United States General Accounting Office

GAO Testimony

Before the Subcommittee on Civil Service Committee on

Government Reform and Oversight

House of Representatives

For Release on Delivery

Expected at

10:00 a.m., EST

Wednesday

November 5, 1997

THE FEDERAL EMPLOYEES’

RETIREMENT SYSTEM

Potential Changes in Agency

Retirement Costs Following an

Open Season

Statement by Michael Brostek

Associate Director, Federal Management and

Workforce Issues

General Government Division

GAO/T-GGD-98-27

Summary 

The Federal Employees’ Retirement System:

Potential Changes in Agency Retirement

Costs Following an Open Season

The Federal Employees’ Retirement System (FERS) was implemented in

1987 and generally covers those employees who first entered federal

service after 1983. When FERS began, employees covered by the Civil

Service Retirement System (CSRS) were provided an opportunity to

transfer to FERS during a 6-month open season that ended in

December 1987. The Federal Employees’ Retirement Open Season Act of

1997, passed by Congress but vetoed by the President, would have allowed

employees currently enrolled in CSRS or the CSRS Offset program a second

chance to transfer. Transferees under the act would have received

substantially the same coverage and benefits that were provided to those

who transferred during the first open season.

GAO was asked to examine the potential impact of a new FERS open season

on agency retirement costs. GAO developed illustrations that estimated the

effect if differing proportions of about 500,000 permanent general

schedule CSRS and CSRS Offset Plan employees (excluding employees of the

Postal Service and certain other groups such as Wage Grade employees)

decided to switch. GAO used information on current retirement practices

and work it had performed on the early implementation of FERS to provide

perspective on the difficulty of predicting how many employees might

switch. GAO applied different assumptions about the portion of eligible

employees who might switch and their salary levels and calculated the

resulting differences in agency retirement costs.

GAO found that:

• It is difficult to predict who among the eligible employees would switch.

GAO’s review of the first FERS transfer program in 1987 showed that

although eligible employees were provided the information and counseling

that they would need to make a decision, about 4 percent of the eligible

employees transferred to FERS. The review suggested that employee

decisions can be based on situational factors that are economic as well as

noneconomic.

• Assuming some employees opt to switch, agency retirement costs would

increase following an open season because of differences in the way CSRS

and FERS are funded. The amount of any cost increase would critically

depend on the number of employees who switch and their salary levels.

For example, assuming (1) a 10 percent switch rate—which would be

twice the largest percentage of employees who transferred in 1987 in the

agencies GAO reviewed—and (2) that employees earning higher salaries

would be most likely to switch, agency costs for the period January 1997

through December 1997 would have been an additional $332 million.

Page 1 GAO/T-GGD-98-27
Summary 

The Federal Employees’ Retirement System:

Potential Changes in Agency Retirement

Costs Following an Open Season

• Given the uncertainty regarding how many employees might transfer, it is

correspondingly difficult to estimate whether agencies would have a

difficult time absorbing the cost increases. Although the largest increase in

retirement costs GAO calculated—$332 million—would appear small in

proportion to the cost of personnel benefits governmentwide, some

agencies might find the costs difficult to absorb, depending on their

different circumstances. Regardless of the size of the increases in costs,

under the budget process discretionary spending is capped, and Congress

may choose not to provide agencies extra funding to cover their increased

retirement costs.

Page 2 GAO/T-GGD-98-27
Statement 

The Federal Employees’ Retirement System:

Potential Changes in Agency Retirement

Costs Following an Open Season

Dear Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the potential impact on agency

retirement costs of a retirement system open season in which anyone who

is a general civilian employee of the federal government and is

participating in the Civil Service Retirement System (CSRS) or the CSRS

Offset plan would be allowed to transfer to the Federal Employees

Retirement System (FERS).1

 As you requested, the focus of my statement is

on the potential changes in retirement costs charged to federal civilian

agencies that might follow such a transfer program. Because agencies

would be responsible for paying any additional costs, information about

changes in retirement costs could be important for workforce planning

and management.

My statement has three main points. First, it is difficult to predict the

number and salary levels of those eligible employees who would switch.

Our review of the original FERS open season suggested that employee

decisions can be based on situational factors that are economic as well as

noneconomic. Second, assuming that some employees opt to switch,

agency retirement costs would increase following an open season because

of differences in the way CSRS and FERS are funded. The amount of any

such increase in agency retirement costs would depend on the numbers of

employees who switch and their salary levels. Finally, given the

uncertainty regarding how many employees might transfer, it is

correspondingly difficult to estimate whether agencies would have a

difficult time absorbing such an increase. Although the largest increases in

retirement costs that we calculated could appear small in proportion to

the costs of personnel benefits governmentwide for the employees

included in our analysis, some agencies might find the costs difficult to

absorb, depending on their individual circumstances. Regardless of the

size of the cost increase, under the budget process discretionary spending

is capped, and Congress may choose not to provide agencies extra funding

to cover their increased retirement costs.

The Federal Employees’ Retirement Open Season Act of 1997, passed by

Congress but vetoed by the President, would have allowed employees

currently enrolled in CSRS or the CSRS Offset program to transfer to FERS.

Under the act, an open season for transfers would have begun on July 1,

1998, and run through December 31, 1998. Transferees under the act

1

Typically, the CSRS Offset plan covers employees who (1) had a break in service that exceeded 1 year

and ended after 1983 and (2) had 5 years of creditable civilian service on January 1, 1987. CSRS Offset

plan coverage is described in greater detail in Federal Retirement: Federal and Private Sector

Retirement Program Benefits Vary (GAO/GGD-97-40, April 7, 1997).

