STATEMENT OF THE NATIONAL ASSOCIATION OF GOVERNMENT EMPLOYEES BEFORE THE HOUSE COMMITTEE ON POST OFFICE AND CIVIL SERVICE ON THE DESIGN OF A SUPPLEMENTAL RETIREMENT PROGRAM FOR EMPLOYEES HIRED AFTER 1983

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89-00066R000300090011-1
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 16
• Document Creation Date: December 22, 2016
• Document Release Date: April 1, 2011
• Sequence Number: 11
• Publication Date: April 23, 1985
• Content Type: MISC

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NATIONAL ASSOCIATION OF GOVERNMENT EMPLOYEES
1313 ''L'' STREET, N.W., WASHINGTON, D.C. 20005
202/371-6644
HOUSE COMMITTEE ON POST OFFICE AND CIVIL SERVICE
ON
THE DESIGN OF A SUPPLEMENTAL RETIREMENT PROGRAM FOR
APRIL 23, 1985
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The National Association of Government Employees, which is
an affilliate of the Service Employees International Union,
(AFL-CIO) is pleased to have this opportunity to present our
views on selected issues in the development of a supplemental
retirement plan.
The design of a retirement system for employees covered
under Social Security is a task of historical importance to
the Civil Service. The Committee faces many complex
challanges in coordinating the divergent benefits provided by
Social Security and CSRS in creating a.system which will be
fair and reasonable. The Committee recognized the difficulty
of this task early in the process and elected to take a
comprehensive approach to the design of such a system. To
further public knowlege of the issues, the Committee has
commissioned several studies by the Hay Higgins Associates,
the General Accounting Office, and the Congressional Research
Service. These studies have comprehensively spelled out the
many considerations involved in the design of the plan. We
applaud the Committee for it's foresight and leadership on
this issue. We look forward to working with the Committee in
addressing these complex and important questions, and to
establish a supplemental which is fair to the new hires and
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consistent with the traditional objectives and goals of CSRS.
The Committee has requested our position on a series of
issues relevant to the design of a new system including cost,
Social Security tilt, employee contributions, funding and
financing and vesting. We will address these matter in order.
COST
The cost of a pension plan is arguably the most important
decision to be made in the shaping of a supplemental
retirement plan. The primary purpose in calculating the cost
of a pension system is to determine the funding levels needed
to fullfill all benefit obligations. As a practical matter
the decision regarding the cost of a pension system will
frequently precede and determine questions of benefit design.
The Civil Service Retirement System is a quality pension
plan comparable to that provided by our nation's largest
employers. The CSRS has traditionally been government's most
important device for the recruitment and retention of
workers. Many current workers chose employment with the
government in preference to higher paying private sector jobs
because of the CSRS. Without the CSRS as a recruitment device
the government will be much less attractive to many of our
best and brightest workers.
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The most commonly accepted measure used to represent the cost
of a retirement system is the entry age normal cost. This
figure measures the long term cost as a percentage of payroll
needed to pay for the retirement benefits of a newly hired
group of workers. It's noted that this figure is an estimate
whose accuracy is contingent upon the prediction of a number
of variables. The Congressional Research Service estimates
that the current normal cost of the CSRS is 31.7% of payroll.
Typically federal employees contribute 7% of their salaries so
that the employers normal cost is 24.7% of payroll.We endorse
this cost figure as an appropriate one for the supplemental
retirement plan. Under these estimates the new plan should
cost 18.6% of payroll so that when added to the 6.1% Social
Security contribution would equal the current system cost.
As this Committee is well aware the design of the
supplemental retirement plan should not take place in a vacuum
but rather must be considered as part of an overall
compensation package. The Hay/Huggins study on total
compensation comparability performed for this Committee
demonstrates that the total compensation of federal employees
lags behinds the private sector by 7.2%. If the retirement
benefits for new hire federal workers were reduced in value
the comparability gap would be truly glaring and would further
erode governement's recruitment efforts.
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The N.A.G.E. strongly endorses the development of a
supplemental plan which when combined with Social Security
would provide comparable levels of benefits at a comparable
cost to those currently provided under CSRS. The House
leadership has endorsed this concept in a February 18,1983
letter signed by Speaker O'Neil, Chairman Ford, and Chairman
Rostenkowski. This approach is the fairest, and most
productive for the government, it's workers and it's taxpayers.
To the extent possible, benefit packages should be uniform
and consistent for like groups of workers. It would heighten
divisions in the workplace and further erode morale and
productivity to provide the new hires with markedly different
retirement benefits, or require different contributions to
CSRS
We thus urge the development of a supplemental plan which
will be comparable in benefit and costs to CSRS. As indicated
the cost estimates available indicate that the cost to the
government of such a supplementary plan would be 18.6% of
payroll.
