Lecisl'1tor\ Heal Thyself'
The 'I':/O-Faced Talp of Pension Poli tics
An Honors
~e~i~
(ID 499)
by
K. Joanne Kalp
Thesis Director
Dr. Terry L. Arndt
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I
I3all StG":e Uni,tersi t::
Hunci e, Tnriiana
November 16, 1978
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TABLE OF' CONTENTS
INTRODUCTION •••••••••••• , .................... , •...• " .••••••••.• ,
The Pes!Jl t
:=;
til
Sj
It . . . . . . . . . . . . . . . . .
2
tllation in the PubJic Sector •.•.••••
THE T1..JO-EDGED s\'/ORD OF FEDERAL RETJRBr,lBNT •••
T~e
r
the Pens; on Reform Act of J974 in the prj vate
Sector ....................................................... ..
The Cur:en t
•• -:f"
Basis of Comput8tion •.•.•.••
......... h
. .. " ... 7
Tr.1? Tn~()nsi.stenrie-p. in BPnefit.8 ................. ~, ................ :. ••.• R
SO~1E
SOIJUTTONS .. '" ................................................................................ ]_0
An AnswE'r--the Priv8te SectoY' •••.•.
................ 10
An EniC'l1a--the
............... 1?
Go'!e~nment •••.•
COtJCT.JITSIONS ..... " ............... " ........
Cl"
.........
" ••••
ft
•••
"'
. . . . . . . . "'
..........................................
1. 4
TABLE OF GFARTS AND GRAPHS
The GrowinG Un funded Liahili t.y •.•.•••••••••••••.•.••••••••••••..•.•••••••• 6
APPENDICIES
APPffiD IX A ........................................................................................................ 1. 5
..... " .. 16
APprnDIX B ............................................... ~ .................................... ..
APP@DIX C ......
I':
....
.,.
..
..
•
..
..
..
•
..
•
..
..
..
..
..
.............................
~
•
.... . .
,
~
• .• 17
INTRODUCTION
In the
'~arl
y seventi es, a p;reat hue Ilnd cry was raised concernine;
the Tca'""ster;::; and their I'E'TIsi on funds, rather, the lack of funds.
busiYles8 \-las blamed and backed +0 a wall.
fj
Big
The public pointed an accusing
ncP"Y' at everyone invo 1 "ed frOM top manar;ement down to the 10\"1 y
pencil.-!lUsher in
pa~rables.
The problem centered mostly around the
accountin':", f'Jr the rreamsters' pension funds and +hE' people "Y'esponsiblp
for that accJuntinr;.
CO!1[,;rpss, in its
of 1974.
dE'sir~
fo .... ;:iusti.cE', passed the Pension Reform Act
It is a Food, comprehensive piece of le[iisJation.
to one z,ourr:", "It at+em]'"l1'1 to safeGuard employees' pension
mandatin[';
mnn~r
pE'nej on plan requirpments.......
Accordin~
ri~hts
by
The Act is fllli te specifi c
ahont tJ..,e reportinc requ-i.rements of' pension plans that are administered
as entities separate -from the e""pJoyer."
1
'T'1--!"" ar:r-:)untinr; professio"1 1.ad not been blind to the topi('
pensions before passa[';E' of ~he Act.
o~
As early as 196~, thE' Ar-countin[i
Princirlps Board (I\PR) i sSl1r>d Opini on #8 to coordinate flrcoun+:i n~
rerlllcin;" +-he ar:olln+ of ;>1cons' stency iYl rractice.
'",as th.P corceY'n of' busin0ss "inn r;0ncref>s that thE' retired emp] oyer's 'be
0~) l
0"'-;''''-- B <~~0-~
.l...~
'~,"'"'
2.
to the emploype upon retirerr.ent.
This estimation process is a crucial one;
it i 8 uswllly done by actuarie8 and it
j
8 based on life expectancy, cost
of' beneri ts. and the effects of inflation.
nrovidf's
mo1H'~y
The company then funds, or
for, these benefits by making payments to an a!':ency that
is set up specif:ically to take this money from the cOP.1pany, invest it,
and then diBtribllte it in the form of henefits to retired employees.
So:r.e pJ ans, ho"rever, are un -I'unded.
this tYfle
done.
Payments to re tirees covered under
plan are mRde a8 they hecome due; there is no "savint':"
0"
Thi.s type of syste:n has been outla,,,ed for nrivate pensions.
It
is still in use by the covernment.
There eIre basic.q] 1;: tHO l!lays to fund .q pension system.
called non-contr; hutory; the ernplo:',rer hp.qrs the full cost.