Page 3 GAO/T-GGD-98-27
Statement 

The Federal Employees’ Retirement System:

Potential Changes in Agency Retirement

Costs Following an Open Season

would have received substantially the same coverage and benefits that

were provided to those who transferred during the first FERS open season.

Those who transferred would have received a single annuity upon

retirement. That annuity would have included a CSRS component,

calculated on the basis of the employee’s final high-3 average salary and

his or her years of CSRS service, and a FERS component using the same

high-3 salary and based on the employee’s years of FERS service. In

addition, transferees would have received Thrift Savings Plan (TSP) and

Social Security benefits from their FERS service.

Because of the Committee’s interests, our analysis was only of the

potential changes in agency retirement costs that would affect agencies’

workforce and management decisions. We did not examine the change in

the total or the government’s share of normal costs of the CSRS and/or FERS

programs, which is OPM’s responsibility, or the budgetary effects on

discretionary and direct spending, which are the responsibility of the

Congressional Budget Office. It is worth noting that any comparison of the

total budgeted costs for CSRS and FERS is driven by the fact, as discussed

later in this statement, that the costs are recorded in the budget on a

different basis. Had we examined the costs on a governmentwide basis the

results may have been different.

To assess the potential impact on agency retirement costs of a new FERS

open season, we developed several illustrations that estimated the effect if

differing proportions of the eligible employees included in our analysis

decide to switch. We used information from work that we performed 10

years ago when we examined the early implementation of FERS, including

the first FERS open season and employee decisions related thereto, and our

knowledge of current retirement practices to provide perspective on the

difficulty of predicting how many employees might switch to FERS.

2

 In

developing our illustrations of the potential costs to agencies of a new

open season, we used benefit assumptions reflected in the recently vetoed

Federal Employees’ Retirement System Open Enrollment Act of

1997—that transferees would receive substantially the same coverage and

benefits as those provided to employees who transferred during the first

FERS open enrollment. To illustrate the range of changes in civilian agency

retirement costs that might occur, we applied different assumptions about

the portion of eligible employees who might switch and their salary levels,

and calculated the resulting differences in agency retirement costs. We

developed two sets of illustrative examples, each assuming that 1, 5, or 10

2

Federal Personnel: Views From Two Agencies on Why More Employees Did Not Join the New

Retirement System (GAO/GGD-88-52FS, Mar. 11, 1988) and Federal Retirement: Implementation of the

Federal Employees Retirement System (GAO/GGD-88-107, Aug. 4, 1988).

Page 4 GAO/T-GGD-98-27
Statement 

The Federal Employees’ Retirement System:

Potential Changes in Agency Retirement

Costs Following an Open Season

percent of the eligible employees would transfer.3 In making our

calculations, we used the most recent available data from the Federal

Retirement Thrift Investment Board on agency TSP payments, which were

1996 data. We used 1997 Office of Personnel Management (OPM) data on

the number of nonpostal permanent civilian employees of the federal

government at the various grade levels4

 and 1996 OPM data on the share of

CSRS and FERS normal cost percentages charged to agencies for their CSRS

and FERS employees. As described in greater detail later in this statement,

normal cost is the term used to describe costs that are calculated to reflect

the cost of pension benefits as these benefits are earned, rather than as

they are paid. Our illustrations show how agencies’ retirement costs could

have changed for the period from January 1, 1997, through December 31,

1997, if all of the transferring employees in each illustration were in FERS

for the full year.

CSRS and FERS Are

Designed and Funded

Differently

CSRS and FERS are the two largest retirement programs for federal civilian

employees. At the beginning of fiscal year 1995, these programs covered

about 2.8 million federal employees, or 90 percent of the civilian

workforce, including postal employees. OPM administers CSRS and FERS.

CSRS and FERS pension benefits are financed partly by federal agency and

employee contributions and partly by other government payments to the

Civil Service Retirement and Disability Fund (CSRDF).5

3

We selected 1 percent because it was the percentage used by the Congressional Budget Office in

making its preliminary cost estimate of the vetoed Federal Employees’ Retirement System Open

Enrollment Act of 1997. We selected 5 percent because it represented about the largest percentage of

employees who actually transferred in the agencies we visited during our review of the first FERS

open enrollment. We added a 10-percent calculation to our analysis because some observers have

speculated that large numbers of eligible employees would switch.

4

OPM’s Central Personnel Data File (CPDF) contains general schedule employees, members of the

Senior Executive Service (SES), blue collar employees, and others. Of those employees in the CPDF,

about 1.3 million are covered by the general schedule pay plan. Because the methodology for our

calculations used general schedule salaries for calculating per employee increases in agency

retirement costs, we identified 1,042,112 permanent general schedule employees in Career,

Career-Conditional, Schedule A, and Schedule B appointments. Of the general schedule employees

who we used in our analysis, 548,377 were covered by FERS, 457,084 were covered by CSRS, and

36,651 employees were covered by the CSRS Offset plan. Had we analyzed changes in agency

retirement costs for non-general schedule employees (e.g., postal service employees, blue collar, and

SES), our combined estimate of these increases would have been higher.)

5

The Department of the Treasury also makes annual payments that are to cover interest on CSRS

unfunded liability, payments for spouse equity, and amortization payments to finance supplemental

liabilities for FERS, including those attributable to CSRS service for employees who elected FERS. The

Treasury Department’s FERS payments are quite small as a share of total normal costs. According to

OPM actuarial reports, in 1996 these payments were about $48 million, which represents $1 in

Treasury payments for each $138 in agency and employee contributions. Thus, for all practical

purposes, agency and employee contributions cover the full normal cost of FERS benefits.

