[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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