One "my is
The other
is contri hl1i:ory; the cost :i s shared by the employee and the employer in
some mutuall.y ac;reed UpO'1 rati.o.
EXPLANATION OF THE PROBLEH
The Results of the Pension Reform Ar+- of 197[!- in the Private Sector
Pu: 8uar't
n
Boa1"d (FASBJ
-1:0
j
t!-le
passa~e
0-'"
the Art, the Financi.al Accounf:ins S+andrlrtis
ssued its mm statement.
Tl-:f' FASB is .qn indeppnrlent ho.q""d
Irlhich rerlac ed the APB and ',vas established to oversee the settin'" of
fina~ci.ql
Rccountin: stand.qrds.
The FASB in its Interpretation
State~ert
Raid that no R~~end~erts were neprl~d to the standards set in APB Opinion
The Act itself sets
~any
new
~uidelines.
For
exa~ple,
rpports,
--------------------------------
.~--.-----~
#8.
3.
sh"in[,;en t re2:111C1r; ons or -rhe +'undin:-; of private retirement sys+:ems.
pri.'T~te
~nd
~mder
sector,
the FASH, had
c-ras "'o+:
ne
Blre?~y
1e!1deY'sh~ n
The
of' or.3A.ni 7,Rtj ons sur::h as thp APB
been hradinc in the
direct~nn
indicated by the
unrr~c",ssary.
FY'o~
this nccOlmt, one r::01l1d conclude thRt all
to retire:-nent.
Corr:;ress,
jy\
vlaS
'l'here is, however, one larr;e, ominous h,!''1ck Cl011d.
These
its infinite vrisdoTl'l, diN not sel?' -fit to make itseJf' subjpc-r
crJncerned ':lith "secllY'ity" ""nr -rhp;r Y'etjY'ed employees?
concerr.ed
rosy on the path
\'li th
A.derpJRte fundi nr:?
Arp they not:
Or, is it t1-mt federA.1 reb rement
systems already adhere to the suidelin9s established through the Act?
HaY'dl~'.
Ope onJy needs to read f',lrther to dAtermine by hm-' rnuC'h the
cuideUncs ,'or p:lblic retiref'ent systems miss the mark Con[';ress set for
private systems.
The Current Situation
jr,
the Punl j c Sector
4.
:fOT the federal sovernme'1t.
What these jobs r:anno+ match in current
salaries they compensate for in retirement benefi ts.
The Government
promises \olOndeTf111 benpfi ts ;.,i th ] i ttle or no contribution from the
employees.
To those farsighted individuals who are concerned about
retirement, this sounds 3reat.
The problem does not lie in th", ratio of
er1plo,ree-emr1oyer r:ontdbutions, h01tlever.
The rroblpm lies in the
management of those contributions.
AccountinG :or any funds of a :,:overnment agency is di ffprent from
accountinp: i>n private industry.
Accountin£:, for a r-overnmental uni t,
federal, state, or any other, emphasizes
le~al
form over economic substance.
The o!,posi te is true of f'inand aJ accol1nti ng in industry.
'Phe reason for
this di:fferencp is that the expenditures of the various government units
"1ust he authori zed by
th~ir
respectj,>Te lerislatures.
Governl'1ent1'l.l units
sr,ould be l-teJd accountablp +0 more than the lcciF:lators de:f;!Cinr:: these
accountin~
units' budgpts.
In :fact, one
text defined this accountability
as stm-Tardship.
"The rrr-tr1ary responsi b;_l i ty of governmental entities in
financial reportinG is to demonstr3+e adeqll1'l.te stewardship lor resources
-prr:lvirJed by their ci tizE''1ry.'/+
,
In the !TIat,ter of
ferler~l -TlPnsions,
thi.s
ste 1.'1ardshiYl :i s nonexistE''1t.
While it is true
to it the
13-"ir'P
th~t
zovernmen+
s:'stem of' aCCr111'l. l
S
~l']0
~~countin[
does not hRve
av~i]able
rl,.d'errals llspd by private industry,
ThP amount ()£' uYJfunded li,ahi 1 it;,," is more than
i~200
bi lhon at the :fedpr.q::!
~lr~,
too.
in('n~ase
All of the neDsion nl.nns in use at the federal level involve
i s'lot: taken in.c o
epitofrJe of a
Tr8c:in~
V1(";011S
a~~OlJJ"'+-
. . 'hen the funding oc("urs.
