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DOCUMENT RE'SUAE
04067 - [B3264524J
ore
Cost-of-Livinq Adjustments for New Federal BRetirees:
FCD-78-2;
Needed.
Are
Processes
Rational and Less Costly
* appendix (1 pp.).
B-130150. November 17, 1977. 5 p.
Report
to the Congress;
E.
by Elmer
Staats, Comptrcller General.
anagement and CompeLsation 4300); Federal
Issue Ara: Personnel
Personnel anagement and Compensation: Retirement Policies
and Practices (307).
Contact: Federal Personnel and Compensation Div.
Budget Function: Income Security: federal Emplcyee Retirement
and Disability (602); National Defense {050).
Organization Concerned: Department of Lefeie; Civil Service
Commission; Department of State; Federal Reserve Systet.
Congressional Relevau.:e: ouse Committee on Post Office and
Civil Service; Congress.
Authority: Federal Employees Compensation Act. E.L. 89-205. P.L.
92- 136.
To protect the purchasing power of retirement incsome,
the annuities o Federal employees under the various retirement
systems are automatically ajusted each arch 1 and September 1
tor the increase in the consumer price index during the
preceding 6-mouth period ending December 31 and June 30,
respectively.
Since,
by law, cost-of-living adjustments are
applicable t all annuities payable on the effective date f the
increase, retiring Federal employees benefit from cost-of-living
increases which occurred while they were still emplcyed. They
can receive a higher starting annuity which reflects the
precediaq annuity cost-of-living adjustment and, depending on
the timing of their retirement, may ks eligible fo an
additional adjustment immediately. Such increases escalate the
already high costs of Federal retirement y inflatiug the asic
annuity upon which succeeding adjustments are applied and can
encourage valuable, experienced emplyaes to zctir.
Findians/Conclusions: The existing process cveicompFnsates
retiring employees by providing aDnuit7 increases based on
changes in the consumer price index
which occurred
efore t'heir
retirement. Eliminating the added enrichment of compensating
retiring Federal employees and new Federal retiees tor living
c:st increases which cccLr while they are still in an active
status would still fully protect the purchasing power of
retirement annuities. Federal annuity cost-of-l:ving adjustment
processes, which fully protect the purchasing power cf
retirement income as living costs rice, would still be more
liberal than those ot essentially all iin-Pederal pensicn
systems. Few non-Federal ilans have automatic adjustment
provisions and those which do generally limit the amount of
increase that can be granted in
any
1 lear.
A more rational
method of computing adjustments of new retirees would be to
prorate their adjustments to reflect
only the cost-cf-living
increases that occur after they retire. Proration of the annuity
adjustments of new retirees would be uch less costly than the
existinq process; over $800 million .n annuity payments could be
service employees
saved over the rerainig litespans of civil
should enact
Congress
Recommendations'
retirinq in 1978.
leqislation making the cost-of-living adjustment prccesses of
ervices, foreign service, Central
the Civil Service, uniformed
Reserve Board retiLEaant
Federal
and
Intelligence Agency,
cre rational and less costly by: (1) repealing the
systems
provisions of existing law which permit retiring emplcyees and
ecause cf
new retirees to receive higher starting annuities
and
retirement;
their
before
index
price
consumer
te
in
chanqes
be
adjustents
cost-of-living
new
retirees'
that
(2) providing
after
prorated to reflect only ccnsumer price index increases
their retirement. (Author/Si)
REPORT 'TO THE CONGRESS
i+_.
N
-
t m
BY THE C(OMPTROLLER GENERAL
OF THE UNilTE) STATES
Cost-Of-Living Adjustments For
New Federal Retirees:
More Rational And Less Costly
Processes Are Needed
Cost-of-living adjustments are intended to
protect the purchasing ower of Federal annuities, but existing law permits retiring
employees and new retirees to benefit froin
cost-of-living increases which occur while
they are still employed.
