Federal Pensions: Judicial Survivors' Annuities System Costs
Released: 2002-06-26T00:00:00

Letter

Background

Most federal civilian employees are covered by the Civil Service Retirement System (CSRS) or the Federal Employees’ Retirement System (FERS). Both of these retirement plans include survivor benefit provisions. Three separate retirement plans apply to various groups of judges in the federal judiciary, with JSAS being available to participants in all three retirement plans to provide annuities to their surviving spouses and children. Appendix I provides additional information regarding retirement plans that are available to federal judges.

History of JSAS

JSAS was created in 1956 to provide financial security for the families of deceased federal judges. It provides benefits to eligible spouses and dependent children of judges who elect coverage within either 6 months of taking office, 6 months after getting married, or during an open season authorized by statute. Active and senior judges currently contribute 2.2 percent of their salaries, and retired judges generally contribute 3.5 percent of their retirement salaries to JSAS. Upon a judge’s death, the surviving spouse is to receive an annual annuity that is equal to 1.5 percent of the judge’s average annual salary during the 3 highest consecutive paid years (commonly known as the “high 3”) times the judge’s years of creditable service. The annuity may not exceed 50 percent of the high 3 and is guaranteed to be no less than 25 percent. Separately, an unmarried dependent child under age 18, or 22 if a full-time student, receives a survivor annuity that is equal to a maximum of 10 percent of the judge’s 3 highest paid years or 20 percent of the judge’s 3 highest paid years divided by the number of children, whichever is smaller. JSAS annuitants receive an annual adjustment in their annuities at the same time, and by the same percentage, as any cost-of-living adjustment (COLA) received by CSRS annuitants. Spouses and children are also eligible for Social Security survivor benefits.

Since its inception in 1956, JSAS has changed several times. Because of concern that too few judges were participating in the plan (74 percent of federal judges participated in 1985, which was down from 90 percent in 1976), Congress made broad reforms effective in 1986 with the Judicial Improvements Act of 1985 (Public Law 99-336). The 1985 Judicial Improvement Act (1) increased the annuity formula for surviving spouses from 1.25 percent to the current 1.5 percent of the high 3 for each year of creditable service and (2) changed the provisions for surviving children’s benefits to relate benefit amounts to judges’ high 3 rather than the specific dollar amounts provided by the Judicial Survivors’ Annuities Reform Act of 1976 (Public Law 94-554). In recognition of the significant benefit improvements that were made, the 1985 Judicial Improvements Act increased the amounts that judges were required to contribute from 4.5 percent to 5 percent of their salaries, including retirement salaries.

The 1985 Judicial Improvements Act also changed the requirements for government contributions to the plan by specifying that the government would contribute whatever amounts were necessary (up to a maximum of 9 percent of participating judges’ salaries or retirement salaries) to keep the plan fully funded. Under the 1976 Judicial Survivors’ Annuities Reform Act, the government matched the judges’ contributions of 4.5 percent of salaries and retirement salaries. Despite the benefit improvements in the 1985 Judicial Improvements Act, the rate of participation in JSAS continued to decline. In 1991, the rate of participation was about 40 percent overall and 25 percent for newly appointed judges.

In response to concerns that required contributions of 5 percent may have created a disincentive to participate, Congress enacted the 1992 Federal Courts Administration Act. Under this act, participants’ contribution requirements were reduced to 2.2 percent of salaries for active and senior judges and 3.5 percent of retirement salaries for retired judges. Another significant change was an increase in benefits for survivors of retired judges. This increase was accomplished by including years spent in retirement in the calculation of creditable service and the high 3 salary averages.

The 1992 Federal Courts Administration Act also allowed the judges to stop contributing to the plan if they ceased to be married and granted benefits to survivors of any judge who died in the interim between leaving office and the commencement of a deferred annuity. As of September 30, 2001, there were 1,256 active and senior judges, 203 retired judges, and 260 survivor annuitants covered under JSAS compared to 1,284 active and senior judges, 136 retired judges, and 241 survivor annuitants as of September 30, 1998.

Defining Cost for JSAS JSAS is financed by judges’ contributions and direct appropriations in an amount estimated to be sufficient to fund the future benefits to current participants. The government’s contribution is approved through an annual appropriation and is not based on a rate or percentage of judges’ salaries. An enrolled actuary engaged by the Administrative Office of the United States Courts (AOUSC) calculates the annual amount of funding needed based on the difference between the present value of the expected future benefit payments to participants and the present value of net assets in the plan. Appendix II provides more details on the formulas used to determine the participants’ and the government’s contributions and lump sum payments.

