wfedstaff | April 17, 2015 4:27 pm
By Tom Trabucco
Special to Federal News Radio
When Federal News Radio asked if I would contribute to its FERS: 25 Years Later project with my personal reflections on that time, I was pleased to say yes for at least three reasons.
First, for those of you who might not remember, the Social Security Amendments of 1983 radically changed the federal retirement landscape by requiring Social Security coverage for federal employees. This piece gives me an opportunity to recognize the good people — including a number of friends and colleagues who worked in the Senate, House of Representatives, federal agencies, unions and associations — who labored long and hard to come up with the best possible design for a dramatically new retirement benefits package, the Federal Employees’ Retirement System (FERS). Many individuals deserve credit and recognition for taking on the largely thankless, but vitally important challenge of developing a program that has provided benefits for thousands — as it ultimately will for millions — of federal employees. And this leads to my second reason: Time has shown that the changes they made have actually succeeded in achieving the established goals for the retirement program.
Finally, in a time when the ability of Congress and the administration to successfully work together seems like a quaint memory, it’s important to remember that they can and have done so. The process that resulted in FERS has relevance today. Many of the issues faced and actions taken during the FERS evolution in some ways foreshadow issues in the news today — including the pressure created by the so-called “fiscal cliff.” Some discussion of the problems encountered 25 years ago and the methods used to resolve them may thus resonate with current events. So, let’s get to it.
Why was FERS necessary?
The Civil Service Retirement System (CSRS) was created in 1920 and served as the complete retirement benefit program for the federal workforce through 1983. Its structure was simple — a defined-benefit program. Funding was provided by agency and employee contributions to the Civil Service Retirement and Disability Fund. These contributions were supplemented by annual appropriations from the government. This arrangement guaranteed the program’s solvency, although over time the government began paying a growing share of the cost.
The Social Security system was created in 1935 to provide an “income floor” for private-sector workers when they retired. The idea was that additional savings or pensions would build on the Social Security base. Like CSRS, Social Security was funded by payments from workers and their employers, and its trust fund enjoyed many flush early years with a large number of contributors and a small number of beneficiaries.
But that favorable ratio of contributors to beneficiaries began to turn in the 1970s as, over time, Social Security benefits were enhanced and beneficiaries became a relatively larger number compared to contributors.
Further, looming ahead was the so-called “pig-in-the-python” as the large baby-boomer cohort approached retirement age. (The latter was not an issue for CSRS since the size of the federal workforce had remained quite stable for a half century.) The impetus to create FERS flowed immediately from the Social Security Amendments of 1983 that were enacted to address these two serious concerns.
As explained in her Jan. 18, 2010, analysis in The New York Times, reporter Jackie Calmes bluntly explained that the 1983 amendments to Social Security were necessary because “the program [was] projected to go broke.” We weren’t talking decades in the future. Short-term insolvency was on the immediate horizon as well as in the long-range forecast. Nevertheless, as Calmes further noted, “Democrats remained opposed to benefit cuts and Republicans to payroll tax increases.” Sound familiar?
Enter what became known as the (Simpson-Bowles style) Greenspan Commission Report, which identified options to trim benefits from and increase revenues to the Social Security system. This is where it got interesting for federal employees, who were about to be rolled up in a campaign to save Social Security via what was being called “universal coverage.”
How did federal employees get pulled into a debate over a system targeted to the private-sector workforce? Well, benefit-minded policy makers argued that universal coverage was a fair and equitable way to guarantee a basic level of retirement benefits to all of the nation’s working people. Further, including federal employees under Social Security would improve their disability coverage, and lower-paid federal employees would benefit from the tilt in Social Security that provides a relatively higher “replacement ratio” of pre-retirement income for lower-paid individuals.
While there was truth in those arguments, as usual, the real driver was the money. Social Security needed more of it to pay current beneficiaries, and inclusion of federal employees would provide an immediate new income stream to the system. Moreover, if only future federal employees were covered, they would contribute to Social Security for decades before they would begin drawing their own benefits.
Earlier efforts to dramatically reform CSRS or extend Social Security to federal employees had failed. However, this changed when Congress accepted the Greenspan Report’s recommendations in January 1983; the die had been cast and the fix was in.
The key commitments
Federal employees were not without extremely capable advocates, who worked very hard and smart on their behalf as the Social Security debate progressed.
