16

(CRS) and the General Accounting Office (GAO) agree that the “federal retirement
system’s unfunded liability is not a problem that needs to be fixed.” Both CRS and
GAO have concluded that “there will always be sufficient assets in the retirement
fund to cover benefit payments to all current and future r es.” In fact, the un-
funded liability of the Social Security system is over $7 trillion, and no one seems
concerned about that.

Who should finance the retirement system? In a CRS report entitled, Federal
Civil Service Retirement: Comparing the Generosity of Federal and Private-Sector
Retirement Systems, it was noted that virtually all private pensions (97%) are fund-
ed entirely by the employer. The military retirement system operates under this
principle. Yet, federal workers are preparing themselves for a slightly higher con-
tribution and reduced benefits.

Now, I do not mean to suggest that federal agencies (and taxpayers), as employ-
ers, should pay the entire contribution to the federal retirement system, which
would be approximately 25 percent of salary. This would represent a significant cost
to agencies, which, in these times, would be problematic to say the least. However,
lam reserving judgement on the Administration's proposal to fully fund the system,
excluding the current employee contribution. At face value, this too seems problem-
atic. But, Mr, Flynn from OPM is here today, and he will hopefully outline the con-
cepts of this idea.

Should the CSRDF be off-budget? The intent of this idea is to protect the earned
benefits of federal workers. I support this. However, a number of individuals have
expressed doubts that this idea would have this effect. Some feel the inverse is true,
predicting increases in the deficit and current outlays, while providing no real pro-
tection for current or future federal retirees. I am a cosponsor of Mr. Bilirakis’ bill,
HR 103, which would take the CSRDF “off-budget.” I am glad that this Subcommit-
tee will afford Mr, Bilirakis an opportunity to discuss his bill and its financial impli-
cations T also believe that Mr, Blum, Deputy Director, CBO, will offer insight in

is area,

What else should we be investigating? The importance of financing the federal re-
tirement system cannot be understated, but for me, the quality of retirement life
is the real issue. When a 33-year old government worker is projected to receive
around $3,100 a month when he retires at age 55, I wonder what kind of life he
will have. In a letter to me from a sixth grade constituent, she too raises the quality
of life issue. “Some people . . . would have fewer choices if they get less money
(pension),” she wrote.[11Mr. Chairman, I do not think anyone on this Subcommittee
wants to see individuals having “fewer choices” in their olden years. So after we
examine the financing of the system and we make needed changes, let us turn our
attention to strategies that maximize pension investment opportunities for federal
workers. With plans to base federal worker pensions on a “high-five,” investments
may be the difference between a federal worker having a quality life in retirement

nding on someone else to take care him/her.

T plan to introduce a bill that would amend the Federal Employee’s Retirement
System Act of 1986. The bill would authorize a Small Capitalization Stock Index In-
vestment Fund and an International Stock Index Investment Fund as part of the
Thrift Savings Plan (TSP) for federal employees. These additions to the funds cur-
rently available will provide federal workers sufficient financial options for diversify-
ing their investment portfolios. But, Mr. Chairman, it will do more than that. This
bill would empower federal workers to take more personal: responsibility for their
retirement.

I would also like to submit for the record a statement by Helene A. Benson, Presi-
dent, Professional Managers Association. Ms. Benson raises an interesting point in
her statement. ERISA laws prohibit lower benefits that private sector employees
have already accrued. Following that logic, the “high-5” provision would only apply
to future years of accrual and not to the years employees have already accrued
under the “high-3” formula. If much of what we are planning to do to federal
retirement system is modeled after the private sector, let us at least give federal
workers the same protections afforded private sector employees.

in, thank you, Chairman Mica, for calling this hearing. I look forward to hear-
ing the witnesses. .

[The prepared statement of Ms. Benson follows:]

PREPARED STATEMENT OF HELENE A. BENSON, PRESIDENT, PROFESSIONAL MANAGERS
ASSOCIATION

Mr. Chairman and Members of the Subcommittee:


37

Over the long term, however, Federal outlays would be unaf-
fected. Spending now projected to occur in distant out years would
be reduced by shifting spending to near-term budgets. If only the
FERS program, the FERS component of the trust fund, were fully
funded and moved outside the budget, the effects on the budget
deficit would be smaller, on the order of $10 billion a year or about
$85 billion over the 1996-2002 period.

Changing the financing of the civil service retirement program at
this juncture would be difficult, given the objective of balancing the
budget by 2002. It would also raise a number of other budgetary
and ponbudgetary issues that would have to be considered at
length.

Thoiy, many budget experts believe that even with a cleverly
designed pension fund outside of the budget, the Congress would
still be able to reduce the annual budget deficit by cutting deferred
compensation. In fact, the only way to completely protect earned
benefits probably would be to switch to a defined contribution plan
like the Thrift Savings Plan.

In closing, Mr. Chairman, I would urge the subcommittee to
evaluate proposals to change the financing of the retirement bene-
fits not only in terms of the budgetary effects but also in light of
their effects on the ability of the government to recruit and retain
a skilled work force and, relatedly, on the credibility of the Federal
Government as an employer. This, after all, is the primary purpose
for the retirement program.

Thank you, Mr. Chairman.

Mr. Bass [presiding]. Thank you very much.

[The prepared statement of Mr. Blum follows:]


33

Mr. Davis. Thank you, Mr. Chairman.

I think one of the problems we have here is comparing apples to
apples and oranges to oranges. It gets a little jumbled when we
start throwing numbers around. I think the purpose of this hearing
and the later dialog we will be having up here is to really arrive
at where truth is in this.

For example, when you take the figure of $528 billion unfunded
liability, my question then was what does that mean. If you looked
at Social Security in the same light, what would be the unfunded
liability then, and what do we do with it, and the answer I think
that we have gotten is it is something like $7.6 trillion. When you
start looking at numbers like that and trying to look at the fix, I
think it puts it all in perspective about what we are trying to do.

I think, Mr. Bilirakis, you have ably presented that, that every-
thing isn’t coming due all at once, that it is done over a period of
time. I am a cosponsor of your bill. I think it is a good bill. I think
it doesn’t do anything in terms of masking the deficit, which is one
of the concerns that has been raised, and I hope that we can move
forward with that this year.

I think the focus here, though, ought to be on the taxpayer as
the employer. This point, the government basically representing
the taxpayer as an employer, the question we have to ask ourselves
is what kind of benefit package do we want to pay our employees
so that we can have the best people who are qualified to be FBI
agents and qualified people as cancer researchers and astronauts,
who have the right background and those kind of issues, and yet
you want qualified people at the window and on the phone when
you call up the Social Security Administration or the Immigration
Office. I think really we have to cast this whole debate in those
terms. Then we can start talking about who pays what.

But you want to have an appropriate benefits package that is
going to attract and maintain qualified people for government serv-
ice so that we can get the job done at a time when we are asking
fewer people to do more with less. It seems to me, I was in the pri-
vate sector, those are issues that we have got to face.

Let me ask you, my understanding is that most defined benefit
plans in the private sector, there is really no employee contribu-
tion. Do you have any thoughts on that?

Mr. BILiRAKIS. Well, they vary. You know as much about it as
I do. I don’t know what I can add to it. But they certainly vary.
I have been—heck, I worked in the aerospace industry for a while
as an engineer and as a lawyer back before my wife could go back
to work and I could start a law practice, but we didn’t have any
kind of retirement plan back in those days. They instituted it some-
time shortly after I left, and that is—so it really varies, the com-
pany that you are with and things of that nature. Those are all the
things we take into consideration when we decide whether we want
to accept a job with this company, this firm or the other firm,
whatever, and the same thing is true with all of these people over
the years. They made their decisions to stay with the Government
for a number of reasons. One, as I said before, they wanted to serve
their country in a way, but also, the benefits, which are the same
reason that we tell people to stay in the military because they can


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42

Funding the federal pension liability with private assets is not necessary to
ensure that retirees receive their benefits. Private pension funds are required to be
funded to protect workers’ pension benefits in case the employer goes out of
business. The federal government does not risk business failure, since it has the

sovereign authority to tax.

yw Retirement 2

Balances in the CSRDF represent the cumulative difference between income to the
fund from all sources and the benefits paid out of the fund. As shown in Table 1, the
retirement fund collects two types of income--intragovernmental transfers and
payments from those outside the government (federal employees and the Postal
Service, whose employees are eligible for federal pensions). Most workers covered
by CSRS contribute 7 percent of their salaries to the fund, but they pay no Social
Security taxes. Most FERS employees also pay 7 percent of salary toward their
retirement, but only 0.8 percent goes to the CSRDF with the remainder used to pay
their 6.2 percent share of the Social Security tax. Employees contributed $4.7 billion
to the fund in 1993, the most recent fiscal year for which a complete report is
available from the Office of Personnel Management. The Postal Service, which is

technically off-budget, paid in $4.8 billion.


10

As the Congressional Budget Office official will tell us, the Civil Service Retire-
ment and Disability Fund is actually a ledger that is useful in measuring the costs
and liabilities of the Federal retirement systems.

His big news is the retirement fund does not face a financial crisis. He will ex-
plain that in fact the demand on the general fund to make up any shortfall actually
declines in constant dollar terms after 2015.

That should be good news for my colleagues worried about the Nation’s deficit!

Another important point that will be made is that the Civil Service Retirement
and Disability Fund is a trust fund—just like Social Security and the myriad of
other trust funds that abound in the Federal Government.

‘Any excess in the fund—which now stands at well over $300 billion—is invested
in non-negotiable Federal Government securities. The same thing happens with the
Social Security Trust Funds.

The Government pays interest on these notes and when additional funds are
needed to pay benefits, this money comes out of general revenues.

My friends on the other side of the aisle are not as quick to criticize such repay-
ments to the Social Security Trust Funds as they are to the Civil Service fund. They
are not as quick to discuss the much greater so-called unfunded liability the Social
Security system faces in the next century.

The reality is it is the same type of transactions occur in both systems and both
should be held in the same high esteem. We have made commitments to both sets
of retirees and they should be kept.

While I understand there are budget implications surrounding Representative
Bilirakis’ proposal, I certainly share his view that the Civil Service Retirement and
Disability Fund deserves the same kind of protection and respect afforded the Social
Security Trust Funds.

Hopefully this hearing will begin that long overdue process.

Thank you Mr. Chairman.

Mr. Mica. I thank the gentleman. Now I will yield to Mr. Burton.

Mr. BurTON. Thank you, Mr. Chairman.

Mr. Chairman, I have a statement I would like to submit for the
record and make some brief remarks because I want to get to my
colleagues and listen to them.

Mr. Mica. Without objection.

Mr. BurTON. I don’t want them to go to sleep out there listening
to my statement.

I have voted, Mr. Chairman, for the revised approach to dealing
with the pension plans for Federal employees, and it bothered me
a lot. I think it caused a lot of us heartburn. I hope that we don’t
have to go back, and I don’t think I will support going back and
hitting them again. I think they have been hit enough.

I do believe that we need to look very seriously at changing the
Federal retirement system for new people coming into the Federal
work force, and that is something I hope this committee will take
a look at in the future. I also think we need to consider creating
a Federal retirement system that is fully funded, and that is sepa-
rate from the Federal budget. ERISA requires private sector pen-
sions to be fully funded, and I think that is a good idea and it
should apply to the Federal pension system as well.

This is a very difficult and thorny issue. I hope we can come up
with some solutions to the problem that won’t cause any more pain
for the Federal work force. We have a lot of fine people in the Fed-
eral work force, and they shouldn’t be mistreated, and as I said be-
fore, it caused a lot of us heartburn to vote for the original plan
that passed the House, and we shouldn’t hit them again.

With that, Mr. Chairman, I yield back the balance of my time.

Mr. Mica. I thank the gentleman.

[The prepared statement of Hon. Dan Burton follows:]



70

(Nominal $ in billions)

Less: Unified Less: On-budget
Employee Budget Postal Deficit
FY | Outlays | Contributions Deficit Agency Impact
impact Contributions
2005 65 5 60 9 51
2015 115 3 112 17 95
2025 166 4 162 24 138
2035 219 6 213 28 185
(Constant 1995 $¢ in billions)
Less: Unified Less: On-budget
Employee Budget Postal Deficit
FY | Outlays | Contributions Deficit Agency Impact
Impact Contributions
2005 42 3 39 6 33
2015 47 1 46 7 39
2025 44 1 43 6 37
2035 338 1 37 5 32



52

increase agency labor costs by $5.3 billion per year. Those intragovernmental
transfers, however, would not affect budget outlays or the budget deficit. If the
discretionary spending cap that limits budget resources under the Budget
Enforcement Act (BEA) was adjusted upward by $5.3 billion, then no staff.
reductions or other cuts in agency spending would be necessary. However, if the cap
was not adjusted, those other cash outlays would have to be reduced. The Office of

Management and Budget proposed that the cap be adjusted.

The Administration also proposes a series of intragovernmental transfers from
the Treasury to the CSRDF that would eliminate the trust fund's $540 billion
unfunded liability over 40 years. The only advantage of spreading that transfer over
40 years is to avoid an immediate, large increase in the federal debt limit, which
includes government trust fund holdings of Treasury securities. If, however, it is
desirable to improve the accuracy of the accounting through full funding, then it
would be desirable to do so sooner rather than later. Moreover, inasmuch as that
transfer could be accomplished entirely on the books of the federal government, there
is no economic cost of doing so. Such a one-time accounting transfer would enable
the fund balances to reflect more accurately the amounts that the government has

committed itself to pay.

In sum, accounting proposals that reduce or extinguish the unfunded liability
do not affect the retirement program's soundness or affordability. The

15


50

The cost of deferred compensation to the government can be reduced by
either raising the employee contribution rate or lowering the pension benefit. A
cutback in pension payments can be achieved through such policies as smaller cost-
of-living adjustments ("diet COLAs"), COLA delays, the use of the highest five years
of pay (rather than three), or a reduced benefit accrual rate per year of service.
Reducing the federal workforce, including what is already planned, will also reduce
total compensation, deferred as well as current. Higher payroll contributions by
federal employees would help future cash flow, although that form of financing is not

common in private pensions.

The greater national income is, the more tolerable will be future tax burdens
from financing federal pension benefits when they come due. One way the
government can contribute to a larger national economy in the future is to increase
saving and investment now. The most direct means of achieving that result would
be to reduce the federal deficit. All of the measures reducing normal cost, as
illustrated above, would reduce the deficit, but so would policy actions far removed

from the federal retirement arena.

Neither the $540 billion unfunded liability nor the annual cash deficit of the
retirement fund signals a financial crisis. The government will be able to meet its
retirement obligations from anticipated tax revenues. Efforts to reduce the cost of the
system and limit taxpayer burdens further should weigh the effects of such actions

13


56

If only FERS was fully funded and moved outside the budget, the effects on
the deficit and debt held by the public would be less than from moving the entire
CSRDF outside the budget. A one-time budget outlay of $42.5 billion would have
fully funded FERS in 1993. The annual deficit would have been about $8.5 billion

higher.

Moving the retirement funds outside the budget raises a number of non-
budgetary issues. The new retirement fund, which might invest in private securities,
would need a well-defined policy on the extent to which it would exercise its
authority over management of private firms. If the investment returns to the new
CSRDF were less than expected, the government would have to make additional
contributions to the system, unless the retirement plan was converted to a defined
contribution system. To maintain the current level of indexing for price inflation, the
new pension fund would probably need to hold assets whose income is also indexed.
Such dollar-denominated assets do not currently exist in the quantities required to

fund federal pension benefits.

Putting the retirement fund outside the budget would have three potential
advantages. First, the budget would recognize retirement costs as they are incurred,
which is when they are most controllable. Second, retirees would have more
assurance that their earned benefits would be paid in full. Third, current taxpayers
would pay the current cost of providing government services, which might improve

19


60

in constant 1995 dollars, the real effect upon the budget remains
essentially stable, going to $33 billion in 2005, $39 billion in 2015,
$37 billion in 2025, and $32 billion in 2035. These figures are in-
cluded in some material that we provided the subcommittee earlier.

The credits accumulating in the retirement fund are invested in
special interest-bearing securities of the U.S. Government which
cannot be sold to the public. Since these securities and the interest
they earn are nonmarketable, they are, in essence, government
I0Us which are liquidated to pay current and future benefits.
When this occurs, the securities recorded in the retirement fund
are reduced accordingly.

Because the fund securities amount to loans the government.
makes to itself, loans the government by law is required to repay
with interest, there is no need for real cash to change hands when
amounts are recorded in the fund. But when we pay out benefits
in real cash, in effect, we redeem the paper in the fund with cash
from the Treasury.

The vast majority of income that the fund receives is from gov-
ernmental sources. The fund’s income from the public does not ap-
proach its outgo to the public. Thus, the operation of the retirement
fund does not present a source of cash for financing government op-
erations in general.

Two financing mechanisms already established in current law
work together to ensure that the retirement fund, despite operating
with a large unfunded liability, will have sufficient budget author-
ity available to pay retirement benefits.

The first, set up in 1969, is a series of extra payments designed
to slowly stop the Civil Service Retirement System’s unfunded li-
ability from growing and eventually reducing it. The second was
set up when the Federal Employees Retirement System was cre-
ated in 1986. Under it, employing agencies began paying the full
accruing cost of benefits for new hires.

Also, the Federal Employee’s Retirement System Act makes
those assets available to pay any remaining Civil Service Retire-
ment System benefits after that system’s funds are depleted, and
creates in the process a payment stream to repay the Federal Em-
ployees Retirement System. Together, these two financing mecha-
nisms ensure that the retirement fund will always have sufficient
budget authority to pay benefits.

Nonetheless, for civilian employees hired before 1984, employing
agencies still pay only about two-fifths of the government’s share
of the accruing cost, resulting in an increasing unfunded liability.
The administration’s proposal to deal with the situation will re-
quire agencies to pay the full accruing employer cost of Civil Serv-
ice Retirement System benefits beginning in fiscal year 1997. It
will also address the $540 billion unfunded liability by amortizing
the debt over a 40-year period beginning that same year.

This is a “good government” measure designed to provide more
accurate cost accounting, showing Civil Service Retirement System
costs when and where they are incurred rather than as a govern-
mentwide cost at some point in the future. It will also respond to
concerns about the system’s large unfunded liability and stop it
from growing further.


48

balance with the Treasury. Nevertheless, the burden on future taxpayers, who are
ultimately liable for all obligations of the federal government, would be unaffected.
Inasmuch as that bookkeeping transfer would not change the liability of taxpayers,
“full funding" would not afford additional protection to annuitants against the risk

of future reductions in pension benefits.

Isthe Civil Service Trust Fund Facing a Financial Crisis?

Since employee payroll taxes and Postal Service payments are the only source of real
resources to the CSRDF, one can gauge the extent of its call on taxpayers by the
annual difference between cash inflows from those sources and cash outflows. In
1993, cash outflows exceeded inflows by $25.6 billion. Projections prepared by the
Office of Personnel Management and reported in Table 3 show the cash flow deficit
increasing to $95 billion in 2015 and $185 billion in 2035. Stated in constant 1994
dollars, however, the fund's deficit in 2015 is $41 billion and declines to $33 billion

in 2035.

Although the projected cash flow deficits of the retirement fund appear to be
manageable under the current pay-as-you-go policy, the Congress has two means of
reducing the burden to future taxpayers: reducing net pension benefits or increasing

national saving and investment.


20

benefits from all sources, again without any Social Security bene-
fits.

In conclusion, it is worth mentioning for the record that the fi-
nancing system that we are discussing today is basically the same
financing system used by Congress to operate the Military Retire-
ment System and to some extent the Social Security program.
Many of the issues we are discussing today cannot and should not
be addressed in isolation. Nevertheless, as Americans live longer
lives and as Congress works toward balancing the Federal budget,
the entire range of Federal retirement programs must continue to
be reviewed and safeguarded.

Today, Mr. Chairman, let’s begin the long, honest dialog about
the strengths and weaknesses of the current system, and let’s re-
member what this is about. It is about recruiting and maintaining
quality employees, protecting promises made, and ensuring that
American taxpayers are getting their money’s worth.

Thank you.

[The prepared statement of Hon. Thomas M. Davis follows:]

PREPARED STATEMENT OF HON. THOMAS M. Davis, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF VIRGINIA

Thank you, Chairman Mica, for allowing me to join the Subcommittee today to
discuss a’subject that is of great interest to me—the federal retirement system. I
commend the subcommittee for holding this hearing, and I look forward to more
hearings in the near future to allow us to conduct responsible oversight of the fed-
eral retirement system.

Congress wears two hats when it turns its attention to the federal retirement sys-
tem. We must balance the twin goals of protecting the taxpayer from any wasteful
spending on federal retirement, and we must maintain a secure retirement system
that provides for a decent standard of living for our retired federal workers and en-
courages the recruitment and retention of talented federal workers. As we turn our
attention to the detailed workings of the current retirement system, let’s not forget
that we are dealing with a major component of the federal government's compensa-
tion package that is relied upon by 2.3 million retired workers and another 2.8 mil
lion active workers. The current system may have room for improvement, but let’s
remember that the main objective in providing a retirement plan is to better guar-
antee that the taxpayer gets government service from qualified professionals who
are paid a decent wage with retirement security. When Congress created the federal
retirement system in 1920, it was concerned that growing nation must attract tal-
ented professionals to provide the public with high quality government service. This
goal is as important today as it was in 1920.

Before we hear from our excellent panels of witnesses today, let me briefly men-
tion a few important facts about the federal retirement system and about the people
who depend on it. The average federal retiree receives about $16,000 in retirement
payments a year and, since the CSRS system does not provide for any social secu-
rity benefits, this $16,000 amounts to the entire annual budget for the average fed-
eral retiree. Approximately 80% of federal retirees receive less than $25,000 in an-
nual retirement benefits—again, without any social security benefits.

In conclusion, it is worth mentioning for the record that the financing system that
we are discussing today is basically the same financing system used by Congress
to operate the military retirement system and the Social Security program. Many
of the issues we are discussing today should not be addressed in isolation. Neverthe-
less, as Americans live longer lives and as Congress works towards balancing the
federal budget, the entire range of federal retirement programs must continue to be
reviewed and safeguarded. Today, Mr. Chairman, let us begin a long, honest dia-
logue about the strengths and weaknesses of the current system. Let’s remember
what this is about—recruiting and maintaining quality employees, honoring prom-
ises made, and insuring that American taxpayers are getting their money's worth.

Mr. Mica. I thank the gentleman.
Now I would like to turn to our panel. As you can see, this mat-
ter has generated a great deal of interest and controversy, even



38
PREPARED STATEMENT OF JAMES L. BLUM, Deputy DirEcTOR, CBO.

Mr. Chairman and Members of the Subcommittee, I appreciate the opportunity to
discuss the financing of the Civil Service Retirement and Disability Fund (CSRDF).

In my statement today, I will make five points:

° The CSRDF is a set of accounts, common in the federal budget, for
recognizing the cost of deferred compensation as it is earned and the
liabilities that have accumulated for future payments. That
accounting may give the illusion that the government is setting aside
funds to pay future benefits. Unlike private pension funds, however,

the trust fund has no independent capacity to make future payments.

° Financing for civil service retirement benefits is on a pay-as-you-go
basis. Benefits paid each year are financed by federal revenues
received that year, including payroll tax contributions paid by federal

employees.

° The retirement fund does not face a financial crisis. Over time, the
ratio of beneficiaries to the revenue base does not surge. In fact, the
demand on the general fund declines in constant dollar terms after

2015.

° The Administration's proposal to increase agency contributions for

Civil Service Retirement System (CSRS) employees could make


69

-8-
BALANCE. THE STATEMENT OF THE OFFICE OF MANAGEMENT AND BUDGET

ADDRESSES THIS ISSUE IN GREATER DETAIL.

| HOPE THIS OVERVIEW HAS BEEN HELPFUL TO THE SUBCOMMITTEE, AND |
WILL BE GLAD TO ANSWER ANY QUESTIONS YOU MAY HAVE.


RETIREMENT TRUST FUND INVESTMENTS:
ADEQUATE FOR LONG-TERM NEED?

WEDNESDAY, JUNE 28, 1995

House OF REPRESENTATIVES,
SUBCOMMITTEE ON CIVIL SERVICE,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 10:15 a.m., in room
2154, Rayburn House Office Building, Hon. John L. Mica (chair-
man of the subcommittee) presiding.

Present: Representatives Mica, Bass, Burton, Morella, Moran,
and Mascara.

Also present: Representatives Davis and Collins.

Staff present: George Nesterczuk, staff director; Dan Moll, pro-
fessional staff member; Caroline Fiel, clerk; Bruce Gwinn, minority
senior policy analyst; Cedric Hendricks, minority professional staff;
and Elisabeth Campbell, minority staff.