The cost of a retirement or survivor benefit plan is typically not measured by annual expenditures for benefits. Such expenditures are not an indicator of the overall long-term cost of a plan. The more complete and acceptable calculation of a plan’s cost is the projected future outlays to retirees or survivors, based on the current pool of participants, with such costs allocated annually. This annual cost allocation is referred to as the normal cost. Normal cost calculations, prepared by an enrolled actuary, are estimates and require that many actuarial assumptions be made about the future, including mortality rates, turnover rates, return on investments, salary increases, and COLA increases over the life spans of current and future participants. The plan’s actuary using the plan’s funding method, in this case, the aggregate cost method, determines the plan’s normal cost. Under the aggregate cost method, the normal cost is the level percentage of future salaries, which will be sufficient, along with investment earnings and the plan’s assets, to pay the plan’s benefits. There are many acceptable actuarial methods for calculating normal cost. Regardless of which cost method is chosen, the expected total long-term cost of the plan should be the same; however, year-to-year costs may differ, depending on the cost method used.

Objectives, Scope, and Methodology

Our objectives were to determine whether participating judges’ contributions for the 3 years ending in fiscal year 2001 accounted for 50 percent of the JSAS costs and, if not, what adjustments in the contribution rates would be needed to achieve the 50 percent figure.

To satisfy our objectives, we examined the normal costs reported in the JSAS annual report submitted by AOUSC to the Comptroller General for plan years 1999 through 2001. We also examined participants’ contributions and other relevant information in the annual report. An independent accounting firm hired by AOUSC audited the JSAS financial and actuarial information, included in the JSAS annual report, with input from an enrolled actuary regarding relevant data such as actuarial present value of accumulated plan benefits. An enrolled actuary certified those amounts that are included in the JSAS annual report. We also discussed the contents of the JSAS reports with officials from AOUSC for the 3 fiscal years (1999 through 2001). We did not independently audit the JSAS annual report or the actuarially calculated cost figures.

We performed our review in Washington, D.C., from August 2001 through May 2002, in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Director of AOUSC or his designee. On June 10, 2002, the Deputy Associate Director of AOUSC provided technical comments, which we incorporated into the report where appropriate.

Portion of JSAS Costs Covered by Judges’ Contributions Varied

For JSAS plan years 1999 through 2001 under the Federal Courts Administration Act of 1992, the participating judges paid more than 50 percent of the JSAS normal costs in the first year and less than 50 percent in the remaining 2 years. In fiscal year 1999, the participating judges contributed approximately 61 percent of JSAS normal costs, and in fiscal years 2000 and 2001, the participating judges contributed approximately 48 percent of the JSAS normal costs.

On the basis of data from plan years 1999, 2000, and 2001, the participating judges contributed, on an average, approximately 52 percent of JSAS normal costs; the government’s share amounted to, on an average, approximately 48 percent. Table 1 shows the judges’ and government’s contribution rates and shares of JSAS normal costs (using the aggregate cost method, which is discussed in appendix II) for the period covered in our study.

The judges’ and the government’s contribution rates for each of the 3 years, shown in table 1, were based on the actuarial valuation that occurred at the end of the prior year. For example, the judges’ contribution of 2.36 percent and the government’s contribution of 2.60 percent in fiscal year 2001 were based on the September 30, 2000, valuation contained in the fiscal year 2001 JSAS report.

The judges’ share of JSAS normal costs in the above table decreased from approximately 61 percent in fiscal year 1999 to approximately 48 percent in fiscal years 2000 and 2001, while the government’s share of JSAS normal costs increased from approximately 39 percent to approximately 52 percent. During those same years, the judges’ contribution rates remained constant, while the government’s contribution rate increased from 1.5 percent of salaries in fiscal year 1999, based on the September 30, 1998, valuation, to 2.6 percent of salaries in 2000 and 2001. The increase in the government’s contribution was primarily a result of the increase in total normal costs determined by the actuary from 3.86 percent of salaries in fiscal year 1999, based on the September 30, 1998, valuation, to 4.97 percent of salaries in fiscal year 2000. The increase in normal costs resulted from a decline in the market value of assets held in JSAS, as well as an increase in plan benefits being paid out over the period.

Specifically, the total plan assets decreased from $366.7 million in fiscal year 1998 to $363.6 million in fiscal year 1999. At the same time, the accumulated plan benefit obligations increased from $311.9 million in fiscal year 1998 to $329.3 million in fiscal year 1999. The increase in the JSAS normal costs reflects the combined effect of the decrease in the value of plan assets and increase in the estimates of plan benefit obligations. Although the judges’ contribution rate remained fairly constant, the judges’ share of normal costs decreased to approximately 48 percent in fiscal years 2000 and 2001 because the total normal costs increased. In fiscal year 2001, the normal costs covered by the judges’ and government’s contributions remained constant because the percentage change in asset value was approximately 6.5 percent, which was in line with the 7.0 percent rate of return on investments that was assumed by the plan actuary.

Adjustment That Would Be Needed in Judges’ Contribution Rates

On the basis of the information contained in the JSAS actuarial report as of September 30, 2001, we determined that the participating judges’ future contributions would have to increase a total of 0.1 percentage point above the current 2.2 percent of salaries for active and senior judges and 3.5 percent of retirement salaries for retired judges in order to cover 50 percent of JSAS costs. If the increase were distributed equally among the judges, those contributing 2.2 percent would have to increase to 2.3 percent, and those contributing 3.5 percent would have to increase to 3.6 percent.

