Federal Retirement: Federal and Private Sector Retirement Program Benefits Vary
Published: 1997-04-07T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to congressional requests, GAO reviewed federal and nonfederal retirement programs, focusing on: (1) an update of the reports on nonfederal retirement programs GAO completed for Congress when the Federal Employees Retirement System (FERS) was being designed; and (2) a comparison of current nonfederal programs with FERS and the Civil Service Retirement System (CSRS). GAO did not independently verify the accuracy of the Watson Wyatt Worldwide database or the benefit amounts calculated.
section_title: What GAO Found
paragraphs: GAO noted that: (1) the results of GAO's review revealed that there is no clear, bottom-line answer to the question of whether FERS and CSRS offer greater benefits, or smaller benefits, than private sector retirement programs; (2) the benefits available from FERS and CSRS can be smaller, similar, or greater than the average of the programs in the contractor's private sector employer database, depending on a number of factors and how these factors interact with the retirement programs' designs; (3) chief among these factors are the: (a) ages at which employees retire and at which programs provide unreduced benefits; (b) extent to which employees and employers contribute to the defined contribution plans that are integral components of FERS and most private sector programs; and (c) impact of cost-of-living adjustment practices on benefit amounts over the long term; (4) in fact, FERS and CSRS can provide quite different benefit amounts because of their different designs; and (5) as a rule, greater benefits are available from FERS than from CSRS, but FERS employees must contribute higher percentages of their salaries to receive the greater benefit amounts.

section_title: Letter
paragraphs: This report is in response to requests by the Chairmen of the former Senate Subcommittee on Post Office and Civil Service and the House Subcommittee on Civil Service that we make a series of analyses of federal and nonfederal retirement programs. As part of the requests, we were asked to (1) update the reports on nonfederal retirement programs we completed for Congress when the Federal Employees Retirement System (FERS) was being designed and (2) compare current nonfederal programs with FERS and the Civil Service Retirement System (CSRS). As agreed with the Subcommittees, this report provides comparative information on the features and benefit levels of retirement programs offered by primarily large private sector employers, FERS, and CSRS. We are not making any recommendations in this report.
As agreed with your representatives, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to (1) the Ranking Minority Members of the Senate Committees on Appropriations and Governmental Affairs and of the House Subcommittee on Civil Service, (2) other appropriate congressional committees, (3) the Director of the Office of Personnel Management, (4) the Executive Director of the Federal Retirement Thrift Investment Board, and (5) other interested parties. We will also make copies available to others on request.
Major contributors to this report were Robert E. Shelton, Assistant Director, and Laura G. Shumway, Senior Evaluator. Please contact me at (202) 512-8676 if you or your staff have any questions concerning this report.
subsections: section_title: Introduction
subsections: section_title: Background
paragraphs: Thousands of private sector retirement programs exist, and they cover millions of employees. According to information available from the Bureau of Labor Statistics (BLS), in 1992, 16.1 million full-time employees (47 percent) in small private establishments with 99 or fewer employees were covered by at least one retirement program to which their employers contributed. BLS also reported that, in 1993, 22.4 million full-time employees (78 percent) in medium and large private establishments with 100 or more employees were covered by retirement programs. The remaining employees are covered by Social Security, but not by retirement programs to which their employers contribute.
The designs of private sector retirement programs and their individual plans vary greatly. All programs include Social Security, while some also include defined benefit (DB) plans only, some include defined contribution (DC) plans only, and others include a combination or variation of DB and DC plans.
DB plans specify formulas for computing benefit amounts that are payable at retirement and are typically based on an employee’s age, length of plan participation, and salary history. In contrast, DC plans specify amounts the employer (and employees, if required) will contribute to the plan. The accumulated contributions, plus investment earnings, constitute the source of retirement benefits from a DC plan. In summary, a DB plan specifies benefit amounts, and a DC plan specifies contribution amounts.
The Federal Employees Retirement System (FERS) and the Civil Service Retirement System (CSRS) are the two largest retirement programs for federal civilian employees. Together, they covered about 2.8 million employees at the beginning of fiscal year 1995. Several other retirement programs for specific groups of federal civilian employees exist, but these programs are much smaller than FERS and CSRS.
CSRS was established in 1920 and is a DB plan that predates the Social Security system by several years. When the Social Security system was established, Congress decided that employees in CSRS would not be covered by Social Security through their federal employment. CSRS provides employees the option to retire with unreduced benefits at age 55 with 30 years of service, at age 60 with 20 years of service, and at age 62 with 5 years of service.
At the beginning of fiscal year 1995, CSRS covered about 1.4 million employees and, during that year, paid annuities of almost $38 billion to about 2.3 million retired employees and survivor annuitants. CSRS was closed to new entrants after December 31, 1983. When all covered employees and annuitants are deceased, the program will end. According to OPM actuaries, the program is projected to end about 2070.
FERS was implemented in 1987 and generally covers those employees who first entered federal service after 1983. The primary impetus for the new program was the Social Security Amendments of 1983, which required all federal employees hired after December 1983 to be covered by Social Security. FERS is a three-part retirement program and includes the following: (1) Social Security, (2) a DB plan, and (3) a DC plan—the Thrift Savings Plan (TSP)—to which the government and most employees contribute. In FERS, the minimum optional retirement age (MRA) has been increased from the CSRS’ age 55 to age 57 for FERS employees born after 1969. FERS provides employees with the option to retire with unreduced benefits at their MRA with 30 years of service, at age 60 with 20 years of service, and at age 62 with 5 years of service. FERS continued the CSRS objective of encouraging employees to spend their working careers in federal service by making unreduced benefits available at the MRA only to employees who serve 30 or more years with the government. FERS has another provision that is intended to serve as an incentive for employees to extend their careers beyond the MRA. This provision allows FERS employees who retire at age 62 or older and who have completed at least 20 years of service to receive retirement benefits calculated at a formula that provides a 10-percent greater benefit amount than the formula applied to employees who retire before age 62. However, FERS also provides employees the option to retire with reduced benefits at their MRA with 10 years of service. This provision is not available to employees covered by CSRS.
At the beginning of fiscal year 1995, FERS covered about 1.4 million employees and, during that year, paid annuities of about $474 million to 48,000 retired employees and survivor annuitants. (See app. I for additional details on CSRS and FERS participants.)
The government automatically contributes an amount equal to 1 percent of salary each pay period to the TSP for each FERS-covered employee whether or not the employee contributes to the TSP. In addition, FERS employees may contribute up to 10 percent of their salaries and receive government-matching contributions on the first 5 percent. CSRS-covered employees may also contribute up to 5 percent of their salaries to the TSP, but the government does not make matching contributions for them.
Employees in FERS and the private sector paid 6.2 percent of their salaries to the Social Security system (excluding Medicare) on earnings of up to $65,400 in 1997. FERS-covered employees receive the same Social Security benefits as private sector employees. Social Security benefits payable at retirement are designed to replace a higher proportion of earnings for lower-paid employees than for higher-paid employees (see table II.4).
section_title: Objective, Scope, and Methodology
paragraphs: In response to the requests of the Chairmen of the former Senate Subcommittee on Post Office and Civil Service and the House Subcommittee on Civil Service, our objective in preparing this report was to compare FERS, CSRS, and private sector retirement programs. These retirement programs can be compared in a number of ways. One possible way is to compare the average benefit amounts different programs paid to their retirees in a given year. In this method, the “typical” benefits paid by each program would be presumed to be indicative of the relative benefits offered by the programs. However, such a comparison approach would ignore differences in ages, salary levels, years of service, and other factors that cause benefit amounts to differ for individual retirees under the programs. Another possible comparison method is to compare program features, such as age and service requirements for retirement eligibility, benefit calculation formulas, salary amounts used in the benefit calculations, and how pension plan benefits are integrated with Social Security benefits. This method would provide useful information on how the various programs are designed, but it would not compare the actual benefit amounts available under the programs.
Although a number of other comparison methods exist, the method we used in this report was to determine the benefit amounts federal and private sector programs would pay to employees who retire at the same ages with the same years of service and salary histories. In using this method, we avoided the benefit differences that could be caused by variances in individual employees’ circumstances. Also, this method allowed us to (1) compare federal retirement benefits with the average benefits available under private sector programs for employees in the same circumstances and (2) provide a measure of the extent to which differences in the features of federal and private sector retirement programs cause differences in the relative benefit amounts available from the programs. However, this method does not consider what portions of the benefits are financed by the employee and the employer.