Mr. Mica. Good morning, and welcome to the Subcommittee on
Civil Service.

I would like to start this morning’s proceeding by providing an
opening statement, then I will defer to my colleagues on the panel.

Again, good morning and welcome. I see we have several of our
Members. who will be testifying. Every Member and every Federal
employee who plans on retiring some day should be very concerned
about the present financial condition of the system. It is my belief
that if we take appropriate action today, we can ensure that every
Federal employee can be assured of a funded Federal retirement to-
morrow.

I want to extend a welcome to our witnesses who will be testify-
ing, in addition to many Members of Congress. We have represent-
atives of the administration, the Congressional Budget Office, and
the General Accounting Office. We have asked our witnesses to tes-
tify regarding the financing of the Civil Service Retirement and
Disability Fund, CSRDF, and on alternative proposals such as the
one introduced by Representative Michael Bilirakis in H.R. 103,
which would move the retirement fund to off budget.

The conference committee on the annual budget resolutions has
just reached an agreement which includes changes in the Federal
employee benefit package. The conference report includes a change
in the formula used to compute retirement benefits, a move to
high-five calculation by 1998 with an increase in employee con-
tributions to the retirement system of one-quarter percent in 1996
and one-quarter percent in 1998. I believe that these are both rea-
sonable, affordable, and measured increases, which I can support.

(ey)


72

That concludes my statement, Mr. Chairman. I would be pleased
to answer questions.

Mr. Mica. I thank you for your testimony and your participation.

(The prepared statement of. Mr. Finch follows:]


7

Mr. Bass. We must now recess for 30 minutes for a vote.

[Brief Recess.]

Mr. Mica [presiding]. If we can reconvene the hearing of the
Subcommittee on Civil Service; Mr. Finch, had you finished or had
you started?

Mr. FINCH. No, I am ready, it is my time.

Mr. Mica. If you would proceed, then, thank you.

Mr. FINCH. Thank you, Mr. Chairman.

I am pleased to be here to discuss Federal system financing. The
previous witnesses have already laid a good foundation in explain-
ing the way the retirement fund is financed. We all seem to be in
agreement that the fund does not face a financial crisis. Given that,
I will just make one additional point on the issue of the current fi-
nancing approach and then quickly summarize our thoughts on the
other issues you asked us to address and then we can move right
into the questions. I would ask for my detailed statement to be sub-
mitted for the record.

Mr. Mica. Without objection, so ordered.

Mr. FINCH. Thank you.

Our major concern with the retirement funding process has been
that agencies are charged less than the full accruing cost of CSRS,
thus understating the cost of government programs.

Our recommendation to charge agencies all accruing retirement
costs not covered by employee contributions was adopted for the
FERS pension plan when it was put in and for the Military Retire-
ment System but not for CSRS.

The President’s budget proposals for fiscal years 1995 and 1996
called for the dynamic normal cost approach to be applied to CSRS
and for CSRS’ unfunded liability to be amortized over a 40-year pe-
riod. We agree with the general objective of the proposal as de-
scribed in the budgets. The effect of the change would be to recog-
nize the full government cost of CSRS in agency budgets without
increasing the deficit, as we understand it.

On occasion, consideration has been given to moving the retire-
ment fund off budget. In our opinion, no purpose would be cur-
rently served by such an action. On budget or off budget, the
Treasury would still have to secure the money necessary to make
benefit payments from general revenues or from borrowing. We
have long supported the principle of the unified budget, believing
that the budget should be a comprehensive statement of receipts
and expenditures of activities of the Federal Government.

Changing the investment policy from nonmarketable Treasury
securities to private sector securities, that is, as Mr. Blum said ear-
lier, taking the fund entirely out of the budget, would result in sig-
nificant cash outlays which would further exacerbate the deficit sit-
uation. The government would have to borrow the money to make
the investments and then run the risk that the investment returns
would be less than sufficient to cover its obligations.

Because the accruing cost of CSRS and the FERS pension plan
for active employees are greater than the outlays to retirees each
year, requiring outside investments would cause an increase in out-
lay requirements over the amounts required under the current in-
vestment policy.


74

cost is expressed as a percentage of payroll and represents the
amount of money that should be set aside during employees’
working years that, with investment earnings, will be sufficient
to cover future benefit payments. Normal cost calculations
require that many assumptions be made about the future, including
mortality rates, quit rates, interest rates, employee salary
increases, and cost-of-living increases over the lifespans of
current and future retirees.

The amounts employees in CSRS and their agencies contribute to
the retirement fund are approximately equal to the system’s
"static" normal cost, that is, the cost of future benefits
calculated under the assumptions that federal pay schedules will
not increase and employees will receive no cost-of-living
adjustments (COLA) after they retire. However, when normal cost
is calculated on a "dynamic" basis, including assumptions for
future pay increases and COLAs, the cost percentage is about
doubled. It has long been our position that the dynamic approach
is the appropriate way to calculate and provide budget authority
for CSRS costs since it identifies the full cost of providing
benefits to covered employees. When done properly, recognizing
retirement costs as they are being accrued reflects the full
costs of providing retirement benefits to federal personnel at
the time their services are rendered.

Unlike CSRS, the FERS pension plan is funded on a dynamic normal
cost basis. Agencies are required to contribute the difference
between dynamic normal cost and employee contributions. The
differing approaches result in employing agencies making greater
contributions per employee toward the cost of FERS than they make
to CSRS, even though the overall costs of the two systems are
roughly comparable.

Although the amount of agency contributions covers less than the
actual cost to the government of providing CSRS benefits, much of

2


31

necessarily insulate retirement benefits from cutbacks. Well, those
are some major problems. Now we are going to hear from them
later on. But is there any point you want to make in advance that
you would like us to ask them when they explain these statements?

Mr. BILIRAKIS. Yes. First of all, yes, Social Security is not insu-
lated from cutbacks just because it is an off-budget item. It is set
up as, I understand, a separate category item as part of the unified
budget which basically red flags it if we were to fool around with
it, red flags it, and that is what we are asking insofar as our Fed-
eral retirees are concerned, the same treatment. So there is really
no difference as far as that is concerned.

I don’t know, I read the sentence, and I realize one sentence does
not constitute a full 21-page report from CBO, but that one particu-
lar sentence basically tells me there is no change as far as pay-as-
you-go financing nor budget totals, so that is from the CBO written
report. I haven't, frankly, looked at the other reports.

There is a chart here which I guess is from CBO which talks
about the transaction agency; this is, what difference does it make
for the deficit if the funds are treated like Social Security and are
placed off budget? Agency payment of an accrual charge? It says
no effect, same as current accounting. Employee contributions? It
says decreases, same as current accounting. Treasury interest pay-
ments? No, effect, same as current accounting. Annuitant benefit
payments? Increases, same as current accounting. It looks like that
sort of equals out to roughly zero. I realize it is not a zero, so again
no effect as far as that is concerned.

Jim, I think, really we have got to maybe bend a little bit here
if we really think that fairness should be a part of the equation.
We are all concerned about budget deficits. I am chair of the
Health and Environment Committee. I have got to come up with
these $270 plus billion savings in Medicare, and the additional
amount of Medicaid.

I represent one of the oldest districts in the country, so I have
great concerns about that and great concerns about the budget. I
certainly would not be a party to all this if I thought in my mind
and my heart that we are going to have any great concerns budget
wise. These other people are more expert than I, but they also don’t
have to answer to the constituents the way we do.

Mr. Moran. Yes. Well, I appreciate the work that you are going
to have to be doing on that. I don’t know, it seems like an
unsolvable problem. I am glad you are doing it and not us. I appre-
ciate your response and the intent of your legislation, Mr. Bilirakis.

I am going to make the point, and I don’t know that you even
disagree with it in terms of the underlying rationale for the system
that we have, but you know, we need to bear in mind we keep talk-
ing about what the private sector does. The private sector, 97 per-
cent of the private sector pays in full for the retirement plans for
their employees, and the Federal retirees pay 24 percent, on aver-
age, for their retirement.

As to whether we take it off budget or not, I think we probably
ought to talk to the budget experts that come up, and I certainly
appreciate your interest in this issue and your leadership, Mike.

Mr. BILiraKIS. May I just very quickly, again with all indulgence,
I was a Federal employee for a little while many years ago. I was


17

We appreciate the opportunity to present the views of the Professional Managers
Association on funding civil service retirement. The Professional Managers Associa-
tion (PMA) represents the interests of career mid-level managers and management
officials, Grade 13 through 15, in the Federal government. P| is also a member
of the Coalition for Effective Change, which consists of twenty-nine professional as-
sociations of Federal career executives, managers, and professionals.

I, like most Federal employees, am concerned and outraged over recent proposals
to change various aspects of the Federal employee retirement plans. |

I want to make one point before I go on to the others. And, that is that the bene-
fits employees have ‘already accrued simply cannot be tampered with, unless, to
speak plainly, the Congress is walling to engage in outright stealing from Federal
employees and, in addition, do to Federal employees what would be a violation of
the Employee Retirement Income Security Act of 1974 (ERISA) in the private sector.

ERISA, which regulates private-sector employee retirement plans in Internal Rev-
enue Code 411(d)6) and section 204G of Title I in ERISA, prohibits lowering bene-
fits that employees have already accrued (earned). Would you countenance expropri-
ating employees’ thrift savings accounts? Surely not, Lowering benefits employees
have already accrued in a defined benefit pension plan (such as the Civil Service
Retirement System (CSRS) and the annuity portion of the Federal Employees Re-
tirement System (FERS)) is no different from taking away the amounts that have
already been contributed to the thrift savings plan accounts of employees.

Accordingly, if the formula, such as the “high-3” formula, for computing benefits
is changed to “high-5,” the “high-5” formula cannot apply to past years, it can apply
only to future years of accrual. So, if the “high-3” formula is changed to “high-5,”
all of the years employees have already accrued must be based on “high-3”—only
their future years of service for which they have not yet accrued benefits can be
based on “high-5.”

If Congress, in dealing with Federal employees’ retirement, does not abide by
those simple protections given under Federal law to private-sector employees, it is
allowing itself to strip Federal employees of rights and protections that private-sec-
tor employees in this country have long been protected from suffering at the hands
of their employers. Not respecting benefits already accrued by employees would be
more than Breakin the Government’s contract with us—it would be’ robbing us of
benefits we have already earned. Remember, Congress recently promised to abide
by the rules it imposes on the private sector.

For the Government to renege on any of its retirement promises to current Fed-
eral employees (even with respect to those benefits employees have not yet accrued)
is to break faith with Federal employees and break the Government's contract with
us. Such an action is akin to defaulting on paying interest on Treasury bonds. Fed-
eral employees’ retirement is deferred compensation—it’s an earned contractual ben-
efit and part of employees’ compensation package; it’s not welfare or charity or an
income transfer program. The Federal retirement system is a cost the Federal Gov-
ernment has as one lover of more than 2 million employees. Federal employees have
kept their part of the bargain by working—the Government, as their employer, must
keep its part of the bargain and pay the benefits it has promised to pay them in
exchange for that work. We cannot take back our work and years of service and the
Government should not take its promises back.

Many employees are close to retirement and made retirement plans based on their
contract with the Government. If Congress reneges on its promises, even with re-
spect to benefits employees have not yet accrued but expect to accrue in the future
in accordance with the promises made to them, it will cause the maximum hardship
to those near retirement. I hope that Congress will abide by its promises. It’s the
right thing to do.

Any changes to Federal retirement programs should apply only to future employ-
ees. However, we see no reason for changes, even for future employees. It wasn't
so long ago that FERS was enacted after much study and deliberation to cover em-
ployees hired after 1983. Nothing has happened since then to suggest that there are
any real problems with or valid complaints about the Federal retirement system.
So, we see no sensible reason for major changes. And, we think that, if changes are
made (unless they are improvements that increase benefits), the Government will
be seen as a less desirable and even frivolous and unstable employer unable to re-
cruit and retain a competent workforce.

As the General Accounting Office testified, the combination of a defined benefit
and a defined contribution component is quite common in the private-sector. There
are problems in offering only a defined contribution plan. In a defined contribution
plan the employee bears all the risk. The employee cannot count on a specified re-
tirement benefit. Employees can be disadvantaged based on when they retire in a
defined contribution plan if the economy is such that their account balance has gone


23

arms. For this reason, I am puzzled by current attempts to alter this decade-old re-
tirement system, which even yet is not fully operational.

I would additionally like to speak about simple fairness. Many loyal public em-
ployees, whom I happen to represent, thought they had an agreement with their em-
ployer—the Federal Government. Year after year, these decent and committed
Americans have been asked to make significant financial sacrifices in order to help
alleviate this Nation’s budget problems. We—and I include myself in the “we”—have
eliminated, reduced and delayed cost-of-living-adjustments to which postal and Fed-
eral retirees had been entitled. While I commend this subcommittee for not suggest-
ing any annuity reductions to current retirees, I am very concerned about proposals
to adversely effect earned-retirement benefits that current employees will be enti-
tled to during their retirement years. This is especially true for the countless postal
and Federal workers approaching retirement and who have made retirement deci-
sions based upon the program as it stands today.

Finally, as I stated at the Rules Committee, I simply do not understand why the
Postal Service's workers should be impacted by CSRS or FERS reductions, as the
Service fully pays for its retiree obligations—the result being no budget impact. Al-
though I know that postal assessments are not under the jurisdiction of this sub-
committee, I wanted to point out that hitting the Postal Service for “supposed” re-
tiree obligations, as has been done over the years, ig patently unfair. We all know
that in the business world, if a corporation is taxed, the consumer will be forced
to absorb the cost and the product becomes less attractive. We should resist any at-
tempt to “manufacture” a financial obligation for the Postal Service and simply cred-
it it to the CSRS Trust Fund in the name of deficit reduction.

Mr. Chairman, the confidence of our workers and their families depends on ac-
tions taken by this subcommittee and the Congress re regarding their retirement sys-
tem. So, I implore you not to experiment with it, and if changes must be made, they
should be prospective so as to protect the benefits of current employees.

Thank you, Mr. Chairman and members of the committee, for allowing me to
share some of my concerns and thoughts with you.

Mr. Mica. Now I yield to the gentleman who has a large Federal
work force contingency in his district from Virginia, Mr. Bateman.

STATEMENT OF HON. HERBERT H. BATEMAN, A REPRESENTA-
TIVE IN CONGRESS FROM THE STATE OF VIRGINIA

Mr. BATEMAN. Thank you very much, Mr. Chairman, members of
the committee, I have a brief prepared statement which I would
propose to read in view of the fact that if I sought to summarize
it extemporaneously, the summary might be longer than the state-
ment.

Mr. Mica. Proceed with the statement.

Mr. BATEMAN. Mr. Chairman, I appreciate the opportunity to be
here today and add my testimony to the proceedings to investigate
financing of the Civil Service Retirement System. As you have indi-
cated, I represent Virginia’s First Congressional District, which has
one of the Nation’s highest concentrations of Federal "employees,
and I am extremely concerned that budget cutting efforts relating
to civil service retirement are misled attempts to balance the budg-
et on the backs of Federal employees. As a Member who has con-
sistently fought against efforts that unfairly target Federal employ-
ees, I believe it is extremely important that we understand all the
facts in this matter before making any unwise decisions in the
name of deficit reduction or reform.

As you know, civil service retirement, like most other employer-
provided defined benefit plans, is financed significantly by the em-
ployer. In this case, the Federal Government. The private employ-
ers finance pensions from business income or revenues. The Fed-
eral Government also finances pensions primarily from revenues,
tax revenues collected from the American people.


19

Federal plans No proposals to require Federal employees to work longer, pay more,
or receive less should be considered. None of the proposed changes to the retirement
systems covering Federal employees are really about making valid needed reforms
or proper funding or equity. It is unconscionable to take promised benefits from em-
ployees to balance the budget or give tax-relief or pay for other programs.

12, Federal employees, as Federal employees, have done more than their share
in the past few years for deficit reduction, as well as taking hits as citizens. That
has not been fair. Suggesting that Federal employees, as such, bear additional bur-
dens ignores the fact that cuts in Federal employee pay and benefits since 1981
have totaled approximately $170 billion. This continual beating up on Federal em-
ployees is distasteful. It would be inappropriate for the Government to engender dis-
respect from its own employees, but that is what will happen if the Government
cavallerly breaks its retirement promises to incumbents, as has been proposed.

We will be happy to work with you on these issues and look forward to testifying
in the future. Thank you for considering our views.

Mr. Mica. And before the witnesses in our panel die on the vine,
we have one additional member of our full committee, the gen-
tleman from Virginia, Mr. Davis, who also Chairs the D.C. Sub-
committee. I recognize him now.

Mr. Davis. Mr. Chairman, thank you.

I was also offered to testify on the panel and knew that I would
be able to speak first if I was up here with the subcommittee today,
but thank you, Chairman Mica, for allowing me to join the sub-
committee today to discuss a subject that is of great interest to me,
the Federal retirement system.

I commend the subcommittee for holding this hearing. I look for-
ward to more hearings in the near future to allow us to conduct
responsible oversight of the Federal retirement system.

Now, Congress wears two hats when it turns its attention to the
Federal retirement system. We must balance the twin goals of pro-
tecting the taxpayer from any wasteful spending, and we must
maintain a secure retirement system that provides for a decent
standard of living for our Federal retired workers, and encourages
the recruitment and the retention of current Federal workers.

As we turn our attention to the detailed workings of the current
retirement system, let’s not forget that we are dealing with a major
component of the Federal Government’s compensation package that
is relied upon by 2.3 million Federal workers and another 2.8 mil-
lion—excuse me, 2.3 million retired workers and another 2.8 mil-
lion active workers. The current system may have room for im-
provement, but let’s remember that the main objective in providing
a retirement plan is to better guarantee that the taxpayer gets gov-
ernment service from qualified professionals who are paid a decent
wage with retirement security.

When Congress created the Federal retirement system in 1920,
it was concerned that a growing Nation must attract talented pro-
fessionals to provide the public with high quality government serv-
ice. This goal is as important today as it was in 1920.

Before we hear from our excellent panels of witnesses today, let
me briefly mention a few important facts about the Federal retire-
ment system and about the people who depend on it.

The average Federal retiree receives about $17,000 in retirement
payments a year, and since the CSRS system does not provide for
any Social Security benefits, this $17,000 amounts to the entire an-
nual budget for many Federal retirees. Approximately 80 percent
of Federal retirees receive less than $25,000 in annual retirement


32

an engineer up here before I decided to go to law school, and I wish
sometimes I had stayed as an engineer, but in any case, the point
of the matter is that you can’t really equate that, the salaries in
the private sector, and I know that the Federal salaries have in-
creased, but these people have been here all these years for a cou-
ple of reasons, and one is I think they are patriots and want to
serve but the second reason is these benefits, and now we are talk-
ing about after all those promises, one, we are trying to reach out
and pull them away from them conceivably, and that is damn
wrong on our part.

Mr. Moran. Thank you, Mr. Bilirakis.

Mr. Mica. I thank the gentleman and yield now to the vice chair-
man, Mr. Bass.

Mr. Bass. Thank you, Mr. Chairman.

I guess the gentleman from Virginia is correct. According to the
Civil Service Retirement Disability Fund annual report by OPM,
total expense money paid out, $12.6 billion; combined payroll, $47.4
billion; 1995, the total amount of money that is paid out is $37.6
billion for a combined payroll of $110.3 billion, and then in the year
2020, the total amount of money to be paid out, projected, is $140.6
billion, with a combined payroll projection of $346.4 billion, which
is 40 percent.

I guess my question to you, Congressman Bilirakis, is on budget,
off budget, so forth, do you think that we need to address the fact
that we have an employee contribution in 1995 of $4.7 billion and
a total expense of $37.6 billion, which is about a $34 billion total
cash out on the Federal Government, and increasing over the
years. Do we have a responsibility to address this question and try
in as an imaginative fashion as possible, being sensitive to the in-
terests of Federal employees and what they need and deserve and
also what the taxpayers deserve to formulate some sort of solution?

Mr. BILiRAKIS. To paraphrase what Jim said to me about my
problem, that is basically your responsibility to determine that. I
am not in a category to do that. I have enough on my plate. First
of all, I don’t know; that has nothing to do directly with whether
we take it off budget or not. The problem is still there whether we
leave it alone now as it now stands or whether we take it off budg-

et.

Certainly, I think that if everything—all the statistics basically
bear out that you have got to have some kind of increases, certainly
for new employees coming aboard. That has got to be considered.
And I think that NARFE as well as the active Federal employee
unions have to take all that into consideration.

The tough thing, of course, is changing horses in the middle of
the stream for those who are now still working, and that is a tough
decision on your part. But even those people I think would prob-
ably understand what has to be done in order to protect the pro-
gram, sort of like what we are telling the Medicare beneficiaries
now, we have got to preserve the program, and so we are going to
have to take some hard lines and we don’t know yet what those
are, but we are working hard at it.

Mr. Bass. Thank you very much, Congressman Bilirakis. Thank
you, Mr. Chairman.

Mr. Mica. I yield now to Mr. Davis.


14

General Accounting Office and the Congressional Budget will also testify that the
“unfunded liability,” poses no threat to the retirement fund.

I look forward to their testimony, and I will continue to work to ensure that the
Federal government lives up to the commitments it has made to its employees and
to ensure that there is a competent and motivated workforce to do the people's busi-
ness.

Mr. Mica. And now I would like to yield to the gentlelady from
Maryland, Mrs. Morella.

Mrs. MoRELLA. Thank you, Mr. Chairman.

I was going to be testifying, but I prefer to do it here as a mem-
ber of this subcommittee, and so I want to reflect to all of you that
the proposed revisions to the Federal retirement system have un-
earthed a number of very critical issues, and although you and I,
Mr. Chairman, have divergent views on some of the issues, I do
share your belief as outlined in your memorandum of June 23, that
“an understanding of the financing of the Civil Service Retirement
and Disability Fund is fundamental to any consideration of long-
term, prospective reforms to the CSRDF.”

I want to commend you, Mr. Chairman, for calling this hearing
which is a crucial step in moving toward this understanding.

Is the retirement fund insolvent? Much has been made about the
unfunded liability of the Federal retirement system, and yet both
the Congressional Research Service and the General Accounting
Office agree that, “the Federal retirement system’s unfunded liabil-
ity is not a problem that needs to be fixed.” Both CRS and GAO
have concluded that “there will always be sufficient assets in the
retirement fund to cover benefit payments to all current and future
retirees.” In fact, the unfunded liability of the Social Security sys-
tem is over $7 trillion, and no one seems concerned about that.

Who should finance the retirement system? In a CRS report enti-
tled, “Federal Civil Service Retirement: Comparing the Generosity
of Federal and Private Sector Retirement Systems,” it was noted
that virtually all private pensions, 97 percent, are funded entirely
by the employer. The Military Retirement System operates under
this principle, and yet Federal workers are preparing themselves
for a slightly higher contribution and reduced benefits.

Now, I don’t mean to suggest that Federal agencies and tax-

ayers, as employers, should pay the entire contribution to the

‘ederal retirement system, which would be approximately 25 per-
cent of salary. This would represent a significant cost to agencies
which in these times would be problematic, to say the least. How-
ever, I am reserving judgment on the administration’s proposal to
fully fund the system, excluding the current employee contribution.
At face value, this, too, seems problematic. But Mr. Flynn from
OPM is here today, and he will hopefully outline the concepts of
this idea.

Should the CSRDF be off budget? The intent of this idea is to
protect the earned benefits of Federal workers. I support this. How-
ever, a number of individuals have expressed doubts that this idea
would have this effect. Some feel the inverse is true, predicting in-
creases in the deficit and current outlays while providing no real
protection for current or future Federal retirees.

I am a cosponsor of Mr. Bilirakis’s bill, H.R. 103, which would
take the CSRDF off budget. I am glad that this subcommittee will
afford Mr. Bilirakis an opportunity to discuss his bill and its finan-


86

Mr. Mica. I have some questions myself about the health benefit
proposals. In fact, I met with the Speaker earlier this morning and
relayed some of my concerns about the possible effect there, maybe
not so much on current employees but also on our retirees that are
under some different constraints and circumstances. I guess it all
isn’t finished until the bill is signed, so we have got some ways to

0.

Mr. BLUM. I would like to make a couple of comments, if I may,
Mr. Chairman.

Mr. Mica. Go right ahead.

Mr. Bum. I am not at liberty to take a position, but I can make
some observations for you.

First of all, regarding the Federal Employee Health Benefit Pro-
gram, the change proposed there in the Government’s contribution
rate was one of the options for reducing the deficit that was in-
cluded in CBO’s volume of deficit reduction options this year, so I
would call it to your attention.

