PRESENTATION BEFORE THE POST OFFICE AND CIVIL SERVICE COMMITTEE OF THE UNITED STATES HOUSE OF REPRESENTATIVES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89-00066R000900050007-4
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 12
• Document Creation Date: December 23, 2016
• Document Release Date: July 15, 2011
• Sequence Number: 7
• Publication Date: October 23, 1985
• Content Type: LETTER

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HAYIHUOOINS COMPANY, INC.
PRESENTATION BEFORE THE
POST OFFICE AND CIVIL SERVICE COMMITTEE
OF THE UNITED STATES HOUSE OF REPRESENTATIVES
KENNETH SHAPIRO, F.S.A., M.A.A.A.
PRESIDENT
HAY/HUGGINS COMPANY, INC.
OCTOBER 23, 1985
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Presentation before the
Post Office and Civil Service Committee
of the United States House of Representatives
by
Kenneth Shapiro, F.S.A., M.A.A.A.
President
Hay/Huggins Company, Inc.
October 23, 1985
Mr. Chairman:
We are honored to appear before this Committee for the third time
in two years, to testify on the appropriate design of a supplemental
retirement system for Federal employees who are covered by social
security.
In 1983, the Congress set a deadline of December 30, 1985 for
establishment of a retirement system for new and returning employees who
would be covered by social security. Your committee has used that time
well. You have considered all the major issues and trade-offs involved
in the complex task of building a retirement system. You have examined
many possible approaches to designing the new supplemental benefits. You
have called on Hay/Huggins, the Congressional Research Service, and
others to provide a thorough background of information and analysis. You
have solicited the views and concerns of all interested parties.
In our opinion, Mr. Chairman, this thoughtful approach has proven
well worth the effort. Its end product is the well designed proposal
that you and Congresswoman Oakar have placed before the Committee for its
consideration.
Our original testimony in 1984 covered the range of options
available to you in designing the new system. Our second appearance, in
April of this year, reported on our findings to date and concentrated on
a more limited set of designs that were being actively considered as a
basis for the new system. Today, we will review the specific features of
the Ford/Oakar proposal and compare them to the two proposals
incorporated in Senate Bill 1527.
The Ford/Oakar proposal was developed consistent with two guiding
principles. First, the plan retains as much as possible the benefit
structure of the current system. Second, where changes had to be made to
accommodate the design of social security, you have used proven private
sector approaches to the coordination of benefits. Through this dual
approach you have succeeded in formulating a retirement system that is
least disruptive to the Federal workforce and based on proven system
design.
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Consistent Retirement?Systems
Carrying forward to the new system a basic structure similar to the
current Civil Service Retirement System (CSRS), and with comparable
benefit levels, is important for at least three reasons. First, a
well-designed compensation system avoids providing different benefits to
two similarly-situated employees. Because social security and CSRS
benefits are based on greatly different approaches, it is not possible to
reproduce CSRS benefits exactly in the new system. But you can ensure
that the average employee will receive the same benefits under both
systems.
Second, the extension of social security coverage necessitated the
development of a new retirement system. Extending coverage was not then,
and is not now, a mandate for sweeping changes in the basic purpose and
design of the CSRS. Modifications to CSRS, if needed, should be made as a
result of consideration of appropriate benefits for all federal
employees. They should not be enacted through the back door, by reducing
total benefits in the new system, potentially leading to cuts in the
current system to conform with the new. The new system should sustain
the basic design choices of the current system as far as possible.
Finally, Hay's study of total compensation in the Federal government
and the private sector demonstrated clearly that retirement is the only
major element of Federal compensation that is more valuable than found
among private sector corporations who compete for the same employees.
Further, and this warrants special emphasis, the value of CSRS is much
more than offset by the lower values of Federal salaries and
non-retirement benefits. From the perspective of total compensation, the
only fair approach is to introduce a new retirement system that at least
preserves the value of the current system. Reducing the value of the
retirement system would weaken the only financial inducement that Federal
employment can offer to attract and retain the people needed to do the
important work of this government.