We and the Congressional Budget Office (CBO) contracted, at different times, with Watson Wyatt Worldwide, a company that collects benefits data from a wide range of employers, to obtain the information on the features and benefit levels of private sector retirement programs included in this report. Watson Wyatt provided this information from its 1993 COMPARISON database, which was the latest database available at the time our contract was awarded. The database contained information on the retirement programs of primarily large private sector employers and that, by design, excluded employers who had no retirement programs other than Social Security. About one-half of the employers were Watson Wyatt clients; the remainder were from a survey of U.S. employers included in Fortune magazine’s list of 1,000 top employers. Therefore, the features and benefit levels developed from the database could not be generalized to the private sector as a whole.
The database described the features of 661 employers’ retirement programs. Of these programs, sufficient information was available to allow the contractor to determine the benefit amounts provided by 435 employers’ programs. Of the 435 employers, 61 percent had 2,500 or more employees. Another 22 percent had 1,000 to 2,499 employees; about 15 percent had 999 or fewer employees. The remaining 2 percent of the employers did not provide size information. About 70 percent of the 435 employers provided both defined benefit and defined contribution plans, whereas about 24 percent of the employers had defined contribution plans only and about 6 percent had defined benefit plans only. Appendix I contains more detailed information on the sizes and program designs of the employers in the contractor’s database as well as information on the industries and geographical areas that the employers represented.
To show how employees with varying ages and years of service would fare under FERS, CSRS, and private sector retirement programs, we asked the contractor to calculate the benefit amounts potentially available to three illustrative employees (i.e., age 55 with 30 years of service, age 62 with 20 years of service, and age 65 with 20 years of service) at three different final salary levels (i.e., $25,000, $40,000, and $60,000). (See app. II for the salary histories and the actual dollar amounts used to calculate the benefit amounts.)
Because of limited contract funds, we were limited to three illustrative employees. We chose the specific ages and years of service in the following manner: (1) age 55 with 30 years of service since that is the earliest age at which general employees in CSRS can choose to retire,(2) age 62 with 20 years of service since reduced Social Security retirement benefits are first available at that age, and (3) age 65 with 20 years of service since full Social Security benefits are available at this age. We chose 20 years of service to reflect the shortening of federal careers that may occur under FERS.
Subsequently, CBO contracted with Watson Wyatt to obtain the benefit amounts potentially available to an additional two illustrative employees—age 62 with 30 years of service and age 65 with 30 years of service. CBO chose age 62 with 30 years of service since that was the average for employees who retired under CSRS’ optional retirement provisions in fiscal year 1995; they chose age 65 with 30 years of service to show the effect of the 30-year career on the age 65 comparisons. The results provided under the CBO contract were based on the same methodology and the same assumptions as the results provided under our contract. We did not independently verify the accuracy of the Watson Wyatt database or the benefit amounts calculated. However, the results from its database and calculations were consistent with results we reported in 1985 and with results reported more recently by others in the benefits field. Also, Watson Wyatt’s calculations for FERS and CSRS were consistent with FERS and CSRS calculations we had made.
The benefit amounts in this report are expressed as “replacement rates.” A replacement rate is the annual retirement benefit amount divided by an employee’s salary amount in the final year of employment. For example, an employee who earned $40,000 in the final year of his or her employment and received retirement benefits of $20,000 a year would have a replacement rate of 50 percent.
Because the amounts of benefits employees can receive from DC plans are determined in large part by the amounts they and their employers contribute to the plans, we calculated replacement rates for benefits from the FERS and private sector DC plans using the following three levels of assumed employee contributions: (1) employees contributed amounts necessary to receive maximum employer contributions, (2) employees contributed amounts necessary to receive one-half of the maximum employer contributions available, and (3) employees made no contributions to their DC plans.
To examine the effects of cost-of-living adjustment practices that the retirement programs provide to restore lost purchasing power, we also calculated, in constant dollars, the replacement rates that would be available after 10 and 20 years of retirement.
The replacement rates presented in chapter 2 of this report are for five illustrative employees at a final salary of $40,000. Appendix III shows the results of the replacement rate analyses for these five employees if they retired at the final salaries of $25,000, $40,000, and $60,000.
While the relative replacement rates available from federal and private sector retirement programs for the five illustrative employees and salary levels used in our analyses are meaningful measures of how the various programs compare, they do not necessarily represent employees’ actual experiences under the programs. For example, employees in CSRS and FERS, on the average, are considerably older than age 55 when they retire. In fiscal year 1995, employees retiring under CSRS’ optional retirement provisions averaged age 62 with 30 years of service. Employees retiring under FERS’ optional retirement provisions averaged age 63 with 14 years of service. The contractor’s database did not contain information on the ages at which employees choose to retire in the private sector programs.
In making the replacement-rate calculations, the contractor included the benefit amounts from the defined benefit and defined contribution plans to which employers made contributions as well as the amounts from Social Security. For private sector employers, the contractor made and then averaged separate calculations for each of the 435 private sector retirement programs. Therefore, the replacement rates presented represent averages of the benefits available from all programs of the same design. They do not represent the actual benefits that are available from any individual employer’s retirement program. Rather, some programs will provide replacement rates that are higher than the average, and other programs will provide replacement rates that are lower than the average.
The benefit amounts calculated were based on a single set of assumptions about salary histories, return on investments, the conversion of defined contribution plan amounts at retirement to annuities, and the rate of inflation after retirement. We had the contractor assume 4.5 percent annual increases in long-term inflation and the CPI and a 7-percent annual return on investments. These are the same assumptions the Office of Personnel Management (OPM) used in its latest actuarial valuation of FERS and CSRS. Because defined contribution plan benefits accumulate as individual account balances, the contractor converted these balances to life annuities using the 1983 Group Annuity Mortality table with a 3-year age setback so they could be compared with the benefits provided by defined benefit plans. We had the contractor assume that all of an employee’s years of service were with the same employer who was the last employer before retirement; and that, for Social Security benefit calculations, employees had no earnings in the years before hire and after retirement.
We also had the contractor assume that the salary histories for the illustrative employees included base pay only so that they would have a common compensation structure. Although base pay is generally the only type of compensation used in FERS and CSRS to calculate benefit amounts, at least one-half of the 435 programs in the contractor’s database included base pay and other types of compensation, such as overtime pay, bonuses, and commissions, in their benefit calculations. We did not include these other types of compensation in the salary histories because (1) benefit calculations for FERS and CSRS do not include them and (2) the contractor did not collect data on the amounts of compensation, by type, that are typically provided to employees covered by the programs in the database. However, had we assumed the illustrative employees had other types of compensation in addition to the base pay represented in the salary histories, the replacement rates available from FERS and CSRS would have remained the same and the averages of the replacement rates available from the private sector programs could have increased. Also, had we assumed that the rate of salary growth in the last years of employees’ careers had been greater, the replacement rates available from FERS, CSRS, and the private sector programs could have been smaller. However, because FERS and CSRS use the average of the highest 3 years’ salaries in their benefit calculations, while about one-half of the 435 private sector programs use the highest 5 years’ salaries, the replacement rates available from FERS and CSRS would not decrease as much as the private sector replacement rates.
We believe these assumptions are reasonable because they either were those used by OPM in its latest actuarial valuations, were based on standards used in the benefits field, or were necessary to provide a common basis of comparison. However, different assumptions would change the relative magnitude of results between programs and the absolute magnitude over all programs. It could also be possible in some circumstances to change the relative rankings between programs. For example, an assumed annual return of 9.5 percent, rather than 7.0 percent, on DC plan investments could mean that a 30-percent increase in replacement rates would be available from DC plans after 20 years of service. Over 30 years, a 9.5 percent annual return could generate a 50-percent increase in DC plan benefits.