('i>"~le.
the reasons
fo~
+.:his nnfortunl3.te state of affairs leads +-0
ano+.:he>" intesraJ part of the fene>"!')' '!1ension formu]a:
~overpd
. v thosp plans CRn re+-ire as early as
Of-<';("E' (GAO) has
S11r:~ested
buti ons fror ernp] o:recs
pCly-"'oll hv
28S~
Thj s is the
8'10
an
;ncre~we
a~e
55.
employees
The General
Accoun+-in~
in that minjrum lirit t.o reJi.eve
the .":overn,,,ent
111Ot11
d have to exr;eeri to+..8 1
to stav even t·!ith increases riue to in f lation. 5
In th8t
sa"'e ye8r, the ferleralr;(wern"'1ent 'das ·I'jnandnr the 1m f unded linhili.ty
Hjth monev out of the ::-e'1era1 r""enllPs, thus :placinz !"lore
Of
tljp bUY'den
on the taxpayer.
Like privnte pensio'1s, thee recei:pts fro:r1 p"overnl'1ent retirer1pnt funds
n:e invested.
rates.
Unf'or+-unarely, sovernment funds nre invested at very low
They are require", by law. to be investerl in federal securities.
No cash is 5.rlvol"erl j n this transAction, only bookkeepinr: entrjes.
TherpfoY'e, the ""und i TIS ches nnt crpate a financial burden for the
government.
HhpY' funds are needpd to mnke benefit :payments, the Treasury obtains
cash throuFh nornal chan'1els suer. as taxation and the issuance of bonds.
6.
There are no uniform practices or principles that exist in
and funding federal retirement systems.
some do not.
Some require
financin~
e~loyp.e
contributions;
The different requirements of some retirement systems are
discussed later.
THE 'NO-EDGED SWORD OF FEDERAL :RE'l'J:RDmNT
;;,
The Growing Unfunded Liability
.~
.
A Widening Federal Pension Gap •.
e.".
e
Contributions from civil service workers and government
are expected to fall increasingly short of benefits paid.
.
Billions ...-______-.,._ _ _ _ _ _-.-_ _ _ _ _--,
And Unfunded-Liabilities
They will double in· the next ten years
for U.S. civil service employees alone.
Billions
$14~-----_--~--------~------)f~~~
12
-
~-----+_-- Benefit\
10
\, 8
~
//
y.:.~,_.
/
....': -,.
~:.
:--:'
':-"
6~----_-~----~#~~·4--·--~---·'··-·~~··
..,-
4
2 I .:
,,---
o~
:j','ll-:en
~
________
1970
fro~'
"Contributions-
.-.e---
__________
1965
0-' " -_...... - : . • .;;.., -
-+----,~/- ~ ;;0.'
__ --==I~
I--_ _ _ _ _ _
Dun t s
nevi~'·T,
~
________
~!a:-c:",
~
1980 <Ht.)
1975
10'7t:
, ,'r ".
,
ito
--
.
These charts are uerhans the best l:,a~:T to illustrate t~e 7o'ving financial
disorder in federal pensions.
__ 4"-- ~
It can he plai:!l:r seen t::at l::ene fi ts are
The unf'lnjed liabilities are ;rowin[ at a.T} alar:::i:!.~ ra+:2.
This is due
partly to increased benefits and partly tc: un::J.1'C:1ed cost of livinf';
adjustments.
What cannot be seen from these
of the proble:n.
~raphs
are the two
fa~ets
Not only is the }iFtbiJity Rrossly unfunrled, but the
benef'i ts and portabili t71
0+'
retirement r.redit vary from system to system.
The Dasis of Computation
\vhen a pensi on plan is adopted, there is usually some
ri ven to
plan.
se:~vice
re~o~nition
rendered before the date of adoption of a particular
This period of time, fron the date of f'mployee elir;ibility under
the plan un-';j 1 the date of adoption, is known as past service ti:ne.
,,,i 1~h
Ftsso~:_ated
costs
fundinr<- benefi ts arisinc from this perioD are
known as paf;t servi ce costs.
Hi th pension benefits.
forward.
The
There is a second ti"'le period assodFtted
Tllis time neriod runs from the date of adontion
Any costs associated 'vi tl1 thi s period of
tj
me are callf'd
normal costE;.
The
norma~
.
static basH;.
to the
6
cost of the ferleral
offj~es
researched is computed on a
That is, future pay increases and cost of l i vin£," increases
annuit~nts
are not taken into consideration.
If they were
incJuded, He plan would then be functioning on a dynamic basis as are all
of the priv<ete procrams.
I,/hile !Tost annuities ATe bAsed on salary and lenr::th of service,
general pay and annui ty increases have occurred {'rerpenUy and in J arsf'
amounts.
For eXClr.rr1e, \-1'1i te collar 'Day has increased (,.5% and nnnui ty
ad .iustments have [,;one up 8Qb si
n~e 196q.7
Ar:encies and employ.;rs each contribute 7~ of pay, as required by law.
