Transcript Pensions for the Legislative Branch of Government: Members

Pensions for the Legislative Branch of
Government:
Members of the U.S. Congress and State Legislators
John Turner
AARP Public Policy Institute
10th International Pension Seminar
Tokyo, November 22, 2005
The U.S. Congress
• The U.S. Congress is divided into 2 parts:
– The Senate –100 Members, 6 year terms
– The House of Representatives—435
Members, 2 year terms
Pensions for Congressmen
• Congressmen are covered by the same
pension system as other government
workers, but their plan has some features
that are more generous.
1983 Pension System Reform
• Before 1983
– Members of Congress were not covered by
Social Security
– They had a generous defined benefit pension
system that was fully indexed for inflation
Since 1983, FERS
• Since 1983, the Federal Employees
Retirement System (FERS)
• This system covers all government
employees hired since 1983, and all
Members of Congress elected since 1983.
• FERS modeled after the pension benefits
provided by large employers in the early
1980s.
A 3-Part System
• 1. Coverage by Social Security, just like for
nearly all other U.S. workers
• 2. Coverage by a basic defined benefit
plan, called the Basic Benefit Plan
• 3. Coverage by a supplemental defined
contribution plan, called the Thrift Savings
Plan
Social Security
• Members of Congress elected since 1983
participate fully in Social Security.
• Just like other workers, they pay 6.2
percent of their wages (up to $90,000) into
Social Security, and their employer
(Congress) also pays the same amount.
Social Security (2)
• At retirement, Members of Congress
receive Social Security benefits under
exactly the same arrangement as any
other worker.
• Workers can receive Social Security
benefits starting at age 62.
The Defined Benefit Plan
• The defined benefit plan for Members
of Congress, called the Basic Benefit
Plan, provides mandatory coverage for
all government workers in the Civil
Service, but it is voluntary for Members
of Congress.
• This plan is more generous for
Members of Congress, and their staff,
than it is for other government workers.
More Generous Benefits
• In comparison to regular government
workers, the Basic Benefit Plan for
Congressmen provides:
– A higher benefit accrual for each year worked
– Benefit eligibility at an earlier age
– Benefit eligibility with fewer years of work
Benefits
• The benefit accrual rate is 1.7 percent per
year for the first 20 years of work in
Congress and 1.0 percent per year for
each year after that.
• Thus, someone working in Congress 20
years would have a total accrual of 34%
(=20x1.7), which is multiplied by the
average of the high 3 years of earnings
while in Congress.
Benefits (2)
• The benefits for Members of Congress are
considerably more generous than for other
employees of the federal government.
• While a Member of Congress would have
accrued a benefit replacement rate of 34
percent, an employee of the federal
government would have a replacement
rate of 20 percent.
Contributions
• Members of Congress who participate in
the Basic Benefit Plan contribute 1.3% of
their pay to the plan.
• The amount is automatically withheld from
the Member’s pay.
• Congress also contributes 15.8% of the
Members pay.
• The amounts for other government
employees are 0.8% and 10.7%
Contributions (2)
• The requirement of worker contributions is
unusual in the United States.
• Only 5% of private sector workers in
defined benefit plans are required to
contribute to those plans.
Vesting
• Members of Congress vest (have a legal
right to their pension) after 5 years in
Congress.
• This is the longest period of time allowed
in the private sector, and the amount of
time that most private sector pension
plans require.
Eligibility Age
• Members of Congress can receive
benefits from the Basic Benefit Plan at
– at age 62 with 5 years of service
– at age 55 with 10 years of service
– at age 50 with 20 years of service
– at any age with 25 years of service.
Thrift Savings Plan (TSP)
• Members who participate in the Basic
Benefit Plan are automatically covered by
the Thrift Savings Plan
• This is an individual account defined
contribution plan, which is similar in many
ways to a 401(k) plan, which is the most
popular type of plan in the United States
Contributions to TSP
• The Member receives an automatic 1%
contribution from Congress
• Members can decide how much to
contribute
• They receive a matching contribution from
Congress
Matching Contributions
• The government matches the contributions
of Members dollar for dollar for the first 3%
of pay and 50 cents per dollar for the next
2% of pay.
• Combined with the 1% automatic
contribution, if a Member contributes 5%,
the government also contributes 5%, for a
total of 10%
Investments
• Members can invest their funds in the TSP
in a stock index fund, a bond index fund, a
government bond fund, an international
stock fund, a small company fund, or a
“life cycle” fund that increases its
percentage holdings in bonds as the
worker approaches his target retirement
date.
Investments (2)
• The accumulated funds in the Basic
Benefit Plan and in Social Security are all
invested in U.S. government bonds.
Pensions for State Legislators
• Each of the 50 states has its own state
legislature
• Each state has its own plan for the elected
legislators in the state legislature
• In most, but not all cases, these legislators
are also covered by Social Security
Generous Benefits
• While the plans all differ, they all tend to
provide more generous benefits than are
provided for regular state government
employees.
State Police
• Often the state legislatures have the same
or similar pension plan to that of the state
police.
• The state police have a more generous
pension plan than regular state
government employees because their job
is more hazardous.
Florida
• For example, in Florida, state legislators
accrue benefits at the rate of 3%, the
same rate as state police, while regular
state employees accrue benefits at the
rate of 1.6%.
• Thus, after 10 years, a state legislator
would have earned a benefit of 30% of his
high average compensation.
ILLINOIS
• Because of special features of the pension
plan for legislators, about half of them that
are retired are receiving higher pensions
than their final salary as a legislator.
• They are able to get high pensions by
taking a high-paying job in the government
after leaving the legislature, raising their
final average pay.
Massachusetts
• State employees in Massachusetts are not
covered by Social Security, so the same
holds for members of the state legislature.
• Legislators have a shorter vesting period
than regular state employees.
Texas
• The pensions for state legislators in Texas
are tied to the pensions for judges.
• The legislators work only part time, and
have low pay. Their pensions are
considerably higher than their salaries.
• Judges in most states receive more
generous pensions than other government
employees.
Conclusions
• Members of Congress and state
legislators receive more generous
pensions than do regular government
employees.
• Most Members of Congress and state
legislators are covered by Social Security,
and they are covered in exactly the same
way as other workers in the United States.
Conclusions (2)
Social Security contributions and pension contributions are
automatically withheld from the pay of Members of Congress
They have a three retirement plans, like many workers in large
corporations
Social Security
A defined benefit employer-provided plan
A defined contribution employer-provided plan