Page 5 GAO/T-GGD-98-27
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The Federal Employees’ Retirement System:

Potential Changes in Agency Retirement

Costs Following an Open Season

Program Design

Differences

Although CSRS and FERS both provide pensions, the programs are designed

differently. CSRS was established in 1920 and predates the Social Security

system by 15 years. When the Social Security system was established,

Congress decided that employees in CSRS would not be covered by Social

Security through their federal employment. CSRS is a stand-alone pension

program that provides an annuity, determined by a formula, as well as

disability and survivor benefits. The program was closed to new entrants

after December 31, 1983. According to OPM actuaries, the program is

estimated to end in about 2070, when all covered employees and survivor

annuitants are expected to have died.

FERS was implemented in 1987, and generally covers those employees who

first entered federal service after 1983 as well as those who transferred

from CSRS to FERS. The primary impetus for the new program was the

Social Security Amendments of 1983, which required that all federal

employees hired after December 1983 be covered by Social Security. FERS

is a three-tiered retirement program that includes Social Security and TSP

benefits in addition to a pension. Like CSRS, FERS provides disability and

survivor benefits.

Differences in Program

Funding

CSRS and FERS also are funded differently. The costs of FERS retirement

benefits are paid by agencies and participating employees as these benefits

are earned, but some of the government’s CSRS pension costs are deferred.

To better appreciate how this occurs and the impact that the two

programs’ different funding approaches have on agency retirement costs,

it is useful to understand differing methods for measuring retirement

program costs. The cost of a retirement plan is generally not well

measured by annual cash expenditures, because annual cash expenditures

simply cover the payments to existing beneficiaries in any given year. An

alternative measure of retirement costs assumes that funds are set aside in

roughly equal payments over the working life of the employee to cover

current and future liabilities for benefit payments. “Normal cost” is the

term used to describe costs calculated in this manner; it measures the

costs of pension benefits, which are earned during an employee’s working

years but paid during retirement, on an accrual rather than a cash basis. If

resources including interest amounts are set aside that are sufficient to

fully fund employees’ retirement benefits as measured by normal cost

(including the pay increases for employees and cost of living adjustments

for annuitants), the retirement plan is said to be fully funded on a dynamic

normal cost basis.

Page 6 GAO/T-GGD-98-27
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The Federal Employees’ Retirement System:

Potential Changes in Agency Retirement

Costs Following an Open Season

It has long been our position that the appropriate way to calculate and

fund retirement costs is as the benefits are accruing.6

 When done properly,

recognizing retirement costs as they are being earned reflects the full cost

of providing these benefits to federal personnel at the time their service is

rendered. The annual normal cost of CSRS, which is a much older program

than FERS and predates modern financing methods (which attempt to

finance pension plans on an actuarial basis),7

 is calculated for CSRS by OPM,

but these costs are not fully funded from agency and employee

contributions. According to OPM, when CSRS costs were estimated in this

way, the normal cost for fiscal year 1996 was 25.14 percent for CSRS. For

that year, the combined contributions of agencies and employees was

14 percent, or about 11 percent less than the full normal cost. Beginning in

fiscal year 1998, agencies will pay an additional 1.51 percent of pay

towards their CSRS employees’ retirement costs. Employees covered by

CSRS as well as those covered by FERS will also pay an additional

.25 percent in 1999, another 0.15 percent in 2000, and a final extra

0.1 percent in 2001. Payment of a portion of the difference between the full

normal cost and agency and employee contributions is funded through

various means, and the remainder is deferred.8

 When Congress established

FERS in 1986, it adopted our recommendation to charge agencies for all

accruing retirement costs not covered by employee contributions.

6

For example, see Federal Retirement Systems Unrecognized Costs, Inadequate Funding, Inconsistent

Benefits (GAO/FPCD-77-48, Aug. 3, 1977); The Design of a New Retirement Program for Federal

Employees Covered by Social Security (Apr. 12, 1985); Overview of Federal Retirement Programs

(GAO/T-GGD-95-172, May 22, 1995) ; and Federal Retirement System Financing (GAO/T-GGD-95-197,

Jun. 28, 1995).

7

In establishing a defined benefit pension plan, an employer is promising to pay benefits that will come

due in the future. Generally the money used to pay these benefits is obtained in one of two ways, either

through pay-as-you-go financing or through reserve funding. The pay-as-you-go method would pay the

pension benefits to retired employees as these benefits come due out of appropriations. Under the

reserve funding method, contributions are made as benefits are earned based on actuarial estimates of

the value of the benefits. CSRS was originally funded on a pay-as-you-go basis, and as a consequence,

built up an actuarial unfunded liability. Regarding federal government pension plan liabilities, Public

Law 95-595, 31 U.S.C. 9501-9504, enacted in 1978, established financial and actuarial reporting

requirements to such plans and required the plans to report financial and actuarial information

regarding plan liabilities in annual reports. According to our summarization of these reports in 1996,

most of the 34 plans that we examined were underfunded on a dynamic cost basis. However, FERS is

fully funded, and statutory provisions for the future elimination of the unfunded benefit obligations of

CSRS and the Military Retirement System have already been enacted. See Public Pensions: Summary

of Federal Pension Plan Data (GAO/AIMD-96-6, Feb. 16, 1996).