The discussion of that option laid out how it would work and
gave the arguments for it and against it, including the comments
Mr. Flynn just made in terms of adverse selection possibilities and
so forth. I would just commend that to your attention.

With respect to increasing the employee contribution for Federal
employee retirement, I would simply note that the rate of contribu-
tion has been increased in the past, as you have noted, but typi-
cally those increases have occurred when benefits were being in-
creased rather than diminished, as would be happening this time
with the shift from the high-three to the high-five average.

Mr. Mica. Actually, the high three and the high five is really the
only thing that affects the unfunded liability; is that correct?

Mr. Bum. No, both would have an effect, I assume.

Mr. Mica. Well, the quarter of a percent times two really just di-
minishes the amount of the future projected contribution from the
General Treasury.

Mr. BLUM. That is true for the FERS program.

Mr. Mica. But not for the old CSRS?

Mr. BLuM. No. I think also included in the budget resolution as-
sumptions is an assumption that there would be an increase of 1
percent on the part of agencies, on Federal agencies to pay toward
the CSRS program.

Mr. Mica. But again it was my understanding, I may be wrong,
that that really doesn’t do much to affect the unfunded liability,
that, in fact, only the change in the high five makes a dent there.

Mr. BLuM. I am advised by my staff that raising the employee
contribution rate would not have an effect on the unfunded liabil-
ity.

Mr. Mica. OK. And again it seems like just about every source
comes back to the taxpayer for funding all of these benefits, again
with some changes being proposed in this legislation that would in-
crease the employee contribution and their current contribution.

I have given you a little chart that we just made up this morning
looking at the pension deficit in nominal dollars between 1995.
This is projections in billions of dollars up to the year 2035.


73

PREPARED STATEMENT OF JOHNNY FINCH, ASSISTANT COMPTROLLER GENERAL,
GENERAL GOVERNMENT Division, GAO

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss federal retirement
system financing. This issue is quite complicated and complex.
The purpose of our statement is to attempt to bring some
perspective to the issue by describing how the government
finances its retirement systems and discussing the budget
implications of the financing methods being used and possible
changes to these methods. Our statement concentrates on the
Civil Service Retirement System (CSRS) and the Federal Employees
Retirement System (FERS) because they are the largest retirement
programs for federal civilian personnel.

Since we noted that you asked the Office of Personnel Management
to provide considerable information on the cost, liabilities, and
outlays of the two systems, we have not included such data in our
statement.

RETIREMENT FINANCING PRACTICES
NOW BEING FOLLOWED

There are several similarities in how CSRS and FERS are financed,
but there are significant differences as well.

CSRS and the FERS pension plan require employees to contribute
toward system costs. As the employer, the government is
responsible for funding all costs not covered by employee
contributions. If there were no cost to the government,
employees, in effect, would not be receiving any retirement
benefits from their employer. Thus, the cost of the retirement
systems is part of the overall costs taxpayers pay for the
government services they receive.

Both CSRS and the FERS pension plan are "funded" programs, in
that amounts are set aside (in the same fund) to cover benefit
payments. A "normal cost" is calculated for each plan. Normal


58

a pen without economic costs. The unfunded liability appears to be a problem only
because of the financial illusion created by the retirement trust fund. In fact, the
government has no assets that can be used to spare the American taxpayer the burden
of paying all of the liabilities that the government has accumulated for future pension
benefits. Seen in perspective, however, that burden does not appear unmanageable.

In constant 1994 dollars, the draw on the general fund actually declines after 2015.

The Administration's proposal is designed to perfect the budgetary accounting
for retirement benefits so that all normal cost is recognized on the books of the
federal government as benefits are earned. Moving the retirement fund to off-budget
status, as has been done for Social Security, would have no significant effect on the
financing of benefits. Moving the retirement fund outside the budget would require
a fundamental change in financing and could have significant macroeconomic

consequences.

In closing, Mr. Chairman, I would urge the Committee to evaluate those
proposals not only in terms of their costs but also in light of their effects on the
ability of the government to recruit and retain a skilled workforce and, relatedly, on

the credibility of the federal government as an employer.

21


6

also support efforts to include us and our staffs in any proposal
that would affect executive branch employees.

I commend the administration’s actuaries for realizing and put-
ting forth proposals to address some of the financing problems, one
to deal with fully financing current and future CSRS benefits
through agency contributions, and the other to pay off previously
accrued CSRS unfunded liabilities. I am anxious to hear from the
administration witness today regarding both of these proposals
that were included this year in the President’s budget submission.

Finally, I have some serious concerns about the way we are keep-
ing the books for our Federal employees regarding their pensions.
The majority of so-called “assets” in the fund which make the fund
look like it is flush with cash are nothing but paper IOUs and rep-
resent spending authority for any number of government programs
paid out of the General Treasury. This bookkeeping scheme mis-
leads both taxpayers and the Federal workers and retirees into be-
lieving that we have reserved and invested actual funds into a spe-
cial account.

In addition, the so-called “assets” of the fund are not invested in
private sector funds but in non-negotiable government securities.
Here again, there are no real monetary gains, merely entries on
the books which become additional future draws on the Treasury.
These bookkeeping practices underestimate the growing cost of the
system and mask the real size of our Federal deficit by almost $26
billion in 1994 going up to $1¥2 trillion by the year 2045.

Our accounting is wrong, and I am not the only one who wants
answers. Let me quote one of the letters that the committee re-
ceived recently from Carol Goodyear, a Federal employee who
wrote on June 2, to ask, “Where is all the money that is contrib-
uted to CSRS and why can’t it be accounted for? Do private pension
funds receive more protection from the Federal Government
through the Pension Benefit Guaranty Corporation than do the
pensions of its own Federal employees?”

I couldn’t have asked the question better myself and I hope today
that we will get some answers to this and other questions that I
have raised.

I thank you, Mr. Chairman, for the opportunity to make this
statement.

Mr. Mica. I thank the gentleman.

[The prepared statement of Hon. Charles F. Bass follows:]

PREPARED STATEMENT OF HON. CHARLES F. Bass, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF NEW HAMPSHIRE

‘Thank you, Mr. Chairman, for holding this important hearing to examine the fi-
nancing, bookkeeping, and operation of the Civil Service Retirement and Disability
‘Trust Fund (CSRDF). Clearly, there is a problem with the way the system is work-
ing when year after year Federal employees and retirees remain vulnerable to Ad-
ministration and Congressional budget scrutiny.

In the past several months, a number of Members of Congress have indicated that
they have concerns about the vulnerability of the federal workers and retirees, as
well as what the monies in the trust fund actually pay for. Some of them have been
asked to testify today to share with us their thoughts and hopefully make sugges-
tions on how we might address those concerns.

I look forward to the testimony of the Members today and hope they will share
with us their ideas for prospective reforms.


29

Mr. Biuirakis. Mr. Chairman, I am sorry —.

Mr. QUILLEN. Go ahead.

Mr. Mica. Mr. Bilirakis.

Mr. BILIRAKIS. I wasn’t sure. I didn’t mean to interrupt you, Mr.
Chairman.

Again, a complicated subject. But as I understand it, there is an
off-budget definition and there is an outside-the-budget definition,
and with all due respect, I think you are probably thinking more
and talking more in terms of outside the budget. We aren’t suggest-
ing that.

If we took it outside the budget and let it sit completely on its
own the way our thrift savings program is concerned, then, yes, we
would have to come up with all those dollars on the right-away
basis, and I know that is impossible. That is not what we are talk-
ing about. We are talking about off budget, taking it off budget and
in effect putting it into virtually the same category as Social Secu-
rity is now.

There is no need under those kind of circumstances, as I see it,
to reach out and try to pull in an additional $500 billion or what-
ever that shortfall would be. Outside budget, yes; off budget, no.

Mr. Mica. In conclusion, Mr. Bilirakis, even under your proposal,
you would still have people coming up every year saying that this
money, if there was some increase or when you increase this by a
quarter percent employee contribution, that these funds were
being, in fact, used for some other purpose or could be used for
some other budget purpose.

Mr. BILIRAKIS. Well, I wonder if—the Social Security funds are
kind of used back and forth, too, are they not? So I don’t know that
we have any kind of difference there. I think, again, we have got
to understand clearly that with all due respect that distinction be-
tween off budget and outside budget. I know counsel understands
this one heck of a lot better than I do.

Mr. Mica. I appreciate your comments. I yield now to—.

Mr. QUILLEN, Mr. Chairman?

Mr. Mica. Yes.

Mr. QUILLEN. As I said in my statement, the analyses provided
by both the Congressional Research Service and the General Ac-
counting Office conclude that the Civil Service Retirement Trust
Fund is in financially good shape and its future obligations do not
impact the budget. Furthermore, I urge you to appreciate that
FERS is fully funded, resulting in fully accounted for liabilities.

Mr. Mica. Well, FERS is fairly well funded. As I understand it,
there is a $1.8 billion unfunded liability. Most of the unfunded li-
ability is in CSRS, the old system.

The problem you have here, Mr. Quillen and Mr. Bilirakis, is
that everything is funded out of current revenues. There is no real
reserve in any of this. Even the money that is in the reserve, the
$320 billion, last year we paid $25 billion in interest because we
borrowed, we took all the money out of that. So it continues to re-
flect on annual budgets, and that is part of the problem we face.

I have taken more than my time, and I want to yield to our rank-
ing member for questions. Mr. Moran.

r. MORAN. We are dealing with some data that really needs to
be cleared up when we hear from GAO and CRS. I am really dis-


65

-4-
$138 BILLION IN 2025, AND TO $185 BILLION IN 2035. HOWEVER; EXPRESSED
IN CONSTANT 1995 DOLLARS, THE REAL EFFECT UPON THE BUDGET REMAINS
ESSENTIALLY STABLE; GOING TO $33 BILLION iN 2605, TO $39 BILLIGN iN
2015, TO $37 BILLION IN 2025, AND TO $32 BILLION IN 2038:
ACCOMPANYING THE MATERIALS SUBMITTED TO THE SUBCOMMITTEE
EARLIER, THERE ARE CHARTS SHOWING THE INCOMES AND OUTLAYS

YIELDING THESE NET FIGURES.

THE CREDITS ACCUMULATING IN THE RETIREMENT FUND ARE INVESTED IN
SPECIAL INTEREST-BEARING SECURITIES OF THE U.S: GOVERNMENT, WHIEH
CANNOT BE SOLD TO THE PUBLIC: SINCE THESE SECURITIES AND THE
INTEREST THEY EARN, WHICH IS REINVESTED IN YET MORE SPECIAL
SECURITIES, ARE NON-MARKETABLE; THEY ARE IN ESSENCE GOVERNMENT
"IOUS" WHICH ARE LIQUIDATED TO PAY CURRENT AND FUTURE BENEFITS:
WHEN THIS OCCURS, THE SECURITIES REGGRDED IN THE RETIREMENT FUND

ARE REDUCED ACCORDINGLY:

BECAUSE THE FUND SECURITIES AMOUNT TO LOANS THE GOVERNMENT
MAKES TO ITSELF, LOANS THE GOVERNMENT IS REQUIRED BY: LAW T@ REPAY
WITH INTEREST; THERE IS NO NEED FOR REAL EASH TO CHANGE HANDS

WHEN AMOUNTS ARE RECORDED IN THE FUND: BUT WHEN WE PAY OUT


67

-6-
THE RETIREMENT FUND WILL ALWAYS HAVE SUFFICIENT BUDGET AUTHORITY

TO PAY BENEFITS.

NONETHELESS, FOR CIVILIAN EMPLOYEES HIRED BEFORE 1984, EMPLOYING
AGENCIES STILL PAY ONLY ABOUT TWO-FIFTHS OF THE GOVERNMENT'S
SHARE OF THE ACCRUING COSTS, RESULTING IN AN INCREASING UNFUNDED
LIABILITY. THE ADMINISTRATION’S PROPOSAL TO DEAL WITH THIS
SITUATION WILL REQUIRE AGENCIES TO PAY THE FULL ACCRUING EMPLOYER
COST OF CSRS BENEFITS BEGINNING IN FY 1997. IT WILL ALSO ADDRESS THE
$540 BILLION UNFUNDED LIABILITY BY AMORTIZING THE DEBT OVER A 40-

YEAR PERIOD BEGINNING IN FY 1997.

THIS tS A "GOOD GOVERNMENT” MEASURE DESIGNED TO PROVIDE MORE
ACCURATE COST ACCOUNTING -- SHOWING CSRS COSTS WHEN AND WHERE
THEY ARE INCURRED, RATHER THAN AS A GOVERNMENTWIDE COST AT SOME
POINT IN THE FUTURE. IT WILL ALSO RESPOND TO CONCERNS ABOUT THE
SYSTEM’S LARGE UNFUNDED LIABILITY AND STOP IT FROM GROWING

FURTHER.

IF THE PROPOSAL IS ENACTED, THE DOMESTIC DISCRETIONARY BUDGET CAPS
WILL HAVE TO BE INCREASED BY $4 TO $5 BILLION IN FY 1997 IN ORDER TO

PROVIDE AGENCIES WITH THE FUNDS THEY WILL NEED TO PAY HIGHER CSRS


68

-7-
CONTRIBUTIONS WITHOUT REDUCING STAFF OR CUTTING OTHER PROGRAM
EXPENSES. THE CAP INCREASE WILL BE EXACTLY OFFSET BY HIGHER
INTRAGOVERNMENTAL RECEIPTS IN THE RETIREMENT FUND, AND THUS THERE

WILL BE NO IMPACT ON THE DEFICIT.

THE UNFUNDED LIABILITY AMORTIZATION PAYMENT WILL BE CLASSIFIED AS.
DIRECT SPENDING, AND WILL NOT REQUIRE AN ADJUSTMENT TO THE
DISCRETIONARY SPENDING CAPS. ALSO, IT WILL NOT REQUIRE A DIRECT
SPENDING (OR PAYGO) OFFSET, SINCE THE PAYMENT WILL BE AN
INTRAGOVERNMENTAL TRANSFER, MOVING FUNDS FROM ONE
GOVERNMENTAL ACCOUNT TO ANOTHER. THE PROPOSAL IS NOW IN THE

FINAL STAGES OF INTERAGENCY CLEARANCES.

BUDGETARY STATUS OF FUND

IF THE RETIREMENT FUND WERE TAKEN OFF-BUDGET, IT WOULD CHANGE THE
WAY RETIREMENT COSTS ARE TREATED. AS NOTED EARLIER, UNDER THE
CURRENT SCOREKEEPING RULES, THE FUND’S ON-BUDGET DEFICIT IMPACT IS
EQUAL TO CSRS AND FERS BENEFIT PAYMENTS NET OF EMPLOYEE AND.
POSTAL SERVICE CONTRIBUTIONS. IN AN "OUT OF THE BUDGET" SCENARIO,
THE FUND'S DEFICIT IMPACT WOULD EQUAL THE GOVERNMENT'S
CONTRIBUTIONS TO FINANCE CSRS AND FERS BENEFITS, INCLUDING
AMORTIZING THE UNFUNDED LIABILITY, AND INTEREST ON THE FUND.


26

Office will be able to assist us in resolving these technical ques-
tions.

Mr. Chairman, in closing, I would like to remind my colleagues,
all of us in this House and in this Congress, that Federal annuities
are earned benefits, and so Federal retirees deserve to be treated,
I think, at least equally with other retirees.

Mr. Chairman, I would also like to call to the attention of the
committee the last line on page 16 of the prepared statement by
CBO which goes on to say: “Moreover, placing the retirement fund
into the off-budget category changes neither the pay-as-you-go fi-
nancing of Federal retirement nor the budget totals.” I am not real-
ly sure what is holding us back here. If we don’t have really any
sort of effect so far as dollars are concerned, I think we should just
go ahead and do it so these people can feel less fear when it comes
to budget time here in this Congress.

Again, I am grateful to the subcommittee for its consideration
and look forward to working with all of you on this issue.

Thank you.

Mr. Mica. I thank the gentleman for his testimony. And also
again his patience.

[The prepared statement of Hon. Michael Bilirakis follows:]

PREPARED STATEMENT OF HON. MICHAEL BILIRAKIS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF FLORIDA

I would like to thank you for the opportunity to be here this morning to discuss
H.R. 103, legislation I introduced to take the Civil Service Retirement and Disability
‘Trust Fund off-budget.

As you know, the Civil Service Retirement Fund was created by the Civil Service
Retirement Act of 1920 (Public Law 66-215). It was maintained as an independent
trust fund until 1967, when President Johnson agreed to a recommendation that
such trust funds should be made part of the unified budget.

Since that time, the annuities of Federal retirees and, in particular, their cost-
of-living adjustments (COLAs), have been highly vulnerable to cuts during our an-
nual budget cycle. Most recently, the 1993 Omnibus Budget Reconciliation Act de-
layed Ct for Federal retirees for three months in fiscal years 1994 through
1996. This delay resulted in $778 million in lost COLAs for Federal retirees.

In contrast, the Social Security Trust Fund was removed from the budget in a se-
ries of measures in the 1980s. Social Security was removed from the unified budget
so that cuts in benefits would have no effect on the Federal deficit, giving Social
Security recipients special protection from budget cuts. The 1993 Omnibus Budget
Reconciliation Act did not impact COLAs for Social Security recipients.

As part of the unified budget, the pensions of Federal retirees do not enjoy the
same level of protection. This is why I introduced legislation to remove the Civil
Service Retirement and Disability Fund from the unified budget.

Specifically, H.R. 103 removes receipts and disbursements of the trust fund from
the President's budget request, the congressional budget, and exempts the fund from
sequestration under the Balanced Budget and Emergency Deficit Control Act of
1985. My bill simply seeks to achieve some measure of fairness for Federal retirees
by putting the Civil Service Retirement and Disability Trust Fund on an equal
budgetary status with Social Security.

ile off-budget status does not guarantee absolute protection from cuts, it will
make any cuts more visible and, therefore, more difficult to make. All retirees,
whether they receive Social Security or some form of Federal annuity, should be
treated equally.

My legislation has received widespread, bipartisan support in the House of Rep-
resentatives. To date, 93 Members have cosponsored H.R. 103, including 13 mem-
bers of the Government Reform and Oversight Committee. My legislation is also
supported by the National Association of Retired Federal Employees (NARFE).

ince taking the trust fund off-budget raises some technical questions and issues
regarding budget rules, I felt it was best to introduce a very general piece of legisla-
tion with the anticipation that the bill would be amended as it moved through the
legislative process.


78

investments. In the current deficit situation, this means the
government would have to borrow the money to make the investments
and then run the risk that the investment returns would be less
than sufficient to cover its obligations.

Moreover, the accruing costs of CSRS and the FERS pension plan
for active employees are greater than the outlays to retirees
each year. Thus, requiring outside investments would cause an
increase in outlay requirements over the amounts required under
the current investment policy. If outside investments were used
for the government’s other retirement systems, Social Security,
and other trust funds, the increased outlay requirements would be
even greater.

That concludes our prepared statement Mr. Chairman. We would be

pleased to answer any questions the Subcommittee may have.

(966668)
6


3

sion system burdens the taxpayer by over $1¥ trillion. That is 25
percent of our gross national debt, which includes Social Security
and Medicare.

In the 1980’s, Congress recognized the problem inherent in the
Civil Service Retirement System, but enacted only a partial fix.
When the Federal Employees Retirement System, or FERS, as it
is also referred to, was created, Congress had the good sense to
place the Thrift Savings Plan outside the budget and assure that
its assets rest on real investments.

Congress also provided for the full funding of the basic annuity
through employee and agency contributions but failed to back it
with real assets in a real trust fund. I have asked the General Ac-
counting Office to update its 1978 report on the financing and sol-
vency of the nearly 40 different Federal retirement systems.

As the GAO stated in their 1978 report, “Full recognition of the
accruing retirement cost is essential not only in determining and
allocating the cost of government operations but also in determin-
ing the present and future financial condition of the United
States.”

Unpleasant as it may seem to some, failure to recognize the true
cost of Federal retirement systems only pushes the burden of fund-
ing on to our grandchildren and future generations. I believe a
thorough understanding of CSRDF financing is really fundamental
to any consideration of long-term prospective reforms.

This hearing today will examine the amount of cash going into
the system, the amount of money being paid out in annuities, and
the status of CSRDF’s assets. We will determine whether the $320
billion of so-called “assets” could be used to pay today’s annuities
and we will examine the amount of general revenues that will be
required to pay annuities in the years 2015, 2025, and 2035.

T look forward to the testimony of our witnesses, and I hope that
we can shed some light on the true nature of the retirement trust
fund, its many obligations, and also on the reasons why pensions
have received so much attention in the past, present, and, in all
likelihood, future attempts to reduce our national budget deficit.

Those are my opening comments, and I will yield now to our
ranking member on the panel, Mr. Moran from Virginia.

Mr. Moran. Thank you, Mr. Chairman.

Well, I am glad we are having a hearing without having to be
rushed into coming up with numbers to—or back in to savings
numbers that came down from on high. This is the way we ought
to do this, we ought to take our time and look at it in a careful,
thoughtful way, and listen to experts.

We are going to have some experts talk to us today. I am particu-
larly interested in the CBO analysis. As we said during the debate,
the Federal retirement system is in very good shape. It needs to
be recognized that the Federal retirement system is, in fact, dif-
ferent from private retirement systems. The Federal Government is
not going to go out of business on one day and have all of its retir-
ees seek their full retirement payment in one lump sum. We might
have a problem if that happened. But that is not going to happen.
That does happen in the private sector when businesses go bank-
rupt, but this is unique.


2

In addition, the Government’s share of the premiums of the Fed-
eral Employee Health Benefit Plan would be based on a fixed dol-
lar amount. The government contribution would be frozen to the
1995 level under the proposal with an inflationary increase based
on the Consumer Price Index.

I have several questions relating to this proposal which I hope
can be resolved in working with leadership and my colleagues, and
I just spoke to the Speaker about some of my concerns about this
second proposal. While some may view these changes as good news,
the bad news is that if we have not made substantial progress in
reducing the burden of the taxpayer for Federal retirement in fu-
ture years, we are going to have some serious problems.

By not adequately funding retirement liabilities as they are in-
curred, we are essentially placing this inevitable responsibility on
future Congresses and taxpayers. A great deal of misinformation
has been circulated by various interest groups regarding this sub-
committee’s efforts to stabilize the retirement system for Federal
employees and retirees.

chairman of the Civil Service Subcommittee, it is incumbent
upon me to confront the understated costs of the Federal retire-
ment system. The CSRDF currently has assets of 300, and I use
the term loosely, assets of $320 billion against obligations to cur-
rent and future retirees of $860 billion. The practical effect of this
$540 billion shortfall in assets or unfunded liability is to dramati-
cally understate the cost to the taxpayer of Federal employees’ re-
tirement.

Some have contended that these numbers are irrelevant, just as
some have argued that the public debt, now calculated at $4.640
trillion is not relevant. I disagree. CBO can testify today that there
is no crisis in our Federal pension funds, and I may agree, but this
year and in every future year Congress will continue to scramble
to find general revenue funds to support current obligations and
also to provide payments for debt service for these retirement
plans.

There are additional pension problems on the horizon that this
subcommittee and Congress must address. Those men and women
who have served and are serving in the military are entitled to a
pension benefit from the Military Retirement System, also known
as MRS. Unfortunately the MRS, much like the CSRDF, also has
a current understated liability of over half a trillion dollars.

CSRDF and MRS alone represent more than $1% trillion the
Federal Government is obligated to pay in future benefits. Less
than one-third of this amount, about $450 billion, even shows up
on the government accounting books or in the national debt.

The national debt represents debt incurred in this Congress for
two World Wars and the Korean war, and the war in Vietnam, for
the cost of maintaining an adequate defense through our four dec-
ades of the cold war, for infrastructure investments, for ports, for
bridges, highways, mass transit, and hundreds of education, job,
health, and welfare programs.

The unfunded liability for civil service retirement adds an addi-
tional 12 percent, or $540 billion to this debt. Unfunded liabilities
for military retirement add another 11 percent, or another $510 bil-
lion to this debt. When liabilities are properly reflected, our pen-


15

cial implications. I also believe that Mr. Blum, Deputy Director of
the CBO, will offer insight in this area.

What else should we be investigating? The importance of financ-
ing the Federal retirement system cannot be understated, but for
me the quality of retirement life is the real issue. When a 33-year-
old government worker is projected to receive around $3,100 a
month when he or she retires at age 55, I wonder what kind of life
he or she will have. In a letter to me from a sixth grade constituent
she, too, raises a quality-of-life issue. “Some people would have
fewer choices if they get less money and pension,” she wrote.

