BRIEFING BY SENATE STAFFER ON SUPPLEMENTAL RETIREMENT LEGISLATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89-00066R000300110002-8
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 24
• Document Creation Date: December 22, 2016
• Document Release Date: April 1, 2011
• Sequence Number: 2
• Publication Date: March 14, 1984
• Content Type: MEMO

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D/Pers
14 MAR I T
MEMORANDUM FOR: Director of Personnel
Liaison Division
Office of Legislative Liaison
SUBJECT: Briefing by Senate Staffer on Supplemental
Retirement Legislation
Attached is a near-verbatim transcript of the briefing
session held in the DDA's conference room on the morning of
15 February 1984 on the subject of supplemental retirement
legislation. The briefer was Mr. Jamie Cowen, Special
Counsel on the Subcommittee on Civil Service, Post Office,,
and-General Services, chaired by Senator Ted Stevens
(R,AK). Mr. Cowen is the Subcommittee staffer responsible
for generating supplemental retirement legislation for
Senator Stevens.
Attachments:
As stated
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Good Morning! In regard to the design of the new
retirement system, I'd like to talk this morning about what
exactly we're doing and why you all should be thinking
seriously, now, about your supplemental retirement
requirements, even though our Committee doesn't have direct
jurisdiction over the CIA. In this particular area we on
the Senate Governmental Affairs Committee will have a lot of
influence over whatever happens, and therefore our actions
will have a lot of influence over your supplemental
retirement program. I'll also address why it will be
important to you, as current workers, to design a new
program, and why it will be important to try to get a handle
on what we're doing, of getting off to a quick start, in
other words, of getting involved now in some of the design
work, of working with us, and with the Intelligence
Committee, and so on, of getting an idea of exactly what you
want, and how to actually implement that. I would then like
to touch on some of the specific issues involved in what may
happen in the enacted supplemental retirement system. What
I'd like to do first, though, is distribute this article for
your benefit. It's something that I wrote in the Federal
Times last spring, on designing a new retirement plan for
the federal government, and certainly it goes into a lot
more detail than I will today as far as the various types of
issues that are involved in the design of a new federal
retirement system.
First of all, I'd like to talk about exactly what
we're doing on the Senate Governmental Affairs Committee
staff, describe for you what our goals are and then move on
from there. One of our major concerns is the whole federal
retirement arena, because it is such a volatile and
emotional issue for federal employees. We feel the most
important thing is to try to get a handle on exactly what is
provided elsewhere in this country in the way of pensions
and retirement plans, you know, private as well as public
...,......all the various types of benefits and beneficial
provisions. You know, everybody has their own set of
statistics, unfortunately, and they go from one extreme to
the other, such as that the federal retirement system, at
one extreme, is the most generous system in the entire
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world, to the fact that the federal system is kind of just
average and all the rest of the benefits are so far behind,
to the other extreme that the government is.actually behind
the rest of the country. Because of this, we have asked our
support agencies, the GAO, CRS (Congressional Research
Service),and the CBO (Congressional Budget Office), to do a
lot of technical work for us. The GAO is putting together
some of the most exhaustive work ever attempted as to what
exactly is provided outside of the federal employment sector
in the way of retirement programs. That includes the basic
pension that employers provide, the other additional add-ons
like thrift plans, profit-sharing, and so on. In other
words, they (our support agencies) are determining what the
typical vesting period for employees is in their jobs, what
the types of disability arrangements are that are provided,
what type of survivor arrangements are provided, and the
like. We've asked such retirement age questions as, do you
get a reduced annuity if retirement is early, what kinds of
reductions are effected, and the like. So, we've asked for
some really exhaustive data. They've done a lot of work
already. A lot of the data has already been provided to us
on a preliminary basis and much of it has really been very
revealing, although I don't want to get into that right now,
but it is revealing.
Then we're going to take the source data that we have
and work with the Congressional Research Service in
designing about five to seven options for a new retirement
plan for the government. The purpose of this would be to
publicly distribute these options to the federal work force
and other interested parties to see exactly who likes what
and for what reason, and just kind of get it out in the open
early on. Hopefully we'll get this done in the late
Spring. That part is rough.
CBO is looking at other specific issues, like private
investment management, that is, the private investment of
federal funds. One of Senator Stevens' views is that some
of the money that has been held in government bonds all
these years for the retirement fund probably should be
invested outside of government, not only for the benefit of
the employees but for the benefit of the economy as well,
for obvious reasons. So they're looking at management
techniques, they're looking at budget impacts, insofar as
that goes, and so on. That's one track that we're taking.
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A
The other track is that we have set up five special
f-ederal'pension forums in the Congress. The first one was
held in December, and the next one is tomorrow, in which we
bring in experts, about five or six at a time,'experts from
the private and public sector, on pension development, who
make presentations as to specific issues involved in pension
design. And then we have a number of participants.
Tomorrow we have well over a hundred people, participants
who will include major corporate figures, private and public
labor union people, think-tank individuals, consultants, and
individuals from the insurance and banking industries.
