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KANSAS STATE ,,Lr..!IvEdiSITI HEARING

BEFORE THE

OMMITTEE ON INVESTIGATIONS

rfl OF THE

COMMITTEE ON

7,0 OFFICE AND CIVIL SERVICE

4=z JSE OF REPRESENTATIVES

NINETY-THIRD CONGRESS

FIRST SESSION

APRIL 3, 1973

Serial No. 93-6

Printed for the use of the

Committee on Post Office and Civil Service

U.S. GOVERNMENT PRINTING OFFICE

04-684 0 WASHINGTON : 1973
COMMITTEE ON POST OFFICE AND CIVIL SERVICE

THADDEUS J. DULSKI, New York, Chairman

DAVID N. HENDERSON, North Carolina, Vice Chairman

MORRIS K. UDALL, Arizona

DOMINICK V. DANIELS, New Jersey

ROBERT N. C. NIX, Pennsylvania

JAMES M. HANLEY, New York

CHARLES H. WILSON, California

JEROME R. WALDIE, California

RICHARD C. WHITE, Texas

WILLIAM D. FORD, Michigan

FRANK J. BRASCO, New York

WILLIAM (BILL) CLAY, Missouri

PATRICIA SCHROEDER, Colorado

JOHN JOSEPH MOAKLEY, Massachusetts

WILLIAM LEHMAN, Florida

H. R. GROSS, Iowa

EDWARD J. DERWINSKI, Illinois

ALBERT W. JOHNSON, Pennsylvania

LAWRENCE J. HOGAN, Maryland

JOHN H. ROUSSELOT, California

ELWOOD HILLIS, Indiana

WALTER E. POWELL, Ohio

WILLIAM 0. MILLS, Maryland

RICHARD W. MALLARY, Vermont

ANDREW J. HINSHAW, California

L. A. (SKIP) BAFALIS, Florida

JOHN H. MARTINY, Chief Counsel

VICTOR C. SMIROLDO, Staff Director and Counsel

WILLIAM A. IRVINE, Assistant Staff Director

THEODORE J. KAZY, Senior Staff Assistant

ROBERT E. LocKHART, Assistant Counsel

ROY C. MESKER, Staff Assistant

FRANCIS C. FORTUNE, Coordinator

RALPH J. DEVLIN, Staff Assistant

SUBCOMMITTEE ON INVESTIGATIONS

THADDEUS J. DULSKI, New York, Chairman

DOMINICK V. DANIELS, New Jersey WALTER E. POWELL, Ohio

PATRICIA SCHROEDER, Colorado WILLIAM 0. MILLS, Maryland

JOHN JOSEPH MOAKLEY, Massachusetts ANDREW J. HINSHAW, California

DAVID N. HENDERSON, North Carolina

Ex Officio Voting Member

H. R. GROSS, Iowa

FRANCIS C. FORTUNE, Coordinator, Room 603, House Office Building Annex—Ext. 51664
CONTENTS

Page

Statement of—

Ruddock, Andrew E., Director, Bureau of Retirement, Insurance, and

Occupational Health, U.S. Civil Service Commission 4

Communications from—

Hampton, Hon. Robert E., Chairman, Civil Service Committee:

Letter dated February 21, 1973 1

Letter dated January 2, 1973 38

Ruddock, Andrew E., Director, Bureau of Retirement, Insurance, and

Occupational Health, letter dated January 16, 1973 39

Additional material submitted—

"Retirement Financing," a booklet submitted by the Civil Service

Commission for inclusion in the record 14
N
CIVIL SERVICE RETIREMENT FUND

TUESDAY, APRIL 3, 1973

U.S. HOUSE OF REPRESENTATIVES,

COMMITTEE ON POST OFFICE AND CIVIL SERVICE,

SUBCOMMITTEE ON INVESTIGATIONS,

Washington, D.C.

The subcommittee met at 10:07 a.m., in room 210, Cannon House

Office Building, Hon. Thaddeus J. Dulski (chairman of the subcommittee) presiding.

Present: Representatives Thaddeus J. Dulski, Dominick V. Daniels,

Patricia Schroeder, Walter E. Powell, William 0. Mills, and Andrew

J. Hinshaw, of the subcommittee; also Chairman Jerome R. Waldie

and Representatives Lawrence J. Hogan and Edward Hillis of the

Subcommittee on Retirement and Employee Benefits.

Mr. DULSKI. The committee will come to order.

Today's hearing has been called to consider the present condition

of the civil service retirement fund.

The fund was established in 1920, but it was not until 1969 that our

companion subcommittee initiated what became Public Law 91-93.

This law was designed both to provide improved financing for the

fund and to seek to maintain its fiscal integrity.

It is appropriate at this point to give special recognition to the

work of my distinguished colleague, the ranking member on the subcommittee, the gentleman from New Jersey, Mr. Daniels, who was

chairman of the Retirement Subcommittee in 1969, when Public Law

91-93 was enacted.

Mr. Waldie is not here yet, but I am sure he will be here in due

course.

In February of this year, Chairman Hampton submitted his annual

report to the committee on the status of the fund. Without objection,

the chairman's letter will be made a part of the record.

(The letter follows:)

U.S. CIVIL SERVICE COMMISSION,

Washington, D.C., February 21, 1973.

Hon. THADDEUS J. DULSKI,

Chairman, Committee on ,Post Office awl Civil Service,

House of Representatives, Washington, D.C.

DEAR MR. CHAIRMAN: For the past several years I have reported annually to

the Committee on Post Office and Civil Service the current status of the Civil

Service Retirement System with respect to its financing and with particular

emphasis on the effect of Public Law 91-93 enacted October 20,1969. As reported

previously, the improved retirement system financing established by Public Law

91-93 continues to work well and the system is basically in a sound financial

position. The year 1972 marked several significant events related to the financing

of the retirement system, and want to use this report to comment on them and

on their implications for the future.

(1)
2

First, a brief review of some of the background leading up to the passage of

Public Law 91-93 may be helpful to set this in perspective. This law was passed

as a result of several years of intense study and concern by your Committee, this

Commission, and other interested parties. Our concern at that time was to: (1)

identify and recognize the full costs of retirement benefits; (2) make orderly

advance preparation to meet these costs; (3) control growth of the unfunded

liability, and (4) keep a Fund balance on hand high enough to assure prompt

payment of benefits as they become due in the future. A major concern was to

base the Fund on a more solid financial footing. A serious financing weakness

had arisen over the years because, although employees have always paid their

assessed contributions, the Government had not always paid the remaining

portion of the cost.

In the process of developing legislation which culminated in Public Law

91-93, agreement was reached on these features which were reflected in the law:

1. Employees and agencies will share equally the full normal cost of present

benefits and of all future liberalizations authorized by Congress.

2. Future legislation which creates additional unfunded liability will include

authorization for appropriations to the Fund to finance the newly created liability, in equal annual installments over a thirty year period. Liability created

by legislation enacted after October 20, 1969 for pay increases, new or liberalized benefits, or extension of retirement coverage to new groups is funded under

this provision.

3. The Government assumes full responsibility for unfunded liability attributable to legislation already enacted. It will meet this obligation by making interest

payments on unfunded liability by transfer payments from the Treasury to the

Fund in progressive increments, beginning with 10 percent in 1971; 20 percent

in 1972; and an additional 10 percent each following year until for Fiscal Year

1980 and each year thereafter, the amount transferred will be the full equivalent

of interest on the unfunded liability. This provision finances, without funding,

(a) the liability already existing when the new financing method was enacted,

and also (b) the liability created by future cost of living annuity increases

occurring automatically under laws enacted before October 20, 1969.

Since passage of this law, the financing of the retirement system has clearly

been strengthened. One indication of this occurred during 1972 when, for the

first time since 1920, the cumulative total of Government contributions to the

Fund ($24.4 billion) surpassed the cumulative total of employee contributions

($24.1 billion).

On November 2, 1972, I sent to the Congress the Fiftieth Annual Report of

the Board of Actuaries of the Civil Service Retirement System, including the

Board's valuation of the system as of June 30, 1970. The Board found the

normal costs to be 12.95 percent of payroll, but recommended that employee

deductions and agency contributions not be reduced below the present combined level of 14,000 percent of payroll because of two issues. The issues are:

(1) continuing growth of unfunded liability resulting primarily from cost-ofliving increases in annuities; and (2) the effect on the normal cost of the retirement system of a trend toward earlier retirement by increasing numbers of

employees.

The first issue is discussed on page 13 of the report printed as House Document No. 93-37, where the Board points out that the cost-of-living increases are

not funded. Each such increase adds to the unfunded liability and the interest

payments. Assuming that the economy continues to change in the future as it

did in 1972, the unfunded liability will increase by $38.4 billion in the next ten

years, primarily because of cost-of-living increases in annuities.

The Board suggests that proper funding of these increases could be accomplished either by recognizing the future increases as a part of normal cost

in the actuarial valuation, or by including them in the items to be funded by

30-year payments. We find the first alternative unattractive for several reasons.

For one thing the legislative history of Public Law 91-93 indicates that the

Congress never intended normal cost computations to include provision for

financing annuity cost-of-living increases, which result from an earlier law.

Furthermore, if normal cost were defined to include possible future cost-of-living

increases then logically all economic trends should be recognized in the valuation.

We believe this would result in an unrealistic relation to current pay levels, as

employees would be asked to pay for tomorrow's inflation from today's pay.

There would be a significant increase in normal cost, requiring increased contributions from both agencies and employees.

The second approach, of funding each increase as it occurs through 30-year

payments accomplishes the objective sought by the Board without inflating
3

employee or agency contributions. Of the two methods, we believe this one is

clearly preferable, but we are not at this time recommending adoption of either

alternative suggested by the Board.

The other key issue raised in the Board's report concerns the increasing number of employees who are retiring at an early age. As more and more people tend

to retire early, the normal cost of the retirement system is increased accordingly.

The early retirement rates published in the 1970 report sent to you last fall show

that the rates have increased substantially over the rates in the previous study,

published in the 1963 report. If the rates of early retirement continue to increase,

the normal cost determination of 12.95 percent of payroll made in the Board's

recent report will prove to be too low.

We concur with the Board's suggestion that no action be taken on changing

agency and employee contributions until more experience on the early retirement rate is known. We are now studying the experience of the past three years

and the early retirement rates seem to be continuing to increase. We will make

this data available to the Board as soon as possible for its consideration, and

for any further recommendations to the Congress which may be appropriate.

It should be noted that since the Board's valuation, actions taken by the

Congress during calendar year 1972 have served to increase normal cost to 13.10

percent of payroll. This resulted from benefit liberalizations enacted for air

traffic controllers (Public Law 92-297) and firefighters (Public Law 92-382).

Aside from the Board's report, there is another financing issue still unresolved

in connection with additional unfunded liability resulting from pay increases

granted by the U.S. Postal Service. Since its establishment, the Postal Service

has given five separate pay increases. The Act establishing the Postal Service is

not clear as to its liability for reimbursing the Retirement Fund for the unfunded

liability created by these pay increases. During 1972 we proposed legislation to

require the Postal Service to make reimbursement to the Fund for such unfunded liability through 30-year amortization payments.

Our proposal was not enacted, and we are actively seeking the necessary clearances to include it as part of our legislative program for the 93rd Congress. We

note that you have introduced a virtually identical bill, H.R. 29, and we have

been asked to report on it. In the meantime, our appropriations requests for

Fiscal Year 1972 and Fiscal Year 1973 were reduced by almost $168 million

pending decision as to the liability of the Postal Service. Together with interest,

the Fund has lost over $179 million in this two year period. We hope that this

issue can be resolved through favorable action on our legislative proposal to

avoid further departure from the financing method adopted by the 1969 amendments to the retirement law.

A comprehensive picture of retirement system financing may be gained by

reference to the table in Attachment A. This table reflects the three sources of

Government payments to the Fund (interest payments on unfunded liability;

30-year amortization payments to finance benefit liberalizations; and agency

contributions of 7 percent of payroll) as well as employee contributions. In

virtually every category, we are dealing with billions of dollars.

This table shows data projections at five years and ten years from now. For

the sake of illustration, two sets of projections are shown—Projection A shows

figures assuming no changes beyond Fiscal Year 1972 in work force, pay,, benefits, and cost-of-living; Projection B shows figures assuming changes each year

in work force, pay, benefits, and cost-of-living at the same rate experienced in

calendar year 1972. These projections show that Government contributions to

the Fund could double or triple over the next ten years, as could benefits paid

to annuitants. They also show that unfunded liability could approach the 100

billion dollar mark within ten years.

We continue to believe strongly that any further proposals for retirement

program changes should be considered in the light of policy in all other areas

for compensation for Federal employees, and with full recognition of the burden

being placed on the budget and the taxpayer.

With approximate comparability achieved between overall Government and

industry compensation, and with the continuing level of strain on the Federal

budget and degree of burden on taxpayers, we urge that any proposal for changing the retirement system be considered in the light of the total compensation

package rather than in isolation. This broader scope of consideration will, in our

judgment, best serve the public interest.

