STATEMENT OF PROFESSIONAL MANAGERS ASSOCIATION BEFORE THE SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89-00066R000200040022-5
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 18
• Document Creation Date: December 22, 2016
• Document Release Date: May 19, 2010
• Sequence Number: 22
• Publication Date: September 10, 1985
• Content Type: MISC

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PROFESSIONAL MANAGERS ASSOCIATION
PROFESSIONAL MANAGERS ASSOCIATION
Before the
SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS
September 10, 1985
Presented by
Helene A. Benson
Secretary of PMA Board of Directors
and Chair of PMA Retirement Committee
Accompanied by
Donald E. Gillis
Chairman of PMA Board of Directors
P.O. Box 7762 ? Ben Franklin Station ? Washington, D.C. 20044
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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, 1985, 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
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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
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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-deferred1savings in addition, we suggest that it be funded
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
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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
r
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, 1983, 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
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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 employee 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
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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
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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,
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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.
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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.
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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
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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,
financed generally by the employer.
The CSRS is merely comparable to or, in some cases,
inferior to the combination of benefits provided through the
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
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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
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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
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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.
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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
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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.
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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 one which 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.
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