One important result of the Ford/Oakar proposal will be to avoid any
radical long-term shifts in the workforce as a result of new retirement
concepts. CSRS has evolved over half a century to meet the needs of a
career workforce. It provides full benefits to long career employees,
enc-oureging experienced staff to stay the full route and provide the
government with a solid base of knowledge and continuity.
There will inevitably be some shifts in Federal career patterns
under any new retirement system. The greater portability of benefits
under social security and the capital accumulation plan (CAP) must be
paid for by some reductions in the guaranteed level of benefits for
career employees. But the Ford/Oakar proposal continues to provide a
strong focus on full-career benefits, and devotes its program dollars
accordingly. In the absence of any demonstrated need to reshape the
composition and career patterns of the Federal workforce, we see no cause
to introduce a dramatic change in the philosophy, design, and benefit
distributions of the retirement system.
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Cost to the Government
The Congressional Research Service retirement cost model has been
used extensively by both this Committee and its counterpart in the
Senate. It is a sophisticated model that allows policymakers a ready and
thorough picture of the effects and costs of various proposals and their
components. We are, of course, delighted that the Congressional Research
Service has built their model using the Hay/Huggins Pension Valuation
Language. More importantly, however,' re convinced tna use ot a
s ng a mo el has effectively concentrated the debate on the important and
difficult issues at hand, avoiding esoteric disputes about the validity
of different models and actuarial assumptions.
The Congressional Research Service model shows that the Civil
Service Retirement System costs the Federal government, and therefore the
taxpayers, 25.07. of payroll. Your proposed system would cost 25.5% of
payroll. While t We For acar proposal was carefully designe o
replicate the current system as much as possible, the total cost is
slightly higher than CSRS. This results from the need to contribute
additional funds to over the redistribution of a portion of social
security con_i_ributions toward the benefits of non-Federal workers.
Our study of over 800 private sector firms showed that the CSRS is
worth 6% of salar more than the total retirement system of the typical
private sector firm. But this advantage in the retirement area is more
than offset by higher salaries and more extensive non-retirement benefits
in the average private sector firm. Further, about 10% of the private
sector firms in our study provide retirement packages that are more
valuable than CSRS.
Let's return to the average case, though, to view CSRS from a total
compensation perspective. We estimate that, by the end of next year the
t total compensation of Federal employees will have slipped 16% behind th
average in the privat r. it no substantial improvements in
salaries or other benefits in sight, it seems to us to be important to
make every effort to preserve the full value of the one component of
Federal compensation that is valuable and competitive relative to the
private sector.
The two options in S.152/ would both cost the government
about
22%
of payroll. This cost reduction o 3.~ of ayro mus come
reduced benefits under th ew s stem. In the case 5.1577,
trom-
most
of
the savings are achieve y limiting cost-o - ving protection
and
scaling bark early retirement benefits.
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Cost to the Employees
Employees covered by social securit must contribute an average of
5.9% of salary to that system. T a Tord a ar proposal would require
con r utions to the retirement stem f 1_3X on all salary in the first /
year declining to .8% in 1990 as sot al security contributions increase.
Finally, you would permit the employee to contribute up to 10% of salary
to the CAP.
We estimate that the average contribution to the CAP will be 2.8% of
salary. Combined with an average contribution to the retirement system
of 9% of salary and to social security of 5.9% of salary, the typical
contribution will be--V.6%-of salary. This would exceed the 7%
V contribution to CSRS y 2.6%, on average. Most of-[he increase would be
attributable t dditional savings that the employee would be entitled to
a any time on leaving Federal serv ce.
enate option A would not require a retirement system con ibution
and wou also permit up to 10% to be paid to the CAP. 0 tion B would
permit the same CAP contribution and require a retirement
contribution of less the social security contribution on
all salary.