After each presentation is made, the speaker or moderator
will open it up for discussion. Anyone may comment or ask
questions, because the purpose is really one of education
for all of us. While everybody in the federal government is
very accustomed to, and familiar with the federal retirement
program, they are very unfamiliar with the private pension
area. In fact the level of expertise in the private pension
area in the federal government is phenomenally terrible, and
one of the things we feel is so important is to get the
federal group educated in what exactly is done outside (in
the private sector), get them used to the terminology, to
the concepts, and maybe see if some creative things can be
done for the federal government that are being done on the
outside. We had a very successful forum in December, and we
think we have a successful one tomorrow. To give you an
example of what is going to be done tomorrow, we have
someone who is going to lead it off with a development of
the retirement income system in this country, kind of going
through history, what is provided, why it is provided. Then
we're going to have a three-person panel presentation on
specific design issues, like retirement age, indexation of
the benefits, investing, and so on, in which we'll have
someone from DuPont speaking from the corporate position,
someone from the AFL/CIO speaking from the union position,
and a major consultant speaking from a consultant
perspective, and try to give us an overall perspective of
where we ........ And then we have a very interesting panel
right after that, which is made up of the Pension
Administrator of the state of New York, and the head of the
teachers' union from New York, to describe what has happened
in the state of New York. They (New York State) have set up
three completely new retirement programs in the last twelve
years, all because of serious financial problems. In fact,
they
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have gone through what Maryland is going through right now.
If you've been reading the papers you know that all the
natives are going wild because the Maryland system is very
costly. New York has already gone through this experience
three times in twelve years, so we think it is going to be
very informative for us because we'll be going through
something very similar next year, as to how they approached
it, and how their objectives have been met. Again, the main
purpose of these retirement forums is educational, to get
people accustomed, to try to get everybody in the same room
(so to speak), as well as getting them involved in the
development of the legislation so that when we finally do
get to the legislation, at least there will be a foundation
of understanding. I wouldn't say agreement, by any means,
but at least a foundation of understanding the issues so
that we'll begin to deal with the issues of supplemental
retirement on a much higher plane than many other issues
that we deal with in Congress. We will have each of these
retirement forum proceedings printed so that when they are
finished they will be available to you for your review.
The big question is why is what we are doing in the
Senate going to be important to you in the Agency. As an
aside, I have an arrangement with the Federal Times, to
write four articles on designing a new retirement program
over the next couple of months. Some of these issues will
be discussed there, probably in greater detail, but the real
question this morning is why is it important to you in the
CIA. The first thing is that it (the new supplemental
retirement program) may very well have an impact on the
current retirement program. Senator Stevens has no
intention of changing the current system at all. His view
is that we ought to set up a very attractive new alternative
system, and allow current people to join it if they want to,
but leave the current retirement system (Civil Service)
alone. What I have been telling people is that while that
is what he wants, and that's what we want, I do not think
that we will survive the next Congress without seeing some
major changes made to the retirement program as it stands
now. Part of the impact that this new plan will have on the
current system is if the new plan is significantly less
generous than the current program, and it may or may not be,
but I'm sure there is going to be pressure to make it less
generous, a lot of pressure, that there will be attempts to
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conform the current retirement program to the new program,
at least in its overall value, so that there's not a dual
plan, with two sets of benefits for two types of employees
within an Agency. And that could have a very serious impact
on current employees, unfortunately. It's not fair, either
in our view or in the Senator's, but you have to face it
realistically for what very well may happen.
The second thing is that a retirement plan in many
ways drives the demographics of a work force. As you all
probably know, you at the CIA have your special plan
(CIARDS), that I am only sightly familiar with, that has
certain special features such as early retirement and a very
generous package, that allows you to get your people in for
a full career and then out at a reasonably early age in
order to keep the juice in the blood, so to speak, to
protect against early burnout. Your plan in some ways is
already designed to suit your unique demographic work force
requirements. But in a greater sense, it is true that one
can devise and design so many types of retirement plans to
get the type of people that you want in a work force. To
give you an example, if you're looking for a long-term
career employee, the type of package you should really be
looking for is a late-vesting package. In other words, a
person doesn't vest until later on , say ten years into
their career. Five years is the vesting benefit for the
government now, but ten years is a more common package in
the private sector, because you don't want people in and out
of.-your work force, you want people to stay, not actually
receiving a benefit, but being eligible for one, at least
until they've been in for a while. You will probably want a
rich, or fairly rich benefit at a specified retirement age.
You probably also want a weighted benefit, one that is
weighted towards the later years of service. Now, the Civil
Service System is designed that way but the CIA system, I
understand, is not. It (CIARDS) is a straight level
system. But there's a lot of different kinds of things that
you can do to weight the benefits in later years to try to
keep people on until they're right at the point where it is
marginally better for them to retire.
Another means of retaining career employees for a
longer career is by cutting down on portability. The
current system (CSRS) is totally non-portable so there has
never been a problem there. Social Security, on the other
hand, is a completely portable system and so right
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from the beginning in the new supplemental retirement plan
you are going to have a mor.e portable system. By virtue of
the fact that Social Security exists wherever you go in this
country now, you are going to have credit towards some
retirement benefit. Another means of retaining career
employees is to pay them a little bit less up front but have
a richer retirement benefit. Again the Government is
tentatively that way over the time and that tends to keep
career people longer. If you have a work force in which you
want more turnover, then you want more portability. You may
also want to have benefits such as a cash-out arrangement,
perhaps a thrift plan, which allows employees to cash out
when they cease their employment, without waiting for
retirement, because this benefit will increase turnover to a
certain extent. If you want upward mobility in your work
force, then you want some type of a subsidized early
retirement feature.
