B-130150, JAN. 25, 1957

B-130150, JAN. 25, 1957

TO HONORABLE PHILIP YOUNG, CHAIRMAN, UNITED STATES CIVIL SERVICE COMMISSION:

YOUR LETTER OF DECEMBER 19, 1956, REQUESTS OUR OPINION WHETHER UNPAID REFUNDS UNDER SECTION 4 (D) AND UNPAID OPTIONAL DEPOSITS UNDER SECTION 9 (F) OF THE CIVIL SERVICE RETIREMENT ACT OF JULY 31, 1956, AFFECT THE COMPUTATION OF ANNUITIES WHEN BASED ON 40 PERCENT OF THE AVERAGE SALARY UNDER SECTION 9 (A) OF THAT ACT.

YOU PRESENT FOR CONSIDERATION ALTERNATIVE FORMULAS FOR COMPUTING ANNUITIES UNDER SECTION 9 (A) OF THE ACT DEPENDING UPON THE PROPER INTERPRETATION OF THE LAST PROVISO OF THAT SECTION. THE FORMULAS REFERRED TO IN YOUR LETTER AS "METHOD A" AND "METHOD B" ARE QUOTED HERE FOR CONVENIENCE.

METHOD A "1. USING THE REGULAR FORMULA, COMPUTE THE ANNUITY ON TOTAL SERVICE, ELIMINATING ANY UNPAID REFUND PERIOD. IF THERE IS AN UNPAID OPTIONAL DEPOSIT, REDUCE THE ANNUITY BY 10 PERCENT OF THE UNPAID AMOUNT UNLESS THE EMPLOYEE ELECTS TO ELIMINATE THE SERVICE INVOLVED.

"2. (A) DETERMINE WHAT THE ANNUITY WOULD BE UNDER THE "40 PERCENT OF AVERAGE SALARY" FORMULA, IRRESPECTIVE OF UNPAID REFUNDS OR OPTIONAL DEPOSITS.

(B) DETERMINE WHAT THE ANNUITY WOULD BE UNDER THE "SERVICE TO 60" FORMULA, ELIMINATING ANY UNPAID REFUND PERIOD. IF THERE IS AN UNPAID OPTIONAL DEPOSIT, REDUCE THE ANNUITY BY 10 PERCENT OF THE UNPAID AMOUNT UNLESS THE EMPLOYEE ELECTS TO ELIMINATE THE SERVICE INVOLVED.'

METHOD B "1. DETERMINE WHICH OF THE THREE FORMULAS (REGULAR, 40 PERCENT, OR "SERVICE TO 60") WOULD APPLY IF ALL CIVILIAN SERVICE SINCE AUGUST 1, 1920, WERE COVERED BY DEDUCTIONS, AND COMPUTE THE ANNUITY ACCORDINGLY.

"2. IF THERE IS A REFUND WHICH HAS NOT BEEN REDEPOSITED:

A. USING THE REGULAR FORMULA, COMPUTE AN ANNUITY ON TOTAL SERVICE INCLUDING THE REFUND PERIOD.

B. AGAIN USING THE REGULAR FORMULA, COMPUTE AN ANNUITY ON SERVICE REMAINING AFTER ELIMINATING THE REFUND PERIOD.

C. REDUCE THE ANNUITY DETERMINED IN 1 ABOVE BY THE EXCESS OF (A) OVER (B).

ADOPTION OF THIS METHOD MEANS THAT THE REDUCTION FOR THE REFUND PERIOD WOULD BE BASED ON THE HIGHEST PERCENTAGE APPLICABLE UNDER THE REGULAR FORMULA IF ALL SERVICE WERE COVERED BY DEDUCTIONS. (FOR EXAMPLE, IF SALARY WERE $5,000, TOTAL SERVICE 15 YEARS OF WHICH 5 WERE COVERED BY AN UNPAID REFUND, THE REDUCTION WOULD BE AT THE 2 PERCENT FORMULA RATHER THAN AT 1 1/2 PERCENT OR 1 3/4 PERCENT).