An important difference between the retirement plan contribution
under the Ford/Oakar approach and Senate Option B is that you would only
current y 1.3%, on all salary. 0 tion would require the higher-paid
employees to increase retirement plan contribution when the
social security contribution stops, currently at The Ford/Oakar
proposa wou perm t the higher-aid employee to channel this additional
ded to voluntarily offset
amount to the CA n an to build the funds
needed
stribution of benefits under social security.
Elements of Cost
The cost of the new system will be split among three major
components: social security, the supplemental retirement system, and a
capital accumulation plan. The cost of social security is fixed. The
average employer/employee contribution is 5.9% of salary, taking into
account scheduled changes in the social security contribution rate and
the fact that contributions are not made on salaries above the maximum
taxable.-.wage base. A total of 11.8% of salary will be paid under any new
system, with those contributions financing benefits according to the
categories and patterns stipulated in social security.
The cost of the supplemental retirement system is calculated and
expressed in terms of "normal cost". This is the percent of pay which
would have to be contributed for a typical group of new employees, over
their total Federal'careers, to pay for all the benefits that would be
earned by the entire group. The Congressional Research Service has
determined that the normal cost of the supplemental retirement system in
the Ford/Oakar proposal would be 19.1% of payroll, - The long term
allocation of this cost would 18. % paid by the employer, and .9%
contributed by employees.
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the different 7% a&L the social security contribution
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The cost of the CAP, and the level of average employee
contributions, depend on the design of the system and the degree of
voluntary participation over time. The Ford/Oakar proposal uses a very
common private sector CAP design. It permits each employee to contribute
up to 10% of salary, with a 501 employer match on the first 6% of salary.
Our projection is that employees would contribute an average of just
under 31 of salary to the CAP, resulting in a government matching cost of
1.4% of salary.
With these elements, the total contribution is:
Employer
Employee
Total
Retirement plan
18.2%
0.9%
19.1%
Capital accumulation plan
1.41
2.8%
4.2%
Social security
5.9%
5.9%
11.8%
25.57a
9.6%
35.11
Retirement Benetit
It is in the supplemental retirement system that the Committee, and
the Congress, face a wide range of choices about benefit designs and the
resulting costs. The structure and level of the basic retirement benefit
is the foundation for all benefits from the system. The Ford/Oakar
proposal uses the concept of an "add-on" formula, as do the Senate
benefit of
i
ves a
options. For each year of sere c , an emp o ee rece
percent of the avAXA salary over the ftTgn ree years (high-three
sa ary .
The Ford/Oakar bill provides an accrual of 1% of high-three salary
for each year of service. As in CSRS, employees can receive the full
- - - Grp ...s ?~7n
ene
at age
fit
carne.. v
-
ears of rvirp or at age 62 w ears o service. In order to pay
u continuous benefits, For a ar also provides a- supplement from the
point of retirement to age 62, equal to the expected social security
benefit.
The Senate options and the Ford/Oakar proposal would each credit
about 1% of the pay base to retirement for each year of service. A
typica employee w years o serv ce would receive 171 of salary
4reme
re
II
rom e
from social security so the total including t e 3
system w ose to the re acement income. There are,
nd the Senate
however, important dif erences a weep your appr ac a
approach that lead to significantly different benefits at retirement.
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The Senate options base the benefit on the high-five pay base rather
jb_Bn the CSRS high-three approach that is preserved in your proposal.
V Secon, Sena a _t-i uces benefits by 2X a year under age 62
Finally, neither senate opts-n provides a supplement before age oz to
level out t e benefits a ore and after payment of socia security..