8

The funded portion is 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. The remainder

is addressed in the FERS statute (Public Law 93-335) approved June 6, 1986, which 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.

Page 7 GAO/T-GGD-98-27
Statement 

The Federal Employees’ Retirement System:

Potential Changes in Agency Retirement

Costs Following an Open Season

Agency Costs for CSRS

and FERS Differ

Because of these differences in the way in which CSRS and FERS are

designed and funded, agencies are charged more as a percentage of pay

for employees who are covered under FERS compared to their employees

who are covered under CSRS. As shown in table 1, when the three

components of the FERS benefit package are combined, beginning in 1999,

agencies could contribute a total of 20.9 percent of pay for their FERS

employees, compared with 8.5 percent for their CSRS employees.9 Under

these assumptions, agencies would pay a higher percentage of pay for

each employee who transfers from CSRS to FERS than is currently paid. This

is because agencies would need to contribute 2.2 percent more for the

FERS pension benefit, plus an additional 6.2 percent for the employer’s

share of the Social Security benefit up to a maximum salary of $65,400,

and about 4 percent for the TSP benefit.10 As the table also shows, the

percentage increase in agency costs per transferring employee would be

smaller in the case of employees under the CSRS Offset plan.

9

The CSRS Offset percentage is 14.7. The figures presented in figure 1 and used for our analysis are

only designed to illustrate the potential changes in agency retirement costs. As noted earlier in this

statement, in 1996, agencies actually contributed 7 percent for the CSRS defined benefit and will

continue to contribute this percentage through fiscal year 1997. Also in this regard, in 1996, agencies

contributed 11.4 percent for the FERS defined benefit, although as noted elsewhere in this statement

and as used by CBO in its cost estimate of the budgetary impacts of an open season, the most recent

OPM estimate of this cost is 10.7 percent.

10With respect to the pension benefit, agencies are to pay the difference between employee

contributions of 0.8 percent and the full dynamic normal cost. According to the most recent OPM

actuarial estimates, this difference is 10.7 percent. With respect to TSP, the maximum employer

potential cost, or liability, for contributions for FERS-covered employees is 5 percent of pay—consisting

of up to 4 percent in matching contributions, plus 1 percent in nonmatching contributions. In 1996, the

most recent year for which data were available, the Thrift Board reported that agencies contributed

about $2 billion to FERS employees’ TSP accounts. According to OPM actuaries, the dynamic normal

cost of TSP benefits has been rising and is now estimated to be about 4 percent of pay.

Page 8 GAO/T-GGD-98-27
Statement 

The Federal Employees’ Retirement System:

Potential Changes in Agency Retirement

Costs Following an Open Season

Table 1: Comparison of the

Percentages of Pay Agencies Could

Contribute for Employees Covered by

the FERS, CSRS, and CSRS Offset

Retirement Plans

Federal retirement plans

FERS CSRS CSRS Offset

Defined benefit 10.7% 8.5% 8.5%

Social Securitya 6.2% 6.2%

TSP (average match) 4.0%

Agencies’ total contribution percentages 20.9% 8.5% 14.7%

Percentage increase in agencies’ costs if

employees transfer to FERS 12.4% 6.2%

aAs is true for private employers, this shows the employer contribution to Social Security, not the

full actuarial cost of the system. See Retirement Income: Implications of Demographic Trends for

Social Security and Pension Reform (GAO/HEHS-97-81, July 11, 1997).

Source: 1997 OPM actuarial data.

Although agency costs generally could rise by 12.4 percent of pay for each

employee who transferred to FERS during the open season, the actual

dollar impact of each such transfer would vary depending on employees’

salaries, with the most highly compensated transferring employees

causing the greatest increase in agency retirement costs. Table 2 provides

the range of these dollar increases for general schedule (GS) employees

and shows that the smallest increase would be $1,571 per employee, and

the greatest would be about $9,769. Our results for the CSRS Offset plan

participants ranged from a low of $785 to a high of $5,714 and are

presented in appendix I.

Page 9 GAO/T-GGD-98-27
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The Federal Employees’ Retirement System:

Potential Changes in Agency Retirement

Costs Following an Open Season

Table 2: Comparison of Agency Cost Increases for Each CSRS General Schedule Employee Who Transfers to FERS, by

Grade and Step

Steps

Grades 1 2 3 4 5 6 7 8 9 10

GS-1 $1,571 $1,623 $1,675 $1,728 $1,780 $1,811 $1,862 $1,914 $1,916 $1,965

GS-2 1,766 1,808 1,867 1,916 1,938 1,995 2,052 2,109 2,166 2,223

GS-3 1,927 1,991 2,056 2,120 2,184 2,248 2,313 2,377 2,441 2,505

GS-4 2,163 2,236 2,308 2,380 2,452 2,524 2,596 2,669 2,741 2,813

GS-5 2,420 2,501 2,582 2,663 2,743 2,824 2,905 2,986 3,066 3,147

GS-6 2,698 2,788 2,878 2,968 3,058 3,147 3,237 3,327 3,417 3,507

GS-7 2,998 3,098 3,198 3,298 3,398 3,498 3,598 3,698 3,798 3,898

GS-8 3,320 3,431 3,542 3,653 3,763 3,874 3,985 4,095 4,206 4,317

GS-9 3,668 3,790 3,912 4,034 4,157 4,279 4,401 4,523 4,646 4,768

GS-10 4,039 4,173 4,308 4,443 4,577 4,712 4,847 4,981 5,116 5,251

GS-11 4,437 4,585 4,733 4,881 5,029 5,177 5,325 5,473 5,621 5,769

GS-12 5,318 5,496 5,673 5,850 6,028 6,205 6,382 6,560 6,737 6,914

GS-13 6,324 6,535 6,746 6,957 7,168 7,378 7,589 7,800 8,011 8,166

GS-14 7,473 7,723 7,972 8,165 8,290 8,414 8,539 8,663 8,788 8,913

GS-15 8,450 8,597 8,743 8,890 9,036 9,183 9,329 9,476 9,622 9,769

Source: GAO analysis of OPM data.