Mr. Chairman, I don’t think anyone on this subcommittee wants
to see individuals having fewer choices in their golden years, so
after we examine the financing of the system and we make needed
changes, let’s turn our attention to strategies that maximize pen-
sion investment opportunities for Federal workers. With plans to
base Federal worker pensions on a high five, investments may be
the difference between a Federal worker having a quality life in re-
tirement or depending on someone else to take care of him or her.

I plan to introduce a bill that would amend the Federal Employ-
ee’s Retirement System Act of 1986, and this bill would authorize
a small capitalization stock index investment fund and an inter-
national stock index investment fund as part of the Thrift Savings
Plan for Federal employees. These additions to the funds currently
available will provide Federal workers sufficient financial options
for diversifying their investment portfolios, but, Mr. Chairman, it
will do more than that. This bill would empower Federal workers
to take more personal responsibility for their retirement.

I would also, Mr. Chairman, like to submit for the record a state-
ment by Helene A. Benson, president of the Professional Managers
Association. Ms. Benson raises an interesting point in her state-
ment. ERISA laws prohibit lowering benefits that private sector
employees have already accrued. Following that logic, the high five
provision would only apply to future years of accrual and not to the
years employees have already accrued under the high three for-
mula. If much of what we are planning to do to the Federal retire-
ment system is modeled after the private sector, let us at least give
Federal workers the same protections afforded private sector em-
ployees, so may I ask that her statement be included in the record,
Mr. Chairman?

Mr. MICA. Without objection, so ordered.

Mrs. MORELLA. Again, thank you, Mr. Chairman, for calling this
hearing: I look forward to hearing the witnesses.

Mr. Mica. I thank the gentlelady.

[The prepared statement of Hon. Constance A. Morella follows:]

PREPARED STATEMENT OF HON. CONSTANCE A. MORELLA, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MARYLAND

‘The proposed revisions to the federal retirement system have unearthed a number
of critical issues, And although the Chairman and I have divergent views on some
of these issues, I share his belief, as outlined in his memorandum of June 23, that
“an understanding of the financing of the Civil Service Retirement and Disability
Fund (CSRDF) is fundamental to any consideration of long-term, prospective re-
forms to the CSRDF.” Chairman Mica should be commended for calling this hearing,
which is a crucial step in moving toward this understanding.

Ts the retirement fund insolvent? Much has been made about the unfunded liabil-
ity of the federal retirement system. Yet, both the Congressional Research Service


5

and thoughtful scrutiny of this system so that we can really get
into the details and try to get some real concrete answers.

It has been a rushed process, perhaps necessarily, but still I
think this is a great opportunity. In the past several months, as we
know, a number of Members of Congress have indicated that they
have concerns about the vulnerability of Federal workers and retir-
ees, as well as what the moneys in the trust fund actually pay for.
Some of them have been asked to testify today to share with us
their thoughts and hopefully make suggestions on how we might
address those concerns.

I look forward to the testimony of the Members today and hope
they will share with us their ideas for prospective reforms. The
major problem, as I see it, is the runaway cost of the retirement
system. Money magazine reported on this significant and growing
cost last October. According to Money magazine, “State govern-
ments on average spend 14.3 percent of payroll on pensions; for
local governments, it is 16.5 percent; and at the Federal level, it
is a beltway-sized 25 percent of payroll.” And the magazine contin-
ues later on to say that despite the 1983 law intended to reform
Federal pensions, the OPM expects that 25 percent to grow to 40
percent by the year 2020.

This huge and growing cost to the Federal retirement system
worries me. I understand that Federal taxpayers in effect employ
Federal employees, and as employers, are expected to shoulder
their fair share of the retirement system, similar to the way any
private company might, and for that matter State and municipal
retirement systems. However, if the American taxpayer as an em-
ployer understood what the present costs were and how those costs
are projected to skyrocket, he or she would do like any private com-
pany would do and take a good hard look at the way the system
is financed.

I would like to take the opportunity to tell taxpayers as employ-
ers of Federal workers that the draw from their taxes, the General
Treasury, was approximately $26 billion in fiscal year 1994. That
figure is projected to grow to $44 billion by the year 2010 and will
continue to explode into the hundreds of billions of dollars, as much
as $1¥2 trillion by the year 2045. When Federal programs are al-
lowed to go unchecked like this, it is no wonder that our annual
deficit is too big and so disgraceful.

If you think the price Congress may be asking Federal employees
to pay today is great, think about what these figures will mean a
few years down the road. If we do not begin to correct the way we
are financing the system, we will place an inescapable burden on
future Congresses either to make draconian cuts in Federal bene-
fits, which is something this Congress chose not to do, or to impose
unacceptable taxes on ourselves and those who follow us. I might
add that these decisions, if we do nothing now, will probably not
be made by anybody here today, but by people who follow us.

I strongly believe that we in Congress have a responsibility to
American taxpayers and to the Federal employees and retirees, the
three groups involved, to begin addressing the current financial
problems of the system, and that is why I have supported recent
legislative proposals to get the way we fund this system back on
track. Understanding that Congress is itself part of the problem, I


87

Do any of you see anything that we have miscalculated here or
would you like to comment on the chart? Is it an accurate reflection
of the pension deficit projections? Mr. Blum.

[The chart referred to appears on page 88.]

Mr. BLUM. Well, I assume these are numbers that actually have
been provided by the Office of Personnel Management, and there-
fore would accurately reflect—but I would make this observation,
Mr. Chairman, which is the retirement benefits are not benefits
that are made because government employees are poor or what-
ever. This is part of the compensation package. It is part of the
labor contract that is made between the government as an em-
ployer and the employees. Sooner or later the taxpayer in fact is
going to pay for the costs of those retirement benefits. One can say
they should pay for them all now as they are being accrued, which
could be achieved if, in fact, the pension fund were outside of the
budget, as I had talked about in my opening remarks. Otherwise
those costs are going to be paid later by future taxpayers. One way
or another, it would be the taxpayers that would have to finance
the bulk of those benefits, either later or now.

Mr. Mica. I think you are correct, but again I think the ultimate
obligation for financing all of this does end up in the taxpayers’ lap,
particularly with the accounting methods that we have established
and the borrowing methods. I mean, if you take just the $25 billion
that we paid on the $320 billion we borrowed from the trust fund,
that is 10 percent of the annual interest payments, equivalent to
10 percent of the annual interest payments we pay on the national
debt. It is a pretty significant amount, just for one accounting or
line item as an expenditure.

Mr. BLUM. But that amount is not a real cash outlay. It is merely
an accounting transaction. The interest that is being credited ——

Mr. Mica. But you either pay interest or you don’t pay interest.

Mr. BLum. No, I think there is a difference between the debt held
by the public, on which we pay interest that literally goes out to
the public, as opposed to interest that is——

Mr. Mica. We are paying ourselves.

Mr. BLUM. We are simply paying ourselves, and that has no ef-
fect on the total outlay.

Mr. Mica. Wouldn’t it be nice if we had that money invested in
something else and we could be providing employees with even bet-
ter benefits?

Mr. BLUM. That could be. But as I tried to make clear, that
would be—this is where you do get into the policy choice business—
that would be changing the real financing of the retirement pro-
gram from essentially a current pay-as-you-go to a current full
funding comparable to that which is done for the private sector and
State and local governments.

Mr. Mica. Well, a number of people have proposed a number of
alternate approaches to the standard Federal retirement packages
that are available: some additional IRA’s, some additional savings,
some additional programs, even buyouts and let people out of the
retirement system, not employment, and let people go into the pri-
vate market to see if they can get better returns. Maybe we will
be looking at some other options in the next couple of years.


80

tions about the administration’s proposal which I would like to
bring to your attention.

Essentially, the administration has proposed two things. One is
that agencies should pay the full normalized cost for the CSRS em-
ployees for their retirement benefits. At the present time they do
not do so, and those payments, therefore, have to be made up ei-
ther currently or at some future date in other government pay-
ments to the civil service retirement fund.

The purpose of the administration’s proposal to have the agencies
pay the full normalized cost for these employees is to make the
agencies more aware of the full cost of doing business today. It
would not affect the actual total outlays of the government or the
budget deficit, because these higher agency payments to the civil
service retirement fund are simply intragovernmental transactions,
one agency is paying another, and it all washes out when you add
up everything and come to a bottom line as to what is total outlays
by the government and the deficit.

Now, there is a potential snag in this in the following sense: To
accommodate this increase in the agency labor costs, for example,
the budget for the Congressional Budget Office would have to go
up by some amount in order to pay these higher benefit costs for
the CSRS employees. The administration would propose to increase
the discretionary spending caps that have been placed on the ap-
propriation bills since 1991, and these caps are going to be ex-
tended through the year 2002 under the budget resolution.

If those caps were not raised to accommodate these higher inter-
agency payments, then actually total outlays on the deficit would
go down by that amount, by over $5 billion annually, because
money that otherwise would leave the government to pay for pur-
chases from the private sector or to provide benefits or so forth, in-
stead of going outside the government they would simply remain
within the Treasury.

Now, the second part of the administration’s proposal is to pay
off over a 40-year period this $540 billion unfunded liability in the
trust fund. That, too, doesn’t have any effect, real effect on total
outlays or the deficit because it is another intragovernmental
transfer or payment. The only observation I made there was paying
it off over 40 years could be done all at once. It is simply a paper
accounting type of transaction. It could be done all at once.

The only problem with doing it all at once, and I assume this is
why the administration proposed doing it over a 40-year period
rather than all at once is because there would have to be an in-
crease in the Federal debt limit which Members would have to vote
on, and that is because the Federal debt limit includes the securi-
ties that are held by trust funds such as the Civil Service Retire-
ment Trust Fund. It also includes the securities held by the Social
Security Trust Fund, too.

Mr. Mica. Well, if we were doing proper accounting or accounting
that more properly reflected our indebtedness, we would add al-
most a trillion dollars between CSRS, FERS unfunded liability, and
I guess our military retirement unfunded liability; is that correct?

Mr. BLUM. That is correct. As was pointed out this morning, that
figure would be something like $1.5 trillion if we were going to rec-
ognize these obligations in the Federal budget. But I also observed


83

fect of reducing gradually and eliminating altogether the system’s
unfunded liabilities.

Mr. Mica. On page 6 of your testimony you refer to an increasing
unfunded liability and you also refer to the administration’s pro-
posal, which as you say, will stop it from growing further. Is this
the proposal that you are referring to?

Mr. FLYNN. No, I am sorry, Mr. Chairman, the system that I
have talked about already is in current law. The administration’s
proposal would simply revamp, if you will, the current mechanism
for providing Treasury payments to eliminate the unfunded liabil-
ity by amortizing the current unfunded liability over a 40-year pe-
riod beginning in 1997.

Mr. Mica. Well, you spoke of increasing unfunded liability. What
exactly is the source of the problem here of the increasing un-
funded liability? What are you referring to?

Mr. FLYNN. The increasing unfunded liability is the amount by
which the unfunded liability increases, resulting from current Civil
Service Retirement System employees who remain on the rolls
today, though in ever smaller numbers, and the fact that under
current law only 14 percent of their accruing benefit is deposited
into the fund, compared to a normal cost of 25 percent. That dif-
ference of 11 percent in broad terms results in an increasing un-
funded liability until such time as those employees are no longer
actively on the rolls.

Mr. Mica. This is sort of an interesting exercise. We spend a lot
of our time denying that we have any problem, denying that we
have any crisis, and yet everybody has got a solution to the prob-
lems and crises; whether it is the administration, which is going
to solve the unfunded liability through a 40-year amortization pro-
gram; whether it is the House leadership who wants additional em-
ployee contributions; or whether it is the Senate who has some
other proposal.

Speaking of the proposals that are before us right now, some of
you may be aware of some of the budget agreement provisions to
increase the employee contribution by a quarter of a percent I
think in 2 succeeding—2 future years.

The other provision, as I understand it, deals with putting some
cap on the government’s payment of health benefits. What impact
do you think these will have and do you have any comments relat-
ing to these proposals? Mr. Flynn. Mr. Finch.

Mr. FLYNN. I could probably deal with them one by one. First,
the proposal to increase contributions by a quarter percent, is that
what you were referring to, Mr. Chairman?

Mr. Mica. Yes.

Mr. FLYNN. As you know, the administration has objected to pro-
posals that would increase the cost to employees or increase em-
ployee contributions to the retirement fund and has not proposed
itself any changes to the retirement system for this year.

On the health benefit proposal, we have taken a look at the pro-
posal as best we understand it coming out of the Budget Commit-
tee, and as you said, it will essentially establish a maximum dollar
contribution on the part of the government and then adjust it an-
nually by the change in the consumer price index.


21

among panel members here, and everyone wants to be heard, so we
appreciate your patience.

‘allowing protocol, we will yield to Mr. Quillen first. I think he
is senior. We will do this on a seniority basis. I now yield to you
for your camments.

STATEMENT OF HON. JAMES H. QUILLEN, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF TENNESSEE

Mr. QUILLEN. Thank you, Mr. Chairman. I am delighted to be
here today and witness the expertise of your committee and your
members.

congratulate you and your subcommittee for your efforts to edu-
cate the American public about our two Federal retirement sys-
tems, the Civil Service Retirement System, CSRS, and the Federal
Employees Retirement System, FERS. However, I urge you to sepa-
rate the debate over Members’ pensions from informed discussions
about the retirement system created for our postal and Federal
workers. Should we decide to make changes to our own pension, so
be it, but let’s not shackle ourselves to our employees and drag
them down with us.
r retirement program revisions, I urge you to give
v to the independent analysis provided by both the
nal Research Service and the General Accounting Office
1 conclude that the Civil Service Retirement Trust Fund is in
financially good shape and its future obligations do not impact the
bud el: Furthermore, I urge you to appreciate that FERS is fully
funde d, resulting in fully accounted for liabilities.

FT also, caution you from being tempted to create a budget-driven
proposal to completely redesign the existing Federal retirement
system. We should not engage in this type of legislative effort just
to prove that we can do it. In my view, Congress made a solemn
promise to postal and Federal workers in 1984 when we reformed
the Federal retirement system. Congress unequivocally stated that
retirement benefits would no longer be subject to the ebb and flow
of pudgetary tinkering and political expedience.

FERS, the new retirement system, is fully funded, imposes a re-
du A on its beneficiaries, and encourages employees to save
for their own retirement. These are goals which Members of my
own tical party ought to embrace with open arms. For this rea-
son, I am puzzled by current attempts to alter this decade-old re-
tirement system, which even yet is not fully operational.

T would additionally like to speak about simple fairness. Many
public employees whom I happen to represent thought they had an

ement with their employer, the Federal Government. Year
afer year these decent and committed Americans have been asked
to make significant financial sacrifices in order to alleviate this Na-
tion’s budget problems. We, and I include myself in the we, have
eliminated, reduced, and delayed cost-of-living adjustments to
which postal and Federal retirees had been entitled. While I com-
mend this subcommittee for not suggesting any annuity reductions
to current retirees, I am very concerned about proposals to ad-
versely affect earned retirement benefits that current employees
will be entitled te during the retirement years. This is especially
true for the countless postal and Federal workers approaching re-



RETIREMENT TRUST FUND INVESTMENTS:
ADEQUATE FOR LONG-TERM NEED?

HEARING

BEFORE THE

SUBCOMMITTEE ON
CIVIL SERVICE

OF THE

COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

JUNE 28, 1995

Printed for the use of the Committee on Government Reform and Oversight

a

U.S, GOVERNMENT PRINTING OFFICE
36-574 CC WASHINGTON : 1997

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-054198-0



84

I just might comment that some of the impacts or effects of some-
thing like that do cause us some concern that we are taking a look
at. First, the government’s contribution would be adjusted by the
overall change in the consumer price index. In a program that is
more sensitive to the actual change in the medical price index
which can and in fact has over the past several years risen at a
faster rate than the overall consumer price index. That can have
the effect of shifting more of the cost of the health benefits program
away from the government and to the individual employee.

In addition, there are clearly incentives for employees, then, to
look for plans that offer a good package of benefits at low rates be-
cause under this particular proposal, if they shop around properly
and find a plan, there is at least the ability for them perhaps to
have their entire premium covered within the maximum contribu-
tion that the government would make. That has in the past led to
a phenomenon that we call adverse selection where benefit struc-
tures are put together and their associated premium costs that at-
tract on average younger, more healthy people, and tend not to at-
tract on average older, less healthy people, and that phenomenon
can have really dramatic impacts on health benefit premiums
charged by carriers. So those are the kinds of concerns that we are
studying as we look at that proposal.

Mr. Mica. Mr. Finch.

Mr. FINCH. We haven’t had—those are the first, today is the first
time I have heard those numbers, Mr. Chairman, so we haven’t
really had a chance to focus on them.

I would say that as GAO goes about looking at retirement issues
on behalf of the committee and other committees, things that we
try to factor into our analyses are ways to try to determine whether
it is good retirement policy, and a couple of factors that we consider
or a couple of criteria that we consider in those are reasonableness,
is it reasonable, and competitiveness.

The Federal Government’s retirement system, we think, should
be competitive with non-Federal plans. The retirement system not
only helps the employees prepare themselves for retirement and
represents their major source of income, particularly in the in-
stance of CSRS where you don’t have Social Security or a thrift
plan with government contributions, but it also serves management
objectives in terms of keeping a Federal work force that is both vi-
brant and productive. This gets to a comment that Mr. Blum made
in his opening statement about recruitment and retention tools and
the fact that the Federal Government is going to remain in busi-
ness, and we need a work force that is vibrant and productive. We
need a compensation package, of which retirement is a part, that
will help us both recruit and retain that work force.

Mr. Mica. Well, we know that we will have some pretty signifi-
cant obligations in the future on the General Treasury to meet all
these various retirement system obligations.

Do you feel that it is prudent for us to propose a small increase,
a quarter of a percent over an extended several year period in the
future, for employees to contribute to the retirement fund system
which is taking more and more of a drain from the Federal Treas-
ury now and projected to do so in the future? When was the last


44

The government--that is, taxpayers--must pay all of the costs of federal
retirement not financed by employee contributions and Postal Service payments. The
concept of normal cost provides a convenient measure of that total. Normal cost is
the constant percentage of pay that would have to be invested at a specified rate of
interest each year over the working life of a typical group of new employees to
finance fully all of their retirement benefits. Currently, the normal cost of defined
benefits is estimated to be 12.2 percent of payroll for FERS employees and 25.1
percent for CSRS employees. Inasmuch as FERS and CSRS employees contribute
0.8 percent and 7 percent of pay to the CSRDF, respectively, agencies must
contribute 11.4 percent of pay for FERS employees (plus 6.2 percent for Social
Security and 3.6 percent for the TSP) and 18.1 percent for CSRS employees to fully
cover normal costs. Agencies currently make the requisite payment for FERS
employees. For CSRS employees, however, agencies only match the employee
contribution of 7 percent of pay. That partial payment by the employing agencies

results in a normal cost shortfall of 11.1 percent for CSRS employees.

Financing flows from the agencies to the CSRDF are nearly $8 billion a year,
even though the agencies are not covering normal costs for CSRS employees. The
deficiency in agency payments means that CSRDF inflows are less than the normal
cost of benefits to be paid. That shortfall has necessitated payments to the CSRDF
for past service liabilities, which are intended to make up for the failure of agencies
to contribute full normal costs in the past. Although those adjusting transfers

7


8

In my former life as an accountant and county commissioner and
comptroller in Washington County, PA, I had the responsibility of
administering a pension fund for the employees of Washington
County. And when I left, it was 107 percent funded. We were re-
quired by law to make sure it was fully funded every year.

And I am a little confused as an accountant. I hear all of these
numbers being thrown around and I am not sure what they mean.
In fact, we just went through a BRAC commission hearing and clo-
sure, realignment, and it affected several bases in my district, and
once we looked at the numbers, I was amazed at the inaccuracy,
the flaws, the incorrect numbers that were being fed to us and that
a decision was being made based upon information supplied by the
Air Force and the Department of Defense and others. So you will
excuse me if I am a little reluctant to accept anything at this point
in time.

As a freshman Congressman, having been here only 6 months,
I am totally amazed at how we throw numbers around. I have been
here before, committee meetings and hearings, talking about this
retirement. I thought the problem was solved in 1986 that after a
30-year glide path that we were going to be in good shape and that
the fund did have, indeed, a surplus, this fiscal year a surplus of
something over $350 billion. But there again, maybe it is not there.
I don’t know.

But I want to add that I must say that I am most pleased that
we are finally going to get an opportunity to hear some of my Re-
publican colleagues who share my views that we should not contin-
ually go after Federal workers and their retirement benefits. I have
heard a hue and cry as a result of this move, just amazing the
phone calls I get about this approach to go from high three to high
five, and somehow pick the pockets of Federal employees by an-
other 2.5 percent.

The various provisions included in the recently completed con-
ference report on the Fiscal 1996 Budget Resolution which calls for
increasing retirement fund contributions while cutting retirement
benefits are nothing but ‘a tax increase. The irony is that none,
none of the $5.3 billion in savings these proposed cuts will alleg-
edly generate will be going to shore up the retirement system
which the chairman feels is broke. Instead, they will be falling into
the black hole of deficit reduction and become part of the funds
used to pay for the $245 billion tax cut that will largely benefit the
wealthy.

I stand squarely with my Republican colleagues who will be testi-
fying today in stating categorically that this is unfair. Perhaps
most importantly, today’s testimony from the Congressional Budget
Office, the General Accounting Office, and Ms. Rivlin will help
Members and the public better understand what the Federal retire-
ment systems are and how they are funded. As the Congressional
Budget Office will tell us, the Civil Service Retirement and Disabil-
ity Fund is actually a ledger that is useful in measuring the cost
and liabilities of the Federal retirement systems. The big news is
the retirement does not face a financial crisis. It will explain that
in fact the demand of the general fund to make up any shortfall
actually declines in constant dollar terms after the year 2015. That


7

‘The major problem as I see it is the runaway cost of the retirement system.
Money magazine reported on this significant and growing cost last October. Accord-
ing to Money:

“State governments on average spend 14.3% of payroll on pensions; for
local governments it's 16.5%, and at the federal level it’s a Beltway size
25% of payroll . . . [and, the magazine continued that} Despite a 1983 law
intended to reform federal pensions, the OPM expects that 25% to grow to
40% by 2020.” (Money's source was the OPM, the Office of Personnel Man-
agement.)

This huge and growing cost of the federal retirement system worries me. I under-
stand that federal taxpayers in effect “employ” federal employees, and as employers,
are expected to shoulder much of the cost of the retirement system—similar to the
way a private company might. However, if the American taxpayer, as an employer,
understood what the present costs were and how those costs are Frojected to sky-
rocket, he or she would do like any smart private company would do and take good
hard look at the way the system is financed.

I'd like to take the opportunity to tell taxpayers as employers of federal workers,
that the draw from their taxes—the general treasury—was approximately $26 bil-
lion in FY94. That figure is projected to grow to $44 billion in the year 2010, and
will continue to explode into the $100’s of billions in 2045. When federal programs
ore allowed to go unchecked like this, it is no wonder that our annual deficit is such
a disgrace.

If you think the price Congress may be asking federal employees to pay TODAY
is great, think about what these figures will mean a few years down the road. If
we do not begin to correct the way we are financing this system, we are placii
inescapable burden on future Congresses either to make draconian cuts in federal
benefits, (which is something this Congress chose NOT to do), or to impose out-
rageous taxes on ourselves and our children, or both.

strongly believe that we in Congress have a responsibility to American taxpayers
and to federal employees and retirees to begin addressing the current financial prob-
Jems of this system, and that is why I support recent legislative proposals to get
the way we fund this system back on track. Understanding that Congress too is part
of the problem, I also support efforts to include us in any proposal that would affect
Executive branch employees.

I commend the Administration's actuaries for realizing and putting forth propos-
als to address some of the financing problems: one to deal with fully financing eur-
rent and future CSRS benefits through agency contributions; and the other to pa’
off previously accrued CSRS unfunded liabilities. I am anxious to hear from the Ad-
ministration witness today regarding both of these proposals that were included this
year in the President’s budget submission.

Finally, I have some serious concerns about the way we are keeping the books
for our federal employees regarding their pensions. The majority of so-called “assets”
in the fund—which make the fund look like it’s flush with cash—are nothing but
paper IOUs, and represent spending authority for any number of government pro-
grams paid for out of the general treasury. This bookkeeping scheme misleads both
taxpayers and federal workers and retirees into believing that we have reserved and
invested actual funds into a special account.

In addition, the so-called “assets” of the fund are not invested in private sector
funds, but in ‘non-negotiable governmental securities. Here again, there are no real
monetary gains, merely entries on the books which become additional future draws
from the treasury. These bookkeeping practices horribly underestimate the growing
cost of the system, and mask the real size of our federal deficit—by about $26 billion
in fiscal 1994, and by $100’s of billions by the year 2020.