Sincerely yours,

ROBERT E. HAMPTON,

Chairman.
4

ATTACHMENT A-RETIREMENT FINANCING

[Billions of dollarsj

Actual

fiscal year

1972

Projection A

Assumes no changes beyond

fiscal year 1972 in work

force, pay, benefits, and

cost-of-living

Projection B

Assumes changes each year

in work force, pay, benefits,

and cost-of-living at the

same rate experienced in

calendar year 1972

Fiscal year

1977

Fiscal year

1982

Fiscal year

1977

Fiscal year

1982

1. Treasury transfers for interest on

unfunded liability and for military

service credits $0.6 $2.6 $3.8 $2. 9 $5. 2

2. Appropriations for 30-year amortization of liberalizations . 5 .7 .7 1.8 3. 2

3. Agency contributions 2. 1 2. 1 2. 1 2. 7 3. 5

4. Total Government cost 3.2 5.4 6.6 7.4 11. 9

5. Employee contributions 2. 1 2. 1 2. 1 2. 7 3. 5

6. Annuity payments 3.6 5.4 6.8 6.8 11.1

7. Retirement fund (June 30) 27.7 46. 1 71. 5 49. 5 86. 3

8. Unfunded liability (June 30) 63.5 70. 1 68.9 82.9 101.9

Mr. DULSKI. Earlier, the Board of Actuaries made its own report,

House Document 93-37. Based on these reports, in part, the subcommittee feels a detailed look at the retirement fund is in order at this

time. For example, is the 1969 law doing the job our committee intended in drafting the legislation?

What is the outlook for the fund in the future?

To bring us up to date, we invited Chairman Hampton and his staff

to appear at this hearing. Chairman Hampton encountered a conflict,

but I understand the Commission has a prepared statement and has

authorized its witness to speak for the Commission.

Before recognizing the witness, I ask the cooperation of all committee members in this proPosed procedure. This is a complex subject

and the witness has an orderly presentation which I believe he should

be allowed to complete before we begin questions.

The witness representing the Civil Service Commission is familiar

to most of us-Mr. Andrew Ruddock, Director of the Bureau of

Retirement, Insurance, and Occupational Health.

Before you begin, Mr. Ruddock, I want to acknowledge the arrival

of Mr. Waldie, chairman of the Subcommittee on Retirement and

Employee Benefits. We are glad to have him here and, of course, I had

extended a special invitation to him and all members of his subcommittee to participate.

Welcome Mr. Ruddock, and now you may proceed.

STATEMENT OF ANDREW E. RUDDOCK, DIRECTOR, BUREAU OF RETIREMENT, INSURANCE, AND OCCUPATIONAL HEALTH, 'U.S.

CIVIL SERVICE COMMISSION

Mr. RUDDOCK. Thank you, Mr. Chairman. I would first like to join

in your tribute to Mr. Daniels for the landmark legislation, Public

Law 91-93, enacted in October of 1969. I personally had the opportunity to know just how many hours, both of committee time and of

his own personal time, Mr. Daniels put into that particular legislation.

I have a prepared statement, and I would like to proceed with it.

IMP"
5

Mr. Chairman and members of the subcommittee, I am happy to be

here this morning to discuss a subject which has been a contmuing concern of the Civil Service Commission for many years. At the same time,

I am sorry that Chairman Hampton could not be here to make the

statement which I will present in his absence. He asked me to express

his regret that a schedule conflict required him to be out of town today

and to assure you that this statement represents the position of the

Civil Service Commission.

The Civil Service Commission has a strong interest in retirement

system financing, and is mindful of the fact that the major legislation

of 1969 improving retirement financing was a landmark.

The important subject of retirement system financing is of vital importance to more than 1 million annuitants who currently receive

benefits under the civil service retirement system. It is equally important to present Federal employees who hope to receive a future benefit.

There are several million Federal employees who are counting on

this retirement system to provide them with benefits when they reach

retirement age. They have every right to be concerned with our ability

to maintain a sound financial basis for the retirement system.

Increasingly they are seeing reports in the press about both public

and private retirement systems which are in serious financial difficulty. Some retirement systems have been able to pay retirees only a

fraction of the benefits they had been led to expect. Other systems are

finding that the benefits they are committed to provide are beyond

their ability to finance.

Mr. Chairman, we are all concerned because we see these same reports and we are mindful of our responsibilities as public officials. We

do not wish ever to see the day when reports of financial difficulty

could be made about the civil service retirement system.

If this were 1968 instead of 1973, I would be here urging prompt

corrective action for a serious financing problem. At that time, there

was a financing crisis which was approaching steadily with no solution at hand.

I am glad to say that we are not in that position today. Thanks to

enactment of Public Law 91-93 by the Congress in October 1969, the

financing problem was solved. The legislative solution to the problem

was accomplished in large measure because of the leadership and effort exerted by members of the Committee on Post Office and Civil

Service.

Therefore, we are not here to seek a change in the financing of the

retirement system. Instead, we wish to call your attention to the need

for maintaining the sound financing established by Public Law 91-

93. We believe it is vital that costly benefit liberalizations should not

be allowed to undermine or destroy the financial integrity of the system. Too many people are dependent upon the system for us to allow

that to happen.

If we are true to our responsibilities as administrators of a public

retirement system, we must concern ourselves with the benefit costs of

the system. We accept this as a truism, unglamorous though it may be.

We accept it on behalf of those who are dependent upon the system,

and on behalf of the taxpayers who help support the system. We seek

to balance the just concerns of both groups in recommending approval

or disapproval by the Congress of specific legislative proposals.

94-684 0-73-2
6

The cost of a retirement system is affected by many factors. Among

the things which will increase costs are such major factors as increases

in pay, granting benefits to additional groups of employees, or liberalizing benefits. Singly or in combination, these factors can dramatically

increase the cost of a retirement system.

The significance of the cost dimension is apparent in the budgets

for the Civil Service Commission over the past 5 years. In fiscal year

1969, the total Civil Service Commission budget for all purposes was

$181 million. Shortly, we will be appearing to testify at an appropriation hearing on a proposed Commission budget of $2.5 billion for fiscal

year 1974. Ninety-one percent of this amount, or $2.3 billion, is money

needed for the retirement fund.

My point is simply that the cost of providing retirement benefits is

enormous. Our appropriations and our expenditures are growing because of benefit commitments already established by law, and because

since 1969 the real costs of operating the retirement system have been

recognized in our financing procedures. The money required to operate

the retirement system clearly overshadows the money required for all

our other Commission operations combined.

In this context, we hope you will understand and share our concern

for maintaining the financial integrity of the retirement system. We

believe any proposals for changing the system should receive careful

consideration from the standpoint of equity to employees, consistency

with compensation practices of other employers, and sympathy for the

taxpayers who shoulder the major burden of supporting the system.

We believe this places on the proponent of a liberalization a substantial burden to establish a real need for the change.

This concludes my formal statement.

Mr. Chairman, in line with your introductory remarks, shall I proceed directly to the briefing booklet?

Mr. Durisio. Mr. Waldie has a question.

Mr. WALDIE. You refer to the cost today versus the cost in 1969. I

gather you are reflecting the bookkeeping juggling in the difference

between $181 million and $2.5 billion.

Am I correct in reading the paragraph following that, where you

say that since 1969 the real costs of operating the retirement system

have been recognized. Am I correct that the real costs were not recognized in the difference between $181 million and $2.5 billion?

Mr. RUDDOCK. You are absolutely correct.

Mr. WALDIE. So the budget has not really increased from $181 million to $2.5 billion. We just recognized what the budget was now.

Mr. RUDDOCK. I would have to differ with you, sir, on the point of '

the budget. The budget which the Civil Service Commission will appear and justify before the Civil Service Committee has changed

from $181 million to $2.5 billion. You are quite right that retirement

costs have not increased by that amount.

Mr. WALDIE. Some persons reading that would think we have been

spendthrifts, but in fact we have only transfers accounting to your

office, right?

In other words, we have not increased expenditures from $181 million to $2.5 billion.

Mr. RUDDOCK. No, sir.
7

Mr. WALDIE. What have we increased expenditures from, from 1969

to 1972? It is $2.5 billion now. What was it in 1969, the equivalent

figures?

Mr. RUDDOCK. I do not remember.

Mr. WALDIE. Was it $2.3 billion?

Mr. RUDDOCK. It would not have been that much. It would have been

a substantial figure. The expenditure has not grown in proportion to

the increase in the budget, because the budget reflects the improved

financing.

Mr. WALDIE. What has the expenditure increased? Ninety-one percent, you say, is the money needed for the retirement fund. When the

$181 million was your budget in 1969, did you have any money in that

for the retirement fund?

Mr. RUDDOCK. I do not believe so.

Mr. WALDIE. So what was the retirement fund in 1969?

Mr. RUDDOCK. In the retirement fund?

Mr. WALDIE. What would be the equivalent of the $2.3 billion that

is retirement funds in your budget this year; what would be the

equivalent?

Mr. RUDDOCK. In the budget? Zero.

Mr. WALDIE. No, no, wherever it is.

Mr. RUDDOCK. Prior to 1969 

Mr. WALDIE. Was there no $2.3 billion anywhere?

Mr. RUDDOCK. No, sir.

Mr. WALDIE. Was there no money for the retirement fund?

Mr. RUDDOCK. Prior to Public Law 91-93, the income would have

been employee contributions, agency contributions, and interest on the

retirement fund, which then consisted of $19 or $20 billion.

Mr. WALDIE. How much was that altogether? You see what I am

trying to do. Your paragraph indicates that we have increased expenditures from $181 million.

Mr. RUDDOCK. No, sir. I did not use the word "expenditures." I am

speaking of the Commission's budget.

Mr. WALDIE. I understand that, but you say the budget is up from

$181 million to $2.5 billion. An unlearned person would assume we

had increased expenditures that much. I may be unlearned.

Have we, in fact, increased expenditures from $181 million to $2.5

billion in that period?

Mr. RUDDOCK. The total disbursement was $2,410,119,508 in 1969:

Mr. WALDIE. Is that the equivalent figure for the $2.3 billion which

you cite in that paragraph?

Mr. RUDDOCK. No, sir. There is no equivalent to the $2.3 billion

figure cited in this paragraph, because the $2.3 billion represents appropriations for the annual payments on the 30-year amortization of

liabilities created since 1969, and it represents the transfer of amounts

by the Secretary of the Treasury from general funds for the retirement fund to represent—for 1974, it will be 40 percent of interest on

unfunded liability.

Mr. WALDIE. Maybe I can get at it another way.

Ninety-one percent of your budget is money needed for the retirement fund. So I would presume your budget is $200 million. Is that

correct? Your budget, other than retirement fund money, is $200

million?
8

Mr. RUDDOCK. Yes, sir.

Mr. WALDIE. Is that equivalent to the $181 million that you were

spending in 1969? Is that money spent for the same purposes?

Mr. RUDDOCK. They would be more nearly comparable.

Mr. WALDIE. SO, you have less than $20 million increase from 1969

to 1974.

Mr. RUDDOCK. In all the activities of the Civil Service Commission

except moneys going into the retirement fund. The retirement financing is infinitely stronger now than it was prior to the requirement that

that money be appropriated and go into the fund.

Mr. DANIELS. Will the gentleman yield?

Mr. WALDIE. Yes.

Mr. DANIELS. I think you might clarify the picture if you go back

to 1969 and indicate to the committee what that legislation did. I was

then chairman of the subcommittee in charge of that legislation, and

we conducted extensive hearings over a period of about 2 years before

we enacted Public Law 91-93.

I further recall that the unfunded liability as of July 1, 1969,

amounted to over $60 billion. It was estimated that at that time the

normal cost, that is, a contribution required from agencies and employees of those agencies, should equal at least 13.86 percent of the

payroll.

Now, when this law came into effect, Public Law 91-93, we provided

for placing the fund on a sound financial basis, and according to the

testimony you just gave this morning, you feel that this was a good

law, and a sensible, practical and reasonable approach to the existing

problem.

Now, we provide certain financing to keep the fund on a sound

financial basis. Would you explain, then, to the committee just what

we did? How did we take care of the unfunded liability of $60 billion?

Mr. RUDDOCK. I think I can do that most easily by using the briefing

document.

Mr. DANIELS. We also provided that when we increase benefits in the

future, we take out a 30-year mortgage. Is that right?

Mr. RUDDOCK. Yes, sir.

Mr. DANIELS. Therefore, when you talk about the $21/2 billion, you

are talking about the money necessary to put into this fund by reason

of the legislation enacted in 1969?

Mr. RUDDOCK. Yes, sir, and for money not put in the fund prior to

1969. The financing was in bad shape prior to 1969.

Mr. WALDIE. I think I understand it now. The thing that threw me

off was your line, "The real costs of operating the retirement systems

have been recognized since 1969 in our financing procedure."

