    [Senate Hearing 105-639]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 105-639

           S. 1710--RETIREMENT COVERAGE ERROR CORRECTION ACT OF 1998

    =======================================================================

                                    HEARING

                                   before the

      SUBCOMMITTEE ON INTERNATIONAL SECURITY, PROLIFERATION, AND FEDERAL
                                    SERVICES

                                     of the

                                  COMMITTEE ON
                              GOVERNMENTAL AFFAIRS
                              UNITED STATES SENATE

                           ONE HUNDRED FIFTH CONGRESS

                                 SECOND SESSION

                                       on

                                    S. 1710

              TO PROVIDE FOR THE CORRECTION OF RETIREMENT COVERAGE
                  ERRORS UNDER CHAPTERS 83 AND 84 OF TITLE 5,
                               UNITED STATES CODE

                                   __________

                                  MAY 13, 1998

                                   __________

          Printed for the use of the Committee on Governmental Affairs

                          U.S. GOVERNMENT PRINTING OFFICE
     49-133 cc                   WASHINGTON : 1998
    _______________________________________________________________________
               For sale by the U.S. Government Printing Office,
     Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

                       COMMITTEE ON GOVERNMENTAL AFFAIRS

                       FRED THOMPSON, Tennessee, Chairman
    WILLIAM V. ROTH, Jr., Delaware       JOHN GLENN, Ohio
    TED STEVENS, Alaska                  CARL LEVIN, Michigan
    SUSAN M. COLLINS, Maine              JOSEPH I. LIEBERMAN, Connecticut
    SAM BROWNBACK, Kansas                DANIEL K. AKAKA, Hawaii
    PETE V. DOMENICI, New Mexico         RICHARD J. DURBIN, Illinois
    THAD COCHRAN, Mississippi            ROBERT G. TORRICELLI, New Jersey
    DON NICKLES, Oklahoma                MAX CLELAND, Georgia
    ARLEN SPECTER, Pennsylvania
                 Hannah S. Sistare, Staff Director and Counsel
                     Leonard Weiss, Minority Staff Director
                           Lynn L. Baker, Chief Clerk

                                     ------

       SUBCOMMITTEE ON INTERNATIONAL SECURITY, PROLIFERATION AND FEDERAL
                                    SERVICES

                      THAD COCHRAN, Mississippi, Chairman
    TED STEVENS, Alaska                  CARL LEVIN, Michigan
    SUSAN M. COLLINS, Maine              DANIEL K. AKAKA, Hawaii
    PETE V. DOMENICI, New Mexico         RICHARD J. DURBIN, Illinois
    DON NICKLES, Oklahoma                ROBERT G. TORRICELLI, New Jersey
    ARLEN SPECTER, Pennsylvania          MAX CLELAND, Georgia
                       Mitchel B. Kugler, Staff Director
                   Ann C. Rehfuss, Professional Staff Member
                   Linda J. Gustitus, Minority Staff Director
                          Julie A. Sander, Chief Clerk

                                C O N T E N T S

                                     ------
                                                                       Page

    Opening statement:

        Senator Cochran..............................................     1

                                   WITNESSES
                            Wednesday, May 13, 1998

    William E. Flynn, Associate Director for Retirement and
      Insurance, U.S. Office of Personnel Management.................     2
    Hon. Roger W. Mehle, Executive Director, Federal Retirement
      Thrift Investment Board........................................     4
    Dallas Salisbury, President, Employee Benefit Research Institute
      (EBRI).........................................................    24
    Daniel F. Geisler, President, American Foreign Service
      Association (AFSA) I6025.......................................

                         Alphabetical List of Witnesses

    Flynn, William E.:
        Testimony....................................................     2
        Prepared statement...........................................    75
    Geisler, Daniel F.:
        Testimony....................................................    25
        Prepared statement...........................................    96
    Mehle, Hon. Roger W.:
        Testimony....................................................     4
        Prepared statement...........................................    84
    Salisbury, Dallas:
        Testimony....................................................    24
        Prepared statement...........................................    88

                                    APPENDIX

    Questions and responses from Senator Durbin to OPM...............    31
    Copy of bill S. 1710.............................................    33
    Additional prepared statements submitted for the record:
        Robert Tobias, President of the National Treasury Employees
          Union......................................................    59
        Thomas O'Rourke, Shaw, Bransford and O'Rourke law firm.......    63
        Linda Oakey-Hemphill, U.S. Department of Treasury............    72

           S. 1710--RETIREMENT COVERAGE ERROR CORRECTION ACT OF 1998

                                  ----------

                            WEDNESDAY, MAY 13, 1998

                                          U.S. Senate
                    Subcommittee on International Security,
                          Proliferation, and Federal Services
                      of the Committee on Governmental Affairs,
                                                       Washington, D.C.
        The Subcommittee met, pursuant to notice, at 2 p.m. in room
    342, Senate Dirksen Building, Hon. Thad Cochran, Chairman of
    the Subcommittee, presiding.
        Present: Senators Cochran and Levin.

                  OPENING STATEMENT OF SENATOR COCHRAN

        Senator Cochran. The Subcommittee will please come to
    order.
        Today we are conducting a hearing on S. 1710, the
    Retirement Coverage Error Correction Act of 1998, a bill which
    I introduced in March of this year at the request of the
    administration.
        The Retirement Coverage Error Correction Act is designed to
    provide an appropriate remedy for approximately 20,000 Federal
    employees who have been placed by the government in an
    incorrect retirement system. To give you some background on
    this situation, let me try to explain that this erroneous
    pension problem stems from the government's transition to the
    Federal Employees Retirement System, FERS, in 1984. Some
    employees hired since 1984 were erroneously placed in the older
    Civil Service Retirement System, CSRS, and later informed that
    they should be in FERS.
        Retirement coverage errors generally resulted from the
    difficulties government agencies experienced in applying two
    sets of transition rules. The CSRS is a traditional defined
    benefit program; participants receive an annuity based on age,
    years of service, and average compensation. FERS is a hybrid
    plan; FERS participants receive a substantially smaller annuity
    than CSRS participants, but they are covered by Social Security
    and are eligible for greater benefits under the Tax-deferred
    Savings Plan, TSP.
        To provide benefits equivalent to those payable under CSRS,
    it is generally considered necessary to contribute to the TSP
    and enhance retirement benefits by obtaining government
    matching. Employees erroneously placed in CSRS or CSRS-Offset,
    a plan which combines CSRS coverage and Social Security
    coverage, for a substantial period may be disadvantaged with
    respect to TSP benefits. For example, due to erroneous coverage
    they may not have contributed to the TSP in the belief that
    they would obtain a CSRS or CSRS-Offset benefit. Since the TSP
    began in 1987, employees whose erroneous coverage was detected
    have been allowed to obtain TSP benefits retroactively, with
    makeup contributions, but they may not have used the makeup
    opportunity for a variety of reasons, including lack of income
    available for savings.
        To remedy the situation, the administration's proposal, S.
    1710, allows individuals affected by an error lasting at least
    3 years to choose between being retroactively placed in FERS,
    which current law provides or requires, or CSRS-Offset,
    whichever the individual prefers. CSRS-Offset coverage provides
    benefits that employees expected during erroneous coverage
    through annuity and Social Security.
        Providing choice allows the equivalent of choosing FERS or
    CSRS, but does not disturb Social Security coverage rules. The
    CSRS-Offset choice makes the remedy administratively feasible
    for employees already placed in FERS and participating in
    Social Security, including retirees already receiving Social
    Security benefits. Employees, retirees, survivors, and certain
    salaried employees will have a window of opportunity to choose,
    and there will be an outreach program to explain this change.
    As Chairman of the Subcommittee with jurisdiction over this
    subject, I will try to ensure a careful review of all of the
    options for dealing with this issue.
        This afternoon we will hear from two panels of witnesses.
    The first panel will include William E. Flynn, Associate
    Director for Retirement and Insurance at the U.S. Office of
    Personnel Management, and the Hon. Roger W. Mehle, Executive
    Director of the Federal Retirement Thrift Investment Board. The
    second panel will include Dallas Salisbury, President of the
    Employee Benefit Research Institute, and Daniel F. Geisler,
    President of the American Foreign Service Association.
        Our first panel is at the table. We have received
    statements from you; we will include those in the record as if
    read. We also have statements from Robert Tobias, President of
    the National Treasury Employees Union, Thomas O'Rourke of the
    law firm of Shaw, Bransford and O'Rourke, and from Linda Oakey-
    Hemphill, U.S. Department of Treasury, which also will be
    included in our hearing record.\1\
    ---------------------------------------------------------------------------
        \1\ The prepared statements of Mr. Tobias, Mr. O'Rourke, and Ms.
    Oakey-Hemphill appear in the Appendix on pages 59-74 respectively.
    ---------------------------------------------------------------------------
        We invite you, Mr. Flynn and Mr. Mehle, to proceed with any
    comments or summary description of your views on this issue, as
    you like.
        Mr. Flynn, we will begin with you.

       STATEMENT OF WILLIAM E. FLYNN,\2\ ASSOCIATE DIRECTOR FOR
     RETIREMENT AND INSURANCE, U.S. OFFICE OF PERSONNEL MANAGEMENT

        Mr. Flynn. Thank you, Mr. Chairman. We appreciate very much
    the opportunity to be here today.
    ---------------------------------------------------------------------------
        \2\ The prepared statement of Mr. Flynn appears in the Appendix on
    page 75.
    ---------------------------------------------------------------------------
        You provided, I think, a very good summary of the proposal
    that is before the Subcommittee, so I might shorten my
    introductory remarks even further and just talk about a couple
    of very brief issues regarding it.
        I think the first thing that I would like to say, Mr.
    Chairman, is that in dealing with this issue of the incorrect
    retirement coverage, we worked closely with the Federal
    Retirement Thrift Investment Board, the Social Security
    Administration and the Treasury Department. We also sought, Mr.
    Chairman, the views of other major employing agencies where
    these errors have occurred around government. What we tried to
    do was put together, in consultation with all those parties, a
    proposal that represents a consensus position on resolution of
    what are, quite honestly, very intricate and intertwined issues
    dealing with being in the correct or incorrect retirement
    system.
        In putting forth the proposal, we tried to satisfy four
    primary objectives.
        First, we thought it absolutely essential that this remedy
    should demonstrate that the government cares about Federal
    employees who have been disadvantaged by an error in their
    retirement coverage, and that the government is committed to an
    equitable solution not only for them, but for their families as
    well.
        Second, we wanted to make sure that employees had a choice
    between corrected coverage--i.e., in most cases, being in the
    Federal Employees Retirement System--or a benefit the employee
    expected to receive, without disturbing Social Security
    coverage laws, as you've mentioned.
        Third, we wanted to make sure that these options would be
    easy to understand for affected employees.
        And finally, we wanted to minimize the administrative
    complexity that can be associated with situations like this in
    order to keep the solutions simple and timely as we move
    forward.
        We believe the proposal that is before the Subcommittee
    meets these objectives. During our study of this matter we also
    considered the option of placing individuals in the Federal
    Employees Retirement System and making a compensatory payment
    to the Thrift Savings Plan to make up for the period of time of
    their erroneous classification.
        In very short order, Mr. Chairman, we realized that there
    were intractable basic problems that limit the feasibility of
    going down that road. More importantly, we concluded that the
    approach of offering CSRS-Offset coverage provides a make-whole
    solution to affected individuals. Under this approach, as you
    have pointed out, no one would get less than they believed they
    were going to receive prior to the discovery of the error.
        Your bill, Mr. Chairman, is largely based on the
    administration's proposal. Most importantly, both proposals
    would provide a solution for all affected groups, as you've
    mentioned. Many people have worked hard to develop a solution
    to this problem; however, none of us can move forward until
    legislation is enacted, and our hope is that we can move
    forward quickly in order to begin the work of actually
    delivering relief to people who have been adversely affected.
        Thank you, Mr. Chairman. I would be happy to answer any
    questions you might have.
        Senator Cochran. Thank you, Mr. Flynn.
        Mr. Mehle.