The following illustration compares the result of the Senate and
Ford/Oakar proposals for a typical employee retiring at age 5b with 3U
years of service:
Salary in year before retirement
$30,000
CSRS Benefit
$15,900
/
Ford/Oakar proposal
Retirement benefit
$8,500
Supplement
$4,8u0
Total
$13,300
--10,
Senate Option A
Retirement benefit = total benefit
$6,900
V
Se
nate Option B
Retirement benefit = total benefit
$8,100
/
CSRS would provide income of $15,900 for an employee retiring at age
55 with 30 years of service and a final salary of $30,000. The
Ford/Oakar proposal would pay a retirement benefit of $8,500 plus a
supplement of $4,800 until age 62 when an equivalent social security
benefit would begin. A CAP contribution of 3.5% of salary would add
enough income to permit retirement at age 55 at CSRS levels.
The Senate options would produce annual income of $6,900 to $8,100.
Without=4 supplement, it would not be possible to produce CSRS income
levels at age _55 even with the maximum CAP contribution. The result
would be to delay many retirements from age 55 to age 62 when full.
benefits would begin.
CSRS provides the same percentage benefits to all employees with the
same service. Because of the design of the social security benefit
formula, all of the options, including Ford/Oakar, would redistribute
benefits among income categories. If, as in Ford/Oakar, the average
benefit is close to that of CSRS, the lower-paid employees would receive
somewhat more and the higher-paid employees somewhat less than under
CSRS. We would note, however, that the higher-paid employees have more
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disposable income to invest in the CAP than the lower-paid employees.
Th.e--_end'result could be the same as under CSRS, at the option of the
employee.
There are several important groups under CSRS who are entitled to
Lull retirement benefits at ages before 55 to permit the government to
maintain a young effective workforce. These include lgw-enforcement-
otficers, firefighters and-air-traffic controllers o 'build a new
retirement syst-em at is cons s en w , the Ford/Dakar proposal
continues the current retirement eligibility conditions for these
employees and provides the higher accrual rates needed to replicate CSRS
benefits. Changes in the eligibility or benefits should follow specific
consideration of the workforce needs, not be achieved through arbitrary
changes in categories in designing the new retirement system.
The Ford/Oakarprroposal continues the practice of charging .5Z more_Ry
to hazardous duty employees for their s are of the added benefits.
charging the butunce 5117e added cost directly to the agencies with
employees entitled to these benefits, there is no impact on the cost of
the system for the general benefits.
Inflation Protection 0Ok$4
ord/Oaks continues the CSRS practice of providing full protection
agains t e erosion of retirement income due to rising prices. Since
1962, a decade before the concept was introduced for social security
benefits, Federal benefits have had a statutory formula providing full
cost-of-living protection.
Senate 0 ti on would remove the protection entirely until age 62,
and from age 62 to age o7 would ad'ust benefits by 2 percent less than
the actual inflation rate. tion B would provide reduced protection
before age b2 and full protection from that point on.
These limitations on inflation protection could seriously erode the
value of the benefits, especially in Option A. If inflation averaged 4
percent per year, an employee retiring at age 55 under Senate Option A
would lose over 30% of the value of the supplemental benefit by age 67.
Under the Option B formula, benefits would lose 13% of their value
between ages )5 and 62.
In addition, the CAP provides no automatic protection against
inflation. The retiring employee could elect to receive an indexed
annuity, but would pay for it by greatly reducing the initial amount of
the annuity. Without indexing, this part of the benefit would erode
throughout the retirement years.
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Survivor Benefits
provides valuable benefits to survivors of deceased employees.
would provide benefits that emulate those of CSRS. All
employees with more than 18 months of service would receive a benefit
equal to 50% of the accrued retirement benefit, without any further
reductions. For example, the survivor of an employee with 20 years of
service at death would be entitled to a benefit of 1U% of high-three
salary. The average social security benefit for a surviving spouse is
over 20% of salary. When the two are combined, the total benefit would
usually exceed the 21% benefit typically payable under CSRS.