What were those real costs that were unrecognized prior to 1969?

Mr. RUDDOCK. At that time, we had employee deductions and agency

contributions which were less than normal costs.

We had liberalizations and pay raises and other items which were

creating new liability, and for which no financing was being provided.

We had the unfunded liability which Mr. Daniels has referred to, on

which the fund was receiving no interest, and very frankly we were

headed for a financial crisis.

Mr. WALDIE. Is there any way that we could get a financial crisis

with the change in the law Mr. Daniels implemented in 1969'? Does

not every benefit increase now require funding?
9

Mr. RUDDOCK. Yes, it does.

Mr. WALDIE. There is no way we could hit the financial crisis unless

the Treasury goes bankrupt.

Mr. RUDDOCK. If the Congress appropriates the amounts which are

snecified in the financing system established by Public Law 91-93,

then this system is permanently and fully financed.

Mr. WALDIE. Does this Congress have an option in this regard?

Mr. RUDDOCK. Yes. I believe that no amount of money is appropriated without the approval of Congress.

Mr. WALDIE. So, your system could be in trouble if Congress refuses

to appropriate moneys under the law that Mr. Daniels passed?

Mr. RUDDOCK. Yes, sir; if the financing system is not carried out, we

would be in trouble.

Mr. WALDIE. If the formula is followed, and the Congress appropriates in accordance with the law, there is no way the retirement fund

could be in difficulty, is there?

Mr. RUDDOCK. No, sir.

Mr. WALDIE. I have no further questions.

Mr. DuLsKi. Proceed with the statement.

Mr. RUDDOCK. We have given you a document, "Retirement Financing Under Public Law 91-93," and we have characterized that as a

good law, working well.

If you will follow me as I go through page 2, we outline the problem before Public Law 91-93. In 1969, we had a situation where disbursement was growing faster than income. We could project that 17

1975, the disbursement would exceed the income. At that point, obviously, the balance in the retirement fund would begin to go down, and

by 1987, we projected the fund balance would hit zero.

After 1987, we faced the prospect that any delay in the annual budget would stop benefit payments until new funds were authorized.

In case there is any question about that being a real possibility, we

administer in addition to civil service retirement system, the Lightl-ouse Service Widows' Annuity Act and the Panama Canal Construction Annuity Act. They have been financed out of annual appropriations.

In other words, no funds, and you pay benefits only from moneys

as they were appropriated. We have two instances which I can cite. In

1957, we were not able to send out the June 1 check until the funds

were appropriated. The June 1 check went out June 25. That caused

some hardship among the people who were expecting those checks the

first of the month.

In 1968, on July 1, instead of sending each annuitant the amount of

his monthly annuity, we were able to send only half a month's check

and then when the funds were appropriated, we sent the balance of it.

We just think it would be a disaster if the civil service retirement

fund had ever reached a zero balance where from that point on payments could be made only as we received additional income.

What caused the financing problem? Primarily inadequate Government payments. The system was established in 1920, but there were no

Government contributions until 1929. We had liberalizations; we had

pay raises; we brought in additional groups, all of which created new

liability for which no financinp: provision was made.

We had the unfunded liability which in 1969 was about $57 billion,

and of course we were receiving no interest on that. The interest loss
10

was about $2 billion a year. That interest loss increased the amount of

unfunded liability.

The interest loss was making the financing worse each year, and

we could see that when we reached a point where we had no fund, we

would also lose the interest we were then receiving on the retirement

fund, and interest is needed to help meet the costs of the future

benefits.

At.the bottom of this page, we have an obviously oversimplified

definition of unfunded liability, expressed as the excess of liabilities

over assets.

Public Law 91-93 solved the financing problem. It did basically

three things. It raised employee and agency contributions to 7 percent

each, and that covered on a 50-to-50 basis the then estimated normal

cost, which was 13.98 percent of payroll including the liberalizations

that were in Public Law 91-93.

It authorized Government to pay in equal installments over 30 years

the unfunded liability due to new laws such as new benefits or new pay

raises or bringing in new groups.

Actually, that is a pretty strong authorization. The language of

Public Law 91-93 says that each piece of legislation which creates

liability is deemed to authorize the appropriations to finance it.

Then, finally, Public Law 91-93 authorized the Government to pay

interest on the unfunded liability which was due to laws already

passed. That included the then existing unfunded liability, and it

included the liability which would come about because of cost-ofliving increases resulting from laws already on the books when the

financing was passed, but occurring automatically from that point on.

To ease the impact on the budget, the interest transfers were set up

at 10 percent for 1971, 20 percent for 1972, and increasing so that by

1980 and thereafter, the interest transfer will be 100 percent.

Normal cost, which we referred to as being 13.98 in 1969 is the

amount required to be paid and invested at interest during the active

service of employees in order to cover the benefits.

On page 5, we have a block diagram which shows the civil service

retirement fund, the sources of income, and the outgo. We have the

interest on invested funds we are currently receiving at 5.7 percent.

We are getting employee contributions and agency contributions at

7 percent of payroll. We have Treasury transfers on this gradually

rising schedule so that by 1980, it will be 100 percent of interest on

unfunded liability. We have the 30-year amortization payments for

laws enacted after 1969.

Going out of the fund, we have benefit payments, and while we

have not shown it, there is a tiny corner of that box that could be set

aside as the administrative costs of the Civil Service Commission,

which is about 0.03 percent.

The result of enactment of Public Law 91-93 was stronger financing. The loss of interest was slowed, and it will be stopped completely

by 1980.

Under this system, and this gets back to your point, Mr. Waldie, the

outgo will never exceed the income. Theoretically, using static assumptions, you could reach the point where they could be equal, but the

outgo will never exceed the income, and the balance of the fund will

never get down to zero. Prompt benefit payment is assured as long as

we follow this financing plan.
11

For the picture today, we show figures as of June 30, 1972. A fund

of $27.7 billion and annual receipts for fiscal year 1972 of $6.8 billion.

We show the source of those receipts. Annual disbursements, $3.6

billion; and the unfunded liability as of June 30, 1962; $63.5 million.

But I think we need to consider some items, and this is mainly why

we are here this morning.

On page 8, the first item for consideration is the cost-of-living

increases. Cost-of-living increases come about because of laws which

were on the books before Public Law 91-93, basically a 1962 law

amended in 1965, and then a final amendment in 1969 which added 1

percent to the increase in the consumer price index to compute the

amount of the annuity increase.

We had an increase immediately upon us when Public Law 91-93

was passed. We had a 5-percent increase on November 1, 1969.

Since that time, we have had three increases, all occurring since the

June 30, 1970, valuation of the fund, with 5.6 percent on August 1,

1970, 41/2 percent on June 1, 1971, 4.8 percent on July 1, 1972.

These three added $4.5 billion to the unfunded liability, and unless

the cost of living levels off and stops going up, we will continue to have

cost-of-living annuity increases, and they will add billions more to the

liability in the next 10 years.

I want to emphasize that the Treasury transfers of interest on the

unfunded liability created by cost-of-living increases will fully finance,

without funding, all the cost-of-living increases, and this was intended

by Public Law 91-93.

I make the distinction here between financing and funding. Financing is raising the money that is needed to pay the benefits, as opposed

to actually putting the dollars in advance into the retirement fund,

which I would refer to in this context as funding.

There was debate while Public Law 91-93 was pending, as to

whether there should be some other method of financing or funding

cost-of-living increases. The decision to leave them in the category to

be financed by Treasury transfers of equivalent interest was the deliberate decision and was clearly intended by Public Law 91-93. So that

is working exactly as it was intended.

In the recent report from the Board of Actuaries, the Board recommended funding of the liability created by the cost-of-living increases,

and they recommended that it could be done in one of two ways: One,

by putting an assumption into the normql cost estimates, the other by

including these costs in the category to be funded by 30-year amortization.

We specifically indicged here that the Board of Actuaries recommended funding by applying the 0.9-percent excess of contributions

over normal cost to the unfunded liability. At the same time they talked

about building an assumption into normal cost, they recommended no

change in the employee deduction or the agency contributions, which

means you would be applying just the excess, which is currently 0.9

percent.

The Civil Service Commission recommends no change in the method

of financing the cost-of-living increases. We believe that under present

circumstances, as long as the Treasury transfers will provide the

money to pay the cost-of-living increases, that we do not need to change

that method of financing.
12

The second item worth looking at is normal cost. This is now 13.10

percent of payroll, and as you recognize, it is less than the 14 percent

that is being collected from employee deductions and agency contributions. This drop from the 13.96 normal cost in 1969 is due to the valuation being made using a higher interest rate. Prior evaluations had

been.made using an assumed rate of 31/2 percent. The current valuation is at 5 percent. The rise from the finding of the Board of Actuaries,

which was 12.95 as of June 30, 1970, up to the present 13.10 is due to

two pieces of legislation passed last year, benefit increases for air traffic controllers and a separate bill for firefighters.

The Board of Actuaries recommends against either raising the

benefits or reducing contribution rates, either one of which, of course,

would reconcile this difference between the present normal cost and

the present amount being collected. The Civil Service Commission

agrees that neither of these things should be done. We recommend that

the deductions be kept for the present time at 7 percent for employees,

and 7 percent for agencies.

Why? We have two reasons: First, our benefit package is already

comparable. To develop this particular table, we selected 11 large employers, each of whom pays a larger percentage of health benefit contributions for its employees than does the Federal Government. So we

started off with, obviously, progressive employers paying more on

health benefits than the Federal Government. But then we compared

the total benefit package. I would have to inform you that this kind of

a comparison does have to include some subjective judgments, and

everyone might not agree with us on every box in which we put the

name of a company. We found that when we compare the retirement

systems, Aetna, the city of Baltimore, IBM and New York State have

retirement systems which are more liberal than that of the Federal

Government. DuPont, Michigan, Pacific Gas & Electric, United States

Steel, are comparable with the Government, and General Motors, the

State of Georgia and the State of Wisconsin are less liberal. Coming

down through the categories of benefits to the bottom line, we find that

on an overall basis, only New York State of these 11 employers had a

total benefit system which in our judgment is more liberal than that of

the Federal Government. Aetna, the city of Baltimore, DuPont, General Motors, IBM and Michigan have total benefits systems which are

comparable to the Federal Government, and the State of Georgia,

Pacific Gas & Electric, United States Steel and Wisconsin, have a total

benefit system which is less.

We point out that present law has also been enacted to assure pay

comparabilty.

Our second reason for recommending that we not make any change

in the deductions or contributions at this point is that there is the

prospect, pointed out by the Board of Actuaries, that the trend toward

earlier retirement may raise the costs. We have shown the average age

of voluntary retirees, and we have shown it decreasing from an average of 64.3 in 1963 to 62.0 in 1972. The Board of Actuaries recommends

that we watch this and study it. They made the point that before the

next valuation, which by law must come by June 30, 1975, we should

have some more experience and some more insight into what, if anything, the early retirements are doing to normal costs.

It is a truism that early retirements cost more money, and in light

of these two things, one, the comparability of our benefits, and, two,
13

the early retirement trend, we suggest that any change in the contribution rate at this point would be premature.

On page 13, we show the rising Government costs, and let me say

that this is rising Government costs in the sense of those costs being

recognized through the appropriations procedure. This is not an attempt to estimate costs on an accrual basis, but of the amounts of dollars that the Government is actually putting into the retirement fund,

which is one measure of the current costs. We see that in 1972 the total

Government cost is $3.2 billion, and assuming we have no changes in

the work force, in pay, in benefits, or in the cost of living after 1972,

the total Government cost would be at $5.4 billion by 1977, and at $6.6

billion by 1982.

The increase in the amount here is largely due to the increasing percentage of interest on unfunded liability which is being transferred

to the fund by the Secretary of the Treasury each year.

We show in another column, which is not intended to be a prediction, but an arithmetic projection that if the work force, pay, benefits,

and the cost of living change each year at the same rate they actually

changed in 1972, then by 1977, the Government costs will be $7.4 billion, and will be at $11.9 billion by 1982.

Next is an item which is of concern to this committee, the Postal

Service liability. The question is, should that be paid from postal

revenues, or from general revenues?

There was some question about the interpretation of the Postal

Service Act. It is my understanding that the Comptroller General is

of the opinion that the language of the Postal Service Act does not

require the payment of these amounts from postal funds. The Civil

Service Commission in its regular appropriation procedure has asked

for, but has not received, the 30-year appropriations needed to cover

the retirement liability created by five separate postal pay raises. The

loss to the fund for 1972-73 exceeds $179 million.

In the 1974 budget there is a request for a little over $284 million

from postal funds. That is actually presented in the President's budget

as a request for "$874,572,000, of which $284,667,000 shall be derived

from Postal Service funds."

I can't emphasize too strongly the point that if we are to follow the

financing setup of Public Law 91-93, the retirement fund needs this

money.

The Civil Service Commission believes that in the context of the

Postal Service becoming self-supporting, the retirement liability

created by Postal Service pay increases should be recognized as a

Postal Service cost.