       STATEMENT OF HON. ROGER W. MEHLE,\1\ EXECUTIVE DIRECTOR,
               FEDERAL RETIREMENT THRIFT INVESTMENT BOARD

        Mr. Mehle. Yes, Mr. Chairman, thank you. As you noted, my
    name is Roger Mehle, and I am the Executive Director of the
    Federal Retirement Thrift Investment Board.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Mehle appears in the Appendix on
    page 84.
    ---------------------------------------------------------------------------
        I have been invited to present the Board's views on S.
    1710, the Retirement Coverage Error Correction Act of 1998. The
    proposed legislation addresses the longstanding problem of
    retirement system coverage errors of what the Board understands
    may be thousands of Federal employees.
        Unfortunately, upon discovery of these coverage errors, the
    only legal avenue for agencies at present is to reclassify the
    affected individuals into the correct retirement system, often
    entailing serious financial consequences and special problems
    for those about to separate from Federal service.
        The most common error, apparently, was misclassification of
    newly-hired employees into the Civil Service Retirement System
    when those employees should have been placed into the Federal
    Employees Retirement System. In that regard, Mr. Chairman, S.
    1710 and H.R. 3249, comparable legislation pending in the
    House, wisely provide complete relief for such errors by
    allowing the affected employees to elect coverage under a
    retirement system virtually equivalent to CSRS--that is, CSRS-
    Offset.
        Since all such employees had much earlier, by law, already
    been offered and had rejected FERS coverage, absent any newly-
    legislated inducements to do otherwise, practically all such
    employees should opt for the retirement coverage which they
    already thought they had.
        It is difficult to conceive a more equitable and principled
    result, both for the employee and for the government. Both
    proposals, S. 1710 and H.R. 3249, however, also permit
    employees misclassified as CSRS to select FERS coverage,
    thereby triggering makeup contributions and lost earnings
    procedures.
        To implement this choice, S. 1710 adopts the well-
    understood makeup processes now used when TSP contributions are
    missed, either as a result of employing agency error or hiatus
    from civilian employment to perform military service. In
    contrast, H.R. 3249 would create special, new error correction
    procedures requiring complex new Board regulations and
    provisions to implement.
        In permitting employees misclassified as CSRS to select
    FERS coverage and to make up missed contributions, S. 1710
    retains the same lost earnings calculations currently embedded
    in TSP mainframe computer programs, thus error correction under
    S. 1710 could be accomplished immediately.
        S. 1710 does authorize agency-paid lost earnings on makeup
    employee contributions, a benefit not in current law. However,
    lost earnings on employee contributions are now paid by
    agencies if, having withheld these contributions, they failed
    to forward them timely for investment. The computer programs
    that calculate such lost earnings can easily be applied to
    makeup contributions by misclassified employees who select FERS
    coverage.
        In contrast, H.R. 3249 would mandate an option radically
    different from existing law. Most notably, misclassified
    employees would no longer make up their own missed
    contributions. Instead, agencies would be required to pay an
    amount equal to a kind of ``proxy'' for missed employee
    contributions, as well as missed agency contributions, together
    with much differently-calculated lost earnings on the whole.
        There are practical limitations on the Board's ability to
    implement the error correction procedures of H.R. 3249, both in
    the manner and within the time it contemplates.
        First, the Board is currently halfway through a complete
    redesign of its entire computer software system. The existing
    system is to be replaced by a state-of-the-art design to permit
    daily valuation of participant accounts, investment in two
    additional funds, and greatly improved service to participants.
    The resources of the Board and its recordkeeper, the National
    Finance Center of the Department of Agriculture, not devoted to
    new system design and current system maintenance are committed
    to the exigency of making the current system Year 2000
    compliant.
        The Board, therefore, would not be able to program or run
    the calculation of lost earnings called for by the House
    proposal which, as I said, is completely different from the
    calculations that would be used under S. 1710 or current law,
    on the mainframe computers at the National Finance Center. To
    do so would jeopardize both our current system integrity and
    our timetable for Year 2000 compliance and new system
    implementation.
        The Board, moreover, is not in a position, as contemplated
    by the House bill, to perform the new lost earnings
    calculations in some other way, nor is its recordkeeper. The
    potentially thousands of payroll and personnel records needed
    to do so, to say nothing of the myriad individual circumstances
    of misclassified employees, dictate that the calculations of
    H.R. 3249 be accomplished by employing agencies with personal
    computer software and guidance furnished by the Board. This
    accords with current agency statutory responsibility for the
    calculation and correctness of TSP contributions submitted by
    the agencies for their employees.
        Finally, one full year would be required to develop the new
    approach contemplated in the House bill, rather than the 6
    months that it would allow.
        Chairman Mica of the House Civil Service Subcommittee
    invited the Board to submit legislative language that would
    resolve these concerns. We did so, but unfortunately the
    changes were not incorporated into H.R. 3249, and thus the
    Board continues strongly to oppose the House bill.
        The legislation considered by this Subcommittee creates no
    administrative problems for the Board nor, for that matter,
    should it do so for agencies as they correct retirement
    misclassification errors under it. Thus we would be able to
    implement the TSP provisions of S. 1710 soon after its
    enactment.
        We have appreciated the opportunity to work with your staff
    on this legislation, and we look forward to working with the
    staff and Members of the Subcommittee in the future.
        Thank you, Mr. Chairman.
        Senator Cochran. Thank you very much, Mr. Mehle.
        Let me ask Mr. Flynn some questions.
        One, for background, how have you gone about identifying
    erroneously-placed Federal workers in these programs, and how
    will you identify them in the future?
        Mr. Flynn. Mr. Chairman, as you pointed out in your opening
    statement, the problem of misclassification actually began in
    the transition to the Federal Employees Retirement System in
    the late 1980's. We believe, quite honestly, that virtually all
    of the misclassification problems that occurred, occurred
    during that time period. Virtually all new Federal employees
    hired today are automatically placed in the Federal Employees
    Retirement System.
        So you have two groups of people, the majority of whom were
    misclassified during this transition period. We believe that
    about half of them have been identified and have had, under
    current law, their situations corrected. We believe that there
    is another group, about half again, who have not yet been
    discovered who will need to be identified. But the provisions
    of this legislation would enable relief to be given to an
    individual at the point in time that an error is discovered,
    even if it is yet, prospectively, 5, 10, or 15 years from now.
    We hope that would not occur.
        Nonetheless, when these errors first began to be identified
    in the late 1980's and early 1990's, we worked very hard with
    departments and agencies across government, providing them
    guidance and information so as to work through their employment
    rolls to identify people who were in the wrong retirement
    system and effect these corrections. Many of the people who
    have not yet been discovered have been missed in that process.
    Some people have separated from Federal service, and so their
    records aren't currently subject to review, but they might come
    back to Federal service. Some people, quite honestly, have
    retired, and that error hasn't been discovered and I suspect it
    probably never will at this point.
        But what this legislation would allow is for those residual
    problems that are yet to be discovered to be corrected as they
    are found, although I do think, in terms of an ongoing basis as
    new appointments are made today, very, very few errors, if any,
    are occurring today.
        Senator Cochran. I know that everybody would like to be
    able to figure out a way to make up for any losses that anybody
    incurred so that no one would have been harmed by being
    misclassified. Is that possible? And if that is not possible,
    why not?
        Mr. Flynn. Mr. Chairman, we believe that in crafting the
    administration's proposal and in the elements of S. 1710 there
    is a make-whole provision, and that make-whole provision
    consists of two components: one, a component which provides any
    affected employee, whether they were corrected in the past or
    whether they are yet to be discovered and offered this
    opportunity, a choice. And the choice is between a retirement
    system that, up to that point, they thought they were in, and
    they've been doing their career planning, their life planning,
    their savings for retirement and things like that, on the basis
    of that understanding. So one aspect of the choice is to enable
    that individual to stay with that retirement system with a
    known, defined benefit that they have used as a basis for their
    planning up to that point.
        On the other hand, the second component of the choice
    involves understanding, particularly for people whose error has
    been discovered in the past and who have now been in the
    Federal Employees Retirement System--perhaps unwillingly at
    first, but employees pretty much figured that was the situation
    that they had to deal with--may have aggressively done makeup
    contributions, may have aggressively invested prospectively, so
    as to make for themselves the best of what started out as a bad
    situation, but which may now, after 5, 6 or 7 years, be
    preferable.
        But in providing that choice, to enable the choice to be
    made under existing provisions of law--not disturbing Social
    Security coverage, not disturbing the tax code, and things of
    that nature--so that employees could see clearly how they could
    make themselves whole, one, by providing a known, defined
    benefit that was what they thought they had; two, if they
    believe it preferable, to remain where they are and continue to
    invest toward their retirement that way.
        We think that's an appropriate way to move forward.
        Senator Cochran. You described in your statement how the
    1990 FERS Technical Correction Act and the Thrift Board rules
    provide for limited lost earnings protection to misclassified
    employees. Why does the government require employees to make up
    their contributions to trigger these provisions?
        Mr. Flynn. That particular provision of the 1990 law was
    given careful consideration by both the Congress and the
    administration as it was approved. The fundamental rationale
    behind that was that this represented, for all practical
    purposes, money that individuals had already earned, and in
    order for an individual to receive the benefit of a matching
    contribution and lost earnings on that matching contribution by
    the government, it was appropriate for the individual employee,
    from their own resources, to make up what they otherwise would
    have contributed during the period of time that the erroneous
    coverage was there.
        To do otherwise, Mr. Chairman, would essentially provide
    dual compensation to the individuals because they have already
    had use of that money during the period, and any other way
    would not really recognize that.
        Senator Cochran. Can you explain how and why erroneous
    misclassifications affect those who have been misclassified for
    long periods of time and are nearing retirement?
        Mr. Flynn. We'll try to do that very simply. I was thinking
    the other day--I heard someone say that someone had asked
    Albert Einstein what was the greatest invention of mankind, and
    he said, ``Compound interest.'' And I think that goes to the
    heart of answering your question.
        In order for savings to accumulate in ways over a lifetime
    that provide--or provide a portion of--one's retirement income
    security in their nonworking years, contributions have to be
    made regularly over a long period of time. Earnings on those
    contributions have to be given time to accumulate and to
    compound. And over time, the magic of compound interest
    produces a substantial benefit.
        If one is nearing retirement or separates from the service,
    or has a very long period during which an individual, through
    no fault of their own, didn't believe they needed to make those
    contributions or were prevented from making those
    contributions, then the ability of that investment to grow in
    size and value is essentially truncated. Makeup contributions
    can only be made prospectively, and if you only have 6 months
    to go until you retire, or you are caught in a situation where
    you don't have a government job, you essentially have no
    opportunity over a long period of time to get yourself back to
    where you otherwise should have been.
        Senator Cochran. Does OPM believe that there is any
    justification for the government to help employees make up
    their own missed contributions? One argument, for example, is
    that although an employee received compensation that was not
    deferred, they may have spent it under the false assumption
    that their pension benefit alone would be sufficient to assure
    an adequate retirement. Do you agree with that?
        Mr. Flynn. Well, I think there is no question but that
    through an inadvertent error on the part of government, as
    employer, employees' expectations about their need to save for
    their retirement weren't what they should have been.
        By the same token, by providing an opportunity for an
    individual to choose to be in the retirement system that he or
    she thought up to that point they were in, you preclude the
    requirement of making a compensatory payment to the individual
    because you are able to guarantee them a benefit that they
    reasonably expected.
        Senator Cochran. The FERS Act gave all CSRS and CSRS-Offset
    employees an opportunity to transfer to FERS during an open
    season between July 1 through December 31, 1987. To what extent
    does the government have an obligation to provide a FERS option
    to those employees who had an opportunity to transfer and chose
    not to do so?
        Mr. Flynn. Well, I think one could argue, Mr. Chairman,
    that there is not an obligation per se, but I would mention two
    points in response to that question.
        First, as we know, when the Federal Employees Retirement
    System was introduced, we can look back in hindsight and see
    that actually very few employees chose it, when in fact
    rational economic financial analysis would suggest that a
    larger number of people should have chosen it than did.
        I think the reason many people did not at the time was
    because there was great uncertainty about the program. It was
    new. There was a great deal of certainty about the old program,
    and it was well known.
        Second, because the government has erred here, it seems
    that in the process of constructing a make-whole remedy,
    providing people with a choice--again, that gives them the
    benefit they thought they were going to have, but also
    particularly for people whose error has been corrected and
    where they've got some investment experience, where they may
    feel it preferable to stay in FERS--it just seems that in
    recognition of an error committed by the government, it seems
    appropriate to give people a second choice this time around as
    we move forward in correcting this issue.
        Senator Cochran. One approach to the erroneous enrollment
    problem, it has been suggested, may be to simply allow the
    misclassified employees to remain in CSRS and amend the Social
    Security laws as necessary to accomplish this. Why was this ap-