That wouJd sper: to cover thp
norm~l
(:08 t
,
romDuted on a static basis by
8.
8
the Board of Actuaries, of
1").64%.
np"" r",tj Y'0rr]P)1t C0S+: ""ct'):'
0~ ?i.
;",",Y'~":
r1~r""a'";'" ~"s~ s
"0""->-:
CO':1p"tpd OY)
'1
C"';
Hmvcver, in
~J'
1976, the Office of
"r:1pJ oyees'
the>
'·ms
~l. 70~. 9
the 7% "'.o'1t~;bnt;(m fro'!' the pmploY0eR, left an Rgency contribution of ?4.7%
as mentioned ahove.
use of the facto:'
In June of
pendin~
and its iMpl e:nel1+:ation.
1977, the OMB temporarily suspended the
a complete review of the circular
advocatin~
it
Hovlever, t.he GAO '"aR informed by the OMB that the
m:B hflo nr) reaSon to douht the 31. ~{, fj
~ure
isslled :i n thp ci. Y'cu1ar.
ar p ""0 planf to rei Y)state thp ?4.Tb fi C'lre at this til1e.
There
The obvious
question of "1tlhyl! goes ,manswered hy the governMent.
Th~
!lri mary p11rpose of ;,,;overnment funding
the cos+. of the pension liabi l i t.y.
fisea' and
le~islative
j
s to formR lly recognize
T1-]is fundi nc should proMot.e S011Y'.d
responsihility and enhance budget.ary discipline.
Em"ever I be r allse the fundi nr:; is CO'1Jpllteri on a st.ati r "basis. it f';)lls
short of its coals (See Apperdix A).
The Inconsif;tenci.es in Benefi ts
As
:T'en~ionerl_
bef'orp, the
eJj~jbi!jty
"'-eql1irements for ace and years
of service yary within the rliff'erent federal. retirement systems,
Appenrlix ~, ,'or details).
one systf'm to another.
the
"'!iljtar~r
Gpne .... al~y, reti .... eMent credits t.ransfer from
'T'he:--e are S01'1e except:ions, thouCh.
For instance,
does not zrant credit for federal dvilian service.
military se'·vi.-::e
i~
(See
H01tleVE'Y',
creditable under civilian retiY'ement systf'ms, ...nth
·
10
only a few eYCeptlons.
At the tirr:e of transfer to the 'renneGsee Valley AuthoY'jty ('J'IJA), an
err:ployee covered t:y the (i vi J. Servi ce Retirement System is required to
continue contributions to the Civi] Servi.ce SystAr.1
occurred ave>' a break of more than +-hY'ee nays.
unl~ss
the transfer
An emplo::ree transferring the
other ':my, f1'o>:1 the TVA r·ad: to the Ci vi 1 Service System, recA; ves cre(ii t
for any ser',;-' ce to the TVA.
This is provided that the employee makes
contribution!:; to cover trwse years of service.
11
Employees under the Foreip;n Service Retirement System doing duty at
certain desiP"nated
Tt1Jnhe~lthfuJ
rostsTt may receive 1.5 years of retirement
"1?
credit for each yep.r of re!'"vice.·
election to "eceive
'1
'T'h'O're is available, ho,,"rever, an
di ffe>'ential payable fo!'" that post.
employees 1:1ho are ,,,orki n,~ in thp
S8r'l8
Civil Se.,...vice
area only have the di fferenti a 1
payable a'Jai 1able +:0 t}1er'l.
Th~se
no
a.:~e
lnci~al
VIi th ruJes
derjvin~
.just a fe"1 of the transfer requirer.1ents that see'11 to folJ
h~
p?ttern.
It seems to
d'~vploped
alon;:>; the way as they we!'e needed.
the benefits
see~ +0
0\'1
a very haphazard collection of systems
The methods of
have R bit more reason to them.
However,
foy the sake of clarity, they are better explained in a tabJe.
(See
Appendix C).
'T'lop
rer"ulation:J coverinc this tonic are as numerous and as varie,:ated
AG t1;osp su>'rounrlin::,: the trAYlsfer of" benefits.
TInder voDlntary
1'
p
rptire~ent
from the
For eX:1rnple,
~ivil
serviep And
e"'1ploYT11ent b: r tlle fpde.,...al government, the indi v'; (l11r-ll
a'1 r m; ty contir"les, hl1t the salary
amount of the
~nnlljty.
j
s reduced by the
IS
'0.
rp:lpra' pmrloyees \.,rho retire unrler \vashineton D.C. 's
l!n l:i ~~"0!'U1
:1
Y'
n
"'i reman
8YlO
~0rl11c-l-i()n
in
r,,11pd
;"1C ,--: -.~ rlll+"
-1-('\
S:"ll.:1~~r
s~rstem
'"'r
ro.ay be re"''''pJoyeo 1";
~mnl1i~~:.
j 1'1
~hp
Het:ire~"n:
l:l-,()U+
!')'10:- h,...
