Retirement in the Red
MARCH 01, 1960 by LAWRENCE SULLIVAN
Mr. Sullivan is Coordinator of Information, U. S. House of Representatives.
There was an almost audible lifting of troubled eyebrows on Capitol Hill when U.S. Comptroller General Joseph Campbell submitted a detailed actuarial report projecting a deficit of $27,451,000,000 in the Civil Service Retirement Fund.
"The amount of the liability for which appropriations have not been made ($27,451,000,000 as of June 30, 1958) should be shown in the government’s published financial reports. The liability is as real as the public debt and, in our opinion, should be given comparable stature in the government’s financial reports."
Five years earlier the official actuarial audit had reported the accrued deficit at only $10,700,000,000.
Obviously, the 2,100,000 government workers contributing annual payroll deductions of 6.5 per cent to the retirement fund are promised much more in benefits than anybody is actually paying for, even after the current matching contribution from the employing bureau or agency. How else explain an increase of $16.8 billion in the accrued deficit in only five years?
At today’s level of benefits, the real cost of the civil service retirement program would be covered by a combined payroll tax of 21.25 per cent, instead of the 13 per cent now collected, the actuaries reported to Congress. The difference of 8.25 per cent made an item of $915,693,000 added to the accrued deficiency in the trust fund account for the fiscal year ending June 30, 1958.
In June 1959 the Senate Appropriations Committee was informed officially by the Civil Service Board of Actuaries that, under prevailing retirement rates and schedules, the existing reserve trust fund would begin to evaporate in 1974, "until ultimately it would be eliminated."
By 1987, this report continued, all reserves would be consumed, and that year’s payments from the retirement fund would exceed the year’s payroll-tax receipts by $514,000,000; and for the fiscal year 2000 A.D. the annual deficit in the retirement fund would hit $2,093,000,000—over and above payroll-tax receipts of $1,452,000,000 for that year.
"The valuation shows that employee deductions and government payments through agency contributions, combined, [13 per cent] do not meet the requirements of the system on the normal cost-plus-interest basis. Unless additional amounts are provided, the result will be further increases in the deficiency."
A Deficiency, Nonetheless
These financial problems do not worry Washington acutely at the moment, because there is still a balance of $10,096,000,000 in the Civil Service Retirement Fund. Yet the October 1959 report of Comptroller General Campbell admonishes somewhat sternly: "The accumulation of U.S. government securities in the Civil Service Retirement and Disability Fund does not improve either the soundness of the system or the ability of the government to fulfill its retirement obligations. The soundness of the system is dependent on the faith and credit of the United States." This is only a polite and gentle way of saying that the Civil Service Retirement Fund deficiency of roundly $27.5 billion is an unitemized segment of the total national debt.
But Comptroller-General Campbell insists the retirement accounts should be put in order, so that Congress and the country may know precisely from year to year what additional actuarial deficits are being piled up against the full faith and credit of the U.S. government.
He does not insist that the whole range of future liabilities in the retirement system should be funded currently. But he does urge insistently that all unfunded liabilities be carried in the budget from year to year, and thus reflected honestly in the total federal debt.
This view is expressed also in the report of Roger W. Jones, Chairman of the U.S. Civil Service Commission.
"Standard actuarial methods are useful in determining the cost of federal staff retirement systems, just as they are useful in evaluating the cost of industrial retirement plans. However, when it comes to financing federal retirement systems, additional considerations enter which reduce the necessity for accumulating reserves based on strictly actuarial concepts. In view of these factors, it is not surprising to find that there is no common basis or principle for funding the dozen or more federal retirement plans now in operation… The Kaplan Committee found  that a number of federal retirement systems do not have any reserves toward their accrued liabilities, and are financed entirely from current appropriations each year. The most notable In The Red 15 instance is the military retirement system, which covers at present 2,500,000 personnel. It was estimated by the committee to have an unfunded liability of $17,600,000,000 in 1953, and it is likely that its deficiency at present is higher than the $27,500,000,000 of the civil service system. The retirement plans for the judiciary, although much smaller in size, also are entirely unfunded."
The Worst Is Yet To Come
Chairman Jones’ report suggests that possibly our national debt should reflect unfunded retirement liabilities not merely in the range of $27.5 billion for the civil service fund, but more likely in the region of $60 billion or $65 billion for our "dozen or more" retirement programs centered in Washington.