The law should be changed to provide tnat
new retirees' adjustments be prorated to in
clude only the cost of living increases that
occur after retirement.
This change woulo be pMore rational av;d save
over $800 million in annuity payments over
the remaining lifespans of civil service em =
iloyees ret.ring in 1978 alone.
FPCD 78 2
NOVEMBER 17, 1977
COMPTROLLR
GINIAL OF THL UNITED
WAIi)I'STON. MC.
rTATES
B-130150
To the President of the Senate and the
Speaker of the House of Representatives
This report discusses the need to repeal those provisions of various laws that permit retiring
Federal employees
and new Federal retirees to benefit from cost-of-living increases which occur before they retire.
As you know, we have long been concerned about the inequities, illogical and inconsistent benefits, and the affordability of Federal staff retirement systems. The adjustment process for new retirees is one of several extremely
costly and generous special features which raise serious
questions about the continued viability of those systems.
It
inflates the basic annuity upon which succeeding adjustments
are applied and escalates the costs of retirement. We are
recommending that the Congress amend the law to prorate the
annuity cost-of-living adjustments of new Federal retirees
to reflect only living cost increases after their date of
retirement, since it would be more rational and substantially
less costly.
We made our review pursuant to the Budget and Accounting
Act, 1921 (31 U.S.C. 53), and the Accounting and Auditing
Act of 1950 (31 U.S.C. 67).
Comptroller General
of the United States
C
nten ts
Page
ADJUSTMENT PROCESS INFLATES PURCHASING
POWER OF NEW RETIREES' ANNUITIES
1
ELIMINATING THE OVERCOMPENSATION ASSOCIATED WITH THE EXISTING POLICY WOULD
RESULT IN CONSIDERABLE COST SAVINGS
4
PECOMMENDATIONS TO THE CONGRESS
5
Comparison of retirement payments
under the present method and proration method over the remaining
lifespans of civil service employees expected to retire in 1978
6
APPENDIX
I
ABBREVIATIONS
CP1
Consumer Price Index
GAO
General Accounting Office
COST-OF-LIVING ADJUSTMENTS FOR NEW FEDERAL RETIREES:
MORE RATIONAL AND LESS COSTLY PROCESSES ARE NEEDED
A pension system operates on the premise that those who
have worked are entitled someday to stop working and to receive a retirement income as a right earned through their
past service. Inflation shrinks the purchasing power of all
Americans, especially pensioners, annuitants, and others on
fixed incomes.
To protect the purchasing power of retirement income,
the annuities of those under the civil service, uniformed
services, foreign service, Central Intelligence Agency, and
Federal Reserve Board retirement systems are automatically
adjusted each March 1 and September 1 for the increase in
the C nsumer Price Index (CPI)
uring the preceding 6-month
period ending December 31 and June 30, respectively.
Since, by law, cost-of-living adjustments are applicable to all annuities payable on the effective date of the
increase, retiring Federal employees benefit from cost-ofliving increases which occurred while they were still mployed. They can receive a higher starting annuity which
reflects the preceding annuity cost-of-living adjustment
and, depending on the timing or their retirement, may be
eligible for an additional adjustment immediately. Such increases escalate the already high costs of Federal retirement by inflating the basic annuity upon which succeediradjustments are applied and can encourage valuable, experienced employees to retire.
This report updates our comments to the Congress, various congressional committees, and individual
Congressmen
on the Government's annuity adjustment policy for new retirees. In this report, we are reiterating our concerns
about the inflated starting benefits and the cost implications which will continue to result if the existinq policy
is not changed.
The following comments are generally limited
to the civil service system, since it is the largest system
and often leads the other systems to change. Most of our
observations, however, also pertain to other Federal retirement systems.
ADJUSTMENT PROCESS INFLATES
PURCHASNG POWER OF NEWEREEES' ANNUITIES
The legislative urpose of the cost-of-living adjustment
process is clearly to protect the purchasing power of the
annuity at retirement. Thus, retiring employees should not
benefit from a process designed for those already
in a retired status. But the law permits new Federal retirees
to
receive annuity increases based on CPI changes that
occurred
while they were still employed.
