Senate Report 108-108 - AMENDING CHAPTER 84 OF TITLE 5, UNITED STATES CODE, TO PROVIDE THAT CERTAIN FEDERAL ANNUITY COMPUTATIONS ARE ADJUSTED BY 1 PERCENTAGE POINT RELATING TO PERIODS OF RECEIVING DISABILITY PAYMENTS, AND FOR OTHER PURPOSES

[Senate Report 108-108]
[From the U.S. Government Publishing Office]

Calendar No. 219
108th Congress Report
SENATE
1st Session 108-108
_______________________________________________________________________

AMENDING CHAPTER 84 OF TITLE 5, UNITED STATES CODE, TO PROVIDE THAT
CERTAIN FEDERAL ANNUITY COMPUTATIONS ARE ADJUSTED BY 1 PERCENTAGE POINT
RELATING TO PERIODS OF RECEIVING DISABILITY PAYMENTS, AND FOR OTHER
PURPOSES

__________

R E P O R T

of the

COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE

to accompany

S. 481

July 21, 2003.--Ordered to be printed

______

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003

COMMITTEE ON GOVERNMENTAL AFFAIRS

SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan
NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama MARK PRYOR, Arkansas

Michael D. Bopp, Staff Director and Chief Counsel
Jennifer Hemingway, Professional Staff Member
Michael Russell, Staff Director, Subcommittee on Financial Management,
the Budget, and International Security
Joyce A. Rechtschaffen, Minority Staff Director and Counsel
Lawrence B. Novey, Minority Counsel
Jennifer Tyree, Minority Counsel, Subcommittee on Financial Management,
the Budget, and International Security
Amy B. Newhouse, Chief Clerk

Calendar No. 219
108th Congress Report
SENATE
1st Session 108-108

++======================================================================

July 21, 2003.--Ordered to be printed

_______

Ms. Collins, from the Committee on Governmental Affairs, submitted the
following

R E P O R T

[To accompany S. 481]

The Committee on Governmental Affairs, to which was
referred the bill (S. 481) to amend chapter 84 of title 5,
United States Code, to provide that certain Federal annuity
computations are adjusted by 1 percentage point relating to
periods of receiving disability payments, and for other
purposes, having considered the same reports favorably thereon
without an amendment and recommends that the bill do pass.

CONTENTS

Page
I. Purpose and Summary..............................................1
II. Background and Need for the Legislation..........................2
III. Legislative History..............................................5
IV. Section-by-Section Analysis......................................6
V. Evaluation of Regulatory Impact..................................6
VI. CBO Cost Estimate................................................6
VII. Changes to Existing Law..........................................7

I. Purpose and Summary

The bill would amend title 5 of the U.S. Code to help
injured civilian federal workers recover the retirement
benefits they lose while they are off the job receiving
worker's compensation. Under current law, employees receiving
worker's compensation are precluded from contributing to their
retirement savings and from receiving matching funds from the
government.
Under S. 481, the loss would be offset by a larger
contribution to the employees' direct pension benefit for the
time they were receiving worker's compensation, as long as the
employee eventually returns to work. The legislation would
correct an inadvertent inequity in the calculation of
retirement benefits for employees covered under the Federal
Employees Retirement System (FERS) .

II. Background and Need for the Legislation

S. 481 was introduced by Senator George Allen of Virginia
on February 27, 2003 to help those federal workers who were
injured as a result of the terrorist attacks on September 11,
2001. The most notable recipient of this legislation would be
Louise Kurtz, an Army accountant who was severely burned on
over 70 percent of her body and lost her hands and ears. Her
plight was publicized by the Washington Post in 2002.\1\ Mrs.
Kurtz has worked for the federal government for 14 years. As
she is receiving workers' compensation, Mrs. Kurtz is unable to
contribute to Social Security or the Thrift Savings Plan (TSP)
because those contributions are taken from an employee's wages.
This bar results in lost retirement benefits.
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\1\ Donna St. George, Alive, but Not the Same; Pain, Loss Are
Pentagon Survivor's New Reality, The Washington Post, September 10,
2002, at A01.
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S. 481 addresses the situation faced by Mrs. Kurtz and
others which results from differences in the construction of
the Civil Service Retirement System (CSRS) and the newer
Federal Employees Retirement System (FERS). Despite the fact
that the total retirement benefits under FERS were intended to
be roughly equivalent to the benefits under CSRS, the reliance
on TSP and Social Security puts FERS employees who receive
workers' compensation at a distinct disadvantage. To ensure
parity between CSRS and FERS in this matter, S. 481 would
increase the rate at which the FERS direct benefit annuity
accrues during a period of disability.