To calculate the benefit amounts 10 and 20 years after retirement, the contractor needed estimates of the cost-of-living adjustments (COLA) provided in the DB plan portion of private sector employers’ programs. Wide variation exists in how COLAs are provided. The adjustments tend to be ad hoc, and their size and frequency tend to vary by employer size. The contractor routinely tracks COLAs given by 50 large companies, but neither we nor the contractor are aware of any data sources that accurately track COLAs given by private sector DB plans, overall. In the absence of more complete data on DB plan COLAs in the private sector, we had the contractor use the 50 companies’ COLA experiences to represent all private sector DB plans in calculating replacement rates available from private sector programs 10 and 20 years after retirement.
We limited the federal and private sector benefit comparisons presented in this report to the benefits available to career employees under the “optional” or “regular” retirement provisions of employers’ retirement programs. Accordingly, we did not include the following in our comparisons: other program provisions, such as early involuntary retirement, disability retirement, or survivor benefits; special benefits that are available in FERS and CSRS, such as the benefits that are provided to Members of Congress and congressional staff, law enforcement officers and firefighters, and air traffic controllers; extra benefits that private sector programs may provide to top executives; spousal or children’s benefits that may be paid by Social Security in addition to benefit amounts paid to retirees.
Our findings may have been different if another private sector database had been used in the benefit comparisons because our contractor’s database could not be generalized to the private sector as a whole. Over one-half of the employers in the contractor’s database have 2,500 or more employees. A number of small employers are in the database, but not in proportion to their overall representation among private sector employers with retirement programs in 1993. About 99 percent of the employers with retirement programs in 1993 had fewer than 2,500 employees. Also, about 24 percent of the employers in the contractor’s database had retirement programs that included DC plans only. In an earlier report, we described the retirement program designs of all U.S. private sector employers who offered pensions in 1993. Overall, a higher proportion (88 percent) of these employers sponsored only DC plans than the employers in the contractor’s database. However, the percentage of all employers with 2,500 or more employees that sponsored both DB and DC plans increased from 1984 to 1993, and nearly one-half of the employers with 2,500 or more employees sponsored DB plans in 1993.
We did our review in Washington, D.C., from October 1995 to January 1997 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from Watson Wyatt Worldwide and the heads of OPM and the Federal Retirement Thrift Investment Board (the Thrift Board) or their designees. The Research Actuary of Watson Wyatt’s Research and Information Center in Washington, D.C., and the Thrift Board’s Director of External Affairs provided us with oral comments. The Director of the Office of Personnel Management provided written comments. Both the oral and written comments are presented and evaluated in the executive summary and chapter 4. The OPM comments are reprinted in appendix VI.
section_title: Comparative Benefit Levels Available From FERS, CSRS, and Private Sector Retirement Programs
paragraphs: The comparative benefit amounts available to employees in FERS and CSRS and the average benefit amounts available from the retirement programs in the contractor’s private sector database can differ considerably, depending on a number of factors and how these factors interact with the retirement programs’ designs. These factors include (1) the ages at which employees retire and at which programs provide unreduced benefits, (2) the extent to which employees and employers contribute to the DC plans that are integral components of FERS and most private sector programs, and (3) the impact of inflation and cost-of-living adjustments provided through the retirement programs. In general, when employees retire before age 62, the largest benefits are available from FERS and the smallest benefits are available from the private sector programs. The benefits available from CSRS fall between those available from FERS and the private sector programs.
However, the comparative benefits are quite different for employees who retire at age 62 or older. For retirees at these older ages, FERS continues to make the largest benefits available, but these benefits are just slightly more than the average for private sector programs that, like FERS, include both DB and DC plans. The benefits that are available at age 62 or older from the private sector programs that include DB or DC plans only are quite similar, but these benefits are smaller than the benefits available from FERS and the average benefits available from the private sector programs that include both DB and DC plans.
CSRS benefits for employees retiring at age 62 or older with 20 years of service are smaller than FERS benefits and the average benefits available from private sector programs, regardless of program design because (1) CSRS benefits are the same for specific years of service, regardless of age, and (2) CSRS-covered employees receive no Social Security benefits from their federal employment. For employees who retire at age 62 or older with 30 years of service, CSRS benefits are still smaller than the benefits available from FERS and the private sector programs that include both DB and DC plans, but the CSRS benefits become similar to the benefits available from private sector programs with DB or DC plans only.
The level at which employees contribute to their DC plans is a significant factor in determining the benefits that are available from FERS and the private sector programs that incorporate DC plans. Considerably smaller benefits are available from such programs when employees contribute lesser amounts than are necessary to receive maximum employer contributions.
In this chapter, we present the replacement rates available from FERS, CSRS, and private sector programs for five illustrative employees who are (1) age 55 with 30 years of service, (2) age 62 with 20 years of service, (3) age 65 with 20 years of service, (4) age 62 with 30 years of service, and (5) age 65 with 30 years of service and who retire with a final salary of $40,000. Unless otherwise indicated, the replacement rates are calculated using the assumption that employees in FERS and the private sector programs that include DC plans contributed amounts that are necessary to receive maximum employer contributions to their DC plans. However, separate replacement-rate calculations are also presented for each illustrative employee to show the effects of lower amounts of employee contributions to DC plans. The effects of cost-of-living adjustment practices on retirement program replacement rates after 10 and 20 years of retirement are also analyzed in this chapter.
subsections: section_title: Comparative Replacement Rates at Retirement
paragraphs: With a replacement rate of 65 percent, FERS ranks first in a comparison of available benefits for employees who retire at age 55 with 30 years of service. CSRS is second with a replacement rate of 53 percent for employees who retire at age 55 with 30 years of service, and the average of private sector programs with both DB and DC plans in the contractor’s database is third with a 45-percent replacement rate. The private sector programs that have DB or DC plans only have available benefits averaging less than 30 percent of final salary. (See fig. 2.1.)
The availability of unreduced DB plan benefits in FERS and CSRS for employees retiring at age 55 with 30 years of service is an advantage over most DB plans in the private sector because private sector plans usually impose reductions in accrued benefits for employees retiring at age 55, regardless of their number of years of service. Moreover, Social Security retirement benefits are not available to private sector retirees until they reach age 62, whereas the FERS’ DB plan provides an annuity supplement equal to the estimated Social Security benefits that a retiree earned while employed by the federal government and that the retiree could receive at age 62.
Because Social Security retirement benefits are available to retirees in FERS and the private sector programs at age 62 or older, the relative positions of the federal and private sector programs, in terms of replacement rates, change at age 62. Specifically, when the employee retires at age 62 with 20 years of service, FERS is no longer the dominant program, and CSRS drops from the second position to the last position. The FERS replacement rate of 66 percent is higher than the 63-percent average replacement rate of the private sector programs with both DB and DC plans. Private sector programs that include either a DB plan or a DC plan, but not both, have available replacement rates of about 40 percent, which is higher than the CSRS rate of 36 percent. (See fig. 2.2.)
When an employee retires at age 65 with 20 years of service, the relative positions of the programs, in terms of replacement rates, are the same as at age 62, but the available replacement rates for all programs, except CSRS, are higher than at age 62. At age 65, replacement rates available to employees under FERS and the average of the private sector programs with both DB and DC plans are almost the same, 71.1 and 70.5 percent, respectively. For private sector programs with either a DB or DC plan, the average available replacement rate increases to almost 50 percent. The CSRS replacement rate remains the same at 36 percent. (See fig. 2.3.)
Several factors cause replacement rates for FERS and private sector programs, on average, to increase between the ages of 62 and 65. Social Security benefits are reduced for employees who retire before age 65. Similarly, some private sector DB plans impose reductions in accrued benefits when employees retire before age 65. Finally, DC plan benefit amounts are larger at age 65 because account balances are paid out over shorter periods when employees retire at older ages. These factors do not apply to CSRS because (1) CSRS benefit amounts are not determined by employees’ ages upon retirement at age 55 or older, (2) CSRS employees are not covered by Social Security through their federal employment, and (3) CSRS employees do not receive any employer-paid DC plan benefits. Therefore, after age 55, CSRS replacement rates are the same for all employees with the same years of service, regardless of the ages at which they retire.