In conclusion, the Civil Service Commission is of the opinion that

the financing principles of Public Law 91-93 are sound, are working

well, and that they should not be changed at this time. For my final

point, Chairman Hampton asked me to emphasize that the Civil Service Commission urges the Congress to appraise proposed retirement

liberalizations in the light of the total benefit package. The Commission urges Congress to weigh their effect upon employees, upon the

employer, and on the taxpayer.

The Commission urges the Congress to require proponents of

costly liberalization to demonstrate that it is needed, that it is justified, and that it will serve the public interest.

I will be glad to answer any questions.

[The retirement financing booklet follows:]

94-684 0 - 73 - 2
RETIREMENT FINANCING 

UNDER PL 91-93 

A GOOD LAW, WORKING WELL 

U.S. CIVIL SERVICE COMMISSION

BUREAU OF RETIREMENT, INSURANCE,

AND OCCUPATIONAL

MARCH 1973

: "-
PROBLEM BEFORE PL 91-93 

• 1969-Fund outgo growing faster than income

• 1975-Fund outgo to exceed income

• 1987-Fund balance to hit ZERO

k After Delay in annual budget would V 1987

STOP BENEFIT PAYMENTS 

until new funds authorized
WHAT CAUSED THIS PROBLEM?

1. Inadequate Government payments

2. Underfinanced liberalizations

3. Loss of interest on Unfunded Liability

($2 billion annually in 1969)

Interest loss was making financing WORSE

each year: with no fund, there would be

NO INTEREST— Interest is needed to help

meet the cost of future benefits

Unfunded Liability: Excess of liabilities over assets
PL 91-93, ENACTED 10-20-69, SOLVED PROBLEM

O Raised employee-agency contributions to 7% each

—to cover, 50-50, full normal cost (then 13.98%)

O Authorized Government to pay, in equal installments

over 30 years, unfunded liability due to NEW

laws (e.g. new benefits, new pay raises, new groups)

O Authorized Government to pay interest on unfunded liability

due to laws already passed (i.e. existing unfunded

liability, cost of living increases) by transfers from the

Treasury: 10% 1st year, 20% next, etc., to 100% in 1980 and after

Normal Cost: Amount required to be paid, and invested at

interest, during active service to cover benefits in retirement
Employee

Contributions

(TA of pay)

Treasury Transfers

(gradually rising

10-yr. schedule)

Interest on

Invested Funds

(Now 5.7%)

1

Civil

Service

Retirement

Fund

If

Agency

Contributions

(7% of payroll)

H

Appropriations

for

30-yr. amortization

BENEFIT

PAYMENTS
RESULT: STRONGER FINANCING 

• Loss of interest slowed, will STOP by 1980

• Outgo will never exceed income

• Balance will never hit Zero

and

PROMPT, FULL BENEFIT PAYMENT IS ASSURED 
PICTURE TO DAY 

Fund Balance (6-30-72)

Annual Receipts (FY 1972)

from billions 

Employee Contributions $2.1

Agency Contributions 2.1

Treasury Transfers .6

30-yr. Appropriations .5

Interest on fund 1.5

Annual Disbursements (FY 1972)

Unfunded Liability (6-30-72)

BILLIONS

$27.7

6.8

3.6

63.5

Consider These Items som sm.+
1789-V6 0 - EL - E ITEM

1. Cost-of-Living Increases

• Pre-PL 91-93 laws authorized future annuity increases

5.6% on 8-1-70

4.5% on 6-1-71

4.8% on 7-1-72

Added $4.5 billion to

unfunded liability, AND

• Will add billions more in next 10 years

• Treasury transfers of interest on unfunded liability

will fully finance (without funding) all C-O-L increases—

as intended by PL 91-93

•
BUT 

• Board of Actuaries recommends funding by —applying the current .9% excess of contributions

over normal cost to the unfunded liability,

or —including these costs in those to be funded by

30-yr. payments

CSC recommends NO CHANGE:

dollars needed to pay for C-O-L increases are

provided by present financing

t
ITEM

2. Normal Cost 

. Now 13.10%—below the 14% being collected

• Drop from 1969 due to higher interest rate on Fund

investments

• Rise from 1970 (12.95%) due to benefit increases for

Air Traffic Controllers and Firefighters

• Board of Actuaries recommends against raising

benefits or reducing contribution rates

CSC agrees neither should be done now

WHY? millimmil
a) Our benefit package is already comparable:

BENEFIT

The benefits of these employers are

MORE LIBERAL

than ours

COMPARABLE

with ours

LESS LIBERAL

than ours

•

RETIREMENT

Aetna, Baltimore,

IBM, New York

State

du Pont, Michigan,

PG&E, USSteel

General Motors,

Georgia, Wisconsin

HOLIDAYS,

SICK LEAVE,

VACATIONS

New York State Baltimore

Aetna, du Pont, GM,

Georgia, IBM, Mich.,

PG&E, USSteel, Wisconsin

HEALTH

BENEFITS

General Motors,

IBM

Michigan, New

York State,

Wisconsin

Aetna, Baltimore,

du Pont, Georgia,

PG&E, USSteel

LIFE

INSURANCE

Aetna, du Pont,

General Motors

Michigan, USSteel

Baltimore, Georgia,

IBM, New York State,

PG&E, Wisconsin

OVERALL

New York State

Aetna, Baltimore,

du Pont, GM,

IBM, Michigan

Georgia, PG&E,

USSteel, Wisconsin PACKAGE

Present law also assures pay comparability
b) Early retirements may raise costs 

• Average age of voluntary retirees:

64.3 in 1963

64.0 in 1966

62.9 in 1969

62.7 in 1970

62.7 in 1971

62.0 in 1972

? in 1973 and after

• More early retirements COST MORE MONEY

In light of (a) and (b), change in benefits or contribution rates

at this time would be premature

1\D

:_)1
ITEM

3. Rising Government Costs

IN BILLIONS OF DOLLARS

Actual

FY 1972

Costs

-AIf NO CHANGE in work

force, pay, benefits

or C-O-L after 1972

-BIf work force, pay,

benefits, and C-O-L

change at 1972 rate

FY 1977 FY 1982 FY 1977 FY 1982

1. Treasury Transfers $0.6 $2.6 $3.8 $2.9 $5.2

2. 30-yr. Appropriations 0.5 0.7 0.7 1.8 3.2

3. Agency Contributions 2.1 2.1 2.1 2.7 3.5

4. Total Gov't Cost 3.2 5.4 6.6 7.4 11.9
ITEM 

4. Postal Service Retirement Liability

Should liability due to Postal Service pay

raises be paid from Postal or General revenues?

• Postal Service Act held not to require

payment from Postal funds

• CSC requested, but HAS NOT RECEIVED,

30-yr. appropriations to cover added costs

due to 5 separate Postal pay raises

• 1972-1973 loss to fund exceeds $179 million 

1974 budget requests $284 million—

from Postal funds
THE RETIREMENT FUND NEEDS THIS MONEY

• CSC believes that liability for

Postal Service pay increases

should be recognized as a

Postal Service cost
CONCLUSION:

The financing principles of PL 91-93

• are sound

• are working well

• should NOT BE CHANGED at this time
CSC URGES CONGRESS TO 

Appraise retirement liberalizations in light of

the TOTAL BENEFIT PACKAGE

Weigh their effect on

• employees

• the employer

• taxpayers

Require proponents of a costly liberalization

to demonstrate that it —is needed —is justified —will serve the PUBLIC INTEREST
31

Mr. Dur,sia. Thank you, Mr. Ruddock.

On page 12, you cite the trend downward in average age of voluntary retirees. Do you expect it to continue downward, and if so, what

will be the effect on the fund? For example, what will be the effect of

enactment of the pending rule-of-80 bill for voluntary retirement after

30 years, or similar measures? Chairman Hampton's letter mentions a

study underway. Is this available to the committee?

Mr. RIMDOCK. It will be, just as soon as we have any additional information. We have the trend through 1972. For fiscal year 1973, which

will end June 30th, we should have the information sometime this fall.

The Board of Actuaries suggests that the trend be observed until the

next valuation, which is not later than June 30, 1975. It must be by

then.

Whether this trend will continue, I do not know. We are aware that

the rule of 80, if enacted, would make some people eligible to retire

earlier than they can currently retire.

As to what effect it would have on the trend, very frankly, I cannot

predict it at this point.

Mr. DIMSKI. On page 14, you discuss the postal retirement liability.

Do you consider this a breach of the intent of Public Law 91-93?

On the same page, you state that the Postal Reform Act is held not

to require payments from postal funds. Do you know the basis of this

holding?

Mr. RODDOCK. It is my understanding that it was an opinion, or a

decision, by the Comptroller General given to Mr. Steed, the chairman

of the Appropriations Subcommittee that handles the Commission's

ap nropriation.

This point first came up before his subcommittee when we asked for

supplemental appropriations for the fiscal year 1972 to cover the 30-

year amortization payments on liability created by postal pay raises.

At that point, Mr. Steed believed that the Postal Service Act might

require those funds to come from postal sources. The committee deleted

the postal item from our 1973 budget as well, doing so without prejudice until it could be resolved as to whether the Postal Service Act did

indeed require the Postal Service to produce that money.

It is my understanding that the Comptroller General says that that

act does not specifically require the payment by the Postal Service.

Mr. DULSKI. I reserve the balance of my time.

Mr. DANIELS. Mr. Chairman, on that last point. It is the opinion of

the Civil Service Commission, though, that the Postal Service should

absorb this liability that is being created in the fund?

Mr. RITDDOCK. Yes, sir. That is the policy position. If the Postal

Service is to be self-sufficient, the Civil Service Commission believes

this is a cost that should be recognized by the Postal Service.

Mr. DANIELS. If I heard you correctly, the administration's budget

in 1974 includes a sum of about $285 million to cover this liability?

Mr. RITDDOCK. Yes, sir, $284,667,000.

Mr. DANIELS. So the administration shares the same view, then, that

the Postal Service should pick up this liability which is being created

in the fund by virtue of the pay increases that have been given out over

the past year or two ?

Mr. RUDDOCK. Yes, sir. That is the position of the President in his

budget.
32

Mr. DANIELS. You are aware that this committee has under consid- eration legislation to do exactly that?

Mr. RUDDOCK. Yes, and within the last 10 days the Civil Service Commission has sent up a proposal by the Commission which is similar

to the pending bill which I believe is H.R. 29.

Mr. DULSKI. Mr. Mills?

Mr. MILLS. Thank you, Mr. Chairman. I want to congratulate Mr.

Ruddock on an excellent statement. I think it is easily understood.

Mr. RUDDOCK. Thank you, sir.

Mr. MILLS. I wanted to inquire if the Civil Service Commission has

ever made a study on the number of retired Federal employees that

are still on the Federal payroll for active work?

In other words, they retire and then they come back again.

Mr. RUDDOCK. Come back as reemployed annuitants?

Mr. MILLS. Yes.

Mr. RUDDOCK. I do not remember the figure on that. The Commission does have information on it. A few years ago the Comptroller

General looked into it and recommended that the amounts deducted

from the pay of a reemployed annuitant be transferred to the retirement fund, and there was an estimate—I am working from memory

which is less than perfect.

My recollection is that it was around 13,000 or 14,000 in total at that

time, but I will verify that and correct it for the record.

[The following information was furnished.]

The figure of 13,000 or 14,000 reemployed annuitants should be corrected to the

number 3,000. This represents our current estimate, as the employment statistics

routinely received by the Commission do not include specifics on reemployed

annuitants. It also represents an update of an earlier estimate of 2,700 used in a

Comptroller General's report in May 1968 (Report No. B-130150).

Mr. HOGAN. Does that include military?

Mr. RUDDOCK. No, sir. We are talking about civilian employees who

have retired, and come back as reemployed annuitants in civilian

positions.

Mr. MILLS. I should think we should include military as well. If you

could get it for the committee, I think it would be interesting, Mr.

Chairman. You just look at the comparisons you have made with that,

and Baltimore and IBM, Du Pont and General Motors, and I

wonder if any of these have an arrangement whereby an employee can

retire and then come back to work for them and draw their annuity

and also an active salary.

Mr. RUDDOCK. I will see if I can get an answer to that question, also.

[The following information was furnished:]

A question was asked concerning whether private employers permit employees

to retire, and then return to work drawing both an annuity and a salary. Our

information indicates that private employers generally do not reemploy annuitants. It is customary in the private sector to set mandatory retirement age at the

same point (usually age 65) as normal retirement. However, at the option of the

employer, the period of employment may be extended by deferring mandatory

retirement. By this procedure, employees with essential skills can be retained

by the employer without having them retire and return later. For this reason

most private retirement plans are silent on the subject of reemployed annuitants.

The plans which do mention it (for example, U.S. Steel and Du Pont) generally

indicate that full time reemployment will result in suspension of pension benefits.