    proach not taken? And do you think it would be a better
    solution than either of the alternatives currently being
    considered?
        Mr. Flynn. Well, Mr. Chairman, during the period of time
    when the Federal Employees Retirement System was created, one
    very important part of that debate was the application of
    universal Social Security coverage to Federal employees. Even
    though the numbers here are small in proportion to the total
    number of people involved, I don't believe that creating a
    little carve-out to Social Security coverage would be
    appropriate, particularly given the fact that we have this
    hybrid system, this CSRS-Offset system, that replicates the
    benefits of the Civil Service Retirement System without
    requiring an amendment to Social Security coverage law.
        Senator Cochran. Now, do you think, given the fact that
    there are less than 20,000 individuals involved, this would
    affect the principle of universal coverage under Social
    Security?
        Mr. Flynn. Well, I think it does affect the principle. As I
    said, it's not a large number of people, but I also believe it
    would create a situation where unknown situations that might
    occur in the future with other groups of employees--perhaps not
    even public employees--would look to this as a precedent and
    would look to, perhaps, find a way to skirt around or come out
    from under coverage of Social Security law. Even though the
    numbers are small, I think the policy issue is a large one, Mr.
    Chairman.
        Senator Cochran. The bill that we've introduced at the
    administration's request suggests the requirement that an error
    must have existed for at least 3 years at any time after
    January 1, 1987.
        Why did OPM recommend that? And what might be the effect of
    lowering the length of time from 3 years to 1 year?
        Mr. Flynn. We chose the 3 years as of 1987 for two primary
    reasons, Mr. Chairman. First, you had to pick some point in
    time. Errors that last for a very brief period of time,
    generally speaking in the context of a long career, are not
    going to be very consequential. So in choosing a point, we
    chose the 3-year point because that's the point at which the
    Thrift Savings Program's vesting provisions go into effect, and
    it seemed appropriate to parallel that.
        We chose 1987 because that was the start date for the
    beginning of the Thrift Savings Program.
        Senator Cochran. I have some other questions, but I am
    prepared to yield to my friend whenever he would like to ask
    some questions. We have been joined by the distinguished
    Senator from Michigan, as you can see; Senator Levin is the
    Ranking Minority Member of this Subcommittee.
        Are you prepared to ask some questions now? I'd be glad to
    yield to you.
        Senator Levin. I only have a few questions, but I'm happy
    to listen to yours. You're asking the right questions, as
    always. [Laughter.]
        So let me follow your line of questions.
        Senator Cochran. Okay. Well, let me ask one or two more,
    then.
        Some experts say that the Thrift Savings Plan, TSP, could
    account for as much as 50 percent of the retirement benefits
    for FERS employees. Do you agree with this? And how does this
    share of FERS retirees' total retirement benefits--how is this
    accounted for, or compared to the share expected at the time of
    FERS enactment?
        Mr. Flynn. I will try to do that in a couple of ways, Mr.
    Chairman.
        First, I think it is important to sort of point out at the
    outset that the Federal Employees Retirement System does
    consist of three primary components. It has a Social Security
    base; it has a FERS defined benefit component that sits on top
    of that; and then the Thrift Savings Program, which is a
    defined contribution savings vehicle, sits on top of that.
        The three together, at the point in time that the system
    was enacted in 1987, were in fact designed to more or less
    approximate the benefit that the older Civil Service Retirement
    System--a single, defined-benefit program--provided. And the
    TSP component, if I have it correctly, was considered, given
    rates at which employees save and rates of return of the fund,
    to account for approximately 20 percent of that replacement
    benefit.
        Now, if you look at the record of the Thrift Savings
    Program over the past 10 or 11 years, particularly the record
    of the Stock Fund, clearly the rate of return is beyond those
    predictions at that point. And so the benefit that might be
    payable out of the TSP in retirement could be larger, could be
    potentially as large as some commentators have suggested, but I
    want to emphasize that it is additive to the Social Security
    benefit and the FERS basic benefit that are the first two
    components of the system.
        So in effect, it is gravy on top more than it is a
    replacement for the first two components of that FERS benefit.
        Senator Cochran. Given the fact that that is a large
    difference, is it fair to employees without contribution
    histories to use G Fund rates of return in calculating agency
    contributions for lost earnings, as would be done under S. 1710
    and is now done under current law?
        Mr. Flynn. Well, I would make one comment, and then perhaps
    defer to Mr. Mehle also on that one.
        I think the thing that I would say there, Mr. Chairman, is
    that the G Fund, which of course is invested in Treasury
    securities, will always have a positive rate of return. That's
    not guaranteed with either the C Fund, which is the stock index
    fund, or the F Fund, which is the bond fund. And while we have
    seen reasonably good rates of return over the past 11 years on
    average, there have been some years in the Stock Fund, for
    example, where there has been at least a negative return, and
    then at least 1 or 2 years of relatively poor returns vis-a-vis
    the rest. So there is risk.
        And just as we can look back on 10 years and see good
    performance, one could also look back, perhaps in another 10
    years, and see poor performance. And so because of the risk
    associated with that, using the G Fund, which always guarantees
    a positive rate of return, seems appropriate.
        Senator Cochran. Mr. Mehle, what is your reaction to that
    question?
        Mr. Mehle. I couldn't have said it better. [Laughter.]
        Senator Cochran. Okay. We hadn't forgotten you; we know
    you're there, and I've got some questions specifically for you,
    as a matter of fact.
        Mr. Mehle. I'm ready.
        Senator Cochran. Let me ask you this. There is a House
    bill, and you referred to it, Mr. Flynn--or Mr. Mehle did--
    would it be more advantageous to the misclassified employees to
    use the aggregate investment experience of FERS participants as
    contemplated in the House bill? Have any cost estimates been
    prepared on that bill, to your knowledge?
        Mr. Flynn. Looking at H.R. 3249, clearly, if one is using
    as a basis of comparison the G Fund rate of return versus the
    composite rate of return, it is more advantageous to look at
    the composite rate of return. However, that's true in the
    aggregate. For some employees, perhaps, who have invested
    aggressively, even the composite rate of return is a smaller
    return than their actual rate of return. By the same token, you
    could have some employees who have invested very conservatively
    for whom the composite rate of return would be advantageous.
    That's one of the difficulties of trying to figure out averages
    and then apply them to everyone. It clearly creates winners and
    losers, and that's one of the difficulties, I think, with that
    particular bill.
        Senator Cochran. It has been suggested that litigation be
    used in determining a proper remedy for employees who have been
    misclassified. Is that justified in the legislative history, to
    your knowledge? What's been the experience of the litigation
    avenue?
        Mr. Flynn. First of all, Mr. Chairman, there is no central
    repository of information on litigation. I do think, though,
    from what we have seen anecdotally in our discussions with
    agencies, the occasions of litigation are really quite minimal.
        I guess the point that I would like to make, and perhaps
    emphasize, is that we are here representing government as
    employer. I think the last thing that we want government
    employees and government retirees to do is to come in, sue
    their employer for an error that their employer inadvertently
    made; or, if that is to be the case, that we minimize as much
    as we possibly can through responsible, caring actions on our
    part, the grounds for future litigation.
        I think that the 1990 amendments were a positive step in
    the right direction. I think we have seen that while we have
    covered a lot of cases, there are some particularly sympathetic
    cases that still need to be dealt with, and it just strikes me
    that asking employees to sue their employer to get something
    that they really are entitled to is something that we ought to
    avoid as much as possible.
        Senator Cochran. Senator Levin.
        Senator Levin. Thank you, Mr. Chairman.
        This is kind of a complicated issue and I'm trying to get
    my arms around it as best I can without squeezing it to death.
    [Laughter.]
        The estimate is that about 20,000 people, as I understand
    it, were by mistake put into--new employees, is that correct,
    almost exclusively new employees?
        Mr. Flynn. Well, these, Senator Levin, were primarily
    employees who had prior Federal service. Most new employees
    hired since 1984 are automatically covered under the Federal
    Employees Retirement System.
        Senator Levin. Weren't the 20,000 people put into CSRS by
    mistake?
        Mr. Flynn. By mistake, that's correct, sir.
        Senator Levin. New employees?
        Mr. Flynn. Usually upon reappointment, as opposed to being
    a new employee.
        Senator Levin. All right. Well, I wasn't using the word
    technically. They were newly hired?
        Mr. Flynn. That's correct.
        Senator Levin. Now, after they were newly hired and put in
    CSRS by mistake, at some point--1 year or 2 or 3 years
    afterward--all CSRS people were given an opportunity, were they
    not, to switch to FERS?
        Mr. Flynn. That's correct, the original Federal Employees
    Retirement System open season in 1987.
        Senator Levin. How many of these 20,000 people would have
    been given that opportunity?
        Mr. Flynn. The easiest way to say this is that all
    employees who are currently in CSRS or CSRS-Offset have been
    given the opportunity at least once to switch, some during the
    open enrollment period that occurred in 1987, others upon
    reappointment because they have that election opportunity at
    any point if they meet certain conditions. But most of them are
    1987----
        Senator Levin. Let's assume there are 20,000 people out
    there who were put into a category by mistake. How many of them
    would have been given an opportunity at least some point after
    that mistake was made of putting them in the wrong category,
    would have been notified that they were in CSRS and they could
    switch to FERS?
        Mr. Flynn. All of them have had that opportunity at least
    once.
        Senator Levin. They weren't told that they were put in CSRS
    by mistake, they said, ``You are in CSRS''----
        Mr. Flynn. That's correct.
        Senator Levin [continuing]. ``You can switch to FERS should
    you choose to do so''?
        Mr. Flynn. That is correct.
        Senator Levin. And the people we're talking about are
    exclusively those who did not use that opportunity, is that
    correct? Or would this legislation also in some way make up
    some funds or benefits to people who did use that opportunity
    and switch to FERS?
        Mr. Flynn. You are correct, Senator Levin, in that all of
    these people believed they were in CSRS or Offset, and had the
    opportunity to switch to FERS with full knowledge of the
    provisions of that system.
        Senator Levin. But that's not quite my question.
        Mr. Flynn. Sorry.
        Senator Levin. My question is, does this bill provide a
    correction only for people who did not switch from CSRS to FERS
    when they had that opportunity?
        Mr. Flynn. Only those who did not switch? Yes. Anybody who
    switched to FERS is now in FERS, and so would not be benefitted
    by this.
        Senator Levin. Even though they may have switched a number
    of years after they came in?
        Mr. Flynn. That's correct.
        Senator Levin. And even though the mistake would have
    perhaps cost them for that period of time that they were
    erroneously in the CSRS system?
        Mr. Flynn. With the exception, Senator Levin, of anybody
    who, for whatever reason, was in the wrong system erroneously
    for a period of 3 or more years after January 1, 1987. So it is
    conceivable that you could have employees who were in the wrong
    system for 3 years who at some point later were given the
    opportunity to voluntarily switch to FERS--in other words, they
    didn't know there was an error--who did, and who are now there
    of their own volition. If that prior error is discovered and it
    meets those two conditions, then they would also have an
    opportunity to make an election under this proposal, that's
    right.
        Senator Levin. And about how many of the 20,000 would fall
    into that category? Could it be as much as 10 or 20 percent of
    the 20,000?
        Mr. Flynn. Well, let me try to comment on the 20,000 just
    for a second. The numbers have grown over the course of the
    past year from an estimate that I provided to the Civil Service
    Subcommittee a year or so ago, of about 10,000, to about 20,000
    now.
        I think the important point to make here is that no one
    really knows how many people have had themselves placed in the
    wrong retirement system.
        Senator Levin. Have had themselves placed in it? Were
    placed in it.
        Mr. Flynn. Well, were placed in the wrong system, you are
    correct.
        We know that based on the activities that agencies have
    engaged in to identify those that they could identify, that
    several thousand people have been identified and corrected. In
    order to provide some rough order of magnitude, we figured
    there might be as many as twice that number who were put in the
    wrong system, because there are obviously, then, some people
    that you don't know about, plus we have individuals who have
    come into government service and who have since separated. So
    that will affect the number, and that got us to about 10,000.
        Then, because the House bill has differing standards for
    eligibility for its provisions, the number--for example, the
    period of error in the House bill is 1 year, and in this bill
    it is 3 years. If it is 1 year, you have a larger number of
    people who might be affected by the bill's provisions, and so
    the number grew from there.
        But whether it's 20,000 or 10,000, the provisions of the
    bill would apply if anybody was ever erroneously covered during
    the period of time defined by the bill.
        Senator Levin. My question, though, is whether you can give
    us an estimate of the percentage, roughly, of people who
    switched from CSRS to FERS on their own?
        Mr. Flynn. There is no way that I would know an internal
    number to that, Senator Levin. But I will say that this bill
    will cover them if they have the error----
        Senator Levin. I understand that. You don't know whether
    it's a small minority or a majority or what?
        Mr. Flynn. Off the top of my head, I would suspect that
    that's a relatively small number. The reason for that is
    because as we have seen, most people--except those who have
    aggressively invested in the Thrift Savings Program--are going
    to believe that the Civil Service Retirement System, or its
    hybrid, the Offset, is going to provide them with a well-known,
    defined, reasonable benefit. So I would suspect that very few
    people would have switched to FERS because of that.
        Senator Levin. The next question is this. What percentage
    of Federal employees who were given the option to switch from
    CSRS to FERS exercised that option?
        Mr. Flynn. I believe the correct number in 1987 is about 4
    percent during that open enrollment period.
        Senator Levin. That was in 1987?
        Mr. Flynn. That was in 1987, yes.
        Senator Levin. And then, say, in the next 5 years, how many
    would have switched?
        Mr. Flynn. I really can't answer that. We may be able to
    get at that by looking at some Central Personnel Data File
    numbers, and I will try and go back and see if we can get to
    that.