When an employee retires at age 62 or older with 30 years of service, the relative positions of the federal and private sector programs, in terms of replacement rates, change again. FERS and the private sector programs that include both DB and DC plans remain in the top two positions, but CSRS is no longer in the last position. The CSRS replacement rate moves just ahead of the averages of the replacement rates available from programs with DB or DC plans only. Some of the change in the CSRS position is due to the graduated accrual rates used for calculating benefit amounts under CSRS.
For a 30-year career, 20 years are calculated at the highest rate; while for a 20-year career, only 10 years are calculated at the highest rate. Therefore, a 30-year career under CSRS yields a greater benefit than does a 20-year career.
When the employee retires at age 62 with 30 years of service, CSRS has a replacement rate of 53 percent; while the averages of the replacement rates for the DB and DC plans only programs are about 50 percent. The FERS’ replacement rate and the averages of rates from the private sector programs that have both DB and DC plans are 81 and 75 percent, respectively, when the employee retires at age 62 with 30 years of service. (See fig 2.4.)
At age 65 with 30 years of service, the replacement rates available to employees under CSRS and the averages of the replacement rates for the private sector programs with DB or DC plans only are within 5 percentage points of each other, ranging from 53 to 58 percent. The replacement rate for employees retiring at age 65 with 30 years of service under FERS is 87 percent, and the average of the rates for private sector programs that include both DB and DC plans is 82 percent. (See fig. 2.5.)
section_title: Relationship of Employee Contributions to Retirement Program Benefits
paragraphs: Just as differences exist in the levels of benefits provided by various retirement programs, differences also exist among programs in the amounts employees must contribute toward program costs. In general, to receive the replacement rates discussed above, CSRS and the private sector programs that include Social Security and DB plans only require the smallest employee contributions. FERS and the private sector programs that include DC plans, regardless of whether a DB plan is also provided, require the greatest employee contributions to receive maximum employer contributions to their program benefits.
The amounts that employees contribute to the FERS and private sector DC plans are critical factors in determining the benefit amounts employees can receive from the overall retirement programs. Employees who contribute the amounts that are necessary to receive maximum employer contributions to DC plans will receive greater benefits at retirement than those employees who elect not to contribute to the DC plan or those employees who contribute smaller amounts.
subsections: section_title: Effects of Equalizing Employee Contributions to FERS, CSRS, and Private Sector Retirement Programs That Include Both DB and DC Plans
paragraphs: Most employees in CSRS are required to contribute 7 percent of their salaries toward program costs. Employees in FERS also generally contribute a total of 7 percent of their salaries to Social Security and the FERS’ DB plan (i.e., 6.2 percent to Social Security and 0.8 percent to the DB plan). Private sector employees contribute 6.2 percent of their salaries to Social Security, but virtually all of the programs in the contractor’s database with DB plans did not require employee contributions toward DB plan costs.
In the FERS’ DC plan—the TSP—employees must contribute 5 percent of their salaries to receive the maximum available employer contributions to their accounts. Accordingly, to obtain the greatest available benefits from FERS, employees must contribute a total of 12 percent of their salaries. Employees in private sector programs that include DC plans must also generally contribute about 12 percent of their salaries to receive the greatest benefits available from their programs. These employees must contribute 6.2 percent of their salaries to Social Security, and, according to the contractor, typically must contribute 6 percent of their salaries to receive maximum employer contributions to their DC plans.
Employees in CSRS can, by law, contribute up to 5 percent of their salaries to the TSP with no employer-matching contributions. Therefore, CSRS employees who contribute 5 percent of their salaries to the TSP would contribute a total of 12 percent of salary to their retirement program, just as the employees in FERS and private sector programs that include DC plans. To show the effects of employee contributions on replacement rates if employees in FERS, CSRS, and private sector programs that include both DB and DC plans were all to contribute approximately 12 percent of their salaries to their retirement programs, figures 2.6 through 2.10 reflect the comparative replacement rates that would be available to these employees. As the figures show, the replacement rate available to CSRS employees who retire at age 55 with 30 years of service would be quite similar to the FERS replacement rate, but considerably higher than the average replacement rate available from private sector programs that include both DC and DB plans. However, even with employee contributions of 12 percent of salary, the CSRS replacement rates for employees who retire at ages 62 and 65 with 20 or 30 years of service would be lower than FERS and the private sector programs that include both DB and DC plans.
section_title: Effects of Employee Contribution Rates on DC Plan Benefits
paragraphs: Whether comparisons are made of the replacement rates available solely from DC plans or the replacement rates available from all plans that are part of the retirement programs (i.e., Social Security, DB plans, and/or DC plans), the amounts that employees contribute to DC plans significantly affect replacement rates and can affect which retirement program provides the highest replacement rate.
Table 2.1 illustrates the effects of employee contribution amounts on DC plan benefits. The table shows the comparative average replacement rates that are available from FERS’ TSP and the private sector DC plans in the contractor’s database when employees (1) contribute amounts that are sufficient to receive maximum employer contributions, (2) contribute amounts that are sufficient to receive one-half of the maximum employer contributions available, and (3) make no contributions to their DC plans. The amounts that employees contribute to their DC plans have a major influence on the benefits they could receive from their DC plans. For example, employees retiring at age 62 with 30 years of service under FERS could expect to receive annual benefits of about 30 percent of their final salary from their TSP accounts if they had received the maximum employer contributions by contributing 5 percent of their salary to the TSP throughout their 30-year career. This amount would be 10 times greater than the 3 percent of final salary they could expect to receive from TSP if they had made no contributions to their TSP accounts.
To show the effects of employee contributions to DC plans on the total replacement rates available from all parts (i.e., Social Security, DB plans, and/or DC plans) of the federal and private sector retirement programs, figures 2.11 through 2.15 show the total retirement program average replacement rates available at each of the three levels of contributions to DC plans. The replacement rates decline with reduced levels of employee contributions in all programs that include DC plans.
When employees retire at age 55 with 30 years of service, CSRS’ replacement rate is higher than the replacement rates for all other programs in the comparison, regardless of the amounts employees contribute to the DC plans, except for FERS employees who contribute at least one-half of the amount required to receive maximum employer contributions to the TSP. (See fig. 2.11.)
When employees retire at ages 62 and 65 with 20 years of service, the other programs, even if covered employees made no contributions to their DC plans, generally provide higher replacement rates than CSRS. The only average replacement rates when employees retire at ages 62 and 65 with 20 years of service that are lower than the CSRS replacement rate are those rates that occur in private sector programs with DC plans only when employees did not make maximum contributions to their DC plans. FERS’ replacement rates when employees retire at ages 62 and 65 with 20 years of service are comparable to the replacement rates available from private sector programs with both DB and DC plans at all three levels of employee contributions. However, employees in private sector programs with DC plans only must make maximum contributions to their plans to receive replacement rates at ages 62 and 65 that are comparable to the FERS’ replacement rate with no employee contributions to the TSP. (See figs. 2.12 and 2.13.)
When employees retire at ages 62 and 65 with 30 years of service, the replacement rates available under FERS and the average of the private sector programs that have both DB and DC plans are similar at all three levels of employee contributions as they were with 20 years of service. The relative position of the CSRS replacement rate at 30 years of service has improved. CSRS now provides a replacement rate that is similar to (1) the averages of the replacement rates available from the private sector programs with DB plans only, (2) programs with DC plans only when employees make the contributions that are needed to receive the maximum employer match, and (3) FERS and private sector programs that have both DB and DC plans when the employees make no contributions to their plans. CSRS has a higher replacement rate than private sector DC plans only programs when employees contribute less than the amounts needed to get the maximum employer match. However, CSRS’ replacement rate remains behind the rates available from FERS and private sector programs that have DB and DC plans as long as the FERS and private sector employees make some contributions to their DC plans. (See figs. 2.14 and 2.15.)
section_title: Impact of Cost-of-Living Adjustment Practices on Long-Term Replacement Rates
paragraphs: After retirement benefits begin, inflation will erode the purchasing power of these benefits unless they are maintained by COLAs. By law, the Social Security portion of FERS and private sector retirement programs is adjusted each year. Social Security retirement benefits are increased each year by the percentage increase in the CPI, which is used for inflation adjustment purposes. However, in the DB plan portion of private sector employers’ programs, wide variation exists in how COLAs are provided. The adjustments tend to be ad hoc, and their size and frequency tend to vary by employer size. The contractor we used routinely tracks the COLAs given by 50 large companies, but neither we nor the contractor are aware of any data sources that accurately track COLAs given by private sector DB plans, overall. Using COLA data from the 50 companies, the contractor determined that employees who retired from the companies in 1985, had received, on average, a 4-percent benefit increase by 1994. These cumulative COLAs offset about 10 percent of the CPI increase during the 10-year period. For employees who retired in 1975, cumulative COLAs averaging 30 percent were given, which was about 15 percent of the CPI increase during the 20-year period from 1975 to 1994. In the absence of more complete data on DB plan COLAs, we used the 50 companies’ COLA experiences to represent all private sector DB plans in calculating replacement rates available from private sector programs 10 and 20 years after retirement.