Their largest unions and associations had banded together to expand their legislative and political clout via the Fund to Assure an Independent Retirement (FAIR). Led by the National Association of Letter Carriers and its well-known and highly effective lobbyist, George Gould, the FAIR groups couldn’t defeat universal coverage — but they did secure key commitments protecting current and future employees.
Most notably, the House Democratic leadership promised in writing that any new retirement system would provide “retirement benefits comparable to those under the Civil Service Retirement System” and protection from “any proposal which would threaten or adversely affect the financial integrity of the Civil Service Retirement Fund”. (See “Dear Colleague” letter from then-Speaker “Tip” O’Neill and committee chairmen Bill Ford and Dan Rostenkowski.)
At that time, the House was overwhelmingly Democratic, and had been so for nearly 30 years. So these leaders were in a position to deliver on their promise.
With these pledges from the Democratic House in hand, the employee groups then worked with longtime federal-employee friend Republican Senator Ted Stevens of Alaska and his chief subcommittee counsel Jamie Cowen.
Cowen has recently issued his own excellent, highly detailed FERS 25-year retrospective and I strongly recommend his work for those who would like to read a detailed account of the process that ultimately resulted in the creation of the new system.
With Stevens’ approval, Cowen took the first step by setting up a series of five pension policy forums. Because Stevens had already been trying to reform CSRS to insulate it from attack by making it look more like private-sector plans, he had a head start and had already developed a draft plan for reform.
With that, we were off to the races. (Here I say “we” because, following nearly 10 years as a representative for NFFE and a professional staff member on the House Post Office and Civil Service Committee, I would shortly leave that committee to join legendary lobbyist, Judy Park, at NARFE. My first assignment there was to work on the development of the new retirement system. Ms. Park also engaged the public policy consulting firm Chambers and Associates, which gave us access to the outstanding analyst James Storey who made many key contributions to the design effort).
The FERSA cliff
To read some stories in the news today, one might think that the so-called “fiscal cliff” is a thoroughly modern phenomenon. But it is, of course, a tried and true action-forcing event used since time immemorial. Politicians actually have a limited number of options when it comes to forcing 10 pounds of controversy into a more manageable five-pound bag.
One is to create the inevitability of a relentlessly approaching disaster that can only be avoided via a less disastrous but still painful escape option, thereby providing a path to agreement. And one of these action-forcing choices was orchestrated during the FERS process.
But first, Social Security was facing both an immediate and long-range funding problem, and the pressure was on to enact the recommendations of the Greenspan Commission into law promptly after the report was issued in January 1983. So the provision requiring new federal employees to begin contributing to Social Security could only be delayed until January 1984.
Key people had been assembled at a number of agencies, including a Government Accountability Office team led by Clifford Gould and Bob Shelton; a special team at the Congressional Research Service led by the stalwart analyst (and philosopher) Dennis Snook; Office of Personnel Management representatives; and a group of pension experts at the Department of Labor under Alan Lebowitz and Ian Dingwall. But years of work lay ahead to design the new Federal Employees’ Retirement System.
The immediate question was how to bridge the gap between the urgent need to have new hires begin sending funds to Social Security and the time necessary to properly build their new retirement system.
The Congress bought a couple years by creating an interim plan under which new employees would generally contribute 5.7 percent of their pay to Social Security and 1.3 percent to a yet-to-be-created retirement plan. Old-system employees contributed 7 percent in pay to CSRS, so parity between the groups was generally retained while the new system was being built. Work on the benefit design continued for three years, led by Cowen in the Senate.
The counterpart House Committee conducted a number of hearings, while general counsel Robert Lockhart, his associate Pierce Myers and Alan Lopatin dealt with the myriad design details, focusing primarily on the defined-benefit component.
Despite everyone’s hard work, time passed and progress began to lag. That is when those of us lobbying on the legislation learned about “the FERSA cliff” from two highly respected senior House committee and subcommittee staff directors, Tom DeYulia and Jerry Klepner.
They let it be known that, absent better progress, the interim plan would expire and double coverage (including double payments to CSRS and Social Security) would kick in. If this in fact happened, every new employee would have to contribute nearly 14 percent of his or her pay toward retirement with nothing going to a savings plan like the Thrift Saving Plan. (By this time, the basic structure of FERS-Social Security — a less generous defined-benefit plan and a 401(k)-type defined contribution plan — had been discussed.)
If the project went over the cliff, employees would get whacked with mandatory double payments, overlapping defined benefits and no defined-contribution option. The prospect of this looming “cliff” helped negotiators put things back in perspective and ultimately brought about an agreement for the final design of FERS.