The Civil Service Retirement System and the Federal Employees
Retirement System

The Civil Service Retirement System (CSRS) \2\ was
established in 1920, 15 years before Congress created the
Social Security system for workers in the private sector.
Because CSRS was designed to provide adequate retirement and
disability benefits on its own, federal employees were excluded
from participating in Social Security.
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\2\ Pub. L. No. 66-215.
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In the Social Security Amendments of 1983,\3\ Congress
mandated participation in Social Security by all civilian
federal employees initially hired on or after January 1, 1984.
Because Social Security provides both retirement and disability
benefits, and because enrolling federal workers in both CSRS
and Social Security would have required each employee to
contribute more than 13 percent of pay, Congress directed the
development of a new federal employee retirement system with
Social Security as the cornerstone. The result of these efforts
was the Federal Employees Retirement System (FERS),\4\ which
was enacted on June 6, 1986. The new system, patterned after
the retirement programs typical of medium and large employers
in the private sector, is comprised of three elements: (1)
Social Security, (2) a defined benefit plan (the FERS basic
annuity),\5\ and (3) a defined contribution plan (the Thrift
Savings Plan). All permanent federal employees whose initial
federal employment began after December 31, 1983, are covered
by FERS, as are employees who voluntarily switched from CSRS to
FERS during ``open seasons'' held in 1987 and 1998. Former
federal employees who have completed at least five years of
service under CSRS and are rehired after a break in service of
less than one year can either join FERS or participate in both
CSRS and Social Security through the ``CSRS offset plan.''
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\3\ Pub. L. No. 98-21.
\4\ Pub. L. No. 99-335.
\5\ In a defined benefit plan, the amount of the retirement benefit
is based on an employee's salary and number of years of service. With
each year of service, a worker accrues a benefit equal to a fixed
dollar amount or a percentage of pay. A defined contribution plan is
like a savings account maintained on behalf of each participating
employee. The amount of retirement benefits that a worker receives will
depend on the balance in the account, which is the sum of
contributions, plus interest, dividends, and capital gains (or losses).
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Under FERS, workers who have completed at least 30 years of
service can retire at age 55. The minimum retirement age will
increase beginning with workers born in 1948, eventually
reaching age 57 for those born in 1970 or later. Employees with
20 or more years of service can retire at age 60 and those with
at least five years of service can retire at age 62. Federal
employees and former employees who have completed at least 10
years of service, but fewer than 30 years of service, can
receive a reduced FERS pension benefit at age 55.
Under CSRS, the minimum retirement age is 55 for employees
with 30 years of federal service, age 60 for those with 20
years of service, and 62 for employees with at least five years
of service. CSRS has no provision for early retirement with a
reduced benefit, except for special circumstances such as a
reduction in force.\6\
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\6\ Agencies undergoing a reduction in force can, with the approval
of the Office of Personnel Management, offer retirement to employees
age 50 or older with 20 or more years of service or at any age with 25
or more years of service.
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Under both CSRS and FERS, the amount of an employee's
retirement annuity is based on the average of the individual's
highest three consecutive years of basic pay multiplied by
their years of service and the rate at which benefits accrue
for each year of service. Under FERS, this accrual rate is one
percent of base pay per year.\7\ Accrual rates are higher under
CSRS than under FERS because employees covered by CSRS do not
pay Social Security payroll taxes or earn Social Security
retirement benefits. Under CSRS the benefit accrual rate
increases with length of service. Workers accrue benefits equal
to 1.5 percent of high-three average pay for each of their
first five years of service; 1.75 percent of high-three pay for
years 6 through 10; and 2.0 percent of high-three pay for each
year of service after the tenth year. This yields a pension
equal to 56.25 percent of high-three average pay after 30 years
of federal service under CSRS.
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\7\ Workers with 20 years or more of service under FERS who work
until at least age 62 are credited with an accrual rate of 1.1 percent
for each year of service. For example, a worker covered by FERS who
retires at 61 with 25 years of service will receive a FERS annuity
equal to 25 percent of high-three average pay. Delaying retirement by
one year would increase the annuity to 28.6 percent of high-three
average pay (26 1.1 = 28.6).
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For all federal workers covered by FERS, the agency where
they are employed contributes an amount equal to 1 percent of
the employee's base pay to the Thrift Saving Plan (TSP), even
if the employee makes no voluntary contributions to the TSP.
Beginning in July 2001, employees covered by FERS were allowed
to contribute up to 11 percent of pay to the TSP, and employees
covered by CSRS were allowed to contribute up to 6 percent of
pay to the TSP. The maximum permissible contribution will rise
by 1 percentage point each fiscal year until reaching 15
percent for FERS and 10 percent for CSRS in FY2005. In fiscal
year 2006, the percentage-of-pay limits will be eliminated,
but, the contribution limits under section 402(g) of the
Internal Revenue Code of 1986 will continue to apply. All
employees covered by FERS receive ``agency automatic
contributions'' of 1 percent of pay. Employee contributions are
matched dollar-for-dollar on the first 3 percent of pay and at
$.50 on the dollar on the next 2percent of pay. Thus, the
maximum agency contribution is 5 percent of pay.\8\ These contributions
are made on a pre-tax basis, and neither the employee's contribution
nor any investment earnings are taxed until the money is withdrawn from
the account. In addition, the first 5 percent of employee pay
contributed to the TSP generates agency matching contributions. Workers
covered by CSRS also may participate in the TSP, but their total
contribution is limited to 7 percent of pay, and they receive no
matching contributions from their employing agency.
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\8\ See also Pub. L. No. 107-304, which allows certain catch-up
contributions to the Thrift Savings Plan to be made by participants age
50 or over.
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Because enrollment in CSRS has been closed to new entrants
since 1984, the proportion of federal workers covered by FERS
has been rising and coverage under CSRS has been declining.
Fiscal year 1995 was the first year in which a majority of
civilian federal employees (51 percent) were covered by FERS.
During FY2000, 62.4 percent of federal employees were covered
by FERS.