Forei:,;n Servicp rpcei 'les
.q "'11'_ sP!lar:v, hut t1-Jp annllit:r is sllspendpo.
If's/he
-;F; reemp'_oved in another fpopra1 ae;en~y,
n~cei yes
the salary of +:h(' ne . .v ar:ency.
j
s decreased so that
-1-1;1">
s/he
The ;)"1ount of the annnj ty
-I-otal is not more than PH"
salP!TY rpceiver1 from thp F'c)reir:n Service on the
0"'
dC1~'"
retj rement.
1ilhpn f'nced 1:lith a S1 +uation so con"'lls;nn- !'is this,
be hard pressed to find a
even Daedallls ',JOuld
O'lt ()f the maze of 1'e(,"111 at; ons.
WiY
It:is
honed that the Con,,:ress '.vi 11 trJkp to hpRrt the rer:ornmenrlR.tion
of'
ttJP GAO
that a blR.nket n 1 an be j'1troouc p ri to COVAr 8.11 of t1-je fed",rR.l
()f'-fi
ces.
SOLUTIONS
An Answer--the Private
Secto~
T!1ere is a say; nr~: if' you are
of the
nrohlp~.
1'10-1-
n.<"!rt of t}1c soJnti on, yon are part
Pri'late industry, not H:ishin"" to be nart of the latter,
qui ckl? took steps tn assurp thRt Rl.l
HOUJ
d be
\.,rel~
cor>~erninr:
pensions.
In September of HF:;6, the"> AmericrlYl Ins~i tnte of Cert.i fied P11hli c
Accountants (AICPA) iss1Jeo Accoun-l-in", Research Bul1_eti n /,1+7, "Accountine;
for Cnsts of Pension P1(l"ls.,,13
of pronouncements aimed R.t
This document was the f'jrst in
Rccountino:- for a secure pension
!3
series
11.
plan.
It was fol1m.,ed, , n 19h"3, by Accounting Research Study (ARS) #8,
also sponsored by the AICPA.
first to try to
brin~
14
This publication and APB fl8 were the
to=ether the various nethods in reportinc practices
APB #8 set forth standards in reportinrr the expenses
relative to pensions.
and liabilities ::r)winr; out of a pension !llano
As was mentioned before,
the excess of pension expense over the contributions is recorded as an
unfunded liRbility.
It is nm" Y'el'"jui red that a pri vate pension fund be
recorded on the accrual basis.
accruals, deferrals, and
In other words, accounting- concepts of
esti~ations
must be used to allocate the proper
!lension cost to the appropriate time period.
set forth in ERISA, the
Ac~ordinc
anD1lal pension expense should equal
'~inimum
the interest on any unfunded nast service cost.
j
to the guidelines
The interest -rate
s determined by an actuary, as (Li scussed previously.
The APB has established str:mdards for a mini mUlTI and a maximur.1 amount
to be expensed for any pension pJan in anyone fiscal !leriod.
Not only
are pensions and their related expenses recorded on a firm's income
statement, but the
balance sheet.
footnote to
amoun~
of the unf1lnded liability must appear on the
In addition, exter.sive information must apnear in a
~hese
statements.
This footnote must state:
1.
a pension plan exists
2.
the company's accountin?; I'mrl fundine; nolicies
'5.
the amount of the pension cost for the period
4.
5.
the excess of any benefits due over the amount funded
15
any other si~nificant matters
The pen3lti es associated
ramifi(;ations in ERISA.
Everv
wi
th noncompli I'l.~ce extenn beyond the leGal
VPIlT:
publicly
held companies must be
-.
12.
audited by indeppndent cp.rtifien public accountants.
It is the rp.sponsi-
biJity of these auditors to attest to the fairness of the financial
sbltementR nf' "m Budi ted +'irr:: in a'1 opini on
accom!lan~Ti nO"
the statementR.
If any of the inforrJa.tio'1 reF':ardinS pensions is erroneous, or
the auditor may bp f'orced to issue
An
Eni'""!""a--th~
y
Rn
8rlverse opin:ior:.
ex~-'uded,
'T'h1G \-cir.d
0""
Govprnment
In contra.5': to the ,"xt.ensi ve :'l.ccountine; systems existi n::; fm" rri vate
nension funds, the feder."'ll governP1en t ; uses a vp.ry sirrple forJ11Ula.