"3. IF THERE IS AN UNPAID OPTIONAL DEPOSIT, REDUCE THE ANNUITY DETERMINED IN (2C) ABOVE (OR IN (1), IF THERE IS NO UNPAID REFUND) BY 10 PERCENT OF THE UNPAID OPTIONAL DEPOSIT. AN ELECTION TO ELIMINATE THE OPTIONAL SERVICE WOULD RESULT IN THE SAME ANNUITY REDUCTION AS DESCRIBED WITH RESPECT TO AN UNPAID REFUND.'

SECTION 9 (A) OF THE ACT OF JULY 31, 1956, 70 STAT. 752 READS AS FOLLOWS:

"SEC. 9. (A) EXCEPT AS OTHERWISE PROVIDED IN THIS SECTION, THE ANNUITY OF AN EMPLOYEE RETIRING UNDER THIS ACT SHALL BE (1) THE LARGER OF (A) 1 1/2 PERCENTUM OF THE AVERAGE SALARY MULTIPLIED BY SO MUCH OF THE TOTAL SERVICE AS DOES NOT EXCEED FIVE YEARS, OR (B) 1 PERCENTUM OF THE AVERAGE SALARY, PLUS $25, MULTIPLIED BY SO MUCH OF THE TOTAL SERVICE AS DOES NOT EXCEED FIVE YEARS, PLUS (2) THE LARGER OF (A) 1 3/4 PERCENTUM OF THE AVERAGE SALARY MULTIPLIED BY SO MUCH OF THE TOTAL SERVICE AS EXCEEDS FIVE YEARS BUT DOES NOT EXCEED TEN YEARS, OR (B) 1 PERCENTUM OF THE AVERAGE SALARY, PLUS $25, MULTIPLIED BY SO MUCH OF THE TOTAL SERVICE AS EXCEEDS FIVE YEARS BUT DOES NOT EXCEED TEN YEARS, PLUS (3) THE LARGER OF (A) 2 PERCENTUM OF THE AVERAGE SALARY MULTIPLIED BY SO MUCH OF THE TOTAL SERVICE AS EXCEEDS TEN YEARS, OR (B) 1 PERCENTUM OF THE AVERAGE SALARY, PLUS $25, MULTIPLIED BY SO MUCH OF THE TOTAL SERVICE AS EXCEEDS TEN YEARS: PROVIDED, THAT THE ANNUITY SHALL NOT EXCEED 80 PERCENTUM OF THE AVERAGE SALARY: PROVIDED FURTHER, THAT THE ANNUITY OF AN EMPLOYEE RETIRING UNDER SECTION 7 SHALL BE AT LEAST (1) 40 PERCENTUM OF THE AVERAGE SALARY OR (2) THE SUM OBTAINED UNDER THIS SUBSECTION AFTER INCREASING HIS TOTAL SERVICE BY THE PERIOD ELAPSING BETWEEN THE DATE OF SEPARATION AND THE DATE HE ATTAINS THE AGE OF SIXTY YEARS, WHICHEVER IS THE LESSER, BUT THIS PROVISO SHALL NOT INCREASE THE ANNUITY OF ANY SURVIVOR.'

SECTION 7 (A), 70 STAT. 750 PROVIDES:

"SEC. 7. (A) ANY EMPLOYEE WHO COMPLETES FIVE YEARS OF CIVILIAN SERVICE AND WHO IS FOUND BY THE COMMISSION TO HAVE BECOME DISABLED SHALL, UPON HIS OWN APPLICATION OR UPON APPLICATION BY HIS DEPARTMENT OR AGENCY, BE RETIRED ON AN ANNUITY COMPUTED AS PROVIDED IN SECTION 9. ANY MEMBER WHO COMPLETES FIVE YEARS OF MEMBER SERVICE AND WHO IS FOUND BY THE COMMISSION TO HAVE BECOME DISABLED SHALL, UPON HIS OWN APPLICATION, BE RETIRED ON AN ANNUITY COMPUTED AS PROVIDED IN SECTION 9.'