We know of only one employer—General Motors—which permits continuation of

basic retirement benefits after reemployment.
33

Mr. MILLS. On the last page you say we should weigh the effect upon

the employees, employers and the taxpayers and determine if it is

needed, justified and serves the public interest.

I think that is a question that really bears looking into.

Mr. RUDDOCK. Is your question on the military; does this have to

do with the retired military personnel who come into civilian positions

and who ultimately retire under the civilian retirement system?

Mr. Mims. No. I would like to know very much how many retired

military are presently working for the Government on active jobs.

Mr. RUDDOCK. I will get that for you.

Mr. Mims. Thank you.

Mr. DUI/SKI. Mr. Daniels?

Mr. DANIELS. Mr. Ruddock, may I express my thanks to you for

your kind, complimentary remarks with respect to enactment of

Public Law 91-93? I appreciate it very much.

As I recall, Mr. Ruddock, in considering the financing legislation of

the 91st Congress, statistics showed that from the retirement systems

inception until about 1968, employees had contributed about $2 'billion

more than the Government.

How do the total contributions made by the Government compare

with the total of employee contributions through fiscal year 1972?

Mr. RUDDOCK. The Government contributions have exceeded employee contributions. Through fiscal year 1972, the total of employee

contributions by salary deduction was $24,055,703,613, and through

1972, the Government through a combination of agency contributions

and appropriations had paid in $24,391,898,797. The Government has

now paid in more than the employees.

Mr. DANIELS. The Government has now paid in more?

Mr. RUDDOCK. Yes, sir.

Mr. DANIELS. That came about by Treasury transfers and direct appropriations made during the intervening years from 1970 to 1972?

Mr. RUDDOCK. Yes.

Mr. DANIELS. Treasury transfers on interest will soon equal 30 percent of the full interest. If, as indicated on page 7 of your chart,

the fiscal year 1972 figure of $0.6 billion was equal to 20 percent of the

interest thereon, is it correct to assume that the amount to be transferred for fiscal year 1973 will approach $1 billion?

Mr. RureocK. Yes, it will. I have a figure. The transfer for 1973 will

be $1,001,411,000. So it is just a little over $1 billion.

Mr. DANIELS. 'Under Public Law 91-93, we commenced with 10-percent interest contributions, is that correct, in the year 1971?

Mr. RUDDOCK. Yes.

Mr. DANIELS. Each year we pick up an additional 10 percent, so by

1980, we will be receiving 100-percent interest on the unfunded

Mr. RUDDOCK. Yes, and that is easy to remember, because the interest is the same as the last digit of the year with a zero added. For 1974,

it is 40 Percent, for instance.

Mr. DANIELS. As long as the Congress makes the necessary .appropriations in line with the schedule as provided for in Public Law

91-93, and so long as we pick up any increase or liberalization of the

retirement fund by the 30-year amortization payments, then you feel

that this fund is financially sound, and there is no danger of again
34

encountering what was facing us in 1969 that is, the outpay in several

years would exceed the income, and in 17 or 18 years the fund would

have gone bankrupt, and thereafter it would have been necessary for

the Government to make the necessary annual appropriations.

Mr. RuppocK. That cannot happen if the financing method of 91-93

is carried out.

Mr. DANIELS. According to the figures on page 7, it is estimated

that an amount of $91 billion would be needed in the retirement fund

to be fully funded, but the system is now only funded to one-third.

Is it necessary to fund it in full to the amount of $91 billion?

Mr. RunDocK. In my opinion, it is not. If the Government were going to go out of business, and if we were going to discontinue the

retirement system and attempt to liquidate all liability, then we should

have the entire $91 billion. As long as it is a going concern, and part of

government, and a system which is going to continue, the fund balance

of $27 billion as indicated on page 7 for June 30, 1972, is quite adequate

to assure prompt payment of any benefits.

The income that is coming in from these other sources, primarily

the transfer of interest on the $63 billion which is not funded, will provide all of the money to pay the benefits as they are due.

Mr. DANIELS. How does financing of private funds such as those concerns which you have mentioned on page 11 compare to the financing

of this? In other words, are Aetna, Baltimore and IBM funded at

100 percent.

Mr. RIIDDOCK. They are either funded at 100 percent or they should

be so striving. I will make a distinction between the private corporations and those which are Governmental entities. The private corporations either should be fully funded or should be striving to have in a

fund invested and earning interest, an amount equal to their liabilities.

The governmental entities which have the power of taxation do not

have to be fully funded so long as they recognize all costs that are

accruing and make provision to finance them, which the Federal Government has done in this system.

Mr. DANIELS. It is noted on page 5 that the current interest yield

is 5.7 percent. How does that interest rate compare with the other

systems, both in the public and private sectors?

Mr. RIIDDOCK. Mr. Daniels, I will have to try to get you an answer

for that. All of the funds of the civil service retirement system are

invested in interest-bearing securities of the United States. Most of

that is in special issues, and special issues have to be at the average rate

of then outstanding long-term securities. The average return on the

entire retirement fund is now running 5.7. Some investments are being

made currently, and some investments were made in February, I believe, at 6% percent.

Now, to what extent the other systems are making investments and

how they compare with that, I don't have an answer at the moment. I

will see if I can get one for you.

[The information follows:]

A recent survey for the period 1968 to 1972 of fixed income funds invested by

certain major banks for private pension plans showed an average annual rate

of return ranging from 3.5% to 8.7%. These funds are primarily invested in

bonds. The same banks showed an average annual return of from 1.1% to 10.0%

on their common stock funds held for private pension plans.
35

Mr. DANIELS. In 1968 and 1969, the fund was only obtaining an interest rate of about 3 or 31/2 percent, and that has considerably appreciated at the present time.

Mr. RTIDDOCK. Yes, very much so.

Mr. DANIELS. As you just indicated, the increased interest on the

funds in the retirement system has resulted in the normal cost being

reduced to 13.1, is that correct?

Mr. RTIDDOCK. Yes, sir.

Mr. DTILSKI. Mr. Hinshaw?

Mr. HINSHAW. Yes.

On page 8, you show the cost-of-living increases and I am wondering if you have made a survey of the larger State and local government

retirement systems as to how many of them have cost-of-living benefits

cranked into their retirement system?

Mr. RUDDOCK. I can't give you that in numbers. I can supply something on that for the record.

[The information follows:]

Our review of retirement plan provisions of a dozen state and city governments,

as well as publications reporting trends in public retirement systems, indicates

many public jurisdictions make some type of periodic cost-of-living adjustment.

Moreover, the trend is clearly in the direction of an increasing number of public

employers which are recognizing a responsibility to help maintain the standard

of living of their retirees. (The same trend is evident in the private sector as

well.)

The methods used in making cost-of-living adjustments vary considerably.

Public employers commonly impose some limitation on the amount of increase

permitted (such as a percentage limitation) or on the conditions under which an

increase will be permitted (for example, subject to legislative approval) rather

than relating the increase entirely to the Consumer Price Index. Some jurisdictions ani)ly a local rather than a national CPI to determine the need for adjustments, and some make periodic reviews to determine the need for adjustments

at intervals longer than one year.

Mr. RITDDOCK. Let me give you my impressions:

Some systems have automatic adjustment features. It is common in

those features to put a limit on the annual increase that can result

from that policy. I do happen to remember a provision which Aetna

uses, which increases the 

Mr. lingsHAw. I am speaking only about State and local

governments.

Mr. RtropocK. I don't remember any of the State or local, but I will

get something for you on that point.

Mr. HINSHAW. Will you make a study, and have your cutoff to those

jurisdictions that have 2,000 or more employees?

Mr. RUDDOCK. Sir, we don't have that kind of information readily

available across the board.

Mr. HINSHAW. I am not suggesting that it be readily available. I am

suggesting that perhaps a questionnaire be sent to the States to find

out which jurisdictions of local government have 2,000 or more local

employees, and thereby that you could get the information for us by

questionnaire. I am wondering if we are in fact making the Federal

civil service provisions more lenient than any other unit of government. So if you could develop that type of information by questionnaire, I think the committee could find it useful.

Mr. RunDocs. All right, sir. I will have to take that up with my

superiors. You recognize you have suggested an item which would
36

incur substantial cost to obtain that information on an across-theboard basis. I can get information on a representative sample at

practically no cost.

Mr. HINSHAW. Then I suggest that if you will prepare the questionnaire and give me the necessary jurisdiction information I will undertake to send it out so that it won't cost your agency too much. I further

submit that a questionnaire to State and local governments really

would not entail much cost when we are talking about your annual

budget for other than retirement of $200 million. I would suggest the

questionnaire cost would be minimal.

Mr. RIIDDOCK. Yes, sir.

[The response follows:]

A request was made to develop a questionnaire which could be sent to public

jurisdictions employing 2,000 or more people, inquiring as to cost-of-living adjustment provisions in their retirement systems. If the Subcommittee wishes

to pursue this inquiry, it would involve literally hundreds of jurisdictions which

have 2,000 or more employees. A listing of such public employers appears in

these two publications:

U.S. Bureau of the Census, Census of Governments, 1967. Vol. 3, No. 1, Employment of Major Local Governments. U.S. Government Printing Office,

Wash.. D.C. 1969.

U.S. Bureau of the Census, Statistical Abstract of the United States: 1972.

(93rd edition) Washington, D.C. 1972. (Page 431, "No. 676. Government Employment and Payrolls-States: 1971.")

A number of these jurisdictions have more than one retirement plan (e.g.,

separate plans for teachers, police and firemen, blue collar employees, and white

collar employees). We suggest that questions similar to the following be used:

1. Do you have any retirement plans which contain provisions for cost-ofliving adjustments to retirement benefits?

2. If yes, please list separately each plan and the groups of employees (e.g.,

teachers, policemen) covered by that plan where: (a) There is a cost-of-living

adjustment provision; and (b) there is not such a provision.

3. For each plan listed above, indicate the approximate number of employees

covered by the plan.

4. For each plan which has a provision for cost-of-living adjustments, please

provide either a copy of the plan if it has been published, or an excerpt of the

specific cost-of-living adjustment provision.

Mr. HINSHAW. I would like to pursue an earlier question. Those employees when they retired—I ask if you would compile for the committee, by $2,000 levels a list of those employees and their salaries

before they retired, which department they worked for at the time

of retirement, what their present annuity amount is, either on a

monthly or an annual basis, what their present salary is, and which

department of Government they are now working for, separate between civilian employees and former military employees, with the

same type of information for each category.

Mr. Rumocx. I will have to take that one back with me, too.

Mr. HINSHAW. I was under the impression that you had made some

kind of a study like this, also.

Mr. RupPocK. That was made by the Comptroller General some

years ago.

Mr. HINSHAW. Would you take my request back, and will you advise

the committee as rapidly as possible, which I would think would be

some time within a month, as to what your intentions are in pursuing

these two lines of inquiry?

Mr. RIIDDOCK. Yes, sir: I certainly will.
37

Mr. HINSHAW. Can you tell me whether or not one of the reasons for

encouraging early retirement is to facilitate turnover of older employees so that there will be jobs available for younger employees?

Mr. RUDDOCK. Yes, I am sure that is a factor. That is particularly

pertinent when an agency is faced with a reduction in force situation

where the jobs of some of the younger people can be saved to the extent

that older people retire.

Mr. HINSHAW. Then would it not be a desirable feature of the retirement system to provide that those who take early retirement cannot work for the Federal Government after early retirement?

Mr. RUDDOCK. The present law places no bar to the reemployment of

an annuitant. This provision allows the Federal Government to acquire

the services of any person where the Federal Government thinks it

needs the services.

Mr. HINSHAW. I recognize that. But if the reason for early retirement is to make jobs available for younger employees, is not that provision self-defeating if we turn right around and hire that same employee in the same agency or even in a different agency?

Mr. RUDDOCK. I think it is. I think most people reemployed after

retirement are reemployed either for a relatively short period, or on

an intermittent basis, rather than reemployment to be a full-time

permanent employee.

Mr. HINSHAW. Will you add to the former information which I have

requested how long the annuitants have been employed in their reemployed position?

Mr. RUDDOCK. Yes, sir.

[The response is as follows:]

A number of specific data items were requested concerning reemployed annuitants. We find that our current data files do not contain information on reemployed annuitants. To obtain the data requested we would need to make a

specific inquiry of Federal agencies and ask them to report it to us. A similar

survey and compilation of data on retired military personnel employed in the

civilian service took about a year to complete. While there are fewer reemployed

annuitants than retired military in civilian jobs, a survey in the detail requested

would be a substantial undertaking.

Before I proceed on this request, I would appreciate further consideration by

the Subcommittee on whether you would like us to obtain this data. Perhaps the

data already supplied in this letter may substantially meet your needs. If it does

not, then I will refer your request for additional information to my superiors

because I will need higher level approval for a commitment of the required

resources.