The government is one of the few systems in this
country which provide a full unreduced benefit at an early
retirement age (by 55). Most firms, which some of the GAO
work has already pointed out, in fact upwards of 90 percent
of the firms in this country provide early retirement at 55,
but a vast majority of them require a reduction in their
basic annuity at an early retirement age. However they
don't necessarily actuarially reduce that benefit. Other
words, when I mean actuarially reduce it, if your normal
retirement age is 60 and that is the point at which your
retirement plan calls for them to receive a full benefit,
but you want to let them retire at age 55 instead, if you
actuarially reduce their retirement benefit, that means what
you want to do is reduce it so that there is still a total
retirement income from 55 to death that will be the same as
if they retired at 60. So you reduce the employee's
retirement benefit by the amount that is actuarially
projected, currently about 8 percent a year. Most firms do
not actuarially reduce the benefits. Rather, they subsidize
benefits to a certain extent. In other words, they reduce
it by two or four percent a year which gives an incentive
then for the employee to retire early, because they will get
more retirement income over their lifetime by retiring early
than they would if they retired later on. If you, as an
employer, want upward mobility, in other words, people
moving on at an earlier age, you want to subsidize early
retirement or, even if you are a government employer you can
provide a fuller retirement and that gets
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them out. You may also want a situation which some in the
government have, such as the law enforcement agencies, that
is a benefit that gives you a high level benefit in the
first number of years, maybe the first 20, at say 2 1/2
percent a year, and after that you reduce the benefit to 2
percent a year. So that is, again, an incentive to get
people out at a certain age and moving on.
Now, the question is what relationship is this going
to have on your Agency and the Agency's retirement program.
Terry and I have talked about this quite a bit (i.e., some
strategy and some impact that this may have). As you all
well know CIA is covered under both retirement plans and I
guess your employees have a choice to take one or the
other. We in the Governmental Affairs Committee have
jurisdiction over the people that go into the civil service
plan insofar as where the benefit package goes and the
Intelligence Committee (SSCI) has jurisdiction over the
special CIA plan. And so the question that comes up is how
are you going to achieve getting through what you want to
get through at whatever point in time you feel is necessary
to get it through and so on. Terry and I have talked about
this quite a bit. My own view is that probably the best
alternative for this Agency is to try to become'a subpart of
whatever major retirement bill that we move through the
Senate. The reason is is that your Agency is going to want
a number of special features. I understand that you have
certain cover requirements and the like that are fairly
obvious. But you will also want more attractive features
because you have more attractive features now in your plan
and it is more attractive than most of the rest of the
Government. If you want to maintain it, then the biggest
mistake that you could make would be to try to move a
separate bill through the Congress providing, at least by
comparison, a very rich retirement benefit for CIA
employees. The last thing you want to do is be isolated, in
separate, parallel legislation, with a nice fat retirement
program. The first thing that is going to happen to such
legislation, regardless of the sponsor of the bill and
regardless of the agency or department involved, will be the
last thing that happens, and that is nothing. It will die
because, by comparison, it will be far too generous. The
equity of the issue will be immediately lost on the Senate.
It doesn't matter who you are, you are going to get lopped
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off. My suggestion, therefore, is that you move with us as
part of the bigger package. Everybody is going to be
focusing on the big package (i.e., the governmentwide CSRS
replacement or supplemental retirement program) and the CIA,
as I am suggesting, would only be a very small part of a
much larger moving train, and probably almost totally out of
the limelight or main focus of attention, along with the few
others in-a similar situation like law enforcement and fire
fighter personnel. In this way, some of what you might want
to get could be accomplished that way which would not be
accomplished if you isolated your package to send through
the Congress. I am afraid that everyone's initial reaction
would be to compare proposed benefit levels, and your's
would be so far superior to the rest of the government that
people's emotional reaction would be to say ..."no way can
the CIA be that special" or the like, and you would lose
almost before you got started.
Now, Terry has told me that you have hired and you are
working with Ed Hustead of Hay Associates, to help you forge
a range of supplemental retirement plan design features. I
know Ed very well. He is probably, if not the best,
certainly one of the best in the business of retirement
planning and probably the most expert actuary in' the country
as far as the government goes. We have worked with him a
great deal but I have a few suggestions which might be very
helpful in accomplishing what you want. I think the biggest
mistake that you can make with him, especially using his
expertise, is to say to him that you want five or six
options for the type of retirement plan that could be
provided for CIA and, upon receipt of them from Ed, select
any of them and develop a plan to run that selection through
the Congress. My own view is that would be a very serious
mistake to make, not only because it would work to your
detriment on the Hill, but because it would not be using
some of Ed's abilities to the fullest. The reason is
because the last thing that I think that you want to do is
to try to move through the Congress a type of plan that is
.pletely different from the governmentwide plan that our
4.:ommittee takes to the floor of the Senate. In other words,
let's say we decide to move through ......, let's give you
an example, I am not saying that we would do this and
probably won't, but lets say that we decide to move through
a major defined contribution plan like Senator Stevens
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introduced during the last session of the last Congress,
with some type of a thrift plan on top of it, and you (in
the Agency) have already decided that the best program to
serve the Agency's requirements is a defined benefit plan.