In addition, Ford/Oakar provides a floor of protection to survivors
who are not entitled to social security. A gap in social security
coverage occurs between the time the youngest child reaches age 16 and
the time the widow or widower reaches age 60. During this time, your
proposal would pay a benefit to survivors of typical employees equal to
the benefit currently paid under CSRS. To avoid notches in the formula,
the floor benefit would be limited to the benefit that would be paid at
age 6U under the basic Ford/Oakar formula, plus social security.
Survivor coverage under the Senate options begins with the same 50%
of the accrued benefit. A ai hough, it would be based on high-five
pay and, in the case of tion A not fully protected against inflation.
The Senate proposals do no provide any special coverage during th
social secur ty blackout period. instead of directly filling in benefits
e blackoli perio a ens a options provide for additional
coverage through basing the benefit on at least ten years of service an
providing increased life insurance amounts.
Disability
The Ford/Oakar disability benefit will be 2U% of high-three salary
tor the typical employee who is eligible for social security. When
combined with an social security benefit that averages 30% of salary, the
total benefit is around 50% of salary compared to the typical 4u% in
CSRS. As in CSRS, a drop in the benefit at retirement is avoided by
limiting the benefit to the amount that would be computed on service
projected to age 60.
About three-fourths of disabled Federal employees will be eligible
for social security. Those not eligible will rely entirely on retirement
system benefits until age 62. To provide reasonable income to these
disabled employees, Ford/Oakar would pay a supplement equal to the basic
benefit. In other words, the typical employee would receive 20% from the
retif eme,hts-ystem, and about 50Z in total, when eligible for social
security, and 40% when social security benefits were not payable. To
avoid a notch at age b2, the supplemental benefit is limited to 70% of
social security disability benefits, consistent with the social security
reduction factor for benefits received at age 62.
The Senate o tp ion_s would pay 60% of high-five salary, minus
the
social security benefit. At age b2, the benefit would change to
accumulated retirement benefit including service and indexing to
the
age
62.
Employees not eligible for social security would receive a benefit of 40%
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of pay.
Disability is the one benefit area where the Senate bill could be
more liberal than the Ford/Oakar proposal. In following the CSRS design,
your.---proposal provides lower benefits than the typical private sector
plan used as the model for the Senate provisions. The Ford/Oakar
approach is consistent with the overall philosophy that the new system
should emulate CSRS. If there is a need tor liberalization of CSRS
disability benefits, that should occur after a consideration of the
entire system.
Capital Accumulation Plan
Capital accumulation plans have become an important element in total
retirement benefits in the private sector. Our latest survey shows that
two-thirds of employers provide a CAP plan as the third leg of a
retirement program that includes social security and a traditional
pension system. Ford/Oakar introduces this concept to Federal retirement
policy by incorporating a typical private sector CAP to complement the
overall system.
The Ford/Oakar CAP allows all employees to contribute up to 10Z of_
salary into the plan. For those cover-Tr by the new ret rement plan,
employing agencies will contributes an additional $.50 for each dollar
employee contributions u to 6Z pay. Thus, a new employee will be
able to build a fund of Mary by contributing 6% each year. This
accumulating fund will allow the individual employee flexibility in
tailoring a retirement income pattern. This will be particularly
important for higher paid employees whose benefits from the retirement
system and social security are lower than from CSRS.
The administration of the CAP has been designed to incorporate the
best features of private sector systems within the constraints necessary
for a Federal plan. Employees will be given semi-annual opportunities to
adjust the amounts of their contributions, to channel them to specified
investment options, and to shift the investment of their total
accumulated accounts. There will be six investment options, ranging from
funds providing steady earnings with virtually no risk to funds trading
in more speculative equity and bond portfolios. Individual employees
will be free to pursue the most appropriate mixes of risk and return, and
to adjust them as their circumstances and needs change over the course of
their careers.
The employee could allocate his or her contribution could among any
of the six investment options. For the first five years, employer
matching contributions will be directed to a government securities
investment fund. After five years, the employee will be able to allocate
new matching funds to any of the six investment options. This will avoid
any possible adverse budget consequences in the short term. In fact, a
significant number of employees can be expected to invest some or all of
their own contributions in the government securities fund. As a result,
it is quite possible that the overall effect will be to increase net
Federal revenues over the first five years.