Nor does this calculation even touch the unfunded accrued liabilities of the Social Security system, which does its own accounting and bookkeeping quite independently of all other government retirement funds.’
Neither does the calculation reflect the unfunded accrued liabilities of the veterans life insurance programs administered by the Veterans Administration. Here, again, the bookkeeping and actuarial calculations are independent of like activities in all other departments and agencies.
As of June 30, 1958, the Treasury reported combined holdings of $55.9 billion in fourteen trust fund accounts operated by the several federal departments. In all these accounts combined the net accumulation for 1958 was $262,000,000 after total combined deposits of $16.3 billion.
Another correction of considerable magnitude must be made in the report of the Civil Service actuaries, as transmitted to Congress last November. The actuaries made their calculations through 2000 A.D. on the basis of an estimated interest rate of 3 per cent on trust funds invested in U.S. government bonds. The actual return in recent years has been only 2.58 per cent.
The Civil Service Commission now urges a new law which would permit the trust fund to realize a net return of 4 per cent on government bonds held in the retirement reserve. By increasing realized interest about 11/2 per cent on the current invested reserves of roundly $10 billion, such new legislation would tend to contribute toward the ultimate liquidity of the Civil Service Retirement Fund to the extent of $150,000,000 a year. Over a period of ten years, the accrued liability deficit thus would be reduced from today’s $27.5 billion to roundly $26 billion by 1970.
Backed by the Government
Regardless of the pretext ultimately adopted to siphon more Treasury funds into the retirement account, the liability is very real. Congress in 1958 passed a special appropriation of $589,000,000 to be added to the Civil Service Retirement Fund, representing the calculated actuarial deficiency for the fiscal year 1959. President Eisenhower vetoed this measure on the ground: "There is no sound justification whatever for adding unnecessarily over half a billion dollars to a deficit which may reach $12 billion this fiscal year."
The fact remains: whether we add the figure to the published deficit or not, the government’s liability still is there. Nor is the total economic burden lightened in any degree, to anyone concerned, by mere bookkeeping gimmicks which conceal the true dimensions of the deficit from public view and discussion.
This point, too, was acknowledged by President Eisenhower, who added in his veto message: "The Retirement Act promises to make certain payments under specified conditions, and regardless of the size of the balance in the retirement fund at any particular time, these benefits will be paid, because the promise to do so is backed by the government. To assume otherwise is to call into question the full faith and credit of the U.S. government."
Since establishment in 1920, the Civil Service Retirement system has been wholly self-sustaining, out of direct employee contributions. Through 1958, total receipts from workers alone were $6.9 billion, and total disbursements $5.9 billion.
Thus the employees themselves have contributed $1 billion to the present trust fund.
Over the same period, the Treasury contributed $4.8 billion to the fund, in annual matching contributions, plus $2.6 billion in interest on the fund balances.
These three items account for $8.4 billion in the current trust fund balance of roundly $10 billion. The pivotal historical and economic fact is that over these first forty years the Treasury, through both interest and direct appropriations, has contributed 52per cent of the total retirement fund receipts.
Whether this actuarial deficiency is covered in the future out of reserve funds or by direct Treasury appropriations from year to year is only a decision of policy. In either case the ultimate burden on the taxpayers will be the same.
What fiscal authorities must keep in mind is that annual benefit payments from the Civil Service Retirement Fund will increase from $700,000,000 in 1958 to a calculated total of $1 billion in 1962; to $2 billion in 1972; $3 billion in 1986; and $3.5 billion in 2000 A.D.
Under prevailing assessments and benefit schedules, total benefit payments from 1959 through 2000 A.D. will be $76.5 billion, and total employee contributions, roundly, $25 billion.
The difference of $51.5 billion somehow must be collected from the taxpayers—an average budget charge of $1.3 billion a year which shows nowhere in the budget!
With total tax burdens already well past the point in diminishing returns in virtually every area of government—federal, state, and local, calls for additional retirement assessments in the near future will almost certainly raise the shrill question: Where’s the money to come from?
1 The Social Security Administration’s Actuarial Study No. 48 put the "unfunded liability" under the 1956 Social Security Act at $321 billion. Mr. W. Rulon Williamson, formerly Actuarial Consultant to the Social Security Board, thinks the figure under present rates and commitments is nearer to $650 billion. (See his "Great Expectations" in the July 1959 FREEMAN, p. 38.)