Well, the last thing that you want is something that is so
completely different from the proposal for the rest of the
Government that it can be easily looked at and picked apart,
if for no other reason than it is different from the
governmentwide plan. Then you are told no, in my
hypothetical example, as your bill is starting to move
through Congress. You now would find yourself in the dark
with no viable legislative proposal, able only to try to
append yourself to the governmentwide plan that is already
moving along and has its own momentum, in some way;...not a
very attractive situation to find yourselves in.
Alternatively, my suggestion is, first of all, for the
Agency to determine your retirement objectives or
requirements as an agency. In other words, you need a
certain retirement age. For your purposes you probably need
long term career employees and several features that we have
already discussed. You need to determine the types of
people you want to be in your system. Obviously,you go out
and look for a certain type of individual to employ. These
concepts need to be built into and can be built into a
retirement plan. Is your expectation that when a person
retires early from the Agency that they are going to be able
to live fully at that income level in retirement or is your
expectation that they will require some sort of additional
income from some type of post-Agency employment to
supplement their Agency annuity until they reach social
security age or something like that. These are the kinds of
objectives you should focus on, and then go to Ed and say
Ed, look, these are our retirement objectives/requirements,
and I want your firm to put together five or six methods,
completely different methods, to achieve these objectives.
Because then what happens is, to give you an example, let's
say we have a defined contribution plan like I said before
that moves through the Congress. Well, just because we have
a defined contribution plan does not mean that just because
current defined contribution plans in existence inherently
mean increased portability, increased turnover,.and the
like, it does not have to be that way. To give you an
example: there are some types of contribution plans, in
fact the country's jikv6st defined contribution plan which
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the TIA/Crest System in New York. It covers all teachers
and professors in New York universities, covers about
350,000 New York employees, and so on. They are a
non-typical, atypical defined contribution plan in that they
do not allow employees to remove their contributions at all
until retirement age. Most contribution plans let you cash
out early or roll over into another plan; but they don't let
you do that at all. What they say is if you leave the
university or you leave the profession altogether, you can
leave the money in, but you do not get it until 62. It will
continue to accrue interest, but you are not going to get
any more contribution under that plan and we are not going
to let you contribute to that on the outside unless you are
actually working for one of our sponsored organizations.
So just because you have a defined contribution plan
does not mean that you have lost your long-term career
employee objective. You can still have it, and still build
in certain features like that. Another example is, that Ed
can build a designed benefits package in which there is what
is called "significant backloading", as I talked about a
minute ago, in which more weight is given to later years of
that someone, let's say, has gone and has worked
LUL Lvvv ty five years in the Agency at two percent a year so
he world retire at fifty percent of his salary. Well, what
you could do in the same way is you could design a program
in which you will still get fifty percent of the salary
after twenty five years but if you leave after fifteen
years, you won't get a proportional amount. In other words
the accrual rate may be 1 1/2 % in the first ten years and 2
1/2 % in later years so that it forces the employee, if he
or she wants the lucrative retirement, to stay on in the
later years, and then to end retirement credit there, and/or
reduce retirement credit thereafter, etc. You can ask Ed to
provide a defined benefit plan with a thrift plan which,
again, doesn't allow people to cash out. It lets them keep
their money in the retirement fund.
If I were in your shoes, and I were doing what you are
doing, having Ed Hustead's level of expertise available, I
would present him with a listing of retirement plan
objectives/ requirements (i.e., these are the types of
mployees that we want working for us, and these are the
nes of employees that we want to be career employees,
`' ?A and I want 4Qu to put together five retirement plans
for our consideration....
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Director of Personnel interjection: Essentially, that
is what we have done, isn't it? We had a meeting just like
that with him about the middle of January in which he tried
to make us a bit smarter on this subject, and I think out of
that we did tell him to establish four or five goals like
you are talking about. Now, I hope that is what is going on
in my office, that the wheels are turning, and I have a
vision of Ed sitting in a room filled with machines, pushing
buttons, and all this data pouring out. I am somewhat
reassured in hearing what you are saying, that we have
probably taken the first step essentially down the right
path, although there are a couple of interesting ideas that
I have heard here that I hadn't thought of, such as the
means for getting people out of the system by dropping their
annuity off quickly, at a certain age. That is really
interesting. I'm sorry that I have to leave, but thank you
for your time and your thoughts. These peoples remaining
are the ones who will most benefit from your remarks.
Thanks again.
Jamie Cowen continues: The main thing, in other words,
asking him to do those things so that when we're (in the
Senate Governmental Affairs Committee) moving a bill
through, you can just link in whatever you've got'with
exactly what we're doing. Just merge it right in there with
some of the objectives that you all have need for. I told
Terry before that we haven't done a lot with the
intelligence agencies, but in my experience, the Senator
will often defer to specific interests like yours. He is
obviously very intelligence-minded. He is the Chairman of
the Defense Appropriations Subcommittee and so he has a
great appreciation for some of the needs as far as this goes
and I think he will be very willing to listen and to be open
to some of these other things but the primary importance
from you is to at least have the overall structure of
whatever you want ready to go to merge into whatever we've
got no matter what kind of design we've got.