                           Information for the Record
              Workforce Information has advised us that there were 12,208
            individuals employed during the 5-year period following the
            1987 FERS Open Season who would have had an opportunity to
            elect to switch to FERS. Of these 12,208 total employees, 893
            (or 7.3 percent) actually did switch to FERS. (Source: Central
            Personnel Data File.)

        Senator Levin. Would it be a majority?
        Someone is shaking their head ``no'' behind you, I want you
    to know--I think she's shaking her head ``no,'' or maybe it's
    that she doesn't know. I'm not sure.
        No way of knowing? All right. Anyway, she's shaking her
    head; I want to put you on judicial notice here that somebody
    is shaking their head behind you. [Laughter.]
        Mr. Flynn. The only thing that I would say is that if
    someone had gained title, if you will, to a Civil Service
    Retirement System benefit, they would have to be looking at a
    pretty substantial career ahead of them under FERS in order for
    them to select FERS and to have that selection be advantageous
    to them.
        Senator Levin. Okay, if you could get us a figure for how
    many made the original switch and how many, say, 5 years after,
    made that switch, that might be helpful to us, too.
        Finally, could you give us a couple examples of what the
    difference in benefit this bill would make to an average
    employee? How much of a benefit would they get without this
    change? Or if it were not made retroactively, how much they
    would get if they were placed in FERS retroactively now? Could
    you somehow or other give us a feel? The CBO estimate
    apparently is that this bill will cost--the House bill, excuse
    me--would cost around $240 million. We don't know what the cost
    of the Senate bill, if any, would be; apparently we are still
    waiting for the CBO estimate. Is that correct?
        Mr. Flynn. I have not seen a CBO estimate. I know that our
    own internal estimates would be that both this bill and the
    administration's bill, for all practical purposes, are
    essentially budget-neutral, particularly in comparison to the
    $200-million-some.
        Senator Levin. This bill and the administration's bill?
    What bill? The bill that we're having the hearing on?
        Mr. Flynn. There's a very slight difference between----
        Senator Levin. I thought this was the administration's
    bill, the one that we're having the hearing on.
        Mr. Flynn. This has a provision for payment of lost
    earnings on employee contributions that was not part of the
    administration's original bill. But other than that, that's the
    only difference.
        Senator Levin. All right. In any event, could you put this
    in kind of ``layman's terms'' for me? What would a typical
    Federal employee--under the House bill, what difference would
    it make? Under the Senate bill, what would that benefit be?
    Could you give us an estimate?
        Mr. Flynn. I will try to do this as quickly as I can.
        Senator Levin. Just dollar figures, that's all I want.
    [Laughter.]
        Take all the time you want, but at the end of it, it will
    be $300 a month this way, and $250 this way.
        Mr. Flynn. Okay.
        Senator Levin. So we'll wait until you get to that, if you
    get to that.
        Mr. Flynn. Okay. Well, I'll do the best I can.
        Senator Levin. Well, you may not be able to do it. You can
    do it for the record.
        Mr. Flynn. I am going to try and give a sense of this, and
    then maybe I'll want to amplify it for the record.
        Both bills offer employees choices----
        Senator Levin. Both bills?
        Mr. Flynn. Both the House bill and S. 1710 offer employees
    choices. If the employees choose to remain in Civil Service
    Retirement System-Offset and get the benefit they always
    expected to receive, there are no differences between the two
    bills in that regard.
        Where the difference comes in is if an employee under S.
    1710 chooses to be in FERS, the Federal Employees Retirement
    System, and makes that same choice under the House bill.
        Under S. 1710, the individual employee would then be placed
    in the Federal Employees Retirement System, would be given an
    opportunity to do makeup contributions on the basis of current
    law, and on the basis of their choice for makeup contributions
    under S. 1710, would have deposited to their account the 1
    percent automatic agency contribution, any matching
    contributions authorized given the employee's makeup
    contribution, lost earnings on the government contribution, and
    lost earnings on the employee's contribution.
        Under the House bill, in lieu of that, a payment would be
    made to the individual's Thrift Savings Program that attempts
    to replicate, in a composite way, what the employee would have
    contributed had he or she been in the FERS all along; the lost
    earnings on those contributions; all of the government matching
    contributions; and the lost earnings on that. So over time, the
    benefits produced by either of those choices would more or less
    approximate one another, although it is also true that
    depending upon the investment performance, the net retirement
    result could be higher in the long run.\1\
    ---------------------------------------------------------------------------
        \1\ The charts containing examples 1 to 4 appear in the Appendix on
    pages 55-58.
    ---------------------------------------------------------------------------
        That's the best I can do right now. I don't know that I can
    say that it works out to $200 per month per individual because
    so much of that is a function of what is deposited on the
    individual's behalf for retroactive contributions, and the
    choice that an individual makes then in terms of prospective
    contributions to the Thrift Savings Program--which, I might
    add, probably need to be somewhere in the 5 to 10 percent range
    going forward, and if they're not doing that now, that could be
    a difficult issue for them.
        Senator Levin. Well, I won't ask you about a prediction of
    the future. It is difficult enough to figure out, looking
    backward, what difference this would make.
        So for the record, if you would, tell me this. A person who
    is retiring tomorrow, if this bill passed--retiring tomorrow,
    was rehired in 1987 or 1983 or whatever that year was, if that
    person stayed in the CSRS, give me a typical person--take an
    average length of time that they previously were on the
    payroll, however you want to do it in a way that you think is
    fairly illustrative. How much would that person get if they
    stayed in the CSRS system, how much would they get under the
    Senate bill, how much would they get under the House bill? Just
    that one person.
        And then one other thing I would like you to tell me for
    the record is this. The Senate bill uses the G Fund, is that
    correct? It assumes that the person who is going back into FERS
    was a G Fund person, 100 percent?
        Mr. Flynn. Unless that person has a contribution history,
    in which case the contribution history of that person would be
    used. The G Fund is the default----
        Senator Levin. Excuse me. How long does the contribution
    history have to be?
        Mr. Flynn. I'd defer to Mr. Mehle on that. I think it's any
    contribution.
        Mr. Mehle. Any history.
        Mr. Flynn. Right.
        Senator Levin. Well, so if somebody has a contribution
    history of 1 month, they were smart enough to go into the Stock
    Fund--or presient enough, whatever that word is, to go into the
    Stock Fund--and it had a 25 percent annual jump during that
    month or whatever it is, that's a contribution history, and
    then that would mean they would be in the Stock Fund all the
    way back to 1983 or 1987?
        Mr. Flynn. No. It's the actual history. In other words, if
    an employee who was CSRS--mistakenly, CSRS--nevertheless chose
    to contribute to the Thrift Savings Plan, as CSRS employees can
    do----
        Senator Levin. I see. But for how long would that history
    be, then?
        Mr. Flynn. His employment period.
        Senator Levin. Okay. Well, I may be a little bit confused--
    --
        Mr. Flynn. I might be able to shed some light on that.
    There are actually two issues. One is the allocation itself;
    the other is the investment performance.
        Senator Levin. Okay. Well, I think I probably missed
    something here in terms of my understanding, but let me not
    take up the Subcommittee's time with that.
        We are using a G Fund unless there's a different history--
    --
        Mr. Flynn. Right.
        Senator Levin [continuing]. And then we're assuming that if
    there is no such history, that that is what the typical person
    would have used? Why G Fund?
        Mr. Flynn. The G Fund default is a provision of current
    law, and it is there because it is the only fund that
    guarantees a positive rate of return. The Bond Fund and the
    Stock Fund don't provide such guarantees, and it is at least
    arguably just as likely that there could be a negative rate of
    return.
        So use of the G Fund as a default was guaranteed always to
    provide a positive rate of return.
        Senator Levin. So that's not a new provision of this bill,
    that we use the G Fund?
        Mr. Flynn. No. That's correct.
        Senator Levin. This bill doesn't make that choice? It
    builds on existing law?
        Mr. Flynn. It builds on existing law, that's correct,
    Senator.
        Senator Levin. Okay. Thanks so much.
        Senator Cochran. Let me ask you to assume that Congress
    surprises everybody and passes this bill. What difficulties, if
    any, do you foresee in implementing it?
        Mr. Flynn. If this bill were to be implemented, clearly, we
    would have some work ahead of us in terms of correcting and
    giving election opportunities to people who have already been
    corrected, and then in terms of those that are discovered
    prospectively.
        I do think, however, that this bill meets those objectives
    that I talked about earlier in terms of simplicity of
    understanding and simplicity of administration. So I would not
    foresee any problem in terms of moving forward, providing
    people with the information they need to make an informed
    election, processing those elections, and then letting those
    individuals sort of get on with their lives and their
    retirement planning on the basis of knowns rather than
    unknowns.
        Senator Cochran. Mr. Mehle, what is the logic for and the
    evolution, if you can tell us, of the Thrift Board's rules to
    provide for correction of misclassification errors by agencies?
        Mr. Mehle. Well, Senator, when the Thrift Savings Plan was
    created, effectively in 1987, we recognized that there were
    going to be mistakes made as to employees' contributions by
    their employing agencies, and these mistakes would be
    discovered subsequently, and there had to be some mechanism
    whereby the missed contributions that the employee did not get
    to make would be made up.
        So we adopted a regulation in 1987 that called for
    employing agencies to give their employees an opportunity to
    make up their missed contributions; and, in connection with the
    employees making up their missed contributions, for the
    agencies to contribute the appropriate matching contributions
    that would have gone with those if the employee had been able
    to make them; as well as, in the instances that the employee
    was not even recognized as being a FERS participant, the 1
    percent automatic contribution that every FERS employee is
    entitled to receive, regardless of whether he or she
    contributes any money voluntarily.
        At that time, we also recognized that there was the issue
    of earnings on those contributions that had been foregone.
    Because the monies had not been put on account when they should
    have been, they did not earn anything. So at the time the error
    was to be corrected, there should be also a payment made by the
    agency, equitably, to make up for the lost earnings on the
    contributions.
        However, the General Accounting Office in 1989 issued an
    opinion of the Comptroller General that there was no authority
    in existing law for Federal agencies to make up earnings on
    missed contributions, whether they be earnings on the 1 percent
    automatic amount, whether they be earnings on the matching
    contributions that were not made, or indeed--but it's sort of a
    different fundamental proposition--on the employee amounts.
        We noted that problem, and we at the Thrift Investment
    Board forwarded draft legislation to Congress, asking Congress
    to pass a law that would permit agencies to make up the lost
    earnings on the 1 percent amount and on the matching
    contributions. Congress passed this law, and agencies thereby
    were permitted at the time that they make up the matching
    contributions and the 1 percent contributions, to make up the
    earnings attributable to those amounts.
        The law that was passed by Congress, however, did not call
    for agencies to make payments in respect of earnings on
    foregone or missed employee contributions. The rationale for
    that was that the employee, however unfortunately not having
    had the contributions taken from his paycheck and deposited
    into the Thrift Savings Plan, nevertheless got the money; it
    was in his or her paycheck, and the employee did something with
    it, spent it or saved it. Therefore it was thought that
    equitably it would not be appropriate for the government to pay
    any lost opportunity costs on these monies as it would be,
    conversely, on the 1 percent and on the matching contributions,
    because the employee actually had the money to spend or to
    save, as the case may be.
        That rationale is invested, imbedded, in our current
    regulations, which reflect that Congressional decision in 1990
    when the legislation was passed, authorizing agencies to make
    up lost earnings.
        Senator Cochran. You mentioned in your statement the
    different approaches in these bills, S. 1710 as compared with
    the House bill. Would you say that the largest difference or
    the most significant difference between the two bills is found
    in the triggers for makeup contributions and lost earning
    procedures? And if that's right, does the Thrift Board have a
    preference for either approach?
        Mr. Mehle. Clearly the most significant difference between
    the House bill and S. 1710 is the requirement under the House
    bill that the agencies--the Federal Government itself--make a
    payment that is a kind of a proxy for the contributions that
    the employee himself would have made, but did not. That is, I
    think, the heart of the difference between the two bills. In
    the one case, S. 1710 calls for employees to choose--if they
    like, CSRS, which is what they thought they had and which, as I
    noted in my prepared testimony, seems like perfect equity,
    certainly for those whose errors have not yet been discovered,
    but they do have a choice. They are given the choice to take
    CSRS or to stay with--or to go with--FERS.
        If they go with FERS, rather than going with CSRS--the
    system you would intuitively think they would go with because
    that's the one they thought they had, and that's the one that
    denial of membership in is promoting all of the hardship for--
    you would think that unless they were biased some way, induced
    in some way, perhaps financially, to go into FERS, they
    wouldn't. But if you look at S. 1710, you can see that, with
    the single exception of the notion of the agency paying lost
    earnings on employee contributions--lost earnings, not the
    contributions themselves, but earnings on the contributions--it
    is neutral. S. 1710 is neutral. It won't bias an employee to
    game between two retirement systems by saying, ``Maybe there's
    something that I can exploit in making my choice.'' If one
    chooses to be in FERS, under H.R. 3249, as I have observed in