Our accounting is wrong, and I’m not the only one who wants answers. Let me
quote one of the letters the Committee received recently from Carol Goodyear, a fed-
eral employee, who wrote on June 2nd to ask:

“Where is all the money that is contributed to CSRS, and why can't it
be accounted for? Do private pension funds receive more protection from the
Federal government (through the Pension Benefit Guaranty Corporation)
than do the pensions of its own Federal employees?”

I couldn't have asked the question better myself, and I hope today we get some
answers to this and other questions that I have raised.
Thank you, Mr. Chairman.

Mr. Mica. I yield to Mr. Mascara from Pennsylvania.
Mr. Mascara. Good morning, Mr. Chairman. I thank you.


57

intergenerational equity. In sum, moving the fund outside the budget might

encourage better planning up front by the Congress, agencies, and employees.

Besides increasing the deficit and debt held by the public, moving the fund
outside the budget has three potential costs. First, it would create new opportunities
to report budgetary savings that might be illusory. For example, critics charge that
state and local governments have artificially lowered their budget outlays by
manipulating the assumptions that determine their required contributions to the
plans. Second, revisions in the actuarial estimates of costs and liabilities could result
in shifts of billions of dollars in either direction between the Treasury and the
retirement funds, which would reduce budget stability. Third, no matter how
cleverly the option is legislated, many budget experts believe that the Congress will
still be able to reduce the deficit by cutting benefit payments to retirees. In fact, the
only way to protect earned benefits completely would be to switch to defined

contribution plans like the TSP.

CONCLUSION

In sum, Mr. Chairman, it is fair to say that if the accumulated unfunded liability of

the retirement fund is perceived as a problem, it could be corrected at the stroke of

20


40

Savings Plan (TSP), a defined contribution plan similar to 401(k) plans offered by
private employers. The defined benefit program of the Civil Service Retirement
System covers most civilian employees not in FERS. Only a few of the 1.5 million
employees who are covered under CSRS participate in Social Security as part of their
federal employment. Both FERS and CSRS defined benefit payments are made out

of the Civil Service Retirement and Disability Fund.

it I ivi ite

The CSRDF is a federal trust fund--an accounting entity used to report the cost of
retirement to the government and the inflow of employee payroll taxes
(contributions) to the defined benefit plans. Even though it is referred to as a trust
fund, the CSRDF bears almost no resemblance to a private pension fund, nor was it
intended to do so. A private pension fund consists of a pool of assets--that is, claims
on real resources set aside and managed by fiduciaries for the exclusive benefit of
recipients. By contrast, the CSRDF is a set of entries on the government's books.
Although the fund is effective in accounting for contributions from employees and
agencies and for amounts to be paid to annuitants, the only asset the account holds
consists of paper balances at the Treasury. Those balances do not constitute a claim
on specific assets outside the government but rather rely on the power of the

government to levy taxes in the future.


81

that this information is not hidden from the public or from the
Congress. It is contained in the annual reports from OPM and from
the Department of Defense on the status of the trust fund, and it
is included in the consolidated financial statements for the govern-
ment as a whole that are put out each year by the Treasury De-
partment.

Mr. Mica. I would venture to say that if you questioned 400
Members of Congress, just the House side, that 398 of them would
not know there is an additional $1% trillion liability. Most of them
would quote the $4¥2 trillion they now consider the national debt,
would not consider the additional $1% trillion a part of it, or even
recognize its existence.

Mr. BLum. I dare say you are right, Mr. Chairman, and one way
of having them recognize its existence would be to fully fund those
liabilities and to have that increased cost included in what we call
gross Federal debt—the national debt as a whole.

Mr. Mica. When I present my amendment on the floor to in-
crease the debt by $1% trillion, I will use your testimony today for
substantiating my position.

Mr. Finch, your testimony states that both CSRS and FERS are
funded programs and that amounts are set aside to cover benefit
payments. Those are your quotes. Is this not somewhat misleading
since moneys contributed to the CSRDF simply become part of the
general revenue available to pay for all government expenditures?

Mr. Fincu. I didn’t mean to infer that there was cash set aside
in the retirement fund in that amount. Basically, the intent there
was to talk about the budget authority.

Mr. Mica. You also stated that the current system provides suffi-
cient budget authority for future benefits. Is this equivalent to set-
ting aside sufficient money to cover future benefits?

Mr. FINCH. Sufficient budget authority means that the Congress
can make appropriations for that amount in the future. It does not
mean that there is that much cash set aside.

Mr. Mica. You state that the current matching agency and em-
ployee contributions to CSRS approximate its static normal costs of
CSRS. Is this by accident or is this by design?

Mr. Fincu. I think this goes back into some of CSRS’ history,
and I think during most of that history, agencies and employees
have been required to contribute the same percentage of salary to
the fund. Technically, the law prescribes the employee contribution
percentages and says that agencies must match these amounts.
That is pretty much the way the law reads.

The current contribution percentages of 7 percent for general em-
ployees, which the agencies must match, which is the other 7 per-
cent, equals the 14 percent that you talk about. These percentages
were set in 1969 when major changes were made to the CSRS. But
in addition to the agency and the employee contribution provisions
at that time, the law also called for significant additional contribu-
tions by OPM and Treasury. This was to cover some of the un-
funded liability. The static cost does not take into consideration
possible pay raises in the future. So in 1969 the law was amended
so that OPM kicks in additional contributions for pay raises that
have been enacted, but not for future pay raises, just pay raises on
the books.


28

It doesn’t follow. I think the problem is there now every bit as
much as it would be if we went off budget, so you are not chaiiging
anything so far as that area goes. |

Mr. Mica. CSRS has an unfunded liability, I believe; of $538 bii-
lion. Current contributions from employees arid einployers aré
about 14 percent of payroll, while its true costs require contribu-
tions—I think Mr. Bass testified from the Money miagazite arti-
cle+of about 25 percent. Given the system’s real Gost, do yoti_be=
lieve that in the past we have been overly genetdus if providing
benefits at the Federal level?

Mr. BILIRAKIS. Well, again, Mr. Chairman, we are talking about
paper transactions, and, you know, we are talkirig about $500 bil-
won.

Mr. Mica. These really aren’t paper now. This is 25 percent——

Mr. BILiraKis. But we are talking about a $500 billion unfunded
liability. That is if Rebecca here, who is my staffer, were to retire
today, which she isn’t going to retire today, because she is hot eligi-
ble for a pension. If she were to retire today, and were able to get
all that she has earned and all the other people if her eategory,
it would total out, as I understand, to that $500 billion. That isn’t
going to happen. So we are really talking about paper here.

Your question, I think, goes not to just whether we take it off
budget, your question goes to the situation as it exists today.

Mr. Mica. Mr. Quillen, you have heard comments of your col-
leagues and also Mr. Bilirakis. One of the things you expresséd
was an interest in keeping our commitments to Federal émployées
and not jerking them around every time there is a budget proposal:
Do you favor the proposal by Mr. Bilirakis or do you favor some
means of independently securing these funds for retirees?

Mr. QUILLEN. Mr. Chairman, I feel like this, véry siticerély and
from the heart, that we should not give a tax decreasé to the people
of this country and at the same time give a tax ifiéréase, Which
that is what it is, to Federal employees who have a commitiient
from the Federal Government. When we really reworked the Fed-
eral retirement program a few years back, we promised that this
system would not change. Now we prepare a tax decrease of one
hand and a selective tax increase on the other. I haven’t beéri able
to resolve any difference in my mind to that concept.

Mr. Mica. Well, Mr. Quillen, politically I think we all, youi know,
would favor trying to provide as many benéfits as we cdh to our
constituencies, whether they are Federal employees or citizens, but
the truth of the matter is that the way this system is how éon-
structed, this entire Federal retirement benefits package is funded
entirely out of current revenues. Not only are we funding the beiie-
fits out of—well, there are some employee contribiitions, let me cor=
rect that, but the largest portion of contributions are, in fact, tomi-
ing out of the general revenue and General Treastiry, and we éan
sit here and say that this money is going for a tax ctit 1 year or
for reducing the deficit in another year or if your agenda is more
social programs, it is going to finance more social programs. Mr,
Bilirakis has made a proposal to take this off budget. ‘Bo you feel
that those funds should be secured for that purpose only?

Mr. QUILLEN. I think his proposal certainly has merit, take it off
budget. You know, we have to look at it realistically.


45

amounted to more than $20 billion in 1993, they are less than is needed to close the
normal cost gap. Accordingly, even with those extra credits, the accounting shortfall,
which has accumulated to $540 billion, is projected to increase until CSRS

employees retire.

Another source of income to the retirement fund is interest from the Treasury.
Those intragovernmental interest payments are critical to CSRDF because normal
cost--the basis for agency FERS payments--is calculated as the amount that, if
invested at interest, would grow to the value of benefits to be paid to retirees in the
future. The use of normal cost, therefore, requires that interest be earned on CSRDF

balances.

The retirement fund paid out $35.1 billion in benefits and operating expenses
in 1993. That outflow was almost $28 billion less than the $62.9 billion in total
income of the account in the same period. That excess of income over outgo added
to the fund's interest-bearing balance at the Treasury, bringing the total balance to
$317 billion at the end of 1993. Note, however, that in terms of the transactions
between the government and the public (those payments that involve cash), the fund
paid out more than it received. In fact, CSRDF transactions with others increased the

federal borrowing requirement by $25.6 billion in 1993.


27

I hope that the Office of Personnel Management and the Congressional Budget
Office will be able to assist us in resolving these technical questions.

In closing, I would like to remind my colleagues that Federal annuities are earned
benefits. Federal retirees deserve to be treated equally with other retirees.

Tam grateful to the subcommittee for its consideration of my legislation and look
forward to working with you on this issue.

Mr. Mica. You have an interesting proposal, Mr. Bilirakis. There
is only one problem with it. In advance reading of some of the testi-
mony that is provided to us today, this whole exercise seems like
a paperwork exercise, that there is no real money in any of these
funds, that the whole system is predicated on a perpetual outflow
from the General Treasury.

One of the problems that you would have if you instituted a trust
fund such as you propose is the immediate replenishing of $320 bil-
lion in current assets to the trust fund. How would you propose to
get that money?

Mr. BILIRAKIS. Well, first of all, with all due respect, I don’t in-
terpret it that way. It follows that this is the requirement that
must take place. The unfunding, the lack of funding, if you will, of
the current fund is a problem. We are all concerned about that. I
am not sure that we are ever going to solve it with all of our defi-
cits and that sort of thing, but that exists, as it now stands, just
every bit as much and is every bit as critical as I think it would
be if we went ahead and took this off budget. So I am not really
sure.

Counsel is a lot more intelligent in this regard and probably
every regard than I, and I am not really sure what counsel feels
in that regard, but it doesn’t follow, I don’t think, that by taking
this off budget that we are going to have to come up with an addi-
tional $300 billion or $500 billion, depending I guess on how you
look at it.

As I understand, the unfunded liability’s total is about $800
some billion and there is about $300 billion of assets in there,
which is attributable mostly to FERS which would leave about
$500 billion, so that is a problem that exists today and it is not
going to exist anymore if we take it off budget.

What it will do if we take it off budget is basically allay these
fears of the people who don’t deserve to have these problems every
time we tackle the budget.

Mr. Mica. Well, again, you have a system that has been created
where you borrowed against all of the funds. Right now on the
$320 billion that should be in the fund, there is no money there.
There are non-negotiable certificates of indebtedness. I think 97
percent of the assets are in those notes, so you wouldn’t replace
that.

You propose just moving forward from this point, but having con-
tributions go into the fund and not be used for any other purpose?

Mr. BILIRAKIS. Yes, I would say that certainly it is true. I mean,
all we are talking about is paperwork entries being switched back
and forth now anyhow. But, again, I don’t mean to say that I don’t
think that there is any problem associated or any concerns should
be associated with the fact that we have this great unfunded liabil-
ity. We have it now. We should be every bit as concerned with it
now. We apparently don’t seem to be that concerned with it now,
but if we put it off budget, we are going to be concerned with it.


64

2
FOR THE GSAS AND FERS RETIREMENT PROGRAMS, BENEFITS PAID BY THESE
PROGRAMS, AND AMQUNTS OWED BY THE GOVERNMENT FOR FUTURE
BENEFIT 6@8TS. EMPLQVEE CONTRIBUTIONS, ALONG WITH ALL OTHER
SQURGES GF INGGME ARE BEPOSITED IN THE TREASURY AND CREDITED TO
THE RETIREMENT EUND. GN THE QPPOSITE SIDE OF THE LEDGER, BENEFITS
BAIB GUT GE THE TREASURY ARE DEBITED TO THE RETIREMENT FUND. THUS,
THE RETIREMENT FUND'S BALANCE AT ANY POINT IN TIME REPRESENTS THE
NET GREBITS IT HAS AGGUMULATED TO PAY RETIREMENT BENEFITS. THESE
NET GREBITS WILL GENERATE THE BUDGET AUTHORITY NECESSARY TO PAY
RETIREMENT BENEFITS WHEN THESE BENEFITS BECOME DUE.

THE FUND'S ACTIVITIES AFFECT THE BUDGET. UNDER CURRENT SCORE-
KEEPING RULES, EMPLOYEE CONTRIBUTIONS AND POSTAL SERVICE AGENCY
CONTRIBUTIONS ARE TREATED AS GOVERNMENT REVENUES, AND
RETIREMENT BENEFIT PAYMENTS ARE TREATED AS GOVERNMENT OUTLAYS.
THE DIFFERENCE BETWEEN THEM REPRESENTS THE AMOUNT BY WHICH THE
RETIREMENT FUND ADDS TO GR REDUCES THE FEDERAL DEFICIT. IN FY 1995,
JHE FUND ADDED $28 BILLION TO THE ON-BUDGET DEFICIT.

OVER THE NEXT FORTY YEARS, THE IMPACT OF THE RETIREMENT FUND FOR
THE ON-BUBGET DEFICIT, MEASURED IN NOMINAL BOLLARS INCLUDING
INFLATION, WILL GO TO $57 BILLION IN 2005, TO $95 BILLION IN 2015, TO


4

Where we are comparable to private sector retirement plans is
that we use it as a tool to recruit the best people we can into the
Federal Government to provide them security, to entice senior
members at higher salaries oftentimes to be replaced by younger
people at lower salaries. It is the result, what we have today, of
many, many years, thousands of Members of Congress and thou-
sands of people in the executive branch working together to come
up with a system that makes sense.

We have that system today. It not only makes sense from em-
ployment policy, it also makes fiscal policy sense. If we were to in-
vest privately, we would have to take these funds out of the Fed-
eral Government and invest them in some form other than where
they are today. By doing it the way we do, there is no direct outlay.
It is a fund transfer. It doesn’t have to be scored as an outlay, and
as a result it doesn’t have any adverse implications in terms of our
budget balancing objectives.

The numbers that I know we are going to see, because I have
looked at them, that CRS has done, that OPM has, and that CBO
has done show that if you look at the income to the retirement pro-
gram, it more than covers any outgo requirements, particularly
when you do it on a real dollar basis. In other words, you adjust
for inflation as you would in any such analysis.

We are in very good shape. The 1986 plan, when it was put to-
gether, was done so in a thoughtful way. Everything that they an-
ticipated would occur has occurred. As the CSRS plan phases out,
the FERS plan phases in with less demands upon the retirement
fund, Social Security is picking up more Federal employees’ retire-
ment needs, and the Thrift Savings Plan is working. So I think we
ought to keep it the way it is. 1 have come to that conclusion after
looking at all the numbers.

Essentially, the retirement fund is invested in much the same
way that people invest their Thrift Savings Plan money when they
decide to go with the safest type of investment, the G fund, the
government securities. That is where the retirement fund is in-
vested, in Federal Government securities, and it has the full faith
and credit of the U.S. Government behind it.

So I am glad you have given us this opportunity to make this
case because I know when we hear from the experts at CBO and
CRS who have done very extensive analyses, it will confirm the ex-
pectation that the people who worked on it for 2 years back from
1984 to 1986 had, and confirm the fact that Federal employees
have, an excellent retirement system that is safe, that is secure,
and that makes a lot of common sense.

Thank you, Mr. Chairman.

Mr. Mica. I thank the gentleman, and I yield to the vice chair-
man of the subcommittee, Mr. Bass.

Mr. Bass. Thank you very much, Mr. Chairman.

I appreciate the fact that you are holding this important hearing
to examine the financing, bookkeeping, and operation of the Civil
Service Retirement and Disability Trust Fund. Clearly, there is a
problem with the way the system is working when year after year
Federal employees and retirees remain vulnerable to administra-
tion and congressional budget scrutiny, and I am pleased that we
have this opportunity to take, as Mr. Moran mentioned, a careful


18

down at the time of their retirement, their pensions will reflect that. Moreover,
CSRS and the annuity portion of FERS include protections for survivors of employ-
ees who die and for employees who become disabled. A defined contribution plan
would not satisfactorily take care of those situations especially if those situations
occur early in an employees’ career.

The purpose of ERISA, which applies to private-sector retirement plans, is to see
that retirement promises to employees are kept. The purpose of ERISA’s funding
rules is not to protect companies and their stockholders—it is to ensure that bene-
fits will be there for employees even if the employer goes out of business and to en-
sure that the employer keeps its hands off money belonging to employees for their
retirement, There is even insurance through the Pension Benefit Guaranty Corpora-
tion (PBGC) And, if the pension plan is in danger of not having the funds to pay
the promised benefits, the employer is liable for up to a substantial portion of its
assets.

The following should also be kept in mind.

1, Very few private-sector retirement plans require employee contributions where-
as the CSRS requires employees to contribute 7 percent of their pay.

2. Some private-sector retirement plans and the majority of state government
plans use a “high-3 year average” formula to compute benefits.

3. Many private-sector retirement plans and close to half of state retirement plans
aliow retirement without benefit reductions at age 85 or earlier, general with 30
years of service.

4. Changing the retirement system for incumbents will require most employees
near retirement to delay their retirement in order to make up the money lost, and
that creates a major problem for agencies mandated to downsize the workforce.
After all, these employees cannot increase their savings for retirement retroactively.

5, In addition to Social Security cost-of-living adjustments (COLAs), private-sector
retirees from the larger companies generally receive increases in their private-sector
annuities periodically. See the Wyatt Company survey of retiree benefits of 50 large
U.S, companies as of January 1994, That private-sector retirees are not yet GUAR-
ANTEED periodic COLAs is a defect in the private-sector retirement system that
should not be emulated by the Federal Government in its retirement system.

6. COLAs do not increase annuities. They simply keep their purchasing power
from being eroded by inflation. COLAs simply keep Federal retirees from becoming
Poorer as they age. Although private sector plans are not yet required to guarantee

‘OLAs, that is often seen as a defect of the private-sector system that needs correc-
tion and should not be emulated by the Federal Government. Without COLA protec-
tion the Federal Government pays retirees in cheaper dollars and thus pays lower
pensions to retirees.

7. Civil service annuities are fully taxable as ordinary income, unlike Social Secu-
rity benefits.

8. While private-sector retirement plans supplement Social Security, Federal em-
ployees under CSRS are forced to forego the Social Security benefits (or the benefits
are limited) to which they would otherwise be entitled because of the windfall elimi-
nation and public pension offset provisions enacted a few years ago.

9. As you know, the so-called “unfunded liability” issue is a red herring We all
know that. If there is anyone who did not, the Congressional Research Service testi-
mony of May 22 and its earlier memorandum of March 18, 1995, on whether there
is a financing or funding problem, should have settled that issue, once and for all.
As we all know, the “unfunded liability” is purely a bookkeeping artifice that rep-
resents the present value of the entire cost of retirement benefits for all current em-

loyees and retirees less the assets of the Civil Service Retirement and Disability
Fund and the present value of future contributions to the fund. It is merely an ac-
counting concept that indicates how much it would take to pay simultaneously the
annuities for current and future retirees, minus the assets of the fund. The Civil
Service Retirement and Disability Fund contained a surplus of almost $320 billion
in 1993, according to the Office of Personnel Management’s (OPM) Annual Report
on the Fund (1994). The fund has nine times the reserves necessary to provide an-
nuities as they become due, according to the OPM report.

10, Even if the so-called “unfunded liability’ were a valid issue, it is the employ-
er’s (in this case the Government's) responsibility to see that it ‘contributed suffi-
cient funds to pay for its retirement obligations. In the private-sector, if a pension
plan is in danger of not having the funds to pay the promised benefits, the employer
is liable for up to a substantial portion of its assets. Remember, 95 percent of pri-
vate-sector employees make no contributions to their retirement plan.

11. Federal retirement benefits are not overly generous. They are not out of line
with plans in the private sector and with plans in state and local government, as
the General Accounting Office has testified. Some of those plans are better than the



82

So given that, I think Congress made it pretty clear that employ-
ees were not expected to pay half of the cost of the retirement sys-
tem.

Mr. Mica. By deferring the recognition of outlays until an annu-
ity payment is actually due, does the current accounting system
hide the true cost of the retirement system to the taxpayer? Mr.
Finch, do you think it hides the actual cost of the retirement?

Mr. FINCH. This goes in part to our recommendation that higher
agency contributions be required in the budget.

Mr. Mica. So that will give a better definition, recognition of the
obligation?

ir. FINCH. A much better definition of the true cost, yes.

Mr. Mica. Mr. Flynn, you stated in your testimony, “The fund
now possesses sufficient balances to pay all its requirements for as
long as one cares to project into the future.” In that case, what
would be wrong with moving the fund and its balances out of the
budget, as some would propose for us to do?

Mr. FLYNN. Well, as has been pointed out, Mr. Chairman, by sev-
eral people who have testified today, the fund balance essentially
represents budget authority. Were that to be moved out of the
budget entirely, that fund balance would shift from debt held by
the government to debt held by the public, and the budgetary im-
pact of that is something that would need to be considered very
carefully.

Mr. Mica. Also in your testimony you stated, “Provisions of cur-
rent law provide a mechanism for the unfunded liability to gradu-
ally be funded and eliminated altogether over time.” I think that
was your quote.

Mr. FLYNN. That is correct.

Mr. Mica. What is the mechanism and what year will the liabil-
ity be reduced to zero?

Mr. FLYNN. The mechanism, and Mr. Finch talked about the re-
tirement amendments of 1969, the mechanism was first put in
place then and later modified with the Federal Employees Retire-
ment System Act of 1986. The payment stream or the payments
that Mr. Finch made reference to dealing with interest payments
on the static, unfunded liability and amortization payments to
cover the cost of future pay increases do set in motion over time
a series of annual payments into the Treasury that as the last Civil
Service Retirement System employee leaves active employment and
goes into retirement, have the effect of reducing the Civil Service
Retirement System’s unfunded liability but not completely.

The Federal Employees Retirement System Act of 1986 recog-
nized this phenomenon and recognized that approximately $80 bil-
lion, I believe in the year 2025, would remain an unfunded liability
of the system, resulting from the government’s obligations to its
Civil Service Retirement System annuitants.

When that law was passed, among its other provisions, it also
contained a provision making the Federal Employee Retirement
System assets available to pay those Civil Service Retirement Sys-
tem obligations, and at the same time, because it assumes an un-
funded liability, creating at that time a 30-year amortization pay-
ment to pay off that liability. Those two things acting together, Mr.
Chairman, over the course of the next 50 to 60 years have the ef-


55

TABLE 4, THE BUDGET’S REACH: WHAT IS COUNTED IN THE DEFICIT?

Transaction In the Budget Outside the Budget
Employee Contributions Yes No
Postal Service Payments Yes No
Agency Contributions No Yes
Treasury Interest Payments No Yes
Benefit Payments Yes No

SOURCE: Congressional Budget Office



79

Mr. Mica. I will start with a couple of questions for Mr. Blum,
if I may.

I read your full statement to the committee and had a couple of
questions. First of all, what method do you think would best reflect
the actual contributions and participation toward meeting the re-
quirements of the retirement funds? I guess you oppose also Mr.
Bilirakis’ proposal to take this, “off budget.”

Are you pretty much an advocate of the status quo as far as re-
porting from where these funds are generated and how they are ex-
pended and reserved? Is that basically your position or opinion?

Mr. BLUM. Mr. Chairman, as you probably know, the Congres-
sional Budget Office doesn’t make policy recommendations, so in
that sense I don’t have an official position. I can make some obser-
vations, however.

Essentially, as was stated this morning by a number of people,
including yourself, the current financing for the retirement benefits
is on a pay-as-you-go basis. In other words, current benefits are
being financed by current tax revenues and by borrowing from the
public.