Inequality between FERS and CSRS when receiving workers' compensation

Under both CSRS and FERS, when an individual receives
workers' compensation benefits under Subchapter I of title 5,
United States Code, and returns to duty under retirement
coverage, that period of time is creditable service in the
subsequent computation of retirement benefits.\9\ Since CSRS is
a one-tier, defined benefit system, an individual's retirement
income is the same as if the individual had continued in
employment during the period he or she received workers'
compensation. However, pensions of workers covered under FERS
comprise three separate sources: the FERS direct benefit,
Social Security, and the TSP. The FERS direct benefit alone
represents only about half of an employee's retirement, and the
TSP contribution and the Social Security benefit was designed
to supplement the remainder of the retirement package. During
periods of workers' compensation, there can be no employer or
employee contributions to the TSP and no wage credits are
earned toward Social Security benefits.\10\ This inequity
places a FERS employee at a distinct disadvantage compared to a
similarly situated CSRS employee, since the FERS employee
receives one-half of the credit towards retirement while on
disability that a CSRS employee receives.
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\9\ 5 U.S.C. Sec. 8332(f), 8411(d).
\10\ See Sec. Sec. 1401 and 3101 of the Internal Revenue Code of
1986 and 5 U.S.C. Sec. 8432.
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When the FERS program was created, it was the intent of
Congress to ensure that the total retirement benefits under
FERS were roughly equivalent to those benefits under CSRS.
Since TSP and Social Security represent approximately 1 percent
of post-retirement income for each year of service, S. 481
would ensure parity in the computation of the worker's
retirement annuity under the FERS direct benefit by increasing
the rate at which annuity accrues during a period of disability
by one percent of base pay. The extra percentage point
dedicated to the FERS direct benefit would offset the temporary
losses to Social Security and Thrift Savings Plan.
In a March 5, 2003 letter to Senator Peter Fitzgerald,
Chairman of the Subcommittee on Financial Management, the
Budget, and International Security, the Director of the Office
of Personnel Management (OPM), Kay Coles James, stated, ``we
believe that this proposal offers a reasonable solution to a
problem that is not widespread, but is of great significance
for the few federal employees affected by it. We support its
enactment.'' OPM further advised that ``increased outlays from
the Retirement Fund would not be material'' under this bill.