FERS does not always provide full COLAs in its DB plan. COLAs for nondisabled FERS retirees are not paid until retirees reach age 62. When paid, the COLAs are equal to the annual increase in the CPI if the price increase is 2 percent or less. The adjustment is 2 percent if the CPI increase is between 2 and 3 percent. If the CPI increase is 3 percent or greater, the adjustment is equal to the CPI increase minus 1 percent.
Like Social Security, the law calls for CSRS benefits to be adjusted annually by the percentage increase in the CPI. However, since 1980, several legislative provisions have often reduced, delayed, or skipped the scheduled CSRS COLAs. For example, in 1983, the CSRS COLA was delayed 1 month and was less than the increase in the CPI for nondisabled retirees under age 62; the 1984 COLA was delayed for 9 months; in 1986, the President and Congress decided not to grant any COLAs to federal retirees that year; and in fiscal years 1994, 1995, and 1996, the COLA payments were delayed until April of each of those years instead of the scheduled January payment dates. In 1995, we reported that the CSRS COLA delays and reductions during the 10-year period from 1985 to 1994 had caused the COLAs to cover about 80 percent of the CPI increase for the period. In figures 2.16 through 2.20, the bars labeled CSRS I represent the statutory policy of full adjustments for CSRS, and the bars labeled CSRS II represent the actual COLA practices during 1985 through 1994 when 80 percent of the CPI increase was covered.
Because of the full COLAs provided for CSRS I, its replacement rates remain the same in constant dollars, regardless of the length of retirement. In contrast, the replacement rates available from FERS and private sector programs decline in constant dollars during retirement because only the Social Security portion of these programs is fully adjusted. Similarly, the limitations on COLAs under CSRS II cause retirees to lose purchasing power, or receive declining replacement rates, during their retirement years.
While FERS makes greater immediate benefits available than CSRS when employees retire at age 55 with 30 years of service, FERS’ smaller COLAscause its replacement rate to fall behind the CSRS I replacement rate after 20 years of retirement (i.e., the effective FERS replacement rate is 65 percent at retirement, declines to 57 percent after 10 years, and further declines to 49 percent after 20 years in comparison to the constant CSRS I replacement rate of 53 percent at retirement and thereafter). However, the FERS replacement rates for age 55 retirees with 30 years of service continue to exceed the average replacement rates for private sector programs in the contractor’s database, with both DB and DC plans that start at 45 percent, increase to 49 percent after 10 years (because of the addition of Social Security retirement benefits at age 62), and decrease to 39 percent after 20 years of retirement. The FERS replacement rate does not show an increase at 10 years after retirement because the FERS annuity supplement ceases at age 62 when Social Security retirement benefits are available. The FERS replacement rate for employees who retire at age 55 with 30 years of service also exceeds the CSRS II replacement rate after 20 years of retirement because, together, the FERS’ higher replacement rate at retirement and the increases provided by COLAs in the FERS’ DB plan and Social Security keep its replacement rate just above CSRS II with its COLA that covers 80 percent of the increase in the CPI.
When retirement occurs at age 62 or older, Social Security retirement benefits are available immediately upon retirement for FERS and private sector retirees. Therefore, the changes in the relative replacement rates that occur within a particular program design after retirement at age 55 do not occur at the older retirement ages. For employees who retire at ages 62 and 65 with 20 or 30 years of service, FERS starts with the highest replacement rates of all programs, and this advantage continues throughout the next 20 years. (See figs. 2.17 through 2.20.)
When retirement occurs at age 62 or older with 20 years of service, the private sector programs in the contractor’s database that have both DB and DC plans rank in the second position for the full 20 years. CSRS I stays in the third position, but moves closer to the private sector program average by the 20-year point. CSRS II remains at the bottom for the full 20 years. (See figs. 2.17 and 2.18.)
When retirement occurs at age 62 or older with 30 years of service, the averages of the replacement rates for the private sector programs that have both DB and DC plans are higher than those for CSRS I at retirement and 10 years after retirement. However, by 20 years after retirement, the CSRS I replacement rate becomes higher than the private sector rate. The replacement rate for CSRS II remains lower than the rates for all other programs at the 10-year and 20-year points. (See figs. 2.19 and 2.20.) However, at the 20-year point, the replacement rates available are similar for employees who retire at age 62 with 30 years of service under CSRS II and the private sector programs that include both DB and DC plans. CSRS II’s replacement rate is 44 percent, and the private sector rate is 45 percent.
section_title: Comparative Features of FERS, CSRS, and Private Sector Retirement Programs
paragraphs: The designs of the private sector retirement programs in the contractor’s database fall into the following three distinct groups: (1) programs with Social Security, a DB plan, and a DC plan; (2) programs with Social Security and DC plans only; and (3) programs with Social Security and DB plans only. The FERS program design is the same as the first group, while CSRS is different from all three groups. CSRS is solely a DB plan with no Social Security coverage. Employees in CSRS may contribute to the TSP, but the government makes no contribution to their accounts.
Along with the differing program designs, specific features of federal and private sector DB and DC plans often vary considerably from plan to plan, including the ages at which benefits are available, the formulas used to calculate benefit amounts, the amounts of contributions employees are required to pay toward plan costs, and the arrangements for determining employer contributions to DC plans.
This chapter compares and contrasts the features of FERS, CSRS, and private sector retirement programs in the contractor’s database.
subsections: section_title: Program Designs
paragraphs: DB plans are offered by 75 percent of the 661 private sector employers in the contractor’s database, and DC plans are offered by 93 percent of the employers. FERS includes both a DB plan and a DC plan—the TSP—to which the government and most FERS employees contribute. CSRS includes a DB plan only, but CSRS employees are allowed to contribute to the TSP. The federal government does not contribute to CSRS employees’ TSP accounts. All of the private sector programs and FERS provide Social Security coverage. Employees in CSRS are not covered by Social Security through their federal employment.
In the contractor’s database, 69 percent of the 661 private sector programs consisted of three parts—Social Security, DB plans, and DC plans. Another 25 percent of the programs had Social Security and DC plans only. The remaining 7 percent of the programs had Social Security and DB plans only. Figure 3.1 shows the various designs of the federal and private sector programs.
section_title: Program Features
paragraphs: Table 3.1 shows that the major features of FERS and CSRS, as well as private sector DB and DC plans, vary greatly. However, one specific feature alone does not reflect a retirement program’s overall generosity. Rather, it is the combination of all the features working together that determines benefit amounts. For example, one DB plan may use employees’ 5-year salary averages in benefit calculations, and a second DB plan may use employees’ 3-year salary averages. In this case, the salary average feature in the second plan appears better because it usually would produce higher salary averages. However, the first plan could produce greater benefit amounts if its benefit formula provided a higher percentage of the salary average for each year of service than the second plan. But, the second plan could still provide greater benefit amounts for employees who retire at age 55 if the first plan had a feature calling for reductions in accrued benefits for employees who retire at that age and if the second plan had no such feature.
Through a replacement rate analysis, as used in the retirement program comparisons presented in chapter 2, all of a program’s features are considered in calculating the benefit amounts the program provides at varying ages and years of service so that meaningful comparisons with other programs can be made.
Additional details on the features of the FERS, CSRS, and private sector DB plans are presented in appendix IV. Appendix V presents details on the FERS and private sector DC plans.
section_title: Conclusions and Agency and Contractor Comments
subsections: section_title: Conclusions
paragraphs: There is no definitive answer to the question of whether federal retirement programs offer greater or smaller benefits than private sector programs. Depending on individual retirees’ circumstances and how they interact with the retirement programs’ designs, the benefits available from FERS and CSRS can be smaller, similar, or greater than benefits available from the private sector programs in the contractor’s database.
