GAO report sheds little light on costs of pension system switch

The General Accounting Office recently analyzed the potential cost to the government of an open season during which federal employees covered by the Civil Service Retirement System could switch to the Federal Employees Retirement System. As usual, its analysis was less than impressive. In fact, the report (GAO/T-GGD-98-27, Nov. 5, 1997) shed little light at all on the subject.

FERS began in 1987 and covers employees who entered federal service after 1983. When it began, employees covered by CSRS were offered a chance to transfer to FERS during a six-month open season that ended in December 1987.

The Federal Employees Retirement Open Season Act of 1997 allows employees enrolled in CSRS another opportunity to transfer. According to GAO, "Transferees under the act will receive substantially the same coverage and benefits that were provided to those who transferred during the first open season."

That's misleading. Those who transferred during the first open season were immediately exempt from the act's "government pension offset" provision. That provision reduces Social Security benefits to those receiving pension benefits from federal or state governments. Under the new legislation, employees must be covered under FERS for five years before they are exempt from the offset provision. That is a significant difference for a federal employee who plans to retire in less than five years. I am amazed that GAO ignored this provision in its report.

Last year Congress asked GAO to examine the potential impact of a new FERS open season on agency retirement costs. In its report, GAO said it "used information on current retirement practices and work it had performed on the early implementation of FERS to provide perspective on the difficulty of predicting how many employees might switch." In other words, GAO wasn't prepared to provide firm estimates to Congress.

Not surprisingly, GAO found it difficult to predict who among the eligible employees would switch to FERS. GAO's review of the first FERS transfer program in 1987 showed that only about 4 percent of eligible employees transferred to FERS, even though eligible employees were provided the information and counseling needed to make a decision. In some agencies, less than 1 percent switched, while the rate was greater than 4 percent in others.

When agency personnel officers were interviewed in 1987, they cited four main reasons for the small number of federal employees who switched. They said employees regarded FERS as too complex to understand— something that may have been true then but probably would not apply today.

Personnel officers also reported that employees believed they could not afford to contribute to the Thrift Savings Plan (TSP) component of FERS. That's likely to remain a concern. The ability to contribute to the TSP depends on an employee's income. Employees with lower salaries find it difficult to save money because most of their income goes toward basic living expenses. Employees with higher salaries have more discretionary income and can afford to invest in the TSP.

A third reason cited by personnel officers was that employees who planned a career in government believed that CSRS provided greater benefits than FERS. Employees enrolled in CSRS have aged 10 years since the first open season and are even more likely to take this view. They have built up more in vested retirement benefits under CSRS and would have less time left under FERS before retirement. Less time means less opportunity to stash away extra dollars in the TSP and build a meaningful Social Security entitlement.

Finally, employees in 1987 did not trust some aspects of the design or stability of FERS, including the viability of the Social Security system and potential for changes in FERS benefit levels. I doubt whether federal employees have greater trust in the viability of the Social Security system today than they did in 1987. On the other hand, the stability of FERS is not likely to be questioned now, as it may have been 10 years ago. The GAO report suggested that employee decisions could be based on situational factors that are economic as well as non-economic.

GAO concluded that agency retirement costs would increase immediately following an open season because of differences in the way CSRS and FERS are funded, assuming some employees opt to switch. The amount of any cost increase would depend on the number of employees who switch and their salary levels. For example, if 10 percent of the eligible employees who earn higher salaries switched, an agency would pay an additional $332 million for the year.

Because there is uncertainty as to how many employees might transfer, GAO said, "It is correspondingly difficult to estimate whether agencies would have a difficult time absorbing the cost increases."

Of course there is uncertainty. Companies' financial officers make calculations every day in the face of uncertainty. No company knows how many widgets it will sell, but that doesn't prevent managers from developing marketing plans. Our friends at GAO, who are always lauding the virtues of the private sector, would be well-advised to emulate their heroes.

GAO did assert that some agencies might find the costs difficult to absorb, depending on their specific circumstances. The report noted that discretionary spending is capped under the budget process, and Congress could choose not to provide agencies extra funding to cover agencies' increased retirement costs. If that occurred, agencies would have to absorb the added short-term costs by cutting other expenditures.

After reading this report, I asked myself what I learned. The answer appears to be the following: GAO doesn't know how many federal employees will transfer to FERS, it doesn't know what the transfers might cost, it doesn't know whether agencies will be able to absorb these costs, and it doesn't know what Congress will do if agencies are having difficulty absorbing the cost increase.

I don't know about GAO.

-- Bureaucratus is a retired federal employee who contributes regularly to Federal Computer Week.

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