Mr. HINSHAW. I will preface this with a statement that last week

on the floor Congresswoman Martha Griffiths from Michigan recently

presented to the Members on the House floor a very comprehensive

study, historic in nature, which was the first of its kind in the history

of Congress. The study shows that 60 percent of the households

sampled were receiving benefits from one or more social welfare programs from the Federal Government, and that 17 percent of the households surveyed received benefits from five or more programs.

Have you made any surveys, or do you have any information as to

whether or not retired Federal employees are receiving some kind of

social benefit, such as food stamps, aid for dependent children, anything other than their retirement check, or their social security check?

Mr. RIMDOCII. We currently have underway a study which is to inquire into the other income---

AMMIEMP
38

Mr. HINSHAW. Other income or benefits.

Mr. RUDDOCK [continuing]. Of a selected group of our annuitants.

That does include a question on social benefits.

Mr. HINSHAW. Do you include the noncash benefits in your questionnaire, such as food stamps?

Mr. RUDDOCK. I believe the question is broad enough to include the

food sta,mps.

Mr. HINSHAW. Will you send to the members of the committee what

your current survey questionnaires are so that I can see whether it is

broad enough to include the noncash benefits.

Mr. RUDDOCK. Yes, sir.

[The response follows:]

A question was asked concerning whether our current annuitant income survey

would elicit information on receipt of food stamps, and a copy of the questionnaire was requested. During my testimony on April 3, I gave my impression that

a questionnaire item on public assistance benefits was broad enough to gain information on food stamps. Upon reviewing the questionnaire and the instructions we sent to aid annuitants in completing it, I must reconsider my earlier

impression. Clearly, the, item would not pick up information on the amount of

food stamps received, nor would it indicate those receiving or not receiving food

stamps.

Attached for the record is a copy of the questionnaire and instruction sheet.

Also attached is a copy of a letter we sent to you and to the Honorable H. R.

Gross, the Honorable Gale McGee, and the Honorable Hiram Fong giving advance notification of our plans to use the questionnaire. We are attaching also a

copy of your reply, which the Subcommittee may wish to include in the record.

JANUARY 2, 1973.

Hon. THADDEUS J. DULSKI,

Chairman, Committee on Post Office and Civil Service,

House of Representatives, Washington, D.C.

DEAR MR. CHAIRMAN: This is to give you advance notice of an annuitant income survey we plan to conduct in January, similar to surveys we made previously in 1964 and 1958. A report on results of the 1964 survey was published as a

Committee Print by the House Committee on Post Office and Civil Service on

March 19, 1965.

A brief questionnaire card will be mailed to approximately 25,000 annuitants

beginning about January 16, 1973. Attached is a copy of the survey form and the

transmittal letter which will be sent out together. The letter explains the purpose

of the survey and gives instructions on how to complete the questionnaire.

We believe it is timely to make this survey now, because data from the 1964

survey are out of date. and because of the many changes in the various retirement, pension, Social Security, and other laws which affect the income of retired

people. We expect the current survey will produce data useful to Members of

Congress, to officials in the Office of Management and Budget, and to us in the

Commission in considering proposals for changes in the Civil Service retirement

laws.

Upon completion of the survey, and analysis of the data obtained, we will report to you the results.

Sincerely yours,

ROBERT E. HAMPTON,, Chairman.

17.5. HOUSE OF REPRESENTATIVES,

COMMITTEE ON POST OFFICE AND CIVIL SERVICE.

207 CANNON HOUSE OFFICE BUILDING,

Washington, D.C., January 10, 1973.

Hon. ROBERT E. HAMPTON,

Chairman, United States Civil Service Commission,

Washington, D.C.

DEAR MR. CHAIRMAN: This will acknowledge the receipt of your letter of

January 2, 1973, informing me of the annuitant income survey the Commission

will undertake shortly.
39

The results of such a survey will, I am sure, be of invaluable assistance to this

Committee in the consideration of legislative proposals affecting civil service

retirees and survivor-annuitants.

I will be very much interested in the results of your findings and any recommendations you deem appropriate thereto.

With kindest regards,

Sincerely,

THADDEUS J. DULSKI, Chairman.

U.S. CIVIL SERVICE COMMISSION,

BUREAU OF RETIREMENT, INSURANCE, AND OCCUPATIONAL HEALTH,

Washington, D.C., January 16, 1973.

DEAR ANNUITANT: The Civil Service Commission is making a study to find

out more about the current income of retired employees and survivors of deceased employees. The information obtained will help us, and help Congress,

reach better decisions on a number of retirement and related adequacy of income questions that are being considered concerning our annuitants and older

citizens generally.

You are one of some 25,000 persons being asked to participate, based on a

statistical sample whose design is explained in a note at the end of this letter. We

shall appreciate it very much if you will answer, as best you possibly can, the

questions asked on the enclosed card. Please return the completed card as soon

as possible, but no later than February 16, 1973, using the enclosed envelope

which requires no postage.

We need some identification on your questionnaire in order to relate replies to

information already in our statistical records. We assure you, however, that

your individual answers will be kept in confidence and will not be published or

disclosed to any other individual or Government agency.

The following information may help you in filling out the form:

Part A: Complete the following Items.

1. Show your civil service retirement claim number, including the prefix CSA

or CSF.

2. Check the box to indicate how many members there are in your family

living in your household. (Include yourself and all family members who

live together with you.)

3. Check the box which indicates the total 1972 income of you and your family.

(Include your civil service annuity and any other income you had, as

well as all income received by the members of your family who live together with you. This refers to the same family members you identified

in the preceding item.)

4. Check the yes or no block to show if you have income in addition to your

civil service annuity. If the answer is no, do not go on to Part B. Just

sign and return the card to us.

Part B: Report all 'amounts in even dollars. Do not report cents.

Question I: Report your total benefits from Social Security in 1972, and keep

in mind that benefits were raised by law beginning in October, 1972. For example,

if your monthly check was $71 during early 1972, you would multiply 9 times $71

or $639 for benefits through September. If your monthly check was $85 during

the last part of 1972, you would multiply 3 times $85 or $255 for benefits from

October through December. You should then add $639 to $255, for a total of $894,

which you would report as your income for the year. Report the total amount

of your check only; do not report the amount of any separate check your husband

or wife may receive because of his or her past employment.

Questions 2 and 3: For benefits paid on a monthly basis, multiply your monthly

check by the number of months you received checks in 1972, and report this

total.

Question 4: Report any other work-related pension or annuity income not covered in the preceding items. (This includes, for example, Railroad Retirement

benefits, pensions from State or local government retirement plans or from

private employer retirement plans. Do not report your civil service annuity.)

Question 5: Report your gross income from wages or your net Income from

self-employment in 1972. This will be the same amount that you will report for

Federal Income Tax if you file a return for 1972. (If you are a disability annuitant under age 60, your answer to this question will tell us how much you

earned, and you will not receive a separate Report of Income card for 1972.)
40

Question 6: If you receive public assistance payments from your State, county,

or local government, please report the total amount received for 1972. (We ask

this question so we may determine the importance of such payments to civil

service annuitants. This includes, for example, aid to families of dependent

children, old age assistance, or aid to the blind or totally disabled.)

Your participation in this survey is entirely voluntary, but we will sincerely

appreciate it if you will take a few moments to help us in this study.

Sincerely yours,

ANDREW E. RUDDOCK,

Director.

Enclosure.

NOTE: Those asked to participate in this survey include all civil service employees who retired before 1972 where: (1) their annuity is $200/month or

more and their claim number ends in the digits 54; or (2) their annuity is less

than $200/month and ther claim number ends in the digits 04, 24, 44, 64, or 84.

Also included are all adult survivors of deceased employees whose claim number

ends in the digits 08, 28, 48, 68, or 88.

?RI 41-171

Jr'. 1973

• U. S. CIVIL SERVICE COMMISSION

BUREAU Of RETIREMENT, INSUPANCE, AND OCCUPATIONAL HEALTH

WASHINGTON, O. C. 20415

OWE A pir*ve:

f46-7 2004

PART 'A: Please complete all of these items. PART B: Answer these questions coly if you personey nad

MY CIVIL ,SERVICE'RETIREMENT income in addition to your Civil Service Annuity. 

CLAIM NUMBER SOURCE OF INCOME 

A!:10UNT -

Please mcrk "X" iappropricte box: RECEIVED IN-1972

1. 'SOCIAL -SECURITY BENEFITS S

Including Yourself, how many fcmily members live in -

your-household? . 

2.. RETIREMENT PAY BASED ON $

EF; 1 E12(11 3 r--7,4 r-715 [7:3 6 El 7 or more • MILITARY SERVICE •

3. PENSION OR COMPENSATION FROM 5

. VETERANS ADMINISTRATION What was the total income of all this family during

1972? fl Under $2,000 r"--I $4,000 to $6,999

Li $2,000 to $3,999 $7,000 and over

4. OTHER WORK-RELATED PENSIONS

OR ANNUITIES

Did you personally have income in 1972 in cddition to 5. WAGES AND 'SELF-EMPLOYMENT $

EJ

your Civil Service Retirement Annuity?

YES El NO (If your answer was "yes," please 6. PUBLIC ASSISTANCE ALLOWANCES 

answer questions in Part B. If your answer was "no,!' SIQNATURE

'skip Port B, sign your name, and return cord.)

Mr. HINSHAW. When do you anticipate the survey you are conducting will be completed?

Mr. RUDDOCK. Approximately three months.

Mr. HINSHAW. Thank you very much. No further questions.

Mr. DuLsiii. Mr. Waldie ?

Mr. WALDIE. What is the purpose of the survey to determine the

income? What business is that of the Federal Government, or any

employers? The annuity isn't dependent upon their other income, is

it?

Mr. RUDDOCK. NO, it is not.

Mr. WALDIE. Why are we curious about what they have?

Mr. RUDDOCK. It has a bearing on the adequacy of the annuity. There

were a number of bills before your subcommittee last year proposing

to improve the lot of persons who were already annuitants. Twice before at the request of this committee we have conducted a similar study

to see what other income there is in order to appraise the adequacy of

those annuities.

Mr. WALDIE. We assume that is the total income of the retiree?

Mr. RUDDOCK. No. We do know that at the time past studies were

made, approximately 40 percent of retired Federal employees were

also receiving social security, for example.

Mr. WALDIE. The only reason I ask the question, it does not seem to

me that it is any of our business whatsoever what other income an-
41

nuitants have. Their annuity they have earned from their labor, and it

is not dependent upon any other income, and it seems to me we have

no business inquiring what other income they have unless this is considered a charitable grant to them and we want to determine whether

the charity is high enough, and it is not in my understanding a charity

grant.

It is a contribution that we make to them on the basis of services

that they have rendered. An inquiry on our part as to what their other

affairs are about, seems to me to be in poor taste.

Mr. RUDDOCK. I agree with you fully and completely that the retirement benefit is not a charity, but I would submit that we do have a

question about the adequacy from a social viewpoint of some of the

benefits we are paying.

Mr. WALDIE. I don't think there is any question. It has nothing to do

with what other income they have. We are not paying some of our annuitants enough money in terms of what they have contributed to this

Government, and it has nothing to do with the amount of income they

have from other sources. It just seems to me it is a fruitless inquiry,

that it would be intruding upon personal affairs of individuals.

The survey would in my view show individuals having different

situations and we would not have anything constructive that would be

derived from such an inquiry except the fact that we would be putting

pressure upon our annuitants to cooperate with us in an inquiry on the

part of the Government that is unnecessary and an invasion of their

privacy.

That is a personal opinion.

Mr. HINSHAW. Would the gentleman yield for a moment on that

point?

Mr. WALDIE. Yes, I will.

Mr. HINSHAW. I would agree fully with the gentleman if the inquiry were to be about income other than benefits or income received

from the Federal Government. If they had outside dividend income,

or if they have a business income of some kind completely unrelated

to the Federal Government, then I would agree, but if they are receiving benefits from the Federal Government other than their retirement, it might indicate that not only are our retirement benefits perhaps too low in some areas, but in fact that we do not have as good an

administration of some of the other social programs as we might have,

or perhaps should have.

Mr. WALDIE. My view is that the inquiry made by Mrs. Griffith was

proper and right, and that inquiry, I suppose, would pick up annuitants, but it does not seem to me we as the employer of employees have

any right to inquire as to where their other income is derived or how

much it is.

If that information is found upon inquiry to be welfare sources, it

seems to me to be less objectionable. It seems to me that an employer

pays an annuitant on the basis of services that are rendered, and the

adequacy or the inadequacy of the annuity is without recourse to what

other income they have.

But I want to get on to another question. Ever since the 1969 change,

if I understand these figures, and I may not, the employees have been

contributing in excess of the cost of the plan. That is correct, is it not?
42

Mr. RD:0(3ml. Yes. We can say that at least on June 30, 1970, when

the Board of Actuaries found the cost to be 12.95.

Mr. WALDIE. And they were contributing 14, and ever since then

they have been contributing a greater amount.

Mr. RUDDOCK. They have been paying more than half the normal

cost.

