Statement by Edward W. Kelley, Jr., Member, Board of Governors of the Federal Reserve System, before the Subcommittee on Civil Service of the Committee on Government Reform and Oversight, U.S. House of Representatives, February 25, 1999

Federal Reserve Bulletin, April, 1999 by Edward W. Kelley, Jr.

The Federal Reserve Banks and the Board, as employers, are responsible to ensure the funding required to pay the benefits promised to participants and have contributed to the plan at varying levels throughout the years as determined necessary by the plan actuary. Since 1986, the actuary has determined that no employer contributions are required. Currently, the Retirement Plan's assets exceed both the plan's accrued liability as well as total liability as calculated by the plan actuary. Plan assets based on a five-year moving average as of January 1, 1998, were $4.0 billion. The total benefit obligation--which includes both future service and future salary increases--was $3.5 billion. Accrued benefits--based on service and salary up to the date of the valuation--were valued at $2.8 billion. The value of plan assets at the end of 1998 was $5.8 billion.

The Board Plan covers Board employees hired before 1984; its plan design is nearly identical to that of the Civil Service Retirement System. Participants do not pay social security tax but have contributed to the Board Plan at the same rate as CSRS participants over the years (except that the Board did not increase the employee contribution rate from 7.0 percent to 7.25 percent in 1999 as CSRS did). The benefit features of the Board Plan mirror those of CSRS in most important respects. The most significant differences are as follows: The Board Plan credits Federal Reserve Bank service, while CSRS does not; the Board Plan has adopted a benefit formula for employees with part-time service after April 6, 1986, that is different from the CSRS; and the Board Plan does not allow incorporation of retired military pay into the Board Plan annuity as allowed by CSRS. A detailed listing of the differences between the two plans is found in attachment A.(1)

The Bank Plan covers all eligible employees of the Federal Reserve Banks. When the Congress passed legislation requiring that federal employees hired after 1983 be subject to social security tax, the Board decided to place all newly hired Board employees in the Bank Plan as well. Unlike the Board Plan, the Bank Plan does not require employee contributions, but all Bank Plan participants are covered under social security and thus are subject to the FICA withholding requirement. The basic annuity formula for the Bank Plan is integrated with social security. The annuity formula is based on years of creditable service and the average of the five highest earning years of the employee's career. The benefit formula provides 1.3 percent of High-5 salary up to the social security integration level times the number of years of creditable service plus 1.8 percent of High-5 salary above the integration level times years of creditable service.

While the Bank Plan is similar to FERS in that it is designed to work together with social security, the plan design features differ. For example, the Bank Plan requires no employee contributions as FERS does; it uses the highest five years of earnings to compute the pension benefit rather than the highest three years under FERS; and it provides for annuity reductions for retirements before age sixty, while FERS allows unreduced retirement below age sixty if the participant has thirty years of service. A detailed comparison of the plan features of FERS and the Bank Plan are provided in attachment B.