    my testimony in the House and a bit here, there is an enormous
    amount of money potentially that the employee may get in making
    that choice. It is the debated double payment that we're
    talking about.
        I do have some examples of that. We have furnished these
    examples in the past, as requested, and I can give you some
    figures that would indicate why an employee might be biased, if
    you like. But I think at the heart of the two is the notion
    that under H.R. 3249, payments will be made by the agency that
    otherwise, under current law and S. 1710, are called for to be
    made by the employee. And then, of course, there are the very
    significant administrative provisions with which we are quite
    vitally concerned that I outlined in my prepared remarks.
        Senator Cochran. There's one aspect of the House bill that
    is unclear to me. It involves the situation of the misplaced
    employee who elects the FERS option and has a history of
    participating in TSP, the Thrift Savings Plan. As we understand
    the proposal, in the case that the employee has an investment
    history, that history is to be used in determining the rate of
    return or makeup contribution. If there is no participation
    history, a proxy is to be used that reflects the aggregate
    investment history of all participants. Is that correct?
        Mr. Mehle. Yes.
        Senator Cochran. What happens to an employee, then, who has
    made poor investment decisions resulting in a lower rate of
    return than an average investor? Will any difference be made
    up? And if so, by whom?
        Mr. Mehle. This may be reaching the question that Senator
    Levin asked. If an employee who thought he was in CSRS ignored
    the Thrift Savings Plan, even though he has an opportunity to
    invest in it up to 5 percent--if he ignored it because he was
    comfortable with the prospect of the ample defined benefit, he
    would have no investment history in the Thrift Savings Plan.
    H.R. 3249 gives to such an individual an amount of money that
    is calculated upon the investment behavior--that is to say, the
    deferral rate, the amount of savings from one's paycheck--that
    the broad FERS and CSRS Federal employee group historically
    had, together with the historic rates of return associated with
    that investment history of all CSRS and FERS employees.
        As to the individual himself, I can't perceive any
    relationship between the amount of money he will get and any
    judgment that the individual had that influenced him not to
    contribute to the Thrift Savings Plan. It's a great windfall,
    in a sense. He made no investments in the Thrift Savings Plan,
    so he has no history in it. Consequently, the history of all
    will be used, and the investment results associated with the
    history of all.
        If, however, the employee, despite the generosity or the
    adequacy of the defined benefit due him under CSRS, decided
    that he would save even a little bit in the Thrift Savings
    Plan--let's say, in the G Fund--and he put away 1 percent of
    his paycheck into the G Fund every payday, as he certainly
    could do, that is his investment history. And in that case,
    that employee, who wanted to go into FERS under H.R. 3249,
    would have the rate of the G Fund used with the deferral rates
    of the average employee experience. It's a lower rate.
        So the differences between the two are quite arbitrary,
    depending on the individual employee's behavior, and certainly
    his behavior foresaw absolutely none of this. Our view is that
    this works some very arbitrary results. I thought that they
    were unintentional when I testified in the House, and I raised
    them as apparent unintentional consequences, or unintended
    consequences. But I think that these consequences are, in fact,
    expected or intended, or at least they are tolerated under H.R.
    3249. So it creates quite a disparity.
        Senator Cochran. What about the employee who contributed
    the maximum allowed as a CSRS or CSRS-Offset participant? Would
    this individual receive the historical average contribution
    also? And will any difference between this amount and the
    maximum allowable under the FERS be returned to the individual,
    along with any earnings?
        Mr. Mehle. No. As I understand H.R. 3249, the individual
    who contributed 5 percent, which is the maximum amount a FERS
    employee may contribute, will receive this payment that I
    outlined based on his investment history, but limited by 10
    percent per annum, because that's the FERS limitation. So that
    person will not get the same amount of money from his agency
    that a person who had not contributed 5 percent would get from
    his agency.
        Senator Cochran. What would the tax treatment of such a
    distribution be?
        Mr. Mehle. Well, in that case there would not be any
    distribution. It would simply be that the amount of payment
    made to him by his agency under H.R. 3249 would be reduced
    relative to the amount the agency would pay to a person who had
    not contributed 5 percent. Therefore there would be no
    necessity for any distribution to that person. In short, there
    would not be an overpayment made to him. The agency payment
    would be adjusted, so that together with his payment it would
    not exceed 10 percent.
        Senator Cochran. An employee who participated while in FERS
    might make different investment decisions than he or she would
    have made if they had been a CSRS participant. The decisions
    might be more or less conservative.
        How can using the investment history for an individual
    while that individual was a CSRS participant be an accurate
    reflection of what the individual's FERS participation might
    have been?
        Mr. Mehle. Well, I honestly don't think it can. I don't
    think you can turn back the hands of time, put the individual
    in a position with no ability to predict the future, what the
    markets would have done. And likewise, you cannot say that that
    person who was looking to a CSRS defined benefit would or would
    not have saved the same amount. Presumably, a person who was in
    FERS--since the message is very strong to such persons that
    they need to contribute to the Thrift Savings Plan to have
    adequate retirement benefits or the same kinds of retirement
    benefits that CSRS participants do--it's very likely that a TSP
    participant as a FERS employee would have contributed more,
    maybe contributed in different proportions.
        So I don't think you can just flatly say that this is what
    the individual would have done if he knew he was in FERS to
    begin with.
        Senator Cochran. If you assume that the House bill is
    adopted, do you think that those who made the effort to
    participate, on average, are going to be worse or better off
    than those who didn't participate in TSP?
        Mr. Mehle. Well, what I can say is that those who did not
    participate in the TSP would have a return, as we calculated
    it, given what we understand H.R. 3249's prescriptions are, of
    about 9.5 percent over the period of 1987 to 1997. Of course, a
    person whose error wasn't that long would not necessarily have
    that rate of return because it's applicable to that period,
    1987 to 1997, about 9.5 percent.
        By the same token, a person who had contributed, let's say,
    to the G Fund only--in other words, he had an investment
    history--would have about 7.5 percent over that same time span.
        So the vicissitudes of contributing or not contributing
    work quirky results under H.R. 3249.
        Senator Cochran. Senator Levin.
        Senator Levin. Just a couple more questions.
        I'm a little unclear on a very basic point that I probably
    should know, and that is, putting aside your choice under the
    Thrift Savings Plan, do you also make a choice which affects
    your FERS benefit as to whether you go G Fund or C Fund or S
    Fund or F Fund?
        Mr. Mehle. You may choose among the three funds to make
    your contribution.
        Senator Levin. Not just on your thrift savings, but also as
    it relates to the non-thrift savings part of FERS?
        Mr. Mehle. No.
        Senator Levin. Am I speaking your language or not?
        Mr. Mehle. I think I know what you are getting at. Whether
    you are a CSRS-covered employee or a FERS-covered employee, you
    may participate in the Thrift Savings Plan, and in either case
    you may make choices among the three funds.
        Senator Levin. But how does your choice among the three
    funds for the Thrift Savings Fund affect your FERS benefit?
        Mr. Mehle. It does not. It does not explicitly affect the
    defined benefit or annuity portion of your FERS benefit.
        Senator Levin. Then how does the investment history in the
    Thrift Savings Fund affect your FERS benefit for the purpose of
    this bill?
        Mr. Mehle. It affects your FERS benefit in a global sense,
    if you think of your FERS benefit as comprising the basic
    annuity, the Thrift Savings Plan balance that you have when you
    leave government, and your Social Security payments. That's the
    total benefit package that you have as a FERS employee. It
    affects that benefit because you may well have, based on your
    investment history, a FERS TSP balance that is lower than it
    would have been if you knew you were in FERS to begin with and
    you contributed more to it.
        Senator Levin. In other words, you might have contributed
    more to your Thrift Savings Plan had you known----
        Mr. Mehle. Had you known you were in FERS. It is important
    that you contribute to your Thrift Savings Plan, because the
    defined benefit portion of the total FERS package is much
    smaller than that under CSRS.
        Senator Levin. And if under the bill we give people the
    option to switch to FERS, what are we assuming their
    contribution to the Thrift Savings Plan is? Not whether it's
    bonds or stocks or government securities, but--up to 5 percent,
    what are we assuming that contribution was for those people?
        Mr. Mehle. Actually, what H.R. 3249 does is invent a
    contribution.
        Senator Levin. What percent contribution?
        Mr. Mehle. It is the average history of all Federal
    employees.
        Senator Levin. So if that's 2 percent, they assume it's a 2
    percent contribution?
        Mr. Mehle. That's right.
        Senator Levin. And does the House bill assume the return on
    that?
        Mr. Mehle. It uses the return for the periods--the actual
    returns for the periods in question.
        Senator Levin. The average return of the three funds?
        Mr. Mehle. Yes, as reflected by broad Federal employee
    investment behavior.
        Senator Levin. The total return of Federal employees on the
    average contribution.
        Mr. Mehle. Yes. That's H.R. 3249. So it has nothing to do
    with an employee's own choices or pocketbook decisions that the
    employee might actually have made if he knew he were in FERS
    back then.
        Under S. 1710, in contrast, when the error is discovered,
    the employee is given a choice to stay in CSRS or be in FERS.
    In other words, he was mistakenly in CSRS, the juncture comes,
    the error is found, he is told ``You can be in CSRS, you can
    stay in it; you thought you were in it, you can stay in it or
    you can be in FERS.'' That person then is given the opportunity
    to make payments, contributions, that he could have made, as
    the present system calls for it, and get matching contributions
    that he's entitled otherwise to get, and the 1 percent
    automatic agency contributions, together with, in the case of
    the 1 percent and the matching contributions, earnings as if
    earned from the date that his contribution would have been
    made.
        The employee chooses to make up to the Thrift Savings Plan
    as much as 10 percent--that's the limit--of his paycheck in
    respect of the year in question.
        Senator Levin. I just have one other question. Can you
    conceive of somebody who is retiring tomorrow, on whom this
    mistake was made, who would not be better off under either the
    House or Senate bill than under--exercising the option to join
    FERS under either bill, can you imagine anyone who would not
    exercise some option to get into FERS, who is retiring
    tomorrow? Could someone be better off under CSRS?
        Mr. Mehle. Absolutely. I would actually expect that it's
    almost inconceivable--unless you offer them a pot of gold to
    retire under FERS. He thinks he's in CSRS; he's going to retire
    tomorrow; he hasn't contributed a nickel to the Thrift Savings
    Plan. If he is forced into FERS, he has an annuity that's half
    of the amount, starting tomorrow, that he thought he was going
    to have.
        It's quite plain that such a person, if given the
    opportunity to be in FERS or CSRS, would say, ``Well, I want to
    be in CSRS. I want the generous annuity. The fact that I don't
    have a TSP account and I don't have enough time to make it up,
    if I'm going to retire tomorrow, means I clearly want CSRS.''
        If on the other hand you say, ``Well, we've got a different
    deal; we're going to give you $1 million if you retire under
    FERS tomorrow. We're going to give it to you. How about that?''
    He says, ``Well, let me think about it.'' That's the kind of
    choice that I think H.R. 3249 is presenting, because the
    employee does not have to pay any of his own money.
        Senator Levin. Okay, but I want to assume an employee who
    can put the money in, make up the money.
        Mr. Mehle. Who can do it?
        Senator Levin. Who can do it. Would any of those employees
    be better off staying in CSRS?
        Mr. Mehle. If you retire tomorrow?
        Senator Levin. I'm talking about just retiring tomorrow.
        Mr. Mehle. If you retire tomorrow, you plainly don't have
    enough time under S. 1710 or under current law to put in money
    of your own to earn and to fetch in the match, over the 1
    percent. You don't have enough time left.
        A person, let's say, who might retire in 10 years, on the
    other hand, is given the opportunity to choose between CSRS or
    be in FERS. Looking forward, knowing that there is a difference
    between the annuities--much heavily weighted toward CSRS--he
    might say, ``Well, I want to be in FERS. The reason I want to
    be in FERS is that I think the markets are really going to do
    well. I like the idea of getting the 1 percent contribution. I
    like the idea of getting the matching contribution, and I like
    the idea of putting in 10 percent of my own money--not just 5,
    but 10 percent--and relying on the markets for the next 10
    years.'' So that would not be an irrational choice, to stay in
    FERS.
        One complicates these----
        Senator Levin. To stay in FERS, you say?
        Mr. Mehle. Yes. I say it would not be irrational for such a
    person to want to be in FERS for----
        Senator Levin. You said to go to FERS.
        Mr. Mehle. I'm sorry, to go to FERS, stay in FERS--it's a
    little difficult to say where the person is. He was mistakenly,
    by hypothesis, told he was in CSRS.
        Senator Levin. I understand.
        Mr. Mehle. So the question is, is he staying in FERS or
    going into FERS, or exactly what.
        Senator Levin. Thanks a lot.
        Senator Cochran. Thank you both for being an excellent
    panel of witnesses for our hearing. We appreciate your being
    here, Mr. Flynn and Mr. Mehle, and your contributions to our
    understanding of these issues.
        Mr. Flynn. Thank you, Senator
        Mr. Mehle. Thank you, Senator.
        Senator Cochran. Our next panel will include Dallas
    Salisbury, President, Employee Benefit Research Institute, and
    Daniel F. Geisler, President, American Foreign Service
    Association.
        We welcome you and thank you for your attendance. We have
    copies of your statements, which we will place in the record.
    We encourage you to make whatever summary comments as
    introductory remarks that you would like to make, and then we
    will have a chance to ask you some questions.
        Mr. Salisbury, we will start with you.