Mr. WALDIE. Would you tell me in the period since 1969 how much

in excess of normal cost employees have contributed to retirement?

Mr. RUDDOCK. Half of that excess would be around $135 million, so

that we are talking about fiscal year 1971, 1972, and 1973 and it would

be three times that, or about $400 million.

Mr. WALDIE. In the future, they will continue for some time at least,

barring action on the part of Congress, to be contributing in excess of

the costs.

Mr. RUDDOCK. They will be contributing more than 50 percent of

normal costs.

Mr. WALDIE. If this were actuarily sound, they would be contributing costs, would they not, their contributions would equal costs?

Mr. RUDDOCK. The idea of the provision in Public Law 91-93 was

that normal costs would be approximately shared by employees and

the employer.

Mr. WALDIE. And the idea has not been met, because the employee

has contributed $400 million over costs, right?

Mr. RUDDOCK. At this point, I would submit that no employee is

paying too much for his retirement benefits.

Mr. WALDIE. That is, I guess, a subjective judgment, but according

to your statistics, he has contributed $400 million over the cost of the

plan.

Mr. RUDDOCK. He has contributed $400 million more than 50 percent

of the normal cost, which means that part of his contribution is going

into the other two areas of financing, primarily into the area of the

unfunded liability.

Mr. WALDIE. But the unfunded liability was not his. It was the

Federal Government's. He contributed $2 billion, if I understand,

over what the Federal Government contributed, right, in the period

of time when the unfunded liability was established.? It was not the

fault of the employee; it was the fault of the Government, was it not?

He made his contribution.

Mr. RUDDOCK. The employee has always made the contribution set

for him by acts of Congress.

Mr. WALDIE. But the Government did not?

Mr. RUDDOCK. That is right.

Now, the employee deduction rate has not always been 50 percent of

normal costs.

Mr. WALDIE. What would have been the unfunded liability at the

present time had the Federal Government contributed in the same

proportion as the employee during the years we were creating the

unfunded liability?

Mr. RUDDOCK. If the Government had matched contributions up to

1969, it would have affected the unfunded liability only to the amount

of $21/2 billion. At that time, instead of being $57 billion, it would have

been $541/2 or $55 billion.
43

Mr. WALDIE. Was it the purpose of the 1969 legislation that the

employee should contribute in excess of costs to retire that unfunded

liability?

Mr. RUDDOCK. No, sir, not on any long-term basis.

Mr. WALDIE. Was it on any short-term basis? Or has that been an

administrative determination of the Civil Service Commission that

that is what should be done with it?

Mr. RUDDOCK. It is not an administrative determination.

Mr. WALDIE. What determination has it been? Isn't that in fact

what has been done with it?

Mr. RUDDOCK. It is a determination by the Congress.

Mr. WALDIE. Has the Congress approved this application of excess

over cost?

Mr. RUDDOCK. No, sir; but the Congress in 1969 fixed the employee

deduction rate at 7 percent of pay, and the Congress has not

changed that, so the law requires a contribution at 7 percent. The

employee deduction goes into the retirement fund. The unfunded

liability at any time is a process of calculating assets and liabilities,

and so the unfunded liability is reduced to whatever extent employee

deductions and agency contributions exceed normal costs.

Mr. WALDIE. But the 1969 law said that the Federal Government

should pick up the unfunded liability, not the employee, right?

Mr. RUDDOCK. When the Civil Service Commission sent up a draft

of the legislation, the Civil Service Commission suggested that it be

given the discretion administratively to change employee deductions

and agency contributions when evaluations so indicated.

Congress decided that that was a prerogative which should be retained to the Congress, it is currently the prerogative of Congress, and

the Civil Service Commission cannot change the deduction rate.

Mr. WALDIE. Mr. Chairman, the reason I engage in this line of questioning is because it is my view that what we are trying to do here

is force the employees to pick up a responsibility which the legislation

slid was the Federal Government's. We have had the employees contributing each year in excess of their share of the unfunded costs. We

are now suggesting that that excess be applied to the unfunded liability, and in my view, that obligation to retire the unfunded liability is

in no part the employee's. It is the Federal Government's by law, and

this 000 million excess that has been collected over the period of years

since 1969 either ought to be returned to the employees in line of increased benefits, or else their contribution ought to be reduced to reflect

actual unfunded costs, so that they are not continually contributing

more than that which is actuarially required of them.

The fund is not in bad shape at all. The $400 million is employee

contributions which could be returned to them in increased benefits

with no disruption in the fund at all.

The only disruption would be an increase in the obligation that apparently we are trying to take off the backs of the Federal Government. The Government is the one that was assigned the responsibility

of picking up the unfunded liability, not the employee, and I get the

distinct feeling, without understanding precisely the responses to my

questions, and that. is probably because I do not know how to phrase

them, I get the distinct feeling that this $400 million is going into the
44

reduction of the unfunded liability that Mr. Daniels' bill said is the

Government's responsibility.

Am I wrong on that?

.Mr. RUDDOCK. No, you are not wrong on that, and I would agree

with you on a long-haul basis the employee should not be asked to

contribute more than 50 percent of the normal cost of the system. But

I would also submit that in the long-haul you should not adjust the

employee deduction rate once every 6 months or every year or even

every 2 years to reflect the current picture.

Mr. WALDIE. This has been almost 4 years now, and the long-haul

has shown that the employee is paying in excess of costs by $400 million. I just get the feeling that you say, "Do not increase benefits; do

not do anything to increase the cost of this fund," and that $400 million

is sitting there, and that $400 million has to be applied to unfunded

liability.

In fact, you recommend that, don't you?

Mr. RUDDOCK. No, I do not recommend it as a long-term proposition.

Mr. WALDIE. Then in the short-term. Let me ask you this: The Board

of Actuaries recommends funding by applying the current 0.9 percent

excess of contribution to the unfunded liability. Isn't that a recommendation?

Mr. RureocK. That is a recommendation by the Board of Actuaries.

Mr. WALDIE. Do you not concur with that?

Mr. RUDDOCK. No, sir.

Mr. WALDIE. Does the Commission concur with that?

Mr. RUDDOCK. No. The Commission is recommending that the deduction rate not be changed at this time. We recommend that we wait until

we get more experience with the early retirement rate to see if normal

cost is going to stay where it is.

Mr. DULSKI. The gentleman's time has expired.

Mr. WALDIE. Whether the Commission has recommended that or

not, but that is in the presentation, and it strikes me that is what they

have in mind. We ought to eliminate that.

Mr. DULSKI. I wish to apologize. Mrs. Schroeder a member of our

subcommittee is here. I did not see her come in. I would have introduced her earlier.

Mr. Hogan?

Mr. HOGAN. Mr. Chairman, I am concerned about the same thing

that Mr. Mills and Mr. Hinshaw talked about. I received a great many

complaints over the last several years about what my constituents refer

to as the buddy system in Government, where a retired military officer

gets a key job in Government and then proceeds to hire all his friends

from the military when they retire from the military service..

I am concerned about that in the general context of our civil service

regulations, but germane to our disscusion today, I am concerned about

what effect it might have on the retirement fund itself.

Let us take a hypothetical case which is really not too hypothetical.

Let us assume a man retires from the military after 25 years' service

and goes to work in the civilian branch and works 5 years. After

that 5-year period of civilian service, he is eligible for civilian retirement on the basis of his 30 years' service.
45

He retires under the civil service retirement system. There is no

contribution from the military for his 25-year portion of that. Is that

right?

Mr. RUDDOCK. There is no contribution from the military. However,

the annuity which is paid to him under the example you gave, fivesixths of that is attributable to his military service and the Secretary

of the Treasury transfers into the retirement fund on this same ascending scale of 10 or 20 percent, and by 1980 it will be 100 percent of annuity disbursements attributable to military service.

So that that is financed from general revenues rather than as a part

of the normal cost of the civil service retirement system.

Mr. HOGAN. So in your opinion this would not in any way aggravate

our unfunded liability problem, this transfer?

Mr. RUDDOCK. No, sir, it would not. Actually, when the provision

was put into the law as a part of Public Law 91-93 requiring Treasury

transfers to cover annuity disbursement attributable to military service, that had actually the effect of reducing the unfunded liability, because this made a permanent provision for meeting that disbursement

on an annual basis.

Mr. HOGAN. Very good. That is reassuring.

Mr. DULSKI. Would you yield at this point.

Mr. HOGAN. Yes.

Mr. DuLsKt. It has been my understanding that this is credited to

the Defense Department. Don't they have to put that in their budget?

Mr. RUDDOCK. No, sir, that is not a part of the Defense Department

budget. That is part of the Secretary of the Treasury's financing arrangements. That comes from general revenues.

Mr. DULSKI. Thank you.

Mr. HOGAN. Just a brief comment or question. You no doubt have

heard me say at these hearings many, many times that it is my feeling

that the Federal Government ought to be the leader rather than the

follower in providing fringe benefits. That is why your graph on page

11 is so interesting. It is obvious that in many areas of fringe benefits

the Federal Government follows and doesn't lead. What is the general

philosophical feeling of the Commission as to what the Federal Government's position ought to be? Should we play catchup football with

private industry and other State and local governments, or should we

be the leader as the biggest employer in the country?

Mr. RUDDOCK. I think the position of the Civil Service Commission

is that the Federal Government should at any time be comparable on

a total compensation basis, that we should compare favorably with

progressive private employer in terms of pay, in terms of retirement,

life insurance, health benefits, leave. We think the comparison needs

to be made on a total basis rather than to compare, for example, our

life insurance system with the very best and most expensive life insurance systems that anybody else might have, and then compare our

retirement system with another set of employers who put most of their

eggs into the retirement basket. So we think the comparison should be

made on a total compensation basis.

Mr. HOGAN. Who should establish the benchmark, the Federal Government, or someone else?

Mr. RUDDOCK. I think at times we should take the progressive step,

and I think at times someone else is going to take it first, and we will
46

be playing, if you will, catchup, but I do not think we should be consistently in a position of playing catchup. Neither do I think we should

be out .ahead of the pack providing substantially more in total compensation for Federal employees than do other employers.

Mr. HOGAN. Thank you, Mr. Ruddock, for your usual fine presentation.

Mr. RUDDOCK. Thank you.

Mr. DETSKI. Mrs. Schroeder ?

Mrs. SCHROEDER. I want to say that I agree with Representative

Waldie about the survey of employes who have retired. It does disturb me that you invade their privacy on that basis.

One of, or most of, the questions that I was going to ask has been

answered, but one of the things that really isn't so much a question

as much as it is a concern, and I suppose that I hear more about it,

being a bit younger, and that is from people who bump into this and

are upset about the early retirement and are seeing how the costs of

the program are. I think it is something we might really look at.

The military is one thing, and I think other people have talked about

it. On civilian retirement, I get complaints about being required to

retire early. Their annuity isn't adequate, and they will go into the

private job market and bid for any job they can get, and they can afford to bid lower than someone else who only have their normal salary

to live on.

Many young people are angry about this situation, and I understood

from your earlier comments that early retirement was to open up jobs

for younger people in civil service. But we are hurting younger people

in private service.

I think in the military retirement, that is especially true. The airline

pilots will always tell you about the retired military pilots.

The unions are not all that strong in my area, so it is competitive

bidding with small employers, and they have found time after time

that retired civil servants who were below 65 would come in and underbid them because of this annuity problem.

That really does disturb me, and I think there must be a way to deal

with this across the board. I think it also smacks of the indignity of

the older service employee. When you are 55 or 60, you don't know

when you will be told, "Okay, we don't need you fellows."

That is not so much a question as a comment.

I want the Commission to be aware of this, and I think it is something you should watch carefully.

Mr. RITDDOCK. Under this system, a man is not required to retire

until age 70. Most employees retire under one of the optional provisions, and where it is an optional provision, there is no option on the

part of the agency and the option is strictly with an employee. I would

appreciate having enough information to identify any employee.who

alleges that he was forced to retire under one of the optional

provisions.

Now, we do have in government, as well as other employers, situations in which it is necessary to have a reduction in force, and our

system does give annuity at quite an early age, age 50 with 20 years of

service, or 25 years of service regardless of age, to a person who is

involuntarily separated, but that is by such things as abolishment of

his agency, reduction in force.
47

Mr. DULSKI. Would the young lady yield at this point?

When the great Postmaster General of the past implied to postal

workers that they go to pasture or else, did the Civil Service Commission take any stand on this at all? You were aware of the fact that

the Postmaster General was forcing many people to retire.

Mr. RUDDOCK. He dangled the carrot, and many people took the

carrot, and he did it in such a way that their future, if they did not

take the carrot, was quite uncertain. But we were not aware of any—

I am not aware of any instance in which a postal official who could be

identified by name, twisted the arm of an individual employee. I quite

agree with Mrs. Schroeder that the overall effect of a management

indication that it prefers the retirement of older people is a form of

pressure.