Although there have been many enhancements to FERS since its Jan. 1, 1987, implementation, the basic structure hasn’t been changed significantly. It still has a basic annuity component, Social Security coverage and the Thrift Savings Plan (its defined-contribution component).
The TSP was a new concept in the federal government and was instrumental in meeting the goals set forth for the new program — particularly the promise on comparability between CSRS and FERS. The success of the legislative process and the efforts of those who worked on the development of the program are proven by the program’s durability and the undeniable fact that FERS met the goals established for it.
Did FERS meet its legislative goals?
Major legislation often contains a title listing the “purposes” of the act. The Federal Employees’ Retirement System Act of 1986 (FERSA) had a list of seven such items. A brief review of these seven purposes confirms that all were achieved through the legislation.
FERS was indeed coordinated with Social Security, budgeted in advance (importantly, this cost is now identified in annual employing agency budgets with necessary amounts regularly recalculated by OPM) and its benefits are portable. Federal employees were given options in drawing their retirement benefits as well as in investing in their TSP accounts.
The system has demonstrated its utility in building a quality career workforce and providing improved disability protection for employees, thus fulfilling all seven purposes as laid out in the law.
But, from my perspective as an employee/retiree advocate through this period, the most critical accomplishment occurred when the Congress followed through on the two previously noted guarantees contained in “Tip” O’Neill’s Feb. 18, 1983, letter: First, that the new system provide “benefits comparable to those under CSRS,” and second, that the “financial integrity” of Civil Service Retirement Fund be protected. The achievement of these two promises made nearly 30 years ago settled a great deal of employee and retiree anxiety.
Employees and their organizations were still very unhappy about being used to bail Social Security out of problems they had nothing to do with creating and losing future access to CSRS. Count me as a member of that group. But the process produced honest assessments of what could be done and firm commitments that have actually delivered on those promises.
The TSP and “comparability”
The Congressional Research Service team that worked on the FERS project performed complex analyses that informed congressional leaders in their policy decisions regarding FERS.
But most impressive to me was the ability of the CRS to distill the complexity of the new plan into one simple visual that captured its essence. That visual shows clearly how the designers used the TSP to make good on the promise that new system benefits would be comparable to those under CSRS. Alone, the FERS basic annuity and Social Security would not have achieved that goal. However, with the adoption of the defined contribution plan concept (TSP) and the addition of an automatic agency contribution to the accounts of all FERS employees, the solution was found.
The CRS’ simple chart shows that the approximately 56 percent of pre-retirement income replaced by CSRS could be duplicated under FERS at all pay levels.
Due to the benefit tilt in Social Security, employees earning upwards of $25,000 would attain comparability without additional contributions to the TSP. Thus, the lowest paid did not have to contribute any additional funds to earn comparable benefits. Employees at higher salary levels would maintain comparability by contributing to the TSP. Although they would need to chip in more of their own money for retirement, the congressional hearings showed that higher-paid employees wanted the new TSP as a tax shelter for additional savings. Thus, they were compensated for their increased contributions via TSP matching contributions and the tax deferral, which is relatively more valuable for higher-paid workers.
Again, the fault line in the FERSA debates seems very familiar to one we see today.
In the solution that was eventually created, the interests of each affected group were recognized, given value and addressed. This was the key. Realistic, mature leaders were willing to slog through the process to get to an acceptable solution. Regular order and proper use of the committee system in the Congress can be slow and painful. But it can also find areas of agreement (or at least an absence of disagreement). Nevertheless, it still takes commitment and hard work, luck and sometimes even a bit of leverage to finish the job.
In concluding this review, I would like to publicly acknowledge the many contributions to FERS by the people I have named as well as many more whose contributions were not covered by the specific subjects discussed in this writing. You know who you are.
I would also like to thank Federal News Radio for its commitment in sponsoring this 25-year retrospective. Newscasters often focus on urgent matters involving failure and pain. As the saying goes, if it bleeds it leads. But by looking back to examine the elements of the successful effort to create FERS, readers and listeners are reminded of what can be accomplished when something big needs to be done and key leaders step up to the line.
The late author Kurt Vonnegut reportedly said, “I want to stand as close to the edge as I can without going over. Out on the edge you see all kinds of things you can’t see from the center.”
In my hopeful view, one of the things that might just be visible is the road to a solution.
More from FERS: 25 Years Later