For example, CSRS benefits are greater than the benefits available from the private sector programs in the contractor’s database when employees retire before age 62. However, for employees who retire at age 62 or older with 20 years of service, CSRS benefits at retirement are smaller than the benefits available from private sector programs in the database of all designs. After 20 years of retirement, CSRS benefits for age 62 or older retirees who retired with 20 years of service are still behind the private sector programs that have both DB and DC plans, even though the COLA provision in CSRS provides greater increases in benefits over time than private sector programs.
CSRS replacement rates are greater than those available in the private sector when employees retire at age 55 principally because private sector DB plans generally impose reductions in accrued benefits for employees who retire at that age. CSRS imposes no such reductions; but it does permit employees to retire at age 55 under regular retirement provisions only if they have 30 or more years of service. Therefore, CSRS limits age 55 retirement eligibility to long-term, career employees. The average private sector program has no similar design feature, although the average program allows employees to retire on reduced benefits at age 55 with fewer than 30 years of service—a feature that does not exist in CSRS. Most federal employees do not have 30 years of service by the time they are age 55, and, of those who do, many elect to retire later. As a result, the average CSRS retirement age is about 62.
The lack of Social Security coverage for employees in CSRS is a major reason why the private sector programs in the contractor’s database can provide higher replacement rates to employees who retire at age 62 or older. Moreover, CSRS employees do not participate in a DC plan to which their employer contributes. As this report shows, most private sector programs in the contractor’s database included DC plans to which their employers contribute and from which employees can earn significant benefit amounts.
CSRS was closed to new entrants at the end of 1983 and was replaced by FERS—a completely restructured federal retirement program. FERS follows the model used by most of the private sector employers in the contractor’s database: a three-part retirement package that includes Social Security, a DB plan, and a DC plan. As our findings illustrate, the FERS benefits from Social Security, the DB plan, and the government’s automatic 1-percent contribution to the TSP alone are smaller than CSRS benefits for employees who retire at age 55. However, these FERS benefits can be greater than CSRS benefits for employees who retire at age 62 or older, even though FERS employees generally contribute the same total percentage of their salaries toward the cost of these benefits as CSRS employees contribute. By contributing to their DC plan, FERS employees can obtain greater benefits than are available from CSRS at all ages, but they will pay more to receive the greater benefit amounts.
FERS continued CSRS’ objective of encouraging employees to spend their working careers in federal service by making unreduced benefits available at age 55 only to employees who serve 30 or more years with the government. Consistent with this objective, FERS also provides an annuity supplement to career employees who retire before Social Security benefits are otherwise available. This feature is not commonly found in private sector programs and, along with the lack of reductions in accrued DB plan benefits for age 55 retirees in federal programs, the feature causes FERS replacement rates available at age 55 to exceed the replacement rates available from the private sector programs of all designs in the contractor’s database. However, as with CSRS, FERS employees generally have been older than age 55 when they retired. FERS was designed to encourage, but not to require, longer careers by raising the age of earliest retirement eligibility to age 57 for employees born after 1969 and by increasing the DB plan benefit formula for employees who continue working to at least age 62.
For employees who retire at age 62 or older, the total benefits available at retirement from all three parts of FERS are quite comparable to the average benefits available from private sector programs in the contractor’s database that also have DB and DC plans in addition to Social Security. Because the COLA provision in the FERS’ DB plan provides greater increases in benefits over time than do private sector DB plans on average, FERS retirees will fare better in times of high inflation when increases in the CPI will be greater. However, the FERS COLA does not fully maintain retirees’ purchasing power and, thereby, represents a reduction from the inflation protection intended for CSRS retirees.
section_title: Agency and Contractor Comments and Our Evaluation
paragraphs: Watson Wyatt Worldwide and the Federal Retirement Thrift Investment Board provided oral comments on the draft of this report, and OPM provided written comments. All of the officials agreed with our conclusion that there is no definitive answer to the question of whether federal retirement programs offer greater or smaller benefits than private sector programs. The Thrift Board and OPM officials noted that it is very difficult to compare varied federal and private sector retirement programs. They said, and we agree, that our analyses and conclusions are dependent on (1) the database used; (2) the age and service characteristics of the illustrative employees; and (3) the assumptions made about salary histories, return on investments, the conversion of defined contribution plan amounts at retirement to annuities, and the rate of inflation.
We believe that the database and illustrative employees used and the assumptions made are reasonable because they either were those used by OPM in its latest actuarial valuations, were based on standards used in the benefits field, or were necessary to provide a common basis of comparison. We modified the executive summary and chapter 1 of this report to clarify that the use of different databases, illustrative employees, and assumptions would have changed the relative magnitude of benefits available among retirement programs as well as the levels of benefits provided by all programs. Using such data could possibly, in some circumstances, change the relative rankings between programs. However, while we believe that no one database or set of assumptions could fully capture the range of private sector programs and employees’ experiences, we also believe that using different databases and assumptions would not have changed our conclusion that no definitive answer exists to the question of whether federal programs offer greater or smaller benefits than private sector programs.
OPM also commented that our analyses and conclusions might be better understood if additional information on the database, illustrative employees, and the assumptions were provided in the report (i.e., the executive summary and chapter 1 of the report). OPM expressed concern that we had implied in the executive summary that variations in retirement benefits result from employee decisions and situations, while the body of the report made it clear that the variations result from the structural differences between retirement programs. We agree that the variations in benefits available did not result solely from employee choices and have modified the executive summary to reflect that it is the interactions between factors, such as employees’ ages, years of service, and DC plan contribution behavior, and the varying designs and provisions of the retirement programs that affect the comparisons among programs.
OPM also said that while it is difficult to include every material item in the executive summary, some significant information contained in the body of the report was not included in the executive summary. OPM mentioned the following: (1) that private sector salaries used in calculating retirement benefits often include overtime and bonuses, (2) that a meaningful “typical” retirement benefit formula does not exist for the private sector, and (3) that retirement program designs vary considerably between large and small private sector companies. We agree that it was difficult to include all information in the executive summary and, as noted previously, have modified the executive summary to clarify that the use of different databases, illustrative employees, and assumptions would have changed the relative magnitude of benefits available among retirement programs, the levels of benefits provided by all programs, and could, in some circumstances, change the relative rankings between programs. We have modified the executive summary to specifically mention that many private sector programs use overtime, bonuses, or commissions in their benefit calculations. We have modified the objective, scope, and methodology section of chapter 1 to include that (1) the salary histories include base pay only, (2) benefit calculations in many of the private sector programs in the contractor’s database would include other types of compensation in addition to base pay, and (3) had we assumed other types of compensation in addition to the base pay represented in the salary histories, the averages of the replacement rates from the private sector programs would have increased. We also deleted the footnote in chapter 2 to which OPM referred.
We agree that not being able to identify a typical benefit formula is significant. It is one of the major reasons why we selected the replacement rate analysis as our method of comparison and had the contractor separately calculate and then average the benefits available from each of the 435 retirement programs in the private sector database.
We agree with OPM that retirement program designs vary considerably and say this in the executive summary. We also agree that program designs vary by employer size and have discussed this in an earlier GAO report.Our methodology did not include analyses by employer size because the contractor’s database included primarily large employers.
The contractor and the Thrift Board also provided editorial and technical comments that we incorporated in the report as appropriate.
section_title: FERS, CSRS, and Watson Wyatt Worldwide Database Statistics
paragraphs: All employers in database (number of employees) could be valued (number of employees)
50th percentile (median)
Less than 0.5 percent.
Note 1: Geographic locations refer to a region(s) in which the employer has at least 1,000 employees or 10 percent of its workforce.