It Is Difficult to

Predict the Number or

Salary Level of

Employees Who

Would Transfer to

FERS

Because each transferring employee would add to an agency’s retirement

costs, assessing the effect of an open season on agencies’ retirement costs

is critically dependent on the number of employees who would switch and

their salary levels. Exclusive of the Postal Service, about 457,000

permanent civilian GS employees covered by CSRS and about 37,000

covered by the CSRS Offset plan would be eligible and could transfer to

FERS during a new open season. Given the potential range of impacts on

agency retirement costs and the difficulty of making a precise estimate of

these costs, it is useful to consider what factors employees might consider

in making their decisions and the salary levels of those who might be most

likely to switch.

When FERS was created, Congress asked us to evaluate the act’s initial

implementation. During the course of our work, we developed information

on the reasons why eligible employees chose not to transfer to FERS. One

lesson from this work was that it is difficult to predict whether an

individual employee will decide to change his or her retirement coverage.

Page 10 GAO/T-GGD-98-27
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The Federal Employees’ Retirement System:

Potential Changes in Agency Retirement

Costs Following an Open Season

For example, at the time of the initial open season in 1987, the Office of

Management and Budget estimated that as many as 40 percent of eligible

employees would transfer to FERS, while after the open season ended in

January 1988, OPM confirmed that about 86,000 CSRS employees (about

4 percent) actually transferred..

Also, transfer rates during the first FERS open season varied across the

agencies that we reviewed. At sites we visited, we found that transfer rates

ranged from less than 1 percent to more than 4 percent, which translates

into a fourfold difference in the increases in the agencies’ retirement

costs.11

During our 1987 work, we also examined the manner in which agencies

fulfilled their implementation responsibilities during the open season, in

part to understand the role that information provided to employees may

have played in their decisions. We found that although fewer eligible

employees than expected actually transferred, there were no underlying

deficiencies in the implementation of the transfer program that might have

accounted for the low percentages. FERS information was widely available

and distributed. Advisors who were to provide individual counseling were

trained by OPM, and these advisors were available to assist employees.

Computer models were also widely available, and analyses and estimates

were generally provided to employees who requested them.

Notwithstanding such agency efforts, briefings at the sites we visited were

not well attended. Also, only a small percentage of employees requested

computer estimates of their potential retirement benefits.

We interviewed personnel officials and advisors who were responsible for

counseling employees during 1987 on the advantages and disadvantages of

transferring to FERS. On the basis of the views of advisors and personnel

officials at the sites we visited, we identified four primary reasons why

employees decided not to transfer to FERS. The reasons—both economic

and noneconomic—were as follows:

• Employees regarded FERS as too complex to understand.

• Employees believed they could not afford to contribute to TSP.

11We visited 23 Department of the Army and Veterans Administration field activities. We selected two

large agencies, one military and one civilian. Both employed a large number of civilian employees and

had numerous field activities widely dispersed throughout the country. However, because we did not

randomly select the agencies or their field locations, the information we obtained could not be

projected to portray the implementation of FERS throughout the Army, Veterans Administration, or

the government.

Page 11 GAO/T-GGD-98-27
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The Federal Employees’ Retirement System:

Potential Changes in Agency Retirement

Costs Following an Open Season

• Employees planned to make the federal government their career and

believed that CSRS provided greater benefits for career employees than

FERS.

• Employees did not trust various aspects of the design or stability of FERS,

including the viability of the Social Security system and potential for

future changes in FERS benefit levels.

In contemplating the relevance of employees’ 1987 reasoning for a new

open season, it is worth noting that much has changed in the past decade.

For instance, although the number of FERS retirees is still small relative to

CSRS retirees, FERS is no longer an unknown or fledgling retirement

program. The benefits available from participation in FERS likely are better

understood today than in 1987 when the program was created. Of

particular importance may be a general improvement in public

understanding of 401(k) plans and the role that they now play in

retirement savings. Although the growth of these plans may be due in part

to their popularity with employers, the plans also enjoy increased

employee popularity because they are seen as an important element of

retirement income and as having the advantage of portability. Also,

notwithstanding the recent volatility of stock markets worldwide,

sustained economic growth has boosted plan earnings and increased total

assets substantially over the past decade, including those of the TSP C fund.

On the other hand, should the U.S. economy falter or market gains abate

or turn to losses, TSP might seem less attractive to those employees who

are considering whether to change their retirement coverage.

As to the TSP affordability issue cited by employees, CSRS

participants—who are allowed to contribute up to 5 percent of pay on a

tax-deferred basis to their own TSP accounts—are doing so in large

numbers. In 1996, more than half of the CSRS-covered employees in civilian

agencies contributed to TSP. Participation rates ranged from a low of about

42 percent at the Postal Service to a high of about 75 percent at the

Education Department. Also, more than 70 percent of CSRS employees who

were contributing to TSP in 1996 contributed the maximum allowed.