The CAP will be a new concept to Federal employees and will have to
be explained comprehensively and clearly, so that employees are equipped
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to make appropriate decisions in light of individual circumstances. We
find that in the private sector a CAP is often perceived by employees as
one of the most valuable benefits that an employer offers. This
perceived value depends very much on the extent and quality of initial
and ongoing communication.
The Ford/Oakar proposal also recognizes that employees sometimes
make choices that need to be changed in light of changing economic
situations and individual needs. The CAP is primarily designed to
supplement retirement income. However, heavy, and often unexpected,
financial needs make it important to be able to have access to the funds
before retirement. Ford/Oakar follows the private sector practice of
1/ permitting loans and/or withdrawals in cases of demonstrable finan
ar s ip. The proposal also jilows employees to stop contributions at
V/ any time. This will be particularly important n the first year of the
program, when some employees may join the CAP in the euphoria of initial
implementation and then discover they cannot actually afford a reduction
in take-home pay.
When the program begins, all employees will be able to join
immediately. Employees hired after commencement will have to wait until
the second open season (i.e. 7 to 12 months) to join. We find that this
is a reasonable qualification period to permit employees to fully
appreciate the options available and to reduce the administrative burdens
of establishing accounts tor new entrants, many of whom will leave within
the first year.
Employees will be fully and immediately vested in the matching
agency contribution as well as in their own funds. This will provide a
valuable incentive to join. It will also avoid complex procedures for
reverting nonvested funds to the employing agency or to plan
participants.
Option A of the Senate plan provides a CAP match of 1U0% on all
employee contributions up to 5% of salary. An employee who participates
by contributing 5Z of salary would have an annual contribution of 1079 to
the CAP compared to 7.5% under the Ford/Oakar proposal. This design
reflects a significant difference in approach between the two proposals.
The Senate Option A would direct more funds to the CAP plan and away from
the defined-benefit retirement plan. The typical private sector approach
used in the Ford/Oakar proposal would assign a much less important role
to the CAP plan.
of the Senate plan provides a CAP that matches a graduated
percent oche employee's contributions. It provides high matching rates
for initial contributions, and then decreases the rate gradually as
contributions approach the matchable ceiling. For fully contributing
employees, the total Option B match is very close to the Ford/Oakar
match.
Both Senate options would provide a gradual vesting of agency
contributions, and would require nvestmen o agency and employee
contr .ut-ns in government securities for an extended period after
implementation. (These provisions contrast with the Ford/Oakar approach
of full and mmed'SaT vesting and the ability to direct all employee
contra utions to any o the six investment options.
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Conclusion
Mr. Chairman, this Committee and its staff are approaching the
conclusion of long and difficult effort. Once social security coverage
was extended to Federal employees, there fell to this Committee the
challenge of retooling CSRS for covered employees without needlessly
abandoning its basic structure and design.
The Ford/Oakar proposal for a new Civil Service Supplemental
Retirement System is a careful, responsible answer to that challenge. It
provides adequate levels of guaranteed total benefits within the
constraints..of social security's benefit system -- not just to retirees,
bu.t-:to their survivors and to employees who become disabled. It protects
all of these benefits from potentially substantial erosion due to rising
prices. On top of these guarantees, as a prudent cost target allows, it
provides employees with additional opportunities for retirement income
through a capital accumulation plan in line with plans widely available
in the private sector.
Mr. Chairman, I hope I have provided the Committee today with a
through assessment of the major components of the Ford/Oakar and how it
differs from the two proposals embodied in the pending Senate
legislation. Hay/Huggins has enjoyed the opportunity to work with the
Committee and its staff over the past three years. We are prepared to
answer any questions the Committee may have.
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