Note 2: Multiple responses were permitted. Therefore, percentages total more than 100 percent.
section_title: Salary Histories Used in Pension Plan and Social Security Benefit Calculations
paragraphs: To calculate retirement benefit amounts available from Social Security and individual employers’ DB and DC plans, a number of factors must be taken into account. A primary factor is an employee’s salary history. Most DB plans base benefits on employees’ average annual salaries received in the final years of employment, such as the last 3 or 5 years. Some use the average of the annual salaries that employees received during their entire careers with an employer. Salary histories are also necessary to determine the total amounts that employees and employers could contribute to DC plans over employees’ working years, as well as to calculate the Social Security benefits earned while working for a particular employer.
For all of the illustrative employees used in this report to show the relative benefit amounts available from FERS, CSRS, and private sector retirement programs, we assumed the employees began working in 1995 and worked throughout the specified periods (20 or 30 years) under each program used in the comparisons. We developed employee salary histories that resulted in final salaries equivalent in 1995 dollars to $25,000, $40,000, and $60,000. The $25,000 salary history has the slowest rate of growth and was selected to represent the experiences of employees at lower salary levels. The $40,000 salary history was selected to represent the experiences of the “typical” federal employee because employees retiring under the optional retirement provisions of CSRS and FERS in 1995 had final salaries averaging about $40,000. The $60,000 salary history has the fastest rate of growth and was selected to represent the experiences of higher-paid employees. The three salary histories are presented in tables II.1, II.2, and II.3.
subsections: section_title: Social Security Benefits Produced by Salary Histories
paragraphs: Table II.4 shows the Social Security benefit amounts earned by FERS and private sector employees with the above salary histories and years of service, assuming the employees had no Social Security-covered employment with any other employer before or after retirement.
Social Security benefits were assumed to be payable at age 62 for retirements before age 62 and were adjusted for the 7 years of 4.5-percent inflation between the ages of 55 and 62.
section_title: Results of the Replacement Rate Analysis
paragraphs: Note 1: Because of differences in the annual rates of growth in the three salary histories, the replacement rates may differ somewhat for each salary history.
Note 2: Some column cells show no data because all of the program components are not applicable to all of the retirement plans.
subsections: section_title: Table III.2: Average Replacement Rates Available With Maximum Employer Contributions to DC Plans - Age 62 and 20 Years of Service
paragraphs: Note 1: Because of differences in the annual rates of growth in the three salary histories, the replacement rates may differ somewhat for each salary history.
Note 2: Some columns show no data because all of the program components are not applicable to all of the retirement plans.
section_title: Table III.3: Average Replacement Rates Available With Maximum Employer Contributions to DC Plans - Age 65 and 20 Years of Service
paragraphs: Note 1: Because of differences in the annual rates of growth in the three salary histories, the replacement rates may differ somewhat for each salary history.
Note 2: Some columns show no data because all of the program components are not applicable to all of the retirement plans.
section_title: Table III.4: Average Replacement Rates Available With Maximum Employer Contributions to DC Plans - Age 62 and 30 Years of Service
paragraphs: Note 1: Because of differences in the annual rates of growth in the three salary histories, the replacement rates may differ somewhat for each salary history.
Note 2: Some columns show no data because all of the program components are not applicable to all of the retirement plans.
section_title: Table III.5: Average Replacement Rates Available With Maximum Employer Contributions to DC Plans - Age 65 and 30 Years of Service
paragraphs: Note 1: Because of differences in the annual rates of growth in the three salary histories, the replacement rates may differ somewhat for each salary history.
Note 2: Some columns show no data because all of the program components are not applicable to all of the retirement plans.
section_title: Table III.6: Average Replacement Rates Available With One-half of the Maximum Employer Contributions to DC Plans - Age 55 and 30 Years of Service
paragraphs: Note 1: Because of differences in the annual rates of growth in the three salary histories, the replacement rates may differ somewhat for each salary history.
Note 2: Some columns show no data because all of the program components are not applicable to all of the retirement plans.
section_title: Table III.7: Average Replacement Rates Available With One-half of the Maximum Employer Contributions to DC Plans - Age 62 and 20 Years of Service
paragraphs: Note 1: Because of differences in the annual rates of growth in the three salary histories, the replacement rates may differ somewhat for each salary history.
Note 2: Some columns show no data because all of the program components are not applicable to all of the retirement plans.
section_title: Table III.8: Average Replacement Rates Available With One-half of the Maximum Employer Contributions to DC Plans - Age 65 and 20 Years of Service
paragraphs: Note 1: Because of differences in the annual rates of growth in the three salary histories, the replacement rates may differ somewhat for each salary history.
Note 2: Some columns show no data because all of the program components are not applicable to all of the retirement plans.
section_title: Table III.9: Average Replacement Rates Available With One-half of the Maximum Employer Contributions to DC Plans - Age 62 and 30 Years of Service
paragraphs: Note 1: Because of differences in the annual rates of growth in the three salary histories, the replacement rates may differ somewhat for each salary history.
Note 2: Some columns show no data because all of the program components are not applicable to all of the retirement plans.
Note 1: Because of differences in the annual rates of growth in the three salary histories, the replacement rates may differ somewhat for each salary history.
Note 2: Some columns show no data because all of the program components are not applicable to all of the retirement plans.
Note 1: Because of differences in the annual rates of growth in the three salary histories, the replacement rates may differ somewhat for each salary history.
Note 2: Some columns show no data because all of the program components are not applicable to all of the retirement plans.
Note 1: Because of differences in the annual rates of growth in the three salary histories, the replacement rates may differ somewhat for each salary history.
Note 2: Some columns show no data because all of the program components are not applicable to all of the retirement plans.
Note 1: Because of differences in the annual rates of growth in the three salary histories, the replacement rates may differ somewhat for each salary history.
Note 2: Some columns show no data because all of the program components are not applicable to all of the retirement plans.
Note 1: Because of differences in the annual rates of growth in the three salary histories, the replacement rates may differ somewhat for each salary history.
Note 2: Some columns show no data because all of the program components are not applicable to all of the retirement plans.
Note 1: Because of differences in the annual rates of growth in the three salary histories, the replacement rates may differ somewhat for each salary history.
Note 2: Some columns show no data because all of the program components are not applicable to all of the retirement plans.
section_title: Features of Federal and Private Sector Defined Benefit Plans
paragraphs: The Watson Wyatt database included information on the retirement programs of 661 employers of which 497 had DB plans. Sufficient information was available to enable Watson Wyatt to determine the benefit amounts provided by 435 of the 661 employers. Of the 435 employers whose program benefits could be valued, 329 had DB plans. Of these 329 employers, 25 had retirement programs that included DB plans only and 304 had programs that included both DB and DC plans.
This appendix describes in detail the features of all 497 DB plans included in the 661 programs in Watson Wyatt’s database. It also describes separately the features of the 329 DB plans in the 435 programs that could be valued. The private sector DB plans are divided into three categories. The first category, “all employers in database,” contains data on all 497 DB plans. The second category, “DB plans only,” contains data on the 25 programs with DB plans only whose benefits could be valued. The third category, “DB and DC plans,” contains data on the DB plans in the 304 programs with DB and DC plans whose benefits could be valued. Therefore, the number of plans in the second and third categories will not total the number of plans in the first category.
The number of plans in each table varies because plans are sometimes excluded when a particular feature is not applicable to them. For example, in table IV.1, the total number of plans in the “all employers in database” category is 497, but in table IV.5, the total number of plans in that category is 470. Twenty-seven plans were excluded because they were nontraditional plans that, by nature, do not use salary averages in benefit calculations.
Table IV.1: Eligibility Requirements to Participate in the Defined Benefit Plans Private sector (percentage of plans)
Employers whose program benefits could be valued Private sector (percentage of plans)
Cliff vesting, 5 years service If certain conditions are satisfied at the time an employee separates from an employer, the employee will have a vested interest in all or a portion of his or her accrued defined benefit plan benefits. Under cliff vesting, an employee must complete a set number of years of service before any benefits are guaranteed. Under graded vesting, an employee is guaranteed an increasing portion of plan benefits as his or her years of service increase.
subsections: section_title: Table IV.3: Employee Contribution Requirements
paragraphs: Private sector (percentage of plans)
Less than 0.5 percent.
section_title: Table IV.4: Compensation Elements Included in Benefit Calculation Base
paragraphs: Private sector (percentage of plans)
Private sector (percentage of plans)
section_title: Table IV.6: Social Security Integration in Benefit Formulas
paragraphs: Private sector (percentage of plans)
Employers whose program benefits could be valued 24 No Social Security integration No Social Security coverage 286 Table IV.7: Age and Years of Service Requirements for Unreduced Retirement Benefits Private sector (percentage of plans)
Less than 0.5 percent.
section_title: Table IV.8: Age and Years of Service Requirements for Reduced Retirement Benefits
paragraphs: Private sector (percentage of plans)
Less than 0.5 percent.
section_title: Table IV.9: Supplemental Benefits Available for Retirees Receiving Reduced Benefits
paragraphs: Private sector (percentage of plans)
Employers whose program benefits could be valued 86 No supplemental benefits for retirees not eligible for unreduced benefits. If eligible for unreduced benefits, an annuity supplement is payable from the MRA to age 62. This supplement equals the portion of the Social Security benefit that was earned during federal service and would be payable at age 62.