     STATEMENT OF DALLAS SALISBURY,\1\ PRESIDENT, EMPLOYEE BENEFIT
                       RESEARCH INSTITUTE (EBRI)

        Mr. Salisbury. Mr. Chairman, Members of the Subcommittee,
    it is a pleasure to be here. Since the full statement is being
    included in the record, I will be even more brief than my
    summary.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Salisbury appears in the Appendix
    on page 88.
    ---------------------------------------------------------------------------
        I was asked to deal with the question of private sector
    practices. One of the primary issues in this legislative issue
    relates to Social Security, and I would note that in the
    private sector the Social Security coverage/noncoverage would
    be a nonissue. It might be in a few State and local situations,
    but given the inability currently of States to opt out of
    Social Security, we were unable to find any situations, in
    looking up research on the States, of a similar situation.
        Second were issues related to employee contributions and
    whether the catch-up contribution issues would normally arise
    in the private sector. On the one hand, there is nothing in the
    law that would disallow an employer, as best as we can tell,
    from making these catch-up contributions and allocations. In
    fact, we did find, as is documented in my full testimony,
    provision in revenue procedures that would allow employers to
    do so. On the other hand we were unable, in going through data
    bases, to find any situations or evidence where that had in
    fact been done.
        The second set of questions dealt with the issue of Federal
    employees being given a chance to switch, and whether there
    would be a private sector counterpart. Again, we were unable to
    find situations where that type of a situation in the private
    sector would generally occur. Employers in the private sector
    frequently find themselves freezing a given defined benefit
    plan, and then doing a replacement plan; or totally terminating
    one defined benefit plan and creating replacement plans, but
    seldom would they be running simultaneously, the two systems,
    as is done in the Federal case.
        One could also ask questions about the benefit accrual and
    employee choices. I would prefer, rather than going through all
    that, to deal with it in the Q&A period. But one can find
    history, particularly in situations like the Unisys case, on
    issues of litigation where employers have chosen to essentially
    make some makeup of investment earnings or contributions where
    they felt that an action was as a result of their own fiduciary
    action. But again, the number of cases that we were able to
    document in the private sector was relatively limited.
        Finally, one would ask the question of the most complicated
    issue being related to the participant's asset allocation.
    You've had a substantial discussion of that. I will simply note
    that in the extensive work that we've done, what one finds in
    most defined contribution plans is a relatively skewed
    distribution; about 25 percent of participants put all of their
    money into the equivalent of the G Fund, about 25 percent of
    participants put all of their money in the equivalent of the
    Equity Fund, and the vast majority do some mix. So to do it
    based on averages would not generally represent what public or
    private employees have done.
        The equitable treatment issue that was discussed at some
    length in terms of what one would do and what a private
    employer would generally do, is they would generally try to
    have an approach that treated all employees, should we say,
    equally, rather than some of the treatments that can arise
    under these pieces of legislation, where an individual who did
    choose to save, as was documented in the last panel, could find
    themselves penalized relative to individuals who had not chosen
    to save in the Federal Thrift Plan.
        Employers in the private sector generally would try very
    hard to avoid that type of what they would deem to be
    inequitable treatment.
        Finally, I would simply note vis-a-vis the last testimony
    and the question that Senator Levin was asking, if one takes
    the revenue-neutral legislation being discussed in the Senate
    bill, the estimate of roughly $240 million as the revenue cost
    of the House bill, and the estimate of 20,000 affected parties,
    it would appear that the average dollar value of the House bill
    is about $12,000 per participant, if you assume that everybody
    went over, which is substantially larger than the hypothetical
    $300 or $400 as the Senator was trying to get at that number.
    But I believe, as the representative of OPM noted, that's the
    type of number that they could readily go back and calculate.
        Thank you for the opportunity to be here.
        Senator Cochran. Thank you, Mr. Salisbury, for your
    statement.
        Mr. Geisler.

    STATEMENT OF DANIEL F. GEISLER,\1\ PRESIDENT, AMERICAN FOREIGN
                       SERVICE ASSOCIATION (AFSA)

        Mr. Geisler. Thank you, Senator.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Geisler appears in the Appendix
    on page 96.
    ---------------------------------------------------------------------------
        Senator, I am here to speak on behalf of the 23,000 retired
    and active duty foreign service officers and specialists that
    we represent. We appreciate the opportunity to testify before
    you today on this issue.
        We alerted our members to this situation over the past
    couple of months, asking them to let us know if they think
    they've been misclassified. We also warned them that if they
    alert their agency that they've been misclassified, they may
    have to be switched immediately, so we've told them to ``tell,
    but don't ask.'' [Laughter.]
        I can report to you that so far the number of people who
    have come back to us has been quite modest. We don't anticipate
    a large-scale corrective action for the foreign service
    agencies.
        Mr. Chairman, I personally experienced the sort of
    situation that this legislation deals with. I joined the
    government back in 1984 as an engineer in the Civil Service,
    and I was put into the interim system at that time. Three years
    later I was serving abroad in the foreign service, and I wanted
    to switch into the new system. I guess I was one of the 4
    percent that Mr. Flynn said were ``rational,'' and I was told
    that I didn't have to do that, that it was automatic. I had no
    choice, I had to be in FERS--or the Foreign Service Pension
    System, equivalent.
        In November of 1987 I got my first statement from the
    Thrift Savings Plan and I saw that I wasn't getting government
    matching, and I went into the administrative section of the
    Embassy and asked them why. They said, ``Oh, you didn't tell us
    that you wanted to be switched.'' I said, ``You told me that I
    didn't have to tell you, that I had no choice.''
        I was lucky that they made that correction right there, so
    I didn't suffer any damage. But some other people in the
    foreign service haven't been so lucky. I think, in our case,
    one of the reasons people were misassigned is that because 60
    percent of our people are serving abroad, while the foreign
    service agencies run these retirement issues out of
    headquarters here in Washington. Washington is where they have
    the specialized personnel who know how to deal with these
    issues. In embassies, we don't have that kind of expertise.
        Ten years ago, when these big changes were taking place,
    nobody had fax machines; nobody had e-mail; international calls
    were very expensive. You generally weren't allowed to make them
    if you were a staff person. And in some of the countries--like
    where I served, in Zaire, in Jamaica--the connections were hard
    to make. So it was very hard to get that kind of information
    out in the field.
        Today it's a little bit easier to do that, so we don't
    think we're getting classification problems now in the foreign
    service.
        Mr. Chairman, from our point of view corrective legislation
    should have three features.
        First, it should include the foreign service. H.R. 3249,
    the House corrective measure, does include the foreign service,
    and we thank Congressman Mica for acceding to our request that
    it do so. And we also ask you, Mr. Chairman, as you mark up S.
    1710, that you also include our people.
        Second, like the people who spoke before, Mr. Flynn and Mr.
    Mehle, we think that employees who have been victims of
    administrative error should have options. And this bill, S.
    1710, does give options to employees, as does the House bill,
    H.R. 3249. We think that's important.
        But third, Mr. Chairman, we think that the option should be
    financially viable, and in particular this means providing
    corrective measures for employees who opt for the new system.
    It seems that on this point, as people have said, the Senate
    bill diverges from the House bill, particularly with respect to
    the Thrift Savings Plan contributions.
        We have seen examples of how this operates now. A couple
    months ago I got an electronic mail from one of our officers
    who is serving in a developing country in Africa. He has been
    on duty since 1987 in the foreign service, and he was in the
    Offset system. Last year his agency told him that they had
    misclassified him, and that they had to put him immediately
    into the new system. Under the current law, to catch up on TSP,
    he would have to come up with somewhere between $65,000 and
    $70,000 very quickly in order to make up his retroactive
    contributions, and he would have to do that while he is also
    putting aside money to make his current contributions.
        Mr. Chairman, most of our people don't have that kind of
    cash available to them. In fact, in the foreign service we have
    an ``up or out'' system where if you are not promoted at
    regular intervals, you have to retire, like they do in the
    uniformed military services. So we have a lot of people who are
    retiring in their mid-50's. They have children in college, and
    if they are asked to make this kind of switch without any kind
    of relief, we are essentially asking them to choose between
    their retirement and their children's education. We think
    that's unfair.
        Mr. Chairman, we think that the changes that you are
    proposing to the current law do much to correct this situation.
    Certainly, the proposal to pay to the TSP an amount equal to
    the earnings on makeup contributions will bring the TSP to a
    healthy balance faster than the current law does.
        As to the differences on TSP between the two bills, Mr.
    Chairman, I will confess that we do not have a lot of
    institutional expertise in the financial area in my
    organization, so we are going to leave that up to the experts.
    We are happy to see that Members of the House and the Senate
    are taking this problem seriously and that they're trying to do
    something to correct it quickly. I am happy to have had the
    opportunity to testify before you on how important it is.
        My main point, Mr. Chairman, for being here today is to ask
    you to include the foreign service in whatever you come up with
    as corrective legislation.
        Senator Cochran. Thank you very much, Mr. Geisler, for your
    comments.
        Let me ask Mr. Salisbury, if there is any history in the
    private sector that is similar with what we're confronting now
    with this issue in the government retirement programs.
        Mr. Salisbury. Not on any point-by-point type of basis.
    Most private employers would not, if you will, have
    ``companion'' comprehensive retirement systems.
        The one real of similarity would be that there are, in
    fact, at times problems of benefit calculation and
    classification. Senator Grassley has held hearings here in the