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EMPLOYEE CONTRIBUTIONS
Historically the Civil Service Retirement System has
required steep employee contributions which were fully taxed
as income. By comparison the vast majority of private sector
plans were 100% employer funded. In recent year many private
sector employers have developed tax deferred savings plans
which serve as an adjunct to the pension plan. Employee
contributions to these plans are tax deferred. In addition
the employer's contribution to a pension plan is also treated
as a business expense and is not taxable as income to the
employer. Thus, unlike the private sector there have been few
incentives for the federal government to fully fund CSRS.
Currently most employees whether covered under the old or
the new retirement system are paying 8.3% to either Social
Security and medicare, or CSRS and medicare. As we have
indicated in our testimony it is desirable to maintain
consistency in benefit programs to the fullest extent possible
including equality in employee contributions towards the
retirement system. Thus we would urge that a 1.3% employee
contribution rate be invoked for the supplemental plan.
Under this scheme all employees would be required to
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contribute 8.3% to their retirement plan. The only exception
would be for those new hire employees earning more than the
Social Security maximum taxable wage base. These employees
currently pay 7% to Social Security only up to the $39,000
maximum taxable wage base. The excess amount over $39,000 are
not taxable under Social Security. Thus for consistency sake
the Committee might also consider requiring a 7% contribution
for new hire employees on amounts in excess of the Social
Security maximum taxable wage base.
The Social Security system and CSRS have differing
purposes which is reflected in their respective structures
for benefit distribution. Social Security is in part a social
insurance program which redistributes wealth from high to low
income workers. By comparison CSRS is a staff retirement plan
which replaces the same percentage of salary for workers at
all income levels.
Thus under Social Security if an employee worked 30 years
and earned $15,000 he will recieve $6,00 in benefits. If he
earned $30,000 he would recieve $8,200 in Social Security
benefits. If he earned $45,000, he'd recieve a $8,400. By,
comparison under CSRS the employee earning $15,000 would
recieve a $8,000 pension At $30,000 he'd recieve $16,000 in
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annuity income and at $45,000 he'd recieve $24,300.
In designing the supplemental retirement system Congress
must decide to either completely offset pension dollars with
social security dollars, ignore the social security benefit by
simply adding the pension benefit on top of the social
security benefit, or integrate the pension with social
security so as to offset part of the tilt but not all of it.
If the plan were to completely offset social security, the
result would be that lower paid federal workers would receive
little of their total benefits from CSRS, and almost all their
pension benefits from social security while the higest paid
federal workers would recieve most of their total benefits
from CSRS. It is noted that the IRS rules would not qualify a
plan which fully offset social security benefits. Further,
full intergration of this sort unfairly disadvantages lower
paid workers to the advantage of higher paid workers.
On the other extreme, however, if the plan were designed
so that its benefits were simply added on to social security
then lower income workers would receive a higher percentage
income than currently received under CSRS, while higher paid
workers under the new system would receive smaller retirement
benefits than comparably paid employees in the current system.
The third option is to partially integrate social security
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with pension benefits. Integration of this sort allows the
design of a pension system with replacement rates across the
entire range of income levels falling between offset and add
on plans. The plan could be designed to offset the social
security tilt at differing levels of income.
There are other factors to consider in designing the
supplemental plan. To the degree possible it is desireable
that pension plans be easy to administer, and easy to explain
and most important easily understand by employees. In general
the offset plans are more complex to administration since they
require a determination of Social Security benefits. In
addition the offset plans are more difficult for employee to
understand, and hence make retirement planning more difficult
to undertake. Thus there are additional disadvantages to an
offset plan.
As an alternative to an offset plan the Committee might
consider a tax deferred thrift plan. A tax deferred plan can
address the social security tilt as effectively as an offset
plan. In addition it is simpler to administer and
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understand. A thrift plan also encourages greater employee
involvement in retirement planning by providing incentives to
save and invest. A tax deferred plan would be of particular
advantage to higher paid employees since they would have more
cash to participate in a thrift plan, and would also recieve
the greatest tax benefits.
In conclusion, a tax deferred thrift plan gives greater
fexbility in retirement planning to all employees . Upper
income workers however recieve the greatest benefits from a
thrift plan. Thus a thrift plan provides an equitable and
simple alternative for addressing the Social Security tilt.
FUNDING AND FINANCING
The evidence is clear and convincing that the current CSRS
has adequate funds to meet the expected demands on the system
for the forseable future. The annual OPM report shows, for
instance, that current financing provisions will produce a
growing fund each year for the next 75 years with no
indication of any instability on the horizon.
OPM has devoted much effort into misleading the public
about the financial status of the CSRS through use of it's
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figures on the unfunded liability in CSRS. The unfunded
liability is a measure of the money that would have to be paid
to the system today, in addition to existing and anticipated
funds needed to cover the cost of all benefits that will be
paid to employees over the next 75 years.