Question: Jamie, give us a sense of the timing for that
need, at least in a gross sense.
Jamie Cowen: Sure; We will have a bill ready.as soon as
the elections are over, basically. If we have a
post-election session, then the Senator will drop a bill in
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at that.point. If we don't, then we'll put a bill in early
in 1,985 as soon as the Congress reconvenes.. The bill will
be enacted presumably before the end of 1985. That's when
we have to. That's the goal that we have to'meet under
current law. But we are doing all the work right now. The
work is done now or will be done by then and so your
involvement with the Hay Associates in getting ready is very
timely at this point, but I would say that you need to get
rolling with us. We will be happy to work with you and the
Intelligence Committee, and maybe you can work out some type
of combined strategy as how to best approach your needs from
a Congressional point of view, with how to best serve some
of your interests. That is essentially the timetable that
we are looking at. The main thing that I would suggest as
far as an overall strategy for you all is for a type of
planning is to truly be creative and ask Ed to be creative.
They've got a tremendous capability in that firm There are
a lot of things that I would fail to think of, but they
could come up with that could really truly meet some of the
objectives that you all have.
Now, the last thing that I do want to talk about is
some of the very basic issues involved in the retirement
plan. Things like what we face as far as the budget goes,
questions of indexation, retirement age, and the standard of
living, etc. I'm not sure what our remedy is. The problem
that we are facing is a 200 billion dollar deficit and that
means pushing a rich employee benefit package through at
that time is going to be an extremely difficult thing to
do. The whole cost issue of the retirement plan is probably
going to be, if not the major issue, it will certainly
become the predominant issue once we get it past the " Sen.
Stevens type-of-individuals" who are concerned about the
structure of the plan and how it meet the employees'
objectives. Once we get beyond those people who are
specifically interested in civil service, everybody else's
mind will be geared towards cost and that's what we have to
be very wary of.
The cost of the current system, and Ed may already
have already told you this, is currently considered to be
36% of the payroll, of which 7% of that 36% is employee
contributed. So you're looking at the government
contribution of 29% of payroll. The average private sector
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cost is extremely elusive. You've heard a lot from OPM and
the Chamber of Commerce saying that the average private
sector retirement plan cost is around 17%. That 17% is like
and apple and orange figure, basically. First of all, that
figure does not include any capital accumulation plan. Of
the BLS study that the GAO has done, of the 1500 firms they
have surveyed, 75% of those firms in addition to having a
pension program also have a capital accumulation plan like
profit sharing a thrift plan, a 401k plan, or the like.
The 17% of the payroll does not include that figure (capital
accumulation cost) at all. So immediately you've got an
increased figure. A second figure, that's extremely
fascinating and somewhat technical, as I was talking to the
people over at the breakfast about this, is that when you're
costing out retirement program, what goes into that cost are
certain economic assumptions. One of those is the interest
rate. In other words, your rate of return on investment,
because all money (contributions) goes into some type of
investment yield. The Civil Service Retirement Program uses
one interest rate assumption and the private sector
generally uses one that far exceeds that, and to give you an
example, a 1% change in the interest rate assumption used in
a cost will change the cost of the program by 25%. A 25%
increase in the cost by one interest rate assumption change
of 1%. In the government we use what is called a 1% real
rate of return. on investments. The private sector
generally uses close to 2%, and so you're saying that the
government program is 29% of payroll and the private sector
17% of the payroll. They are using the 2% real rate of
return and we are using 1% and if we use the same real rate
of return factor, either the private sector system will be
far more expensive, or the government system will be far
less expensive. They are a lot closer in cost than it
really appears. But these are going to be some of the
problems that we're going to have in moving through a bill.
It is most likely, as I said before, that even with
that understanding, that we will not be able to move a
retirement bill through that's as generous as the current
system is now, government wide. I'm not sure what will
happen to special agencies, like your agency and its needs,
but right now the average government retirement, at least
early age, is fifty five with full retirement, and your
agency is fifty. If the government retirement goes up to
61*t#- at sixty-two years for a Lull a retirement, it's going
to be
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hard to hold age fifty for your special retirement system.
It definitely will be hard to hold fifty in this agency.
There may be a way to, probably is a way, to get an age
fifty retirement, maybe with somewhat of a reduced benefit,
at that point. There's a lot of ways to do that, but to get
a full benefit at fifty when the government goes up to sixty
or sixty-two, that would be hard to believe in. You know,
and I can almost guarantee, that the new government system
is going have a higher full retirement age because if
they've just moved social security's up, and that covers a
hundred million people or whatever, you know for the two
million or three million employees that are covered by the
government, the retirement age is probably going to move up,
from experience.
The second issue is indexation of benefits . There's
two issues in indexation. One is the indexing of the
benefit while the person is working. The second is indexing
after he/she has retired. The gross retirement indexation
is the one everybody looks after, but it is the pre-
retirement that is actually more important to the workers.