Private sector (percentage of plans)
Employers whose program benefits could be valued Fewer than five employers/plans in column, and percentages were not determined.
section_title: Table IV.11: Program Provided at Least One Postretirement Benefit Increase During 1983-92
paragraphs: Private sector (percentage of plans)
Employers whose program benefits could be valued Table IV.12: Years When Program Provided Postretirement Increases During 1983-92 Private sector (percentage of plans)
Employers whose program benefits could be valued 19 See table IV.13 for actual postretirement increases paid.
See table IV.13 for actual postretirement increases paid.
Employers in the Watson Wyatt database may have provided more than one increase during 1983-92. Therefore, the percentages total more than 100 percent.
Month and year when postretirement increases were provided FERS became effective January 1, 1987, and COLA payments began in January 1988.
section_title: Features of Federal and Private Sector Defined Contribution Plans
paragraphs: The Watson Wyatt database included information on the retirement programs of 661 employers of which 617 had DC plans. Sufficient information was available to enable Watson Wyatt to determine the benefit amounts provided by 435 of the 661 employers. Of the 435 employers whose program benefits could be valued, 410 had DC plans. Of these 410 employers, 106 had retirement programs that included a DC plan only and 304 had programs that included both DB and DC plans.
This appendix describes in detail the features of all 617 DC plans included in the 661 programs in Watson Wyatt’s database. It also describes separately the features of the 410 DC plans in the 435 programs that could be valued. The private sector DC plans are divided into three categories. The first category, “all employers in database,” contains data on all 617 DC plans. The second category, “DC plans only,” contains data on the 106 programs with DC plans only whose benefits could be valued. The third category, “DB and DC plans,” contains data on the DC plans in the 304 programs with DB and DC plans whose benefits could be valued. Thus, the number of plans in the second and third categories will not total the number of plans in the first category.
The number of plans in each table varies because plans are sometimes excluded when a particular feature is not applicable to them. For example, in table V.1, the total number of plans in the “all employers in database” category is 617, but in table V.2, the total number of plans in that category is 530 because only 530 plans of the 617 plans include employer contributions.
Table V.1: Eligibility Requirements to Participate in the Defined Contribution Plans Private sector (percentage of plans)
Employers whose program benefits could be valued 19 Open season every 6 months; new hires may join during the second open season after hire (6 to 12 months after hire)
Open season every 6 months; new hires may join during the second open season after hire (6 to 12 months after hire)
Table V.2: Vesting Schedules (Plans With Employer Contributions)
Private sector (percentage of plans)
Full and immediate vesting in employee contributions and earnings (no employer contributions are made)
Table V.3: Types of Employer Contributions (Plans With Employer Contributions)
Private sector (percentage of plans)
Employers whose program benefits could be valued 1% of pay; 100% match on the first 3% of pay and 50% on the next 2% of pay that employee contributes 300 Table V.4: Amounts of Employer Contributions as a Percentage of Pay in 1992 Private sector (percentage of plans)
Table V.5: Employer-Matching Contributions (Plans With Employer Contributions)
Private sector (percentage of plans)
Employers whose program benefits could be valued 300 Table V.6: Maximum Employee Contributions Matched by Employer in 1993 (Plans With Matching Contributions)
Private sector (percentage of plans)
Less than 0.5 percent.
subsections: section_title: Table V.7: Percentiles of Maximum Employee Contributions Matched by Employer in 1993 (Plans With Matching Contributions)
paragraphs: Private sector (maximum employee contribution percentages matched)
Employers whose program benefits could be valued 5% 5% of pay 283 Table V.8: Maximum Pretax Employee Contributions Allowed in 1993 (Plans With Employee Contributions)
Private sector (percentage of plans)
Less than 0.5 percent.
section_title: Table V.9: Percentiles of Maximum Pretax Employee Contributions Allowed in 1993 (Plans With Employee Contributions)
paragraphs: Private sector (maximum pretax employee contributions allowed)
Employers whose program benefits could be valued 10% 10% of pay 284 Table V.10: Amounts of Employer Match on a 3-Percent Employee Contribution (Plans That Only Match Contributions Up to 3 Percent)
Private sector (percentage of plans)
Employers whose program benefits could be valued 6 100% employer match on employee contributions up to 3% of pay and 50% employer match on employee contributions of next 2% of pay Table V.11: Percentiles of Amounts of Employer Match on a 3-Percent Employee Contribution (Plans That Only Match Contributions Up to 3 Percent)
Private sector (employer match on a 3% employee contribution)
Employers whose program benefits could be valued 50% 100% employer match on employee contributions up to 3% of pay and 50% employer match on employee contributions of next 2% of pay 28 Table V.12: Amounts of Employer Match on a 4-Percent Employee Contribution (Plans That Only Match Contributions Up to 4 Percent)
Private sector (percentage of plans)
Employers whose program benefits could be valued 11 100% employer match on employee contributions up to 3% of pay and 50% match on employee contributions of next 2% of pay. At 4% employee contribution, employer match is 87.5%.
Table V.13: Percentiles of Amounts of Employer Match on a 4-Percent Employee Contribution (Plans That Only Match Contributions Up to 4 Percent)
Private sector (employer match on a 4% employee contribution)
Employers whose program benefits could be valued 50% 100% employer match on employee contributions up to 3% of pay and 50% match on employee contributions of next 2% of pay. At 4% employee contribution, employer match is 87.5%.
35 Table V.14: Amounts of Employer Match on a 5-Percent Employee Contribution (Plans That Only Match Contributions Up to 5 Percent)
Private sector (percentage of plans)
Employers whose program benefits could be valued 17 100% employer match on employee contributions up to 3% and 50% match on employee contributions of next 2% of pay. At 5% employee contribution, employer match is 80%.
Table V.15: Percentiles of Amounts of Employer Match on a 5-Percent Employee Contribution (Plans That Only Match Contributions Up to 5 Percent)
Private sector (employer match on a 5% employee contribution)
Employers whose program benefits could be valued 35% 100% employer match on employee contributions up to 3% and 50% match on employee contributions of next 2% of pay. At 5% employee contribution, employer match is 80%.
36 Table V.16: Amounts of Employer Match on a 6-Percent or More Employee Contribution (Plans That Only Match Contributions Up to 6 Percent or More)
Private sector (percentage of plans)
Less than 0.5 percent.
section_title: Table V.17: Percentiles of Amounts of Employer Match on a 6-Percent or More Employee Contribution (Plans That Only Match Contributions Up to 6 Percent or More)
paragraphs: Private sector (employer match on a 6% or more employee contribution)
Employers whose program benefits could be valued 40% Employer does not match employee contributions above 5% of pay 176 Table V.18: Employer-Set Dollar Limitation on Employer-Matching Contributions Private sector (percentage of plans)
Employers whose program benefits could be valued Table V.19: Employer Contributions Not Based on a Match of Employee Contributions (Plans With Employer Contributions)
Private sector (percentage of plans)
Table V.20: Employer-Nonmatching Contributions Based on Profits Private sector (percentage of plans)
Employers whose program benefits could be valued 61 Private sector (percentage of plans)
Private sector (percentage of plans)
Employers whose program benefits could be valued Table V.23: In-Service (Other Than Hardship) Withdrawals Permitted Before Age 59-1/2 Private sector (percentage of plans)
section_title: Comments From the Office of Personnel Management
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