We believe it is inappropriate and inequitable fr individuals drawing full
salary
when the CPI increases occur to reap the additional
benefits
of those increases in their annuities.
Federal pay rates
are adjusted periodicalli to maintain pay comparability
with
the private sector.
To the extent that cost-of-living
chan.es influence private sector pay levels, they
are reflected in the Federal pay rates upon which etirement
annuities are based.
The amount of a civil service retirement annuity
is
determined by an employee's average annual salar?'
during
his/her 3 consecutive highest paid years and his/her
years
ar
months of service, including unused sick leave. The
earned annuity is a direct function of the average
salary
and length of service and usually increases proportionately
to these two factors.
But an anomaly was introduced into the retirement
system along with the periodic CPi-related adjustment
provision
in 1965.
That law--Public Law 89-205--removed the requirement of prior law that, to be eligible for a cost-of-livir.g
adjustment, retirees had to be on the retirement
rolls for
more than a year prior to the effective date of the
ment. When the automatic adjustment process became adjustlaw in
1962, it called for an annual annuity adjustment
if
rose by at least 3 percent during the preceding year.the CPI
The
process was changed in 1965 to gear adjustments to
monthly
changes in the CPI because the annual process had
not produced an adjustment. The legislative history of
the
law is not cleat regarding the rationale for removing 1965
the
1-year witing period for annuity adjustment eligibility,
but it appears that the change was made so that all
annuitants would receive the December 1965 legislated
annuity
adjustment--the first adjustment in almost 3 years.
The 1965 law provides that cost-of-living adjustments
are applicable to all annuities payable on the effective
date of the increase.
Until 1973 that provision permitted
an employee who retired on that date to receive a
starting annuity than an employee who retired the higher
following
day.
For the most part a decision to remain on the job
resulted ir lower future annuity payments and, consequently,
large numbers of employees, particularly those whose
pay rates
were frozen, retired immediately before scheduled
annuity increases.
2
To correct this anomaly, the law as changed in 1973--Pulitc Law 93-136--to guarantee that retiring employees would
receive a basic annuity at least equal to the annuity they
could have earned if they had retired as of the effective
date of the last cost-of-living adjustment.
Retiring employees receive the higher of (1) an annuity based on their average salary and length of service at retirement or (2) an annuity based on heir salary and service at the time of the
preceding annu.,y cost-of-living adjustment, plus that adjustment which they would have received if they had retired at
that time.
Although the 1973 amendment has reduced the number
of retirements occurring before a scheduled annuity increase,
it allows employees who retire immediately before a cost-ofliving increase to receive tint increase and to have the preceding cost-of-livina increase considered in their basic annuity calculation.
The existing process overcompensates retiring employees
by providing annuity increases based on changes in the CPI
which occurred before their retirement
For examole, employees who retired August 31, 1977, had considered in their basic
annuity calculation the March 1, 1977, 4.8-percent increase
which epresented the percentage rise in the CPI from December 1975 through December 1976.
The resulting starting annuity frequently would ha.e been greater than an annuity based
solely on salary and service. Additionally, the new retiree
would have received the full 4.3-percent annuity increase of
September 1, 1977, which was based on the percentage change
in the CPI for the 6-month period ended June 30, 1977.
Eliminating the added enrichment of compensating retiring Federal employees and new Federal retirees for living cost
increases which occur while they are still in an active status
would still fully protect the purchasing power of retirement
annuities.
Federal annuity cost-of-livin-I adjustment processes,
which fully protect the purchasing power of retirement income
as living costs rise, would still be nore Liberal than those
of essentially all non-Federal pension systems. Few nonFederal plans have automatic adjustment provisions and those
which do generally limit the amount of increase that can be
granted in any 1 year. A 1974 survey by the Conference Board-an independent, nonprofit usiness research corporation-revealed that only 4 percent of the benefit rograms of
1,800 major private employers had pension plans which were
automatically adjusted for increases in the cost of living.