What I mean by that is, right now the federal system is very
highly indexed pre-retirement. In other words, your
retirement is based on your high three years of salary. And
so what that does, is, obviously your high three years of
salary are always moving up because of wage inflation, in
other words, moving up in your career. For instance, if
your retirement benefit was based on your average salary
over, your career, your benefits would be substantially
reduced because, you know, maybe $30,000 today was $10,000
fifteen years ago, and some of you here may have been in
that ballpark, so the last thing you want is $10,000 in that
little increment.
Now, the private sector generally does index the
benefits pre-retirement. The most common way to do it is
your high five years, not the high three. There is some
high three, and that is most likely what will prevail in
whatever system comes up in the new plan, that is some type
of pre-retirement indexation. Whether it is high three or
high five is uncertain, but at least it will be geared
towards the later years of service, and basing your benefit
on that. The post-retirement indexation is going be a far
different ball game. That is an issue that is probably
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,w.
almost guaranteed to be changed, government wide; not just
civil service, but military retirement, everybody. That's
by the far most expensive part of any retirement program,
the automatic indexation at the CPI level of the
government. In fact, it's one of the very few in this
country that does. Really, in the area of indexation, it's
the one place where the government truly exceeds that of
anything in the private sector. Many other private sector
firms have better benefits at retirement age than the
government, but when it comes to indexation, the government
far exceeds it. You know, to give you an example, we had
GAO do some really interesting work for us as far as
comparing retirement benefits with certain and specific
types of firms. One of the things they did was to take what
is known as the Wyatt Study, which focuses on the top
Fortune Fifty firms in the country. What they did is they
put together a typical employee benefit program. Almost all
those firms include a thrift plan. A typical employees who
uses the thrift plan to the maximum retires at any age and
so on and it shows that, on the average, at almost every age
in service point, that the people in the tops of those firms
did better than the federal employee in almost every single
point. It's amazing. And guess who was in that top fifty,
W.R. Grace and Company. I thought that was very
interesting. But again, most of those benefits are not
indexed after retirement, not fully, not like the government
system is. And maybe there's some type of a trade off that
can be arranged for government employees.
To give you another example of things that could be
done creatively, let's say we put together a defined benefit
package that may include a fairly rich thrift plan or
something, or a 401k plan, or something like that, in any
event a savings plan where you contribute a certain amount
and the government contributes a certain amount and you put
it away in some private investment thing and then you
retire. Well, a lot things could be done with that. First
of all, social security's indexed so you've already got that
indexation issue out of the way. You might have your
underlying pension, the second tier, that may be indexed
too, but the third tier would not be indexed because that's
the thrift plan. And yet, because that money has been
outside in private investments, presumably those investments
will be achieving the equation rate or hopefully better
whJish Slott of .he sima they do except during weird times
like the past
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seven or eight years. And so those investment earnings on
that money should replace the loss of indexation' after your
retirement. In other words that should cover that period,
at no cost to the government. There's no cost . to the
government for that money out there, but that again is a way
to offset some cost to the government but still retaining
the benefit to a certain extent. There are various ways it
can be done and still lessen some of the impact on the
government, particularly future cost, which is what
indexation comes down to.
Now on the issue of retirement age, I've alluded to. it
quite a bit. We've noted that basically the predominant
full retirement age in the private sector is about sixty
two. That is where, at least, I would say about 60% of the
firms we have done allow retirement at age 62 with full
benefits, or sometime before. That is probably a good
figure to use when thinking about what is going to be
provided in the government. There are a lot of ways that
could be changed or achieved. To give you an example, let
us say, let's go back and let's say we have a defined
benefit plan that allows someone to retire with full
benefits at age 55. Now that is fine except members of that
benefit plan are undergirded by Social Security and so that
individual will not be receiving a Social Security benefit
until age 62 at the earliest. So you could have a situation
where you provide a full unreduced benefit at 55 under the
retirement plan but it still not, in other words it will
ride along reduced for seven years and then at age 62 it
will pop up to a higher level and maybe that is possibly one
way it ?V be done. Let us say we have completely
replir -cd a current system as it is now as far as the
gener it f benefits at age 62, but we allowed people to
reti.= !e 55 like they do now with 30 years of service
and A nefits based on the retirement program. Well,
rigti' you get about 56% of your high three after 30
yea: ell, with the Social Security-based plan, and you
war that 56% to key in, at let's say, at age 62, then at
age 55 even though you would not have a reduced benefit
his/her benefit would probably be closer to 35% or 40% and
then at age 62 when Social Security kicks in, it would then
rise up to 56% and go on like that. That again. is one way
to approach the issue of retirement age in allowing the
early retirement feature, even an unreduced feature for the
civil service
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federal employees, but still would not provide a total
benefit of the equivalent now enjoyed at age 62 with Social
Security. Again, like I said before, if the Government
retirement age is going to rise, it will hard to keep this
Agency at the same level as it is right now, at least at a
reduced level, but there are probably ways to keep it if it
is reduced some. In other words, a few percentage points
per year, if it is important to the Agency, for that
purpose. Maybe there could be ways again to cushion that
impact with the use of thrift plans or 401k plans.
Particularly for higher income employees, the 401k plan
could be a great cushion, especially in the later years
because that is a tax sheltered thrift plan, basically, is
what those kinds of plans are, where in the thrift plan, the
employee is paying taxes on those contributions, where in a
401k plan he/she is not, that is, the contributions are made
free of tax. The private sector is falling into this plan
head over feet. Almost all the plans that had thrifts are
all going to the 40lks and so on for the tremendous tax
features. Basically, the government is paying for their
employees' retirement benefits, is what is really
happening. It is an interesting thing.
