Little insight offered on fed, private retirement

Ever wonder how federal retirement benefits compare with those offered by private-sector firms? Well Sen. Ted Stevens (R-Alaska) recently asked the General Accounting Office to compare the features and benefits of the federal retirement system with those in private-sector systems. GAO's results were inconclusive mainly because the agency neglected some major aspects of the issue. Among employers that have retirement plans there are two major forms: defined benefit plans and defined contribution plans.

Defined benefit plans guarantee a specific benefit at retirement based on a formula that takes into account the retiring employee's years of service final salary and age. The Civil Service Retirement System (CSRS) is a defined benefit plan.

Defined contribution plans do not guarantee a specific benefit at retirement. Instead employers - and employees if required - contribute a specified amount to a retirement fund. The amount contributed is usually based on a percentage of the employee's salary. The contributions are invested and they accumulate to serve as the source of retirement benefits. The Thrift Savings Plan (TSP) component of the Federal Employees Retirement System (FERS) is a defined contribution plan.

To compare federal and private retirement programs GAO accessed a private consulting firm's database containing information on the 1 000 top employers in the United States. The results of GAO's review revealed "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."

The reason for this conclusion is that a number of factors play roles in determining which plans offer the best benefits. Chief among the factors that must be considered are: (1) the age of employees when they retire and the time at which retirement programs provide unreduced benefits (2) the extent to which employees and employers contribute to defined contribution plans and (3) the impact of varying cost-of-living adjustment (COLA) practices in the public and private sectors.

The first factor exerts a major influence on the comparative benefit amounts available from FERS CSRS and private-sector programs. Although FERS and CSRS provide benefits to employees retiring at age 55 few private-sector plans do.

According to OPM most federal employees who retired in 1995 under CSRS were about 62 years old and had 30 years of service. Employees who retired under FERS averaged about age 63 with 14 years of service. GAO compared data for these age groups with corresponding data from the private sector.

Regardless of program design the average benefits available at retirement from the private-sector programs in the contractor's database were greater than CSRS benefits for employees who retired at age 62 or older with 20 years of service.

This is because Social Security benefits are available to private-sector retirees at age 62 while CSRS retirees receive no Social Security benefits from their federal employment. FERS employees retiring at age 62 or older make out as well as their private-sector counterparts.

As for the second factor GAO also came to the obvious conclusion that the amount of money employees contribute to defined contribution plans has a major impact on the benefits paid by FERS and by private-sector programs that include defined contribution plans.

The third and final factor GAO examined was COLA practices. GAO found significant differences within and between federal and private-sector programs.

According to the database GAO used retirees under private-sector defined benefit plans have not received adjustments that cover the full increase in the consumer price index (CPI). Retirees from the 50 largest employers in the database received average adjustments that offset less than 20 percent of the CPI increase over 20 years of retirement - not a very impressive performance. In comparison CSRS employees get full COLAs and FERS employees only slightly less.

The GAO report tells me that private-sector plans pay markedly better retirement benefits then the federal government's plans when employees first retire. But because federal government retirees enjoy better COLA protection the amount of paid benefits converge over time and become roughly comparable after about 15 years. At 20 years total federal benefits are better than those in the private sector.

So much for the widely held notion that the federal government offers better retirement benefits than the private sector.

But there is a problem with the GAO comparison. Defined contribution plan payments depend largely on investment return. Federal employees have three investment options available to them under TSP. What type of investment options are available to private-sector employees? GAO is silent on this crucial point.

The bottom line is that GAO did a sloppy job. Any conclusion drawn from this report is on pretty shaky ground. The Senate subcommittee that requested this report should send it back and tell GAO to repeat the study.

-- Bureaucratus is a retired federal employee and a regular contributor to Federal Computer Week.

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