The concept of an unfunded liability is most frequently
used in concert with private sector funding requirement under
ERISA. These funding requirements are protections for the
solvency of a pension fund against the risk that an employeer
will go bankrupt. This concern is not relevant to the federal
government since if it goes out of business federal employees
will have much more pressing concerns than the fate of CSRS.
The current system is in adequate acturarial balance over
the long term. There seems to be limited gains available in
fully funding CSRS in the manner required under ERISA. In
fact we would be concerned if there were amounts in excess of
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the actuarial required amounts needed to pay benefits that
Congress in these days of rising deficits would seek to
transfer those unused funds into general revenues. There is
little that could be done to protect against this contingency
since government, unlike business, can change the laws to suit
it's needs.
The Committee might however require Agencies to continue
to contribute 7% to the Fund for those employees covered under
the supplemental plan. This would maintain a consistency in
the Agency contribution to both the Supplemental, and the
CSRS, and would decrease the share of the Fund's cost which is
borne by general revenue transfers.
The most important "funding question" in the design of a
supplemental plan is the demand to structure the mechanisms in
such a manner so as to protect the benefits of current workers
and retirees. The Supplemental cannot be funded in a manner
which will jeapardise the benefits already accrued by current
participants. Existing participants must be assured that
government will honor it's committments represented in the
current system.
The benefits of current workers can be best protected by
maintaining the supplemental retirement eligible annuitants as
part of the existing CSRS fund. All funds from both the
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current CSRS, and the supplemental should be stored in the
Civil Service Retirement Fund. All contributions from the
Agency, the employee, and general revenues should be made to
the trust fund. Likewise all benefits should be paid from the
trust fund. A unified trust fund would minimize the risk of
stripping the CSRS when it becomes the minority plan, and
provide the greatest assurances to participants that
government will honor it's committments. Finally, to the
degree possible, the CSRS Fund should be structured in a
manner which will insulate it to the greatest degree possible
from yearly partisan debates over the federal budget.
Employees and retires need stability in their benefit packages
so that they can plan accordingly. In current times this
stability has been lacking as retirement packages have served
as a convenient target for federal budget cutters.
There must be a recognition by the Congress that CSRS
constitutes a contract between the federal government and it's
workers which should not be easily altered because of
budgetary demands.
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VESTING
The CSRS vests employees in the system after 5 years of
service. Employees are eligible for an unreduced pension at
age 55 with 30 years of service, or at age 60 with 20 years of
service or at age 62 with five years of service.
The pension benefits under CSRS have been designed to
provide a comfortable and dignified retirement for those who
invest the longest years of their career with the federal
goverment. The CSRS has provided workers an incentive to
remain with the government for their careers.
The five years vesting requirement had been particularly
important to federal workers as there were no social security
benefits which could be transferred to the next job as was
common in the private sector. The circumstances which
demanded five years vesting will no longer exist in the
Supplemental as portability of benefits will be greatly
enhanced.
The Supplemental will have increased portability of
benefits through the addition of social security and a thrift
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plan. Social Security is designed for the maximum
portability, and can be "transferred" from workplace to
workplace. A thrift plan allows an employee to build equity
which leaves with the worker. Thrift plans would also require
a vesting period if there is a matching employer contribution.
In the private sector under ERISA an employer cannot
require more than 10 years for vesting. The majority of these
plans have chosen 10 years as the vesting period. A longer
vesting period is advantageous in that it is less costly
whereas a shorter vesting period allows greater flexibility to
the employee and gives greater protection to workers who
change jobs frequently or work for periods of their careers
for employers without a pension plan.
The Committee should consider a vesting period within the
period from five to ten years contigent upon the cost involved
and the interrelationship with the other terms of the plan.
The Committee might for instance consider a shorter vesting
period on the thrift plan, with a longer vesting period on the
annuity portion of the Supplemental. This would enhance
portability while still providing an incentive for longer
service.
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UNIQUE EMPLOYMENT CATOGORIES
The Committee has indicated that it will hold an
additional hearing wherein it will consider the retirement
plans of employee in certain unique occupations. These
employees include Air Traffic Controller, CIA, FBI, federal
firefighters, hazardous duty employees, foreign service,
legislative, and judicial employees.
The history of pension plans in general indicates that
they were created as a valuable tool to both the employer, and
the employee. Pensions allow employees to leave the job with
income and dignity. A sound pension plan also allows the
employer to create advancement opportunities for younger
workers and allows for orderly transitions in the workplace.
It allows the goverment to reinforce a certain type of career
pattern for the good of the federal government.
There is no evidence that the circumstances which lead to
the special retirement categories for any of these groups has
been changed. We thus would support comparable benefits for
these employees.
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