Investment Policies, Practices, and Performance of Federal Retirement Systems

Because of the importance of investment earnings to retirement system financing, a review was made of the investment policies and practices of six Federal retirement systems that invest funds. Four of the six retirement systems in the study were established by law. The retirement systems of the civil service, the Foreign Service, the judicial survivors, and the U.S. Tax Court are required by law to invest only in Federal securities or other securities guaranteed by the United States. Receipts, including employee and agency contributions, are transmitted to the Department of the Treasury and credited to trust funds maintained there for each retirement system. The Federal Reserve System and the Tennessee Valley Authority initiated their own retirement systems and manage their funds like private pension funds. They independently establish investment policies and accumulate assets that can be converted to cash when needed. The Department of Treasury's investment policy is to sell special nonmarketable issues to the four Federal retirement trust funds.

Arguments favoring this policy include: limited cash requirements; simple purchasing and redeeming procedures; financial transactions offset each other and have minimum impact on the current budget; investments are backed by the U.S. Government; rates of return are stable; and the average rate of return over a 5-year period was higher for the four systems investing in only Federal securities than for the two with diversified investments. The arguments against this policy include: funds for paying future benefits are not accumulated as liabilities are incurred; investing in Government debt securities eliminates the possibility of increasing the asset value through price appreciation which comes with equity securities; and the average annual rates of return for Treasury securities is less than that for corporate stocks and bonds. The policy bears significance on the issue of whether Social Security coverage should be extended to all Federal personnel. The study showed that the arguments for integrating social security with Federal staff retirement plans as a way to alleviate Social Security's financial difficulties have little substance since most of the funds consist of Government debt securities rather than tangible assets. Therefore, only minimal assets could be transferred to Social Security to help meet its obligations. While GAO supports the concept of universal Social Security coverage as a means for comparable and equitable retirement benefits, it is important that the issue be decided on its own merits rather than as a means of rescuing the Social Security system.