'rbe
am01mt of the unfundpd 1 ;ebj J i ty is si'1ply appropriated out of' the
e;eneral revenues, out of tax rlollars.
covp~n~pnt
To be more succinct, when the
realizes it is unahle to pay its hills, it harrows the
seem to be a form of
s~and
theft.
In addition, this is not exactly
in line with the sop!:} st; cated accounti!1['; methods Con[,;ress rerlllested
private pensions to use.
'!'he obvious question is 1!Thy.
r<:=msions E'xe"npt from such
le~i.s'
cO'nImt:ed on
·3.
static bas;s,
ati on?
1:lhyare federal
Why er'" the pension costs
.,ith no recard for inf1ation?
1•
\v}-~~r h"lS
it
taken so lon:>; i"or thi.s p""oble':1 to COP1(" to Ji;::ht?
An ::J"'0:3+ painfully obvious stpr in rectifyin!.: the S1 tuation would
he +,0 com!lute the nor"'lal cost on R rl:;rnamic basi s rather than a static one.
Ho,,! can
a~l
the cenef'its be accrued and prov:ided for if all the costs
are not known?
th~
Another phase of
solution would by comprehensive coverace:
blanket plan for all feder!'!l employpes.
uni forr.1 :"undinp;, thus
__
cre3tin~
Thi s type of plan
one svstem.
.J
1;J0111d
a
promote
There \'1Ou1 d be no douht, on
the part of an employee t"'r:lnf>ferrinp; from one branch to another, of the
amount of contrihl1tion s/h.e
\'TaS
eX"!1ected to make.
There \,rou1d no longer
be sue!' a cor.-:plex jumhle of rules and rer:ulationR fmrroundinr; the retirement
credi t f0110v.'ing a transferrinc em"!110ype.
'I'hesf> ::;u::,:cesbons would help, allt not el:iminClte, the "!1"'ob 1 eT'1.
"1atter of thE' vast unfunded liability still looms 1ar?:e.
Thf>
This is
undo1.lhtedly th<:' larljest rrobJe1"1 existin;"; in the federal retirel"'sn+
systems today.
The
Dj
strict of Col ul"lbia, when faced \.,i th virtually the
same proh1em-.-an inordinate unflmrled ljability--hit upon a
solution:
ful1-f'_mdinc.16
It shl)uld be carved in stone.
bril~icmt
In 1150
pages of hear-inC's before a Con;";ressional subcommittee, one paCe is
devoted to soJutions.
01".'3'
npe
'f'1e reason for this if> simple; there rea1_ly is
sol uti on ann t1-Jat is f1111 y-f'J.nried ret; rC>l'1ent systems.
are at J ~'ls-t three paths to thi f".
1..
Increase ('onb'i r>lJti ('Ins :l-'rom e11'pl ayees.
~eqctiop
j~~ediate
?..
f'lmdjp'~~:
The
f'rorn +he federal workers would be
and en Tasse:
a
ne~a+ive.
Incre8.se ,:,on"':"'; hlltions f''''Ol' +hp pr:rployer.
Tha"': "JOu'r r'lri ve up tre cost of +he vari ous
ae:enc:i "8 FlPri the i Ylcre!'!sed costs vrould have
dead-end.
~~..
Increase the rebp'n on investr::e:r.+s.
Ir..vest trr
fT1here
14.
deht.
But, he . . ! \V; 11 businE"ss react to the
sovernment buy-inc; IIp r:'Y'ea t chunks of securities?
Ad~ittDrlly,
it
i~
R
sticky nroblem.
bull hy the horns before all
citi~ens
It is timE', howevar, to take thn
ere rored.
CONCT.1JSIONS
I+. is nC)ssiblE" to mnve to '" dE"sert islanr:l to retire.
}1ension nrohlems are point:e'3s.
hefore t1;e u'1funded 1iabj 1 i ty
Hark is heine; done.
~c
Thjs n"T'oh1em. ':Illst be dea1t with nml,
becom(~s
totally lmmanaseahle.
GAO is noinE; rese3rch o!" the ff>8Sil:"li1jty
nensions sh()"lld be subiec+
to ERISA rrlJi.rlelincs.
v .
•
1
"laVe reti rer'~nt benefi ts more sec,]"T'f'.
n
syst"'ms are :1ro'1;rl;p,:,: hel"efits to people.
~8npen
invo] vNl.
l~HS
fU1:1P'e
WE're
n;1sspn to
of the
lISadly1T bec811se
~hese
Therl'> is r'ore at stake here
to the retirees if' those funds becor'p nonexistent?
nON is SO:'1e 'TAr:" Y'''alis+;ic- action.