In part, because 10 years have elapsed since the last open season,

individual employees’ personal circumstances could be considerably

different. In general, more CSRS employees would be closer to retirement

eligibility, many may have moved to higher salary levels, and still others’

family responsibilities may have changed—either by increasing or

decreasing.

Page 12 GAO/T-GGD-98-27
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The Federal Employees’ Retirement System:

Potential Changes in Agency Retirement

Costs Following an Open Season

It is reasonable to expect that such economic considerations would play

an important role in employees’ decisions about transferring to FERS. Given

such changes, some employees might find a financial advantage in

changing their retirement coverage now who did not in 1987. For example,

some economic incentives to switch include the following:

• Changes in personal circumstances such as advancing to higher salary

levels could be contributing to the increased CSRS employee participation

in TSP. For example, as shown in figure 1, about 80 percent of CSRS

employees earning between $60,000 and $65,000 contributed the maximum

5 percent of their salaries into TSP. Some of these employees might be

attracted to FERS to take advantage of the opportunity to put up to

10 percent of their salaries, which would result in a 5-percent contribution

by the government.

• After a 5-year period of FERS participation, any CSRS employee who

switched would become eligible upon retirement for the full spousal

benefit provided under Social Security. CSRS retirees have these benefits

partially or entirely offset by their CSRS pensions.

• The approximately 4,000 CSRS employees who have worked long enough to

qualify for the maximum retirement benefit of 80 percent of their high-3

average salary could earn greater retirement benefits by transferring to

FERS, because they would qualify for agency matching contributions to TSP,

Social Security, and other benefits. The pensions that they would receive

as transferees would include the maximum allowable CSRS benefit, plus the

additional FERS annuity.

• Lower-salaried employees may fare well under FERS, because Social

Security benefits are weighted toward lower income workers. Although

employees who participate in CSRS do not receive Social Security benefits

from their federal service, those participants who transfer to FERS would

receive pensions combining CSRS and FERS benefits, and they would be

eligible to receive Social Security benefits from their federal service.

However, this advantage to low wage earners could be considerably

reduced by the Windfall Elimination provision, which would significantly

reduce Social Security benefits for transferees who do not have at least 21

years of substantial Social Security coverage.

Page 13 GAO/T-GGD-98-27
Statement 

The Federal Employees’ Retirement System:

Potential Changes in Agency Retirement

Costs Following an Open Season

Figure 1: Percent of CSRS Participants

Who Contributed 5 Percent of Income

in 1996, by Selected Salary Brackets

Percentage of CSRS employees

0

20

40

60

80

100

$15,000-$19,999

$30,000-$34,999

$45,000-$49,999

$60,000-$64,999

Selected income levels

Source: Federal Retirement Thrift Investment Board data.

On the other hand, concerns about economic risks or uncertainty could

dissuade some employees from transferring. As noted above, concern

about the reliability of Social Security benefits was an important factor in

employee decisions during the first open enrollment season. Current

opinion polls suggest that many Americans remain concerned about

whether these benefits will be a reliable source of retirement income. Our

review of the last open season also suggests that factors such as the

perceived complexity of the FERS program and its attendant risks also can

play important roles in employees’ decisions. For example, some

employees have less than 40 years of service and thus have not reached

the maximum CSRS benefit. These employees might not want to exchange

the larger annuities that additional CSRS service would provide for smaller

FERS annuities that are coupled with the risk of losses from TSP

investments that could result an overall lower retirement income.12

12The amount of the reduction in annuity benefits would depend on the number of years of FERS

service that would be applied to the employee’s eventual annuity calculation.

Page 14 GAO/T-GGD-98-27
Statement 

The Federal Employees’ Retirement System:

Potential Changes in Agency Retirement

Costs Following an Open Season

Finally, although economic factors logically would play an important role

in employee decisions, noneconomic considerations could also play a

significant role. Choices about when is the right time to retire are very

personal and reflect individual values and circumstances as well as

economic considerations. Thus, these decisions could be based on factors

that are hard, if not impossible, to quantify. Upon transferring to FERS, for

example, employees would need to work an additional 5 years to avoid the

public pension offset rules that apply to CSRS employees. However,

working the additional 5 years might take some individuals beyond the

date at which they had planned to retire, and the trade-off between

additional retirement income and a shorter retirement would be a difficult

personal decision. In the final analysis, much like employee decisions to

take or forego recent early-out opportunities, it may be possible to

estimate who would benefit from a FERS open season transfer on economic

grounds, but the deciding factors might in fact be known only to the

employees.

Agency Retirement

Cost Increases Would

Depend on the

Number and Salary

Levels of Employees

Who Transfer

Given the difficulty of predicting the number and characteristics of the

employees who ultimately might transfer to FERS, we developed two sets of

examples to illustrate the range of increases in retirement costs that

agencies could face following a new FERS open season. Using two different

sets of assumptions, we calculated the increase in agency retirement costs

if 1, 5, and 10 percent of the eligible employees transferred to FERS. For the

first set of calculations, we assumed that the distribution of transferring

employees for each GS pay grade matched their actual distribution,

governmentwide. That is, if 2.2 percent of the eligible CSRS employees were

in grade GS-4, then 2.2 percent of the employees included in the 1-, 5-, and

10-percent calculations would also be in grade GS-4. For the second set of

calculations, we assumed that a larger proportion of the transferring

employees would be earning salaries at higher GS grades. This assumption

helps to illustrate the sensitivity of the agency retirement cost increases to

the salary level of transferring employees and may be especially pertinent

if employees nearing the end of their careers, or those who wish to take

advantage of the FERS TSP higher maximum contribution rate are most

likely to transfer.