The last thing I really want to discuss is
specifically the whole issue of where you want your people
to be when they retire. In other words, the goal,.. I will
be,talking about this in the first article I am writing for
the Federal Times... -the goal of the retirement plan should
be to maintain a retiree's pre-retirement standard of living
into retirement, so that they do not take a substantial
drop. For most people, that can be done through a
retirement plan at a reduced benefit, because most people
retire, they pay off their mortgages, the kids are out of
school, the kids are gone, some of the expenses are gone and
so instead of having to pay them 100% of salary at
retirement, you can pay them 70% and still their standard of
living remains unchanged. However, the earlier the
retirement age, the much more difficult that that is going
to be. Again, it is going to be a very serious problem for
some of your people, particularly if we are looking at any
kind of retirement where there is going to be somewhat of a
reduced annuity at an early age. It is going to be very
hard to keep these people at a standard of living that they
are accustomed to at age 50. All I know is that when my
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parents were at age 50 I was still in college and they paid
my way. If my dad's income would have been reduced by 50% I
would have been working while going to college. That again
is the major factor, but that should be a goal in the
system. It may be very difficult in this instance,
particularly, if we count on early retirement age that
should be the goal. Again, there are creative ways that can
be used to try to cushion and bolster that kind of situation.
That is where I will leave you now. I hope that I hit
on all the main points. If you have any questions or
comments.
Question: "I have a couple of questions--Concerning the
research effort is now and your forums, and your schedule is
into summer, May? What is your last one."
ANSWER: The last one is in July.
Question: "July, OK. As you move along had you now or will
you add some ground rules for everyone........the parameters
of the system that you are talking about. In other words,
are you looking at now, for instance, that whatever systems
or options you come up with the provisions, some'kind of a
fix on what you think the government cost should be, a la
the present 36%. There has been a lot of stuff before that
has come up that should be matching, not to exceed 22%, and
all the rest of that, but are there other parameters under
which the research people, the Congressional Research
Service, are going to be working on them, in terms of the
extent of the options would they be in a certain framework?"
Answer: That is right. Much of it depends on the work of
the GAO and the data, because the data will project what we
actually get. What I think most of us that are doing to
work are interested in is trying to provide a system which
is fairly comparable to some of the larger firms in the
country. The cost is going to basically explain what........
Question: I wondered at what point you might reach that
because that is where you could start getting the first real
guidance, aside from your forums, from you, for instance,
whatever you are ready to make available to the full public,
public.
Question: You will have a sense for that Julyish kind of
time frame, won't you, in order to meet the gross schedule
you talked about?
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4ft
Answer: I think we will have the options mapped out
probably by May that we are looking at.
Question: The other question I had is that in looking at,
you mention the FBI and some of the others, and as you went
on, a lot of these things, FBI circumstances where you have
your student pay for special people in civil service, were
you planning to address those within your package of special
provisions. In other words, you are talking actually from
an evaluation point some higher benefits for those kinds of
people than our CIA system even with their 1/2% they are
kicking in, you know, 7 1/2% I am talking existing..... ..up
here with a fear....Even the hazardous duty in the Bureau,
when the total value is 2 1/2% ........ ., I just wondered
if whether you are already addressing those or are going to
be getting into that. I realize that you are early
on, ............
Answer: When we designed the Senator's original package
that he put in a year ago, our position at that time was
that we would treat everybody alike and let the groups come
up and prove to us why they should be treated uniquely. We
may take a different tack this time, and possibly
automatically treat those people that are being treated
uniquely now, uniquely. But we have not focused on how we
are going to treat them yet.
"One last question -- In reference to looking into private
industry, as your base line more or less, you know, see what
they are doing, as you say some features of the program
probably are going to look more like private industry than
the old, historical government system, are you looking at
the total compensation package as part of your base again.
Answer: That is a good question. I talked about it a
little bit at the breakfast we had. One of the things, yes
we are looking at that. How we are going to address it is
that the Senator has asked us to begin looking at and
preparing legislation on every issue of employee pay and
benefits. So the possible goal would be is when we put in a
retirement bill, to have separate bills in on pay, life
insurance, health insurance, leave, and some of the other
things, so that, they won't be merged into one bill because
that bill would never move in a million years, but at least
it would all be out there, so that the retirement issue
Milt 4j* be diatuesed in ? nt?xt with all the other packages,
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so that that issue can be resolved, because there is no
question that in some of the benefit areas we are far behind
the private sector, in others we are comparable, in some
like retirement, we are probably a little bit ahead.
Question: In a related kind of vein we have talked about
retirement, and retirement, and retirement. I am not aware
that I have heard any discussion on the disability side of
the civil service retirement and disability system. How are
you all planning to address disability?"
Answer: We have not focused on all the GAO data which has
not come back. What is interesting, is that the way the
government operates now is actually far different than most
private firms operate. We have a retirement program which
has a disability retirement benefit which is pretty small.