I would observe that this is true for the entire Federal budget,
including military retirement, Social Security benefits, and every-
thing else that the Government provides in the way of services.
This cash-based approach, though, does not accurately reflect the
cost of doing business today. Therefore, the budget has incor-
porated a number of accrual-accounting measures in order to better
reflect the actual cost of doing business. And included in the actual
cost of doing business in the case of paying for Federal employees
is the cost of deferred compensation, or their retirement benefits as
they are being earned.

So in that sense, the Federal budget is actually a composite of
both methods: the bottom line reflects the cash basis financing,
which is how the government works, but it also includes elements
of accrual accounting. The administration’s approach, following the
recommendations of GAO and others, is to perfect or improve that
accrual-accounting approach and make the cost-accounting picture
more accurate. But it doesn’t in any way change the underlying re-
ality of how current governmental expenses are financed.

ir. Mica. Well, basically your report stated pretty much factual
information, that everything is now financed out of current reve-
nues or the amounts that employees are contributing, and you stat-
ed also that there is no crises as long as that obligation is met by
the General Treasury. I would have to concur with that. But obvi-
ously the administration feels that there are some inequities or
something lacking in the manner in which these funds are reported
and accounted. Even by their proposal, they recommend a different
accounting mechanism.

So you don’t have an opinion on changing the accounting proce-
dures that would better reflect what is going on again with the con-
tributions, the future obligations and commitments that have been
made for the various retirement programs?

Mr. BLUM. Well, we would support that as a good cost accounting
measure, what the administration has proposed. In my oral re-
marks, which unfortunately were made when you were absent from
the hearing, I did point out that—I did make a couple of observa-


85

time they changed this? Was it 1969 or 1979? Was it 1969; 1969
was the last time——

Mr. FLYNN. Yes.

Mr. Mica [continuing]. We adjusted the employee contribution.
Do you think this is prudent, fair, meets your criteria, what has
been proposed by the budget conferees?

Mr. FINCH. I think any employer has the responsibility periodi-
cally to look at the cost of its operations, and I think you are doing
that. What I would ask is that, as you look at the cost of govern-
ment operations, you keep the reasonableness and competitiveness
factors under consideration. I am not prepared to endorse the
amounts this morning, Mr. Chairman.

Mr. Mica. What about the health benefit? Is there more of a
trend that you have seen for requiring a little bit closer scrutiny
and selectiveness, on the part of the employee and the employer
when selecting a health benefits package? And also various con-
tributions to fund those benefits?

Mr. FINCH. I would be glad to think that one through and re-
spond to that one for the record. I am not really prepared to ad-
dress that off the top of my head this morning.

Mr. Mica. We will submit that.

[The information referred to follows:]

As discussed in my response to an earlier question, the primary criteria we use
in analyzing federal employee compensation programs, including the health insur-
ance program, are whether the programs are reasonable and competitive in serving
employee and management needs.

It has been some time since we examined federal health insurance, but our earlier
findings suggested that the federal program was not as beneficial to employees as
private sector programs. For example, in a 1985 report,! we noted that our studies
and studies by benefits consulting companies had shown that private sector employ-
ers paid a greater share of employee health insurance premiums than did the fed-
eral government. The studies also showed that the typical private sector health in-
surance plan reimbursed more of employees’ medical expenses, and calendar year
deductibles were less than in federal government plans.

More recent information we have seen indicates that the situation may not have
changed all that much since our studies were completed. For example, a 1993 sur-
vey of employer compensation practices by Hewitt Associates revealed that the me-
dian rate of employer subsidy for employee medical coverage was 82 percent of total
costs for employee-only coverage and 80 percent for family coverage. In the federal
program, the maximum amount the government will pay is 75 percent. Moreover,
the survey found that the majority of employers offered flexible spending accounts
whereby employees paid their share of medical costs with pre-tax earnings. This is
an advantage not afforded to federal employees.

In June 1995, the Congressional Research Service (CRS) issued a report on fed-
eral retirement that also examined other elements of the benefits package.? The re-
port cited data compiled by the Hay/Huggins Company on compensation practices
followed by about 150 large companies showing that the value of health care bene-
fits the companies provided was greater than the value of federal employee health
care benefits.

We believe it is always appropriate to examine whether legitimate economies are
available in federal health insurance and other benefit programs. However, the
above suggests that there have been no apparent developments in private employ-
ers’ health insurance financing practices that would justify changing the employer/
employee cost sharing arrangements in the federal program from either the reason-
ableness or competitiveness standpoints. :

1 Comparison of Federal and Private Sector Pay and Benefits, GAO/GGD-85-72, September 4,
1985.
2CRS Report for Congress, Federal Civil Service Retirement: Comparing the Generosity of Fed-

eral and Private-Sector Retirement Systems, Report 95-687 EPW, Congressional Research Serv-
ice, The Library of Congress, June 5, 1995.


92

H.R. 103 that make artificial distinctions among total government resources by
classifying some as on-budget and some as off-budget.

‘Thank you for the opportunity to present the Administration's views on these im-
portant issues.

Mr. Mica. There being no further business before the subcommit-
tee, I would like to first thank our panel of witnesses for their pa-
tience, their participation, and for their future responses. Thank
you so much.

There being no further business of the subcommittee, I declare
this meeting adjourned. Thank you.

{Whereupon, at 1:13 p.m., the subcommittee was adjourned.]

{Additional material submitted for the record follows:]

PREPARED STATEMENT OF HON. BENJAMIN A. GILMAN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEW YORK

Mr. Chairman I thank you for calling this meeting to examine the current and
future financial status of the Civil Service Retirement and Disability Fund. It is im-

ortant that this subcommittee get an accurate reading of the future financial sta-
Pility of our current system. Even if changes are warranted it is my belief that we
must be vigilant to protect the benefits that current employees are using to plan
their families future and the benefits that retirees are depending on for their liveli-
hood. Although I understand that we must be steadfast in our efforts to lessen the
Federal budget deficit, I believe that we must honor the commitments we have
made to Government employees.

Thank you Mr. Chairman.

oO


62

STATEMENT OF
WILLIAM E. FLYNN, Ill, ASSOCIATE DIRECTOR
FOR RETIREMENT AND INSURANCE
OFFICE OF PERSONNEL MANAGEMENT
at a hearing of the
SUBCOMMITTEE ON CIVIL SERVICE
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
U.S. HOUSE OF REPRESENTATIVES
on the

FINANCING OF THE
CIVIL SERVICE RETIREMENT AND DISABILITY FUND

JUNE 28, 1995

MR. CHAIRMAN AND MEMBERS OF THE SUBCOMMITTEE:

| AM PLEASED TO APPEAR TODAY TO DISCUSS THE FINANCING OF THE CIVIL
SERVICE RETIREMENT AND DISABILITY FUND. | WOULD LIKE TO PROVIDE AN
OVERVIEW OF THE OPERATION OF THE CIVIL SERVICE RETIREMENT AND
DISABILITY FUND AND ITS RELATIONSHIP TO THE CIVIL SERVICE RETIREMENT
SYSTEM (CSRS) AND THE FEDERAL EMPLOYEES RETIREMENT SYSTEM (FERS).
IN DOING SO, | WILL ADDRESS THE SPECIFIC QUESTIONS YOU HAVE ASKED.

MUCH HAS BEEN DISCUSSED AND WRITTEN ABOUT A CRISIS BEING FACED BY
THE CIVIL SERVICE RETIREMENT AND DISABILITY FUND. THAT; DISCUSSION

HAS SUGGESTED THAT EITHER ADDED REVENUES TO THE FUND OR REDUCED
PAYMENTS FROM THE FUND ARE NECESSARY TO AVOID THE CRISIS. LET ME

STATE AT THE OUTSET THAT THE FUND FACES NO CRISIS.


35

Welcome to our subcommittee this morning, gentlemen. First, we
will call on Mr. James Blum of CBO for his comments. If you have
a lengthy written testimony that you would like submitted as part
of the record, we will be glad to do that. If you would like to sum-
marize, we would appreciate it. You are recognized, Mr. Blum.

STATEMENTS OF JAMES L. BLUM, DEPUTY DIRECTOR, CBO;
WILLIAM E. FLYNN, ASSOCIATE DIRECTOR, OPM; JOHNNY
FINCH, ASSISTANT COMPTROLLER GENERAL, GENERAL
GOVERNMENT DIVISION, GAO

Mr. BLUM. Thank you, Mr. Chairman, and members of the sub-
committee. I appreciate the opportunity to be here this morning to
discuss with you the financing of retirement programs for Federal
civilian employees. With your permission, Mr. Chairman, I will, in-
deed, submit my prepared statement for the record.

Mr. Mica. Without objection.

Mr. BLUM. Given the lateness of the hour, let me try, as best I
can, to limit my oral remarks to a few key points that I think
should be made at this juncture. There has been a lot of discussion
this morning already about my prepared statement, and I appre-
ciate the fact that Members have read it and are knowledgeable.
I would just like to highlight a few things at this time. In particu-
lar, rather than speaking about the financing of the program—how
it exists now and so forth—let me switch immediately to the dif-
ferent proposals that lie before this committee. Those include the
one submitted by the administration and its budget office; the one
proposed in H.R. 103 that we have been discussing with Mr. Bili-
rakis; and a proposal not actually made, but we were asked to com-
ment on, which is what would happen if we took the funds com-
pletely outside of the budget.

The administration, as we know, has proposed that agencies pay
the full normalized cost for CSRS employee retirement benefits as
a good cost-accounting measure. That proposal is designed to make
the agencies more aware of the full cost of doing business. It would
increase intragovernmental transactions, that is, payments from
one agency to another, but it would have no effect on total outlays
or the deficit.

To accommodate the increase in agency labor costs, the adminis-
tration proposes to increase the discretionary appropriation caps
that exist now in law and will be extended through the year 2002.
Without such an adjustment, total outlays in the deficit would ac-
tually decrease by over $5 billion annually because money that oth-
erwise would flow outside the Government would remain in the
Treasury.

The administration also proposes to pay off the unfunded liability
of $540 billion in the Civil Service Retirement Trust Fund over a
40-year period. The only advantage of spreading that payment over
40 years is to avoid an immediate, large increase in the Federal
debt limit, which includes government trust fund holdings of Treas-
ury securities.

I know from experience that Members of Congress are very reluc-
tant to vote for increases in the Federal debt limit. Therefore, I
think that such increases are the only real cost of doing this ad-
ministration proposal. It can be explained as an effort to improve


xt)

the remaining costs are covered by other government contributions
to the retirement fund. OPM makes annual contributions to the
fund from its appropriation to amortize the liabilities created
by employee pay raises, once enacted, and other benefit
improvements when they are made; the Postal Service makes
contributions to the fund to cover retirement system liabilities
resulting from collective bargaining agreements with its employee
unions and COLAs postal retirees receive; and the Treasury pays
the cost of benefits attributable to military service and
interest on the system’s unfunded liability as if it were funded.
No provision exists to fund COLAs received by nonpostal retirees.

Because of the manner in which CSRS costs are determined and
funded, the system has accumulated a sizeable unfunded liability.
However, that liability is dealt with by the FERS statute.’ That
statute requires that, when the budget authority in the
retirement fund for CSRS benefits is exhausted, automatic annual
appropriations will be made to amortize the shortfall over 30
years. Thus, provisions have been made for the retirement fund
to always have sufficient budget authority to cover future
benefit payments.

An understanding of CSRS and FERS financing practices and
unfunded liabilities also requires a realization that federal
retirement benefits are not prefunded in the manner that private
pension plans set aside money during employees’ working years to
cover the accruing costs of their retirement benefits. Private
companies are required by law to fully fund their pension plans,
and are not allowed to invest pension funds in their own
securities. The chief purpose of these requirements was to
protect employees against the loss of earned pension benefits if
their employers went out of business or had not properly funded
their pension liabilities.

tpublic Law 93-335, approved June 6, 1986.
3


36

the informational content of the trust fund’s balance sheet. If that
is the goal, the payment could be made all at once, since it is only
a bookkeeping transaction and would not affect budget outlays or
the deficit. On the other hand, the same information is already
available in the annual OPM actuarial reports for the trust fund
and in the consolidated financial statements for the government
published each year by the Treasury.

Now, since the cost of deferred compensation, that is the govern-
ment retirement benefits, can be reduced by either raising the em-
ployee contribution rate or lowering the pension benefit, it is not
surprising that proposals along these lines are often included in
plans to reduce the budget deficit.

For example, CBO always includes a number of options along
these lines in our annual volume of deficit reduction options, and.
as has been observed this morning, the conference report on the
budget resolution also assumes that this will be done as part of the
effort to reach budget balance. To head off such measures, as we
have heard this morning, some Members of Congress have pro-
posed putting the Civil Service Retirement Trust Fund off-budget,
which is the same status given to Social Security and the Postal
Service. The intent is to provide Federal employees and retirees
with the same protection against budget cutbacks as is given to the
Social Security program.

As has been observed, a change in budget status would not affect
the unified budget totals or necessarily insulate Federal retirement
benefits from future cutbacks, given the pay-as-you-go policy of fi-
nancing benefits. It would increase pressures, however, on pro-
grams that remained on-budget and therefore would be opposed by
the budgeteers. For example, the statement from Dr. Rivlin at
OMB strongly opposed this measure.

More protection to the retirement benefits could be given by
changing the financing from a pay-as-you-go basis to a fully funded
basis comparable to the retirement plans sponsored by State and
local governments and private firms. This might be achieved by
moving the trust fund outside of the budget and investing funds in
a manner similar to the Thrift Savings Plan. This would have the
advantage of recognizing the costs of retirement benefits, or de-
ferred compensation, as they are incurred—when they are most
controllable—rather than down the road when the benefits have to

e paid.

It would also mean that current taxpayers would pay the current
cost of providing government services, which might improve
intergenerational equity. It would be consistent with good cost ac-
counting and might encourage better planning up front by the Con-
gress and Federal agencies.

On the other hand, moving the retirement trust fund outside of
the budget and fully funding the retirement benefits would have a
major impact on the Federal budget. Current outlays and the defi-
cit would increase by about $50 billion a year and about $300 bil-
lion over the 7-year period from 1996 to 2002. Those figures as-
sume that the trust fund liabilities of over $850 billion are actually
funded, which would be necessary to make this change in financing
work.


51

on hiring and retaining employees and on the credibility of the government as an

employer.

THE ADMINISTRATION'S PROPOSAL

The Administration believes that accurately measuring federal program costs is
essential to improving the effectiveness of the federal government. The failure of
agencies to pay full normal cost in unfunded plans and for CSRS employees means
that both agency operating expenses and retirement trust fund collections understate
deferred compensation earned by federal employees in the current period. That
understatement may misinform managerial decisions relating to the size and
composition of the federal workforce, the use of more capital-intensive production
processes, initiatives for early retirement, and contracting out. Accordingly, the
Administration proposes charging all federal agencies the full cost of pension
benefits as earned. The intent is to establish a consistent, comprehensive, and timely
measure of labor costs, even though that would not affect the current pay-as-you-go

financing of federal retirement.

For all pension plans, including those in several federal agencies that

currently recognize no accrual of pension costs, the Administration's plan would

14


24

Many have argued that Federal etnployees should contribute a
greater amount to their retirement, and proposals to increase em-
ployee contributions by 2.5 percent are included in both the tax
package and the budget resolution passed by the House. However,
neither the Civil Service Retirement System nor the Federal Em-
ployee Retirement System was ever intended to rely in large part
on employee contributions for financing. In fact, employee contribu-
tions rarely pay for any significant portion of pension obligations.
In the private sector, many employers finance 100 percent of their
employees’ pefisions.

Increasing employee contributions translates to increasing taxes
on all Federal employees. This is clearly an unfairly targeted deficit
reduction effort that singles out Federal employees for tax in-
creases. If an increase in employee contributions is required, it
should be levied on workers coming into the civil service in the fu-
ture, not on those who entered Federal employment based upon a
reasonable reliance upon the system in place.

Another issue that has been raised is the unfunded liability of
the Civil Service Retirement System. All private companies are re-
quired to have funds on hand to pay for pension obligations. This
requirement was properly enacted to protect American workers in
the event their company suddenly goes out of business and to pro-
tect the American taxpayers who ensure private pensions. The Fed-
eral Government will never go out of business and have to pay all
pension obligations at once. Some of the amounts counted in the
unfunded liability of the Federal Government will not come due for
payment for a decade or more. So the unfunded liability of the civil
service retirement plans should not be an issue.

Federal employees perform the daily functions of our government
and deserve our gratitude and respect. Unfortunately, when they
are most recognized is as a bull’s eye for budget cutters. Like all
Members of Congress, indeed like all Americans, I support efforts
to cut Federal spending and reduce the deficit.

I voted for the balanced budget amendment and the House budg-
et this year. However, I believe that such efforts should be well.
conceived and should not unfairly target any one group. For my
part, I will continue to fight against raising employee contributions
of existing employees and annuity calculations designed to decrease
employee pensions of those now in the Federal work force.

Again, thank you for providing me with this time.

Mr. Mica. I thank the gentleman again for his testimony and
also for his patience.

I would now like to yield to my colleague from Florida; Mr. Bili-
rakis. Mr. Bilirakis has a proposal, I believe, to take the trust fund
off budget, so Mr. Bilirakis, you are recognized.

Mr. BiLirakis. Mr. Chairman, my gratitude to you and to the
subcommittee for the opportunity to be here this morning to dis-
cuss H.R. 103, which is the legislation you speak of, taking the
Civil Service Retirement and Disability Trust Fund off budget.

As you know, and by now all of us know, the civil service retire-
ment fund was created by the Civil Service Retirement Act of 1920.
It was maintained as an independent trust fund until 1967, when
President Johnson agreed to a recommendation that such trust
funds should be made part of the unified budget.


54

off-budget category changes neither the pay-as-you-go financing of federal

retirement nor the budget totals.

In contrast, placing the CSRDF outside the budget, rather than merely off-
budget, implies a fundamental change in financing retirement benefits. Following
the state and local government and Thrift Savings Plan model, funds would be
invested outside the government as benefits were earned. That approach would
require the government to provide the pension fund with $857.5 billion in cash or
government securities--the amount needed to pay benefits already earned. That
transaction might have significant short-run macroeconomic consequences, unless

it was spread over time. It would also require a major increase in the debt ceiling.

Moving the CSRDF outside the budget would also mean that transactions
between the retirement fund and other government accounts would no longer be
intragovernmental. Agency contributions and Treasury interest payments to the
CSRDF would increase budget outlays and the deficit, as shown in Table 4. In fact,
shifting the budget status of the CSRDF would increase the deficit by about $50
billion annually. Despite that change in the budget, neither the benefit payments to
current annuitants, the benefits earned by current employees, nor the cost to the
government would change. Over the long term, federal outlays would be unaffected.
Spending now projected to occur in distant out-years would be reduced by shifting
spending to nearer-term budgets.

17


63

-2-
NOTWITHSTANDING THE REPORTED UNFUNDED LIABILITY OF THE FUND, THE
FUND NOW POSSESSES, AND WILL CONTINUE TO POSSESS, SUFFICIENT
BALANCES TO PAY ALL ITS REQUIREMENTS FOR AS LONG AS ONE CARES TO
PROJECT INTO THE FUTURE. INDEED, PROVISIONS OF CURRENT LAW PROVIDE
A MECHANISM FOR THE UNFUNDED LIABILITY TO GRADUALLY BE FUNDED
AND ELIMINATED ALTOGETHER OVER TIME. IN A FEW MOMENTS, | WILL
ADDRESS THE ADMINISTRATION’S PROPOSAL TO IMPROVE THE MANNER IN
WHICH THE UNFUNDED LIABILITY WILL BE FINANCED, BUT IT IS IMPORTANT
TO POINT OUT THAT PROVISIONS ALREADY EXIST TO ACCOMPLISH THAT

OBJECTIVE.

SINCE THERE IS NO FUNDING CRISIS, IT IS IMPORTANT TO EMPHASIZE THAT
PROPOSALS TO INCREASE FUND REVENUES OR DECREASE EXPENDITURES
FUNDAMENTALLY AFFECT THE EMPLOYER/EMPLOYEE DISTRIBUTION OF
BENEFIT COSTS OR THE ACTUAL LEVEL OF BENEFITS PROVIDED TO
EMPLOYEES. THEY SHOULD BE EVALUATED NOT ONLY IN TERMS OF THEIR
COST, BUT ALSO THEIR IMPACT ON THE GOVERNMENT'S ABILITY TO RECRUIT

AND RETAIN A SKILLED WORK FORCE.

THE FUND’S CURRENT OPERATIONS AND FINANCING
THE CIVIL SERVICE RETIREMENT AND DISABILITY FUND IS AN ACCOUNT SET

UP AT THE DEPARTMENT OF THE TREASURY TO RECORD FUNDS EARMARKED




43

TABLE I. TRANSACTIONS OF THE CIVIL SERVICE RETIREMENT AND
DISABILITY FUND, FISCAL YEAR 1993 (In billions of dollars)

Transaction Amount
Employee Contributions 47
Postal Service Payments 48
Agency Contributions (Non-postal) 7
Government Payments for Past Service 20.2
Liabilities (Non-postal)

Treasury Interest Payments 25.5
Total Fund Income 62.9
Total Fund Expense 35.1

Net Effect on the Budget Deficit (Employee
contributions and Postal Service payments minus
fund expenses) 25.6

SOURCE: Office of Personnel Management.

NOTE: The shaded entries reflect the purely bookkeeping entries. Postal Service contributions are
treated differently than other agency contributions because those payments are assumed to
be recouped through stamp charges.



41

The CSRDF is simply a ledger that is useful in measuring costs and liabilities.
Unfortunately, it is also a source of misinformation and confusion. When the
government collects payroll taxes from its employees, it earmarks those receipts by
crediting the collection to the trust fund. Those monies, however, go directly into the
Treasury's cash balances where they are used to pay the government's bills as those
come due--including the current month's federal retirement benefits. When the flow
of collections from current employees is insufficient to cover all of the current
period's expenses for benefits, the Treasury must obtain resources from taxpayers
now or later by borrowing. Thus, the federal retirement system for civilian
employees is on a pay-as-you-go basis, as is military retirement, Social Security, and

the rest of the federal government.

The government could hardly do otherwise because a federal account cannot
"fund" future payments without purchasing claims on private resources. If the
government attempted to purchase and hold stocks and privately issued bonds to pay
future federal pensions, it would require more than $850 billion of such assets just
for the civil service retirement program. Another $630 billion would be required for
the military retirement program. If borrowing and investing that amount were to
occur, federal outlays and the deficit would increase and the government's pension

fund could become the country’s largest stockholder.


66

5.
BENEFITS IN REAL CASH, IN EFFECT, WE REDEEM THE PAPER IN THE FUND

WITH CASH FROM THE TREASURY.

THE VAST MAJORITY OF INCOME THAT THE FUND RECEIVES IS FROM
GOVERNMENTAL SOURCES. THE FUND’S INCOME FROM THE PUBLIC DOES
NOT APPROACH ITS OUTGO TO THE PUBLIC. THUS, THE OPERATION OF THE
RETIREMENT FUND DOES NOT PRESENT A SOURCE OF CASH FOR FINANCING

GOVERNMENT OPERATIONS IN GENERAL.

ADMINISTRATION PROPOSAL

TWO FINANCING MECHANISMS ALREADY ESTABLISHED IN CURRENT LAW
WORK TOGETHER TO ENSURE THAT THE RETIREMENT FUND, DESPITE
OPERATING WITH A LARGE UNFUNDED LIABILITY, WILL HAVE SUFFICIENT
BUDGET AUTHORITY AVAILABLE TO PAY RETIREMENT BENEFITS. THE FIRST,
SET UP IN 1969, IS A SERIES OF EXTRA PAYMENTS DESIGNED TO SLOWLY
STOP THE CSRS UNFUNDED LIABILITY FROM GROWING AND EVENTUALLY
REDUCE IT. THE SECOND WAS SET UP WHEN FERS WAS CREATED IN 1986.
UNDER FERS, EMPLOYING AGENCIES BEGAN PAYING THE FULL ACCRUING
COSTS OF BENEFITS FOR NEW HIRES. ALSO, THE FERS ACT MAKES FERS
ASSETS AVAILABLE TO PAY ANY REMAINING CSRS BENEFITS AFTER THE CSRS
FUNDS ARE DEPLETED, AND CREATES A PAYMENT STREAM TO REPAY THE
FERS FUND. TOGETHER, THESE TWO FINANCING MECHANISMS ENSURE THAT


ll

PREPARED STATEMENT OF HON. DAN BuRTON, A REPRESENTATIVE IN CONGRESS.
FROM THE STATE OF INDIANA

Mr. Chairman, I want to thank you for holding this hearing today. I think it is
very important for this subcommittee to look closely at Federal retirement programs
and how future retirement benefits will be financed.