Table 3 illustrates the potential increases in agency retirement costs if 1, 5,

and 10 percent of the eligible employees covered by CSRS transferred to

FERS, assuming that the transfer rates across the GS grades would match

the current distribution of employees by grade and step. As the table

shows, under these assumptions the increase in agency costs for the full

Page 15 GAO/T-GGD-98-27
Statement 

The Federal Employees’ Retirement System:

Potential Changes in Agency Retirement

Costs Following an Open Season

calendar year 1997 would have ranged from about $24 million more if 1

percent of the employees transferred to about $244 million more if 10

percent transferred. Our results for CSRS Offset plan participants ranged

from less than $1 million to about $8 million and are presented in appendix

I.

Table 3: Comparison of the Estimated

Increase in Agency Costs for General

Schedule Employees Covered by

CSRS

Total cost of selected rates of transfer

Grades 1 percent 5 percent 10 percent

GS-1 $133a $663 $1,326

GS-2 2,694 13,472 26,944

GS-3 39,971 199,856 399,711

GS-4 268,896 1,344,478 2,688,957

GS-5 850,251 4,251,255 8,502,510

GS-6 806,650 4,033,250 8,066,499

GS-7 1,389,418 6,947,090 13,894,179

GS-8 687,775 3,438,877 6,877,753

GS-9 2,017,484 10,087,421 20,174,842

GS-10 319,857 1,599,285 3,198,569

GS-11 4,321,219 21,606,095 43,212,189

GS-12 6,483,941 32,419,705 64,839,410

GS-13 4,273,407 21,367,034 42,734,067

GS-14 1,985,738 9,928,692 19,857,384

GS-15 945,820 4,729,099 9,458,198

Total $24,395,340 $121,965,721 $243,931,442

Note 1: For this table, we estimated the total costs associated with each selected rate of transfer

by assuming that the proportion of CSRS employees who transfer would match the actual

distribution of these employees across GS grades governmentwide.

Note 2: Due to rounding, totals may not equal the transfer rate percentages shown above.

aBecause only seven of the CSRS employees whom we included in our analyses were in grade

GS-1, 1 percent of these seven represents the cost difference for less than one person.

Source: GAO analysis of OPM data.

Table 4 shows the increase in agency costs if 1, 5, or 10 percent of the

eligible employees covered under CSRS transferred to FERS under the

different assumption that transfer rates would be higher for employees in

grades GS-13 through GS-15. Following this logic, the calculations assume

that 75 percent of the total number of employees who would transfer

would be in grades GS-13 through GS-15, and the remaining 25 percent of

the transferring employees would be in grades GS-1 through GS-12. Under

Page 16 GAO/T-GGD-98-27
Statement 

The Federal Employees’ Retirement System:

Potential Changes in Agency Retirement

Costs Following an Open Season

these assumptions, the 1 year agency costs would range from a low of

about $32 million if 1 percent of the employees transferred to a high of

$320 million if 10 percent transferred. Our results for CSRS Offset plan

participants ranged from about $1 million to about $13 million and are

presented in appendix I.

Table 4. Comparison of the Estimated

Increase in Agencies’ Costs for

General Schedule Employees Covered

by CSRS If the Concentration of Those

Transferring to FERS Were at the

Higher Grade Levels.

Total cost of selected rates of transfer

Grades 1 percent 5 percent 10 percent

GS-1 to GS-12 $ 5,393,886 $ 26,964,573 $ 53,934,002

GS-13 to GS-15 26,585,497 132,919,510 265,831,044

Total $31,979,383 $159,884,083 $ 319,765,046

Note 1: For this table, we estimated the total costs associated with each selected rate of transfer

by assuming that 75 percent of CSRS employees who transfer would be in grades GS-13 through

GS-15, and 25 percent of the employees would be in grades GS-1 through GS-12.

Note 2: Due to rounding, totals may not equal the transfer rate shown.

Source: GAO analysis of OPM data.

Agencies Might Have

to Pay Any Additional

Retirement Without

Additional Resources

Regardless of the size of the increase in agencies’ retirement costs may be,

the way in which agencies’ budget resources are controlled under the

current budget process suggests that agencies might have to absorb any

increase. Agency spending to pay retirement costs is discretionary

spending. Under the current process, discretionary spending is subject to

fixed-dollar caps that are implemented through the budget and

appropriations processes.13 As a consequence, unless Congress chose to

provide additional resources to fund the added retirement costs that

agencies could be charged, agencies would need to absorb any increases,

within the limits of their annual appropriations.14

Given the uncertainty regarding how many employees might transfer to

FERS during an open season, it is correspondingly difficult to estimate

13In particular, as noted in Budget Policy: Issues in Capping Mandatory Spending (GAO/AIMD-94-155,

July 18, 1994), congressional budget resolutions set totals by budget function and accompanying

statements to the conference reports allocate funds to the appropriations committees for discretionary

programs. House and Senate appropriations committees subsequently allocate these totals among

their subcommittees. OMB keeps score by tracking congressional actions, and Congress has

established spending levels in each congressional budget resolution. Should appropriations exceed the

discretionary cap, the Budget Enforcement Act provides for eliminating the overage through the

sequestration of discretionary spending. Policymakers vote annually on these discretionary program

appropriations.

14To provide additional appropriations for this purpose would likely require an increase in the

discretionary caps.

Page 17 GAO/T-GGD-98-27
Statement 

The Federal Employees’ Retirement System:

Potential Changes in Agency Retirement

Costs Following an Open Season

whether agencies would have a difficult time absorbing such an increase.