    Senate on that topic. In those cases, the most common private
    sector practice would be basically to try to follow a policy of
    ``do no harm'' and a policy to help those to whom harm had been
    done. If I put that into the situation of this legislation and
    the discussions here, that would fall in the category, but it
    would be quite unlikely that a private employer, if they had a
    legal option, would, upon discovering 10 or 15 years after the
    fact that someone was in a situation and was ``misclassified,''
    that the employer would move them out of that situation
    against, in essence, their desire, to their disadvantage.
    That's the type of thing in the private sector that would lead
    to bad headlines and, potentially, to lawsuits.
        Senator Cochran. Does ERISA have requirements that are more
    costly to employers or more generous to employees than those
    provided in the legislation that we're considering?
        Mr. Salisbury. First, you would note, as one of the cost
    items here--a private employer under ERISA would never face the
    Social Security issue that you face here, which is one of the
    cost items.
        Beyond that, there really is not a comparison in the
    private sector, and ERISA would not create that type of a
    situation.
        Senator Cochran. You mentioned that employees in the
    private sector may consider litigation to try to redress their
    grievances if they have been wronged in any way. Is there any
    proof that granting employees a specific right to sue the
    employer for lost contributions is a useful or valid option?
        Mr. Salisbury. There's no real record on that that we were
    able to find as we researched all of these issues. We do
    believe that if you were to ask that question of the Department
    of Labor, which engages directly in litigation related to
    ERISA, they might be able to find you essentially a count of
    how aggressively those litigation options have been used.
        Senator Cochran. What considerations should be taken into
    account when you're trying to correct erroneous pension
    coverage? How do you meet the individual employee's
    expectations? Why can't we allow misclassified employees to
    remain in the wrong system?
        Mr. Salisbury. Well, as a practical matter, being the
    Congress of the United States, you have the unique power to do
    exactly that, should you choose to do so. And against the types
    of equity issues involved, one might argue that with some that
    would be an appropriate way to do it.
        The issue that was raised earlier with the first panel in
    one of your questions about, ``Well, what about the Social
    Security implications vis-a-vis universal coverage,'' the
    initiatives now in the States for seeking Congressional ability
    to opt out of Social Security, the precedent value--as a
    personal statement, not a lobbying statement but as a personal
    statement as a taxpayer, my comment would be that to
    essentially disadvantage large numbers of Federal workers
    through no fault of their own because of some discussion of
    precedent, when essentially workers hired before 1984 are still
    outside of the Social Security program, exceptions have always
    been made by the Congress. So I believe that you should make an
    effort to fairly accommodate the Federal worker.
        As from a private employer experience perspective, probably
    the closest to this that we could think of as an application
    really relates to retiree medical areas, and litigation where
    an employer has implied, as in the General Motors litigation,
    has implied that there will be a retiree medical benefit, and
    then essentially it isn't there--that type of situation, the
    courts have come down and found in favor of the individual in
    the event that the employer was not very, very clear about the
    fact that these benefits might be taken away.
        One could argue in this particular case that the Federal
    employee will not have been given fair warning as to the
    consequences of the misclassification.
        Senator Cochran. What about the employees who have already
    been corrected? Are there any equity implications in providing
    further opportunities for correction or benefits?
        Mr. Salisbury. Not that we were able to clearly assess as
    we looked against the legislation. In the private sector it
    would normally be that once an individual had been given the
    option to change, that unless the Congress came and said, ``You
    must give them another chance, or you have to tell them you
    made the wrong choice,'' you have to push them in one
    direction.
        Senator Cochran. And is there any precedent for mandating
    an employer to make up the employee's contributions during the
    period of erroneous coverage?
        Mr. Salisbury. Not a precedent on a mandate basis that we
    were able to find.
        Senator Cochran. So which one of these bills, if you had to
    make a comparison, would more closely follow private sector
    practice in correcting errors in coverage?
        Mr. Salisbury. For the most part, as we looked at that
    against private sector practice, it would most readily appear
    to be the Senate bill, with one potential exception, which is
    the issue of what type of investment crediting would be done,
    and that ends up being somewhat of a mix of the two bills,
    because in essence a private employer would generally attempt,
    in essence, to treat all of the affected parties with a totally
    consistent investment crediting as opposed to, if you will, one
    of the side effects of the House bill that was discussed by the
    last panel, that again, the individuals who chose to save might
    well find themselves being given a lower rate of return than
    the individual who had chosen not to save.
        Senator Cochran. And is there any precedent in the private
    sector for making up for lost earnings attributable to the
    employee's share of contributions?
        Mr. Salisbury. As I noted in the full testimony, vis-a-vis
    revenue rulings, there is apparently the legal ability for
    employers to do that should they choose to do that. We were not
    able to find examples of cases in which they had done that.
        Senator Cochran. Mr. Geisler, let me ask you your view
    about what could constitute immediate and complete relief for
    misclassified employees who elect FERS. We've heard about the
    measures that some of the employees have had to take because of
    harm that has been done to them.
        Mr. Geisler. Well, Senator, we think that people should be
    given the assurance immediately that when they reach the point
    where they're ready to retire, they will be in the same
    position that they would have been had the government not made
    its mistake to begin with.
        Senator Cochran. What do you think accounts for the
    majority of these misclassifications? Experiences like yours,
    where----
        Mr. Geisler. In the foreign service?
        Senator Cochran. Right.
        Mr. Geisler. I think it's two things, Senator. I think the
    cases of people who entered during that period, between 1983
    and 1987, who had prior Federal service added a new level of
    complexity to a difficult and somewhat confusing situation, and
    some of our retirement people--particularly those abroad--
    didn't know how to deal with those situations. I don't think it
    was widespread. I don't think there are many instances of just
    sheer administrative slip-up, people losing forms or writing
    dates wrong--I don't think we had much of that. I think it was
    mostly because people were serving abroad where there was not a
    lot of deep expertise in retirement issues, and we had people
    entered the foreign service with prior Federal experience that
    provided an added dimension to consider.
        Senator Cochran. We have had some groups who say they
    prefer one proposal over the other. Why would different groups
    have conflicting views over the appropriateness or fairness of
    these two remedies? Some say that it is fair compensation for
    the harm that's been done, while others say that agencies
    should not be made to bear the financial burdens of other
    agencies' mistakes, and high agency costs might result in
    layoffs.
        What's your impression of these concerns?
        Mr. Geisler. Well, I've heard both of those concerns,
    Senators. On the first one, about which agency should be made
    to bear the costs, frankly, sir, my members really don't care
    about that. This was a government mistake, and it's really
    irrelevant to us which organ or agency of the government is
    charged with rectifying the error.
        In terms of this resulting in layoffs, I heard that when we
    were discussing H.R. 3249 2 months ago. I said then, and I
    still believe now, that that's simply not credible. I can't
    believe that the only way the U.S. Government can correct its
    own errors is by firing its employees to pay for it.
        Senator Cochran. What is your impression of the bill we are
    introducing here in the Senate, S. 1710? Do you think that is a
    satisfactory resolution of the issue, or not?
        Mr. Geisler. Well, as it stands now, Mr. Chairman, I didn't
    find any mention of the foreign service, so from our point of
    view---- [Laughter.]
        Senator Cochran. It needs the foreign service. Yes, we
    heard that. I've got that written down. [Laughter.]
        Mr. Geisler [continuing]. It seems that the nub of the
    matter here is, who is going to pay for the contribution that
    the employee would have made had they been put in FERS between
    1987 and now? And that's a tough issue. It's a tough issue for
    us, too. There is an equity side to that; why should you give a
    windfall to these people who have not been contributing for 10
    years, who had that money available? They either consumed it or
    they saved it. If they saved it, they have it available, and
    they can invest it.
        On the other hand, Mr. Chairman, if you look at the way
    people might reimburse the TSP, they're always going to be
    behind. It's sort of like if there is a race going on, and you
    are going to put somebody in that race in the middle, where do
    you put them? To us, it seems that H.R. 3249 puts them in the
    middle of the pack and says, ``Go forward.''
        The way S. 1710 does it, where the employee has to make up
    all of his own contributions, given his current resources, you
    really put them a couple of steps behind, because their TSP
    balance is never going to be, today, where it would have been
    today had they been investing for the last 10 years. So they're
    never going to be getting the growth that they would have
    gotten.
        Senator Cochran. And what about the question of fairness,
    having those who were misclassified and who elect FERS to
    receive earnings from contributions that they did not make? Is
    that a problem?
        Mr. Geisler. As I said, Senator, we understand that
    concern. It was a concern that I raised in the beginning when I
    first heard the proposal in H.R. 3249. I was concerned about
    that, but my feeling was, ``Everybody in the Civil Service is
    going to get this; I can't see why we would want to exclude the
    foreign service.''
        Senator Cochran. Well, your presence has been helpful, and
    your testimony has been very helpful in our understanding of
    the issues involved. We will continue to review the legislation
    and the record, and hopefully we will come to some decision
    that will be fair and equitable for all concerned. Senator
    Durbin's questions and responses to OPM follows:
           OPM RESPONSES TO ADDITIONAL QUESTIONS FROM SENATOR DURBIN
    Tax Consequences
        Question. To what extent will an employee [who was misclassified
    and then automatically shifted to FERS when the agency detected the
    error] who then elects, if this legislation becomes law, to go into
    CSRS Offset, incur tax consequences? Are the House and Senate bills
    different on this aspect?