Further, a recent congressional task force survey disclosed
that less than 5 percent of the 371 largest State and local
government pension plans had unlimited automatic adjustments
for cost-of-living .ncreases.
3
ELIMINATING THE OVERCOMPENSATION ASSOCIATED
WITH THE EXISTING POLICY WOULD RESULT IN
CONSIDERABLE COST SAVINGS
Despite the fact that cost-of-living adjustments are
designed to protect the purchasing power of those already in
a retired status, existing law also permits new Federal retirees who were not retired when the living cost increases
occurred to benefit equally from those adjustments.
A more
rational method of computing adjustments of new retirees
would be to prorate their adjustments to reflect only the
cost-of-living increases that occur after they retire.
Proration of the annuity adjustments of new retir3es
would be much less costly than the existing process. For
the 92,000 civil, service employees expected to retire in
1978, we estimate that the retirement fund would save over
$800 million in annuity payments over their expected remaining lifespans.
(See app. I.)
This savings estimate is
conservative since annuity payments to survivors of former
civil service employee. and retirees were not considered in
the calculation.
To illustrate how prorating the adjustments would be
less costly than the existing process, assume that a civil
service empioyee retires February 28, 1978, is entitled to
a $1,000 basic monthly benefit based on length of service
and average salary, and the CPI rises by 3 percent each 6mnontn period ending June 30 and December 31.
Under existing
law, the retiring employee's basic monthly benefit would be
increased to $1,030 the next day, March 1, 1978, to reflect
the CPI increase occurring the 6-mont. period ending December
1977 when the employee is still working.
Effective September 1,
1978, the retiree's monthly benefit would be increased to
$1,061 to reflect the CPI increase during the 6-month period
ending June 30, 1978, including the months of January and
February when the employee is still working and drawing
full salary.
Under a policy of prorating adjustments to
reflect only CPI increases a er reti: .ment, the same retiree would not be eligib]
- the March 1, 1978, adjustment since it would repress
the percentage rise in the CPI
during the last 6 months o _977, when the individual is
still working.
Instead, the new retiree would continue to
receive the basic $1,000 monthly benefit from March 1978
through August 1978. Effective September 1, 1978, the
monthly benefit would be increased by 2 percent to $1,020
to reflect the 4 cnths--arcn 1978 through June 1978--the
individual would actually be retired.
4
vnlile we ia not develop estimates of cost savings
ederal retirewihici coulu also be realizeo under the other
ment svsters if te annuity cost-of-living adjustments of
new retirees were prorated, the savings would be considerFor example, over 50,000 military personnel retired
able.
in tiscal years 1975 and 1976, ana those trends are expected
to continue.
federal employees should always earn a higher basic
b continuing to worK rather than by retiring early.
anrnuu
We believe tnat the annuity aa3ustment policy should be
changeda to rquirc prorating new retirees' annuity adjustments to reflect only C?I increases after the effective date
of
retirement.
A similar
olicy exists
for
tne
Federal
Em-
ployeos Compensation Act program--to be eligible for a costof-living adjustment a recipient's disability must nave occurred
more than 1 year before the effective date of the adjustment.
Such a policy would insure higher basic annuities for continued Federal service ana should encourage valuable employees
wno are considering retirement to remain.
Additionally, prorating new retirees' annuity adjustments would eliminate the need for the annuity guarantee
In that regard. the alProvision oi the 19'3 amendment.
ternate annuity calculations reaulrea by law are difficult
ana time consuming for the administering agency. The Civil
Service Commission said that those required calculations have
increased the administrative costs of the civil service retirement system which, like x.he benefits, are financed by
employee and Government contributions.
