neither the best, nor the most economical means of accomplishing this goal. To prove my point, I would refer you to the testimony of the many public employee groups who are objecting to S. 1527's Thrift Savings plan on the grounds that many employees will not take full advantage of it. They know that employees prefer pay today to future retirement benefits. Indeed, experience tells us that the best way to attract highly qualified employees is through high pay. not retirement benefits. Yet, for obvious reasons, Congress has a clear preference for paying later, rather than now. For one thing, future taxpayers are much more compliant than present ones. For another, unfunded liabilities will not show up on this year's budget. As a Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 consequence, the government has saddled itself with a compensation structure that is increasingly skewed toward "deferred compensation." While studies consistently show that total federal compensation -- including pay, health benefits and retirement -- is roughly on par with that provided by large private sector firms, they also show that pay tends to be significantly lower, while retirement benefits compensate by being significantly higher. Under this structure, however, federal compensation policy is geared less toward attracting good employees than retaining the ones we have. It is discomforting to note that the employees who are being retained are those we have attracted with substandard pay; they are probably not the best available. The legacy of such an approach is chilling. Mr. Chairman, we are systematically creating a less efficient, less creative, and less motivated workforce to carry out federal programs. And the consequence for America's future is that there will be more heavy-handed regulation, more $9,000 allen wrenches, and fewer imaginative solutions to the many challenges facing government. In short, I would conclude that the current federal compensation policy does a double injustice to future taxpayers. Not only does it contemplate that they will pay the lion's share of the cost of compensating today's civil servants through "deferred Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 271 8 compensation." It guarantees that they will be served by a less-qualified workforce than could have been recruited had today's taxpayers been willing to shoulder their fair share of the compensation burden. In analyzing the Civil Service Pension Reform Act (S. 1527), one is tempted to say that the glass is half-empty. Cleary , the bill is a long way from accommodating the principles of generational equity. Yet, compared with the current retirement system, this legislation represents a major step in the direction of intergenerational fairness and fiscal responsibility. I recognize that the provisions in S. 1527 that I consider the most desirable are controversial among the powerful special interest groups who would have us replicate the current CSRS in order to justify the unrealistic promises made to current employees. I also recognize that these provisions compete with the important short-term goals of deficit reduction and avoiding unnecessary tax increases. For this, I commend the bill's sponsors for their courage and foresight. The principal innovation of S. 1527 is its Thrift Savings plan, under subchapter III. This plan envisions that up to 22 percent of the employer's total retirement contributions will be Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 272 9 placed in employee-owned accounts in the private sector, when matched by a like amount of employee savings. By so doing, the federal government would be funding a substantial portion of its pension liabilities in advance. The effect would be to move away from the current system of financing all retirement benefits with unfunded liabilities, which are nothing more than IOU's from future taxpayers to future retirees. This approach is much fairer to future taxpayers. In addition, by encouraging employee saving, the plan would stimulate capital formation and investment in the world competitive technologies that future workers will require, if they are to finance the Baby Boom generation's retirement. S. 1527 envisions the full advance funding of the Thrift Savings plan but plans to phase it in over a ten-year period. Such a transition may well be necessary in light of the federal government's need to get its fiscal house in order in the meantime. Advance funding means that today's taxpayers must shoulder a greater share of the burden for the retirement of today's civil servants. This costs money, and at a time when deficits threaten to precipitate an economic crisis, it is understandable that Congress would want to avoid actions that increase short-term pressures on the budget. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 273 10 normal cost of 20.8 percent of payroll, the pension plan envisioned under S. 1527 achieves only a modest 16.8 percent savings, compared to the current plan. This is still about 2 percent of payroll higher than the better private sector plans. And until federal pension costs get down to the levels provided by the private sector, it is unrealistic to discuss the meaningful kinds of federal pay reform that will be necessary to enable government to compete with private firms for the best talent available. Finally, I would note that about 72 percent of the savings under this plan would come from the cost-of-living allowance formula, which envisions that COLA's would be two percentage points less than increases in the consumer price index. While such a policy is more or less consistent with private sector practice, it has practical political drawbacks. The public employee unions and retiree associations will fight any such change out of fear that the new COLA formula will next be applied to them. I would recommend, therefore, that the Committee look for savings in other areas, such as reducing the accrual rate under the defined benefit portion of the plan, or raising the federal retirement age to more closely match that under the Social Security program. Although changes to the bill are in order, it is overall a good effort. Clearly, S. 1527 could do much more to improve the intergenerational fairness of federal retirement policy. But I suspect it is close to the best that can be accomplished this year Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 under existing constraints. For that, the bill's sponsors deserve That concludes my comments, Mr. Chairman. Phil Longman and I will be happy to answer any questions the Committee may have. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator STEVENS The next panel is the president of the Federal Managers Association, Mr. Minahan; the general counsel of the Senior Executives Association, Jerry Shaw; and the president of the National Council of Social Security Management Associations, Stephen Bauer. Mr. Bray and Ms. Ball are accompanying Mr. Minahan, and Mr. Childs and Dr. Strombotne is with Mr. Shaw. Mr. Minahan, you are first on my list. Why don't you start off. TESTIMONY OF MICHAEL E. MINAHAN, PRESIDENT, FEDERAL MANAGERS ASSOCIATION, ACCOMPANIED BY BUN B. BRAY, JR., EXECUTIVE DIRECTOR, AND CATHERINE BALL, LEGISLATIVE COUNSEL; G. JERRY SHAW, GENERAL COUNSEL, SENIOR EXECUTIVES ASSOCIATION, ACCOMPANIED BY BLAIR CHILDS, EXECUTIVE DIRECTOR; DR. RICHARD STROMBOTNE, CHAIR, SEA TASK FORCE; AND STEPHEN BAUER, PRESIDENT, NATION- AL COUNCIL, SOCIAL SECURITY MANAGEMENT ASSOCIATIONS, INC. Mr. MINAHAN. Mr. Chairman, members of the committee, my name is Michael Minahan. I am national president of the Federal Managers Association, full-time career manager working with the Army in upstate New York. I am accompanied by our legislative counsel, Catherine Ball and executive director, Bun Bray. First, we would like to comment on your efforts and the efforts of your staff in designing a new supplemental retirement system. We recognize the amount of work it entails. We believe the basic design of the plan, a three-tiered system, is sound. We do wish, however, to offer some suggestions for improvement. We note that upon introducing your bill, as you indicated in the Congressional Record on July 30, you stated, "according to experts, the ideal retirement plan provides benefits that will maintain the standard of living of a career employee into retirement." Although you indicated that the Stevens-Roth bill provides such a benefit, we must respectfully disagree. Designing a retirement system is a complex assignment. It is made even more complex here because there will be two different plans in one work force. We must note that our members are ada- mantly opposed to any changes in the current retirement system. We are pleased to see that the basic pension is a designed bene- fit. In addition, we believe that the three-tiered plan provides the best method for moving toward equal benefits for all workers. In a manager's case, he or she has already been penalized in salary growth in the Federal Government. Pay caps and a merit pay system with no pools of money for raises has lessened the value of the Federal manager's pay. To penalize this person further by of- fering him or her a lower percentage of replacement income at re- tirement would cause heightened frustrations. The add-on plan ap- pears to do this. The tilt inherent in Social Security, whereby lower income em- ployees have a larger percentage of their income replaced by Social Security than do higher income employees, is an important item for FMA. While we certainly agree that such a distribution is a noble social goal, most of our members are at the higher end of the Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 salary scale and an equitable solution must be found to offer them a reasonable replacement income. We must point out that what we are designing is a retirement system, not a social welfare program. In considering the income distribution issue, the two types of plans often mentioned are offset plans and add-on plans. Our mem- bership does not favor an add-on plan, such as in your bill because add-ons follow the tilt of Social Security. Whereas in our current system, workers at all levels of income receive the same percentage of income at retirement, with an add-on our members will receive a smaller percentage of their income than lower income workers. What FMA would really like is a 100-percent offset plan which would eliminate the tilt. We are willing to compromise on this be- cause it would cost more than the current system. After much soul searching, we are ready to support an offset plan of at least 50 per- cent, and we strongly urge you to consider this change. This will relocate some of the tilt in Social Security and still enable us to stay within the cost parameters of the current system. Most of the plans in private industry are 50-percent offset plans. If we do end up with an add-on plan, some accommodation must be made for higher income employees. Such an accommodation would be a capital accumulation plan. The CAP as defined in your bill offers a good opportunity for higher grade employees to achieve a reasonable amount of replace- ment income when they retire, if they have 10 percent of their income to invest. Because the defined benefit part of your plan is an add-on, it is especially important that the CAP offers a chance for significant personal savings. In addition, with the CAP, we be- lieve there is a psychological benefit to depoliticizing at least some of the retirement benefits afforded Federal employees. We understand that the administration is again proposing the elimination of 401(k)'s. Should this happen, it appears unlikely that your bill will be allowed to retain the CAP's for Federal workers. If the 401(k) is eliminated, we would urge that you reconsider and accept the notion of explicitly integrating this plan so that retire- ment income is equally distributed to all salary levels. One of the most important goals in the new system should be to make it as similar to the old system as possible. The ideal would be two people working side by side, one in the current system and one in the new system, with the same benefits. With the inclusion of Social Security into the system, it is not possible to attain such a goal. Even so, we would like to suggest some changes in the fea- tures of your plan that will lessen the dissimilarity. In the current system, employees are eligible to retire at 55 years with 30 years of service with full benefits. Your plan allows retire- ment at that age with 30 years of service and a 2-percent reduction for every year under age 62. This means a difference of 53 percent of income replaced at retirement in the current system compared with a 23-percent to 38-percent replacement rate in the new system, depending on how much income one has available to put into the CAP. We believe than an employee who gives his or her entire career to the Federal Government is certainly worthy of re- tiring at 55 with a reasonable expectation of equitable benefits. We believe that it's important to remember that the retirement system is only a part of the total compensation package of the Federal em- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 ployee. A good retirement system is what has helped us retain top- notch managers. Please keep in mind that the Federal manager has been repeatedly penalized in salary growth. Federal employees have worked hard to retain a full COLA for annuitants in the current retirement system. We believe full COLA's should continue. The current system uses the high 3 years of salary in its formula for the defined benefit. Your plan uses the high 5 years. We see no reason for such a change, and in the interests of equity, urge a high-3-year salary base. A 3-year span more closely relates the basic rate to salary. While we understand the need to contain costs in this atmos- phere of concern about Federal expenditures, we submit that the survivor and disability benefits in your plan could benefit by some additional features. For instance, we must insist on a survivor ben- efit that is payable immediately, regardless of whether the employ- ee was eligible to retire or not. The introduction of Social Security into the compensation of Fed- eral employment means that some benefit dollars currently spent on retirement. benefits will flow to benefit categories not paid under the current system. To reduce the retirement benefit even more by reducing the overall cost of the system would be unfair. We urge you to consider the addition of benefits as we have out- lined. It is possible to have a retirement plan that more closely ap- proximates the current one. For the benefit of assuring a continued high quality workforce, it is essential. On the subject of special category employees, many of our mem- bers in FMA are air traffic control supervisors. The changes in the Stevens-Roth bill for these workers are even harsher in their effect than for regular workers. If an air traffic control specialist retires at age 50 with 20 years service under this new bill, as he could under the CSRS, his income replacement rate ranges from approxi- mately 9.4 percent to 14.4 percent with full participation in the CAP. That is, if this worker paid out the 5.7 percent to Social Secu- rity and put another 10 percent away in the CAP, he'd get 14.4 per- cent of his income at retirement. Senator STEVENS. Let me interrupt you right there. What do you think they do in the private sector? We have people in law enforce- ment in the private sector. They don't get Social Security until they are 62 and they don't get full retirement until they are 65. Somehow through this whole thread of testimony is a lack of awareness of what the private sector is paying today. You heard the previous witness, I hope. He reflects the sentiment of younger people that the concept of different standards for Federal workers is going to go away. I really think your organization ought to help us find a solution to that problem rather than be critical of the plan that accepts the reality of the marketplace today. If you are in the private sector and you are in law enforcement, you have a special benefit for the 20 years you are in law enforcement, but then you go on to another job. Under the existing situation, if you are in law enforcement in the Federal Government and you get full retirement after 20 years and do not go on to another job, that is what the complaint is. I just don't see that we ought to expect the retirement plan to solve the problem you are discussing. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. MINAHAN. We agree, but we just feel the replacement income based on the current plan for this category of employees is too low. We just feel like it ought to be at a higher rate. Senator STEVENS. That employee is not disabled at the end of 20 years. He or she is going on to another job. It is like military person retiring after 20 years. They go on to other jobs. They don t get full retirement at the end of 20 years. What you are telling me is we ought to have full retirement at the end of 20 years. Mr. MINAHAN. We certainly ought to have it at a higher level than 14.4 percent or replacement income. We would be delighted to work with the committee on this. We just feel it is too low. We will work with you on trying to make it a bit more equitable for this special category. Air traffic control is a very difficult job. I think we have to recognize that, witness the last several years in the system. We have managers that are working extraordinarily long hours and they are burning out. Just the normal job. Senator STEVENS. I certainly agree. While they are doing that ex- trahazardous duty, they ought to get extra pay and they ought to be fully compensated for it but we ought not to expect the retire- ment plan to compensate for that fact because they are going on to another job when they are 50. And you are really asking us to give them full retirement at 50, notwithstanding the fact that they are going on to another job. That is the complaint that is coming from the private sector. Mr. MINAHAN. What we don't want is to have them treated dif- ferently than those under the current system. Senator STEVENS. It's the current system we cannot continue. That decision was made by Congress. The Federal employees were not under Social Security before the decision by Congress. Now they are not eligible for Social Security until they are 62. There is nothing special in Social Security for people who hold law enforce- ment or other high-risk jobs. That is the difficulty that we face. I agree with you but I think your group above all ought to help us find a solution for the problem of the person who is burned out as far as the job he or she is in now and find a solution of what we do with those people in the Federal system if they want to continue to work and now to compensate them for the 20 years at the higher wage they deserve. That is the real thing. If they had the proper compensation for the 20 years, we wouldn't have the retirement problem. That is what the young man who preceded you is really saying. Mr. MINAHAN. Our organization is committed to work with you and your committee on this subject. Senator STEVENS. Thank you very much. Sorry for the interrup- tion. Mr. MINAHAN. While it is true we are asking for several things, we are also willing to concede that some costs will have to be in- curred by the emoloyee. We believe that by requiring level contri- butions, that is, that each employee contributes 7 percent of pay minus the amount paid to Social Security, Federal employees will be able to have a satisfactory retirement plan. By adding up the changes incurred by our suggestions we can keep the thrift savings plan as it is-an even more important point if we stay with an add- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 on plan-and end up with a cost of approximately 25 percent, simi- lar to the cost of the current system. In conclusion, we must seek to provide the work force with an adequate. stable income to maintain each person's standard of living. As we have said, a retirement plan is a form of deferred compensation. It is not a social welfare program. It aids in attract- ing and retaining a competent work force. We have taken signifi- cant cuts in benefits over these last few years. An attractive retire- ment plan is about all we have left to entice people to come into Government service. I would be happy to relate some of the experi- ences we, as managers, have had in attracting and retaining work- ers. Finally, the current system offers some features that have proven to be important and valuable to the work force. These fea- tures, such as retirement at age 55 with 30 years service and unre- duced benefits, calculating the benefit on the high 3 years of salary, and full cost-of-living adjustments, have been seen as steps forward in the design of retirement plans. Let's not move backward by eliminating these features in the new plan. Much has been said about the high cost of our current retirement system. We seem to have lost sight of the fact that many of the retirement plans of the larger companies in this coun- try are more generous than the civil service retirement system. We must ask ourselves whether we are seeking mediocrity or excel- lence in a retirement plan for Federal workers. That completes our testimony. We will be happy to answer any questions you may have. Senator STEVENS. Thank you very much. Mr. Shaw. Mr. SHAW. Thank you very much. We thank you for the opportu- nity to testify on S. 1527 to establish a new retirment system for new Federal employees who are now covered by Social Security. I am G. Jerry Shaw, general counsel of the Senior Executives Asso- ciation and I am accompanied by Mr. Blair Childs, executive direc- tor, and Dr. Richard Strombotne, chair of the SEA task force on retirement issues. As you know, Mr. Chairman, SEA is the professional association representing the interests of career Federal executives who are re- sponsible for directing all the programs and operations of the Fed- eral Government under the policy guidance of political leadership and the statutory requirements enacted by Congress. We are vitally interested in the retirement system for new em- ployees for several reasons. We have spent more time on this piece of vital legislation than any other in our history. Why? Because first, Mr. Chairman, it is our job as career executives to make sure that the Government that we operate attracts and retains high quality employees whom we manage. Second, we believe it is important for the Government that the new system be sufficient to insure continuity of Federal operations, as well as insure that citizens of this country are willing to make a career commitment to public service. Third, the new retirement system will directly affect future senior executives and possibly current executives and employees who decide to transfer to the new system and, therefore, will affect the ability of the Govern- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 ment to attract and retain topnotch career managers and execu- tives. The SES was established by the Civil Service Reform Act in order to provide a cadre of career executives who were profession- als in their occupation, who would provide continuity in Govern- ment operations, and who were available to be placed by their agency in positions which the political leadership deemed impor- tant. Members of the SES gave up most of their job protections, which many other Government employees continue to enjoy in order to be judged on their performance and to be rewarded or re- moved from the SES on the basis of their continued performance. When the SES was established, over 95 percent of the career ex- ecutives in Government voluntarily entered the system. They did so because they believed there were greater challenges, and they were willing to compete to stay in the SES on the basis of their performance. A bonus and award system was set up to reward these outstanding individuals who excelled at their profession, but the implementation of such a system has been very slow. A retirement system is an extremely important part of the com- pensation package which the Government must rely on to attract career executives into the SES and to retain them there for the re- maining years of their career. Every study made of compensation between career SES members and the private sector shows that they are woefully underpaid for the amount of responsibility they carry and the importance of their duties in comparison to private sector executives at similar levels. In fact, over 50 percent of the career SES members who volun- tarily entered the SES in 1978 have since resigned or retired from the Senior Executive Service. Those who have remained, and those who have newly entered the SES, have done so in large part be- cause of the retirement system currently in place. A new retire- ment system which does not have the attrac- tiveness of the cur- rent retirement system could be a major disincentive to attracting quality people to the ranks of the career executives. It is impera- tive that the new system that is in place be sufficient to attract and retain executives who can carry out the complex missions of the Federal Government. We think the outlines of such a system are contained in this legislation, but we emphasize at the outset that without the capital accumulation plan that is contained in this bill, it would not meet the goal of attracting good people. Before commenting on the specifics of this bill, I want to express our appreciation to Senators Stevens and Roth for their leadership and efforts over the past years to deal with the very complicated issue associated with the design of a new retirement system which is fair to employees and which is seen to be fair by all involved. We strongly support the philosophy that the new retirement system should follow the best private sector practice in most re- spects, with a few exceptions appropriate for a staff retirement system of the Nation's largest employer. The GAO report of June 1984 on features of private sector retirement systems is an excel- lent source of information and evaluation. It is important to note that the Federal Government, as an employer of predominately professional, technical, and administrative personnel, is generally Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 competing with the largest companies and organization in the country for talent, not with the smallest. We support the overall design of the new retirement system so long as it includes all of the three principal components. It is im- perative that Social Security coverage be supplemented by a non- contributory defined benefit plan, and a voluntary tax deferred thrift plan with 1 to 1 employer matching of an employee's contri- butions up to a minimum of 5 percent. The new retirement system should permit the employee who has devoted a full career of 30 years to public service, and his spouse, to maintain the same standard of living after retirement as they had before retirement. As you know, benefits under Social Security are tilted toward the employee with lower lifetime earnings. That is, the percentage of final pay replaced by annuities under Social Security is much greater for lower paid employees than it is for higher paid employees. By contrast, the current CSRS provides an- nuities that replace the same percentage of final average pay for both higher paid and lower paid employees having the same age and length of service. As proposed, the defined benefit plan portion is simply added on to the benefits of Social Security. There would be a very large dis- parity in retirement income at age 62 for the 30-year career high- income employee under this proposal without the capital accumula- tion plan [CAP]. For example, the employee with $60,000 final salary would receive 10 percent of final pay from Social Security while the employee with $30,000 final salary would receive 18 per- cent of final salary. Even with the defined benefit portion of the plan added to Social Security, the higher paid career employee would receive only 37 percent of final pay in pension if the CAP was not in place. Attached to our testimony is a chart by the Con- gressional Research Service setting forth relative disparities be- tween the lower paid employee and the higher paid employee uti- lizing Social Security and the defined benefit plan. Approximately 90 percent of private firms utilize what is known as an offset plan to eliminate part of the Social Security tilt. They integrate the defined benefit component with Social Security so that replacement rates for lower and higher compensated employ- ees are not at disparity. The current bill does not employ an offset to compensate for the Social Security tilt, but instead establishes the CAP to do so. It is absolutely imperative that the CAP proposed in this legislation remain strong or the Government will be at a serious disadvantage in competing for higher paid executive, mana- gerial, professional, and technical talent. I would like to digress for a moment, Mr. Chairman, at this point and respond to a question Senator Eagleton asked of the prior panel. The issue was whether 1.3 percent would be placed in the defined benefit portion of the plan or would the employees prefer that it be contributed to a capital accumulation plan, or which would the organizations testifying prefer. The organizations said they would obviously prefer the higher return that would come from the capital accumulation plan if the return was guaranteed. In fact, as you know, Mr. Chairman, a 7.5-percent return is guar- anteed by the Government bonds which the capital accumulation plan would be placed in and that 1.3 percent, as Senator Eagleton Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 pointed out, the Congressional Research Service said, would return the 12 percent on the investment guaranteed. I think that is an im- portant point and I was urged by some Congressional Research Service representatives in the audience to make that point. The capital accumulation plan is so important and that is par- ticularly true when one considers that the recent Hay study re- ports that Federal employees lag behind their private sector coun- terparts by about 10 percent in overall compensation. This disparity is even more severe for executives where it has been found that total cash compensation would have to be in- creased 58.4 percent to equal aggregate private sector total cash compensation. We cannot endorse strongly enough the CAP plan as the only acceptable alternative to not using an offset to the Social Security tilt. SEA strongly opposes the CPI minus 2 COLA adjustment for the defined benefit plan portion of the proposed retirement system. We feel that a full COLA is necessary as an essential part of the com- pensation system. For a career executive, a substantial amount of his/her retirement income under the proposed bill would, of neces- sity, come from investment in the CAP. Since Social Security would make up a very small portion of the replacement rate, the COLA on Social Security would be a very small protection for higher paid executives. Since there would be no cost-of-living pro- tection on the CAP and if there was a reduced COLA on the de- fined benefit portion, executives, as well as Members of Congress, would have little protection against substantial erosion of their re- tirement benefits over a normal retirement span. The reduced COLA on the defined benefit would have a much bigger impact on higher paid employees than lower paid employ- ees. Senator STEVENS. Do that again. Mr. SHAW. Assuming Social Security continued at full COLA and there was a COLA minus 2 or 1, whatever, on the defined benefit portion and no COLA protection-- Senator STEVENS [interposing]. It is 100-percent COLA on the top; By definition it is adjusted for inflation since the account continues to draw investment from the private sector. Mr. SHAW. 100 percent COLA on the capital accumulation plan? Senator STEVENS. Right. It is in the private sector, therefore, it is adjusted by the private sector to inflation. Mr. SHAW. Except, Mr. Chairman, the retired employee would be drawing down the amount that that pot of money would be able to draw from the private sector. Senator STEVENS. No; it is equal to the private sector, therefore, it is equal to the CPI. By definition it is going to keep up-the fig- ures were given to us yesterday-it would keep up over the 20-year period. Any 20-year period would show it was equal to or ahead of inflation. Mr. SHAW. The capital accumulation plan. Senator STEVENS. If it is invested in the private sector. Mr. SHAW. We would like to see the figures, Mr. Chairman. We are not aware of those. That might well change our position. Senator STEVENS. That is why it is out there in the private sector. It is automatically involved in the spirals that take place in Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 the private sector, which are what brings about the adjustments in COLA. If you put it in Government bonds, they are not necessarily indexable to the private market. By definition, some of that fund is going to be in stocks and bonds which appreciate rather than just earn interest according to the fluctuation of the interest rates. Mr. SHAW. As I understand, the employee would determine what portion was in-- Senator STEVENS [interposing]. They would have the option in some broad categories to decide what level of risk they want to incur. I think we ought to look at that. Senator GORE. I think Dr. Strombotne wanted to make a com- ment on that. Mr. STROMBOTNE. Yes, if I may. In discussions with your staff, Senator Stevens, Mr. Cowens had explained that the tables pre- pared by the Congressional Research Service analyzing the cost of the Stevens-Roth bill make an assumption that the capital accumu- lation, the annuity purchased by the capital accumulation plan, would increase at some constant rate appropriate to the economic assumptions. I believe that is correct. And that is appropriate, of course, for considering the overall costs. Looking at it from the standpoint of an individual employee or retiree, he sees a certain amount of money invested in a capital accumulation plan and there is no guarantee that his fund will share in future inflation and, generally, inflation is pretty bad for any kind of fixed invest- ment. Stocks don't do too well under those conditions. I believe the point Mr. Shaw was making is there was no guaran- tee of a full cost-of-living adjustment on the capital accumulation plan. That is the point we wanted to make. Senator STEVENS. There is no guarantee of COLA's, as we have witnessed. There is a greater quarantee in the private marketplace than there is congressional acquiescence in the COLA's year after year after year. We want to put that fund out in the private sector. As we said yesterday, we hope to liberalize it as we go along: a por- tion of it in real estate, a portion of it in bonds, a portion of it in Government bonds, a portion of it in Government notes. In effect, if an employee were participating in a diversified portfolio as he would have the option to do, he would have the best protection against inflation, better than relying upon the Governemnt, better than relying upon Congress. I can show you, the history is that Congress has never responded in 20 years either. If you want to look at the inflationary spiral, the best protection is the person who has his money in a diversified portfolio in the private sector. The next best protection is the person who has some guarantee from the Federal Government, but that is always 4 or 5 points below what has been the return in the private sector. I just saw published the other day some of the funds of the, what do they call them, the mutual groups, particuarly one out of Boston. They were substantially ahead of anyone who had money in Government bonds. Over the past years, your money has been and mine too, at what, 4, 51/2 percent. During this period of 13- to 20-percent inter- est, we were getting 4 and 5 percent. Now we are getting about 11. But when the interest factor goes up to 22, we will still be getting 11. I would hope your people above all would recognize the advan- tage of the third tier. I think you do, Jerry. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. SHAw. We don't disagree with that point, Mr. Chairman. We really would like to see the figures. I think we can be persuaded. Our fear is from a guarantee standpoint, assuming a Social Securi- ty COLA remains and there is a minus on the final benefit, the lower paid employee would have a much better guarantee against inflation than higher paid. We would certainly like to go over that. Senator STEVENS. I think you ought to go over it. If you assume 5 percent of salary, as I pointed out yesterday, through the contribu- tion pattern here, we are already providing 1.3 percent of that to start with-1.7, really, when you consider the free insurance. It is 1.7 percent of the first 5 percent that is provided in this bill. If you put in the extra 3.3 to have 5 percent, that 10 percent over a period of time has a staggering value if it is properly invested. Mr. SHAw. It does, Mr. Chairman. That raises another response on Senator Eagleton's question to the postal unions. One of the things is, putting the money in the thrift plan would be better than the defined benefit plan for employees who do not stay for a full career. There is portability in the thrift plan. That money can be rolled over and continue to earn their benefit if the 1.2 was put into the defined benefit plan. Of course, the short-term employee would not benefit. Senator STEVENS. I want to let you finish. In going over last night what I hear in terms of having the contribution increase- and we are looking at, say, 7.5, 8 percent of the first 2 years and then make it 1.15 for the next 10, and graduate after that-I should think what we ought to do is also makethe matchable con- cept increase with the years as far as the thrift plan is concerned because as I look back, I had more money to save in the last 10 years than I did in the first 20. We ought not to presume everybody is able to save money in the first 10, 15 years of employment. We want to look at that and see if we can't, in terms of the employee's career, give a higher degree of match at the time when he or she has more money to invest. Again, you could help us on that. Mr. SHAW. We will be very pleased to work with you on that. I think one of the things, since new employees coming into the system right now are obviously lower grade employees, people are concerned about that. The normal career progression is going to bring those employees coming into Government now in another 10, 15 years up into the middle-, senior-level groups, and I think that kind of provision would be helfpul to all employees. The provision, Mr. Chairman for optional, normal retirement at age 55, or greater, for an employee with 10 or more years of serv- ice, but less than 30 years of service, with a penalty of 5 percent per year for each year before age 62, is commendable. It would pro- vide employees with a wider range of choices, at no cost to the Gov- ernment, and we support it. We recognize that the penalty of 2 percent per year for each year before age 62 that would apply to normal retirement-or involun- tary retirement-conforms with typical private-sector practice. Nevertheless, the GAO and other studies point out that some large firms permit retirement at age 55 with no penalty. In order to en- courage long-service employees who dedicate their professional lives to the Government, we think that an employee who has served his country for 30 years should not be penalized for deciding Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 to retire at age 55 with 30 years of service. What is more, the cost of unreduced retirement at age 55 and 30 years of service is rela- tively small, and we are not talking about Social Security offset here. It would be 11/2 percent of payroll. Senator STEVENS. Do you know why that is, Jerry? The answer is no one will take it without Social Security at 62. I couldn't figure out why they were telling us it was one-half of 1 percent. The reason is, who is going to do it? Mr. SHAW. The principle, however, the 55 years, 30 years without reduced, I think, is an important principle and most employees probably won't retire; many now do not retire at 55 when they are eligible. However, the fact they have that is an important principle to them and one we very, very strongly support. If they choose to stay, assuming the Government is a competitive employer, and they choose to stay for those extra 7 or 10 years, then that is an option the employee should be able to make. That is a principle we support. Senator STEVENS. I will agree with you if you help me work out the reemployeed annuitant problem of people who decide they are going to get out but stay in. That is one of the things going on right now, and I think under this new system we complicate it if we face that. The option ought to be get out. If you are going to stay working with Uncle Sam, you stay in rather than get out and still come back in. That is the worst part about this system when you have that thrift plan out there, to have someone out and get- ting the pension plan but still in and getting the kicker. Now that wont work. You show us how we can keep your com- mitment for 55 and 30 and we will agree to it as long as there is an option to get out, but you can't be employed by the Federal Govern- ment if you are out, and I mean anywhere. Mr. SHAW. Mr. Chairman, we will certainly look at that and we will discuss that with your staff. I think we can be-for myself per- sonally, I think we can support that. Senator STEVENS. Everyone is for 55 and 30. Senator GORE. I think in terms of the political support for what we enact here, that is something that is going to have to be ad- dressed. I will look forward to joining in those discussions. Mr. SHAW. We are not going to speak to the survivors annuity provisions, which I think everyone recognizes are inadequate, be- cause we understand you stated earlier today that you are dealing with those. We do, however, believe the provision of the current civil service retirement system for joint and 50-percent survivor annuity at a cost of 21/2 percent reduction in the first $3,600 of annual annuity payments and 10 percent of annual payments above $3600 should be retained in the new system and used as the basis for any fur- ther actuarial adjustment needed for other options. We believe it is a reasonable balance between the individual employee having to completely fund the survivor annuity and the employee having to fund none of it. We strongly support the 1-to-1 matching ratio for contributions to the tax deferred CAP which will provide a strong incentive for a high percentage of all new employees to participate. The 5-percent limit provides these employees with an opportunity to save for ad- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 ditional retirement benefits as they see their own needs. It is par- ticularly important that the higher paid half of the employees have access to such a plan to compensate for the Social Security tilt. We advocate permitting a higher percentage of salary be invested in the CAP than the proposed 10 percent. Virtually all employee groups in the country potentially have access to some kind of tax-deferred retirement saving plan whether it is 403(b), 401(k), 457, et cetera. Indeed, even nonprofit organiza- tions can proovide a 401(k) or in some instances a 403(b) profit sharing plan for their employees, as the April 29, 1985, issue of Forbes points out. Federal employees are virtually the only major group of employ- ees that have not been included as yet. We recommend that all Federal civilian and military employees be provided with the op- portunity to contribute to a tax-deferred CAP, not limited to the new employees, and that the contribution limit be set at 20 percent of statutory pay. This change would remove an oversight that has become a gross inequity. We are not recommending any employer matching of an employee's contributions, except in the new retire- ment system. In consideration of how the new retirement system is to be ad- ministered, it is apparent that the defined benefit component can be viewed as a variation on the current CSRS and that OPM is the appropriate agency to administer it. The New Capital Accumula- tion Program is, or should be, a different matter. We recommend that a separate, independent organization be formed to administer the CAP for the benefit of its participants, that is, current, and past employees, and annuitants. In addition, careful attention needs to be given to the appoint- ment authorities and to organizational matters to ensure that the administration is performed objectively, fairly, and without parti- san bias. Mr. Chairman, we have a very long list of technical provisions which we would like to submit that would deal with some of the points on how the capital accumulation plan should be adminis- tered. This concludes our prepared testimony. We want to thank you, Senator Roth and others, again, for giving us this opportunity. We will work with your staff and we fully support this bill so long as we have all three components of the system in place in your pro- posed retirement plan. Thank you, Mr. Chairman. Senator STEVENS. Mr. Bauer. Mr. BAUER. Mr. Chairman, we thank you for the opportunity to testify on S. 1527. I speak for an association that is comprised of Social Security field office managers and supervisors. My name is Stephen Bauer. I am president of that association. Let me note that we lack the expertise to examine the accuarial projections of the proposed legislation and, therefore, I will only make comments concerning certain principles that the bill estab- lishes for the new retirement system. The bill would provide a high replacement rate for lower grade employees who retire at age 62 with 30 years of service. If the em- ployee was to participate fully in the thrift program portion of the bill, the replacement rate at retirement age of 62 with 30 years of Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 service for a $20,000 per year employee would be approximately 69 percent. For a higher paid employee whose average salary was ap- proximately $48,000, the replacement rate, again, if fully participa- tinq in the thrift program, would be approximately 55 percent. The replacement rate, of course, would vary depending upon the amount of participation in the thrift program, but the projected rate of salary would still be substantially in excess of 50 percent for lower grade employees and could be substantially less than 50 percent for higher grade employees. This further will increase the problem that we face of retention in the management ranks where the comparability pay-gap increases with grade. Managers would end up suffering disproportionately in compen- sation both while they are working and subsequently in retire- ment. We do not object to the higher replacement rate for lower grade employees. We just believe the salary replacement level should be the same for all employees at all grade levels. This could be achieved under the defined benefit portion of the plan by providing employees at higher grade levels, for example, GS-11 or above, with additional contributions from the employer. It could also be accomplished by providing for higher matching contributions from the Government for contributions made to the thrift program by higher grade employees. Lacking, again, the expertise to propose a solution to this dilemma that we see, we suggest that the Congres- sional Research Service make calculations and evaluate the cost of providing the same replacement rates for higher grade employees as those that will be received by lower grade employees. This is im- perative in order to retain senior managers and executives in Gov- ernment. Our main concern as Federal managers is that recruitment and retention problems will increase and we will be unable to effective- ly perform the functions entrusted to the Federal Government. If Congress decides to equalize replacement rates, we have heard testimony today of different offset plans for Social Security that can be used to correct the tilt in Social Security benefits. We can note that we would strongly recommend any offset plan only taking into consideration Social Security benefits earned during Federal service. For short-term Federal employees, if we off-set Social Security earned in other employment against the defined benefit plan annuities, that would be unfair and could reduce their annuity to virtually nothing. We strongly recommend that retirement be made available with- out reduction at age 55 with 30 years of service. We recognize that the average Federal employee works until nearly age 60, which is very similar to the private sector. However, few employees, either in Government or out of Government, spend 30 years with a single employer. Those who do should be rewarded for their continuous and dedicated service to the Government and should be granted an annuity at age 55 without actuarial reduction. Indeed, more and more private plans are providing such a benefit. At present, Federal employee pay levels are not competitive, health insurance coverage is lower, and other fringe benefits are being proposed for reduction. One of our grave concerns is that this situation, coupled with a retirement system which does not reward Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 an employee for length of service, will induce a dramatic rate of turnover in the ranks of midlevel management. There has to be an incentive, and a strong incentive, for a Federal employee to choose public service as a career and to stay with that career during his working years. If Congress decides to treat Federal employment as just another career, then all pay benefits should be competitive with the private sector in order to retain quality managers at the middle and senior grade levels. I think we need to note this will probably be a strong induce- ment and would encourage people to participate fully in the thrift program so they potentially, for example, could retire at age 591/2, roll over to an IRA, and reduce that difference in the time between 59% and or 62 with contributions of withdrawals from their IRA Program. Senator STEVENS. I was looking at that. You are right. It is a very good program. Mr. BAUER. We think retirement at 55 with 30 years of service would be an important aspect to retain. That would be one of the reasons. We are adamantly opposed to the COLA minus 2 or any other COLA reduction provision. That has been discussed here at great length today. But as Social Security managers, we have seen in the past the result of lack of cost-of-living increases in benefits prior to Congress in its wisdom enacting COLA protection on a regular basis, and we saw that decision confirmed in Congress this past year. An individual retiring at age 55 or age 60 could see a dramatic decrease in purchasing power within 15 years after retirement in his defined benefit with a COLA-minus-2 option. It is in the annu- itant's later years that it is much harder to replace that benefit lost to inflation by going to work because they are much more likely at that point to be too sick or too elderly to obtain other em- ployment. In the long run, I think it would not be a wise decision to place Government annuitants in that position. Finally, and it has been mentioned several times, the survivor and disability provisions of S. 1527 are extremely important. A young worker with children has unconscionably inadequate protec- tion. At Social Security, we preach the Social Security benefit is in- tended only as a floor of protection. S. 1527 does very little to pro- vide the walls and the roof for a family's protection. I was pleased, Mr. Chairman, to hear you will be addressing that important prob- lem and we view that as an essential issue in an adequate retire- ment system for Federal employees. Overall, with those modifications, we could support the proposed legislation; We would very much appreciate the opportunity to work with you, Mr. Chairman, and the members of your committee and staff in order to achieve passage of this legislation. Thank you again for the opportunity to testify. Again, we do ap- preciate how difficult it is to come to grips with the various issues involved in this program, and we will be happy to answer any ques- tions you have. Senator STEVENS. I don't have any questions. I have injected mine as we went along. The full COLA concept, obviously, is the Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 most difficult to achieve and maintain the thrift plan at the same time. The cost of the full COLA is such that it would totally elimi- nate the thrift plan if we are going to stay within the budget direc- tives. So it is a difficult proposition. It is 3 percent of payroll to re- store the COLA. But if you put that same amount into the thrift plan, it has an elasticity that is not there with just the COLA. Again I would urge you to study it. If restoring the full COLA is an absolute necessity, we have to abandon the third tier, except just for voluntary contributions with no matching. I personally think the thrift plan has more to offer in terms of long-term securi- ty for a new employee. I would appreciate your comparison. If you have any further comments you would like to submit on that, I will be happy to have them. Senator Gore. Senator GORE. You are all in favor of the thrift plan, is that cor- rect? Mr. SHAW. Absolutely. We do not think the retirement system is viable at all for midlevel managers and senior level managers with- out the thrift plan. Senator GORE. All three of you are in favor of it? Mr. MINAHAN. That is correct. Mr. BAUER. Yes. Senator GORE. All three of you are in favor of a full COLA? Mr. MINAHAN. Yes, sir. Mr. BAUER. That is correct. Senator GORE. All three of you are in favor of retirement at age 55 without penalty? Mr. MINAHAN. That is correct. Mr. SHAW. That is correct, but we understand it would be-since Social Security would not be present, the incentive to retire at age 55 would not be as high. Senator GORE. If you are all three in favor of all three of those things, then is it fair to conclude that all three of you are in favor of a new plan that costs significantly more than the present plan? Mr. SHAW. We wouldn't oppose-- [Laughter.] Senator GORE. Pardon me? Mr. SHAW. We would not oppose a little more contribution by the Government to this plan. They sure saved enough on our pay in the last 5 years or so. Senator GORE. Mr. Minahan. Mr. MINAHAN. We want it to be similar in cost to the current system. Senator GORE. Maybe a little more? Mr. MINAHAN. We are not asking for more. Senator GORE. How can you not have more if you have what you have now plus the capital accumulation plan? Mr. MINAHAN. We are suggesting level contributions at 7 per- cent. Senator GORE. Mr. Bauer. Mr. BAUER. I believe that we need to look again at the picture we miss sometimes, that is, the overall compensation. Senator GORE. I don't disagree with you there. As long as we are looking at overall pictures, do any of you believe that a plan more Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 expensive than the current one would both pass the Congress and be signed by the President this year? Mr. SHAW. No. Senator GORE. Where do you come out then? Mr. SHAW. I think the assumptions, Senator-and I know you have worked on this and probably know it better than we do-the assumption if you had 55 and 30 retirement eligibility, if you don't have a social security base, No. 1, as Senator Stevens pointed out, as the Congressional Research Service points out, that costs 11/2 percent of payroll. That is not really an expensive item. The Senior Executive Associations is willinq to look at the fig- ures Senator Stevens provided this morning on the fact there is COLA protection on the capital accumulation plan. That would ob- viously cause us to rethink our position. But it is very difficult for us as representatives of an organization to say we are not for COLA protection. We have seen what that has done to others in the past. Senator GORE. Are you, Mr. Shaw, and you, Mr. Bauer, both in favor of level contributions as Mr. Minahan is? Mr. SHAW. No; we like the contribution the way it is set up in the current plan. Senator GORE. Mr. Bauer. Mr. BAUER. We have a problem with the current plan-- Senator GORE [interposing]. Are you in favor of level contribu- tions? Mr. BAUER. Yes. Senator GORE. I have some additional questions which I will submit in writing to you because of the time constraints we are under. Did you want to add something else? Mr. MINAHAN. Considering the recommendations FMA has made in approving the Stevens-Roth bill and taking into consideration level contributions at 7 percent, our calculated cost is 24.4 percent of payroll, 3/i o percent under-using the figures from the Congres- sional Research Service information. Senator GORE. If we did have level contributions, would you object to a requirement that such contributions be made to the thrift plan rather than to the defined benefit plan? Mr. MINAHAN. We would prefer that they be to the defined bene- fit plan. Mr. SHAW. Senator, we prefer they be made to the thrift plan for two reasons. One, for shorter-term employees who don't stay for full career, they are portable, and second, because the return would be better on the 1.3 percent in the thrift plan than it would be de- fined benefit plan. I am glad Senator Eagleton walked back in be- cause it pertains directly to the question he asked the Postal Serv- ice or Postal Service representatives on the 1.3 and defined benefit or the thrift. In fact, Senator, the Congressional Research Service member here in the audience informed me that if the 1.3 went into the thrift plan and the 12-percent return is based on a 71/2 percent return on Government bonds which are by law guaranteed, a 12- percent return on the 1.3 in the thrift plan is guaranteed versus if the 1.3 percent in the defined benefit plan. Senator GORE. I, in fact, asked that question in behalf of Senator Eagleton and he may wish to pursue it. But let me say I appreciate Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 your testimony. We certainly appreciate your appearance here today. Mr. SHAW. Senator Gore, on behalf of the Senior Executives As- sociation, we know you have put a tremendous amount of time, effort, and study into this and we really do appreciate it very much. Senator GORE. I appreciate that. The work began long before I became a member of this committee. Mr. SHAW. But you have caught up. Senator GORE [presiding]. Thank you all. [The prepared statements of Messrs. Minahan, Shaw, and Bauer follow:] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 FEDERAL MANAGERS ASSOCIATION President ACMMM Executive Director Michael E. Minahan \ - Bun B. Bray, Jr. 257 Stowe Avenue - 2300 South 9th Street Troy, NY 12180 Arlington, VA 22204 (518) 274-4572 (703) 892-4408 TESTIMONY OF MICHAEL E. MINAHAN, PRESIDENT FEDERAL MANAGERS ASSOCIATION BEFORE SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS SEPTEMBER 10, 1985 First, we would like to commend your efforts and the efforts of your staff in designing a new, supplemental retirement system. We recognize the amount of work it entails. We believe that the basic design of the plan, a three-tiered system, is sound. We do wish to offer some suggestions for improvement, however. We note that upon introducing your bill into the Congressional Record on July 30, you stated, "According to experts, the ideal retirement plan provides benefits that will maintain the standard of living of a career employee into retirement." Although you indicated that the Stevens-Roth bill provides such a benefit, we must respectfully disagree. Designing a retirement system is a complex assignment. It is made even more complex here because there will be two different plans in one workforce. We would note here that our members are adamantly opposed to any changes in the current retirement system. We are pleased to see that the basic pension is a defined benefit. In addition, we believe that the three-tiered plan provides the best method for moving toward equal benefits for all workers. In a manager's case, he or she Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 has already been penalized in salary growth in the Federal government. Pay caps and a merit pay system with no pools of money for raises has lessened the value of the Federal manager's pay. To penalize this person further by offering him or her a lower percentage of replacement income at retirement would cause heightened frustrations. The add-on plan appears to do this. dal security "Tilt- The tilt inherent in Social Security, whereby lower-income employees have a larger percentage of their income replaced by Social Security than do higher-income employees, is an important item for FHA. While we certainly agree that such a distribution is a noble social goal, most of our members are at the higher end of the salary scale and an equitable solution must be found to offer them a reasonable replacement income.` We must point out that what we are designing is a retirement system, not a social welfare program. In considering the income distribution issue, the two types of plans often mentioned are offset plans and add-on plans. Our membership does not favor an add-on plan, such as in your bill, because add-ons follow the tilt of Social Security. Whereas in our current system, workers at all levels of income receive the same percentage of income at retirement, with an add-on our members will receive a smaller percentage of their income than lower-income workers. What FHA would really like is a 100% offset plan which would eliminate the tilt. Unfortunately, there are major problems with such a plan, one of which is that it would be illegal in the private sector. Another is that it would cost more than the current system. After much soul-searching, we are ready to support an offset plan of at least 50% and urge you to consider this change. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 294 This will relieve some of the tilt in Social Security and still enable us to stay within the cost parameters of the current system. Most of the plans in private industry are 50% offset plans. If we do end up with an add-on plan, some accommodation must be made for higher-income employees. Such an accommodation would be a capital accumulation plan. Capital Accumulation flgn (CAP) The CAP as defined in your bill offers a good opportunity for higher grade employees to achieve a reasonable amount of replacement income when they retire, if they have 10% of their income to invest. Because the defined benefit part of your plan is an add-on, it is especially important that the CAP offers a chance for significant personal savings. The options available under the plan for investment and disbursement of the funds allow Federal employees greater discretion in planning their=retirement. In addition, we believe there is a psychological benefit to depoliticizing at least some of the retirement benefits afforded Federal employees. We understand that the Administration is again proposing the elimination of 401(k)s. Should this happen, it appears unlikely that your bill will be allowed to retain the CAPs for Federal workers. If the 401(k) is eliminated, we would urge that you reconsider and accept the notion of explicitly integrating this plan so that retirement income is equally distributed to all salary levels. One of the most important goals in the new system should be to make it as similar to the old system as possible. The ideal would be two people working Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 side by side, one in the current system and one in the new system, with the same benefits. With the inclusion of Social Security into the system, it is not possible to attain such a goal. Even so, we would like to suggest some changes in the features of your plan that will lessen the dissimilarity. ? Age - In the current system, employees are eligible to retire at 55 years with 30 years of service with full benefits. Your plan allows retirement at that age with 30 years of service and a 2% reduction for every year under age 62. This means a difference of 53% of income replaced at retirement in the current system compared with a 23%-38% replacement rate in the new system, depending on how much income one has available to put into the CAP. We believe that an employee who gives his or her entire career to the Federal Government is certainly worthy of retiring at 55 with a reasonable expectation of equitable benefits. We believe that it's important to remember that the retirement system is only a part of the total compensation package of the Federal employee. A good retirement system is what has helped us retain top-notch managers. Please keep in mind that the Federal manager has been repeatedly penalized in salary growth. ? Cost-of-living adjustment - Federal employees have worked hard to retain a full COLA for annuitants in the current retirement system. We have fought hard because it is untenable to allow a retiree's income to shrink each year at a time in onus life when market forces have the most impact. ? Salary base - The current system uses the high three years of salary in its formula for the defined benefit. Your plan uses the high five years. We see no reason for such a change, and in the interests of equity, urge a high three year salary base. Further, because the accrual rate (1%) is so much lower than in the current system, it is important that the salary base be as accurate a reflection of salary as possible. A three-year span more Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 296 closely relates the basic rate to salary. ? Survivor and disability benefits - While we understand the need to contain costs in this atmosphere of concern about Federal expenditures, we submit that the survivor and disability benefits in your plan could benefit by some additional features. For instance, we must insist on a survivor benefit that is payable immediately, regardless of whether the employee was eligible to retire or not. In addition, actuarially reducing the survivor's benefit to the extent that your plan does, is about the same as offering no benefit at all. ? Cost - The introduction of Social Security into the compensation of Federal employment means that some benefit dollars currently spent on retirement benefits will flow to benefit categories not paid under the current system. To reduce the retirement benefit even more by reducing the overall cost of the system would be unfair. We urge you to consider the addition of benefits as we have outlined. It is possible to have a retirement plan that more closely approximates the current one. For the benefit of assuring a continued high quality workforce, it is essential. ? Special categories of employees - Many of our members are air traffic control supervisors. The changes in the Stevens-Roth bill for these workers are even harsher in their effect than for regular workers. If an air traffic control specialist retires at age 50 with 20 years service under this new bill (as he could under the CSRS), his income replacement rate ranges from approximately 9.4% to 14.4% with full participation in the CAP. That is, if this worker paid out the 5.7% to Social Security and put another 10% away in the CAP, held get 14.4% of his income at retirement. The way this bill is set up, a controller would do far better leaving on disability than retiring. This would put a tremendous stress on the disability system. These employees Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 have been put in a special category because we have found over the years that they need to retire earlier with fewer years of employment. It is in our beat interest that they do no. The arbitrary changes you seek disregard what we have learned thus far. Them are some points regarding special category employees that do not appear to be addressed in the bill: a mandatory retirement age, and the ability to retire with 25 years of service at any age with a guaranteed annuity. We would hope that these points will be dealt with before the bill is released from committee. While it is true that we are asking for several things, we are also willing to concede that some costa will have to be incurred by the employee. We believe that by requiring level contributions, that is, that each employee contributes 7% of pay minus the amount paid to Social Security, Federal employees will be able to have a satisfactory retirement plan. By adding up the changes incurred by our suggestions - 55/no reductions, full COLA, high-three salary base, changes in survivor and disability benefits, and the addition of level contributions - we can keep the thrift savings plan as it is (an even more important point if we stay with an add-on plan) and end up with a cost of approximately 25%, similar to the cost of the current system. In conclusion, we must seek to provide the workforce with an adequate, stable income to maintain each person's standard of living. As we have said, a retirement plan is a form of deferred compensation. It is not a social welfare program. It aids in attracting and retaining a competent workforce. We have taken significant cuts in benefits over these last few years. An attractive retirement plan is about all we have left to entice people to come into government service. I would be happy to relate some of the experiences we, as managers, have had in attracting and retaining workers. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Finally, the current system offers some features that have proven to be important and valuable to the workforce. These features, such as retirement at 55 with 30 years service and unreduced benefits, calculating the benefit on the high three years of salary, and full oost-of-living adjustments, have been seen as steps forward in the design of retirement plans. Let's not move backwards by eliminating these features in the new plan. Much has been said about the high cost of our current retirement system. We seem to have lost sight of the fact that many of the retirement plans of the larger companies in this country are more generous than CSRS. We must ask ourselves whether we are seeking mediocrity or excellence in a retirement plan for Federal workers. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 TESTIMONY OF THE SENIOR EXECUTIVES ASSOCIATION BEFORE THE SENATE GOVERNMENT AFFAIRS COMMITTEE ON S-1527 TO ESTABLISH A NEW CIVIL SERVICE RETIREMENT SYSTEM GIVEN BY G. JERRY SHAW GENERAL COUNSEL BLAIR CHILDS EXECUTIVE DIRECTOR DR. RICHARD STROMBOTNE CHAIR OF THE SENIOR EXECUTIVES ASSOCIATION TASK FORCE P.O. BOX 7610 ? BEN FRANKLIN STATION ? WASHINGTON, D.C. 20044 202535.4328 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 300 Mr. Chairman and members of the committee, we thank you for the opportunity to testify on S-1527 to establish a new retire- ment system for new federal employees who are now covered by Social Security. I am G. Jerry Shaw, General Counsel of the Senior Executives Association (SEA) and I am accompanied by Mr. Blair Childs, Executive Director and Dr. Richard Strombotne, Chair of the SEA Task Force on Retirement Issues. The SEA is the professional association representing the interests of career federal executives who are responsible for directing all the programs and operations of the Federal Govern- ment under the policy guidance of political leadership and the statutory requirements enacted by Congress. We are vitally interested in the retirement system for new employees for several reasons. First, it is our job to make sure that we attract and retain high quality employees whom we are responsible for managing. Second, we believe it is important for the government that the new system be sufficient to insure continuity of federal operations, as well as insure that citizens of this country are willing to make a career commitment to public service. Third, the new retirement system will directly affect future senior executives and possibly current executives and employees who decide to transfer to the new system, and therefore will affect the ability of the government to attract and retain top notch career managers and executives. The Senior Executive Service (SES) was established by the Civil Service Reform Act (CSRA) in order to provide a cadre of Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 301 career executives who were professionals in their occupation, who would provide continuity in government operations, and who were available to be placed by their agency in positions which the political leadership deemed important. Members of the SES gave up most of their job protections that other government employees retained in the CSRA in order to be judged on their performance and to'be rewarded or removed from the SES on the basis of their continued performance. When the SES was established over 95% of the career executives in government voluntarily entered the system. They did so because they believed there were greater challenges, and they were willing to compete to stay in the SES on the basis of their performance. A bonus and award system was set up to reward these outstanding individuals who excelled at their profession, but the implementation of such a system has been very slow. ?A retirement system is an extremely important part of the compensation package which the government must rely on to attract career executives into the SES and to retain them there for the remaining years of their career. Every study made of compensa- tion between career SES members and the private sector shows that they are woefully underpaid for the amount of responsibility and the importance of their duties in comparison to private sector executives at similar levels. In fact, over 50% of the career SES members who voluntarily entered the SES in 1978 have since resigned or retired from the SES. Those who have remained, and those who have entered the SES have done so in large part because of the retirement system currently in place. A new retirement Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 system which does not have the attractiveness of the current retirement system could be a major disincentive to attracting quality people to the ranks of the career SES. It is imperative that the new system that is in Place be sufficient to attract and retain executives who can carry out the complex missions of the Federal Government. We think the outlines of such a system are contained in this legislation, but we emphasize at the outset that without the capital accumulation plan that is contained in this bill, it would not meet the goal of attracting good people. Before commenting on the specifics of this bill, I want to express our appreciation to Senators Stevens and Roth for their leadership and efforts over the past years to deal with the very complicated issue associated with the design of a new retirement system which is fair to employees and which is seen to be fair by all involved. OVERALL POSITION ON STEVENS/ROTH BILL We strongly support the philosophy that the new retirement system should follow the best private sector practice in most respects, with a few exceptions appropriate for a staff retire- ment system of the nation's largest employer. The GAO report of June 1984 on features of private sector retirement systems is an excellent source of information and evaluation. It is important to note that the Federal Government, as an employer of predomi- nately professional, technical and administrative personnel, is generally competing with the largest companies and organizations in the country for talent, not with the smallest. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 303 We support the overall design of the new retirement system so long as it includes all of the three principal components. It is imperative that Social Security coverage be supplemented by a non-contributory defined benefit plan, and a voluntary tax deferred CAP with one to one employer matching of an employee's contributions up to some limit. The new retirement system should permit the employee who has devoted a full career of 30 years to public service, and his spouse, to maintain the same standard of living after retirement as they had before retirement. As you know, benefits under Social Security are tilted toward the employee with lower lifetime earnings. That is, the percentage of final pay replaced by annuities under Social Security is much greater for lower paid employees than it is for higher paid employees. By contrast, the current Civil Service Retirement System (CSRS) provides annuities that replace the same percentage of final average pay for both higher paid and lower paid employees having the same age and length of service. As proposed, the defined benefit plan portion is simply added on to the benefits of Social Security. There would be a very large disparity in retirement income at age 62 for the 30 year career high income employee under this proposal without the CAP. For example, the employee with $60,000 final salary would receive 10% of final pay from Social Security while the employee with $30,000 final salary would receive 18% of final salary. Even with the defined benefit portion of the plan added to Social Security, the higher paid career employee would receive only 37% of final pay in pension if the CAP was not in Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 place. Attached to our testimony is a chart by the Congressional Research Service setting forth relative disparities between the lower paid employee and the higher paid employee utilizing Social Security and the defined benefit plan. Approximately 90% of private firms utilize what is known as an off-set plan to eliminate part of the Social Security "tilt". They integrate the defined benefit component with Social Security so that replacement rates for lower and higher compensated employees are substantially the same. The current bill does not employ an off-set to compensate for the Social Security "tilt", but instead establishes the CAP to do so. It is absolutely imperative that the CAP proposed in this lecislation remain strong or the Government will be at a serious disadvantage in competing for higher paid executive. managerial. professional and technical talent. This is particularly true when one considers that the recent HAY study reports that federal employees lag behind their private sector counterparts by about 10% in overall compensation. This disparity is even more severe for executives where it is been found that "total cash compensation would have to be increased 58.4% to equal aggregate private sector total cash compensation". We cannot endorse strongly enough the CAP plan as the only acceptable alternative to not using an off-set to the Social Security "tilt". SEA strongly opposes the CPI minus 2 COLA adjustment for the defined benefit plan portion of the proposed retirement system. We feel that a full COLA is necessary as an essential part of the compensation system. For a career executive, a substantial Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 305 amount of his/her retirement income under the proposed bill would, of necessity, come from investment in the CAP. Since Social Security would make up a very small portion of the replacement rate, the COLA on Social Security would be a very small protection for higher paid executives. Since there would be no cost of living protection on the CAP and if there was a reduced COLA on the defined benefit portion, executives, as well as members of Congress, would have little protection against substantial erosion of their retirement benefits over a normal retirement span. The people most harmed by a CPI minus 1 or 2, or a percentage of CPI on the defined benefit portion of the plan would be those in the middle and senior levels of government and in the technical positions. This is exactly the area where government has the most difficulty recruiting and retaining employees currently. The provision for optional, normal retirement at age 55 (or greater) for an employee with ten or more years of service, but less than 30 years of service, with a penalty of 5% per year for each year before age 62, is commendable. It would provide employees with a wider range of choices, at no cost to the government, and we support it. We recognize that the penalty of 2% per year for each year before age 62 that would apply to normal retirement (or involun- tary retirement) conforms with typical private sector practice. Nevertheless, the GAO and other studies point out that some large firms permit retirement at age 55 with no penalty. In order to Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 encourage long service employees who dedicate their professional lives to the government, we think that an employee who has served his country for 30 years should not be penalized for deciding to retire at age 55 with 30 years service. What is more, the cost of unreduced retirement at age 55 and 30 years of service is relatively small -- 1/2% of payroll. Therefore we recommend that the defined benefit plan retain the provisions of the CSRS with respect to the ability to retire without penalty at 55/30, 60/20, and 62/5. Next, we believe that provisions of the bill regarding benefits to survivors of employees and annuitants are quite inadequate. Survivor benefits are very important considerations for employees. The availability and level of benefits to survivors in the new system should not be less than in the current CSRS. Moreover, the provision of the current CSRS for joint and 50% survivor annuity at a cost of 2 1/2% reduction in the first $3600 of annual annuity payments and 10% of annual payments above $3600 should be retained in the new system and used as the basis for any further actuarial adjustment needed for other options. It is a reasonable balance between the individual employee having to completely fund the survivor annuity and the employee having to fund none of it. We strongly support the one-to-one matching ratio for contributions to the tax deferred CAP which will provide a strong incentive for a high percentage of all new employees to partici- pate. The five percent limit provides these employees with an Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 307 opportunity to save for additional retirement benefits as they see their own needs. It is particularly important that the higher paid half of the employees have access to such a plan to compensate for the social Security "tilt". We advocate permit- ting a higher percentage of salary be invested in the CAP than the proposed 10%. Virtually all employee groups in the country potentially have access to some kind of tax deferred retirement savings plan whether it is 403(b), 401(k), 457, a Keogh plan or a defined contribution plan. Indeed, even non-profit organizations can provide 40k(k) or in some instances a 403(b) profit sharing plan for their employees, as the April 29, 1985 issue of Forbes points out. Federal employees are virtually the only major group of employees that have not been included as yet. We recommend that all federal civilian and military employees be provided with the opportunity to contribute to a tax deferred CAP, not limited to the new employees, and that the contribution limit be set at 20% of statutory pay. This change would remove an oversight that has become a gross inequity. Note that we are not recommending any employer matching of an employee's contributions, except in the new retirement system. In consideration of how the new retirement system is to be administered, it is apparent that the defined benefit component can be viewed as a variation on the current CSRS and that OPM is the appropriate agency to administer it. The new CAP is, or should be, a different matter. We recommend that a separate independent organization be formed to administer the CAP for the Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 308 benefit of its participants, that is, current and past employees and annuitants. In addition, careful attention needs to be given to the appointment authorities and to organizational matters to ensure that the administration is performed objectively, fairly, and without partisan bias. CONCLUSION Mr. Chairman, this concludes our prepared testimony. Thank you again for giving us the opportunity to discuss the Stevens/- Roth bill today. We will be happy to work with your staff to develop these recommendations further or to discuss other topics concerning the retirement system for federal employees generally or for senior executives specifically. If you have any questions now, my colleagues and I will be pleased to respond. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 National Council SOCIAL SECURITY MANAGEMENT ASSOCIATIONS, INC. P.O. Box 2067, Minot, ND 58702 Pte.Wem STEVE BAUER MOW, ND VI .Pnddant JOE HARRISON Hot Spmga. AR See,Nary JANET ROTH Peoria. IL Tr nurv ANTHONY CHIOTA R,obury. MA Exeouti a Committee OTIS HARRISON New Britian. CT ELYSE CONNERY Perth Amboy. NJ LUCI JULSON El Cajon, CA ALBERTA CANADA Bremerton, WA Exeoutiw Officer THOMAS TOBIN Wilmmglon. DE -dlete Paat Prmldant ROBERT FLEMINGER Grand Rapids, MI TESTIMONY OF STEPHEN BAUER PRESIDENT NATIONAL COUNCIL BEFORE THE CIVIL SERVICE, POST OFFICE, AND GENERAL SERVICES SUBCOMMITTEE OF THE GOVERNMENTAL AFFAIRS COMMITTEE U. S. SENATE SEPTEMBER 10, 1985 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. Chairman, we thank you for the opportunity to testify on S1527, a proposal to establish a new civil service retirement system for those employees who entered the federal service after January 1st, 1984. We lack the expertise to examine the actuarial projections of the proposed legislation, and thus will only make comments concerning certain principals that the bill establishes for the new retirement system. The bill would provide a very high replacement level for lower grade employees who retire at age 62 with 30 years service. If the employee was to participate fully in the CAP program portion of the bill, the replacement rate at retirement at age 62 with 30 years of service for a $20,000 per year employee would be approximately 69 percent. For a higher paid employee, whose average salary was approximately $48,000 a year, the replacement rate if fully participating in the CAP program, would be approxi- mately 55 percent. While the replacement rate would vary depend- ing upon the amount of participation in the CAP program, the projected replacement rate of salary would still be substantially in excess of 50 percent for lower grade employees and could be substantially less than 50 percent for the higher paid employees. This further increases the problem of retention in management where the comparability gap increases with grade. Managers would support disporportionately in compensation, both while working and in retirement. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 312 We do not object to the replacement rate for lower grade employees being as high as is projected in this plan. However, we believe that the salary replacement level should be the same for all employees at all grade levels. This could be achieved under the defined benefit portion of the plan by providing employees at higher grade levels, for example, GS-11 or above, with additional contributions from the employer. It could also be accomplished by providing for higher matching contribu- tions from the government for contributions made to the CAP program by higher grade employees. Lacking the expertise to propose a solution to this dilemma, we request that the Con- gressional Research Service make the calculations and evaluate the cost of providing the same replacement rates for higher grade employees as those that will be received by lower graded employ- ees. This is imperative in order to retain senior managers and executives in government. Our main concern as federal managers is that recruitment and retention problems will increase and we will be rendered unable to perform the functions entrusted to the Federal Government. If the Congress decides that there should be any kind of offset for Social Security credit on retirement annuities, we strongly recommend that such offset only take into consideration the Social Security benefits earned during federal, service. For 2 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 313 short term federal employees, to offset Social Security earned in other employment against defined benefit plan annuities would be totally unfair, and could reduce their annuity to nearly nothing. We strongly recommend that retirement be made available without reduction at age 55 with 30 years of service. We recog- nize that on average federal employees work until nearly 60 years of age, which is similar to the private sector. However, few employees either in government or out of government spend 30 years with a single employer. Those who do, should be rewarded for their continuous and dedicated service to the government and should be granted an annuity at age 55. At present, federal employee pay levels are not competitive, health insurance coverage is lower than comparable private sector offerings, and other fringe benefits are being proposed for reduction. one of our grave concerns is that this situation, coupled with a retire- ment system which does not reward an employee for length of service, will induce a dramatic rate of turnover in the rank of mid-level management. There has to be some incentive for a federal employee to choose public service as a career and to stay with that career during their working years. If Congress decides to treat federal employment as just another career, then all pay and benefits should be competitive with the private sector in 3 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 314 order to retain quality managers at the middle and senior grade levels. We think that retirement at 55 years of age with 30 years of service would provide an incentive for people who are committed to public service to stay, even though they might be able to gain more pecuniary benefits from private sector employ- ment. We are adamantly opposed to a COLA minus 2 or any other COLA reduction provision. As Social Security managers, we have seen the results of a lack of cost of living increases in benefits prior to Congress enacting that protection for elderly people. A 2 percent per year reduction in COLA protection for an individual retiring at either 55 or 60 could cause as much as 40 to 60 percent reduction in purchasing power within 15 years after retirement. It is in an annuitant's later years that they need the protection of COLA's because they have no alternative other than the annuities that they receive. They are often elderly or sick and unable to obtain meaningful employment to supplement the annuities they receive and thus are generally totally reliant on their retirement income. In the long run, the government would probably pay more in welfare and other benefits as a result of COLA reductions than they would save by a COLA minus 2 or some other partial COLA percentage formula. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 315 With these modifications, we could support the proposed legislation. We would like very much to work with you, Mr. Chairman, and the members of the committee and staff in order to achieve passage of this legislation. Thank you very much for the opportunity to testify, and we would be happy to answer any questions you might have. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator GORE. Our next panel of witnesses includes Bruce Henry, president and executive director, National Association of Air Traffic Specialists, accompanied by Edward Huie; and Lt. Gen. LaVern Weber, executive director of the National Guard Associa- tion of the United States. I might say, the witness list had included Thomas Doyle execu- tive vice president of the Federal Law Enforcement Officers Asso- ciation, as a member of this panel, but at the last minute, Special Agent Doyle was called on to duty for a work assign ment that was unexpected. In the nature of his business, that is an occupational hazard and we fully understand and we will have his statement in- cluded in full in the record.' Senator GORE. I would like to make just a brief personal state- ment before this panel begins. That is by way of apologizing to you and the witnesses immediately following you because I will not be able to be here. Normally we break between 12 and 2 and I have something that I absolutely cannot get out of. I fully support the chairman s determination to continue through the day in order to make certain we complete these hearings, and I want to assure you and the witnesses immediately, following that I will read your statements very carefully and the interchanges you have with Sen- ator Eagleton; and I know that Senator Stevens is going to do the same because he and I have talked about it. I apologize for having to leave. My distinguished senior ranking member here is going to take over. Senator EAGLETON [presiding]. Thank you, Senator Gore. Gentle- men, you may proceed. TESTIMONY OF BRUCE B. HENRY, PRESIDENT AND EXECUTIVE DIRECTOR, NATIONAL ASSOCIATION OF AIR TRAFFIC SPECIAL- ISTS, ACCOMPANIED BY EDWARD L. HUIE, DIRECTOR OF LEG- ISLATIVE AFFAIRS; AND LT. GEN. LA VERN E. WEBER (RE- TIRED), EXECUTIVE DIRECTOR, NATIONAL GUARD ASSOCIA- TION OF THE UNITED STATES Mr. HENRY. Mr. Chairman and distinguished members of the committee, I am grateful you have provided me with the opportuni- ty to appear before you and to express my thoughts and opinions relative to early retirement benefits for air traffic control special- ists [station]. I am accompanied by Mr. Edward L. Huie, our direc- tor of Legislative Affairs. We believe that the issue we are bringing before you is one of air safety and fairness. I will limit my comments to this simple issue, and this is a summary of my entire statement which I would like to submit for the record. Senator EAGLETON. All statements will be printed in the record in their entirety. That covers every witness. Mr. HENRY. Flight service is an integral part of the air traffic control system and there are about 317 flight service stations throughout the United States. The personnel who staff the air traf- fic control system are designated by the Office of Personnel Man- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 agement as series 2152 and are called: air traffic control specialists [station]. This category is the least understood of all the categories because of the lack of term standardization and the widespread use of collo- quialisms. FAA, and others as well, confuse the issue by referring to this category as flight service specialists, specialists, flight serv- ice station specialists, station specialists, station personnel, station controllers and controllers. It is so confusing that uninformed per- sons sometimes infer that these are the personnel who fuel and maintain aircraft. For our organization, this is an overwhelming educational burden. The two other categories are air traffic control specialists [termi- nal] and air traffic control specialists [center]. This association is designated by the Secretary of Labor as the exclusive representative of all the bargaining unit members who are air traffic control specialists [station], series 2152. Personnel in all three categories are frequently called "control- lers" by FAA and others as well, and one might infer that they ac- tually control aircraft in the ordinary sense of the word "control." Federal Aviation Administration Regulation 91.3(a) clearly states: "The pilot in command of an aircraft is directly responsible for, and is the final authority as to the operation of that aircraft." If responsibility for operation of the aircraft is vested in the "pilot in command" as the FAA has prescribed, then control and separation can only be exercised by the pilot and not by an FAA employee located on the ground in some faraway place using a ra- darscope, an inexact instrument at best, even when operating at peak efficiency. On such a basis we do not believe that responsibility can be shared for the safety of that aircraft, and we believe that control can only be exercised in the cockpit. This is not to say that the FAA employee on the ground has no responsibility, for he does have the responsibility for carrying out the assigned duties of that position which are to provide informa- tion, issue clearances, make recommendations and to warn the pilot of other objects in the area as seen on his radarscope or as visually sighted. He cannot in anyway interfere with the preroga- tives of command, which can be no less than absolute. The statement of mission and function of flight service deserves careful study for it contains requirements of an emergency nature, such as: Assist pilots in distress; work with search and rescue units in locating missing aircraft; assist lost aircraft and aircraft in emergency situations; and advise Customs and Immigration of transborder flights including drug and narcotics interdiction. It is very significant that 45.7 percent of all flight assists in the air traffic control system were made by air traffic control special- ists [station], while flight service was endowed with only 18 percent of the total personnel positions in the entire system. To us, this looks like our people work in an environment where there are more opportunities to provide assistance for safe flight. Flight assists are usually emergency situations where the pilot, passengers and aircraft are in jeopardy. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 We believe that emergency situations create a tense working en- vironment which requires the utmost from the journeyman in time-critical situations where superior judgment is required. In this matter, we believe that the Federal Aviation Administra- tion itself has expressed the strains upon the air traffic control spe- cialists [station] far more eloquently than we ourselves can express it. An FAA attorney, before the Merit Systems Protection Board, stated relative to a flight service position: "There are few jobs that require more alertness of mind, more sound judgment [sic], the ability to assimilate information, and the ability to make split second decisions. The stresses and the strains of the job are incalcu- lable. And there are very few people who can perform in that posi- tion." In January 1985, the National Transportation Safety Board pub- lished a report setting forth the stark body count of fatalities in aviation over the past 10 years. It is noted that hours flown in general aviation are 5 times great- er than hours flown for the scheduled carriers, and fatalities are 13 times greater. Moreover, general aviation operates about 100 times the number of aircraft. The FAA prefers to deal in fatality rates per 100,000 hours flown. This produces minuscule results. We, however, prefer to set for forth fatality count, which we believe is a better measure of safety and does not include hundreds of thousands of very safe hours flown. The real hazards to aviation are weather, landings, takeoffs, and low altitude flying. This is the area of General Avia- tion operations. From all this, we can only conclude that air traffic control spe- cialists [station] experience physical and mental strain and hard- ship in the workplace and that the work is unusually taxing and extremely stressful, perhaps more than any other part of the air traffic control system. It is for these reasons that the Secretary of Transportation in im- plementation of 5 U.S.C. 5542, included air traffic control special- ists [station] within the provisions of that law, which states: "The duties of which are critical to the immediate daily operation of the air traffic control system, directly affect aviation safety, and in- volve physical or mental strain or hardship; * * ` Not only has the Secretary of Transportation determined that air traffic control specialists [station] are covered by 5 U.S.C. 5542, but also, the Secretary has reaffirmed this determination every pay period since the enactment of the law. Similarly, permissive premium pay is authorized in the continu- ing appropriations for fiscal year 1983 and includes flight service station specialists. We, accordingly, hold that the community of air traffic control specialists [station] is a unique group of Federal employees which, by law, is worthy of special consideration, and that exclusion of this group from early retirement benefits accorded to other air traffic control specialists of the same 2152 designation and covered by 5 U.S.C. 5542 and Public Law 97-276, constitutes unfair and in- equitable treatment. On June 26, 1985, Hon. Gene Taylor, testifying before the Sub- committee on Compenstion and Employee Benefits of the House Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Post Office and Civil Service Committee relative to early retire- ment for flight service station specialists and his bill, H.R. 989, stated: If fairness and equity in the workforce is to be achieved and if aviation safety is to be enhanced, we have no alternative but to include the air traffic control special- ists in stations within the group entitled to early retirement and remove the stigma of separateness from these loyal and dedicated Federal employees. The issue is one of fairness and equality, and our community of specialists have been second-class citizens since the passage of Public Law 92-297, and they consider themselves as such. It is axiomatic that all personnel in the same personnel category must be treated equally and fairly if high morale, good order, and discipline are to be achieved. This is not the case in the air traffic control community where there exists a caste system of noblemen and serfs. In conclusion, we quote the chairman of the Subcommittee on In- vestigations and Oversight of the House Committee on Public Works and Transportation, in his hearing record on "The Impact of Weather on Aviation Safety": "It became pretty clear that the message being given by all the witnesses is that suspect weather cells should be avoided just as one aircraft should avoid the path of another aircraft." Mr. Chairman and members of this committee, we urge that air traffic control specialists [station]-flight service personnel-be provided the same early retirement opportunities as are accorded other air traffic control specialists of the same series 2152 designa- tion. Thank you, Mr. Chairman. Senator EAGLETON. Thank you. Why don't we go with all the statements and then I will get into questioning later. General Weber. General WEBER. Mr. Chairman, members of the committee, I ap- preciate the opportunity to be appearing before you today to present the views of the National Guard Association of the United States on the provisions of the Civil Service Pension Reform Act, S. 1527. I am accompanied today by Col. Chuck Schreiber, a member of our association staff. The association supports the overall design of the proposed re- tirement plan, which utilizes a three-tier system of Social Security, a defined benefit plan, and a thrift savings plan. We are especially appreciative of the concern shown by this committee for the nearly 47,000 military technicians who, by law, must maintain military membership in the Army and Air National Guard as a condition of their Federal civil service employment, and are subject to mobiliza- tion and deployment in their military status. We generally support the bill, but the association does have sev- eral concerns relating to specific provisions applicable to military technicians, as we understand the bill will be written. In passing the National Guard Technicians Act of 1968, Congress anticipated that the eligibility requirements of age 55 with 30 years service for an unreduced annuity would blend well with a techni- cian's military career. This assumption has been proven correct. We fully support continuation of this criteria, and appreciate the Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 committee's inclusion of such a provision in the new retirement plan. In 1968, Congress also recognized that the military retention laws would make the discontinued service retirement provisions, at age 50 with 20 years service or at any age with 25 years service, a key factor in the technician program. For example, military sepa- rations often occur between the ages of 53 to 55, due to the reten- tion provisions of the Reserve Officer Personnel Act and the De- partment of Army and Department of Air Force policy. Even though such individuals take a 2-percent reduction in an- nuity for every year under age 55, this concept has caused relative- ly few problems and has proven to be harmonious with the techni- cian's military career. The National Guard Association believes that the proposed in- crease in penalty reduction from 2 to 5 percent for each year under 55 will have a drastic impact on those technicians who, unlike other Federal employees, lose their Federal civil service employ- ment when loss of military membership occurs. Full consideration must be given to the effect of loss of military membership on a technician's civil service employment. We urge the committee to reconsider this portion of the bill and continue the 2-percent provi- sion. We understand the staff has given favorable consideration to this issue and we appreciate that very much. Mr. Chairman, the National Guard Association has one addition- al important area of concern. You have stated that the prooosed legislation is intended to encourage employees to remain for a full career, to maintain the standard of living for a career employee into retirement, and to provide good benefits while restraining costs. We feel the bill establishes an excellent vehicle for accom- plishing these goals, through the establishment of the three-tier system. However, the association is seriously concerned about the possible absence of one of the tiers during an extended period im- mediately following a military technician's retirement. The new plan relies on the Social Security tier to provide a sub- stantial portion of the employee's retirement income. The absence of this tier for any period would significantly reduce the retiree's overall annuity and would certainly preclude continuing the em- ployee's previous standard of living into retirement. The necessity to provide for retirement prior to eligibility for a Social Security annuity has been recognized for special retirement classes, such as law enforcement officers, firefighter, and air traffic controllers. Provisions for revised retirement eligibility criteria and an annuity supplement until age 62 are included in the bill. The annuity supplement equates to the Social Security tier which is not available from the date of retirement until age 62. This association urges the committee to consider a change to the bill to provide for an annuity supplement for military technicians similar to that provided for law enforcement officers, firefighters, and air traffic controllers. The bill recognizes the special circum- stances of the military nature of the dual-status National Guard technician by providing for a fully defined benefit annuity retire- ment at age 55. We have discussed the need for a 2-percent penalty rather than 5-percent provision, because of the possible early loss of military membership and the resultant involuntary termination Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 of Federal employment. We also feel that the demands for physical ability, coordination and stamina of the military technician are similar to those of the other special retirement classes. Mr. Chairman, parenthetically, permit me to remind all that Na- tional Guard military technicians are subject to mobilization with their unit on very short notice and to deploy to any part of the globe in support of a national emergency. These conditions make those demands of physical ability, coordination, and stamina even more significant. Under the current provisions of the bill, a National Guard tech- nician would be penalized for early retirement mandated by the military relationship of his employment. For example, a technician who is forced to retire at age 53, due to loss of military member- ship, would not receive a critical portion of his total retirement an- nuity for approximately 9 years. Senator EAGLETON. Would you explain that previous sentence to me again, General? General WEBER. If one of our technicians, and frequently this is the case, is forced to retire by loss of military status, and conse- quent loss of his techician status, he will go 9 years without the Social Security tier being provided. Senator EAGLETON. What forces him out at 53? General WEBER. We have a Reserve Officer Personnel Act which forces out officers at certain points of years of service and age, a combination of those. In the case of both the Army and the Air Force, policy matters, not a matter of law, require mandatory screening of all military personnel again to meet those conditions that I outlined earlier, the physical stamina and the ability to be mobilized. Senator EAGLETON. Let's take this fellow then. He is forced out at 53. What does he get in the three tier now? Take me through this. What tier does he lose? General WEBER. The Social Security. Senator EAGLETON. He has no Social Security from 53 to 62. So for 9 years, he is minus that portion of the plan? General Weber; Yes, sir. And under the plan, as we understand your plan, he does not get a supplement. Senator EAGLETON. And does not get a supplement that the con- trollers would get? General WEBER. Yes, sir. Senator EAGLETON. So that category or group of folks, they are double-whammied, aren't they? General WEBER. Yes, sir. Senator EAGLETON. I ask my staff to make a note about that. It seems to me on initial hearing or impression it doesn't sound fair to me. We certainly ought to look into that. How many people might this affect in a given year? General WEBER. In a given year we have about an 8-percent turnover on 47,000 that is something like 3,600, give or take a few. Of that 3,600, about a third, or just a few over a thousand, go into retirement, voluntarily, involuntarily, or on physical disability. Senator EAGLETON. What would be the average age of those people? Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 General WEBER. The average age in that category would come out about 54.6 years of age based on the best figures we could get. Senator EAGLETON. Do this for me when you go back to your office, make me up some real life cases-you don't have to put any names on them, Mr. X, Mr. Y, Mr. Z-and show me what that might mean compared to a controller. If the controller is forced out-of course, under Senator Stevens' bill, there is no mandatory retirement, am I right, for controllers? Under present law there is, age 55, 56. Mr. HUIE. Fifty-six. Senator EAGLETON. Under present law, 56 mandatory. Under the Stevens' bill no mandatory. Mr. HUIE. It is permissive with the Secretary. Senator EAGLETON. Permissive. Mr. HuIE. He can go to 61. Senator EAGLETON. He can waive it? Mr. HuIE. The Secretary can depending upon the needs of the service. Senator EAGLETON. Let's say a controller under the Stevens' bill goes out at 55. He doesn't get Social Security? Mr. HUIE. Under the existing system, sir? Senator EAGLETON. Under Senator Stevens' bill, he can't get Social Security. Mr. HuIE. He gets a supplement which is equal to what-- Senator EAGLETON [interposing]. I'm tracking now. I am wondering why we get this double penalty to your folks, General. General WEBER. In all fairness, sir, let me tell you we have sur- faced this with the staff and we have gotten a favorable response. Senator EAGLETON. Give us Mr. X, Mr. Y, Mr. Z. Let's make him a controller on the one hand, real cases, compared to your folks on the other hand. Let me just look at what it means in the real life income, monthly income or annual income, however you want to show it to us, of these two individuals, if both are going out about the same time and one fellow is getting x dollars in his pocket and the other fellow is getting x moneys. [The information referred to follows:] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 COMPARISON OF RETIREMENT ANNUITY FOR NATIONAL GUARD MILITARY TECHNICIANS AND AIR TRAFFIC CONTROLLERS National Guard Tarhninians Air Traffic Controllers ASE GRADE AGE YEARS OF SERVICE HIGH-3 SALARY HIGH-5 SALARY ANNUAL RETIREMENT ANNUITY UNDER PRESENT SYSTEM ANNUAL ANNUITY UNDER 5.1527 DEFINED BENEFIT PLAN ANNUAL SOCIAL SECURITY SUPPLEMENT DEFINED BENEFIT WITH SUPPLEMENT A GS-09 55 30 $28,300 $26,800 $15,848 $8,040 $5,628 $13,688 B GS-12 56 32 $35,000 $33.500 $21,000 $10.720 86,365 $17,085 C 00-07 53 26 $20,200 $19,000 110,084 $4,788 $4,940 $9,728 D GS-10 54 25 $25,500 $24.100 $11,496 $5,724 $5,543 $11,267 E GS-08 1 50 20 822,300 821.000 $7,226 $3,150 $4,200 $7,320 Figures do not include reduction for survivor annuity, health benefits or life insurance, nor an increase for an estimated thrift plan annuity. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator EAGLETON. Pardon me, gentlemen, go ahead. You may continue. General WEBER. Our association believes it is the Federal Gov- ernment's responsibility to ensure that these dual-status techni- cians receive fair and reasonable compensation for their years of faithful and dedicated service. We strongly support a change in the bill to provide an annuity supplement from the date of retirement to age 62. In summary, the National Guard Association of the United States looks forward to offering its support for the proposed new three-tier retirement plan. We solicit the committee's support in revising the plan to decrease to 2 percent the reduction for those National Guard techicians who are involuntarily terminated prior to age 55 and to provide an annuity supplement from the date of retirement until age 62. Mr. Chairman, the National Guard Association is deeply appreci- ative of the positive support you, the members of this committee and the Congress continue to give to the members of our associa- tion. I wish to thank you for the opportunity to present the views of the National Guard Association. I look forward to working with your staff and members of this committee on this important issue. Senator EAGLETON. Mr. Henry, while I am collecting my thoughts up here, did you in your prepared testimony address the COLA question? Mr. HENRY. No, sir; we did not. Senator EAGLETON. What is your position on the proposed Ste- vens COLA? Mr. HENRY. Sir, we support the existing COLA's. Senator EAGLETON. Were you present in the room when I was here earlier in the day talking about the 1.3-percent issue as to where that 1.3 percent might be placed, whether in the defined benefit plan as is recommended by some of the previous witnesses or in the thrift plan? Mr. HENRY. Yes, I was present. Senator EAGLETON. Can you give us your comment on that ques- tion? Mr. HENRY. Unfortunately, Senator, I haven't polled my mem- bership on this issue. I have a personal opinion. I would agree with the thrift plan-- Senator EAGLETON [interposing]. Your personal opinion is it would be better placed in the thrift? Mr. HENRY. That's correct. Senator EAGLETON. General, how about you? General. WEBER. We were just chatting on the same issue, sir. We did not have it in our prepared statement but we would prob- ably agree with the thrift savings, as we feel it would better com- pensate. Senator EAGLETON. Mr. Henry, the Stevens thrift plan provides dollar-for-dollar up to 5 percent of salary. Do you support that? Mr. HENRY. Yes, I do. Senator EAGLETON. Any dimunition thereof you would not sup- port? Mr. HENRY. I would say that would be fair. Senator EAGLETON. The better the thrift, the more you like? Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. HENEY. That would be fair. Senator EAGLETON. How about you, General? General. WEBER. I would agree with that position, sir. Senator EAGLETON. What is the average length of service, Mr. Henry, of your people at the time of retirement? Mr. HENRY. The average flight service specialist retires at age 57 with 30 years of service. Senator EAGLETON. 57 with 30. General, do you have any figures on that question? General. WEBER. We are very close to the 55. Senator EAGLETON. You are close to the 55? General. WEBER. Yes, sir. Senator EAGLETON. With what service? General. WEBER. Most of those are with 30 years. That's our ex- perience right now, sir. Senator EAGLETON. Pretty close to 30, you say? Thank you gentlemen, we appreciate it very much. [The prepared statement of Messrs. Henry and Weber follow:] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 MNgATSD NATIONAL ASSOCIATION OF AIR TRAFFIC SPECIALISTS SUITE 415, WHEATON PLAZA NORTH WHEATON, MARYLAND 20902 Area Code 301 946-0882 STATEMENT before the COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE Ninety-ninth Congress Chaired by THE HONORABLE TED STEVENS BENEFITS FOR AIR TRAFFIC CONTROL SPECIALISTS (STATION) EMPLOYEES OF THE FEDERAL AVIATION ADMINISTRATION DEPARTMENT OF TRANSPORTATION BRUCE B. HENRY PRESIDENT & EXECUTIVE DIRECTOR NATIONAL ASSOCIATION OF AIR TRAFFIC SPECIALISTS Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. Chairman and distinguished Members of this Committee, I am grateful that you have provided me with the opportunity to appear before you and to express my thoughts and opinions relative to early retirement benefits for Air Traffic Control Specialists (Station). I am accompanied by Mr. Edward L. Huie, our Director of Legislative Affairs. We believe that the issue before you is one of air safety and fairness. The Flight Service System is an integral part of the Air Traffic Control System and there are about 317 flight service sta- tions throughout the United States. The personnel who staff the Air Traffic Control System are designated by the Office of Personnel Management as Series 2152 and are called: . Air Traffic Control Specialists (Station) This category is the least understood of all the categories because of the lack of term standardization and the widespread use of colloquialisms. FAA, and others as well, confuse the issue by referring to this category as Flight Service Specialists, Specialists, Flight Service Station Specialists, Station Specialists, Station Personnel, Station Controllers and Controllers. It is so confusing that uninformed persons sometimes infer that these are the personnel who fuel and maintain aircraft. For NAATS, this is an overwhelming educational burden. An example is included as Attachment (1) hereto (FAA news release dated March 5, 1985 -- FAA 10-85). Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 The two other categories are: Air Traffic Control Specialists (Terminal) Air Traffic Control Specialists (Center) This Association is designated by the Secretary of Labor as the exclusive representative of all the bargaining unit members who are Air Traffic Control Specialists (Station) Series 2152. Personnel in all three categories are frequently called "Controllers" by FAA and others as well, and one might infer that they actually control aircraft in the ordinary sense of the word "control." Federal Aviation Administration Regulation 91.3(a) clearly states: "The pilot in command of an aircraft is directly responsible for, and is the final authority as to the operation of that aircraft". If responsibility for operation of the aircraft is vested in the "pilot in command" as the FAA has prescribed, then control and separation can only be exercised by the pilot and not by an FAA employee located on the ground in some faraway place using a radarscope, an inexact instrument at best even when operating at peak efficiency. Additionally, we have all heard of radar "outages" in recent years, an event upon which the news media thrives. We often wonder how the media finds out about "outages" so qui1ckly. Of course, when there is an "outage", the FAA ground Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 personnel can provide no information to the pilot at all. The Federal Aviation Administration has, therefore, wisely placed all command, control and separation squarely on the shoulders of the pilot because there is no other place where this awesome responsibility can be lodged. On such a basis we do not believe that responsibility can be shared for the safety of that aircraft, and we believe that control can only be exercised in the cockpit. We can provide no better example of this than the near miss between two jumbo jet aircraft on March 31, 1985, at Minneapolis, Minnesota, with a combined total of 500 oeoule aboard. While the National Transportation Safety Board has not rendered its report, Chairman Burnett and other Safety Board personnel have been widely quoted by the news media. "Both crews were executing the air traffic control instruc- tions they were provided, no question", according to Michael O'Rourke, investigator in charge for the Safety Board. However, one pilot in command disregarded the "controller instructions" and acted on his own and within his authority and responsibility. He avoided what could have been a dis- aster reminiscent of the world's worst aviation disaster, where 577 people were killed in Tenerife, Canary Islands, in 1977 in a similar crossing situation. This is not to say that the FAA employee on the ground has no responsibility, for he does have the responsibility for carrying out the assigned duties of that position which are Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 to provide information, issue clearances, make recommendations and to warn the pilot of other objects in the area as seen on his radarscope or sighted visually. He cannot in any way inter- fere with the prerogatives of command, which can be no less than absolute. Nevertheless, we have heard in past hearings, and probably in this one as well, the FAA witness state that station personnel are not qualified for early retirement because they do not control and separate aircraft. We hasten to add that no FAA employee on the ground controls and separates aircraft with the exception of the operation of a drone aircraft (no pilot) and, in this case, control is exercised from a ground position or from another vehicle. An example of this was the recent intentional crash of FAA aircraft in the desert for reasons of research. In that specific case, FAA employees on the ground did, in fact, exercise the prerogatives of command, control and separation. This is the only example that has come to our attention, where control and separation have been experienced by FAA ground personnel. In our view, commercial air carriers are not too anxious for it to be well known that their pilots in command bear the full responsibility for the aircraft. It is in their best interest to dilute and confuse the issue when it comes to public liability litigation and, if possible, involve the government as much as possible in sharing damages which may be awarded by the courts as the result of an aircraft accident or crash. This applies to the General Aviation Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 community as well. In FAA's recent report to the Congress entitled "FY 1985-87 Planned Office and Facility Consolidations--To Improve System Effectiveness and Efficiency",dated December 1, 1984, the functions and mission of the flight service stations are set forth as follows: "Flight Service Station (FSS). Flight service stations offer a broad range of pre-flight and in-flight services aimed at general aviation (or non-airline) pilots. These services include conducting pre-flight weather briefings for pilots and accepting and closing flight plans, primarily through telephone and radio communications. Additionally, FSS's provide enroute communications with pilots flying under Visual Flight Rules (VFR), assist pilots in distress, work with search and rescue units in locating missing aircraft, assist lost aircraft and aircraft in emergency situations, monitor radio navigation stations, relay air traffic control (ATC) clearances, originate Notices to Airmen, broadcast aviation weather and National Airspace System (NAS) information, receive and process Instrument Flight Rules (IFR) flight plans, and monitor radio air navigations facilities (NAVAIDS). In addition, at selected locations, FSS's provide Enroute Flight Advisory service (Flight Watch), take weather observations, issue airport advisories, and advise Customs and Immigration of transborder flights. The FSS's also have communications equipment for relaying information to air traffic towers and control centers and for various emergency services. Flight service stations are under the general direction of the regional Air Traffic Divisions and Washington headquarters." In the first sentence, the FAA attempts to downgrade our service by eliminating scheduled airline pilots as one of the users of flight service information. while the service may be aimed at general aviation pilots, the truth is that scheduled carriers are very frequent users of flight service products. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Other phrases: . Assist pilots in distress. Work with search and rescue units in locating missing aircraft. . Assist lost aircraft and aircraft in emergency situations. Advise Customs and Immigration of transborder flights (includes drug and narcotics interdiction-- added). It is very significant that 45.7 percent (1985 House Appropriations. Hearings,Part 6, page 641), of all flight assists were made by Air Traffic Control Specialists (Station), while the system was endowed with only 18 percent of the total personnel positions in the Air Traffic Control System. To us, this looks like our people work in an environment where there are more opportunities to provide assistance for safe flight. Flight assists are usually emergency situations where the pilot, passengers and aircraft are in jeopardy. We believe that emergency situations create a tense working environment which requires the utmost from the journeyman in time-critical situations where superior judg- ment is required. In this matter, we believe that the Federal Aviation Administration itself has expressed the strains upon the Air Traffic Control Specialists (Station) far more elo- quently than we ourselves can express it. In the case of Marvin A. Miyai (an Air Traffic Control Specialist (Station)) v. Federal Aviation Administration, before the United States Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Merit Systems Protection Board, at a hearing dated February 7, 1985,(Docket No. SF07528510116), Mr. Malachy T. Coghlan, for the FAA, said of Mr. Miyai's job: "There are few jobs that require more alertness of mind, more sound judgement (sic), the ability to assimilate information, and the ability to make split second decisions. The stresses and the strains of the job are incalculable. And there are very few people who can perform in that position." The Comptroller General of the United States recently published a Report to the Congress, "Safety Standards on Small Passenger Aircraft," (GAO/ACED-84-2 of January 4, 1984), which is germane to the Flight Service System and sets forth the major safety problems with smaller aircraft. While the report deals specifically with small air carrier aircraft, the problems set forth are applicable, we believe, to all General Aviation aircraft. All of these are the primary customers of Flight Service. An appropriate excerpt from this report follows: "For a variety of reasons it is difficult to attribute an aircraft accident to any single cause or factor. According to NTSB reports, aircraft accidents generally result from multiple causes. Yet, based on the accident statistics, one fact remains clear: Flying in a small carrier aircraft is definitely less safe than flying in a large one. "How small commuter and air taxi aircraft are used obvi- ously affects the level of safety that they can achieve. For example, small commuter aircraft average twice as many take-offs and landings per hour flown as do large air carrier aircraft (most accidents occur during take-offs and landings). Also, commuter and air taxi aircraft serve a significantly larger number of lesser equipped or remote airports than the large aircraft. Finally, small aircraft spend considerably more time operating at lower altitudes, where flying weather is often less than ideal. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 "The incongruity of this situation, however, is that small aircraft, which are operating potentially under the more hazardous conditions, are being built and operated under FAA's least stringent airworthiness standards and operating rules for air carriers. "MAJOR CAUSES AND FACTORS THAT INFLUENCE AIR CARRIER ACCIDENTS "While we cannot draw a direct link between accidents and specific causes, our analysis of FAA accident data for the period 1975-81 indicates that the causes and factors of air carrier accidents are related to three areas. --personnel (including pilot and flight crew and other personnel such as mechanics and dispatchers), --environment (airports, weather, and terrain), and --aircraft (airframe, powerplant, instruments and accessories). ' "Using FAA and NTSB data and our own analyses of these data on 1,327 commuter and air taxi accidents that occurred during 1975-81, we found that about 53 percent of the accident causes and factors were personnel-related, 30 percent were related to the environment, and 14 per-- cent were related to the aircraft." In aviation, overall, it is estimated that forty per cent of all accidents are weather related. To approach this from another point of view, the National Transportation Safety Board (SB 85-01 of 1/10/85) has published the stark body count of fatalities for the past ten years, as listed on the following page. Please note that hours flown in General Aviation are five times greater than hours flown for the scheduled carriers and fatalities are thirteen times greater. Moreover, General Aviation operates about one hundred times the number of aircraft. The FAA prefers to deal in fatality rates per one hundred thousand hours flown. This produces minuscule results. We, however, Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 9 prefer to set forth the fatality count which we believe is a better measure of safety and does not include hundreds of thousands of "very safe" hours flown. The real hazards to aviation are weather, landings, takeoffs, and low altitude flying. This is the area of General Aviation operations. U.S. Air Carriers* All Scheduled Service (Airlines) (14 CPR 121) General Aviation** Air Taxis Commuters Air TOTAL Taxis Commuters General Aviation 1975 122 1976 38 1977 78 1978 160 1979 351 1980 0 1981 4 1982 233 1983 15 P. 1984 4 Total 10 yr. 1,005 period 1,355 1,353 1,430 1,761 1,380 1,392 1,410 1,268 1,119 1,094 69 100 118 155 77 103 94 72 62 55 28 27 32 48 66 37 34 14 11 41 1,258 1,226 1,280 1,558 1,237 1,252 1,282 1,182 1,046 998 AIRCRAFT HOURS FLOW P. 1984 7,302,000 35,626,000 3,328,000 1,757,000 30,541,000 P. Preliminary * About 2,200 aircraft **Over 200,000 aircraft Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Further, on February 28, 1985, the Chairman, National Transpor- tation Safety Board, testified before the House Committee on Appropriations (Transportation) as follows: "Tremendous strides have been made in aviation technology in the brief eight decades of its existence, and yet aviation continues to be plagued by one of the oldest causes of accidents in the book -- weather." From this, one might observe that the FAA is concentrating the preponderance of its personnel and material resources in the safest and least accident-prone sector of the Air Traffic Control System (e.g., scheduled carriers). From all this, we can only conclude that Air Traffic Control Specialists (Station) experience physical and mental strain and hardship in the workplace and that the work is unusually taxing and extremely stressful, perhaps more than any part of the Air Traffic Control System. It is for these reasons that the Secretary of Transporta- tion, in implementation of 5 USC 5542, included Air Traffic Control Specialists (Station) within the provisions of that law. The pertinent provisions are quoted below: "(3) Notwithstanding paragraphs (1) and (2) of this subsection for an employee of the Department of Transportation who occupies a nonmanagerial position in GS-14 or under and, as determined by the Secretary of Transportation, (A) the duties of which are critical to the immediate daily operation of the air traffic control system, directly affect aviation safety, and involve physical or mental strain or hardship; (B) in which overtime work is therefore unusually taxing; and Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 (C) in which operating requirements cannot be met without substantial overtime work; the overtime hourly rate of pay is an amount equal to one and one-half times the hourly rate of basic pay of the employee, and all that amount is premium pay." Air Traffic Control Specialists (Station) are employees of the Department of Transportation. They do occupy nonmanagerial positions in GS-14 or under. Their duties are critical to the operation of the Air Traffic Control System and directly affect aviation safety. These duties involve physical and mental strain and hardship and, therefore, overtime work is unusually taxing- Lastly, operating requirements cannot be met without substantial overtime work. In the House Appropriations Hearing for Fiscal Year 1985, (Part 6, page 641), the FAA estimated that overtime in the Flight Service System would be 163,561 hours. Not only has the Secretary of Transportation determined that Air Traffic Control Specialists (Station) are covered by 5 USC 5542, but also the Secretary has reaffirmed this determination every pay period since the enactment of the law. Not only is special overtime pay for Air Traffic Control Specialists (Station) provided in 5 USC 5542, but also premium pay is provided by the Congress in the Continuing Appropriations for Fiscal Year 1983 (P.L. 97-276 Oct. 2, 1982) quoted below: "35546a. Differential pay for certain employees of the Federal Aviation Administration "(a) The Administrator of the Federal Aviation Administration (hereafter in this section referred to Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 as the 'Administrator') may pay premium pay at the rate of 5 per centum of the applicable rate of basic pay to-- "(1) any employee of the Federal Aviation Administration who is-- "(A) occupying a position in the air traffic series classified not lower than GS-9 and located in an air traffic control center or terminal or in a flight service station;..." "(e)(1) The Administrator may pay premium pay to any air traffic controller or flight station specialist of the Federal Aviation Administration who, while working a regularly scheduled eight-hour period of service, is required by his supervisor to work during the fourth through sixth hour of such period without a break of thirty minutes for a meal. "(2) Premium pay paid under paragraph (1) of this subsection shall be paid at the rate of 50 per centum of one-half of the applicable hourly rate of basic pay." Here again the law is permissive as to its application, and the FAA Administrator has, for good and sufficient reasons, included Air Traffic Control Specialists (Station) as a group of employees qualified for the premium pay authorized. We, accordingly, hold that the community of Air Traffic Control Specialists (Station) is a unique group of Federal employees who, by law, is worthy of special consideration and that exclusion of this group from early retirement benefits accorded to other Air Traffic Control Specialists of the same 2152 designation and covered by 5 USC 5542 and P.L. 97-276 constitutes unfair and inequitable treatment. Unfair and inequitable treatment is demonstrated daily by the "Second Class Citizen" label which Air Traffic Control Specialists (Station) have applied to themselves on a national Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 basis with the attendant low morale environment which is apparent to even a casual observer. The enabling legislation, Public Law 92-297, provided that only those GS-2152 series Air Traffic Control Specialists employed at centers and towers would be provided coverage and benefits under that legislation. The discriminatory aspects of that legislation has divided the different categories of Air Traffic Control Specialists into the "haves" and the "have-nots" and has created a very real caste system within this safety and life-saving system. This discrimination has escalated at all levels of the FAA and the legislation as enacted has proved to be detrimental, rather than beneficial, to aviation safety. The cumulative effects of the discrimination by FAA, which favored one sector of its Air Traffic System workforce to the exclusion of another, has resulted in feverish attempts on the part of those covered by the legislation to protect the "private domain" interests, and they were provided with all possible aid and comfort by the FAA in continuing and expanding the area of discrimination. The question is sometimes asked, "Can the Government be sued in aircraft accidents involving alleged negligence on the part of Air Traffic Control Specialists (Station)?". The answer to that question is in the affirmative, and there are numerous examples. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Accordingly, legal burden is upon the shoulders of every Air Traffic Control Specialist (Station) in the everyday performance of his/her duties. While pay is not a subject of this hearing, discrimination certainly is a major subject. One only needs to refer to GAO Report "Development of the Classification Standard for Flight Service Station Specialists" (FPCD-79-52 of July 25, 1979) to find significant examples which are quoted: "Because of the possibility of widespread work slowdowns by controllers, the Commissioners intervened directly in the decison making process.PATCO was granted a personal hearing by the Commissioners who overturned the Standards Division's position which resulted in a one-grade increase for controllers over what the Standards Division had recom- mended. NAATS was also granted a personal hearing, but it was unsuccessful in its appeal for higher grades for flight service station specialists." We hold that if the Commissioners so much as lifted a finger in response to a threat of a widespread work slowdown by "con- trollers, then the Commissioners were, in fact, placed in the position of condoning the commission of an intended felonious act. Air Traffic Control Specialists (Station) did not threaten the Commissioners in any way nor did they contemplate any such action. In the Secretary of Transportation's comment on this GAO report, the Secretary stated: "It was the Department's and the Agency's expectations and point of view that selected air traffic control and FSS facilities should be elevated one grade level. "Although the GAO concludes, and we agree, that proper procedures were followed by the CSC, we continue to be convinced that high-volume FSS facilities should be established at the GS-12 level. Nothing in the report changes this belief or resolves this dilemma." Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 This GAO Report was prepared at your request, Mr. Chairman, and we are eternally grateful for your demonstrated interest in the Flight Service System. 5 USC 2109 defines Air Traffic Controller as "an employee of the Department of Transportation who is actively engaged in the separation and control of air traffic", and provides that the Secretary of Transportation may prescribe regulations or determine the application of this section. As previously argued in this testimony, we contend that no FAA personnel on the ground controls aircraft. It is interesting to note at this time the document used by the Secretary of Transportation to implement the provisions of P.L. 92-297. It is identified as Department of Transporta- tion Federal Aviation Administration order 3410.11a,dated May 16, 1975, and reprinted August 30, 1976, with change 1 entitled "ATC Second Career Program". The "Foreword" to this order, signed by the "Acting Administrator", J. W. Cochran, is quoted: "EXPLANATION. This order revises the ATCS Second Career Program to incorporate recommendations of the ATCS Second Career Review Committee, guidance contained in Supplemental Instruction letters issued as supplements to Order 3410.11, and recommendations from Washington and field offices." No mention is made of retirement benefits and yet, on page 1, we find that the purpose of the order is significantly expanded: "PURPOSE. This order implements Public Law 92-297 which is designed to improve the conditions of employment for air traffic controllers by offering retirement benefits, job training and special appeal procedures for those who are involuntarily removed from air traffic control work; and Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 to establish maximum age limitations for recruitment under 5 U.S.C. 2109, 3307, and 3384." The coverage section is of such importance that it is set forth in its entirety: "5. COVERAGE a. This order applies to and affords coverage for: employees of DOT with five or more years of career controller service who meet all of the following requirements; or the immediate super- visor or a nonsupervisory employee who meets all of the following requirements: (1) Offically assigned to an air traffic control facility; (2) Actively engaged in the separation and control of live air traffic; (3) Occupies a position which requires him to meet on a continuing basis the physical qualifica- tion standards established by the Civil Service Commission for an air traffic controller. b. This coverage includes and is limited to full professional level controllers and their immediate supervisors; those assigned as flow controllers; and employees receiving developmental training at or above the established entry levels as defined by the classification standards and the Civil Service examination announcement at time of en- trance on duty. Also included are controllers assigned to a combined Flight Service Station/ Tower where the tower duties are performed on a regular, recurring basis. Where a second level or higher supervisor is required to serve as a career controller or as the immediate supervisor of a career controller or as the immediate super- visor of a career controller performing the full range of first level supervisor duties on a regular, recurring basis for a substantial portion (e.g., 50% or more) of his time, and these duties are included in the official position description, he is covered under P.L. 92-297. c. This coverage does not include employees tempor- arily assigned to control.of live air traffic Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 primarily for the purpose of maintaining profi- ciency in order to aid in the performance of their other regularly assigned duties or primarily for research, development, or evaluation purposes. Also not included are employees receiving pre- developmental training at grades below the normal entrance level, supervisors of flow controllers, and second level and higher level supervisors except as provided in item b.above. d. Decisions regarding application of coverage provisions in this paragraph will be made by the regional/center directors. This authority may be redelegated to the manpower division chief. The regional/center director, or his designee, may refer questions regarding interpretations of coverage provisions to the Director of Personnel and Training." Not only are "full professional level controllers" included in the coverage, but also those receiving developmental training and those employees holding "flow controller" positions. The authority for making decisions regarding coverage provisions is delegated to regional/center directors of which there are thirty-one in number. Such authority may be further delegated to "manpower division chiefs". Accordingly, we have 62 officials who may be authorized to make decisions relative to coverage under this order. How any standard for approval/disapproval can be achieved under these conditions is indeed mysterious to us. To look further into the implementing order, we believe the section on retirement is germane to the confusion; Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 "12. RETIREMENT , a. An employee who meets the service and age require- ment under P.L. 92-297 has a vested right to such entitlement, which he may exercise at his option, regardless of subsequent job assignments within the Federal service. The annuity computed for employees retiring under the provisions of this order is based on the regular retirement formula with a guaranteed minimum equal to 508 of the high-3 average salary. The annuity is not reduced even if the employee is under age 55 at the time of separation. b. In order for the Civil Service Commission to determine whether the retirement claim of an employee is governed by P.L. 92-297, it is necessary that a certification will be made by the chief of the servicing payroll branch and will be based on the determination of creditable service made by the respective manpower division chief in coordination with the air traffic division chief, as appropriate. A completed FAA Form 3300-30, signed by the manpower division chief, or his designee, will be forwarded along with Standard Form 2801, Application for Retirement, (and any other applicable material) to the chief of the payroll branch. Based on this information, the payroll chief will make the necessary certification on Standard Form 2806, Individual Retirement Record. Where the employee claims credit- able experience which is not readily determined, due to inadequate records, position descriptions, etc., the employee should seek verification of his claimed experience from his former supervisor, if available; from old records at home or elsewhere; and furnish his own statement of the duties he performed, time performed, and circumstances surrounding the perfor- mance. All the pertinent information should then be sent along with the employee's application for retirement to the manpower division for determination. The Regional Flight Surgeon will also submit a recertification that the employee is permanently disqualified for career controller work." In this section we note that additional officials partici- pate in the approval/disapproval determination relative to the "certification of creditable service," i.e.: Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Chief of the Servicing Payroll Branch; Air Traffic Division Chief; Designee of the Manpower Division Chief. Not only are additional authorities designated, but also the section provides that creditable service may be certified by a former supervisor or by an unsworn self-serving statement by the employee himself relative to his own stewardship. From this implementing order 3410.11A,it is difficult for us to understand how any knowledgable Air Traffic Control Specialist (Center/Tower) would be denied the benefits provided by Public Law 92-297. By way of review, this issue with kindred subjects was con- sidered by the House Committee on Post Office and Civil Service in the 96th Congress and reported favorably (House Report 96-726 (Part I)) after exhaustive, in-depth hearings conducted by Chairperson Schroeder, Subcommittee on the Civil Service (Serial 96-37). The Bill was subsequently referred to the House Appropri- ations Committee which reported the Bill adversely (House Report 96-726, Part 2) but with an important recommendation quoted as follows: "The Committee is cognizant of the potential for detrimental effect on employee morale resulting from the exclusion of flight service station specialists from programs such as those authorized by Public Law 92-297. The Committee intends, therefore, to recom- mend a further review of this problem and its impact on aviation safety. The Committee believes that this further study is necessary before a decision is made with respect to inclusions of flight service station personnel in this program." (Italics added) Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 On July 24, 1980 - House Appropriations Committee directed further review and report (House Report 96-1193) quoted below: "Under Public Law 92-297, air traffic controllers can qualify for an early retirement program, but flight service station specialists are not entitled to similar benefits. In part 2 of the report of H.R. 1262, the Committee recommended a further review of this situation. This Committee reiterates this recommendation and directs the FAA, in cooperation with an independent organization, to report on this matter no later than September 30, 1981." Finally, on November 24, 1981, the Administrator of the Federal Aviation Administration forwarded his report to the House Committee on Appropriations. In his covering letter the Administrator stated: "Based on the findings and conclusions presented by JWK International, we do not find any evidence which warrants the extension of early retirement benefits to Flight Service Station Specialists." This was an excellent opportunity for the Administrator to express his own views on the issue since the entire Flight Service System is an important part of his organization. He, however, remained silent and relied completely on the views of an outside. entity. We can only infer that the FAA Administra- tor had no position he considered worthy of consideration by the Appropriations Committee. believing the JWK International study to be inadequate, the NAATS leadership commissioned the authoritative personnel firm of Ruttenberg, Friedman, Kilgallon and Associates, Inc., to critique the FAA product, which they found to be faulty. These conclusions were forwarded to the House Appropriations Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 "EARLY RETIREMENT - Under Public Law 92-297 air traffic controllers can qualify for an early retirement program, but flight service station specialists are not entitled to similar benefits. In part 2 of House Report 96-726 the Committee recommended a further review of this situation. This study was completed in November, 1981, and an analysis of the study was provided to the Committee earlier this year. Because of the questions raised regarding the validity of the conclusions contained in the study, the Committee is considering requesting a General Accounting Office evaluation of both the study and the subsequent analysis." The Senate and House conferees, meeting on the Department of Transportation and related agencies appropriations in 1983, con- sidered this issue to be of such importance that it was addressed in the Conference Report: "The conferees urge that the study and the analysis relative to eligibility of flight service station specialists for early retirement under Public Law 92-297 be referred to the General Accounting Office for evalua- tion, analysis and report." (Congressional Record, Volume 128, No. 46, Monday, December 13, 1982, page H 9512) Eventually, in May,1983, the FAA Administrator, in compliance with the Congressional mandate, forwarded the two studies to the General Accounting Office. On March 27, 1984, the United States General Accounting Office report B-214320, "Review of Studies on Early Retirement of Flight Service Station Specialists," the GAO concluded: "Our review showed that JWK's study results are inconclu- sive. The results do not support FAA's conclusion that FSS specialists should not be afforded early retirement . . . . . . . . Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 When the FAA was questioned by Congressman Ratchford about the GAO Report and the GAO conclusions (Hearings - Subcommittee on Transportation, House Appropriations Committee for Fiscal Year 1985 - Part 6, page 572), FAA witness Weithoner responded: "Mr. Ratchford, we believe the (FAA - added) study could have been more thoroughly done, and we agree with and accept some of the GAO criticisms. We also disagree with and do not accept some of their observations. "We believe their review was limited because they concerned themselves only with two documents: our report and the critical report that had been prepared at the request of the union. "We believe that their criticism would have been some- what different if they had the opportunity, or had they taken the opportunity, to review some of the supporting documentation and talked with our people at the Civil Aviation Medical Institute and so on." (Italics added) This response by witness Weithoner was a surprise since, at that time, there was an ongoing study at the Civil Aviation Medical Institute relative to the Miami Flight Service Station. It is entitled: "PHYSIOLOGICAL RESPONSES TO UNVARYING (STEADY) AND 2-2-1 SHIFTS: MIAMI INTERNATIONAL FLIGHT SERVICE STATION (FAA-AM-85-2 - dtd. February,1985) Civil Aeromedical Institute Federal Aviation Administration Oklahoma City, Oklahoma" The Civil Aeromedical Institute is the FAA's own medical research activity and Dr. Melton has been involved in, and has conducted, many studies related to stress in the Air Traffic Control environment. Some excerpts from this report are germane to this Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 "In 1974 a stress index was formulated in this laboratory based on excretion levels of the stress indicator hormones (SIH's) in urine (KGS, E, and NE). This index facilitated comparison of stress at various ATC facilities (5,7). Basic- ally, the index consists of the product of resting and working values of each SIH mathematically treated so as to provide a unitary common denominator for each SIH. The SIH's are treated in this way so that each will have equal importance in stress assessment; otherwise, the catecholamines' importance would be overwhelmed by the steroids' importance because of the far greater amount of steroid material in urine compared to catecholamines. The individual indices are designated cat (KGS), ce (E) and cne (NE). The average of the three indices is designated Cs, the composite stress index." (Underlining added) .When stress indices for all ATC facilities studied are listed (Table XIX), MIA IFSS tops the list as the most stressful (Cs=2.60)." Comparison of Various ATC Facilities by Means of a Stress Index Miami IFSS ('82)* O'Hare ATCT ('68) Opa Locka ATCT ('72) Atlantic ARTCC ('73) Miami ARTCC ('72) Los Angeles TRACON ('74) Houston ATCT ('70) Oakland TRACON ('74) Houston ATCT ('71) Oakland TRACON ('72) Los Angeles TRACON ('72) Fort Worth ARTCC ('73) 2.60 1.05 .84 .82 .76 .75 .74 .72 .68 .60 .60 .34 C st .95 1.41 .64 .76 .61 .27 1.27 .23 .89 .62 .66 .22 1.03 .75 .74 .34 .71 1.10 .29 1.31 .62 .76 .34 .58 C ne 4.85 .98 1.15 1.37 .96 1.44 .65 .61 .52 .43 .81 .20 *NOTE: The C s for Miami IFSS was subsequently corrected as per the Addendum (pages 29-30) to 1.46. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 "It was thought that perhaps the high level of excretion of NE might be a reflection of the age of the subjects. However, the correlation between NE excretion level and age is not statistically significant (r=0.29, p;~ 0.30). Some of the subjects were on medication for control of blood pressure; however, there was no apparent significant correlation between medication usage and NE excretion. Analytical reruns and audits of laboratory procedures have likewise failed to reveal experimental error as the cause of the high values. Further, urine collection procedures were identical to procedures used in other studies. The same personnel performed these analyses by the same methods as in the previous studies." (Underlining added) "A diligent search for experimental error has delayed this report beyond the reporting time normally required for studies of this type and the search will continue as long as personnel and facilities are available for this purpose or until the validity of the high values is established. "The MIA IFSS employees as a group possibly show the highest level of acute workload stress of any ATC facility yet studied." It is apparent to NAATS that the Miami International Flight Service Station did not fit the mold which we believe was presupposed by the FAA's Civil Aeromedical Institute. In fairness to Dr. Melton, he did include information as to his checks and double checks of all procedures in the laboratory reruns. In fact, at the end of the report he included an addendum to express his views, not based on fact or research, but based on his belief and conjecture: "It is now believed that, by human error, samples for creatinine analysis were taken from the nonacidified moiety, resulting in low creatinine values. Because the weight of creatinine forms the denominator of the creatinine-based ratio, calculated SIH's were inordinately high. The fact that all SIH values were high, impelled us to look first at the creatinine analysis, but the samples for the reruns were again taken from the urine previously set aside for creatinine analysis, thus giving Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 the same result as the first run. It was only when we started from "square one" that we realized what had hap- pened." (Underlining added) The last sentence in the above paragraph is not under- stood since throughout the report it is apparent that the CAMI staff and Dr. Melton started from "square one" many times. Even with his "correction", Dr. Melton states: "Because the error is a relatively constant one, we do not believe that conclusions regarding differences in the two shift patterns are compromised. The com- puted level of stress is changed, however, to about half the value reported." And,finally,FAA's Dr. Melton states: "The Miami International Flight Service Station (MIA IFSS), though, still retains its number one position on the stress index list, surpassing even O'Hare Tower during the high-stress time of the 1968 ATC slowdown (IFSS Cs= 1.46, ORD Cs= 1.05)," (ORD means O'Hare Tower.) On February 6, 1985, the Honorable Gene Taylor of Missouri introduced HR 989 in the House of Representatives, which seeks to include Flight Service personnel for early retirement. On June 27, 1985, The Honorable Mary Rose Oakar, Chairperson, Subcommittee on Compensation and Employee Benefits of the House Post Office and Civil Service Committee, held hearings on HR 989. In his statement before that Subcommittee, Mr. Taylor stated, among other compelling arguments, the following: "The Secretary of Transportation recognized the hazards of the workplace in the Flight Service System, in the im- plementation of 5 USC 5542 by including station employees for eligibility for special overtime pay and stated: Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 '(A) The duties of which are critical to the im- mediate daily operation of the Air Traffic Control System, directly affect aviation safety, and involve physical or mental strain or hardship.' In my view, this action alone is sufficient reason for the enactment of H. R. 989. "General Aviation is the most hazardous segment of aviation, and yet, the FAA denies early retirement benefits to employees involved with general aviation and provides these same benefits to those employees involved with scheduled carriers, the safest segment of aviation. "If fairness and equity in the work force is to be achieved and if aviation safety is to be enhanced, we have no alternative but to include the air traffic control spe- cialists in stations within the group entitled to early retirement and remove the stigma of separateness from these loyal and dedicated Federal employees." And that, Mr. Chairman and Members of this Committee, is .where the matter stands today. In our view, the recommendations to aircraft pilots by Air Traffic Control Specialists (Station) are just as important and just as vital to aviation safety as the recommendations by Air Traffic Control Specialists (Center, Tower), including such geographical locations as O'Hare, Kennedy, Los Angeles and any other area. The issue is one of fairness and equality, and our com- munity of Specialists has been second class citizens since the passage of PL 92-297, and they consider themselves as such. It is axiomatic that all personnel in the same personnel category must be treated equally and fairly if high morale, good order and discipline are to be achieved. This is not the case in the Air Traffic Control community where there exists a caste system of noblemen and serfs. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 We believe it to be appropriate to quote the Chairman of the Subcommittee on Investigations and Oversight of the House Committee on Public Works and Transportation in his hearing record,"The Impact of Weather on Aviation Safety". (98-44, pages 425-26) "We did not begin this inquiry with the thought that it might solve the weather problem, but I believe we did put a handle on some of the things which will help in improving our accommodation of weather into the Nation's air trans- portation system. "Initially, we learned some alarming statistics from the Safety Board as to the impact of weather on general aviation, commuter airlines, and the air carrier opera- tions. The percentages quoted for the number of fatal accidents where weather was considered a factor seem to be far beyond what the safety investigators had expected to find, and certainly they were shocking to us. "The loss of even one life is difficult to accept, but the 5-year total of 4,000 tells us that a lot of people may be concerned about weather. But not enough people are talking about how to avoid flying into these turbulent cells. "We heard of the planning activities of some carriers who utilize all the weather information available so as to avoid flying near or into what may be a hazardous situation. But we also heard of some of the difficulties associated with general aviation attempts to obtain weather information from flight service stations. "It became pretty clear that the message being given by all the witnesses is that suspect weather cells should be avoided just as one aircraft should avoid the path of another aircraft." (Italics added) We urge that Air Traffic Control Specialists (Station) - Flight Service Personnel - be provided the same early retirement opportunities as are accorded to oth?r 'eraffic Control Specialists of the same Series 2152 designation. Thank you, Mr. Chairman Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 U.S. Deportment oT ! t1 I Transi,ortation News: FOR RELEASE TUESDAY FAA 10-85 March 5 11985 Contact: John G. Leyden Tel.: (202) 426-8521 FAA REPORTS MORE THAN 1,000 FLIGHT ASSISTS IN 1984 In April 1984, a Federal Aviation Administration air traffic controller in St. Louis gave flying instructions by radio to a woman in a private aircraft when her pilot- husband suffered a heart attack, The controller guided her down to a safe landing. A few months later, Miami controllers, confronted with the same scenario, provided similar assistance and went home that night knowing they had saved a human life. And in November; Kansas City controllers helped two passengers keep their airplane. straight and level until the ill pilot recovered consciousness and brought them all down safely. The FAA calls these incidents flight assists, and during 1984 controllers and flight service station specialists were involved in 1,069 assists, possibly saving the lives of 2,852 people. Secretary of Transportation Elizabeth Hanford Dole said, "I am very proud of the highly professional work done by the air traffic control specialists who have guided so many pilots in distress to safe landings. They bring credit to th'! entire air traffic control service." FAA Administrator Donald D. Engen said that these flight assists happened at a rate of roughly three a day in 1984, and that almost all of them involved private and business aircraft. More typically, the assistance given to pilots in trouble involves less dramatic situations, although most assists are still critical. Typically, a non-instrument rated pilot is lost, caught on top of clouds and may be running low on fuel. Controllers and flight service station specialists use radar or direction-finding equipment to pinpoint the pilot's position, talk him down through the overcast, and guide him to the cixest airport for a safe landing. The FAA Administrator said, "These flight assists rarely make the newspapers or evening television news, so the outstanding work done by the agency's air traffic control specialists on a day-to-day basis goes largely unnoticed by the general public. "However," he added, "I believe the aviation community understands and appreciates these efforts, and pilots fly with a lot more assurance knowing that help from the FAA is as close as their radio microphone if they should get in trouble. Both the pilots and controllers know that the FAA is here to serve." Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 NATIONAL GUARD ASSOCIATION OF THE UNITED STATES ONE MASSACHUSETTS AVENUE, NORTHWEST ? WASHINGTON, D.C., 20001 ? (202) 789-0031 STATEMENT BY LIEUTENANT GENERAL LA VERN E. WEBER (RET.) EXECUTIVE DIRECTOR of the NATIONAL GUARD ASSOCIATION OF THE UNITED STATES to the COMMITTEE ON GOVERNMENTAL AFFAIRS Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 TESTIMONY BEFORE THE SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS 10 September 1985 Mr. Chairman and members of the committee, I appreciate this opportunity to appear before you today to present the views of the National Guard Asso- ciation of the United States on the provisions of the Civil Service Pension Reform Act, S.1527. The Association supports the overall design of the proposed retirement plan, which utilizes a three-tier system of Social Security, a defined benefit plan and a thrift savings plan. We are especially appreciative of the concern shown by this committee for the nearly 47,000 military technicians who, by law must maintain military membership in the Army and Air National Guard as a con- dition of their federal Civil Service employment, and are subject to mobil- ization and deployment in their military status. While we generally support the bill, the Association does have several concerns relating to specific provisions applicable to military technicians. In passing the National Guard Technicians Act of 1968, Congress antic- ipated that the eligibility requirements of age 55 with 30 years service for an unreduced annuity would blend well with a technician's military career. This assumption has been proven correct. We fully support continuation of this criteria, and appreciate the committee's inclusion of such a provision in the new retirement plan. In 1968, Congress also recognized that the military retention laws would make the discontinued service retirement provisions, at age 50 with 20 years service or at any age with 25 years service, a key factor in the technician program. For example, military separations often occur between the ages of 53 to 55, due to the retention provisions of the Reserve Officer Personnel Act. Even though such individuals take a two percent reduction in annuity Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 for every year under age 55, this concept has caused relatively few prob- lems and has proven to be harmonious with the technician's military career. The National Guard Association believes that the proposed increase in penalty reduction from two percent to five percent for each year under 55 will have a drastic impact on those technicians who, unlike other federal employ- ees, lose their federal Civil Service employment when loss of military member- ship occurs. Full consideration must be given to the effect of loss of mili- tary membership on a technician's Civil Service employment. We urge the com- mittee to reconsider this portion of the bill and continue the two percent provision. Mr. Chairman, the National Guard Association has one additional important area of concern. You have stated that the proposed legislation is intended to encourage employees to remain for a full career, to.maintain the standard of living for a career employee into retirement, and to provide good benefits while restraining costs. We.feel the bill establishes an excellent vehicle for accomplishing those goals, through the establishment of the three-tier system. However, the Association is seriously concerned about the possible absence of one of the tiers during an extended period immediately following a military technician's retirement. The new plan relies on the Social Security tier to provide a substantial portion of the employee's retirement income. The absence of this tier for any period would significantly reduce the retiree's overall annuity and would certainly preclude continuing the employee's previous standard of living into retirement. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 The necessity to provide for retirement prior to eligibility for a Social Security annuity has been recognized for special retirement classes, such as law enforcement officers, firefighters, and air traffic controllers. Provi- sions for revised retirement eligibility criteria and an annuity supplement until age 62 are included in the bill. The annuity supplement equates to the Social Security tier which is not available from the date of retirement until age 62. The Association urges the committee to consider a change to the bill to provide for an annuity supplement for military technicians similar to that provided for law enforcement officers, firefighters, and air traffic con- trollers. The bill recognizes the special circumstances of the military nature of the dual-status National Guard technician by providing for a full defined benefit annuity retirement at age 55. We have discussed the need for a two percent penalty provision because of the possible early loss of military membership and the resultant involuntary termination of federal employment. We also feel that the demands for physical ability, coordination and stamina of the military technician are similar to those of the other special retirement classes. Under the current provisions of the bill, a National Guard technician would be penalized for early retirement mandated by the military relationship of his employment. For example, a technician who is forced to retire at age 53, due to loss of military membership, would not receive a critical portion of his total retirement annuity for approximately nine years. The Association believes it is the federal government's responsibility to ensure that these dual-status technicians receive fair and reasonable compen- sation for their years of faithful and dedicated service. We strongly support a change in the bill to provide an annuity supplement from the date of retire- ment to age 62. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 359 -4- In summary, the National Guard Association of the United States looks forward to offering its support for the proposed new three-tier retirement plan. We solicit the committee's support in revising the plan to decrease to two percent the reduction for those National Gard military technicians who are involuntarily terminated prior to age 55 and to provide an annuity supplement from the date of retirement until age 62. Mr. Chairman, I wish to thank you for the opportunity to present the views of the National Gard Association. I look forward to working with your staff and members of this committee on this important issue. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator EAGLETON. It is now my pleasure to call to the table Dr. Arthur Flemming, one of the truly great men of this country. It is an honor to have you here. TESTIMONY OF ARTHUR S. FLEMMING, COCHAIR, SAVE OUR SECURITY COALITION Mr. FLEMMING. It is a privilege to appear before you as we look at issues of common concern. I want to express my appreciation for your leadership in this and many other areas. Senator EAGLETON. You are going to keep that microphone in? You haven't aged in all the years I have been here. You are just the same as you were. I have aged so my hearing has diminished. So thank you for keeping the mike in. Mr. FLEMMING. Mr. Chairman, I appear today in behalf of SOS, the Coalition to Protect Social Security. We certainly appreciate the opportunity of testifying on this proposal. As you know, the SOS is a national coalition of about 100 nation- al organizations with a membership of some 40 million, including the elderly, disabled, and workers. My colleague as cochair is Wilbur Cohen, another former Secretary of Health, Education, and Welfare. He also serves as chairman of our Federal Employee Com- mittee. As you appreciate, I have a special interest in the issues con- fronting the committee at this time as a result of my serving as a member of the U.S. Civil Service Commission from 1939 to 1948. Quite a ways back, but we were beginning to look at these same issues back there in those days. From these two points of view, I want to address what we who are part of the coalition agreed are the chief issues of the legisla- tion. In brief, I would like to talk about the level of benefits for the retired and survivors; the proposal to cut the cost-of-living adjust- ment and then the rights of the disabled. As you appreciate, Mr. Chairman, the underlying principle of Social Security is that it is a floor for economic security, and that employers and employees must build on it. It is the united convic- tion of our coalition that the benefits in the pending bill are not adequate. Some measure or test to income adequacy should be applied in order to judge the true worth of a retirement plan. Those who drafted this legislation have focused on the amount of benefits in comparison to a person's annual salary at the time of retirement, technically known as the income replacement rate. To test the adequacy of that replacement rate, we must turn to some baseline. How much does a person need to live on? What is the goal we seek? Is it merely to keep people out of poverty or is it to provide an income which is consistent with our belief that the individual retiree should be able to cope with the hazards and vicis- situdes of old age? Social Security does provide the floor. Of course, there are wel- fare programs, but surely the goal of the civil service retirement system and, indeed, all retirement plans should be to provide an income which will make it unnecessary for an older person to become a part of our welfare system. Surely the Federal Govern- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 ment functioning in its capacity as an employer needs to provide an adequate living standard for the people who have given so much of their lives to serving the public. The President's Commission on Pension Policy which reported in 1980 developed what we think is a good standard for retirement income goals. I have included in my testimony a table which uses the final salary of $15,000, $30,000, and $45,000; deals with a retir- ee at age 62 with 30 years of service, unmarried and without joint survivorship annuity. It shows that the total defined benefit of this proposal at the $15,000 level would be 50 percent; $30,000 level, 45 percent; $45,000 level, 40 percent. The President's Commission on Pension Policy recommended a replacement rate of 66 percent for the $15,000 category; 58 percent for the $30,000 category; and 54 percent for the $45,000 category. The total defined benefit in this proposal is short. In the case of the low income and average fellow workers, it is so far short of the goal that we believe S. 1527 does not fulfill its basic responsibility for economic security. We believe that the defined benefit plan can and should be strengthened by providing, for example, that employ- ees would earn 1.5, maybe more, up to 1.75 percent, instead of 1 percent of the average of their highest 5 consecutive years of wages for each year of service completed. This would be far more consist- ent with the practice of progressive private employers than would be the current proposal. SOS believes that indivduals must bring some personal initiative, such as savings, investments, and insurance to provide for their re- tirement and their survivors. S. 1527 recognizes this and provides a thrift plan to encourage such participation and a modest term life insurance policy. I will comment on the survivor benefit proposal at a later point. Regarding the thrift plan, we have reservations. First of all, the generosity of the plan contrasts sharply with austerity of the de- fined benefit plan. S. 1527 depends far too much on the thrift plan to reach the goal of adequate economic security. The analysis of the Congressional Research Service shows that the drafters of the proposal depend upon the thrift plan for a full 19 percent of the replacement rate. This is the equivalent of around 30 percent of the total retirement income. This, in our judgment, is unrealistic. According to the Social Security Administration's new benefici- ary survey, in a report published in January 1985, very few Ameri- cans depend so much on savings for their retirement. Most depend upon their pensions and Social Security and savings represents a small percent of their income, typically less than 15 percent. A recent poll that the AARP commissioned which was issued just last month found over 80 percent of working Americans agreeing that their income just gets them by and they find it very hard to save for their retirement. No thrift plan is going to bring about any significant change in that picture. Moreover, the drafters of the bill seem to think that the higher paid and lower paid will benefit equally from the thrift plan. Common sense tells us this is not so. I want to note at this point that I was disturbed by the Congres- sional Research Service analysis of the bill which said that comput- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 ed benefits were based on uncapped earnings. While I personally share the belief of many that executive pay in the Federal Govern- ment is a serious problem and capping it is wrong, I do not think we should make up for that sin by sinning against others. It is wrong to pay a higher replacement rate to the highly paid than the low income and average who need it more. That, however, is the effect of the proposed method for defining benefit computation. As I understand it, senior executive and political appointees will get thrift matches and benefits computed on salary as high as $86,000, even though it is capped at $68,000. I do not think this is an equitable approach to this problem. Next, I would like to take a look at the proposed survivors' bene- fits. The civil service system has always had a poor history of bene- fits for survivors. There are many elderly widows living on civil service pensions who are below the poverty level or just barely above it. We had thought and hoped that since Social Security pro- vides a foundation for survivors benefits, the civil service plan would build on the foundation in such a manner as to deal more equitably with the problems of survivors than has been the case in the past. But instead of doing this, the proposed plan eliminates to a considerable extent from the civil service plan benefits for young widows with children. Social Security does provide more than what the old system paid, but we must build on that foundation. The cost of making this kind of a contribution to dealing with the poverty that confronts many in this group would be marginal. The proposed employer-paid term life insurance is just barely the average of what private sector employers provide. Also, under this proposal, the civil service benefits of elderly widows would be reduced. In addition, benefits for school-age chil- dren have been eliminated. Again, in view of the fact that these cost so little, we do not understand why this has been done. The Social Security System cannot make up for the loss of all civil service retirement benefits. Social Security is the foundation for economic security. We urge the committee to build on this foun- dation by restoring the civil service retirement system benefits for survivors. Together, they will make it possible for survivors to come to grips with the hazards and vicissitudes of life. Neither Social Security nor civil service can do it alone. On the COLA issue, we are unanimously opposed to cutting the cost-of-living adjustment. That would set the wrong kind of prece- dent. Any defined benefit sets a target at some replacement rate of earned income. We have suggested that the committee adopt the recommended goals of the President's Commission on Pension Policy. A COLA simply ensures that over the lifetime of the retiree that replacement rate is maintained, that the standard of living does not deteriorate, especially in view of the extraordinary health care costs of the elderly and disabled. If annual adjustments are not made to allow for the full increase in the cost of living, the whole retirement plan would be invalidat- ed. The full COLA is an integral and essential feature of an ade- quate retirement program. We urge the committee to return to that principle. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 We have reviewed the disability provision from the perspective of our recent experience with the disability program of Social Securi- ty. We oppose the administration of the disability program by multi- ple contracts with different insurance companies. In our view, it will inevitably lead to disparate treatment. The bill also is inadequate and inconsistent with Social Security in providing the disabled with adequate protection in connection with the process of medical reevaluation. We urge the committee to incorporate the same standards and the same provisions for due process as are available to Social Security beneficiaries. We are ready to advise the committee on this issue. We have reviewed S. 1527 from the point of view of pensions available to other workers in America. As a member of the U.S. Civil Service Commission, I always when I appear before the Congress, urge that the Federal Govern- ment, as an employer, should be known as one of the Nation's most progressive employers. I still believe that this should be our stand- ard. If S. 1527 should be enacted into law, it would not meet this test. We believe that we should be moving toward this standard if the plan incorporated these minimal provisions: An accrual rate of at least 1.5 to 1.75 percent; a much less coer- cive penalty for elderly retirement. What is proposed is more severe than the normal and does not allow for the very common conditions of people who are forced to retire. Moreover, to impose any penalty at all for people who are forced to retire, whether be- cause of job requirements or incapacity is inequitable. Building in some incentives for later retirement, such as aug- mented benefits for longer careers and a much less generous thrift plan and a stronger defined benefit with improvements especially for survivors. We urge that the committee give consideration to these recom- mendations. If SOS can help you in your continued work, please call upon us. Our committee on Federal employees has access to some of the best talent in the country, and we will be very happy to work with you and your staff. Senator EAGLETON. Thank you, Dr. Flemming. Your chart on page 3, of course, does not include any return from the CAP, the thrift plan. I realize with low-paid Federal employees, there may not be much, if any, invested in the CAP plan. Mr. FLEMMING. I could argue-I don't know just what you would put in there. You have to speculate. Senator EAGLETON. An individual, for instance, using your chart, whose final salary was $45,000, chances are, he or she put some- thing in the CAP plan. Mr. FLEMMING. Yes. Senator EAGLETON. The individual making $15,000, chances are, probably not. But I admit, it is speculative. Mr. FLEMMING. That's right. Senator EAGLETON. Doctor, earlier today we had some-have you been here all day? I hope not. Mr. FLEMMING. No; I have been over on the House side. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator EAGLETON. Earlier today we had some discussion with some of the witnesses about this level of payment business. Under the Stevens bill, all the individual pays in is 7 percent; that is the 7 percent to Social Security and nothing more under the Stevens bill. Under the existing retirement system, the individual pays in 8.3 percent-7 to the system and 1.3 to Medicare. We were discussing the wisdom of having so-called level payments; that is, in the new system having the individual pay in another 1.3. We have been discvssing whether we should do that, and if we do, where to place that 1.3 percent. Do we place it in the defined benefit portion, as most of the witnesses have encouraged, or some have encouraged, or do we place it in the thrift plan, automatically putting the person in the thrift plan to the tune of 1.3. I would like to have SOS give us their views on that. You don't have to give it off the top of your head. You probably want to talk with your colleagues, and we would like to have your view on that in the next week or so, if you could. Mr. FLEMMING. I will be very happy to do that. It is an interest- ing idea. Senator EAGLETON. I am not quite tracking with you on your statement with respect to the disability benefits. That begins at the bottom of page 7 and goes over a bit to page 8. Mr. FLEMMING. There, Senator, I should give you and the com- mittee a memorandum on that. Senator EAGLETON. Would you? Mr. FLEMMING. Yes, which spells that out. That is very brief. That is a boildown. Senator EAGLETON. Give us an expanded memo on the disability. Mr. FLEMMING. Because we have, as you know, been working very hard on the disability part of Social Security and SSI. I think we can give you a memorandum which will spell out some of our experiences and then apply it to this bill. Senator EAGLETON. That would be excellent. Thank you, Doctor. I will get those two memos from you. Mr. FLEMMING. Thank you very much for this opportunity. Senator EAGLETON. Ms. Marie Argana, national president, Feder- ally Employed Women. Ms. Argana. TESTIMONY OF MARIE ARGANA, NATIONAL PRESIDENT, FEDER- ALLY EMPLOYED WOMEN ACCOMPANIED BY CHRIS deVRIES, LEGISLATIVE DIRECTOR Ms. ARGANA. Thank you, Senator Eagleton. With me is Chris deVries, our legislative director. Thank you for asking the Federally Employed Women to testify here today. Federally Employed Women [FEW], is an international membership organization representing women in the Federal Gov- ernment throughout the United States and foreign countries. FEW is a private, nonprofit, nonpartisan organization and was founded in 1968 to advocate equal opportunity and foster full potential for working women in the Federal sector. Women employed by the Federal Government have a vital inter- est in the development of a supplemental civil service retirement system. In 1984, there were over 800,000 Federal women workers. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Women comprised nearly half of the total Federal work force. Many of these women are dependent upon their retirement annuity as their main source of income during their retirement years. Retirement income that women Federal retirees depend upon is usually inadequate to live on comfortably. In 1984, the median monthly annuity for retired Federal women was $740 as compared to $1,081 for men. Women retired from Government receive lower annual annuities than their male counterparts in large part be- cause female Federal workers are concentrated in the lowest paying grade levels. Of all women who work for the Federal Gov- ernment, 75 percent are in the GS grades 1 through 8. The median wages for federally employed women in the GS clas- sification system totaled $18,864 per year in 1984. Under the cur- rent retirement system, women replace, on the average, 46.5 per- cent of their final pay as compared to 47.2 percent for men. When examining the median years of service for Federal employ- ees, however, it is shown that it is similar to men employed by the Federal Government. The median years of service in the civilian work force total 25.2 for women as compared to 26.7 for men. Feder- al women also tend to retire at a later age than men in order to gain full retirement benefits. Therefore, women's low-retirement annuities can in large part be attributed to their low earnings. Older women are the fastest growing poverty population in our Nation. Federal women retirees share the same burdens in their retirement years as all other women. The great majority of elderly women live alone, depend on their retirement benefits for the ma- jority of their income, and pay increasing shares of that income for medical bills. In 1983, 52 percent of elderly white single women and 84 percent of elderly black single women lived at or near the poverty level. Today, working for the Federal Government is no guarantee that a Federal woman retiree will not join the increasing ranks of elderly women living in poverty. Although the current civil service retirement system is gender neutral, it has a disparate impact upon women. The present system rewards employees with high earnings and lifelong Federal careers with high-retirement annuities. Women who do not occupy high- paying occupations in the Federal Government suffer under the current retirement system. The benefit calculation that averages the 3 years of the highest earnings with an increased percentage of return as the number of years of service increases affords women little opportunity to build a substantial retirement annuity. Al- though the question of women's concentration in the lowest grade levels and resulting low wages is another concern, it must be taken into account when looking at a retirement system. The new supple- mental retirement system cannot ignore these facts and continue to discriminate against federally employed women. FEW urges this committee to closely examine women's current status in the Feder- al work force when designing this new system. FEW envisions a new retirement system with either two or three levels. The basic annuity would consist of the Social Security bene- fit with a defined benefit as the second level and possibly an op- tional capital accumulation plan as the third level. FEW urges the implementation of a defined benefit plan as the second level bene- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 fit, rather than a defined contribution plan, because a defined ben- efit plan targets a set of retirement annuities under specified con- ditions. These specific benefits allow workers to better plan for their retirement years. Also, a defined benefit plan eases the addi- tion of supplemental benefits, such as disability and survivor, and can be retroactive for employees hired prior to the enactment of the plan. This latter aspect is important because the Federal work- ers who will be under the new system are currently entering the work force. Defined contribution plans, on the other hand, are not usually utilized by large corporations, but rather by small compa- nies or for short-service employees. Defined contribution plans are more risky and do not allow workers to plan adequately for their retirement income. Capital accumulation plans are becoming increasingly more pop- ular among private sector companies. Under a typical 401(k) thrift plan, employees can defer a percentage of their yearly earnings to a retirement account. A range of options exist on employer match- ings of this deferred income. Retirement income from a capital ac- cumulation plan is directly related to one's investment participa- tion. Many women would be unable to take advantage of a capital accumulation plan, due to their inability to decrease their modest take-home pay, but such a plan would afford higher paid employees the option of higher retirement benefits with immediate tax sav- ings. There are certain components of the present civil service retire- ment system that should be kept intact. FEW believes that the cur- rent structure of full benefits at age 55 with 30 years of service should be continued. Many employees have entered the Federal service with the understanding that they can exercise this option. Although women employed by the Federal Government currently retire later than their male counterparts, they should retain the option of retirement at age 55. Also, as we see women's labor force attachment grow stronger and more continuous, it is likely that more women will have enough years of service to retire with full benefits at age 55. FEW would also like to see the present computation of the 3 years of highest earnings for benefit calculations preserved. Al- though women have a relatively flat earnings profile as opposed to male workers, women are beginning to make inroads into the higher-paying grade levels. Because this movement is relatively recent, expanding the computation years will only serve to lower women's final annuity. Averaging lifelong earnings, as in the Social Security System, would drastically lower these women's retirement annuities. To protect retirement benefits from inflation, cost-of-living adjust- ments, or COLA's, must be paid on an annual basis. If no COLA provision is provided to Federal retirement benefits, the benefits are quickly eroded away and the philosophy of replacing a percent- age of a retiree's salary is lost. The median replacement rate for Federal retired women is 46.5 percent, based on the 3 years of highest earnings. Any reduction in this amount is inadequate to live on. For example, after 10 years, with a 4-percent inflation rate, a benefit only has two-thirds of its original purchasing power. A Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 woman retired from the Federal Government must be able to keep her purchasing power in pace with inflation. Although we contend that certain provisions of the current civil service retirement system should be preserved and implemented into the supplemental system, we will also offer some suggestions on how to change the system to better accommodate Federal women. As previously mentioned, the current system does not adequately provide women retirees with a decent standard of living. If we base the supplemental system on the present system, women will contin- ue to be losers. At the retirement hearings held in the House Post Office and Civil Service Committee on April 2, 1985, it was stated that Federal employees had to reach the General Schedule grade 9 before they received a Federal annuity as large as the Social Secu- rity benefit. Because most women are concentrated in grades below General Schedule 9, they are receiving lower retirement annuities than their private sector counterparts. Although the Social Security system is not free from inequities for women, the Social Security tilt built into this system guaran- tees low-wage earners a higher replacement rate of their earnings upon retirement than high-wage earners. Due to the fact that women make up a large part of the low-paid, long-term Federal employees, FEW recommends maintaining the Social Security tilt by simply adding on the supplemental civil service benefit. The Hay-Huggins Co. has reported that this procedure would be simple to administer. They offer an example of a benefit calcula- tion of 1 percent of base pay for each year of service added to the Social Security benefit. This calculation would fully preserve the tilt incorporated in Social Security benefits. This system is used by several State retirement plans. The Hay group also points out that under this plan, there would be losers and gainers. Short-term, low-paid employees and married employees would gain as com- pared to the present system, and high-paid career employees would lose relative to the present system. Some of these results could be partially offset by using a benefit calculation that does not give a straight percentage of base pay for each year of service, but rather increases the percentage of base pay as the number of years of service increases, similar to the current system's present benefit calculation. Using this method would increase the replacement rate for the higher earning, long-term employees. In addition, if a capital accu- mulation plan was adopted, it is likely that higher earning employ- ees would be more likely to participate and further increase their replacement rate of their final salary. The Congressional Research Service has provided a model of such a system that includes an add-on supplemental benefit and a capital accumulation plan that allows a maximum 6-percent em- ployee contribution with a 3-percent employer match. The Social Security tilt is maintained for the lower paid earner, yet the higher paid, long-term employee does not suffer. The Presi- dent's Commission on Pension Policy reported in 1981 that 51 to 86 percent of before tax final earnings was needed for retirees to maintain a constant standard of living upon retirement in 1980. They also showed that lower earners needed a higher replacement Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 rate of their final salary than higher earners to accomplish a pre- retirement standard of living. By maintaining the Social Security tilt, part of this goal is accomplished. By integrating the Social Security benefit with a pension annu- ity, the long-term, low-paid employee will receive a lower benefit. A 100-percent Social Security offset would eliminate the tilt altogeth- er and continue the philosophy of the present civil service retire- ment system of penalizing the low earner. Under the current system, Federal employees contribute 7 per- cent of their income toward their retirement benefit. Under the Social Security system, employees now contribute 5.7 percent of their income toward the Social Security benefit. FEW suggests that the supplemental retirement system not require an employee con- tribution beyond the Social Security contribution. According to the GAO, 93 percent of all workers in the private sector do not contrib- ute to their retirement plans. FEW would like to see this practice translate into the supplemental retirement system. When discussing the question of vesting periods, it is important to note that most Federal employees who leave the Government prior to 10 years of service elect to remove the it retirement money rather than select a deferred annuity. For this reason, FEW would support either a 5-year or a 10-year vesting period for the supple- mental retirement system in order for the system to be compatible with Social Security vesting requirements. The Hay group has estimated that only 1 percent of employees would receive a benefit under a 5-year vesting period who would not receive benefits under a 10-year vesting period. The civil service benefits must be protected from fluctuations in the economy, changing political atmospheres, and inflation. Under the current retirement system, Federal agencies match the employ- ee's contribution and the remaining funds come from the Federal Treasury. FEW encourages the committee to set up a system that better segregates the retirement funds from other Treasury funds. Each agency should be required to set aside funds for this pur- pose in a similar manner to segregating funds for Social Security benefits. Yearly congressional appropriations to the retirement fund should be eliminated and replaced by a funding formula. It is the ultimate responsibility of the employer to ensure that retire- ment funds are solvent. A cost decision must be made whether to approximate benefit levels in the present CSRS or retirement systems in the private sector in comparable companies. We do not feel that the level of benefits afforded Federal employees should be unduly hampered by strict cost constraints. Desired benefit levels should be calculated for cost and adjusted according to funding constraints. A decision must be made on how to deal with Federal employees hired prior to January 1, 1984. As many of them have devoted the majority of their working lives to civil service under the current civil service retirement system, it is necessary to preserve the cur- rent system as it is until all of these employees have retired. FEW would, however, also suggest opening the new retirement system to employees hired prior to 1984, allowing them the option of partici- pating in the new system. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 With regards to S. 1527, FEW commends this committee for dili- gently working toward a fair and equitable retirement system for Federal employees and introducing S. 1527. There are, however, several components in the proposed legislation that will provide in- adequate retirement benefits for a large number of women em- ployed by the Federal Government. As mentioned previously, averaging the 5 years of highest earn- ings, providing a reduced cost-of-living adjustment, and increasing the retirement age will lower Federal women's retirement annu- ities due to the low earnings women receive. Although we support the concept of a thrift plan, many women in the Federal service will not be able to exercise this option and defer a portion of their earnings as they need their income to sup- port themselves and their families. We look forward to working with this committee on developing a retirement system that pro- vides equitable retirement annuities to women employed by the Federal Government. The supplemental civil service retirement system should main- tain the integrity of a Federal retirement system and provide ade- quate benefits to employees of all income levels while attracting a qualified Federal work force and not penalizing low earners. This task is no small job. In today's atmosphere of constant attacks on Federal workers, it is even more important that a new retirement system be designed that will reward hard-working civil servants and attract talented new employees. FEW urges this committee to look at the current status of women employed by the Federal Government and to incorporate your findings into a new system that does not penalize low-wage earners. We would suggest taking civil service womens' employment data and inputing it into a retirement computer model to determine how women will fare under the variety of proposed retirement sys- tems. Even though there is a wealth of excellent information on sup- plemental civil service retirement plans, there is little data on how these proposals would impact women retired from the Federal Gov- ernment. Although women are moving into higher grade positions, the fact that most federally employed women are concentrated in the lowest General Schedule grade levels will not substantially change in the near future. These hard-working, devoted Federal employees cannot be ignored in the development of a new supple- mental civil service retirement system. Thank you for asking federally employed women to testify before the committee today. I will be happy to answer any questions the committee has. Senator EAGLETON. Thank you very much, Ms. Argana. Your statement is a very constructive one. You are used to this commit- tee. Let me ask you this question. I think the statistics show that women are in and out of the work force much more than men, isn't that correct? Ms. ARGANA. Yes, at the moment. Women are becoming more attached to the work force, but that is true for prior data. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator EAGLETON. So for those women who are going to work for a period of time and for whatever reason might not work for a period of time and once again work for a period of time-contrast- ing the old system, the one in place, with the new one beinq de- signed as proposed by Senator Stevens-there is some advantage in the structure of the new system, is there not? Ms. ARGANA. Yes, there appears to be. Senator EAGLETON. If we increase some of the numbers in the Stevens bill, and this is very speculative because I can't tell you precisely what they might be increased to, but if the benefits, some of the ones that you described, if the COLA were increased to a level more attractive than exists in the Stevens bill, if early retire- ment were improved a bit beyond the Stevens bill, if the accrual rate were improved perhaps a bit, disability improved a bit, a gen- eral enhancement of the Stevens package, would you estimate that a sizable number of women workers would opt to transfer from the old system to the new system? Ms. ARGANA. That's a very difficult question to answer. Senator EAGLETON. My guess-I am not an expert-- Ms. DEVRIES [interposing]. I think if a lot of women employed by the Federal Government were made aware if this and the Stevens/ Roth proposal was enhanced, they would probably get a larger ben- efit than under Social Security: that is a very convincing argu- ment. The Stevens/Roth proposal certainly provides more mobility for women in the current system. Federal women workers tend to be more attached to the workforce than the average women in the pri- vate sector. Of course, the economic needs of families and single mothers are increasing. I think the Stevens/Roth proposal certainly could be worked with. One of our main problems with it is that the benefit levels are largely dependent upon the thrift plan, and under the current statistics, most women employed by the Federal Government today could not take advantage of that thrift plan. Senator EAGLETON. That leads me to the next question. This 1.3 question, were you here when I was posing that question? MS. DEVRIES. Yes. Senator EAGLETON. Do you have a view on that? Part A, should we impose the additional 1.3? That is the question. Senator Stevens has it tailored down to 7. Should we impose another 1.3, and, part B, where should we put it? Ms. DEVRIES. We have no objection to the 1.3-percent contribu- tion. We would like to see it put into the defined benefit part of the plan. Senator EAGLETON. Why is that? Ms. DEVRIES. Just because that part of the plan will benefit women more. It is a guaranteed benefit they will receive on which they will be largely dependent. Senator EAGLETON. Did you hear the statistics I got from GAO? Ms. DEVRIES. I wasn't here. Senator EAGLETON. GAO tells us that if we put the 1.3 in the thrift package, it could ultimately enhance benefits by as much as 12 percent, and if we put it in the defined benefit part, it will only Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 enhance benefits by as much as 3 percent. We are going to try to draw that out a bit more. That is what they tell us. If that is the case, then it would seem to be a very clear bargain to go thrift vis-a-vis go defined benefit. If we draw that out, we may circulate it to all the various witnesses and ask them to comment. It is intriguing to me. Could you elaborate a bit, on page 9 of your testimony, the para- graph entitled "Costs." Could you elaborate a bit? What point are you making there? Ms. DEVRIES. This point was made in regard to when OPM was setting a cost target. They wanted to lower the cost of the new system as opposed to the present system by a certain percentage of payroll. Basically, what we are saying is, cost, of course, is a consid- eration, but it cannot override the consideration of adequate bene- fits for women retirees. Senator EAGLETON. I appreciate that point. My only joiner with that is if we are going to get a bill signed, passed in both Houses and signed, the cost of the new system as a percent of payroll is going to have to be less than the old system. Now, query, how much lower and in which category? That is a big query. This would be an exercize in futility if we came in with a plan that cost as much or more than the old system because the man downtown ain't going to sign that. Ms. ARGANA. We did not suggest that funding constraints should not be considered. It is just that we didn't think they should be pri- mary, first importance. Senator EAGLETON. Got you. Thank you very much. [The prepared statement of Ms. Argana follows:] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 e7q.~ ilk -!*- 2 federally employed women a an organlzatlon for opportunity & equality for women in government (202)898.1101 ? 1O1Overmontavenue, northwest, washington,d.c.20005- TESTIMONY OF FEDERALLY EMPLOYED WOMEN BEFORE SENATE GOVERNMENT AFFAIRS COMMITTEE ON THE DEVELOPMENT OF A SUPPLEMENTAL CIVIL SERVICE RETIREMENT SYSTEM Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 SENATOR ROTH, TIIANY. YOU FOR ASKING FEDERALLY EMPLOYED WOMEN TO TESTIFY HERE TODAY. FEDERALLY EMPLOYED WOMEN (FEW) IS AN INTERNATIONAL MEMBERSHIP ORGANIZATION REPRESENTING WOMEN IN THE FEDERAL GOVERNMENT THROUGHOUT THE UNITED STATES AND FOREIGN NATIONS. FEW IS A PRIVATE, NON-PROFIT, NON- PARTISAN ORGANIZATION AND WAS FOUNDED IN 1968 TO ADVOCATE EQUAL OPPORTUNITY AND FOSTER FULL POTENTIAL FOR WORKING WOMEN IN THE'FEDERAL SECTOR. THE DEVELOPMENT OF A NEW CIVIL SERVICE RETIREMENT SYSTEM FOR FEDERAL WORKERS HIRED AFTER 1983 AND UNDER THE SOCIAL SECURITY SYSTEM IS AN ISSUE OF PRIME IMPORTANCE. WE APPLAUD THIS COMMITTEE FOR CONTINUING TO PURSUE THE DEVELOPMENT OF A NEW SUPPLEMENTAL RETIREMENT SYSTEM THAT WILL MEET EVERYONE'S NEEDS. WOMEN EMPLOYED BY THE FEDERAL GOVERNMENT HAVE-A VITAL INTEREST IN THE DEVELOPMENT OF THE SUPPLEMENTAL CIVIL SERVICE RETIREMENT SYSTEM. IN 1994, THERE WERE OVER 800,000 FEDERAL WOMEN WORKERS. WOMEN COMPRISED NEARLY HALF OF THE TOTAL FEDERAL WORKFORCE. MANY OF THESE WOMEN ARE DEPENDENT UPON THEIR RETIREMENT ANNUITY AS THEIR MAIN SOURCE OF INCOME DURING THEIR RETIREMENT YEARS. IN 1980, THIRTY-SIX PERCENT OF ALL SINGLE ELDERLY WOMEN RETIRED FROM THE FEDERAL SERVICE DEPENDED UPON THEIR GOVERNMENT PENSION FOR OVER 50 PERCENT OF THEIR TOTAL INCOME. THE RETIREMENT INCOME THAT WOMEN FEDERAL RETIREES DEPEND UPON IS USUALLY INADEQUATE TO LIVE ON COMFORTABLY. IN 19811, THE MEDIAN MONTHLY ANNUITY'FOR RETIRED FEDERAL WOMEN Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 WAS $740 AS COMPARED TO $1,081 FOR MEN. WOMEN RETIRED FROM THE GOVERNMENT RECEIVE LOWER ANNUAL ANNUITIES THAN THEIR MALE COUIIIERPARTS IN LARGE PART BECAUSE FEMALE FEDERAL WORKERS ARE CONCENTRATED IN TIIE LOWEST PAYING GRADE LEVELS. SEVENTY-FIVE PERCENT OF ALL WOMEN WHO WORK FOR THE FEDERAL GOVERN- MENT ARE IN GENERAL SCHEDULE (GS) GRADES ONE THROUGH EIGHT. THE MEDIAN WAGES FOR FEDERALLY EMPLOYED WOMEN IN THE GENERAL SCHEDULE CLASSIFICATION SYSTEM TOTALED $18,864 PER YEAR IN 1984. UNDER THE CURRENT RETIREMENT SYSTEM, WOMEN REPLACE, ON THE AVERAGE, 46.5 PERCENT OF THEIR FINAL PAY AS COMPARED TO 57.2 PERCENT FOR MEN. WHEN EXAMINING THE MEDIAN YEARS OF SERVICE FOR FEDERAL EMPLOYEES, HOWEVER, IT IS SHOWN THAT WOMEN'S COMMITMENT TO THE FEDERAL GOVERNMENT IS SIMILAR TO MEN EMPLOYED BY THE FEDERAL GOVERNMENT. THE MEDIAN YEARS OF SERVICE IN THE CIVILIAN FEDERAL WORKFORCE TOTALS 25.2 FOR WOMEN AS COMPARED TO 26.7 FOR MEN. FEDERAL WOMEN ALSO TEND TO RETIRE AT A LATER AGE THAN MEN IN ORDER TO GAIN FULL RETIREMENT BENEFITS. THEREFORE, WOMEN'S LOW RETIREMENT ANNUITIES CAN IN LARGE PART BE ATTRIBUTED TO THEIR LOW EARNINGS. OLDER WOMEN ARE THE FASTEST GROWING POVERTY POPULATION IN OUR NATION. FEDERAL WOMEN RETIREES SHARE THE SAME BURDENS IN THEIR RETIREMENT YEARS AS ALL OTHER WOMEN. TIIE GREAT MAJORITY OF ELDERLY WOMEN LIVE ALONE, DEPEND ON THEIR RETIREMENT BENEFITS FOR THE MAJORITY OF THEIR INCOME, AND PAY INCREASING SHARES OF THAT INCOME FOR MEDICAL BILLS. IN 1983, 52 PERCENT OF ELDERLY WHITE SINGLE'WOMEN AND 84 PERCENT OF ELDERLY BLACK SINGLE WOMEN LIVED AT OR NEAR THE POVERTY LEVEL. TODAY, WORKING FOR THE FEDERAL GOVERNMENT IS NO GUARANTEE THAT A FEDERAL WOMAN RETIREE WILL NOT JOIN THE INCREASING RANKS OF ELDERLY WOMEN LIVING IN POVERTY. WOMEN WHO DEVOTE THEIR WORKING LIVES TO THE CIVIL SERVICE SYSTEM MUST BE GUARANTEED A DECENT STANDARD Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 THE PRESENT CIVIL SERVICE RETIREMENT SYSTEM ALTHOUGH THE CURRENT CIVIL SERVICE RETIREMENT SYSTEM (CSRS) IS GENDER NEUTRAL, IT HAS A DISPARATE IMPACT UPON WOMEN. THE PRESENT SYSTEM REWARDS EMPLOYEES WITH HIGH EARNINGS AND LIFE-LONG FEDERAL CAREERS WITH HIGH RE- TIREMENT ANNUITIES. WOMEN WHO DO NOT OCCUPY HIGH PAYING OCCUPATIONS IN THE FEDERAL GOVERNMENT SUFFER UNDER THE CURRENT RETIREMENT SYSTEM. THE BENEFIT CALCULATION THAT AVERAGES THE THREE YEARS OF HIGHEST EARNINGS WITH AN INCREASED PERCENTAGE OF RETURN AS THE NUMBER OF YEARS OF SERVICE INCREASES AFFORDS WOMEN LITTLE OPPORTUNITY TO BUILD A SUBSTANTIAL RETIREMENT ANNUITY. ALTHOUGH THE QUESTION OF WOMEN'S CONCENTRATION IN THE LOWEST GRADE LEVELS AND RESULTING LOW WAGES IS ANOTHER CONCERN, IT MUST BE TAKEN INTO ACCOUNT WHEN LOOKING AT A RETIREMENT SYSTEM.. THE NEW SUPPLEMENTAL RETIREMENT SYSTEM CAN NOT IGNORE THESE FACTS AND CONTINUE TO DISCRIMINATE AGAINST FEDERALLY EMPLOYED WOMEN. FEW URGES THIS COMMITTEE TO CLOSELY EXAMINE WOMEN'S CURRENT STATUS IN THE FEDERAL WORKFORCE WHEN DESIGNING THIS NEW SYSTEM. BASIC STRUCTURE OF A NEW SUPPLEMENTAL CIVIL SERVICE RETIREMENT SYSTEM FEW ENVISIONS A NEW RETIRMENT SYSTEM WITH EITHER TWO OR THREE LEVELS. THE BASIC ANNUITY WOULD CONSIST OF THE SOCIAL SECURITY BENEFIT WITH A DEFINED BENEFIT AS THE SECOND LEVEL AND POSSIBLY AN OPTIONAL CAPITAL ACCUMULATION PLAN AS THE THIRD LEVEL. FEW URGES THE IMPLEMENTATION OF A DEFINED BENEFIT PLAN AS THE SECOND LEVEL BENEFIT, RATHER THAN A DEFINED CONTRIBUTION PLAN, BECAUSE A DEFINED BENEFIT PLAN TARGETS A SET OF RETIREMENT ANNUITIES UNDER SPECIFIED CONDITIONS. THESE SPECIFIC BENEFITS Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 376 ALLOW WORKERS TO BETTER PLAN FOR THEIR RETIREMENT YEARS. ALSO, A DEFINED BENEFIT PLAN EASES THE ADDITION OF SUPPLEMENTAL BENEFITS (I.E. DISABILITY AND SURVIVOR) AND CAN BE RETROACTIVE FOR EMPLOYEES HIRED PRIOR TO THE ENACTMENT OF THE PLAN. THIS LATTER ASPECT IS IMPORTANT BECAUSE THE FEDERAL WORKERS WHO WILL BE UNDER THE NEW SYSTEM ARE CURRENTLY ENTERING THE WORKFORCE. DEFINED CONTRIBUTION PLANS, ON THE OTHER HAND, ARE NOT USUALLY UTILIZED BY LARGE CORPORATIONS, BUT RATHER BY SMALL COMPANIES OR FOR SHORT SERVICE EMPLOYEES. DEFINED CONTRIBUTION PLANS ARE MORE RISKY AND DO NOT ALLOW WORKERS TO PLAN ADEQUATELY FOR THEIR RETIREMENT INCOME. CAPITAL ACCUMULATION PLANS ARE BECOMING INCREASINGLY MORE POPULAR' AMONG PRIVATE SECTOR COMPANIES. UNDER A TYPICAL 40) (k) THRIFT PLAN, EMPLOYEES CAN DEFER A PERCENTAGE OF THEIR YEARLY EARNINGS TO A RETIREMENT ACCOUNT. A RANGE OF OPTIONS EXIST ON EMPLOYER HATCHINGS OF THIS DEFERRED INCOME. RETIREMENT INCOME FROM A CAPITAL ACCUMULATION PLAN IS DIRECTLY RELATED TO ONE'S INVESTMENT PARTICIPATION. MANY WOMEN WOULD BE UNABLE TO TAKE ADVANTAGE OF A CAPITAL ACCUMULATION PLAN, DUE TO THEIR INABILITY TO DECREASE THEIR MODEST TAKE-HOME PAY, BUT SUCH A PLAN WOULD AFFORD HIGHER PAID EMPLOYEES THE OPTION OF HIGHER RETIREMENT BENEFITS WITH IMMEDIATE TAX SAVINGS. THERE ARE CERTAIN COMPONENTS OF THE PRESENT CIVIL SERVICE RETIREMENT SYSTEM THAT SHOULD BE KEPT INTACT. FEW BELIEVES THAT THE CURRENT STRUCTURE OF FULL BENEFITS AT AGE 55 WITH 30 YEARS OF SERVICE SHOULD BE CONTINUED. MANY EMPLOYEES HAVE ENTERED THE FEDERAL SERVICE WITH THE UNDERSTANDING THAT THEY CAN EXERCISE THIS OPTION. ALTHOUGH WOMEN EMPLOYED BY THE FEDERAL GOVERNMENT CURRENTLY RETIRE LATER THAN THEIR MALE COUNTERPARTS, Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 377 THEY SHOULD RETAIN THE OPTION OF RETIREMENT AT AGE 55. ALSO, AS WE SEE WOMEN'S LABOR FORCE ATTACHMENT GROW STRONGER AND MORE CONTINUOUS, IT IS LIKELY THAT MORE WOMEN WILL HAVE ENOUGH YEARS OF SERVICE TO RETIRE WITH FULL BENEFITS AT AGE 55. FEW WOULD ALSO LIKE TO SEE THE PRESENT COMPUTATION OF THE THREE YEARS OF HIGHEST EARNINGS FOR BENEFIT CALCULATIONS. PRESERVED. ALTHOUGH WOMEN HAVE A RELATIVELY FLAT EARNINGS PROFILE AS OPPOSED TO MALE WORKERS, WOMEN ARE BEGINNING TO MAKE INROADS INTO THE HIGHER PAYING GRADE LEVELS. BECAUSE THIS MOVEMENT IS RELATIVELY RECENT, EXPANDING THE COMPUTATION YEARS WILL ONLY SERVE TO LOWER WOMEN'S FINAL ANNUITY. AVERAGING LIFE LONG EARNINGS, AS IN THE SOCIAL SECURITY SYSTEM, WOULD DRASTICALLY LOWER THESE WOMEN'S RETIREMENT ANNUITIES. TO PROTECT RETIREMENT BENEFITS FROM INFLATION, COST OF LIVING ADJUSTMENTS (COLAS) MUST BE PAID ON AN ANNUAL BASIS. IF NO COLA PROVISION IS PROVIDED TO FEDERAL RETIREMENT BENEFITS, THE BENEFITS ARE QUICKLY ERODED AWAY AND THE PHILOSOPHY OF REPLACING A PERCENTAGE OF A RETIREE'S SALARY IS LOST. THE MEDIAN REPLACEMENT RATE FOR FEDERAL RETIRED WOMEN IS 46.5 PERCENT (BASED ON THE THREE YEARS OF HIGHEST EARNINGS). ANY REDUCTION IN THIS AMOUNT IS INADEQUATE TO LIVE ON. FOR EXAMPLE, AFTER IO YEARS, WITH A 4 PERCENT INFLATION RAGE, A BENEFIT ONLY HAS TWO-THIRDS OF ITS ORIGINAL PURCHASING POWER. A WOMAN RETIRED FROM THE FEDERAL GOVERNMENT MUST BE ABLE TO KEEP HER PURCHASING POWER IN PACE WITH INFLATION. ALTHOUGH WE CONTEND THAT CERTAIN PROVISIONS OF THE CURRENT CIVIL SERVICE RETIREMENT SYSTEM SHOULD BE PRESERVED AND IMPLEMENTED INTO THE Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 THE SYSTEM TO BETTER ACCOMMODATE FEDERAL WOMEN. AS PREVIOUSLY MENTIONED, THE PRESENT SYSTEM DOES NOT ADEQUATELY PROVIDE WOMEN RETIREES WITH A DECENT STANDARD OF LIVING. IF WE BASE THE SUPPLEMENTAL SYSTEM ON TIIE PRESENT CSRS, WOMEN WILL CONTINUE TO BE LOSERS. AT THE RETIREMENT HEARINGS HELD IN THE HOUSE POST OFFICE AND CIVIL SERVICE COMMITTEE ON APRIL 2, 19P5, IT WAS STATED THAT FEDERAL EMPLOYEES HAD TO REACH THE GENERAL SCHEDULE GRADE NINE BEFORE THEY RECEIVED, A FEDERAL ANNUITY AS LARGE AS THE SOCIAL SECURITY BENEFIT. BECAUSE MOST WOMEN ARE CONCENTRATED IN GRADES BELOW GENERAL SCHEDULE NINE, THEY ARE RECEIVING LOWER RETIREMENT ANNUITIES THAN THEIR PRIVATE SECTOR COUNTERPARTS. SOCIAL SECURITY TILT ALTHOUGH THE SOCIAL SECURITY SYSTEM IS NOT FREE FROM INEQUITIES FOR WOMEN, THE SOCIAL SECURITY TILT BUILT INTO THIS SYSTEM GUARANTEES LOW WAGE EARNERS A HIGHER REPLACEMENT RATE OF THIER EARNINGS UPON RETIREMENT THAN HIGH WAGE EARNERS. DUE TO THE FACT THAT WOMEN MAKE UP A LARGE PART OF THE LOW PAID LONG TERM FEDERAL EMPLOYEES., FEW RECOMMENDS MAINTAINING THE SOCIAL SECURITY TILT BY SIMPLY ADDING ON THE SUPPLEMENTAL CIVIL SERVICE BENEFIT. THE HAY-HUGGINS COMPANY HAS REPORTED THAT THIS PRO- CEDURE WOULD BE SIMPLE TO ADMINISTER. THEY OFFER AN EXAMPLE OF A BENEFIT CALCULATION OF 1 PERCENT OF BASE PAY FOR EACH YEAR OF SERVICED ADDED TO THE SOCIAL SECURITY BENEFIT. THIS CALCULATION WOULD FULLY PRESERVE THE TILT INCORPORATED IN SOCIAL SECURITY BENEFITS. THIS SYSTEM IS USED BY SEVERAL STATE RETIREMENT PLANS. THE HAY GROUP ALSO POINTS OUT THAT UNDER THIS PLAN THERE WOULD PE LOSERS AND GAINERS. SHORT TERM, LOW-PAID EMPLOYEES AND MARRIED EMPLOYEES WOULD GAIN AS COMPARED TOITHE PRESENT SYSTEM AND Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 379 111011-PAID CAREER EMPLOYEES WOULD LOSE RELATIVE TO THE PRESENT SYSTEM. SOME OF THESE RESULTS COULD BE PARTIALLY OFFSET BY USING A BENEFIT CALCULATION THAT DOES NOT, GIVE A STRAIGHT PERCENTAGE OF BASE PAY FOR EACH YEAR OF SERVICE, BUT RATHER INCREASES THE PERCENTAGE OF BASE PAY AS~TIIE NUMBER OF YEARS OF SERVICE INCREASES (SIMILAR TO THE CURRENT SYSTEM'S PRESENT BENEFIT CALCULATION). USING THIS METHOD, WOULD INCREASE THE RE- PLACEMENT RATE FOR THE HIGHER-EARNING LONG TERM EMPLOYEES. IN ADDITION, IF A CAPITAL ACCUMULATION PLAN WAS ADOPTED, IT IS LIKELY THAT IIIGIIER- EARNING EMPLOYEES WOULD BE MORE LIKELY TO PARTICIPATE AND FURTHER INCREASE THEIR REPLACEMENT RATE OF 11IEIR FINAL SALARY. TIIE CONGRESSIONAL RESEARCH SERVICE HAS PROVIDED A MODEL OF SUCH A SYSTEM MAT INCLUDES AN ADD-ON SUPPLEMENTAL BENEFIT AND A CAPITAL ACCUMULATION PLAN THAT ALLOWS A MAXIMUM 6 PERCENT EMPLOYEE CONTRIBUTION WITH A 3 PERCENT EMPLOYER MATCH. THE SOCIAL SECURITY TILT IS MAINTAINED FOR THE LOWER PAID EARNER, YET THE HIGHER PAID LONG TERN EMPLOYEE DOES NOT SUFFER. THE PRESIDENT'S COMMISSION ON PENSION POLICY REPORTED IN 1981 THAT 51 TO 86 PERCENT OF BEFORE TAX FINAL EARITIITGS WAS NEEDED FOR RETIREES TO MAINTAIN A. CONSTANT STANDARD OF LIVING UPON RETIREMENT IN 1980. THEY ALSO SHOWED THAT LOWER-EARNERS NEEDED A IIIGIIER REPLACEMENT RATE OF THEIR FINAL SALARY THAN HIGHER-EARNERS TO ACCOMPLISH A PRE-RETIREMENT STANDARD OF LIVING. BY MAINTAINING TIIE SOCIAL SECURITY TILT, PART OF THIS GOAL IS ACCOMPLISHED. BY INTEGRATING TIIE SOCIAL SECURITY BENEFIT WITH A PENSION ANNUITY, 711E LONG TERM LOW-PAID EMPLOYEE WILL RECEIVE A LOWER BENEFIT. A 100 PERCENT SOCIAL SECURITY OFFSET WOULD ELIMINATE THE TILT ALTOGETHER AITD CONTINUE THE PIIILOSOPIIY Or TIIE PRESENT CIVIL SERVICE RETIREMENT SYSTEM Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 UNDER THE CURRENT SYSTEM, FEDERAL EMPLOYEES CONTRIBUTE 7 PERCENT OF THEIR INCOME TOWARD THEIR RETIREMENT BENEFIT. UNDER THE SOCIAL SECURITY SYSTEM, EMPLOYEES NOW CONTRIBUTE 5.7 PERCENT OF THEIR INCOME TOWARD THE SOCIAL SECURITY BENEFIT. FEW SUGGESTS THAT THE SUPPLEMENTAL RETIREMENT SYSTEM NOT REQUIRE AN EMPLOYEE CONTRIBUTION BEYOND THE SOCIAL SECURITY CONTRIBUTION. ACCORDING TO THE GOVERNMENT ACCOUNTING OFFICE (GAO), 93 PERCENT OF ALL WORKERS IN THE PRIVATE SECTOR DO NOT CONTRIBUTE TO THEIR RETIREMENT PLANS. FEW WOULD LIKE TO SEE THIS PRACTICE TRANSLATE INTO THE SUPPLEMENTAL RETIREMENT SYSTEM. VESTING WHEN DISCUSSING THE QUESTION OF VESTING PERIODS, IT IS IMPORTANT TO NOTE THAT MOST FEDERAL EMPLOYEES WHO LEAVE THE GOVERNMENT PRIOR TO TEN YEARS OF SERVICE ELECT TO REMOVE THEIR RETIREMENT MONEY RATHER THAN SELECT A DEFERRED ANNUITY. FOR THIS REASON, FEW WOULD SUPPORT EITHER A 5 YEAR OR A 10 YEAR VESTING PERIOD FOR THE SUPPLEMENTAL RETIREMENT SYSTEM REQUIREMENTS. THE HAY GROUP HAS ESTIMATED THAT ONLY 1 PERCENT OF EMPLOYEES WOULD RECEIVE A BENEFIT UNDER A 5 YEAR VESTING PERIOD WHO WOULD NOT RECEIVE Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 FUNDING THE CIVIL SERVICE BENEFITS MUST BE PROTECTED FROM FLUCTUATIONS IN THE ECONOMY, CHANGING POLITICAL ATMOSPHERES, AND INFLATION. UNDER THE CURRENT RETIREMENT SYSTEM, FEDERAL AGENCIES MATCH THE EMPLOYEE'S CONTRIBUTION AND THE REMAINING FUNDS COME FROM THE FEDERAL TREASURY. FEW ENCOURAGES THE COMMITTEE TO SET UP A SYSTEM THAT BETTER SEGREGATES THE RETIREMENT FUNDS FROM OTHER TREASURY FUNDS. EACH AGENCY SHOULD BE REQUIRED TO SET ASIDE FUNDS FOR THIS PURPOSE IN A SIMILAR MANNER TO SEGREGATING FUNDS FOR SOCIAL SECURITY BENEFITS. YEARLY CONGRESSIONAL APPROPRIATIONS TO THE RETIREMENT FUND SHOULD BE ELIMINATED AND REPLACED BY A FUNDING FORMULA. IT IS THE ULTIMATE RESPONSIBILITY OF THE EMPLOYER TO ENSURE THAT RETIREMENT FUNDS ARE SOLVENT. A COST DECISION MUST BE'MADE WHETHER TO APPROXIMATE BENEFIT LEVELS IN THE PRESENT CSRS OR RETIREMENT SYSTEMS IN THE PRIVATE SECTOR IN COMPARABLE COMPANIES. WE DO NOT FEEL THAT THE LEVEL OF BENEFITS AFFORDED FEDERAL EMPLOYEES SHOULD BE UNDULY HAMPERED BY STRICT COST CONSTRAINTS. DESIRED BENEFIT LEVELS SHOULD BE CALCULATED FOR COST AND ADJUSTED ACCORDING TO FUNDING CONSTRAINTS. OLD EMPLOYEES A DECISION MUST BE MADE ON HOW TO DEAL WITH FEDERAL EMPLOYEES HIRED PRIOR TO JANUARY 1, 1984. AS MANY OF THEM HAVE DEVOTED THE MAJORITY OF THEIR WORKING LIVES TO CIVIL SERVICE UNDER THE CURRENT CIVIL SERVICE RETIREMENT SYSTEM IT IS NECESSARY TO PRESERVE THE CURRENT SYSTEM AS IT IS UNTIL'ALL OF- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 382 THESE EMPLOYEES HAVE RETIRED. FEW WOULD, HOWEVER, ALSO SUGGEST OPENING S. 1527 FEW COMMENDS THIS COMMITTEE FOR DILIGENTLY QORKIIIG TOWARD A FAIR AND EQUITABLE RETIREMENT SYSTEM FOR FEDERAL EMPLOYEES AND INTRODUCING S. 1527. THERE ARE, HOWEVER, SEVERAL COMPONENTS IN THE PROPOSED LEGISLATION THAT WILL PROVIDE INADEQUATE RETIREMENT BENEFITS FOR A LARGE NUMBER OF WOMEN EMPLOYED BY THE FEDERAL GOVERNMENT. AS MENTIONED PREVIOUSLY, AVERAGING THE FIVE YEARS OF HIGHEST EARNINGS, PROVIDING A REDUCED COST-OF- LIVING-ADJUSTMENT, AND INCREASING THE RETIREMENT AGE WILL LOWER FEDERAL WOMEN'S RETIREMENT ANNUITIES DUE TO THE LOW EARNINGS WOMEN RECEIVE. ALTHOUGH WE SUPPORT THE CONCEPT OF A THRIFT PLAN, MANY WOMEN IN THE FEDERAL SERVICE WILL NOT BE ABLE TO EXERCISE THIS OPTION AND DEFER A PORTION OF THEIR EARNINGS AS THEY NEED THEIR INCOME TO SUPPORT THEMSELVES AND THEIR FAMILIES. WE LOOK FORWARD TO WORKING WITH THIS COMMITTEE ON DEVELOPING A RETIREMENT SYSTEM THAT PROVIDES EQUITABLE RETIREMENT ANNUITIES TO WOMEN EMPLOYED BY THE FEDERAL GOVERNMENT. CONCLUSION THE SUPPLEMENTAL CIVIL SERVICE RETIREMENT SYSTEM SHOULD MAINTAIN THE INTEGRITY OF A FEDERAL RETIREMENT SYSTEM AND PROVIDE ADEQUATE BENEFITS TO EMPLOYEES OF ALL INCOME LEVELS WHILE ATTRACTII+G A QUALIFIED FEDERAL WORKFORCE AND NOT PENALIZING LOW EARNERS. THIS TASK IS NO SMALL JOB. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 383 IN TODAY'S ATMOSPHERE OF CONSTANT ATTACKS ON FEDERAL WORKERS, IT IS EVEN MORE IMPORTANT THAT A NEW RETIREMENT SYSTEM BE DESIGNED THAT WILL REWARD HARD WORKING CIVIL SERVANTS AND ATTRACT TALENTED NEW EMPLOYEES. FEW URGES THIS COMMITTEE TO LOOK AT THE CURRENT STATUS OF WOMEN EMPLOYED BY THE FEDERAL GOVERNMENT AND TO INCORPORATE YOUR FINDINGS INTO A NEW SYSTEM THAT DOES NOT PENALIZE LOW WAGE EARNERS. WE WOIJLD SUGGEST TAKING CIVIL SERVICE WOMENS' EMPLOYMENT DATA AND INPUTIIIG IT INTO A RETIREMENT COMPUTER MODEL TO DETERMINE HOW WOMEN WILL FARE UNDER THE VARIETY OF PROPOSED RETIREMENT SYSTEMS. EVEN THOUGH THERE IS A WEALTH OF EXCELLENT INFORMATION ON SUPPLEMENTAL CIVIL SERVICE RETIREMENT PLANS (I.E. GAO, CRS, HAY), THERE IS LITTLE DATA ON HOW THESE PROPOSALS WOULD IMPACT WOMEN RETIRED FROM THE FEDERAL GOVERNMENT. ALTHOUGH WOMEN ARE ROVING INTO HIGHER GRADE POSITIONS, THE FACT THAT MOST FEDERALLY EMPLOYED WOMEN ARE CONCENTRATED IN THE LOWEST GENERAL SCHEDULE.GRADE LEVELS WILL NOT SUBSTANTIALLY CHANGE IN THE NEAR FUTURE. THESE HARD WORKING, DEVOTED FEDERAL EMPLOYEES CAN NOT BE IGNORED IN THE DEVELOPMENT OF A NEW SUPPLEMENTAL CIVIL SERVICE RETIREMENT SYSTEM. THANK YOU FOR ASKING FEDERALLY EMPLOYED WOMEN TO TESTIFY BEFORE THE COMMITTEE TODAY. I WILL BE HAPPY TO ANSWER ANY QUESTIONS TILE COMMITTEE HAS. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator EAGLETON. We will take a 3-minute break. [Brief recess.] Senator EAGLETON. We are once again back in session. TESTIMONY OF HELENE A. BENSON, SECRETARY OF THE BOARD, CHAIR, RETIREMENT COMMITTEE, PROFESSIONAL MANAGERS ASSOCIATION, ACCOMPANIED BY DONALD E. GILLIS, CHAIR- MAN OF THE BOARD, PROFESSIONAL MANAGERS ASSOCIATION Ms. BENSON. I am Helene Benson. I am accompanied by Don Gillis, the chairman of the Professional Managers Association board of directors. Senator EAGLETON. Thank you, Ms. Benson. We are delighted to have you here. Proceed. Ms. BENSON. Thank you. We appreciate the opportunity to present the views of the Profes- sional Managers Association on S. 1527. The subject of retirement is of keen interest to our members, Federal midlevel managers, who are greatly concerned about the effectiveness and the efficiency of the Federal Government, and I might add that we have spent more time on this issue than any- thing else. It is the most important issue to our members, overall retirement. As you know, our retirement system has come under attack in recent years. Recent studies have shown, though, that the reasons advanced for offering Federal employees less generous benefits than presently provided are invalid. PMA hopes that you can agree with us that simple justice demands that the benefits now prom- ised us by CSRS be delivered. While the Federal Government is not breaking faith with new hires by offering less generous benefits, since new hires have not been promised any specific benefits, PMA sees no reason for offering these employees less generous benefits and feels that doing so will be to the detriment of the Federal Gov- ernment. We would first like to summarize our three principal problems with S. 1527. First, we feel that the plan as proposed favors short-term Federal employees to the detriment of those who spend their careers in the Federal Government. We suggest that the plan be revised to pro- vide a better balancing of the concerns of these two groups. We be- lieve that coverage under Social Security provides the portability sought between the Federal Government and private sector em- ployment. We feel that under the plan as proposed, with such heavy emphasis on the defined contribution portion, the Federal Government will find that it is establishing an expensive severance pay plan, principally benefiting short-term Federal employees, and rather than recruiting the best and the brightest for a career in Federal service, Federal employment will be used and viewed by such individuals primarily as a training program for future pri- vate-sector employment. PMA prefers that the plan to be established be a defined benefit plan and that the contributions of the Federal Government for re- tirement should go only to the defined benefit plan. If the Federal Government wishes to provide a method of tax-deferred savings in Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 addition, we suggest that it be funded entirely by voluntary em- ployee contributions. We feel that the defined contribution portion of this proposed plan does not provide the flexibility that it purports to for employ- ees, because those who cannot afford to contribute and do not wish to must forfeit the Federal Government's contribution. In effect, those who do contribute will receive a higher rate of contribution from the Federal Government. PMA feels this is inequitable. Moreover, the rate of contributions required to receive the maxi- mum contributions from the Federal Government is too high. We also feel that in light of the Reagan administration's proposal to eliminate section 401(k) pension plans, we wonder if the tax defer- ral of employee contributions would last long after enactment. Second, PMA is unwilling to forgo for new Federal hires the only two features of Federal employment that are better than the average private-sector employment: That is full cost-of-living adjust- ments to retirement benefits and the opportunity to retire at age 55 after 30 years of service without reduction of benefits. In every other aspect of compensation-total compensation, cash compensation, the amount of retirement benefits at age 65, and every other fringe benefit-all the studies have shown that even the average private sector firm does better for its employees than does the Federal Government. Now, when we say that we are unwilling to forgo age 55 and 30 years of service, we don't mean just retirement at 55 from the de- fined benefit part of the plan and then you don't get Social Securi- ty until age 62. We mean that we would like the plan to bridge the years between retirement and Social Security, as many private- sector plans do. They provide a supplement between age 55 and the time Social Security benefits begin and absorb that cost. I understand that it would cost you 0.9 percent to do it. I don't know if that figure is accurate or not. Senator EAGLETON. We will price out that cost. It is an important consideration, and I understand the point you are making. Ms. BENSON. Right; furthermore, we would like to point out that the Bureau of Labor Statistics study, "Employee Benefits in Medium and Large Firms," found that in 1983, 21 percent of pen- sion plan participants in the private sector were covered by pen- sion plans permitting retirement at age 55 with 30 years of service, or better, with no reduction on account of age. Our third problem with this plan is that we feel it is modeled too closely on private-sector plans, and the average ones at that, and incorporates features which are problems in the private sector which need correction and should not be imitated by the Federal Government. To sum up, our position is that the pension plan adopted for Fed- eral employees hired after December 31, 1983, plus Social Security attributable to Federal service, should equal the benefits now pro- vided by the CSRS, and we would like them provided through a de- fined benefit program. We are not adverse to a thrift plan if it is on top of that, but we suggest that it be funded solely by employee contributions if the Federal Government cannot provide for it on top of that. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 One of the things we would like to point out is, on the subject of defined benefit and defined contribution plans, the Reagan admin- istration has come out in favor of the defined benefit plan ap- proach in the private sector. Two former Reagan administration of- ficials, while in the Reagan administration administering ERISA, stated that defined benefit plans offer a far better method of pro- viding retirement income than defined contribution plans. Robert A.G. Monks, the former Administrator of the U.S. Depart- ment of Labor's Office of Pension and Welfare Benefit Programs, said that defined contribution plans, and I quote: "Are simply tax- aided savings plans," and compared defined contribution plans to "massive individual speculation." Mr. Charles C. Tharp, the former Executive Director of the Pen- sion Benefit Guaranty Corporation, stated that, and I quote: "De- fined contribution plans are well-suited to capital accumulation for medium-term objectives." He further stated that defined benefit plans are "distinctly superior" to defined contribution plans. All of these quotations are in the magazine "Pension and Invest- ment Age," October 29, 1984, which also contains an editorial sup- porting defined benefit plans and gives the reasons why. PMA agrees with these reasons. We believe it is unfair to finance the retirement benefits an employee needs to maintain his prere- tirement standard of living in such a way that the amount of the pension cannot be predicted until retirement and that the amount is subject to market conditions prevailing at the time of retirement. We believe that defined contribution plans should provide only extras after the preretirement standard of living is maintained through a defined benefit plan. Furthermore, we really believe that you will find that the defined contribution portion of this proposed plan will be more expensive than you anticipated because of the payments made to those who leave before retirement. On the subject of cost, covering Federal employees under Social Security has an impact. One is that it costs the Federal Govern- ment more to provide the same benefits that are provided under CSRS. Some of the contributions of Social Security to be made by the Federal Government as employer will be redistributed from Federal workers to private-sector workers. Now, this cost doesn't translate into a benefit for any Federal workers. Being covered under Social Security does have its benefits, and one of those is portability. This benefit is a very valued benefit to workers who leave Federal service. But of course, portability is of no value to those who spend their careers in the Federal Govern- ment. Those costs translate into a value for those who leave. It does not translate into a benefit for those employees who spend their careers in the Federal Government. I have a few pages on the CSRS which I am basically going to skip, except to note that CSRS, really, in the past was considered to be comparatively generous to Federal employees compared to pri- vate sector employees to make up for our lower salaries, but now it really is inferior to many private-sector retirement systems. This has been borne out by the Hay-Huggins Co. and Hay Management Consultants study for the House. Senator EAGLETON. Which corporations is it inferior to, pardon that English? Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Ms. BENSON. I didn't get the names, but according to the Hay- Huggins study, 10 percent of the companies in their study had plans that cost 25.1 percent of payroll as compared to CSRS' cost at 24.7 percent, which provided better benefits. That is 10 percent of the companies in that study. One of the points I want to make about cost is that even that cost figure does not include the tax advantage enjoyed by private sector plans, and that tax advantage should be included in the cost. It is not included in the cost of 18 percent or whatever percent you all are using for the cost of average private-sector pension plans. That figure doesn't take the tax subsidy into account, and it really should. Another point I would like to make is when the Hay-Huggins said the top 10 percent of the companies in their study, their study included the medium and large firms and medium firms included companies with only 100 employees. That is pretty small. We don't think the Federal Government work force is comparable to those work forces. So I will skip over that part. PMA thinks that it is unfair to compare only one segment of compensation, retirement, when in every other single element of compenstion-fringe benefits such as life insurance, health insur- ance and cash compensation-and in total compensation, Federal employees are behind even the employees of the average private- sector firms. Furthermore, we don't think that the Federal compensation should be compared with the compensation of employees of the av- erage or small private-sector firms, because our workforces are noncomparable. We are very concerned that Congress is now considering offering new Federal employees lesser benefits than CSRS based on some of the practices of the average private-sector firm. As noted, some of these practices are problems which need to be corrected, not imitated. ERISA was signed into law 11 years ago, and amendments have been made to it or the Internal Revenue Code every single year since then to correct some of the undesir- able aspects of private sector pension plans. Since all of the prob- lems have not yet been corrected, forums and commissions are con- tinually being established and hearings up on the Hill are contin- ually being held to to deal with the remaining problems. One of those problems is the erosion of retirement benefits through the lack of full COLA's. In the past, bills have been intro- duced on this problem, and I will bet in a few years, this will be a problem that will be corrected in the private sector. Anyway, the fact of the matter is that the-- Senator EAGLETON. You are saying that private companies, let's say, the largest in the Nation, will go to a full guaranteed COLA? Ms. BENSON. Right now, Social Security, of course, is protected from inflation. While not too many of the private-sector firms have a guaranteed full protection against inflation-- Senator EAGLETON. None. Ms. BENSON [continuing]. Some of them have some guarantees against inflation, and some of them have given increases. But nev- ertheless, this is still considered a problem in the private-sector. I Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 don't think that they will correct it on their own, but I do think that there will be found a way, however it may be, and there are various ways to do it, that the retirement benefits will be given protection against inflation eventually. As I say, this is a problem in the private sector. It is not some- thing that should be imitated. At any rate, the trend over the years in the private sector has been to improve benefits, increase benefits and improve them. With the passage of years, more pension plans have improved their bene- fit formulas to base benefits on the final gross earnings; more plans have lower retirement ages for unreduced benefits; more plans pro- vide post-retirement increases because of inflation, and in such a climate, we do not think that the Federal Government should be cutting back on Federal employees' benefits. We think it should be improving them. We don't think the Federal deficit will be improved by reducing our pay package. However, if Federal employees are made, incor- rectly, to seem to be overpaid, the public's attention is focused on that misconception, rather on the fact that some individuals and corporations are not required to pay their fair share of taxes and that the American public is subsidizing through taxes some activi- ties which it certainly would not want to if the facts were known and publicized. We feel a lot has been made of the burden of the Federal taxpay- er in paying for Federal employees' pensions. The American tax- payers employ the Federal employee and thus pay our salaries and benefits, but little has been made of the fact that American taxpay- ers are subsidizing every private-sector employee's pension. We are subsidizing J. Peter Grace's pension of $357,000 a year, because that is a deductible expense to his company. The American taxpayer is subsidizing lavish business luncheons, entertainment, planes, and yachts, and resort condominiums. The American tax- payers are subsidizing those 40 large profitmaking firms that paid no income tax in 1984. We believe that there is a purpose behind many of these groups and organizations that are concentrating public attention on Federal pensions and other Federal expendi- tures, and we believe that it is to key public attention on that rather than on the tax structure from which they benefit so lavish- ly. We would like to make two points with respect to how the new plan will take into account Social Security benefits earned. Since Social Security replaces a higher proportion of earnings for low wage employees, we don't think it is unreasonable for the tilt to be taken into account. We note that the proposed defined benefit por- tion of the plan doesn't really. We do prefer an add-on approach, such as you have, because it is easier for employees to understand than an integrated approach. Hardly anybody understands Social Security integration. We feel maybe an add-on approach could be utilized with a higher rate of accrual for salaries over a specified level in order to take the tilt into account. But regardless of that, one thing that we would like to say is that, however Social Security is taken into account, it is very im- portant that only that part of employee's Social Security benefit at- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 tributable to Federal service be taken into account, not the entire, not a specified percentage of the entire Social Security benefit. Because otherwise, some Federal workers who change jobs who stay in the Federal Government only for a short period of time won't get anything out of the Federal pension plan. We hope you will keep our concerns in mind when you consider this legislation. PMA earnestly desires that this plan be one which will be instrumental in attracting and retaining an efficient Feder- al workforce, and we are very happy to assist you in any way in this important endeavor. Senator EAGLETON. Thank you very much, Ms. Benson. Do you favor the concept of level payments? Ms. BENSON. Yes. I mean-- Senator EAGLETON. The 1.3 percent that I keep raising? Ms. BENSON. That is fine, certainly. Yes. Senator EAGLETON. So you don't think that-- Ms. BENSON. If it is going to be equal benefit. Senator EAGLETON. You don't think employees are paying in enough under the Stevens bill? You want them to pay in a bit more? Ms. BENSON. No. I think they are paying in too much to obtain the maximum Federal contribution. Senator EAGLETON. Under Stevens' bill, they are paying 7.0. Ms. BENSON. Plus 5 percent to get the full contribution. Senator EAGLETON. They are not paying in the 1.3. Ms. BENSON. Right. Senator EAGLETON. Are you in favor of them paying in the 1.3 in the defined benefit portion or not paying it in? Ms. BENSON. We are for a plan that is comparable to this, and we are willing for the employees to contribute comparably to the present levels. So we would like that 1.3 in the defined benefit plan, if that an- swers your question. Senator EAGLETON. You would want, for instance, the accrual rate increased? Ms. BENSON. Yes, sir. And high 3, not high 5. Senator EAGLETON. High 3 rather than high 5; and the COLA, the whole bit? Ms. BENSON. The whole bit. Senator EAGLETON. We priced out a plan yesterday that did ev- erything like that, and it came out to 28 percent. Ms. BENSON. CSRS now costs 24.7 percent, and with the addition, with the little additional of the Social Security costs, if you are using the same figures that CRS did, we just don't feel that we should subsidize, that Federal employees should subsidize the cost of their being put under Social Security since you saw fit to put them under Social Security. We don't feel that they should absorb that cost, although we will grant that portability is a benefit for those who leave. Senator EAGLETON. If we priced out a plan that was 2 or 3 points below the cost of the present plan, you would rather have no plan at all than to have something priced like that? Ms. BENSON. No plan at all? Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator EAGLETON. We would let the new employees pay 14 per- cent-7 and 7. Ms. BENSON. That is not really necessary. Senator EAGLETON. That is what? Ms. BENSON. We don't feel that that is necessary. Senator EAGLETON. That is what we face. Ms. BENSON. Unless you change the deadline. Senator EAGLETON. Oh? We are faced with a deadline. Ms. BENSON. You can change the deadline. You are the Congress. Senator EAGLETON. The most we can change it to is a couple of months. And there is no new plan that the President signs. Ms. BENSON. We are for a new plan comparable to the present plan. Senator EAGLETON. What is that? Ms. BENSON. We are for a comparable new plan. We let you all work out the politics of it. Senator EAGLETON. They can get a present plan for 14 percent. Ms. BENSON. I mean a plan equivalent to CSRS. Senator EAGLETON. We can give them a plan comparable to the existing plan for 14 percent of pay. You don't favor that? Ms. BENSON. I don't understand. If you spent 14 percent-- Senator EAGLETON. On midnight, December 31, new Federal workers will pay out of their pocket 14 percent of their income, 7 percent into Social Security. Ms. BENSON. Then I would presume they would get CSRS plus Social Security, for that matter. Senator EAGLETON. They will get Social Security. Ms. BENSON. Then they would get both, which we are not propos- ing. We are not proposing they get both. Senator EAGLETON. Do you think the workers can handle that? Ms. BENSON. No, I didn't say that. Senator EAGLETON. You are not recommending it? Ms. BENSON. No. Mr. GILLIS. No. Senator EAGLETON. Thank you very much. Ms. BENSON. You are welcome. [Ms. Benson's prepared statement follows:] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Ana Before the SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS September 10, 1985 Helene A. Benson Secretary of PMA Board of Directors and Chair of PMA Retirement Committee Donald E. Gillis Chairman of PMA Board of Directors Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator Stevens, Chairman, and members of the Senate Committee on Governmental Affairs, thank you for the opportunity to present the views of the Professional Managers Association (PMA) on S.1527, the Civil Service Pension Reform Act, introduced July 30, 198`x, to cover post-1983 Federal employees. We would like, first, to thank you Senator Stevens for your pension forums in 1983 and 1984 in which PMA participated. We also appreciate your statement in your letter of December 1982, accompanying the retirement plan you proposed then, that until the majority of those affected by your proposals support it, you would not pursue passage. We urge that you continue to move carefully in this important area. The subject of retirement is of keen interest to our members, Federal mid-level managers, who are greatly concerned about the effectiveness and efficiency of the Federal government. As you know, our retirement system has come under attack in recent years. The public and Congress have been bombarded with myths and misconceptions about our retirement system. If there is public indignation over our retirement system, it has been manufactured and its basis is false. Recent studies have shown that the reasons advanced for offering Federal employees lesser benefits than presently provided -- Donald Devine's scare stories about the cost and financial condition of the Civil Service Retirement System (CSRS) and comparisons with private-sector practices -- are invalid. PMA urges that you proceed in the design of a retirement system for new Federal Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 393 - 2 - employees on a sound and fair basis, with thoughtful consideration of the ramifications. Simple justice demands that the benefits promised those now covered by CSRS be delivered. While the Federal government is not breaking faith with new hires by offering lesser benefits since new hires have not been covered under a plan promising any specific benefits, PMA sees no reason for offering these employees lesser benefits and submits that doing so will be to the detriment of the Federal government. We first briefly summarize our three principal problems and suggestions with respect to the proposed retirement plan and, following that, outline our reasoning in more detail. First, the plan as proposed favors short-term Federal employees to the detriment of those who spend their careers in the Federal government. We suggest the plan be revised to provide a better balancing of the concerns of these two groups. We believe that coverage under Social Security provides the portability sought between Federal and private-sector employment. Under the plan as proposed, with such heavy emphasis on the defined contribution portion, the Federal government will find that it is establishing an expensive severance plan principally benefiting short-term Federal employees and that, rather than recruiting the best and the brightest for a career in Federal service, Federal employment will be used and viewed by such individuals primarily as a training program for future private-sector employment. PMA prefers that the plan to be established be a Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 394 - 3 - defined benefit plan and that the contributions of the Federal government for retirement should go only to the defined benefit plan. If the Federal government wishes to provide a method for tax-deferred savings in addition, we suggest that it be funded r entirely by voluntary employee contributions. The defined contribution portion of this proposed plan does not provide the flexibility and range of options for employees that it purports to because those employees who do not wish to contribute to the defined contribution part of the plan and those who cannot afford to must forfeit the Federal government's contribution. In effect, those who can and do contribute to the defined contribution plan will receive a higher rate of contribution from the Federal government than those who do not or cannot contribute. PMA feels that this is inequitable. Moreover, the rate of employee contribution required to receive the maximum contribution from the Federal government is too high. Finally, in light of the Reagan administration's proposal on September 3, 1985, to eliminate Section 401(k) pension plans, we doubt that the tax deferral of employee contributions to the defined contribution portion of the proposed plan would last any length of time after enactment. At any rate, all of us already have the opportunity to save, on a tax-deferred basis, some of our income for retirement by establishing an IRA. Second, PMA is unwilling to forego for new Federal hires the only two features of Federal employment that are better than the average private-sector employment -- full cost of Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 living adjustments to retirement benefits and the opportunity to retire at age 55 after 30 years of service without reduction of benefits. In every other aspect of compensation -- total compensation( cash compensation, the amount of retirement benefits at age 65, and every other fringe benefit -- even the average private-sector firm does better for its employees than does the Federal government. Further, the BLS (Bureau of Labor Statistics, U.S. Department of Labor) study, Employee Benefits in Medium and Large Firms, 1983, Bulletin 2213, issued in August 1984, found that 21 percent of pension plan participants were covered by pension plans permitting retirement at age 55 and 30 years of service, or lower, with no reduction on account of age. Third, the proposed plan is modeled too closely on private-sector plans -- and the average or mediocre ones at that -- and incorporates features which are problems in private-sector plans which need correction and should not be imitated by the Federal government. It is PMA's position that the pension plan adopted for Federal employees hired after December 31, 1.983, plus the Social Security benefits attributable to their years of Federal service, should equal the benefits now provided by the CSRS to pre-1984 employees. And PMA recommends that the pension plan adopted for these employees be a defined benefit plan. We welcome an opportunity for employees to save and invest on a tax-deferred basis. However, unless the Federal government can provide and contribute to this opportunity on top of benefits Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 396 5 - from a defined benefit plan and Social Security which are equivalent to benefits now provided under CSRS, we suggest that, if such a benefit is offered, it be financed solely by voluntary emFloyee contributions. On the subject of defined benefit and defined contribution plans, we draw the Committee's attention to the fact that the Reagan administration has come out in favor of the defined benefit plan approach -- at least for pension plans in the private-sector. Two former Reagan administration officials, while in the Reagan administration administering the Employee Retirement Income Security Act of 1974, the law regulating private-sector retirement plans, stated that defined benefit plans offer a far better method of providing retirement income than defined contribution plans. Both Robert A. G. Monks, the former administrator of the U. S. Department of Labor's Office of Pension and Welfare Benefit Programs, and Charles C. Tharp, former executive director of the Pension Benefit Guaranty Corporation, while holding those positions in the Reagan administra- tion, have stressed the superiority of defined benefit pension plans. See Pension and Investment Age, October 29, 1984, page 9, for a report of their remarks. Mr. Monks told attendees at the meeting of the American Society of Pension Actuaries that defined contribution plans "are simply tax-aided savings plans," and compared defined contribution plans to "massive individual speculation." He Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 397 also stated that defined benefit plans provide the best means of providing benefits to employees. Mr. Tharp stated to attendees of the Southern Pension Conference and the pension actuaries' meetings that defined benefit and defined contribution plans "have proved best adapted to difference purposes." He stated, "Defined contribution plans are well-suited to capital accumulation for medium term objectives." He further stated that defined benefit plans are "distinctly superior" to defined contribution plans. They encourage orderly retirement from the work force, help limit. turnover among those not yet at retirement age, provide past service credit and are more adaptable, and place the burden of investment risk on the employer. "In the coming year in Washington, we may be facing a great debate on the overall shape of our pension system in America," Mr. Tharp said. Limiting the system in favor of savings plans or in the pursuit of short-term revenue gains "will be detrimental to employees, employers and the long term health of our economy," he concluded. Similar views have been expressed by Senator Jacob Javits, the "father of ERISA." I would also like to quote, in part, the editorial on page 10 of the October 29, 1984 issue of Pension and Investment Age: The Reagan administration finally has come out in support of defined benefit plans, as a story on page 9 of this issue reports. Not that the administration was opposed to defined benefit plans; it simply had been silent on Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 whether defined benefit or defined contribution plans were to be favored. Now, Robert A.G. Monks, the Department of Labor's pension administrator, and Charles Tharp, executive director of the Pension Benefit Guaranty Corp., have declared, in separate speeches, that the administration stands behind defined benefit plans as the most efficient way to provide retirement benefits. This could be good news for pension beneficiaries and pension fund sponsors if the administration makes it commitment known to the congressional tax writing committees. The defined benefit plan is the cornerstone of the private pension system. While defined contribution plans have their place, a pension system built only on defined contribution plans would be unstable, at least as defined contribution plans are now designed. A pension system built only on defined contribution plans would be like a house built on sand. The features of the house might be very attractive, but the foundation is porous. . Another disadvan- tage is that the plan participant takes the investment risk in a defined contribution plan. The employer takes the risk in the defined benefit plan. . . . PMA agrees with these views. We believe it unfair to finance the retirement benefit an employee needs to maintain his pre-retirement standard of living in such a way that the amount of the pension cannot be predicted until retirement and the amount is subject to market conditions prevailing at the time of retirement. PMA believes that a defined contribution plan should provide only extras, not basic economic security. Furthermore, we believe you will find that the defined contribution portion of the proposed plan will be more expensive to the Federal government than anticipated. Defined contribution plans can be more costly to the employer than defined benefit plans in providing given benefits, Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 as was pointed out at the December 13, 1983 pension forum sponsored by this committee. At that forum the president of Martin E. Segal Company pointed out that, for a given contribution a defined benefit plan can generally provide more in the way of benefits than can a defined contribution plan. Annual pay-outs are higher under a defined contribution plan than under a defined benefit plan because of payments made to those who leave before retirement. On the subject of cost, covering Federal employees under Social Security has an impact. One is that it will cost the Federal government more to provide the same benefits that are provided under CSRS. Some of the contributions to Social Security to be made by the Federal government as employer on behalf of Federal employees will be redistributed from Federal workers to private-sector workers. The benefit redistribution to non-Federal employees is caused by Social Security coverage of all types of employment including temporary, part-time, and minimum wage jobs that are not common in the Federal government. This cost to the Federal government for covering Federal employees under Social Security is a cost which does not translate into a benefit for any Federal employees. Since Congress saw fit to put new Federal employees under Social Security, it seems unfair for Congress to bring up now the subject of the cost of that action and expect Federal employees to absorb that cost by receiving lesser benefits. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Being covered under Social Security has its benefits -- for some. Social Security is portable. This benefit is valuable to workers who leave Federal service, but portability is of no value to employees who spend their careers in the Federal government. Thus, this cost does not translate into a benefit for employees who spend their careers in the Federal government. One of the most widespread misconceptions, even occasionally among Federal employees, is that CSRS is overly generous. On the contrary, generally CSRS provides at most merely adequate, certainly not opulent, benefits. In the past CSRS had been considered comparatively generous to Federal employees as a partial offset to lower salaries of Federal employees when compared with private-sector pensions and salaries. Now the CSRS is inferior to many private-sector retirement systems. The general consensus is that retirees should be able to maintain the standard of living attained during their working years into their retirement years. In the private-sector, it has been estimated that 50 to 80 percent of the current value of an employee's gross compensation at retirement is needed to enjoy a post-retirement standard of living reasonably comparable to the pre-retirement standard of living. That estimate was based on Social Security benefits not being taxable, the assumption that the retiree's home and furnishings are paid for, the assumption that the retiree is in a lower tax bracket, and the assumption that the retiree has fewer other expenses. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 However, experts concede that the actual aggregate reduction in the financial needs of a retired person has been exaggerated and that a much higher percentage is needed. CSRS benefits are totally taxable. An employee who retires from the CSRS after 30 years of service with unreduced benefits will receive only 56.25 percent of the three highest years' average salary. That translates to about 53 percent of final gross salary. The 56.25 percent is reduced for those who provide their spouse with a survivor annuity, as most do, generally to 51 percent, and that 51 percent translates to less that 50 percent of final gross salary. Thus, CSRS presently does not meet even this erroneously low standard for an employee retiring after 30 years with unreduced benefits (except for the reduction for survivor benefit for the spouse). The maximum pension benefit that can be earned by a civil service employee is 80 percent of the average of the 3 highest years of salary and that requires 41 years and 10 months of service. On the other hand, it is not uncommon for employees in the private sector to receive much higher benefits. This is borne out by a provision of the Employee Retirement Income Security Act of 1974 (ERISA), which regulates private-sector pension plans. ERISA prohibits private-sector defined benefit qualified pension plans from providing benefits higher than the lesser of (1) $90,000, adjusted for inflation, or (2) 100 percent of the participant's average compensation for the highest 3 consecutive years. These limits are based on benefits Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 attributable only to employer contributions. Benefits can be higher than these limits based in part on employee contributions or when provided outside the qualified plan through excess benefit pension plans and other types of non-qualified plans, i financed generally by the employer. The CSRS is merely comparable to or, in some cases, inferior to the combination of benefits provided through pension plans of the more progressive companies in the private sector and Social Security. And, when you consider additional benefits provided by many private-sector companies, such as stock, profit-sharing, savings and thrift plans, excess benefit plans, etc., there is an even greater disparity. And, let's not forget, these benefits are based on larger salaries -- witness the large number of political appointees, many young and in the early years of their careers, who leave the Federal service after brief appointments because they claim they can no longer live on such low pay. And most of them are paid at the executive-schedule rate, which is higher pay than almost all Federal civil servants receive. The above statements have been confirmed by the study prepared by Hay/Huggins Company and Hay Management Consultants for the House Committee on Post Office and Civil Service, entitled Study of Total Compensation in the Federal, State and Private Sectors, December 4, 1984. That study showed that in total compensation (the total of cash compensation and fringe benefits) the Federal employee is 7.2 percent behind the Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 403 - 12 - private-sector employee on average and that it was expected that the 1985 update of the analysis will show the advantage of private-sector total compensation as 9 percent or more on average. Since that study included small companies, the differences would be even greater if only the large, progressive private-sector employers with work forces similar to that of the Federal government were studied. The study also showed that for employees at the $30,000 pay level the CSRS is 3 percent less valuable that the benefits provided by any of the top 10 percent of private-sector employers in the study. The study showed that the retirement benefits provided to employees of those top private-sector employers in the study cost the employers 25.1 percent of pay. If the Federal tax subsidy enjoyed by private-sector pension plans were taken into account, as it should be, that cost figure would be higher. The Congressional Research Service estimates the employer cost of the CSRS as 24.7 percent of pay. So, even without taking into consideration the tax subsidy enjoyed by private-sector plans, the cost, 25.1 percent of pay, of retirement benefits provided employees of the top employers in the study exceeds the cost to the Government of the CSRS. The study did find that the overall CSRS benefits are more valuable than private-sector retirement on average, although even the average private-sector pension plan provides better benefits at age 65 than CSRS (an 18 percent higher replacement rate of pre-retirement wages). It also found that the cash compensation and the Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 404 13 - other fringe benefits of private-sector employees were better on average than that of Federal employees -- and that the total compensation of Federal employees lags the private sector. As stated earlier, the study included small companies (employing as few as 100 employees) whose work forces are not comparable to the highly educated Federal work force, consisting in such large part of professional, technical, and administrative employees who are experts in many diverse fields -- managers, attorneys, employee benefit plan specialists, actuaries, accountants, scientists, program analysts, economists, etc. PMA submits that it is unfair and intellectually dishonest to compare only one segment of compensation (retirement) when in every single one of the other segments of compensation (fringe benefits such as health insurance and life insurance and cash compensation) and in total compensation Federal employees are behind even the employees of the average private-sector firms. Moreover, it is unfair to compare Federal compensation with the compensation of the employees of the average or small private-sector firm when the Federal government's work force is so unlike such work forces. PMA is very concerned that Congress now is considering offering to new Federal employees lesser benefits than CSRS provides based on some of the practices of the average private-sector pension plan. As noted earlier, some of these practices are problems which need to be corrected, not emulated by the Federal government as employer. ERISA was signed into law 11 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 405 - 14 - years ago and amendments have been made to it or the Internal Revenue Code every year since then to correct some of the undesirable aspects of private-sector plans. Since all of the problems have not yet been corrected, forums and commissions have been established and congressional hearings held to deal with the remaining problems. For example, while Social Security benefits are protected from inflation by the COLA's and while many private-sector employers have increased retirees' benefits because of inflation, one of the problems of many private-sector plans is the erosion of the retirement benefit over the years due to inflation. In fact, over the years, bills have been ,proposed in Congress regarding this problem and it will probably not be long before it is corrected. Moreover, the fact of the matter is that the trend in employee benefits in the private-sector over the years has been to increase and improve employee benefits. Thus, with the passage of years more and more pension plans have improved their benefit formulas to base benefits on final gross earnings; more plans have lower retirement age for unreduced benefits; more plans provide post-retirement increases because of inflation. In such a climate why should the Federal government be considering cutting back on Federal employees' benefits? It should be proposing to improve employee benefits. A more generous retirement system is needed to make up for the less generous pay and other fringe benefits. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 406 - 15 - The Federal deficit will not be cured by reducing Federal employees' pay package. However, if the Federal employee is made, incorrectly, to seem overpaid, the public's attention is focused on that misconception, rather than on facts such as that some individuals and corporations are not required to pay their fair share of taxes and that the American public is subsidizing through taxes some activities which it most certainly would not want to, if the facts were known and publicized. Much has been made of the so-called burden of the American taxpayer in paying for Federal employees' pensions. PMA would like to point out that the American taxpayers employ the Federal employee and thus pay for our salaries and some of our benefits. However, little has been made of the fact that the American taxpayers are also subsidizing every private-sector employee's salary and pension because these are expenses which are deductible from their employer's taxes, are thus a revenue loss to the Federal government, and therefore are activities subsidized by the American taxpayer. Let us not forget that the American taxpayers are subsidizing J. Peter Grace's pension of over $357,000 per year. The American taxpayers are subsidizing lavish business lunches, extravagant business entertainment, and planes and yachts and resort condominiums owned by corporations and flights on the Concorde taken by business executives. The American taxpayers are subsidizing those 40 large, profit-making firms that paid no income taxes in 1984 (according to the August 29, 1985 issue of the wall Street Journal). PMA believes that the purpose behind some organizations' misrepresentations Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 407 16 - to the public on Federal pensions and other Federal expenditures is not a public-spirited one, but a self-serving one. The purpose of these groups' misleading the public about such matters is to keep public attention away from the real tax inequities in our society from which they benefit so lavishly and which we taxpayers are subsidizing. They want to concentrate attention on cutting Federal expenditures, whether fairly and wisely or not, so that our tax structure is not scrutinized. Finally, we would like to make two points with respect to how the new plan will take into account the Social Security benefits earned. Since Social Security replaces a higher proportion of earnings for low-wage employees, it is not unreasonable that this "tilt" be taken into account. We note that the proposed plan does not take the "tilt" into account. We prefer that an "add on" approach be utilized because it is easier for employees to understand than an "integrated" approach. Perhaps an "add on" approach could be utilized with a higher rate of accrual for salaries over a specified level in order to make up for the Social Security "tilt". But, regardless of how Social Security is taken into account, it is very important that only that part of an employee's Social Security benefit attributable to Federal service be taken into account. If a specified percentage of an employee's entire Social Security is taken into account, even that part of Social Security attributable to private-sector employment, then Federal employees who have also worked in the private-sector will lose some or all of their benefits from the Federal retirement plan. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 408 - 17 - We hope you will keep our concerns in mind when you consider this legislation. PMA earnestly desires that the plan adopted for Federal employees hired after December 31, 1983, be onerwhich will enable retirees to maintain their pre-retirement standard of living in their retirement years and thus will be a plan which will be instrumental in attracting and retaining an efficient Federal work force. PMA will be happy to assist you in this most important enterprise. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator EAGLETON. Is Mr. Fowler here? Mr. Fowler, you were supposed to be on with Ms. Benson. We are sorry we juggled the schedules' It is our fault. Would you like to come forward now? Mr. FowLER. Yes. Senator EAGLETON. Mr. Fowler, you may proceed. Mr. Fowler is representing the National Association of Postmasters of the United States. TESTIMONY OF AL FOWLER, POSTMASTER, COLUMBIA, MD, NA- TIONAL ASSOCIATION OF POSTMASTERS OF THE UNITED STATES, ACCOMPANIED BY THOMAS R. ROTH, CONSULTANT TO NAPUS Mr. FowLER. Mr. Chairman, members of the committee, my name is Al Fowler. I am the postmaster for Columbia, MD. I am the former president, past State secretary and State treasurer, past State labor-management chairman-- Senator EAGLETON. You are past everything. Mr. FowLER. Yes and I almost passed out on the way over. We were in a taxi which a truck ran into, so I am glad for the schedule change. So based on that, we are starting at the bottom and going to the top. Today, I am representing Tom Costin. Tom is presently leading the postmasters at the national convention in Las Vegas, NV. Ap- pearing with me is Mr. Thomas R. Roth, economic consultant to our organization. We neatly appreciate this opportunity to testify on behalf of the nation s 29,700 postmasters regarding the critically important issue of designing a new retirement system for postal employees and other Federal employees covered by Social Security. In developing our position in this matter, NAPUS has outlined several important objectives or standards against which any proposed plan should be judged. We have carefully examined the retirement program set forth in S. 1527 introduced by Senators Ted Stevens and William V. Roth in connection with our major objectives and, regrettably, have come to the conclusion that we cannot support that proposed plan in its present form. We are grateful, nevertheless, for the committee's diligence and obvious hard work in preparing this proposal. The postmasters are anxious to make whatever contributions to this committee we can to expedite the process of establishing a supplemental plan before post-1983 hires are confronted with the anticipated 14-percent pen- sion contribution. Our major objectives to the design of the supplemental program as proposed under S. 1527 are in the prepared statement forwarded to the committee. At this point, I will summarize the major points with Mr. Roth and respond to any questions the committee might have. Central to our position is the need to preserve pension compensa- tion at the level present in the current CSRS. NAPUS has advocat- ed from the outset a pension program which would set pension compensation for Social Security covered employees at the same level as non-Social Security covered employees by equalizing em- ployer pension costs between the two groups. The new supplemen- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 tal plan, exclusive of Social Security, should carry a normal cost to the employer of approximately 18.64 percent of payroll. The Stevens-Roth proposal would establish the employer cost at approximately 14.7 percent. This represents a cut in pension com- pensation for postmasters of over 21 percent. Moreover, a full 3 percent of the 14.7 percent is supposed to come in the form of a voluntary capital accumulation program. The estimated 3-percent value assigned to the capital accumula- tion program assures average participation of 60 percent. We doubt that the postmasters' participation rate will be this high. There- fore, the overall value of the proposed plan is exaggerated to begin with. The point is that the main elements of the proposed plan must be substantially upgraded simply to preserve that portion of the total compensation presently devoted to retirement income. The principle of equal pay for equal work among all postmasters, re- gardless of their date of appointment, is perhaps an old-fashioned idea, yet a fundamentally important goal in compensation policy which must be pursued here. NAPUS must unavoidably oppose this bill or any other which seeks to cut pension compensation for new employees through the establishment of a supplemental plan, which, when added to Social Security, falls far below the present civil service standards. What is most disturbing is that the Stevens-Roth proposal accom- plishes this cut in pension compensation by watering down or eliminating certain important features of the present CSRS. Nota- bly, the proposed plan worsens the eligibility requirements for un- reduced retirement benefits which are presently 55 with 30 years of service. Obviously, some individuals retire at the first opportunity. Early retirement is important for some people. For individuals who can no longer tolerate the strain and pressures of work after having served with what anyone would consider a full work life, the 55/30 rule provides a useful and desirable alternative. It is an extremely important feature of the current plan which should be preserved in the new supplemental program. The value of the present post-retirement escalation clause is also greatly diminished under S. 1527. Presently, CSRS retirees receive adjustments equal to changes in the CPI. Under the proposed plan, annual adjustments will be limited to 2 percentage points less than changes in the CPI. The full percentage escalator provision in the proposed CSRS is one of the most significant features of the plan. To be sure, the re- tirement benefit, which may otherwise be adequate at the point of retirement, will steadily dissolve in real terms over the person's re- tired life if not adjusted in accordance with advancing prices. The provisions of S. 1527 guarantee a drop in the real value of annu- ities by 2 percent per year. Over the average life expectancy of a retiree, this amounts to a more than 46-percent cut. Changes in certain key features of the present CSRS of this kind make the proposed plan unacceptable to the Nation's postmasters. We are, of course, aware of those who criticize the CSRS for its alleged high costs and unique provisions. We acknowledge, for ex- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 ample, that eligibility requirements for normal retirement and post-retirement adjustment provisions under the CSRS are not found in the average private sector plan. However, when total compensation is examined, Federal workers have already fallen far behind their private sector counterparts. The Federal Pay Comparability Act of 1970, Public Law 91-656, was designed by Congress to provide an equitable and fair method for setting federal pay by comparing adequate rates to those in the private sector. Two weeks ago, the President's pay agent reported that under existing comparability law, the computation based on this year's survey indicates an upward adjustment in Federal pay rates by 19.15 percent. The uninformed assume that this enormous pay gap will disap- pear when the benefits structure in federal employment, including CSRS, is taken into account. This is simply not the case. The public's perception of the benefits structure in Federal serv- ice was formed in the early 1960's when, indeed, it was enviable by private employment standards. But the basic elements in the civil service and postal service benefits package have been the same for over 20 years. Progressive change and constant liberalization has characterized the private sector development of benefit plans over the past few years, while in the Federal sector, benefits have stayed the same or have been worsened. The Hay study cited earlier found in several benefits areas, Fed- eral Government practice laps behind the private. sector. Any ad- vantage gained under the civil service retirement system is all but eliminated when the deficiencies elsewhere in the tringe benefit programs are included. When total compensation is examined, there is no escaping the conclusion that Federal workers are al- ready paid less than their cohorts in private industry. The Stevens-Roth proposal cuts pension compensation from the present 24.7 percent to 20.6 percent of payroll, thereby widening the Federal lag in total compensation behind the private sector by an additional 4.1 percent of pay. In view of the already serious gap between Federal and private compensation, reducing the pension portion of compensation to conform to private sector levels is simply unfair and unjustifiable. Thus far we have focused our comments on the all-important ob- jective of maintaining pension compensation at a level equal to the value of the present CSRS. There are, of course, several other important issues regarding the specific design of the new retirement system which have not been discussed. Two design issues, the method of Social Security in- tegration and the role of the capital accumulation program, require attention at this time. We know that under the present CSRS, the relationship between pension income and preretirement earnings is the same across all income levels. Social Security, on the other hand, places a higher proportion of pre-retirement earnings for those at the lower end of the income scale. The Stevens-Roth proposed plan preserves the Social Security tilt completely by making basic retirement benefits fully additive to Social Security. This creates a particularly vexing problem for NAPUS. Our organization represents postmasters with an average annual salary of approximately $30,000. Salaries range, Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 however, from under $4,500 to over $60,000. We represent part- time postmasters in the rural areas, where salaries are predicated on 2 to 6 hours of work per day, together with some of the highest paid postal managers, responsible for the entire operation of the largest postal facilities in New York, Baltimore, Washington, Chi- cago, and other metropolitan areas. This sprawling range of salaries leads us to conclude that the costs and benefits of the new retirement system should be distrib- uted equally among the salary range. We are convinced that the fairest and most equitable treatment of with all Federal workers, with regard to distribution of benefits, requires the duplication of the current civil service retirement system structure to the maxi- mum possible degree. This, of course, dictates a new supplemental plan which incorpo- rates an offset of 100 percent of the primary Social Security bene- fit, or as great an offset as practicable. The objective is to design a program which replaces the same percentage of preretirement earnings regardless of the job classification or rate of pay. ,With respect to the voluntary capital accumulation plan, it is our position that it represents far too great a portion of the proposed retirement system under S. 1527. We are not opposed to a thrift payment plan, per se, but we are uncertain as to its value in the overall program. We are uncertain of the degree of participation. The 60-percent assumption seems too high for postmasters, let alone lesser paid groups. We are uncer- tain of the distribution of employer contributions devoted to this element of the plan. It is likely that participation rates will in- crease with salary, thus allocating a disproportionate share of the value to the highest paid classifications, and of course, we are un- certain of the benefit level which is ultimately achieved and which is of primary importance in deciding when or if to retire. After all, the benefit level is a function of the investment earnings over the life of the individual's account. For the same employer contribution, we prefer to allocate more pension compensation to basic benefits which are evenly distribut- ed among all income levels and which are not contingent on an em- ployee's ability to generate additional savings. While we are not dogmatically opposed to capital accumulation programs, we regard them as a third and separate tier of pension development which should be secured only after a solid core of em- ployer-paid benefits is obtained. The capital accumulation approach should be considered in the next generation of pension plan provi- sions, the kind which might, for instance, eventually supplement the civil service retirement system benefits of incumbent Federal workers. At this stage, however, we oppose the capital accumula- tion plan approach as a substitute for cost-equivalent pension bene- fits. In summary, NAPUS advocates the pension program containing the following central theme: One, pension compensation for Social Security covered employees at the same level as non-Social Security covered employees by equalizing the employer pension costs between the two groups; Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Two, distribution of the costs and benefits uniformly across job classifications and salary levels, thereby duplicating the structure of the present civil service retirement system; Three, heavy weighting of costs and benefits on the basic benefit formula without the use of contingent benefits associated with a voluntary capital accumulation plan; Four, preservation of the main features of the present civil serv- ice retirement system in the areas of post-retirement adjustments, vesting and early retirement. We urge the committee to give full and careful consideration to these essential objectives. A retirement program designned in con- formance with these principles provides the fairest and most equi- table adjustment of taxpayers' and employees' interests at this point in time. Moreover, the preservation of pension compensation is critically important to the Postal Service if it is to continue to attract and retain qualified, capable managerial personnel. Thank you, Mr. Chairman and members of the committee, for having provided this opportunity to express the views of the Na- tional Association of the Postmasters of the United States. Senator STEVENS. Thank you very much. I appreciate your comments. Senator Eagleton has asked that I ask you if your position is that new employees should have to con- tribute the same percentage of their pay for retirement as old em- ployees? That is, should there be a level contribution between old and new retirement programs? Mr. FOWLER. We feel that the present rate of contribution is af- fordable to all employees, and we feel that as employees, having spent 20 years in the Postal Service myself, we are having indica- tions that there is an uneven distribution of benefits coming into the Postal Service now. We feel that if you have to have a system that supplements the Social Security, it should be along the same amount of benefits they are paying at the present time. Senator STEVENS. We are not talking about benefits. We are talk- ing about contributions. Under our plan, it is a 7-percent contribu- tion. Under the old plan, it is 8.3. He has been asking everyone, do you believe that we should require new employees to contribute 8.3, even though we can finance the plan with 7 percent? Mr. FOWLER. I don't feel NAPUS can take the position that we favor the 1.3 add-on. There are instances where this is not going to benefit anyone who has been under the civil service retirement system since the first inceptions. We do not favor the 8.3. Mr. ROTH. I might also add, sir, if I may, that the issue as we see it is the fixing of pension compensation, which is measured by the contributions that the employer gives to the benefit structure. Ob- viously, a pension with respect to the size of the employee contribu- tion depends on the benefits which flow from those contributions. Our view is that pension compensation ought to be equalized be- tween the incumbent postmasters and those hired in the post-1983 era. That is to be valued and measured as the employer contribu- tion; if new hires are to receive pension compensation or benefits which exceed those of incumbents, then those should justify contri- butions on their own part, which are higher than the incumbents. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 After all, you get what you pay for. Currently, there are vehicles for postmasters to expand on their retirement income by partici- pating in individual retirement account programs as sponsored by their organization. I am sure there are other ways of disciplining the contributions that enhance their own income. Senator STEVENS. Then if you have IRA's-this should be no news to you-but I was surprised to find that the largest group of IRA's is owned by the younger, middle-aged group. This article I have points out that a survey by Sindlinger & Co. has found that the younger consumers between the ages of 25 and 34 own two- thirds of all of the IRA's. Two-thirds of the IRA buyers are under 45. It is, in fact, the younger people that are buying IRA's. Mr. ROTH. That doesn't surprise me. I think it is one of the rea- sons why NAPUS advocates the greater weight placed on the de- fined benefit program. The IRA's or any 401(k) program are of great advantage to those employees who are in the early years of their careers and who plan to make career moves. It enables the employees to maximize their portability from one job to another, but we are representing a group of persons who are career Postal Service employees. They don't become postmasters until they have made all of the anticipat- ed career moves, so to speak, and there is no advantage to this group of Federal employees in the portability aspects or advantages of a capital accumulation program of the kind you are speaking of. Senator STEVENS. There is no advantage to having 5 percent of the contribution matched when the group you are talking about- 37 percent of all IRA's are held by middle-income individuals with salaries between $15,000 and $30,000? Witness after witness is tell- ing us that these middle-income people aren't going to be interest- ed in a plan that matches contribution. I just don't believe that. These people participating in IRA's get no match. IRA's just amount to deferred income. We have both deferred income and a matching plan of up to 5 percent of your salary matched by your employer, if you save. The record shows that they are the ones who are saving already. Mr. ROTH. What we are saying is that that may well be true, but the characteristics of the group that you cite as being most advan- taged and taking part in these IRA programs simply don't match the group we represent. We are talking about long service, career- oriented postal workers. These persons are going to retire from the Postal Service. It is the main objective of postmasters to design a retirement program which provides and maximizes retirement income, not portability of pension income. Portability to this group is not that important. Senator STEVENS. Portability is secondary to the third tier. We didn't put it in there primarily because of portability. Mr. ROTH. We agree with that. Senator STEVENS. We put it in there because of the fact that it has the greatest earning capacity capability of the whole system, more than Social Security, more than the pension. The third tier is controllable by the employee and can be enhanced more than the other two. It is not dependent upon Congress. Congress can't change that. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Mr. ROTH. Those features certainly are attractive to anyone. Again, we, as Mr. Fowler stated, don't oppose the inclusion of the capital accumulation program as such. It has all of the virtues that you say it does. It is the weight that that element in the holdover of the retire- ment program carries that is objectionable here. As a substitute for a specific, a known, defined benefit program, which has benefits which are evenly distributed against all occupational lines, it is simply not as attractive. Senator STEVENS. Suppose we gave your people the option: They could put their 1.3 percent into a defined benefit plan, or they could put it into a thrift plan or whatever else. Do you think most of your people would elect to put the 1.3 in to the defined benefit plan? Mr. ROTH. This would be apart from any employer contributions? Is that what you mean? Senator STEVENS. It would reduce the matching on the thrift plan. You say that more people would want the defined benefit plan. Suppose we put part of that in the defined benefit but limit those people to the amount that can be matched under the thrift plan. Mr. ROTH. Again, it is an attractive proposition to the extent that it is to supplement what is otherwise established as a retirement program with equal value to the current CSRS. Senator STEVENS. By definition, we are not going to get that. I don't think anyone in this room believes that we can come out with a plan that will be as good as the civil service retirement system for those people who are included in Social Security now. You don't really believe that, do you? Mr. ROTH. Of course, we are talking about the supplemental plan which, when added to Social Security, is the CSRS. If you are asking me whether I believe that is feasible or not, politically, I have no judgment; but certainly, to ask us to support a cut in pen- sion compensation for postmasters of 20 percent, I think, is unfeasi- ble. Senator STEVENS. I don't blame you for asking. Mr. ROTH. I certainly don't blame you for asking. Senator STEVENS. Thank you very much, gentlemen. We appreci- ate your testimony. Mr. FOWLER. Thank you, sir. Mr. ROTH. Thank you, sir. [Mr. Fowler's prepared statement follows:] Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 AL FOWLER National Association of Postmasters of the United States Mr. Chairman, members of the Committee - my name is Al Fowler. I am the Postmaster for Columbia, Maryland. Today I am appearing on behalf of the National Association of Postmasters of the United States. Appearing with me is Mr. Thomas R. Roth, eco- nomic consultant to our organization. We greatly appreciate this opportunity to testify on be- half of the nation's 29,700 Postmasters regarding the critically important issue of designing a new retirement system for Postal employees and other Federal employees covered by Social Security. In developing our position in this matter, NAPUS has outlined se- veral important objectives or standards against which any pro- posed plan.should be judged. We have carefully examined the re- tirement program set forth in S. 1527 introduced by Senators Ted Stevens and William V. Roth in connection with our major objec- tives and, regrettably, have come to the conclusion that we can- not support that proposed plan in its present form. Central to our position is the need to preserve pension compensation at the level represented by the current CSRS. NAPUS has advocated, from the outset, a pension program which would set Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 417 - 2 - pension compensation for Social Security-covered employees at the same level as non-Social Security-covered employees by equalizing employer pension costs between the two groups. In determining the "equal .value", we endorse the employer-normal-cost approach developed by the Congressional Research Service (CRS) in its December 1984 report on designing a retirement system for federal workers covered by Social Security. Accordingly, the new supple- mental plan (exclusive of Social Security) should carry a normal cost to the employer of approximately 18.64 percent of payroll. Under the CSRS actuarial cost model, this equals the employer's norpnal cost of CSRS, net of administrative expense (.05%), and the'cost of unique provisions for special groups (.45%), less the employer's normal cost for Social Security (6.06%). The Stevens-Roth proposal would establish an employer cost of approximately 14.7 percent. This represents a cut in pension compensation for Postmasters of over 21 percent. More- over, a full 3.0 percent of the 14.7 percent is supposed to come in the form of a voluntary capital accumulation program. The es- timated 3.0 percent value assigned to the capital accumulation program assumes average participation of 60 percent. We doubt that the Postmasters' participation rates will be this high; therefore, the overall value of the proposed plan is exaggerated to begin with. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 418 - 3 - The point is that the main elements of the proposed plan must be substantially upgraded simply to preserve that portion of total compensation presently devoted to retirement income. The principle of equal-pay-for-equal-work among all postmasters, re- gardless of their date of appointment, is perhaps an old fashion- ed idea yet fundamentally important goal in compensation policy which must be pursued here. NAPUS unavoidably must oppose the Stevens-Roth bill, or any other, which seeks to cut pension compensation for new employees through the establishment of a supplemental plan which, when added to Social Security, falls far below the present Civil Service standard. What is most disturbing is that the Stevens-Roth propos- al accomplishes this cut in pension compensation by watering down or eliminating certain important features of the present CSRS. Notably, the proposed plan worsens the eligibility requirements for unreduced retirement benefits. Presently, employees can retire at age 55 with 30 years of service, at age 60 with 20 years or at 62 with 5 years. Under the new plan, unreduced re- tirement is available only upon attaining 62 years of age with 5 years of service. Retirement before age 62 results in signifi- cant benefit reductions. There is no evidence to support the notion that liberal eligibility rules are excessively costly or cause a mass exodus of eligible workers. The fact is that early retirement is not Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 419 - 4 - convenient or desirable for every worker. The vast majority of employees eligible for early retirement prefer to continue on the job -- to realize higher pension benefits and complete a full worklife. The latest OPM data show that federal workers retiring under the 55/30 rule make up only 26 percent of all annuitants; the average service of this group is 34.4 years -- a complete worklife by any standard. Overall, the average age of federal annuitants on the date of retirement is 61.0 for normal retire- ment. Moreover, there is no apparent difference between retire- ment patterns under CSRS and those typical in American industry. For example, 75 percent of all workers retiring voluntarily under Social Security today do so before reaching age 65. A survey of corporate experience conducted by the actuarial consulting firm Johnson and Higgins found that the average retirement age was 61.8 among 72 responding companies; 63.4 percent retired before age 65. Obviously, some individuals retire at the first oppor- tunity. Early retirement is important for some people. For in- dividuals who can no longer tolerate the strain and pressures of work, the 55/30 rule provides a useful and desirable alterna- tive. It is an extremely important feature of the current plan which should be preserved in the new supplemental program. The value of the present post-retirement escalation clause is also greatly diminished under S. 1527. Presently CSRS Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 420 5 - retirees receive adjustments equal to changes in the CPI. Under the proposed plan, annual adjustments will be limited to 2 per- centage points less than changes in the CPI. The full percentage escalator provision in the current CSRS in one of the most significant features of the plan. To be sure, a retirement benefit which may otherwise be adequate at the point of retirement, will steadily dissolve in real terms over a person's retirement life if not adjusted in accordance with ad- vancing prices. The provisions of S. 1527 guarantee a drop in the real value of annuities by 2 percent per year. Over the average life expectancy of a retiree, this amounts to more than a 46 percent cut! Changes in certain key features of the present CSRS of this kind make the proposed plan unacceptable to the na- tion's Postmasters. We are, of course, aware of those who criticize the CSRS for its alledged high costs and unique provisions. We acknow- ledge, for example, that eligibility requirements for normal re- tirement and post-retirement adjustment provisions under the CSRS are not round in the "average" private sector plan. Consequently there is some evidence that the overall costs, or value, of the CSRS today exceeds that which is typical in under non-government systems. For instance, the Hay Group's study of total compensa- tiop in the Federal State and Private Sectors, prepared for the House Committee on Post Office and Civil Service, shows that the Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 421 6 - employer-provided cost of the CSRS is 24.7 percent of payroll compared to 18.3 percent for the average private sector retire- ment system (including Social Security). But this gap has nar- rowed tremendously over the years and continus to close as pri- vate sector programs rapidly expand and become increasingly more adequate in providing retirement income. The CSRS was never in- tended to be the average program. The CSRS was established in 1920 when less than 7 percent of private sector workers were co- vered by a pension program. For decades it served as a model for private industry as a device to enhance efficient business oper- ation by providing for comprehensive employee income protection, and as an efficient method for removing from active employment workers whose age or infirmities hindered job performance. Yet the government's leadership role in this area is rapidly diminishing. The principle features of the CSRS -- e.g., the 55/30 rule was added in 1967; hi-3 became effective in 1969; the automatic escalator provision was established in the 1963 -- have remained the same for nearly 20 years during a period when private sector retirement plans developed most rapidly. In view of this trend in liberalizing private sector programs, there is no reason to cut back on the federal system in order to establish pension comparablity. Significantly, when total compensation is examined, fed- eral workers have already fallen far behind their private sector Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 counterparts. The Federal Pay Comparability Act of 1970 (P.L. 91-656) was designed by Congress to provide an equitable and fair method for setting Federal pay by comparing adequate rates to those in the private sector. Two weeks ago the President's Pay Agent reported that "under existing comparability Law, the compu- tation based on this year's survey indicates an upward adjustment in Federal pay rates varying by grade level from a low of 18.35 percent at GS-3 to 20.85 percent at GS-15. The overall average increase would be 19.15 percent"! The uninformed assume that this enormous pay gap will disappear when the presumably generous benefit structure in fed- eral employment, including the CSRS, is taken into account. This is simply not the case. The public perception of the benefit structure in federal service was formed in the early 1960's when indeed it was enviable by private employment standards. But the basic elements in the civil service and postal service benefit package have been the same for over 20 years. Progressive change and constant liberalization has characterized the development of private sector benefit plans over the past few decades while in the federal sector, benefits have stayed the same or have been worsened. The Hay study, cited earlier, found that death benefits, disability income replacement benefits and health benefits, are now significantly lower in the federal government than in the Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 423 -8- private sector. Any advantage gained under the CSRS is all but eliminated when the deficiencies elsewhere in the fringe benefit programs are included. When total compensation is examined, there is no escaping the conclusion that federal workers are al- ready paid less than their cohorts in private industry. The Hay study put it in these terms: Since cash compensation and fringe benefits other than retirement are more valuable in the private sector, the total compensation perspective shows that Federal employees' total compensation is 7.2% behind the private sector on average. As a re- sult, even if a supplemental retirement system is linked with social security to produce benefits that are comparable to those available to Federal employees hire be ore January 1, 1984, the total compensation available to new Federal employees will also lag the private sector. Federal employ- ees' total compensation is 7.1 percent ahead of the total compensation of State employees. When the two data bases are combined, the total compen- sation of Federal employees lags the total compen- sation of other employees by 6.2 percent. It is expected that the 1985 update of this analysis will increase the advantage of private sector total compensation to 9 percent or more. The Stevens-Roth proposal cuts of pension compensation from the present 24.7 percent to 20.6 percent of payroll, thereby widening the federal lag in total compensation behind the private sector model by an additional 4.1 percent of pay. In view of the already serious gap between federal and private compensation, re- ducing the pension portion of compensation to conform to private sector levels is simply unfair and unjustifiable. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 424 - 9 - Thus far we have focused our comments on the all impor- tant objective of maintaining pension compensation at a level equal to the value of the present CSRS. There are, of course, several other important issues regarding the specific design of the new retirement system which have not been discussed. Two de- sign issues -- the method of Social Security integration and the role of the capital accumulation program -- require attention at this time. We know that, under the present CSRS, the relationship between pension income and preretirement earnings is the same across all income levels. Social Security, on the other hand, replaces a higher proportion of preretirement earnings for those at the lower end of the income scale. The Stevens-Roth proposed plan preserves this Social Security "tilt" completely by making basic retirement benefits fully additive to Social Security. This creates a particularly vexing problem for NAPUS. Our organization represents Postmasters with an average annual salary of approximately $30,000. Salaries range, however, from under $4,500 to over $60,000. We represent part-time Postmasters in the rural areas whose salaries are predicated on 2 to 6 hours of work per day, together with some of the highest paid postal managers, responsible for the entire operation of the largest postal installations in New York, Baltimore, Washington, Chicago and other major metropolitan areas. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 425 - 10 - This sprawling range of salaries leads us to conclude that the costs and benefits of the new retirement system should be distributed equally across the salary scale. We are convinced that the fairest and most equitable treatment of all Federal. workers, with regard to the distribution of benefits, requires the duplication of the current CSRS structure to the maximum possible degree. This, of course, dictates a new supplemental plan which incorporates an offset of 100 percent of the primary Social Se- curity benefit, or as great an offset as practicable. The objec- tive is to design a program which replaces the same percentage of preretirement earnings, regardless of job classification and rate of pay. With respect to the voluntary capital accumulation plan, it is our position that it represents far too great a portion of the proposed retirement system under S. 1527. We do not believe that the assumed participation rates of 60 percent will ever be achieved for Postmasters, let alone for those groups of federal workers with lower earnings and less ability to generate volun- tary contributions. More important, however, is the fact that, at any level of average participation, participation will not be evenly distributed. It is likely that participation rates will increase with salary, thus allocating a disproportionate share of Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 426 - 11 - the value to the highest paid classifications. For the same em- ployer contribution, we prefer to allocate more pension compensa- tion to basic benefits which are evenly distributed among all in- come levels and which are not contingent on the employees' abili- While we are not dogmatically opposed to capital accumu- lation programs, we regard them as a third and separate tier of pension development which should be secured only after a solid core of employer-paid benefits is obtained. The capital accumu- lation approach should be considered the next generation of pen- sign plan provisions -- the kind which might, for instance, even- 0 tually supplement the CSRS benefits of incumbent Federal workers. At this stage, however, we oppose the capital accumulation ap- proach as a substitute for cost-equivalent basic pension bene- fits. The Postmasters' position on the issues treated herein- above, as well as other design issues, is expressed in the fol- lowing outline which sets forth the details of the supplemental retirement plan which we are willing to support: Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 427 - 12 - 1.78 percent of high-3 x years of service. ? Social Security Coor- dination ? Post-retirement Adjustments ? Eligibility Require- ments for Unreduced Benefits ? Social Security Supplement ? Disability ? Survivor Benefits ? Employee Contributions ? Capital Accumulation Plan Less 100 percent of Social Security. 100 percent of the CPI in- crease. Age 55 with 30 years, or Age 60 with 20 years, or Age 62 with 5 years. Payable between ages 55 and 62; equal to the Social Security benefit payable at age 62. 5 years, payable beginning at age 62. Applicable to any person who is unable to perform in position during first 24 months; after 24 months, payable if totally and permanently disabled for any occupation; benefit equal to 60 percent of predisability pay less Social Security, or accrued retirement benefit, whichever is greater. For preretirement death, 55 percent of accrued retirement benefits. For postretirement death, if elected, a reduction in the retirement annuity of 2.5 percent of first $3,600 annually, plus 10 percent on amounts over $3,600. Survivor benefit is calculated at 55 percent of annuity before re- duction. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 A pension program containing these central ingredients does not exceed the costs of the current CSRS and accomplishes several objectives critical to our organization: (1) It sets pension compensation for Social Security- covered employees at the same level as non-Social Security-covered employees by equalizing employer pension costs between the two groups. (2) It distributes the costs and benefits uniformly across job classifications and salary levels, thereby dupli- cating the structure of the present CSRS. (3) It places the weight of costs and benefits on the basic benefit formula without the use of contingent benefits associated with a voluntary capital accumulation plan. (4) It preserves the main features of the present CSRS in the areas of post-retirement adjustments, vesting, and early retirement. We urge the Committee to give full and careful consid- eration to these essential objectives. A retirement program de- signed in conformance with these principles, provides the fairest and most equitable adjustment of taxpayers' and employees' inter- ests at this point in time. Moreover, the preservation of pen- sion compensation is critically important to the Postal Service if it is to continue to attract and retain qualified and capable managerial personnel. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 429 - 14 - Thank you, Mr. Chairman, and members of the Committee, for having provided this opportunity to express the views of the National Association of Postmasters of the United States. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Senator STEVENS. Our next witnesses are Mr. James Peirce, President of the National Federation of Federal Employees; Robert Tobias, national president of the National Treasury Employees Union; and Ed Murphy, legislative counsel of the National Associa- tion of Government Employees. Gentlemen; and Ms. Thomas, it's nice to see you, too. Jim, you are first on our list. If that is all right with everyone else, why don't you leadoff? TESTIMONY OF JAMES M. PEIRCE, PRESIDENT, NATIONAL FED- ERATION OF FEDERAL EMPLOYEES, ACCOMPANIED BY PATRI- CIA THOMAS, LEGISLATIVE DIRECTOR, NFFE; ROBERT M. TOBIAS, NATIONAL PRESIDENT, NATIONAL TREASURY EM- PLOYEES UNION; AND EDWARD L. MURPHY, LEGISLATIVE COUNSEL, NATIONAL ASSOCIATION OF GOVERNMENT EM- PLOYEES Mr. PEIRCE. Thank you, Mr. Chairman. Mr. Chairman and committee members, I appreciate the opportunity to testify today on S. 1527, a bill which Senator Stevens and Chairman Roth have introduced to establish a new retirement system for Federal em- ployees hired after 1983. S. 1527, the Civil Service Pension Reform Act of 1985, represents a good start toward designing a retirement system, and I commend the sponsors for your efforts to develop the plan before the Janu- ary 1, 1986 deadline. Throughout the discussion of the new supplemental retirement plan, NFFE has urged Congress to develop a system which would provide a level of benefits comparable to the current program. It would be a disaster to create a new program that did not continue to protect the Government's expertise and institutional knowledge. NFFE has also stressed that cost savings should not be the primary factor in establishing a new system. The last thing we want is a cheap retirement plan. The modifica- tion of the three essential elements of the current CSRS, which S. 1527 proposes, is, therefore, a cause of great concern. The benefits to which I refer are early retirement, cost-of-living adjustments and the high 3 benefit calculation, all of which are valuable compo- nents of the current Federal annuity package. We must also ensure that we retain early retirement and other benefits for special category employees such as law enforcement of- ficers, firefighters, National Guard technicians, air traffic control- lers and so forth. With pay rates and total compensation so low in comparison to the private sector, retirement is one of the few remaining incen- tives to stay in the Federal work force. Should civil service retire- ment also fall below private sector standards, the Government would find it virtually impossible to recruit and retain talented em- ployees. These changes over the CSRS not only threaten future retirees hired after 1983 whose benefits would be significantly reduced, they also set a dangerous precedent for the current system. I, therefore, urge the committee to consider carefully the damaging Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 effect on both annuities and employee morale such reductions would have. I would like now to address the thrift portion of the new supple- mental retirement plan, which, aside from Social Security cover- age, is the most significant change in the current system. While the concept of the thrift plan has merit, there are inherent difficul- ties in both its application and administration. In addition, the plan does not give the employee significant control over the man- agement of his or her account. The thrift plan, as it is now envisioned, leaves me with four im- mediate concerns. They are: One, the effective management of po- tentially vast sums of money in the thrift plan and their impact on the economy; two, the creation of a new Government entity with appointed individuals who more than likely do not have the neces- sary expertise to administer the thrift plan funds; three, the strong economic power base such individuals would hold; and finally, the restriction of an employee's fundamental right to choose where his or her contributions should go. As more and more employees join the Federal work force, and participate in the thrift plan, a huge sum of money will be avail- able for investment. In fact, the fund will be the largest single em- ployer thrift plan in the world and, as such, will have a significant impact on the economy. As the funds accrue, they could increase to such monumental proportions as to be completely unwieldy and possibly economically threatening. According to our estimations, the thrift plan could accumulate approximately a one-half trillion dollars in 3 years and $1 trillion in 4 years. Without a doubt, this vast sum of money would have a signifi- cant impact on the business world. While it is true that private pension funds now hold approxi- mately $1.3 trillion and absorb $100 billion a year, these funds are held by individual pension funds. There is no single board which decides how these private pension funds are invested. Yesterday Mr. Fossel commented in relation to whether or not these funds might control the market. He said, "In my opinion, these fears are wholly unfounded. In the first place," he said, "the proposed act provides for a very gradual phase-in in the private sector investments. Second, the current and prospective size and li- quidity of the U.S. financial markets make it highly unlikely that any responsibly managed fund, even one of this size, could have undue influence in the market." This statement is contrary to the NBC white paper aired several weeks ago relative to the $1.3 trillion in the private sector fund. I think the capability of influence in this area, as far as the board and so forth, would be significant. It would have a significant impact in influencing the ceremony. S. 1527 would create a board which would be making decisions controlling almost $1 trillion. As you can imagine, the potential economic power of the civil service pension system thrift plan man- agers would be enormous. My concerns lie in the ability to ensure adequate protection against financial manipulation by the thrift plan administrators. I am not yet confident that these protections can be made strong enough. Again, Mr. Fossel said, Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 It is clearly in the best interest of all concerned to set up the civil service thrift investment board in such a way as to provide the most professional understanding of pension and investment issues. I think that is great, but I don't think we can assure that through political appointees and other appointees. He went on to say that it was his view that the board should con- sist of employee, employer, and political representatives and should assume broad policymaking and oversight responsibilities includ- ing: investment policy formulation, asset allocation, legal and con- tractual oversight, hiring the executive director, and so forth. That is scary. He also stated that in order for the fund to be best able to achieve its long range objectives for its participants, it is para- mount that the executive director, the professional staff and its thrift plan managers be as far removed from political interference as possible. He went on to say that there are too many examples where this did not happen and had quite negative results. I just can't see any way of establishing an entity in the Federal Government that can give us these assurances. I guess I would like to relate-- Senator STEVENS. We would like to check your numbers on that. Your projection of $1 trillion is about 100 times larger than our projection, and the projections that we have seen indicate that somewhere around $45 billion after 20 years, is what we are talk- ing about. If you take the current system, the contributions are greater in the current system than they would be under the thrift plan, and there is nowhere near $1 trillion in the fund right now, as you know. Mr. PEIRCE. I realize that, but there has been no accumulation there, either. I will be glad to give you our projections and the basis upon which we made the projections. I will furnish those to the committee. Senator STEVENS. We would like to have them. Mr. PEIRCE. The other thing that Mr. Fossel also inferred to was whether there should be both internal and external management as far as this system is concerned; he seemed to be indicating con- tracting out, because he alluded to the fact that many major funds did contract out the management. Still, the cost, the influence involved there really is something that I feel is very dangerous. I think there is a way that we can get away from this, even the potential danger, by, No. 1, not having such a program. The size of the Government entity required to actually adminis- ter this plan would have to be enormous to properly manage and invest such a large fund. I do not believe that, as S. 1527 is current- ly written, either the investment board or the advisory committee can adequately meet their responsibility. Not only would it be diffi- cult to attract the high caliber employees needed to fill this man- date, but appointed individuals with little or no investment experi- ence would wind up making the final decisions. I am not confident that the best decisions would be made. Finally, the thrift plan fails to give employees adequate control over their thrift account. Although the thrift plan provides employ- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 ees with vehicles by which to invest their funds, it takes away their independence to make such decisions for themselves. You would do a great injustice to civil servants by underestimat- ing and limiting their ability to determine their own retirement in- vestments. The Federal work force is better educated and more professional than at any other time in its history. It is essential, then, that its employees be given the right to control their own re- tirement future. Senator STEVENS. Are you suggesting that the cost of the individ- ual thrift accounts is excessive? Mr. PEIRCE. Private sector-- Senator STEVENS. People feel the most successful IRA's are those that are umbrella IRA's with some major insurance company, or something like that, where the management costs are shared and the revenues enhanced. The individual IRA, the person managing his own, has the lowest return. Mr. PEIRCE. I think there again, I can furnish you some informa- tion on that side of it. The committee could grant this right by amending title I of the Civil Service Pension Reform Act of 1985 to designate where their funds will go. Literally speaking, in the private sector, there are all sorts of markets there which the employee could be attracted to. Senator STEVENS. That is true, but in this instance they have half of the money as the employer's money. The employees who made their own decision to put their moneys in savings and loans in Maryland, in their IRA's, made that decision, but it was their own money. It was not an employer contribution which was put there for the purpose of avoiding future COLA's. We think we have a management responsibility to assure that the thrift funds are managed properly. That is why the board has been created, Jim. Mr. PEIRCE. I think the vehicles are there by which this can be done, and I think I can bring them to your attention. There are in- surance funds sitting out there. There is just about anything that you want. There again, by legislation, the thrift fund that the Federal em- ployees can utilize can be structured by legislation. 401(k)'s and IRA's right now have to meet those requirements. Senator STEVENS. These funds could be invested in similar invest- ments, not necessarily turned over to similar management. That is the difference. I don't think we want the funds turned over on an individual basis to a local savings and loan that is a State-char- tered savings and loan. I don't think you would want that, would you? Mr. PEIRCE. I am not talking about that aspect of it. But there again, the investing right is still a feature that could remain, and the funds could be so structured to accommodate that. I think there is no problem with that. Senator STEVENS. Sorry I interrupted you. Go ahead, Jim. Mr. PEIRCE. The design of a system that encompasses both a de- fined benefit, defined contribution and Social Security contribution is a formidable task. I must therefore commend the chairman and Senator Stevens for undertaking this task and for moving the new supplemental retirement system from discussion toward implemen- Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 tation. I hope the committee will consider NFFE's concerns and suggestions and continue to work with us to develop a secure re- tirement system for our future retirees. I have also requested our entire statement be entered into the record. With that, I will con- clude my statement and await any questions. Senator STEVENS. Thank you. Yes, we will put it all in the record. Mr. Tobias? Mr. ToBIAS. Thank you, Senator Stevens. I first wanted to com- mend you and the members of this committee for the very profes- sional, intelligent and prudent manner in which you have ap- proached this complex and difficult task. The research, studies, and legislative drafting work completed by this committee stand in sharp contrast to the haphazard and myopic manner in which this administration has tried to advance changes in the civil service retirement system, make proposals for this retirement plan and propose changes in other areas involving the pay, benefits and working conditions of Federal employees. In the short time remaining in this session of the Congress to consider S. 1527, we hope the consideration and debate necessary to shape this retirement plan will continue to focus on the substance of this complex subject and not become a political numbers game with dollars for deficit reduction becoming the sole determinant of what this retirement plan will be. We will eagerly work with the committee, first, to ensure a re- tirement plan is enacted before January 1986, and second, to ensure the plan enacted is fair, equitable, and rational. In considering this complex legislation, we strongly believe that certain goals and objectives should be established. Should our goal for retirement be one of enabling those in retire- ment to maintain their preretirement standard of living, merely meet basic needs, or something in between? We believe the goal should be that of maintaining their preretirement standard of living. The President's Commission on Pension Salary in 1981 estimated that the average income replacement that is needed to maintain a preretirement standard of living for a single person ranged from 79 percent for the minimum wage earned to 51 percent for the highest income person. The range for married couples was 86 per- cent to 55 percent. Social Security does not provide sufficient income at any level to maintain preretirement living standards. It is not intended to. As a social insurance program, its goal is to provide a floor of income protection. The employer's-in this case the Government's-retirement pro- gram is crucial if adequate income is to be provided for maintain- ing a reasonable standard of living in retirement. Coupled with the goal of maintaining a preretirement standard of living, we also believe that retirement benefits should be former- ly recognized as deferred compensation earned by the employee during a working career. The objective should be to provide legal recognition of this as a guarantee that the benefits provided and promised at the time of employment will not be subsequently taken away. Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 Sanitized Copy Approved for Release 2010/02/26: CIA-RDP89-00066R000100150001-7 This point is particularly noteworthy, as one of the purposes of S. 1527 is "to provide Federal employees with a retirement ben- efits plan