              S. 1710 follows current law in regard to excess TSP
            contributions. (Excess contributions are those that exceed the
            5 percent contribution limit for CSRS employees.) Any excess
            contributions would be returned to the employee by the
            employing agency, and treated as taxable income in the year
            that the excess contributions are returned. Attributable
            earnings on all employee contributions would remain in the TSP
            account. Government contributions, and earnings attributed to
            government contributions, would be removed from the employee's
            TSP account.

              H.R. 3249 would permit all FERS employees who elect
            retroactive CSRS Offset coverage to retain any excess TSP
            contributions, and earnings, in the TSP account. All government
            contributions, and earnings attributed to government
            contributions, would be removed from the employee's TSP
            account.

        Question. For example, will such an individual be required as part
    of that election to withdraw any contributions previously made to TSP
    as a FERS enrollee that exceeded the 5 percent annual cap allowed for
    CSRS enrolless?

              S. 1710 and current law require removal of excess TSP
            contributions from the employee's TSP account. The employing
            agency is required to determine the amount of any excess
            contributions and return that amount to the employeee.

        Question. Will that transaction be a taxable event?

              Contributions returned to the employee are taxed as income in
            the year the excess contributions are paid back to the
            employee. This transaction is not, as H.R. 3249 incorrectly
            presumes, an early distribution from a qualified retirement
            plan that is subject to a penalty tax. Excess contributions are
            simply treated as salary.

        Question. Might that aspect deter persons from shifting out of FERS
    into the CSRS Offset option?

              Not necessarily. In choosing a retirement plan, employees
            must evaluate not only their current financial situation, but
            also their long term plans. The amount and taxability of any
            refunded excess TSP contributions would be among the many
            factors the employee must consider in choosing a retirement
            plan.
    Likely Behavior
        Question. Have any projections been made as to how many individuals
    who were shifted to FERS already (to correct the problem once their
    agency uncovered it) would elect to go into CSRS Offset?

              Under H.R. 3249, we estimate that the percentage of
            previously corrected employees who elect to return to CSRS
            Offset would be 20 percent, as a result of the overcompensation
            under the TSP provisions of that bill.

        Question. Does OPM (or others) presume that many persons whose
    misclassification has previously been detected and shifted to FERS as
    required under current law will elect the CSRS Offset option if it is
    made available under legislation such as S. 1710?

              We believe that employees who were more recently corrected to
            FERS or have not had an opportunity to contribute large amounts
            to the TSP would be more likely to elect CSRS Offset. Given the
            performance of the TSP investment funds, it is less likely that
            an employee who has been covered by FERS for a longer period of
            time and maximizing TSP contributions would choose to leave
            FERS.

        Question. What benefits are there to a corrected FERS employee
    making such an election rather than staying in FERS?

              Certainly not all employees are able to substantially
            contribute to the TSP. To receive a comparable benefit under
            FERS, the employee must generally contribute 12-17 percent of
            salary. Under CSRS Offset, the employee need only contribute 7
            percent of salary. For many employees, the additional 5-10
            percent required under FERS makes CSRS Offset more attractive.
    Improving Discovery of Problems
        Question. Are there any mechanisms of ``best practices'' in place
    in any agency that would make it easier to locate those active,
    separated, or retired employees who may be in the universe of
    misclassified individuals so that necessary corrections can be made
    more promptly?

              Retirement coverage determinations are made by reviewing all
            of the employee's service history and prior retirement
            coverage. Since this information is not automated, verifying a
            retirement coverage determination is usually done by reviewing
            individual employee records. There is, however, some
            information maintained in an automated format that will assist
            agencies in identifying groups of employees that are more
            likely to be affected by a coverage error, such as employees
            with prior service hired during the 1984-1987 transition
            period.

              Because the employment records for separated or retired
            employees are not kept with the last Federal employer, it is
            very difficult to identify separated employees with a coverage
            error.

        Question. Is this problem one that is government-wide in its range?
    Is it known whether particular agencies have significantly higher
    percentage of affected employees?

              A retirement classification error can occur at any Federal
            agency. Generally, the larger the agency, the more opportunity
            for error.

        With that, the hearing will stand adjourned. Thank you.
        [Whereupon, at 3:50 p.m., the Subcommittee was adjourned,
    to reconvene at the call of the Chair.]
                                A P P E N D I X

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