RicCl'MISNDATIONS
ro
H"- CONGRESS
The Congress should enact legislation making the cotof-living adjustment processes of the civil service. uniforumeca services, foreign service, Central Intelligence
oard retirement systems more
ederal Reserve
Agency, and
rovisions
rational anG less costly by (1) repealing the
of existing law which permit retiring emplcyees anc nw retirees
to
receive higher
starting
annuities because
of
changes in the CPI before their retirement and (2) providing
e prorated to
tnat new retirees' cost-of-living adjustments
reflect only CPI increases after their retirement.
5
APPENDIX
I
APPENDIX
COMP.R!SON
OF
ETIREMENT
PAY"ETS UNDER TF
PRESENT METHOD AND THE PRORATION
THE REMAINING
LIFESPANS OF CIVIl,
SEFV.CE
EXPECTED TO RE" IRE IN 1978
AverA.--,
Year
P2
_lat
on
2008
2009
2010
2011
2012
2013
2014
2015
2016
Total
c)
92,00)
7
,
59
60
61
62
63
64
65
66
61
68
69
7C
71
72
73
74
75
76
77
78
79
80
81
82
83
84
95
86
Y0.68
67,996
o,
6;
P3,480
81,r05
78,:,46
75,875
73,068
70,145
67,059
63,840
60 ,520
57,070
53,532
49,892
46,200
42,504
38,896
35,158
31,607
28,099
24:727
21,463
18,372
15,451
12,763
10,313
8,137
6,217
4,56 3
3, 180
,7?
1,254
683
320
;17
3)
1
S
T-e100,
429,364
8 2 51
851,801
880,267
907,595
933,800
982,430
1,003,078
1,021,031
1,04,653
1,044, 103
1,049,175
1,048,718
1,042,750
1,030,170
1,011,179
986,093
954,317
916,464
873,333
822,992
767,674
706,326
640,870
571 316
500 ,23
428,464
358,345
2' ,216
2
88
89
90
91
92
93
94
95
166,794
115,477
73,903
42,667
21,190
8,212
2,106
31
12_52,426
)
onmittedb
S
959,518
L-
a/lJsinq a
'1}0 ant1-ipatPd 3'
sal3ry and lenth
of servitality factors for those
4.'
(note
EFPLOYFES
Pote nt i
vl ' ยข
(not
h)
Total annuity
a men. q_
Presnt
.meProration method
_La t-jon
1978
(nrate
i979
i980
1981
1982
1983
19a4
1985
19e6
19d7
1988
1989
1990
1991
1992
1993
1v94
1995
1996
1S97
1998
1994
2000
2001
2002
2003
2004
2005
2006
2007
METHOD OVEP
"
.,7H6
419,86
795,112
q22, 6 69
850,16257
876,555
901, 64
926,702
948,311
968,773
94,112
999,'68
,008,395
!, !13,293
1,012,f5R?
1,007,0PR
994,938
976,597
952,3S9
921,679
n5,121
843,465
794,846
741,420
682,170
619,952
51 777
481,129
413,811
346,0)91
280,291
2 18, 064
161,090
111,528
71,376
4!,208
20,465
7,931
2,227
304
54,656,806
---11,79
7, 38R
29,112
0t,1
31,040
31,9 16
2,
1 16
13 ,599
34, 30n
44,1
;
13, '5
35,708
5 I'
3ir, 6
3-I,662
, 2 2
3 ,5S9
3_724
3^,-638
3 343
25,968
28,146
2',,254
24,1,G6
?1,91
19,539
1' I08
!4,69~
i ,255
9, 25
',722
%,704
3,949
2,527
1,4,9
725
291
79
11
$868,620
,af
tartinjq renthlv annultV ibased on
veraae
6
-ercent annual ratp of Inflat:on 3nd 'orrouDs.
b/8asd on adjustinq the
700 averaqe monthl, starting annuit
of 1978 retiree
only
or cost-of-livinq
ncreases that occur after
they rtirt.
c/197d
amounts based on .n
status.
(963065)
averaq-
of only about 6-1 si
ont ..
in rtlreu
I
@FedFRASER