~'o;l~r~r(')ne;
'Phose
P"T'Psently, th"
federal re+:i- ernel1+: sysVms is scldl::' jnsecure.
t0at is to
On that i.slanr:l,
Tl,is is
~
sitll~tion
i. t i 0 +: i rre a}J he corre con cern~rl, con c~rned
n~at
enou~l:
r:Jf'fpch:;
to bpC'ome
This
15.
APPENDIX A
Based on Tot'll Payroll of' Emp1oyf'es 1" the Civil Service System
Normal Cost
Percent
Amount
of nay
( billions)
Computation method
et.
31.70
13.64
Dynamic
Static
Taken froT Federal Retirement Systems:
Inconsistent Benefits, 1 0 77.
$12.4
5.3
17.06
Understated cost
Fundin~,
It
Unrecognized Costs, Inadequate
~.
5.
',1'4.,.'
~----
,.~~
.••..;....,..__.... _~~.~.~~.•~."'.,-~"'.~,......".,.,,'''.,.J?~''
)
~
:.-:: ...~;!
""..,-'.,..
__
7~::;::;.i,:-:-::_.
-
.-~,
.. ..;:,:;:...,
....;;'"
...~
)
••
·r'
).
i
f
l.
I,
RETIREMENT ELIGIBILITY
t;
~
8
1-"
P-
::s
t)
''>
'-1
;:s
i
i
;:s
!
I
1
I
0
:3
0
I~
18Ol
,
1-"
CIl
M(1)
;:s
(])
::0
b::J
M1-"
(1)
"i
(1)
,3
1-"
M-
Ol
~
~
\..0
-..J
, -..J
•
CIVIL
SERVICE
TYPE OF
RETIREMENT
(A)
OPTIONAL
g
UNIFORMED
SERVICES
(B)
(A)
62
60
55
30
~/NONE
25
5
20
FOREIGN
SERVICE
(B)
NONE
(A)
20
50
FEDERAL
JUDICIARY
(8)
(A)
(8)
65
15
70
10
20
::s
M-
en
DISCONTINUED
SERVICE
(INVOLUNTARY)
Ol
M(])
::3
NO PROVISION
~/50
PAY·
ABLE
AT AGE
62
DEFERRED
Ol
20
5
IV
0
0
MANDATORY
70
15
§
1-"
!
N
(A)
(B)
65
15
NONE
15
X
TENNESSEE
VALLEY
AUTHORITY
FEDERAL
RESERVE
BOARD
~.d
(B)
(A)
62
60
55
5
20
30
11./55
10
!iNONE
25
NONE
5
!!./50
20
PAY·
ABLE
AT AGE
10
(A)
(B)
j
0
NO PROVISION
VARIES DEPENDING ON
AGE. RANK. PROMO·
TION RECORD. AND
LENGTH OF SERVICE
DEPENOS ON
CLASS OF
OFFICER ~
PAY·
ABLE
AT AGE
60
NO PROVISION
5
NO PROVISION
NO PROVISION
PAY·
ABLE
AT AGE
62
5
5511.1
I
I
60
NONE
NO PROVISION
70
NONE
65
ANY
65
NONE
el)
P-
I
!
0
Ij
I,
Ol
M-
DISABILITY
NONE
5
NO AGE OR
SERVICE
REQUIREMENTS
NONE
5
NO AGE OR
SERVICE
REOUIREMENTS
NO AGE OR
SERVICE
REOUIREMENTS
NONE
5
NONE
5
til
~
H
::s
ill
P-
(])
j
l
,:;
j
1
~/BENEFIT IS REDUCED IF UNDER AGE 55.
ll/BENEFIT IS REDUCED IF UNDER AGE 65.
~/CLASSES
1. 2. and 3 - IMMEDIATE ANNUITY UPON
SELECTION OUT REGARDLESS OF AGE OR SERVICE; CLASSES
4 AND 5 ARE RETAINED IN SERVICE UNTIL AGE 50 AND
20 YEAR REQUIREMENT MET TO RECEIVE AN ANNUITY;
CLASSES 6 AND 7 - SEVERANCE PAYMENT ONLY.
ill
Mel)
1
~
j
-..J
,
,
1
I
•t
r
I.
~~
\,
.
~-~~--
3
I
U.S. TAX
COURT
JUDGES
(])
(1)
~I"
~
+- (])
•
td
t2
(A) MINIMUM AGE REQUIREMENT
(8) MINIMUM SERVICE REQUIREMENT
I-'
M-
....,
fIi'
P"i
ill
(])
;:s
1,,..1
~
(])
H
;:s
I
ill
..
-----~..
--------------------------------~i:,.~,
,-
16.