By one measure—the percentage that the increase in retirement costs

might be of agencies’ total expenditures for salaries and benefits—the

increased retirement costs do not look imposing. For example, our highest

estimate of increased governmentwide costs, about $332 million, would

represent approximately 1 percent increase in expenditures for salaries

and benefits for the employees used in our analysis, based on fiscal year

1997 figures. Of course, depending on how “personnel-intensive” specific

agencies’ operations may be or what other cost increases may arise from

other sources, even such a small overall percentage increase could be

difficult to absorb in certain situations, and might, for example, result in

reductions in staff levels or capital spending. Finally, agencies would be

affected differently, depending on their particular grade structure. For

example, an agency with a relatively larger share of highly salaried

employees who opt to transfer would experience larger increases in its

retirement costs compared to an agency with a smaller share, assuming

that both agencies experienced the same transfer rates.

That concludes my prepared statement. I would be pleased to answer any

questions you or other Members of the Committee may have.

Page 18 GAO/T-GGD-98-27
Page 19 GAO/T-GGD-98-27
Appendix I 

Table I.1. Comparison of Agency Cost Increases for Each CSRS Offset Employee Who Transfers to FERS, by Grade and

Step

Steps

Grades 1 2 3 4 5 6 7 8 9 10

GS-1 785 812 838 864 890 905 931 957 958 982

GS-2 883 904 933 958 969 997 1,026 1,054 1,083 1,112

GS-3 964 996 1,028 1,060 1,092 1,124 1,156 1,188 1,221 1,253

GS-4 1,082 1,118 1,154 1,190 1,226 1,262 1,298 1,334 1,370 1,406

GS-5 1,210 1,251 1,291 1,331 1,372 1,412 1,452 1,493 1,533 1,573

GS-6 1,349 1,394 1,439 1,484 1,529 1,574 1,619 1,664 1,709 1,754

GS-7 1,499 1,549 1,599 1,649 1,699 1,749 1,799 1,849 1,899 1,949

GS-8 1,660 1,716 1,771 1,826 1,882 1,937 1,992 2,048 2,103 2,158

GS-9 1,834 1,895 1,956 2,017 2,078 2,139 2,201 2,262 2,323 2,384

GS-10 2,019 2,087 2,154 2,221 2,289 2,356 2,423 2,491 2,558 2,625

GS-11 2,219 2,293 2,367 2,441 2,515 2,589 2,663 2,736 2,810 2,884

GS-12 2,659 2,748 2,837 2,925 3,014 3,102 3,191 3,280 3,368 3,457

GS-13 3,162 3,268 3,373 3,478 3,584 3,689 3,795 3,900 4,005 4,111

GS-14 3,737 3,861 3,986 4,110 4,235 4,360 4,484 4,609 4,733 4,858

GS-15 4,395 4,542 4,688 4,835 4,981 5,128 5,274 5,421 5,567 5,714

Source: GAO analysis of OPM data.

Page 20 GAO/T-GGD-98-27
Appendix I 

Table I.2. Comparison of the Estimated

Increase in Agency Costs for General

Schedule Employees Covered by the

CSRS Offset Plan

Total cost of selected rates of transfer

Grades 1 percent 5 percent 10 percent

GS-1a $0 $0 $0

GS-2 156 779 1,558

GS-3 4,310 21,550 43,101

GS-4 29,292 146,459 292,919

GS-5 76,991 384,957 769,914

GS-6 68,269 341,346 682,692

GS-7 91,249 456,245 912,491

GS-8 32,855 164,273 328,547

GS-9 77,874 389,370 778,741

GS-10 8,232 41,160 82,321

GS-11 118,355 591,774 1,183,547

GS-12 144,041 720,203 1,440,406

GS-13 92,328 461,639 923,277

GS-14 39,548 197,742 395,484

GS-15 22,982 114,910 229,820

Total $806,661 $4,033,305 $8,064,370

Note 1: For this table, we estimated the total costs associated with each selected rate of transfer

by assuming that the proportion of CSRS Offset employees who transfer would match the actual

distribution of these employees across GS grades governmentwide. That is, because 6.1 percent

of the eligible CSRS employees were in grade GS-4, 6.1 percent of the CSRS Offset employees

included in the 1-, 5-, and 10-percent cost estimates were also in grade GS-4.

Note 2: Due to rounding, totals may not equal the transfer rate percentages shown above.

aBecause no CSRS Offset employees were in grade 1, the cost difference is $0.

Source: GAO analysis of OPM data.

Table I.3. Comparison of the Increase

in Agency Costs for General Schedule

Employees Covered by the CSRS

Offset Plan If the Concentration of

Those Transferring to FERS Were at

the Higher Grade Levels

Total cost of selected rates of transfer

Grades 1 percent 5 percent 10 percent

GS-1 to GS-12 $182,590 $912,951 $1,825,901

GS-13 to GS-15 1,079,569 5,397,844 10,791,690

Total $1,262,159 $6,310,795 12,617,591

Note 1: For this table, we estimated the total costs associated with each selected rate of transfer

by assuming that 75 percent of CSRS Offset employees who transfer would be in grades GS-13

through GS-15, and 25 percent of the employees would be in grades GS-1 through GS-12.

Note 2: Due to rounding, totals may not equal the transfer rate percentages shown.

Source: GAO analysis of OPM data.

Page 21 GAO/T-GGD-98-27
Appendix I 

(410225) Page 22 GAO/T-GGD-98-27
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