Unless you have worked for the government for 20 years you
are in pretty bad shape, if you go out on disability
retirement. Then, everything under disability retirement is
taken care of by sick leave. Most firms provide a long term
disability policy, almost like a life insurance concept.
That is what most firms do. What we did, in the bill that
the Senator introduced a year ago, we built the long term
disability insurance into that. We got killed on it because
if we tamper with sick leave, everybody was going wild.
While we tried to explain to the employees you would be
better off without accumulating sick leave and with the
disability insurance because, particularly in the early
.-years if you get hurt, if you do not have accumulated sick
leave, you are out the door. You do not have anything. We
said this will protect you up to two years. We got more
letters on that sick leave issue, we got blown out of the
water. We have not focused on it yet, but my guess would be
that we will probably again treat it like the private sector
and have some kind of disability insurance concept. In
disability in the private sector, they usually,.. the bottom
line is 60% of salary during that period, for many years and
if you go out on disability retirement, the maximum you can
get presently in government service under 20 years is 40% of
your salary. Forty percent of your salary, if you are
permanently totally disabled, and you are not under Social
Security like the civil servants weren't, you do not have
anything. So, in private industry, they are way ahead in as
far as disability insurance goes. We are going to try and
build that in.
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4
Answer- I elaboration by Wayne Schley (Sen. Stevens staff
director on the Governmental Affairs subcommittee : I would
like to emphasize something that Jamie mentioned and we have
been trying to do it, when you are working with Ed Hustead
and devising your system I want to re-emphasize to work with
us so that we can fit it into our plan. What happens to
your system if you are out there by yourself, like Jamie
sugguested you not be, the same things happens with
retirement as the sick leave provision happened with the
retirement bill Jamie was just telling you about. When you
get ready, talk with us. We are not saying that we are
going to change your system or anything, but we might be
able to smoothe some rough edges. My role comes in after
Jamie has worked out the system. Jamie is the pension
expert in the Congress. I work with Jamie in order to get
it through Congress to the Administration, reaction from the
public, and so forth. It is not an easy job. A perfect
example is the disability section, opponents of our bill
zeroed in that we were taking away sick leave and that is
all we heard about through letters and phone calls. It was
such a minor portion of that bill; it was totally
misconstrued, and that is what we do not want. We do not
want to be separated. You do not want it to be misconstrued
or you are dead in the water. But selling something to the
taxpayers is most difficult because everybody complains that
somehow things start getting less than what you are and they
are paying your salaries and somehow it just grates them.
They may be, in many cases, totally wrong in their
perception but, you have to deal with the perception.
Question: Can you say a little bit about how your
arrangements from all this from your ails point of view
impact upon our hiring and retaining high quality people and
competition in private industry for them?
Answer: We did just a little bit at the breakfast. There
is going to be a real problem. To give you an interesting
example of it. Jerry Rossaw heads up the Advisory Committee
on Federal Pay. He just spoke recently and said that the
government is no longer able to recruit at the better
universities in this country. Particularly in some agencies
like this, in some specialized agencies where you are really
dependent upon getting top quality people, like NASA,
.......working in western union when satellites went off.
Seventy-five million dollars floating around for later
spaceships to finds that i? the last thing you hear. I can
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imagine, an intelligence satellite you send up there and the
shuttle puts it out and it goes up 750 miles miles off the
earth rotating in some kind of crazy orbit. It is the last
thing you need, and yet, maybe we should not have a western
union compensation policy. We definitely have a very
serious problem. Our analysis shows that particularly in
specialized areas, we are really in trouble. We are really
behind private industry, as far as the compensation
package. We are trying to increase incrementally increase
it as best the Senator can, but we are going against a wave
right now; anti-government so to speak and particularly with
the deficit. Trying to increase it now, the problem is one
of the issues I worked on with the Senator is Members pay,
which is very much related to this. There is never a good
time to increase Members pay. There is always something
going on. Five years ago it was rampant inflation, so we
had to hold down Members pay as an example for the rest to
the rest of the country that we had to cut out wage
inflation, so to speak, and to give you an example we are
not going to give the Members pay increases. Then came
unemployment. We cannot have a pay increase now because
unemployment is so high and all these poor workers are out
of jobs. Now, the last pay increase that the Senate just
rejected for itself, you had to show an example of the
country to control the deficit by cutting out Members pay.
Members pay, I think the total was going to be about
$350,000 this year at 3 1/2%, that was the impact on the
federal deficit of $200 billions, that was a real impact.
But it is the same issue when it comes to federal employees
compensation. There is always something that is raised as
an issue to hold it down and now we are at a point where we
are definitely in trouble with some of these industries and
where there needs to be increases in certain areas, now, not
for perception, but for budgetary factors, it is going to be
very hard to do anything. My only hope is that as we move
the retirement package through, maybe some tradeoffs can be
arranged in which, that is why I feel hopeful putting all of
these various bills in it maybe some trails can be arranged
for maybe somewhat of a less generous retirement program,
some of the more current dollar values of benefits like
health and pay can be increased to offset some of the lesser
value retirement..... . Right now the government has too
much of an emphasis on deferred compensation now as it is.
In other words, too much benefit down the line and not
enough now. There really needs to be in order to make it
eeMpeststae wtem private industry, there needs to be
somewhat of a reversal of that.
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