A potential effect of increasing the contribution rates could be a decline in the participation rate for JSAS, which would run counter to the goal of increasing participation—a major reason for the changes made to JSAS in 1992. However, this potential impact appears to be less likely as compared with our findings from 3 years ago, when we reported that an increase of 0.3 percentage points would have been needed to achieve the 50 percent contribution goal. Since fiscal year 1998, the participating judges increased from 1,420 to 1,459 as of September 30, 2001. However, increasing the contribution rates now could affect the judges’ decision to participate in JSAS.

Even if contribution rates are adjusted to the levels currently estimated to cover 50 percent of future normal costs, the future normal costs are estimates that could change in any given plan year. During the course of any year, certain events, such as the number of survivors or judges who have died, the number of new judges electing to participate, or the number of judges who decide to retire, as well as the value of and the rates of return on assets in the plan could create normal statistical variances that would affect the annual normal costs of the plan. Since the plan only has 1,459 participants—both active and retired judges—and 260 survivor annuitants, such variances can have a significant effect on the expected normal costs and lead to short-term variability.

Therefore, the long-term view is important when evaluating the expected judges’ contributions of 50 percent of the normal costs. As shown in table 2, the average of the annual share of judges’ contributions since enactment of the 1992 Federal Courts Administration Act has been approximately 47 percent.

Agency Comments

We requested comments on a draft of this report from the Director of AOUSC or his designee. On June 10, 2002, the Deputy Associate Director of AOUSC provided technical comments, which we incorporated into the report as appropriate.

We are sending copies of this report to AOUSC. Copies of this report will be made available to others upon request. This report will also be available at no charge on the GAO Web site @www.gao.gov. Should you or your staffs have any questions concerning our review, please contact me at (202) 512-9406 or Hodge Herry, Assistant Director, at (202) 512-9469. You can also reach us by e-mail at franzelj@gao.gov or herryh@gao.gov. Key contributors to this report were Joseph Applebaum, Jacquelyn Hamilton, Meg Mills, Charles Ego, and Deborah Silk.

Retirement Plans Available to Federal Judges

AOUSC administers three retirement plans for judges in the federal judiciary.

The Judicial Retirement System automatically covers United States Supreme Court Justices, federal circuit and district court judges, and territorial district court judges and is available, at their option, to the Administrative Assistant to the Chief Justice, the Director of AOUSC, and the Director of the Federal Judicial Center.

The Judicial Officers’ Retirement Fund is available to bankruptcy and full-time magistrate judges.

The United States Court of Federal Claims Judges’ Retirement System is available to the United States Court of Federal Claims judges.

Also, except for judges who are automatically covered under the Judicial Retirement System, judges and judicial officials may opt to participate in FERS or elect to participate in the Judicial Retirement System for Bankruptcy Judges, Magistrate Judges, or United States Court of Federal Claims Judges.

Judges who retire under any of the three judicial retirement plans generally continue to receive the full salary amounts that were paid immediately before retirement, assuming the judges met the age and service requirements. Retired territorial district court judges generally receive the same COLA that CSRS retirees receive, except that their annuities cannot exceed 95 percent of an active district court judge’s salary. United States Court of Federal Claims judge retirees continue to receive the same salary payable to active United States Court of Federal Claims judges.

Those in the Judicial Retirement System and the United States Court of Federal Claims Judges’ Retirement System are eligible to retire when the number of years of service and the judge’s age total at least 80, with a minimum retirement age of 65, and service ranging from 10 to 15 years. Those in the Judicial Officers’ Retirement Fund are eligible to retire at age 65 with at least 14 years of service or may retire at age 65 with 8 years of service, on a less than full salary retirement. Participants in all three judicial retirement plans are required to contribute to and receive Social Security benefits.

Formulas Used to Determine Judges’ and the Government’s Contributions and Lump Sum Payments

Aggregate Funding Method. This method, as used by the JSAS plan, defines the normal cost as that level percentage of future salaries, which will be sufficient, along with investment earnings and the plan’s assets, to pay the plan’s benefits. The formula is as follows: The present value of future normal costs (PVFNC) equals present value of future benefits (PVFB) less net asset value.

The present value of future normal costs is the amount that remains to be financed by the judges and the government.

Normal cost percentage (NC percent) equals PVFNC divided by present value of future salaries (PVFS).

Government Contribution. The following formula is used to determine the government’s contribution amount: The government contribution represents the portion of NC not covered by participants’ contributions.

Lump Sum Pay Out. This may occur upon the dissolution of marriage either through divorce or death of spouse. Payroll contributions cease, but previous contributions remain in JSAS. Also, if there is no eligible surviving spouse or child upon the death of the judicial official, the lump sum pay out to the judicial official’s designated beneficiaries is computed as follows: Lump sum pay out equals total amount paid into the plan by the judge plus 3 percent annual interest accrued less 2.2 percent of salaries for each participating year (forfeited amount).

In effect, the interest plus any amount contributed in excess of 2.2 percent of judges’ salaries will be refunded.

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