All of us have heard from Federal employees back home who strongly oppose the
Federal retirement changes contained in H.R. 1215 and in the budget resolution.
‘They believe that Congress is breaking a contract it has made with them. Now,
many Federal employees who are nearing retirement age, and have already made
plans for retirement, are facing the possibility of reduced pensions. Federal em-
ployee contributions to their retirement will also be increased.

T reluctantly supported these changes when they were considered by the House
because I believe it is urgent that Congress deal with the $540 billion unfunded li-
ability in the Federal retirement fund. If we do nothing, the problem will only get
worse, and then Congress will have to consider even harsher measures such as cut-
ting COLAs.

ongress must meet the commitments it has made to current Federal employees
and retirees. But I think that we need to look very seriously at changing the Fed-
eral retirement system for new persons hired in the future. It is very important that
we protect the benefits that current Federal employees and retirees have earned,
but we can, and should change the system for new hires. so that Congress is no
longer faced with a continual shortfall in the retirement fund to pay for benefits.

T'think we should consider creating a new Federal retirement system that is fully
funded and that is separate from the Federal budget. ERISA requires private sector
pensions to be fully funded and this is a good idea. A fully funded retirement system
would guarantee that the money would be there to pay benefits to Federal retirees.
That is not the case today. We have to use money from the general fund to help
pay Federal retiree benefits because the retirement fund is underfunded. Secondly,

y separating the new retirement system from the Federal budget we protect this
money from being used by Congress for other purposes.

I will conclude by welcoming our witnesses who will appear before the subcommit-
tee, and I look forward to your testimony. This is an important issue and we cer-
tainly need as much expert advice as possible.

Mr. Mica. Now I would like to yield to and apologize for not rec-
ognizing her earlier, the ranking minority member of the full com-
mittee, Mrs. Collins.

Mrs. COLLINS. No apology necessary, Mr. Chairman. I was more
than happy to sit here and hear some of the opening statements.

Mr. Chairman, last week conferees cleared the way for the House
and the Senate to consider the Republican budget proposal for fis-
cal year 1996. That budget, no matter how you Took at it, hits the
pay and benefits of Federal employees harder than any other pro-
posal considered so far. The budget conference agreement cuts all
three of the most important basic employee benefits—pay, health
care, and retirement.

Under this proposal, Federal employees would have to give up
$69 billion in future pay increases and $1.6 billion in retirement
benefits over the next 7 years. During that same period of time,
this budget will also force Federal employees to pay $14.7 billion
more for their retirement and health benefits than they would pay
under the current system.

Now, altogether, the budget snatches $85.3 billion out of the
pockets of Federal employees and retirees. That is $85.3 billion in
pay and benefits that the Federal Government has already made
commitments to provide. Now this is money the Federal Govern-
ment owes its employees and its retirees.

The majority is constantly saying the Federal Government
should operate more like a private business. The budget proposal
does just the opposite on retirement and health benefits. Large pri-
vate employers in the United States pay virtually all the health


53

Administration's proposal to convey a half a trillion dollars in Treasury securities to
the retirement fund over 40 years can only be explained as an effort to improve the
informational content of the CSRDF's asset balance. If that is the goal, the payment
might be made all at once because it creates no burden. Another view is that the
pertinent information already exists in the annual actuarial reports of the CSRDF.

That information need not be registered in a retirement trust fund at all.

MOVING THE CSRDF EITHER OFF-BUDGET OR OUTSIDE THE BUDGET

Social Security and the Postal Service are off-budget entities under current law. As
such, their accounts are segregated within the unified budget. In addition, Social
Security by law is exempt from enforcement of pay-as-you-go procedures under the
BEA. To provide federal retirees with protection similar to that of Social Security
recipients, some analysts have advocated off-budget status for the retirement funds.
H.R. 103, introduced by Congressman Bilirakis, is an example of giving off-budget
status to the Civil Service Retirement and Disability Fund, although it may not
provide the same protection that is given to Social Security recipients. The BEA,
however, already exempts federal retirement payments from being cut in a
sequestration. A change in budget status will not necessarily further insulate federal

retirement benefits from cutbacks. Moreover, placing the retirement fund into the

16


59

Mr. Bass. The Chair will now recognize Mr. Flynn for 5 minutes.

Mr. FLYNN. Thank you, Mr. Chairman.

Mr. Chairman and members of the subcommittee, I am pleased
to appear today to discuss the financing of the Civil Service Retire-
ment and Disability Fund. I would like to provide an overview of
the operation of the Civil Service Retirement and Disability Fund
and its relationship to the Civil Service Retirement System and the
Federal Employees Retirement System. In doing so, as I talk about
those two systems, I will attempt to address the specific questions
you have asked prior to the hearing.

Much has been discussed and written about a crisis being faced
by the Civil Service Retirement and Disability Fund. That discus-
sion has suggested that either added revenues to the fund or re-
duced payments from it are necessary to avoid the crisis. Let me
state at the outset that the fund faces no crisis.

Notwithstanding the reported unfunded liability of the fund, the
fund now possesses, and will continue to possess, sufficient bal-
ances to pay all its requirements for as long as one cares to project
into the future. Indeed, provisions of current law provide a mecha-
nism for the unfunded liability to gradually be funded and elimi-
nated altogether over time. In a few moments, I will address the
administration’s proposal to improve the manner in which the un-
funded liability will be financed, but it is important to point out
that the provisions already exist to accomplish that objective.

Since there is no funding crisis, it is important to emphasize that
proposals to increase fund revenues or decrease fund expenditures
fundamentally affect the employer-employee distribution of benefit
costs or the actual level of benefits provided to retirees. They
should be evaluated not only in terms of their cost, but also their
impact on the government’s ability to recruit and retain a skilled
work force.

The Civil Service Retirement and Disability Fund is an account
set up at the Department of Treasury to record funds earmarked
for the civil service and Federal employees retirement programs,
benefits paid by these programs, and amounts owed by the govern-
ment for future benefit costs. Employee contributions, along with
all other sources of income, are deposited in the Treasury and cred-
ited to the retirement fund. On the opposite side of the ledger, ben-
efits paid out of the Treasury are debited to the retirement fund.
Thus, the retirement fund’s balance at any point in time represents
the net credits it has accumulated to pay retirement benefits.
These net credits will generate the budget authority necessary to
pay retirement benefits when they become due.

The fund’s activities do affect the budget. Under current
scorekeeping rules, employee contributions and Postal Service
agency contributions are treated as government revenues, and re-
tirement benefit payments are treated as government outlays. The
difference between them represents the amount by which the re-
tirement fund adds to or reduces the Federal deficit. In fiscal year
1995, the fund added $28 billion to the on-budget deficit.

Over the next 40 years, the impact of the retirement fund for the
on-budget deficit, measured in nominal dollars, which includes in-
flation, will go to $51 billion in the year 2005, $95 billion in 2015,
$188 billion in 2025, and $185 billion in 2035. However, expressed


13

Under the Republican proposal, Federal employees would have to give up $69 bil-
lion in future pay increases and $1.6 billion in retirement benefits over the next
seven years (from enactment to the year 2000). During that time, this budget will
also force Federal employees to pay $14.7 billion more for their retitement and
health betiefits than they would py under the current systerh.

Altogether, the Republican buc Fee takes $85.3 billion out of the pockets of Federal
employees and retirees—$85.3 billion in pay and benefits that the Federal govern-
ment has already made conimitments to provide. This is money the Fedetal govern-
ment owes its employees and retirees.

Republicans are constantly saying the Federal government should operate more
like a private business. Yet, the Republican budget proposal does just the opposite
on retirement arid health benefits. Large private employers in the United States pay
virtually all, I repeat all, the health care costs for their employers. Under the Re-
publican budget proposal, over 78% of ali Federal employees would pay more for
theit health insutante coverage than they do tiow.

The same is true for retirement benefits. Ninety-seven percerit of all American
employees in medium and large firms are in pension plans paid for entirely by their
employers. However, about 25% of the cost of Providing retirement benefits for Fed-
eral retirees last year was paid by current employers.

So, why does the Republican budget yank $85 billion away from middle class Fed-
eral workers? They first said chatiges were needed, because the “unfunded liability”
of the Federal retirement system was rapidly growing to unacceptable levels; that,
left alone, the civil service retirement fund would require steep increases in con.
tributions from general reveriues to avoid insolvency.

However, the Budget Conference Agreement actually contains less savings for the
retirement system than the Houise has already Passed. If insolvency is the problem,
then this Budget Agreement does little to address it.

Furthermore, we heard from experts at the General Accounting Office and the
Congressional Research Service who said the retirement fund’s “unfunded liability”
is fot even a problem that needs to be fixed. According to these experts, as well
as other equally expert witnesses we will hear from today Mr. Chairman, there is
no danger now, or in the future, that the civil service retirement fund will be insol-
vent.

For this reason, Members of out Committee froin both sides of the aisle were able
to successfully block Committee approval of legislation implementing cuts in the
Federal retitement program.

Later, however, the Republican Majority revealed their piirposes more ¢learly
when they included Federal retirement changes in their bill giving wealthy Ameri-
cans a capital gains tax cut. To help pay for their $354 billion tax cut for the rich,
the Republican Majority pushed through cuts in Federal employee retirement bene-
fits and more than a 300% increase in the retirement witha lding tax for many Fed-
eral workers.

Clearly, many in the Majority are more interested in giving a tax cut to the
wealthy, than in saving the retirement fund from insolvency.

It is the tax eut; and nothing more, that has caused the Majority to seek retire-
ment ctits from the very beginnirig and that continues to be the reason these cuts
are still in the Republican budget. I have, and coritinue to, strongly oppose cutting
retirement benefits for middle class workers in order to pay for a tax cut for the
wealthy.

It is not only tirifair to Federal workets who have participated in a tetirement pro-
gram based on commitments the government made, but these cuts also undermine
efficiency and excellence in government, Extending the base salary period for retire-
ment computation from three years to five years will have a devastating impact on
efforts to downsizé the Federal workforce.

‘These tetirement changes will likely force many experienced Federal workers to
retire earlier, thereby making it more difficult to retain skilled and experiericed em-
ployees. These changes may also force many other workers to stay longer than they
otherwise would in order to recoup lost benefits.

For example, officials at the Drug Enforcement Agency, one of the few agencies
that has authority to hire, say they fear that retirement and other pay and benefit
changes in the budget resolution will make it significantly more difficult to retain
their most experienced agents, and still harder to hire experienced new ones.

The simple fact is that the changes in the budget resolution would mean that pay
and other benefits for Federal employees will be far less competitive than com-
parable benefits in the private sector.

Mr. Chairman, I am vety pleased, therefore, that you are holding this hearing.
We will hear from Members of the Majority, who like myself, Have concerns about
both the fairness and the wisdom of the retirement changes being proposed. The


CONTENTS

Hearing held on June 28, 1995
Statement of:
Bateman, Hon. Herbert H., a Representative in Congress from the State

of Virginia oe
Blum, James jeputy Director, CBO; William lynn, Associate
Director, OPM; Johnny Finch, Assistant Comptroller General, General

Government Division, GAO... ae
Quillen, Hon. James H., a Representative in Congress from the State
of Tennessee .. se
Letters, statements, etc., submitted for the record b;
Bass, Hon. Charles F., a Representative in Congress from the State
of New Hampshire, prepared statement of . se
Benson, Helene A., ‘president, Professional Managers Association, pre-
ared statement of ... se
Bilirakis, Hon. Michael, a Representative in Congress from the State
of Florida, prepared statement of
Blum, James L., Deputy Director, CBO, prepared statement of .
Burton, Hon. Dan, a Representative in Congress from the State of Indi
ana, prepared statement of ..
Collins, Hon. Cardiss, a Representative in Congress from the State of
Illinois, prepared statement of .
Davis, Thomas M., a Representative in Congress from the State of Vir-
ginia, prepared statement of
Finch, Johnny, Assistant Comptroller General, Gener:
sion, GAO:
Information concerning health insurance programs
Prepared statement o!
Flynn, William “Ed”, Assoc’ "
Gilman, Hon. Benjamin A., a Representative in Congress from the St
of New York, prepared statement of .
Hansen, Hon. James V., a Representative in
of Utah, prepared statement of ....
Mascara, ‘Hon, Frank, a Representative in
Pennsylvania, prepared statement of es
Mica, Hon. John L., a Representative in Congress from the State of
Florida, chart concerning pension deficits -
Morella, Hon. Constance A., a Representative in Congress from the State
of Maryland, prepared statement of ... ee
Quillen, Hon. James H., a Representative in Congress from the State
of Tennessee, prepared statement of .. ne
Rivlin, Alice M., Director, Office of Management and Budget, prepared
statement of 7

ap

23

35
21


34

expect such and such after they retire and look what we are trying
to do.

Mr. Davis. Or stay in Congress, as the case may be?

Mr. BiLirakis. That is right. I think basically the same thing ap-
plies. It really varies. Companies are coming up with good plans

ecause they want to do exactly the thing that you are referring
to and that is to attract good people and hope that good people will
stay aboard.

Mr. Davis. The FERS system, of course, when we moved to the
FERS system and we gave people a choice, there is no problem
with the FERS system right now, any significant problem.

Mr. BILIRAKIS. Apparently, it is supposed to be a fully funded
system, and the chairman made the comment about some sort of
a shortfall there. I am sure counsel knows more about it than I do.
But it is virtually fully funded.

Mr. Davis. I think we can get to the bottom of that in these hear-
ings and take a look at it. It is clearly much more actuarially sound
than the CSRS.

Mr. BILirAkIs. They fall in the same category. If we are going to
delay COLAs and things of that nature and hit the Federal retirees
over the years, we are hitting the FERS people as well as the
CSRS people.

Mr. Davis. I think the thing I like the most about your bill is
the fact that for a while we have had a dichotomy between Social
Security recipients and Federal retirees, and many Federal retirees
who were employees get treated in an adverse way even though
they don’t get Social Security.

One thing your bill would do, I think, is to bring it into perspec-
tive and treat everybody the same. It seems to me you just don’t
go after your former employees and look to them for savings and
for other people, give them a break. They ought to be treated
equally. I think that is really what your legislation gets to. There
may be years when there aren’t COLA’s for everybody, and that
may be the right thing to do, but at least you have equality of
treatment.

Anyway, I thank you for being here today. I appreciate your tes-
timony, I know the chairman does. Thank you.

Mr. Mica. I also thank my colleague from Florida, Mr. Bilirakis,
for his testimony and service today as a witness. I appreciate your
interest and look forward to working with you on this issue.

Mr. BILiRAKIS. Thank you.

Mr. Mica. We will excuse our first panel and call our second
panel: Mr. James Blum, Deputy Director of CBO, Mr. Ed Flynn,
Associate Director of OPM, and Mr. Johnny Finch, Assistant Comp-
troller General, the General Government Division of GAO.

Are there additional folks with you? Mr. Finch, do you have any-
one else with you?

Mr. FINCH. I have some experts with me. If we need them at the
table, maybe we could bring them up.

Mr. Mica. It is the custom of this committee and subcommittee
to swear in our witnesses. If you would stand, please, raise your
right hand.

{Witnesses sworn.]

Mr. Mica. The witnesses answered in the affirmative.


16

The pension financing law does not apply to federal or state and
local government pension plans because of Congress’ presumption
that governments will continue to exist, as is not always the
case for private companies.

The federal retirement fund is "invested" in special issue
Treasury securities. These are nonmarketable securities
available only to the retirement fund. There is no cash in the
fund. It is only when the securities are redeemed to pay
retirement benefits that the Treasury must obtain the necessary
money through tax receipts or borrowing. This is the point at
which actual outlays occur. To the extent that these outlays are
met by borrowing, they add to the deficit.

Thus, the CSRS and FERS pension plan retirement fund represents
that portion of estimated future benefit obligations that the
government has recognized on paper. The unfunded liability is
that portion of estimated future benefit obligations that has no
paper backing in the form of special issue Treasury securities.
Being simply an actuarial estimate, the unfunded liability itself
has no effect on the budget or current outlays and is not a
measure of the government's ability to pay retirement benefits in
the future. In fact, appropriations to increase the amount of
nonmarketable Treasury securities in the fund so as to eliminate
the unfunded liability (as the FERS statute requires be done
eventually) would not affect federal outlays or the deficit or
require additional payments by employees or the taxpayers.

Our major concern with the retirement funding process has been
that agencies are charged less than the full accruing cost of
CSRS, thus understating the cost of government programs. Our
recommendation to charge agencies all accruing retirement costs
not covered by employee contributions was adopted for the FERS
pension plan (and the Military Retirement System) but not for
CSRS.

4


22

tirement and who have made retirement decisions based upon the
program as it stands today.

Finally, as I stated at the Rules Committee, I simply do not un-
derstand why the Postal Service workers should be impacted by
CSRS or FERS reductions, as the Service fully pays for its retiree
obligations—the result being no budget impact. Although I know
that postal assessments are not under the jurisdiction of this sub-
committee, I wanted to point out that hitting the Postal Service for
supposed retiree obligations, as has been done over the years, is
patently unfair. We all know that in the business world if a cor-
poration is taxed, the consumer will be forced to absorb the cost
and the product becomes less attractive. We should resist any at-
tempt to manufacture a financial obligation for the Postal Service
and simply credit it to the CSRS Trust Fund in the name of deficit
reduction.

Mr. Chairman, the confidence of our workers and their families
depends upon actions taken by this subcommittee and this Con-
gress regarding the retirement system. So I implore you not to ex-
periment with it, and if changes must be made, they should be pro-
spective so as to protect the benefits of current ‘employees.

Thank you, Mr. Chairman, and members of the committee for al-
lowing me to share some of my concerns and thoughts with you.

One last thought. I don’t think it is fair to these Federal employ-
ees and postal workers to pay for a tax reduction by imposing a
considerable increase in what they have to pay the Government,
which will be an increased tax on their earnings. I implore you to
take a look, and the solution that you reach should not be based
on anything other than the facts, and these Federal employees
should receive the benefit of the agreement made in years past.

Thank you, Mr. Chairman.

Mr. Mica. I thank the gentleman from Tennessee for his testi-
mony and his patience.

[The prepared statement of Hon. James H. Quillen follows:]

PREPARED STATEMENT OF HON. JAMES H. QUILLEN, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF TENNESSEE

Thank you, Mr. Chairman, I congratulate you and your subcommittee for your ef-
forts to educate the American public about’ our two Federal retirement systems—
the Civil Service Retirement System (CSRS) and the Federal Employees Retirement
System (FERS). However, I urge you to separate the debate over Members’ pensions
from informed discussion about the retirement system created for our postal and
Federal workers. Should we decide to make changes to our own pension, so be it;
but let’s not shackle ourselves to our employees and drag them down with us.

‘As you consider retirement program revisions, 1 urge you to give significant
weight to the independent analyses provided by both the Congressional Research
Service and the General Accounting Office, which conclude that the Civil Service
Retirement Trust Fund is in financially good shape and its future obligations do not
impact the budget. Furthermore, I urge you to appreciate that FERS is fully-funded.
Resulting in fully accounted for liabilities.

I also caution you from being tempted to craft a budget-driven proposal to com-
pletely redesign the existing Federal retirement system, We should not engage in
this type of legislative effort just to prove that we can do it, In my view, Congress
made a solemn promise to postal and Federal workers in 1984 when we reformed
the Federal retirement system. Congress unequivocally stated that retirement bene-
fits would no longer be subjected to the ebb and flow of budgetary tinkering and
political expedience. -

FERS, the new retirement system, is fully-funded, imposes a reduced COLA on
its beneficiaries, and encourages employees to save for their own retirement, These
are goals which Members of my own political party ought to embrace with open


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
WILLIAM F. CLINGER, Jr., Pennsylvania, Chairman

BENJAMIN A. GILMAN, New York

DAN BURTON, Indiana

J. DENNIS HASTERT, Illinois

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

STEVEN SCHIFF, New Mexico

ILEANA ROS-LEHTINEN, Florida

WILLIAM H. ZELIFF, Jr., New Hampshire

JOHN M. McHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

PETER BLUTE, Massachusetts

THOMAS M. DAVIS, Virginia

DAVID M. McINTOSH, Indiana

JON D. FOX, Pennsylvania

RANDY TATE, Washington

DICK CHRYSLER, Michigan

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

WILLIAM J. MARTINI, New Jersey

JOE SCARBOROUGH, Florida

JOHN B. SHADEGG, Arizona

MICHAEL PATRICK FLANAGAN, Illinois

CHARLES F. BASS, New Hampshire

STEVEN C. LaTOURETTE, Ohio

MARSHALL “MARK” SANFORD, South
Carolina

ROBERT L. EHRLICH, JR., Maryland

CARDISS COLLINS, Ilinois

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, Jr., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

JOHN M. SPRATT, JR., South Carolina

LOUISE McINTOSH SLAUGHTER, New
York

PAUL E. KANJORSKI, Pennsylvania

GARY A. CONDIT, California

COLLIN C. PETERSON, Minnesota

KAREN L. THURMAN, Florida

CAROLYN B. MALONEY, New York

THOMAS M. BARRETT, it

GENE TAYLOR, Mississippi

BARBARA-ROSE COLLINS, Michigan.

ELEANOR HOLMES NORTON, District of
Columbia

JAMES P. MORAN, Virginia

GENE GREEN, Texas

CARRIE P. MEEK, Florida

FRANK MASCARA, Pennsylvania

CHAKA FATTAH, Pennsylvania

BERNARD SANDERS, Vermont
(Independent)

James L. CLARKE, Staff Director
Kevin Sapo, General Counsel
JupitH McCoy, Chief Clerk
Bup MYERS, Minority Staff Director

SUBCOMMITTEE ON CiviL SERVICE

JOHN L. MICA, Florida, Chairman

CHARLES F. BASS, New Hampshire
BENJAMIN A. GILMAN, New York
DAN BURTON, Indiana

J. DENNIS HASTERT, Illinois
CONSTANCE A. MORELLA, Maryland

JAMES P. MORAN, Virginia
BERNARD SANDERS, Vermont (Ind.)
FRANK MASCARA, Pennsylvania

Ex OFFICIO

WILLIAM F. CLINGER, JR., Pennsylvania

CARDISS COLLINS, Illinois

GEORGE NESTERCZUK, Staff Director
DAN MOLL, Professional Staff Member
CAROLINE FIEL, Clerk
CEDRIC HENDRICKS, Minority Professional Staff

G96

ap


91

with the other two major Federal retirement systems. Agencies and employees al-
ready pay the full retirement costs under the Federal Employees Retirement System
(FERS) which covers most civilian personnel hired since January 1, 1984, and DoD
already pays the full retirement costs for military members. Likewise, the proposed
amortization of the CSRS unfunded liability parallels the existing treatment of the
unfunded liability of the military retirement system.

Now I would like to address some of the questions about the CSRDF raised in
Chairman Mica’s letter. Since the OPM actuaries are responsible for the long-term
projections of income, outlays and assets for the CSRDF, I defer to OPM on these
matters.

The CSRDF is like many other government trust funds in that it is financed by
dedicated receipts. Its receipts include retirement contributions from Federal em-
ployees, agency contributions for employee retirement, and interest on balances,
Currently, the CSRDF's receipts exceed its payments and the difference is invested
in non-marketable government securities issued by the Treasury. Interest on these
securities is paid monthly and is based on the average rate of interest. on all long-
term marketable securities. These securities add to the total national debt.

Outlays for the payment of retirement benefits are like any other government out-
lays. Paying retirement benefits requires the government either to use tax receipts
or to borrow from the public to finance the payments when they are made. Agency
contributions, interest payments and other payments from government accounts into
the retirement trust fund remain inside the government and do not affect the defi-
cit.

Finally, | would like to discuss H.R. 103, a bill to move the CSRDF off-budget.
The Administration strongly opposes H.R. 103. The Administration supports a uni-
fied Federal budget based on the principle that the Federal budget should present
in one place the totality of the Federal Government's fiscal operations. This allows
decisions to be made about how much of the Nation's resources are to be used by
the Government and how these resources are allocated among Government activi-
ties. Since 1967, all Administrations have supported the principle of a unified budg-
et. Proposals to move programs off-budget do not support this principle; they merely
make artificial distinctions among total Government resources.