Mrs. SCHROEDER. Right, and it is a very subjective thing. You can't

really 

Mr. RuppocK. It makes the older employee feel he is not wanted as

much as he used to be wanted.

Mrs. SCHROEDER. I feel sorry for the civil servant. There is always

this great suspicion that you are eating at the trough, and it doesn't

help when you say there are a few young people saying they are forced

out, and he comes and forces me out of my job. It doesn't help at all.

Finding absolute documented cases, it may be the subjective type of

pressure, but it may be something that we should be much more sensitive to.

Mr. RUDDOCK. There is a great trend toward early retirement. This

is something employees have wanted. That is their longest objective,

30-year retirement without regard to age. But most people who want

the privilege of retiring early, in my opinion, do not intend to drop

out of the labor market. They want to begin a second career, and they

want the opportunity to begin it at an age early enough that they can

make that transition from one career to another.

Mrs. SCHROEDER. I think we are going to have to be careful about

this when we have a shortage of jobs, and I don't know how we will

deal with that.

Mr. DraisKi. Anything further?

Mrs. SCHROEDER. That is all. Thank you.

Mr. DLTLSKI. Mr. Hillis?

Mr. Timms. Thank you, Mr. Chairman. I am sorry I was late. I had

to attend another committee meeting prior to coming here.

Perhaps you have covered this subject, I do not know. But one thing

I run into in my district is the feeling that there is some discrimination in the way that the Federal employee's pension is treated tax-wise,

compared with the recipient of social security. As I understand it, and

correct me if I am wrong, the Federal employee gets some sort of a

break on his annuity, in other words, the part that he has contributed.

I suppose that each month there is a fractional share of the benefit

that is returned to him that he can declare as a return of capital or it is

treated as an annuity. Am I correct?

Mr. RUDDOCK. He is entitled to receive back in annuity tax-free an

amount equal to what he paid for the annuity. Most Federal employees

do this somewhere between 1 and 2 years, and after that the

annuity is considered as income and is taxed.
•

48

Mr. Muds. In most retirement plans, a person looks at the package

he will have. Social security is very attractive in that those benefits

are tax exempt or tax free.

Has the Commission given any consideration to the possibility of

setting up.a portion of the annuity, equivalent to what that person

might receive under social security, as being tax exempt?

Mr. RUDDOCK. Yes; and one of the recommendations of the Cabinet

Committee on Federal Staff Retirement Systems in the late 1960s was

that the tax treatment of retired Federal employees be equated with

the tax treatment of people receiving social security or railroad retirement benefits, which also are not subject to tax.

The Commission strongly feels that should be done. We are not tax

experts in the Commission. We defer to the Treasury Department as

to how that should be done, but we in the Commission feel Federal employees should be treated equally. That was the Cabinet Committee

on Federal Staff Retirement Systems.

The retired Federal employee, and of course this is not a provision

limited to him, but under certain circumstances, he is entitled to a,

retirement income credit which is, if I remember correctly, the minimum tax rate applied to the first $1,524 of retirement income. It is a

rather complicated and not too easily understood provision, and it

does not truly equate the taxation of the retired Federal employee with

that of the person receiving a social security benefit.

Mr. HILLIs. Those are all the questions I have.

Mr. DULSKI. I yield my 3 minutes to Mr. Waldie.

Mr. WALDIE. I have nothing to pursue, Mr. Chairman.

Mr. DULSKI. Mr. Daniels?

Mr. DANIELS. Could you define for us the definition of "normal

costs" as distinguished from the unfunded liability?

Mr. RUDDOCK. Yes. Normal cost is the percentage of pay which you

need to set aside and invest at interest in order to provide the retirement benefits to a group of employees.

Let me illustrate with perhaps an oversimplified example, oversimplified in the sense that it will leave out some of the complexities

and some of the technicalities.

Assume you were going to begin a new retirement system, and you

were going to hire a thousand employees. You would decide on a level

of benefits, or eligibility provisions, the amount of annuity and so on.

Then you could calculate, or estimate if you will, the number of people

who would quit before they are eligible to retire, the number who

would die and leave ,a survivor eligible for benefits, the number who

would become disabled, the ones who would be retired mandatorily

and optionally, and you could compute the benefits that would have to

be paid to those people.

Once you get the value of the benefits for that group of individuals,

then mathematically you can calculate the percentage of pay which

you must set aside each payday in a fund earning interest in order to

pay off the benefits to that particular group. That is normal cost expressed as a percentage of payroll.

Theoretically, if you were very, very accurate and very, very lucky

in all of your assumptions and all of your calculations, when you paid

off the last benefit to the last survivor of that group of 1,000, you

would deplete the fund balance to zero.
49

Unfunded liability is the extent to which you do not have either in

that fund which you are building up, or as an asset in the form of

future contributions from the remainder of the group, enough to pay,

off the benefits. In other words, if the present value of the benefit payout is $100 million, and the present value of your fund, let's say, is

$25 million, and the value of the future contributions from the remainder of this group of 1,000 is only 25, then your unfunded liability

will be $50 million; because you are short of seeing where the money

is coming from to pay off the benefits to that group. An oversimplification of unfunded liability is that it is the liability for past service

to the extent that it exceeds the rate at which we have been building up

the fund.

Mr. DANIELS. At the present time, we have an excess of 0.9 of 1 percent in normal cost.

Mr. RITDDOCK. Yes.

Mr. DANIELS. In response to Mr. Waldie's question this has resulted

in employees paying in excess of $400 million to the iund. What is that

being applied to? Is that being applied to unfunded liability, or is it

being put into the fund and drawing interest thereon?

Mr. RIIDDOCK. It is going into the fund. It is drawing interest. To

the extent that it is in the fund, the unfunded liability is less by that

amount, plus its interest earnings.

Now, it is not decreasing the size of the unfunded liability, because

that will continue to grow until 1980 because we are not getting the

full amount of interest. We are getting 30 percent for 1973, 40 percent

for 1974. So the unfunded liability continues to grow for that reason,

and the unfunded liability also grows each time we have a cost-ofliving increase. So the $400 million is slowing the growth of the

unfunded liability rather than reducing it.

Mr. DANIELS. At the present time the employees are paying in excess

of their fair share of the cost.

Mr. RUDDOCK. If you define fair share as 50 percent of normal, yes.

Mr. DANIELS. Is there any time when they paid less than 50 percent?

Mr. RIIDDOCK. Yes, sir; there have been times when employees were

paving less than 50 percent.

In 1969, employees were paying 61/2 percent to a system that had.

13.86 before 91-9, and 13.98 thereafter. Before the financing legislation, the employees were contributing 61/2 percent, and the agencies

were contributing 61/2 percent. The normal cost was 13.86. So we had

a deficiency each year of .86 percent of normal costs.

Mr. DANIELS. In 1969, inasmuch as there would be an excess of

normal costs when raising joint contributions to 14 percent, we provided for certain liberalizations in that legislation; such as reducing

the high five to high three, and give credit on retirement for unused

sick leave, and others.

Mr. RIIDDOCK. Yes.

Mr. DANIELS. In view of the fact that there is a surplus, I would like

to have the Commission's views on the "Rule of 80" bill I introduced.

Could we finance the normal cost of that bill with this excess?

Mr. RIIDDOCK. That would increase normal costs by .96, so that that

would be just very, very slightly over the 14 percent, but I hasten to

add to that that the combination 80 would create unfunded liability

of $9,800,000,000. So that it is awfully difficult to increase benefits to
50

pick up this slack between the normal cost and current deduction rate

without also incurring a substantial liability.

Now, the 30-year amortization payment on the combination 80 bill

would be $690 million a year.

Mr. DANIELS. Just one further question: In view of the continued

rise in the cost of living index, is there anticipation that a cost of

living increase will be granted in the near future? If so, at what

percentage?

Mr. RUDDOCK. There is going to be a cost-of-living increase. It will

be effective July 1, unless the cost of living goes down considerably for

the months of March, and April.

Mr. DANIELS. You don't expect it to do that?

Mr. RITDDOCK. I have no basis on which to predict that it will. If the

cost of living remains either at its present level or goes down slightly,

the increase effective July 1 will be 4/12percent. That will be the 31/2

percent rise in the cost of living since the last increase, plus the extra

1 percent.

Now, if the cost of living continues to go up for March and April

at the rate at which it has been going up, then the cost-of-living

increase effective July 1 will be closer to 51/2 percent.

Mr. DITLSKI. Mr. Hinshaw?

Mr. HINSHAW. One question.

The employees prior to 1969 contributed less, if I understand your

question, than half the cost.

Mr. RUDDOCK. Less than half the normal costs, yes, sir.

Mr. HINSHAW. How long prior to 1969 did that condition prevail,

roughly?

Mr. RUDDOCK. I cannot remember exactly. It would have been probably 7 or 8 years.

Mr. HINSHAW. For the record, could you submit how long that did

prevail, and what the total amount of undercontribution the employees as a group might have contributed to the fund, a figure that

would be comparable to $400 million overage?

Mr. RUDDOCK. I will.

[The response follows:]

A question was asked about the length of the period prior to 1969 when

employee contributions to the retirement fund represented less than half the

normal cost, and the amount of such underpayment. Employees contributed less

than half the normal cost of the retirement plan throughout the period from

July 31, 1956 through December 31, 1969. During this 13 year period normal cost

ranged from 13.50 at the beginning, with some fluctuation to the end of the

period when it stood at 13.86 before Public Law 91-93 took effect. The total

payment by employees during this period was $616 million less than half normal

cost.

Mr. HINSHAW. Thank you very much.

Mr. WALDIE. Would you yield?

Mr. HINSHAW. Yes.

Mr. WALDIE. Whatever the undercontribution was in 1969, Mr.

Daniels' bill proved that the Federal Government would pick up that

share? Was that not the intent?

Mr. RUDDOCK. That was the intent of the legislation, yes, sir.

Mr. DuLsiii. On page 11, you compare Federal retirement and

other employee benefits with other plans. I note the list shows benefits
51

of the New York State Plan as being more liberal. Do you know the

financial status of the New York State Retirement System?

Mr. RUDDOCK. Only from what I read in the paper. There was an

article in the Wall Street Journal indicating that the financing is very,

very critical, that, the legislature is seeking ways to reduce the future

retirement benefits because they are beginning to recognize their

accruing costs.

Mr. DULSKI. Are there any further questions?

Mr. DANIELS. I think both of these questions are pointed towards

legislation that this committee might consider in the near future.

Mr. Ruddock, in enacting Public Law 91-93, provision was made in

section 8348 (f ) that the first payment of any newly created liability is

due at the end of the fiscal year in which it becomes effective. Has that

requirement presented the Civil Service Commission with any

problems?

Mr. RUDDOCK. It gives us this kind of a problem. Each time an act

is passed, or an administrative action is taken as a result of legislation

on the books, we have to go up and ask for a supplemental appropriation because that first payment is due at the end of the fiscal year in

which that change becomes effective.

You remember that when we sent up the draft of legislation that

became Public Law 91-93, we suggested that the first payment be due

at the end of the fiscal year following the fiscal year in which the

change became effective. This would mean, then, that in an orderly

fashion, the request for that first payment could be included in our

next annual appropriation.

Mr. DANIELS. Are you suggesting, then, that it be deferred for a

year, and if so, what effect will this have on funding?

Mr. RUDDOCK. Let me answer the second question first. So long as

we get the amortization and get the equivalent of interest on it, which

is included in the amortization schedule, it is immaterial in the financing system whether you get the payment in the first year or whether

you get it in the next year. You get the same value over the 30-year

period regardless of when you start.

Administratively, and in an orderly budget process, it would be

much simpler to have the first payment due at the end of the year after

the year in which it becomes effective.

We have proposed, in the Commission's proposal for the postal

retirement liability, that the first payment be due the year after.

Mr. DANIELS. Now, with regard to the Postal Service, section 1005 of

title 39 requires the Postal Service to reimburse the retirement fund

for the cost of administering the program for postal employees.

Since administrative costs are one of the elements that determine the

system's normal cost, are not postal employees and the postal service

covering such costs through the joint employer-employee contribution?

Mr. RUDDOCK. Yes. The agency contribution on the Postal Service

equals 7 percent of pay. That would cover the administrative cost just

as that cost is paid by the 7 percent from the other agencies.

Mr. DANIELS. If we were to enact legislation requiring the Postal

Service to finance the unfunded liability created by virtue of pay

raises and so forth, could we drop this provision then?
52

Mr. RITDDOCK. Let me answer that very carefully. I cannot speak

for the administration as to its willingness to forego any revenue.

From the standpoint of financing the retirement system, this would

not unhinge any financing. Financing would be full.

Mr. DANIELS. That is all.

Mr. DULSKI. Mr. Waldie ?

Mr. WALDIE. No questions.

Mr. DITLSKI. Thank you, Mr. Ruddock.

The subcommittee stands adjourned to the call of the Chair.

(Whereupon, at 12 noon the subcommittee adjourned, subject to the

call of the Chair.)

0