APPENDIX C
-
System
Benefit
Civil service:
Regular employee
Congressional employee
Member of Congress
Law enforcement and
firefighter personnel
.56.2.5 percent of high-3
7.5
"
.,
II
7.5
"
70
"
"
fI
Foreign Service
60
Q
"
n
Uniformed services (note a)
7.5
.
Federal judidary
100
U.S. Tax Court judges
100
Federal Reserve Board
.
percent of final basic pay
percent of the salary of the
office
•
11
If
.. .. "
.56.2.5 percent of high-3
TVA (note a)
(b)
alliso covered under social security
!1Varies depEmding on the actuarial value of the employee t s contributions.
Taken from !!!deral Retirement Systems:
Unrecognized Costs, Inadequate
Funding, Inconsistent Benefits, 1977. p. 28.
18.
ENDNOTES
1
Kieso, Donald E. and Jerry ,T. vleyrandl-:, Intermediate Accounting, A
\"liley/Hamilton PubJjcation, tTohn Hiley and Sons, Nel:J Yorl.:-, 1977,
n. 9'11.
2 Ibid. p. 889.
3 Ibid. p.
L}
9'11.
HeCis, \'I;:!.1 ter B., at aJ., Hodern Ad,ranced Accounting, NcGrao"'-Hill
Book Co., St. T,ouis, l07 S • p. 520.
5
u.
S.
Gener~l Accountin~ Of~ice,
Comptroller General, Federal Retirement
Systems:
Unrecosnized Costs, Inadequate Funding, Inconsistent
Benefit~,
Washington, D.C.,
1~77.
p. 8.
6 Stevenson, rom, "In Hock to Fedpral Pensions, II
Ne"l
Repub1ic,
Au~ust
7, 1976,
p. 22.
7 Federal Retirement Systems:
Unrecognized Costs, Inade,!uate Fllndinr:.
Inconsistent Benefits, Ope Cit., p. 4.
8
I'Ol'd • n. It.
r
9 Ibid. n. 4.
10
11
12
Ibid. p. ??
Ibid.
r·
2~.
Ibid. p. 2C).
13 Intermediate
Accountin~,
On. Cit., p. 888.
19.
F:NDNOTES, Conc1uded
14
Inter~ed~ate Accountin3, Op. Cit.
p.
888
1") Ibid. p. 910
1f u. s. Cor:::Tcss, Se l1 ;:j+e, Fiscal Pressures on the Dist""ict of Col'lmbia,
Ninety-~our~~
Washin~ton,
Cnncress, Seconrl Session, Senate Renort 1101,
D.C., March, 1~-25, 1976, p. 478.
20.
HIBI,TOGRAPHY
1.
Ki~Go,
Donal r1 E. av:rl .Terr:r .T. 1,'!0v:r1n,.:iJ-,
T;~J-"'r~"diatp
ACC.01111'-:
,.,c,
A iiJi"p:/Uami1+on Pl1hliC:rltion, ,T('\'r]n itJi.1p~r "ind Sons, New York,
'97 7 •
?
Hp':',is, 1!lalter B., et al., Hodern Advanced Accountin5, McGraw-Hill
Book Co., St. Louis,
"l.
Stevem;on, ':lome
August 7,
4.
1975.
"In Hod: to Federal Pensi ons,"
Ne\., RepubU c.
1976.
U. S. Genera' ACcOl",tin:: Offic.e, Comptroller General, Federal
Re~irf.'wmt
Systems:
Unrecognized Costs, Inadeli,uAte Fundi nf,
Inconsjstent Benefits, Washi":ton, D. C. AUVlst "l, 1977.
5.
u.
S. Coneress. Senate.
District of Columbia Pension Reform Act,
Ninety-fifty Con~~pss, Second Session, Senate Renort
18'3,
?31~,
1,lasl:ington, D. C. , February 23, , 97t1.
h.
U. S. ConJ~ss, SeT'Clte, Fiscal Pressures on the District of Co'_umhia
J'iinety •. fo 1Jrth Con EYf.'ss, Second S(>ssion, Senate Report 1101,
\'/ashinr"ton, D. C. Parch, 16-25, 1976.
21.
ADDITIONAL SOURCES
1.
Aspin, Lee.
?
Keith, Hast} nes.
3.
Perham, J. C.
4.
Ti love, Robert ,T.
"The Burden of Generosity,"
"Pension Pa1i ti cs,"
Harper's.
Forbes.
"The Mess in Pub1i c Pensions,"
"Poor No Harp,"
Nm·lsweek.
December, 1976.
<Tuly, 1976.
Dun's Revietol. March, 1976.
Harch 22, 1976.