John Turner AARP Public Policy Institute 10 th International Pension Seminar

1. 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

2. 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

3. 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.

4. 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

5. 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.

6. 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

7. 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.

8. 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.

9. 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.

10. 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

11. 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.

12. 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.

13. 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%

14. 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.

15. 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.

16. 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.

17. 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

18. 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

19. 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%

20. 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.

21. Investments (2) • The accumulated funds in the Basic Benefit Plan and in Social Security are all invested in U.S. government bonds.

22. 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

23. Generous Benefits • While the plans all differ, they all tend to provide more generous benefits than are provided for regular state government employees.

24. 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.

25. 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.

26. 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.

27. 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.

28. 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.

29. 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.

30. 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