UNDER THE FOREGOING SECTIONS, A DISABILITY ANNUITY IS FIRST COMPUTED UNDER THE FORMULA PRECEDING THE PROVISO IN SECTION 9 (A). IF THE EARNED ANNUITY THUS FIGURED IS LOWER THAN (A) 40 PERCENT OF THE EMPLOYEE'S AVERAGE SALARY OR (B) THE AMOUNT OF AN ANNUITY COMPUTED UPON YEARS OF SERVICE INCREASED BY THE PERIOD FROM DATE OF SEPARATION TO AGE 60, THE ANNUITY WILL BE INCREASED TO THE LESSER OF (A) OR (B).

SECTION 4 (D), AND SECTION 9 (F) OF THAT ACT, 70 STAT. 748 AND 753, PROVIDE RESPECTIVELY:

"/D) EACH EMPLOYEE OR MEMBER WHO HAS RECEIVED A REFUND OF RETIREMENT DEDUCTIONS UNDER THIS OR ANY OTHER RETIREMENT SYSTEM ESTABLISHED FOR EMPLOYEES OF THE GOVERNMENT COVERING SERVICE FOR WHICH HE MAY BE ALLOWED CREDIT UNDER THIS ACT MAY DEPOSIT THE AMOUNT RECEIVED, WITH INTEREST. CREDIT SHALL BE ALLOWED FOR THE SERVICE COVERED BY THE REFUND UNTIL THE DEPOSIT IS MADE.

"/F) THE ANNUITY AS HEREINBEFORE PROVIDED SHALL BE REDUCED BY 10 PERCENTUM OF ANY DEPOSIT DESCRIBED IN SECTION 4 (C) REMAINING UNPAID, UNLESS THE EMPLOYEE OR MEMBER SHALL ELECT TO ELIMINATE THE SERVICE INVOLVED FOR PURPOSES OF ANNUITY COMPUTATION.'

THE REDUCTIONS REQUIRED BY SECTION 4 (D) AND SECTION 9 (F) ARE BASED ON SERVICE CREDITS FOR WHICH DEPOSITS HAVE NOT BEEN MADE AND WE ARE OF THE VIEW THAT SUCH REDUCTIONS SHOULD BE MADE WHEN APPLICABLE IN ALL ANNUITIES IN WHICH THE AMOUNT IS DEPENDENT UPON YEARS OF SERVICE. HOWEVER, THE 40 PERCENT MINIMUM WHEN APPLICABLE IS NOT BASED UPON LENGTH OF SERVICE BUT RATHER, UPON "AVERAGE SALARY," THE DEFINITION OF WHICH IS FOUND IN SECTION 1 (E) OF THE ACT, 70 STAT. 743. AS NO YEARS OF SERVICE ARE INVOLVED IN THE 40 PERCENT COMPUTATION AN ELECTION UNDER SECTION 9 (F) TO ELIMINATE OR RETAIN CREDIT FOR THE YEARS OF SERVICE UNDER THAT SECTION WOULD BE WITHOUT EFFECT.

ACCORDINGLY, WHEN A DISABILITY ANNUITY IS REQUIRED TO BE COMPUTED AT 40 PERCENT OF THE AVERAGE SALARY UNDER THE SECOND PROVISO OF SECTION 9 (A), NO REDUCTION IN THE AMOUNT SO COMPUTED IS REQUIRED BY SECTION 4 (D) OR SECTION 9 (F) OF THE ACT. THUS,"METHOD A," IN OUR OPINION, IS THE PROPER FORMULA FOR APPLICATION.

CONCERNING THE VIEWS EXPRESSED BY YOU IN THE THREE PARAGRAPHS OF YOUR LETTER IMMEDIATELY PRECEDING THE CLOSING PARAGRAPH, WE CONCUR IN YOUR OPINION THAT THE FOREGOING MAY RESULT IN ,WINDFALL" ANNUITIES IN SOME CASES, AND THAT INEQUITIES MAY RESULT UNDER EITHER OF THE METHODS OF COMPUTING ANNUITIES DISCUSSED IN YOUR LETTER. HOWEVER, WE DO NOT SEE HOW ANY OF THOSE MATTERS CAN BE CORRECTED EXCEPT BY AMENDING LEGISLATION.