Updating Interest Rates Charged on Outstanding Civil Service Retirement Contributions Would Save Millions

FPCD-82-39: Published: Aug 4, 1982. Publicly Released: Aug 4, 1982.

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GAO assessed an outdated provision of the civil service retirement system which establishes the rate of interest charged to employees who owe contributions to the retirement fund.

Many retiring federal employees owe the retirement fund for periods of prior civilian service for which contributions were not made. GAO estimates that, if the interest charged on those contributions had been 5 percent rather than 3 percent over the past 20 years, the fund would have realized a long-term savings of $79.6 million for fiscal year 1980 retirees alone. Significant savings can be realized each year in the future if the provision regarding interest charges is amended. The fund has lost investment income because the Office of Personnel Management (OPM) staff responsible for processing owed contributions was reassigned to higher priority work. Furthermore, contrary to a specific statutory prohibition, OPM is giving retirees credit for periods of prior service before their refunds are repaid.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: When we determine what steps the Congress has taken, we will provide updated information.

    Matter: Congress should amend title 5 of the U.S. Code to provide that the annual rate of interest charged on prior service contributions each year be made equal to the average rate of return earned by the retirement fund's investments during the preceding year. Specifically, subsection 8334(e) of title 5 should be amended by striking out the second sentence and inserting: "The interest is computed at the rate of 4 percent a year to December 31, 1947, and 3 percent a year beginning January 1, 1948, through December 31, 1982, compounded annually. Thereafter, the rate of interest for each calendar year shall be established by December 31 of the preceding year by OPM, to equal the average yield for the preceding fiscal year on all issues in which monies in the Fund were invested."

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Director, OPM, should process all applications to make prior service contributions.

    Agency Affected: Office of Personnel Management

  2. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Director, OPM, should terminate the practice of allowing credit for redeposit service before a redeposit has been made.

    Agency Affected: Office of Personnel Management

 

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