III. Legislative History

S. 481 was introduced by Sen. George Allen of Virginia on
February 27, 2003, and was referred to the Senate Committee on
Governmental Affairs. The bill is cosponsored by Sen. Daniel
Akaka of Hawaii, Sen. Hillary Clinton of New York, Sen. Richard
Durbin of Illinois, Sen. Ted Stevens of Alaska, and Sen. John
Warner of Virginia.
On May 12, 2003, the members of the Governmental Affairs
Subcommittee on Financial Management, the Budget, and
International Security (FMBIS) unanimously polled out S. 481 to
the full Committee.
The Committee convened on June 17, 2003, to consider S. 481
with other legislative and executive items. No amendments were
offered to the bill. The Committee ordered the bill reported
favorably to the full Senate, as part of an en bloc voice vote.
Senators present were as follows: Collins, Lieberman,
Voinovich, Coleman, Fitzgerald, Sununu, Levin, Akaka, Durbin,
Lautenberg, and Pryor.
S. 481 is similar to S. 2936, which Senator Allen
introduced during the 107th Congress on September 13, 2002. On
October 8, 2002, S. 2936 was favorably polled out of the
Governmental Affairs Subcommittee on International Security,
Proliferation, and Federal Services. No hearings were held on
the bill. On October 9, 2002, the Committee met in open session
to consider the bill. At that time, Senator Akaka offered an
amendment which made technical corrections to the bill. The
Committee ordered favorably reported the bill S. 2936, as
amended, a quorum being present. S. 2936 was then passed by the
Senate under a unanimous consent agreement. The Senate-passed
bill was referred to the House Committee on Government Reform.
The 107th Congress adjourned sine die without taking further
action on the bill.
The main difference between the two versions is the time
requirement for disability to qualify for the adjustment. In S.
2936, the adjustment would have been offered to employees who
received disability benefits for at least one year; while in S.
481, those workers who have received workers' compensation
benefits for at least two months would qualify for the
computation adjustment.

IV. Section-by-Section Analysis

Section 1. Annuity computation adjustments for periods of disability

Under the Internal Revenue Code, employee contributions to
the Thrift Savings Plan (TSP) can be made only from earned
income. Federal employees who are injured on the job cannot
contribute to the Thrift Savings Plan while receiving
compensation from the Office of Workers' Compensation Programs
for work-related injuries. S. 481 would amend section 8415 of
title 5 to reduce the shortfall in retirement benefits that can
affect federal employees who are injured while performing their
jobs and are unable to contribute to the TSP while receiving
worker's compensation payments. The amendment would increase
the basic retirement annuity under the Federal Employees'
Retirement System (FERS) from 1 percent of basic pay per year
of service to 2 percent of basic pay. The increase would be for
the duration of any period of creditable federal service,
lasting at least two months, during which a federal employee
receives compensation for work-related injuries under chapter
81 of title 5.

V. Evaluation of Regulatory Impact

Paragraph 11(b)(1) of rule XXVI of the Standing Rules of
the Senate requires that each report accompanying a bill
evaluate the ``regulatory impact which would be incurred in
carrying out this bill.'' Carrying out S. 481 would have no
regulatory impact.

VI. CBO Cost Estimate

S. 481--A bill to amend chapter 84 of title 5, United States Code, to
provide that certain Federal annuity computations are adjusted
by 1 percentage point relating to periods of receiving
disability payments, and for other purposes

Summary: S. 481 would increase federal retirement benefits
for certain employees who suffer a workplace injury and then
return to work for the federal government. Specifically, the
legislation would apply to employees who are covered by the
Federal Employees' Retirement Program (FERS) and collect worker
compensation payments under the Federal Employees' Compensation
Act (FECA) for at least two months before returning to work.
CBO estimates this legislation would increase direct spending
on retirement benefits by $1 million in 2004, $16 million
during the 2004-2008 period, and $68 million during the 2004-
2013 period.
S. 481 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA)
and would impose no costs on state, local, or tribal
governments.
Estimated cost to the Federal Government: The estimated
budgetary impact of S. 481 is shown in the following table. The
costs of this legislation fall within budget function 600
(income security).