If H.R. 103 were enacted, total government outlays would remain unchanged. The
following estimates reflect current law. They do not include the Administration pro-
posal described above. In the first year in which the bill is effective, the on-buc get
deficit would increase by about $28 billion and the off:budget deficit would fall by
the same amount. The deficit impact can be summarized as follows:

(1) On-budget outlays would increase by $63 billion because money that currently
remains on-budget when it is transferred from one account to another (agency con-
tributions, interest, and a general fund payment to the retirement fund) would be-
come an on-budget outlay as it would flow to a new off-budget retirement account;

(2) On-budget governmental receipts would fall by about $4.5 billion because cur-
rent on-budget governmental receipts (from employee contributions) would become
off-budget receipts; and

(3) On-budget outlays would fall by just under $40 billion because current on-
budget outlays (for retirement benefits) would become off-budget outlays.

e combined effect of increasing on-budget outlays by just over $23 billion and
reducing on-budget receipts by $4.5 billion would be an increase in the on-budget
deficit of about $28 billion, Similarly, the debt held by on-budget accounts would fall
by $28 billion and the debt held by off-budget accounts would increase by $28 bil-
Hon, leaving total debt held by government accounts unchanged.

If the CSRDF, with its existing balance, were moved outside of the budget, retire-
ment benefit payments would not be included in total government spending, just as
payments to individuals by the Federal Retirement Thrift Investment Board are not
included. Note that moving the CSRDF outside of the budget differs from moving
it off-budget where benefit payments would still be included in the unified budget
totals. A move outside of the budget would increase government outlays and the def
icit by $28 billion. In addition, debt held by the public would increase by over $350
billion; the end of FY 1995 fund balance is projected to be $366 billion.

If FERS were moved outside of the budget, the deficit would increase by about
$10 billion. Outlays would increase by slightly less than $10 billion—for the agency
contributions to FERS and interest on the FERS fund balance—and governmentel
receipts from FERS employees would fall by about $400 million.

In conclusion, I would like to reiterate that the Administration believes the budg-
et should fairly and accurately reflect the Government's assets and liabilities. The
Administration supports showing retirement costs when and where they accrue as
we propose in the FY 1996 Budget—rather than as a government-wide cost at some
point in the future. In addition, the Administration strongly opposes proposals like



As of October 1, 1993, the value of retirement benefits already earned by current
employees and annuitants was $857.5 billion (see Table 2). The retirement fund
account had interest-bearing claims on the Treasury of $317.4 billion. That amount
leaves an "unfunded liability" of $540.1 billion, almost all of which is the result of

underfunding CSRS benefits.

Some people have described that unfunded liability incorrectly as the cost of
federal retirement that future taxpayers must bear. In fact, unless the federal
government renegotiates its pension promises, future taxpayers must pay the entire
earned benefit of $857.5 billion. The retirement fund's balance of $317.4 billion at
the Treasury is merely the cumulative excess of credits to that account over and
beyond payments it made to others. The difference between that balance and the
total liabilities of the fund reveals only the extent to which the cost of future benefits
has not yet been recognized in the budget. But it is the whole of future benefits that

taxpayers will have to pay, funded or not.

Of course, the retirement fund could be fully funded by an intragovernmental
transfer of $540.1 billion from the Treasury to the fund. That bookkeeping entry,
which would require that the federal debt ceiling be raised by that amount, would
cost taxpayers and the government nothing, but it would increase the CSRDF's

9


30

appointed with Money magazine. I used to read that rag, but in the
interest of putting together what they consider to be a catchy story,
they apparently deliberately misled the reader. For one thing, they
must be talking about the dynamic cost of the retirement system
versus payroll, which has actually gone down from 37 percent to
25 percent since 1979. So that figure is way out of context.

But when they talk about the State being, the States being 14
percent of payroll and local government, I think they said, what,
17 percent? It is in Mr. Bass’ statement here, 16.5, 17 percent, 14
percent for State governments, and at the Federal level it is a belt-
way-sized 25 percent of payroll.

Well, they deliberately failed to mention the fact that the State
government is understated because they have the Social Security
system to back them up. That is the difference in these plans.
CSRS is not dependent upon the Social Security system. It makes
up for the whole Federal employees not having the Social Security
retirement if they go into CSRS, and the reform that we put in in
1986 was that FERS would complement the Social Security system.
That is why FERS is so differently funded and is in such good
shape because you have the cost-of-living increases.

CSRS has a problem. Although it is going to be completely taken
care of because CSRS, we are not getting new CSRS people, and
the liability goes down as FERS takes over, and the reason for the
reduction in the dynamic figure is that the numbers that they esti-
mated in 1986 didn’t materialize because we provided less cost-of-
living increases.

The 1986 projection for CSRS assumed that we would give full
cost-of-living increases each year and projected those cost-of-living
increases at an inflation rate in the 1980’s which was much higher
than what we have realized in the 1990’s, and so that is why the
actual dynamic cost that would include a cost-of-living index built
in has gone from 37 percent down to 25 percent of payroll, and a
drastic reduction. You would never know that by reading the
Money magazine article.

But just as importantly, to compare what they must know—is
that Money magazine writers leaving? You didn’t write this thing
for Money magazine, no. But, you know, to be comparing apples
with oranges here I think deliberately misleads the reader.

The State employees have Social Security in addition to their
State retirement. That is why the State retirement is only 14.
Local employees have Social Security in addition to their local re-
tirement, and that is why theirs is only 17 percent.

The 25 percent figure they talked about is CSRS, which doesn’t
have Social Security as a complement to their retirement security.
And as far as going from 25 to 40 percent, we have got to find out
from OPM what they are talking about because I can’t figure out
where that number came from. So, so much for Money magazine.

But now, Mr. Bilirakis, let me ask you some questions about
your proposal because not only do I like you, as you know, I like
the concept of your proposal, but we have got some problems. The
people that we look to for advice for their objective opinion on
this—OMB, GAO, and CBO—all came out in opposition to it. OMB
says it is going to increase the deficit by $28 billion annually, GAO
says it would serve no purpose, and CBO says that it would not


39

agencies more aware of the cost of doing business but is not intended

to cause additional changes in the budget.

° Turning the CSRDF into a pension fund comparable to those
sponsored by state and local governments or private firms would
entail a fundamental policy change. Financial resources would have
to be accumulated outside of government as retirement benefits were
earned. A substantial increase in federal debt held by the public

would be required in the near term to finance the new pension fund.

AN OVERVIEW OF FINANCING FOR FEDERAL RETIREMENT

Federal retirement benefits are an important part of the total compensation offered
by the government to attract and retain a skilled workforce. Most civilian federal
employees are covered by one of two retirement programs. The Federal Employees’
Retirement System (FERS) covers civilian employees hired since January 1984 and
earlier hires who elected to join--a total of 1.3 million employees. FERS is
integrated with Social Security, in which workers covered by FERS also participate.
In addition to the defined benefits of FERS, the government makes automatic and

matching contributions on the behalf of workers covered by FERS to the Thrift


89

Mr. Mica. Mr. Flynn, are these accurate figures? Have they been
misstated?

Mr. FLYNN. Yes, Mr. Chairman, they are a recap of what we had
provided as part of our testimony.

Mr. Mica. And they do represent future obligations?

Mr. FLYNN. They represent, Mr. Chairman, just to be clear, the
difference between income to the fund and the cash outlays of the
fund in those particular years.

Mr. Mica. Mr. Finch, did you have any final commentary?

Mr. FINCH. No, sir, I don’t think so. I would echo a good bit of
what Mr. Blum said. I think one thing to keep in mind is that the
government is an employer and the taxpayers of course are the
government, but there is an employer share to the compensation
package and to the retirement fund. If there were no government
contribution, the employees, in essence, would be funding their own.
retirement out of their salaries, and too often I think in these dis-
cussions the fact that there is an employer-employee contribution
arrangement sometime gets overlooked.

Mr. Mica. I may have some additional questions to submit. to the
panel, and we will get your response. Also we have some questions
coming from the minority side and some of the other Members who
had other obligations today. We will, without objection, make those
a part of the record.

I have testimony from Representative Hansen and from OMB
which will also be made a part of the record without objection.

(The prepared statement of Hon. James V. Hansen follows:]

PREPARED STATEMENT OF HON. JAMES V. HANSEN, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF UTAH

Mr, Chairman and Members of the committee, thank you very much for schedul-
ing this hearing and allowing me to testify. | appreciate the opportunity to share
my views with you regarding federal employees retirement system.

First, I want to commend the federal work force. The men and women who have
chosen to be public servants are dedicated, hard working individuals. They contrib-
ute daily in the effort to reduce the deficit. As we begin to reduce the deficit, it is
the federal employees who will keep the government operating efficiently and effec-
tively. They are one reason America is as great as it is today.

‘As a business owner I learned very early that once an obligation was made, there
was a responsibility to see it through. I made a lot of good deals and I made a few
bad ones but I always kept my word. I feel very strongly that Congress should fulfill
the terms they agreed to with current federal personnel.

Tam fully aware of the budget constraints placed on each committee and the need
to find savings. As Chairman of the Subcommittee on National Parks, I am con-
fronted with difficult decisions. However, federal employees should not be seen as
an easy source of revenue. Any changes in the federal employee retirement program
should apply to prospective employees, not current employees who have committed
years of their lives to government service.

If Congress makes the changes already passed in the Tax Fairness and Deficit
Reduction bill, we will be correctly accused of changing the retirement rules half-
way through the game for all current federal employees—many of whom have cho-
sen their careers based partly on a known and certain retirement formula, and with
many of whom have been employed with the government for decades. I find this
highly unfair.

loreover, according to government studies, federal white-collar wages are lower
than private-sector wages by 27 percent. Even though Congress has made efforts to
diminish this discrepancy with the passage of the Federal Employees Pay Com-
parability Act of 1990 (PL: 101-509), for various reasons, this has not happened.
fevertheless, federal employees have been loyal and one reason for this is because
of the terms of the pension plans. I believe it is not in the best interest of the fed-
eral government to implement the current proposals of raising the contribution or
changing the number of years used in computing retirement benefits.


25

Since that time, Mr. Chairman, the annuities of Federal retirees
and in particular the cost-of-living adjustments have been highly
vulnerable to cuts during our annual budget cycle, Most recently,
the 1993 Omnibus Budget Reconciliation Act delayed COLAs for
Federal retirees for 3 months in fiscal years 1994 through 1996.
This delay resulted in $778 million in lost COLAs for Federal retir-
ees.

Mr. Chairman, I might add that this $778 million is a part, a
small part of the approximately $40 billion that Federal retirees
have contributed during the last 12 years in the name of deficit re-
duction and canceled, delayed, and reduced cost-of-living adjust-
ments, something I think we don’t pay enough attention to.

In eontrast, the Social Security Trust Fund was removed from
the budget in a series of measures in the 1980's. Social security
was removed from the unified budget so that cuts in benefits would
have no effect on the Federal deficit, giving Social Security recipi-
ents special protection from budget cuts. The 1998 Omnibus Budg-
et Reconciliation Act did not impact COLAs for Social Security re-
cipients.

As part of that unified budget, the pensions of Federal retirees
do not enjoy the same level of protection. This is why I introduced
legislation to remove the Civil Service Retirement and Disability
Fund from the budget. The idea of taking the Civil Service Trust
Fund off budget was originated, as I know you remember, John, by
a close friend of ours, former Representative Tom Lewis. Tom re-
tired at the end of the last Congress, and I feel it is important to
continue his efforts and therefore picked up this issue in this Con-

gress.

Specifically, H.R. 103 removes receipts and disbursements of the
trust fund from the President’s budget request and from the con-
gressional budget, and the Balanced Budget and Emergency Deficit
Control Act of 1985. The bill simply seeks to achieve some measure
of fairness—and that word has been thrown around here by other
people testifying—for Federal retirees by putting the Civil Service
Retirement and Disability Trust Fund on an equal budgetary sta-
tus with Social Security.

While off-budget status does not guarantee, Mr. Chairman, abso-
lute protection from cuts, it will make any cuts more visible and
therefore more difficult to make. All retirees, whether they receive
Social Security or some form of Federal annuity, I might add, in-
cluding therein veteran retirees, military veteran retirees, should
be treated equally.

My legislation has received widespread bipartisan support in the
House. To date, 93 Members have cosponsored H.R. 103, including
13 members of the Government Reform and Oversight Subcommit-
tee. My legislation is also supported by NARFE, the National Asso-
ciation of Retired Federal Employees.

Since taking the trust fund off budget raises some technical ques-
tions, God knows it does raise technical questions, and issues re-
garding budget rules, I felt it was best to introduce a very general
piece of legislation with the anticipation that the bill would be
amended as it moved through the legislative process. I hope that
the Office of Personnel Management and the Congressional Budget


90

This is a defining moment in history. We are on the path toward a balanced budg-
et of which I am a strong supporter and I firmly believe we must seize the moment.
A balanced budget is good for America. It means reduced inflation, stronger finan-
cial markets, reduced long-term interest rates, improved purchasing power for fami-
lies and business and guarantees a financially secure future for our children. These
benefits should not be fessened for federal employees.

‘As many of you know, I have always been fiscally conservative and will continue
to vote for less spending and less government. However, I would ask the Committee
to apply any changes to the federal retirement system to prospective employees. Do
not punish those who have dedicated their careers to federal service and have
planned their retirement according to an agreed contract. I thank you for your time.

[The prepared statement of Ms. Rivlin follows:]

PREPARED STATEMENT OF ALICE M. RIVIN, Director, OFFICE OF MANAGEMENT AND
UDGET

Mr. Chairman, Members of the Subcommittee, I appreciate the opportunity to
present the Administration's views on various civilian retirement issues. My state-
ment will discuss the Administration’s February Budget proposal to accrue fully the
retirement costs of Civil Service Retirement System (CSRS) employees, the financ-
ing and investment of the Civil Service Retirement and Disability Fund (CSRDF)
and the Administration’s position on H.R. 103.

Before discussing the Administration's accrual accounting proposal, I would like
to reiterate the Administration's opposition to recent Congressional actions that re-
duce Federal employee retirement benefits. In his April 5th letter to Speaker Ging-
Heh, on H.R, 1215, the President pointed out that the bill is unfair to Federal em-
ployees, stating: “I do not believe we should reduce the retirement benefits of Fed-
eral employees and increase their required retirement contributions in order to help
finance a tax cut for wealthy individuals and corporations.”

We oppose the use of reductions in Federal employee retirement benefits to fi-
nance tax cuts for the wealthy. Unlike Congressional proposals, the Administration’s
accrual accounting proposal would not affect retirement benefits of current or re-
tired Federal employees or survivors. The proposal in the President's February
Budget would charge agencies the full costs for CSRS benefits beginning in FY 1997
and amortize the CSRS unfunded liability over a 40-year period.

Currently, CSRS benefits cost 25.1 percent of base pay. The employee and employ-
ing agency each pay 7 percent toward this cost, for a total contribution of 14 per-
cent. Eventually, the general fund covers the remaining 11.1 percent through a pay-
ment into the retirement fund. Under the Administration's proposal, the 11.1 per-
cent would be reflected in agency budgets. Charging agencies the full CSRS costs
would keep the CSRS unfunded liability from rising in the future.

The proposal includes a $5.3 billion contingent ‘cap adjustment in discretionary
budget authority and outlays, beginning in the first year, FY 1997, to implement
this proposal. This adjustment, to be made only after enactment of the legislation,
would allow agency budgets, beginning with the 1997 budget, to be increased to re-
flect the additional CSRS charge. The $5.3 billion includes $4.6 billion for CSRS;
the remainder is for the other retirement systems (for example, the Foreign Service
Retirement System and the Public Health System) not now on full accrual. Note
that these cap adjustments do not increase the deficit. The additional payments
from the agencies’ discretionary salaries and expenses accounts are offset by addi-
tional receipts to the CSRDF and other retirement funds—as long as these funds
remain on-budget.

When the Clinton Administration took office, it found that the CSRS had an un-
funded liability in excess of $500 billion that was not being systematically recog-
nized in the budget. To address this situation, the Administration proposal would
amortize the unfunded liability over a 40-year period. The amortization payment
would replace the current general fund payment to the Civil Service Retirement and
Disability Fund, which covers mainly interest on the static unfunded liability and
increases in the unfunded liability resulting from pay raises. The OPM actuaries
would determine the schedule of Payments necessary for this purpose.

Like the cap adjustment above, the amortization proposal would not increase the
deficit. Under the proposal, the amortization payment from the general fund would
be transferred into another government account, the retirement fund. In this way,
the roposal would not affect Government spending.

‘The Administration believes that this proposal is a matter of good cost account-
ing—showing costs in the program when and where they accrue, not as a govern-
ment-wide cost at some point in the future. The proposal would bring CSRS in line



9

should be good news for my colleagues worried about the Nation’s
eficit.

Another important point that will be made is that the Civil Serv-
ice Retirement and Disability Fund is a trust fund. Back where I
come from if you violate the trust fund you go to jail, but that ap-
parently isn’t true on Capitol Hill. Just like Social Security and the
myriad of other trust funds that abound in the Federal Govern-
ment, any excess in the fund, which now stands at well over $300
billion, is invested as some who proceeded me said in non-nego-
tiable Federal Government securities. The same thing happens
with the Social Security Trust Funds.

It would have been nice back in Washington County if we could
have just printed something that represented the dollars we col-
lected from our employees. The government pays interest on these
notes, and when additional funds are needed to pay benefits, this
money comes out of the general revenues.

My friends on the other side of the aisle are not as quick to criti-
cize such repayments to the Social Security Trust Funds as they
are to the Civil Service fund. They are not as quick to discuss the
much greater so-called “unfunded liability” the Social Security sys-
tem faces in the next century. The reality is the same type of trans-
actions occur in both systems and both should be held in the same
high esteem. We have made commitments to both sets of retirees,
and they should be kept.

While I understand there are budget implications surrounding
Representative Bilirakis’s proposal, I certainly share his view that
the Civil Service Retirement and Disability Fund deserves the
same kind of protection and respect afforded the Social Security
Trust Fund. Hopefully this hearing will begin that long overdue
process.

Thank you very much, Mr. Chairman.

[The prepared statement of Hon. Frank Mascara follows:]

PREPARED STATEMENT OF HON. FRANK MASCARA, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF PENNSYLVANIA

Good morning Mr. Chairman. Thank you for calling this hearing.

Looking over the testimony, i think it is going to prove to be very interesting and
enlightening. By the end, we will all have a better understanding of what is and
isn’t the Civil Service Retirement and Disability Fund. More importantly, we should
walk away with a loud and clear message that the fund is financially sound, not
standing on the edge of an abyss as some of my colleagues on the other side of the
aisle would have us believe.

I must say that I most pleased that we are finally going to get an opportunity
to hear from some of my Republican colleagues who share my view that we should
not be continually going after Federal workers and their retirement benefits.

The various provisions included in the recently completed conference report on the
fiscal 1996 budget resolution, which call for increasing retirement fund contributions
while cutting retirement benefits, are nothing but a tax increase.

The irony is that none of the $5.3 billion in savings these proposed cuts will alleg-
edly generate will be going to shore up retirement system, which Chairman Mica
feels is broke. Instead they will be falling into the black hole of deficit reduction
and become part of the funds used to pay for a $245 billion tax cut that will largely
benefit the wealthy.

I stand squarely with my Republican colleagues who will be testifying today in
stating unequivocally that this is unfair!

Perhaps most importantly, today’s testimony from the Congressional Budget Of-
fice, the General Accounting Office and Ms. Rivlin, will help Members and the pub-
lic better understand what the Federal retirement systems are and how they are

inded.



61

The budgetary impact of the administration’s proposal has been
outlined in the statement from the Director of OMB, and so I won’t
repeat it as part of my statement. In addition, some of the informa-
tion_you asked about, the cash inflows and outflows when the fund
is off budget or out of budget have also been addressed not only in
the statement by OMB but also in the statemént from the Congres-
sional Budget Office, so I will simply not go back into that, Mr.
Chairinan. ft would be glad to answer any questions the subcommit-
tee inlay have,

Mr: Bass. Thaiik you very much, Mf. Flynn.

[The prépared statement of Mr. Flynn follows:]


171

PRESIDENT’ S BUDGET PROPOSALS
ON RETIREMENT SYSTEM FINANCING

The President’s budget proposals for fiscal years 1995 and 1996
called for the dynamic normal cost approach to be applied to CSRS
and for CSRS’ unfunded liability to be amortized over a 40-year
period. No legislation to implement the proposal was forwarded
to Congress last year, and, to our knowledge, none has yet been
forwarded this year. While we would prefer to see the actual
manner in which the funding change is proposed to be implemented
before we express an opinion on it, we agree with the general
objective of the proposal as described in the budgets. The
effect of the change would be to recognize the full government
cost of CSRS in agency budgets without increasing the deficit.

BUDGETARY TREATMENT OF THE
RETIREMENT TRUST FUND

On occasion, consideration has been given to moving the
retirement fund out of the unified budget. In our opinion, no
purpose would be currently served by such an action. On budget,
or off budget, the Treasury would still have to secure the money
necessary to make benefit payments from general revenues or
borrowing. We have long supported the principle of the unified
budget, believing that the budget should be a comprehensive
statement of receipts and expenditures of activities of the
federal government.

Changing the investment policy from nonmarketable Treasury
securities to private sector securities would result in
significant cash outlays which would further exacerbate the
deficit situation. If investments in outside securities are
made, the agency, employee, and other contributions to the fund
that are now mostly transfers of appropriations rather than cash,
would have to be converted to cash in order to make the

5


aT

TABLE 2. STATUS OF THE CIVIL SERVICE RETIREMENT AND DISABILITY FUND
ON OCTOBER 1, 1993 (In billions of dollars)

CSRS FERS Total
Actuarial Accrued Liability 815.0 42.5 857.5,
Less: Net Assets in Fund 276.7 40.7 3174
Unfunded Actuarial Accrued Liability 538.3 18 540.1

SOURCE: Office of Personnel Management.

NOTE: CSRS = Civil Service Retirement System;

FERS = Federal Employee's Retirement System.



49

TABLE 3. LONG-RANGE PROJECTIONS OF CSRDF CASH INFLOWS AND OUTFLOWS.
(In billions of current dollars)

2015 2025 2035
Employee Contributions 3A 36 56
Postal Service Payments 16.7 244 28.1
Total Cash Inflows 198 28.0 33.7
Cash Outflows 114.6 166.2 218.5
Net Effect on the Budget Deficit 94.8 138.2 184.8
Net Effect on the Budget Deficit
(in constant 1994 dollars) 40.8 383 32.9

SOURCE: Congressional Budget Office estimates based on projections by the Office of Personnel Management.

NOTE: Figures assume that the Postal Service is 20 percent of payroll



12

care costs for their employees, and under the Republican budget
proposal over 78 percent of all Federal employees would pay more
for their health insurance coverage than they do now.

The same is true for retirement benefits. Ninety-seven percent of
all American employees in medium and large firms are in pension
plans paid for entirely by their employers. However, about 25 per-
cent of the cost of providing retirement benefits for Federal retirees
last year was paid by the current employees.

So why does the Republican budget yank $85 billion away from
middle-class Federal workers? They first said changes were needed
because the unfunded liability of the Federal retirement system
was rapidly growing to unacceptable levels; that, left alone, the
civil service retirement fund would require steep increases in con-
tributions from general revenues to avoid insolvency. However, the
budget conference agreement actually contains less savings for the
retirement system than the House has already passed. If insol-
yeney is the problem, then this budget agreement does little to ad-

ress it.

Furthermore, we heard from experts at the General Accounting
Office and the Congressional Research Service that the retirement
fund’s unfunded liability is not even a problem that needs to be
fixed. According to these experts, as well as other equally expert
witnesses we will hear from today, Mr. Chairman, there is no dan-
ger now or in the future that the civil service retirement fund will
be insolvent.

For this reason, members of our committee from both sides of the
aisle were able to take a little more time to consider legislation im-
plementing cuts in the Federal retirement program a few weeks
ago. Later, however, the majority revealed their purpose more
clearly when they included Federal retirement changes in their bill
giving wealthy Americans a capital gains tax cut. To help pay for
their $354 billion tax cut for the rich, the majority pushed through
cuts in Federal employee retirement benefits and more than a 300
percent increase in the retirement withholding tax for many Fed-
eral employees.

Now, clearly many in the majority are more interested in giving
a tax cut to the wealthy than in saving the retirement fund from
insolvency. It is the tax cut and nothing more that has caused the
majority to seek retirement cuts from the very beginning, and that
continues to be the reason these cuts are still in the budget.

I have and will continue to strongly oppose cutting the retire-
ment benefits of middle-class Federal employees in order to pay for
a tax cut for rich folk.

I yield back the balance of my time.

Mr. Mica. I thank the gentlelady.

[The prepared statement of Hon. Cardiss Collins follows:]

PREPARED STATEMENT OF HON. CARDISS COLLINS, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF ILLINOIS

Mr. Chairman, last week conferees cleared the way for the House and the Senate
to consider the Republican budget proposal for fiscal year 1996. That budget, no
matter how you look at it, hits the pay and benefits of Federal employees harder
than any other proposal considered so far.

The Budget Conference Agreement cuts all three of the most important basic em-
ployee benefits—pay, health care, and retirement.