Cost of Increased Retirement Benefits for Panama Canal Employees

FPCD-81-42: Published: May 6, 1981. Publicly Released: May 28, 1981.

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GAO was asked to provide information on the appropriateness of the Office of Personnel Management (OPM) cost determination as related to the increased retirement benefits granted to Panama Canal employees by legislation implementing the Panama Canal Treaty. In a previous report, GAO expressed concern that, unless OPM charged the Panama Canal Commission on a basis which considered future pay and cost-of-living increases, all costs of increased benefits would not be recovered as was the intent of Congress. OPM subsequently completed its cost calculations, and the Commission has paid the first installment on the increased retirement costs.

GAO is still concerned that OPM is basing its charges to the Commission on an actuarial method which assumes that Panama Canal employees will never receive pay increases or retirement cost-of-living adjustments. Because both pay increases and cost-of-living adjustments will add significantly to the ultimate cost, American taxpayers will be subsidizing the cost of the increased benefits by more than $200 million if OPM continues to use this method. OPM estimated the cost of increased benefits under both static and dynamic economic assumptions. The static cost estimate assumed a 5-percent rate of interest. The dynamic estimate assumed a 7-percent rate of interest, and annual pay and cost-of-living annuity adjustments of 6.5 percent and 6 percent, respectively. GAO believes that the static estimate misrepresents the total cost of the increased benefits and concurs with the actuarial methods and economic assumptions used by OPM to develop the dynamic cost estimate. Although OPM has developed a dynamic estimate, the agency believes that, to be consistent with current financing practices of the civil service retirement system, it should charge the Panama Canal Commission on a static cost basis until the law is changed to require funding of the entire retirement system on a dynamic cost basis. GAO believes that the Panama Canal Act provides that OPM charge the Commission for costs of the increased benefits estimated on a dynamic cost basis.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Director of OPM should charge the Panama Canal Commission on the basis of the current dynamic cost estimate of $377.3 million. OPM should periodically review the cost estimate to determine whether the economic assumptions and other actuarial factors used need revision and, if so, to adjust the billing accordingly.

    Agency Affected: Office of Personnel Management


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