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By fiscal year, in millions of dollars--
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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
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CHANGES IN DIRECT SPENDING

Federal retirement benefits:
Estimated budget authority..... 0 1 2 3 4 6 7 9 10 12 14
Estimated outlays.............. 0 1 2 3 4 6 7 9 10 12 14
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Basis of estimate

Direct spending
Under current law, most federal employees who participate
in the FERS program earn retirement benefits at the rate of 1
percent for each year of creditable service. Time spent on FECA
is considered creditable service under FERS. (In contrast,
Social Security ignores time spent on the FECA rolls, and FECA
participants cannot contribute to the Thrift Savings Plan.) S.
481 would increase the annual accrual rate from 1 percent to 2
percent during any period in which a FERS employee has
collected FECA benefits, provided the employee spent a total of
at least two months on FECA. Fractions of a year spent
receiving FECA benefits would be credited at the higher accrual
rate on a pro-rated basis. The legislation would only apply to
federal workers who separate from federal service after the
bill is enacted, regardless of when the FECA benefits were
received. Therefore, outlays for retirement benefits would
increase as those workers who have previously collected FECA
benefits begin to retire.
Based on data provided by the Department of Labor, CBO
projects that between 4,500 and 5,500 FERS employees return to
federal service each year after having spent at least two
months receiving FECA benefits. The average amount of time on
FECA for these workers is about six months. Based on this
information, CBO estimates S. 481 would increase direct
spending on retirement benefits by $1 million in 2004, $16
million during the 2004-2008 period, and $68 million during the
2004-2013 period. For the purposes of this cost estimate, CBO
assumes the legislation will become effective in October 2003.
Spending subject to appropriation
FERS is financed on an accrual basis with agencies and
employees sharing the cost of financing the program. The
contribution rate for employees is fixed in law, but the
percent of payroll that agencies pay toward FERS is determined
by the actuarial costs of the program. Increasing FERS benefits
would cause the program's actuarial costs to increase, which
could cause agency agency contributions to increase. Any
increase in agency retirement contributions would be classified
as spending subject to appropriation. However, CBO estimates
that the cost increases projected to occur under S. 481 would
not be large enough to require a change in agency contribution
rates.
Intergovernmental and private-sector impact: S. 481
contains no intergovernmental or private-sector mandates as
defined in UMRA and would impose no costs on state, local, or
tribal governments.
Estimate prepared by: Federal costs: Geoffrey Gerhardt;
Impact on the private sector; Paige Piper/Bach; Impact on
state, local, and tribal governments: Majorie Miller.
Estimate approved by: Peter H. Fontaine, Deputy Assistant
Director for Budget Analysis.

VII. Changes to Existing Law

In compliance with rule XXVI paragraph 12 of the Standing
Rules of the Senate, the following provides a print of the
statute or the part or section thereof to be amended or
replaced (existing law proposed to be omitted is enclosed in
black brackets, new matter is printed in italic, existing law
in which no change is proposed is shown in roman):

UNITED STATES CODE

TITLE 5--GOVERNMENT ORGANIZATION AND EMPLOYEES

PART III--EMPLOYEES

Subpart G--Insurance and Annuities

CHAPTER 84--FEDERAL EMPLOYEES' RETIREMENT SYSTEM

Subchapter II--Basic Annuity

SEC. 8415. COMPUTATION OF BASIC ANNUITY.

* * * * * * *

[i] (k) In computing an annuity under this subchapter [5
USCS 8410 et seq.], the total service of an employee who
retires from the position of a registered nurse with the
Veterans Health Administration on an immediate annuity, or dies
while employed in that position leaving any survivor entitled
to an annuity, includes the days of unused sick leave to the
credit of that employee under a formal leave system, except
that such days shall not be counted in determining an average
pay or annuity eligibility under this subchapter [5 USCS 8410
et seq.].
(l) In the case of any annuity computation under this
section that includes, in the aggregate, at least 2 months of
credit under section 8411(d) for any period while receiving
benefits under subchapter I of chapter 81, the percentage
otherwise applicable under this section for that period so
credited shall be increased by 1 percentage point.

* * * * * * *

SEC. 8422. DEDUCTIONS FROM PAY; CONTRIBUTIONS FOR OTHER SERVICE.

* * * * * * *

(d)(1) Under such regulations as the Office may prescribe,
amounts deducted under subsection (a) shall be entered on
individual retirement records.
(2) Deposit may not be required for days of unused sick
leave credited under section 8415 [(i)] (k).