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Considering first the question of participation-we have never been satisfied with the number of eligible members electing to come into the program. This particularly is true in the case of enlisted men, since participation is largely among officers. For example, during 1959 only 19 percent of those eligible, 45 percent of the officers and only 5 percent of the enlisted men, elected coverage. This is a substantial increase over previous years but is far short of what we consider to be desirable.
Among the major provisions of the bill designed to increase flexibility, and thereby, we believe, to increase participation, are the following:
1. Members with 18 or more years of service, who are now barred from making an election, would be permitted to make an election that will be effective providing retirement occurs at least 3 years after the date of the election.
2. The time for changes and revocations to become effective would be reduced to 3 years from the 5 years under present law. Revocation would not bar the member from subsequent participation in the program providing appropriate time requirements are met.
3. In cases where continued participation in the program would result in severe financial hardship which is against equity and good conscience, members would be permitted to withdraw from the program with permission of the Secretary concerned upon presentation of fully substantiated justification. A member withdrawing under these circumstances would not be refunded any moneys already paid into the fund since he would have been protected up to the date of withdrawal.
Turning now to improvement of the financial stability-experience has demonstrated that the mortality rate of those members who were retired for physical disability with less than 18 years service was considerably higher than anticipated, with the result that this part of the program was not self-supporting. To relieve this financial drain on the fund and at the same time to provide coverage for the group retired for disability with less than 18 years service, an additional option was developed. This option would permit a member with less than 18 years of service to elect up until the last day of active duty to enter the Contingency Option Act program but should he die a service-connected death and his survivors be awarded Veterans' Administration benefits, no annuity would be paid. In such a case an appropriate refund would be made to the member's beneficiaries.
Chairman RUSSELL. What do you regard as an appropriate refund? Would that be the amount equivalent to that paid in?
Admiral CLAREY. Well, sir I am not an expert, Mr. Chairman, on that.
Chairman RUSSELL. How about that, Mr. Myers? Are you the actuary down there?
Mr. MYERS. Yes, Mr. Chairman, I am one of the members of the Board of Actuaries. In this particular case, Mr. Chairman, it would be a full refund without any interest.
Chairman RUSSELL. It would be limited to the amount that had been contributed in his behalf?
Mr. MYERS. That is correct, the amount that is taken from his retired pay.
Chairman RUSSELL. And less any amount that you had paid him, I assume, if he received any annuities, or can he make the change after he becomes a recipient?
Mr. MYERS. Mr. Chairman, this is in the case of a retired member who later dies, and he has had certain amounts withdrawn from his retired pay so that he would not have received any benefits under the Uniformed Services Contingency Option Act himself.
Chairman RUSSELL. He would not have received any benefits?
Mr. MYERS. Yes, sir. They would not have received any benefits under the act.
Chairman RUSSELL. So the refund would be the equivalent of all that had been contributed toward his annuity?
Mr. MYERS. That is correct.
All that would have been contributed by him through reductions in his retired pay.
Chairman RUSSELL. That is what I understood.
Mr. MYERS. Yes, Mr. Chairman.
Chairman RUSSELL. All right, Admiral, go ahead.
Admiral CLAREY. Other provisions of the bill are designed to facilitate the operation and administration of the program and include transition from the present law and revision in the method of computing multiple options and deductions. These modifications are generally technical in nature but are important to the improvement of the program.
We have been working closely with your staff on this bill and have agreed on certain technical changes which are indicated in the latest committee print. These technical changes will further improve the bill and the Department of Defense has no objection to them.
This highlights briefly the main provisions of this bill which modify the present law. The Department of Defense, on behalf of all uniformed services, wholeheartedly supports these changes which experience has shown necessary for the improvement of this important program. The endorsement of this committee is respectfully requested.
I have a couple of technical experts here with me, sir, who will be prepared to answer any technical questions you have on the operations of this program from the Department of Defense point of view. This concludes my statement, Mr. Chairman.
Chairman RUSSELL. As I understand it, the basic principle of the contingency option program is that it is self-supporting.
Admiral CLAREY. Yes, sir.
Chairman RUSSELL. Pays its own way except for the administrative costs?
Admiral CLAREY. Yes, sir.
Chairman RUSSELL. Can both of you gentlemen representing the Department of Defense and Actuaries Committee and Social Security Administration give this committee assurances here that the liberalizing features of this bill with regard to entering and leaving this system will not affect the actuarial soundness of the program or require appropriations from the General Treasury to supplement the benefits that will accrue?
Admiral CLAREY. We feel that it will, sir, from our operational standpoint.
Mr. MYERS. Yes, Mr. Chairman.
The Board of Actuaries believes that the conditions providing for more liberal entrance into the system are such that the actuarial soundness of the system will be safeguarded and, in fact, will be improved in certain respects.
Senator SALTONSTALL. Would the Senator yield?
Chairman RUSSELL. Yes.
Senator SALTONSTALL. Mr. Meyers, you have written a letter to Mr. Russell in which you criticize several of these provisions. Has that been cured in these amendments?
Mr. MYERS. No, Senator, not completely.
We do have criticisms of certain minor provisions, but the general principles of the bill we endorse.
Senator SALTONSTALL. You say here you have apparently two objections. You believe that there is no necessity for even limited participation by members with less than 18 years of service.
Do you still oppose that section or believe it is wrong as it is now
Mr. MYERS. Our preference would be that that section were not in the bill, but we do not think that it would destroy or affect the financial soundness of the program or create any significant obligation on the General Treasury.
Senator SALTONSTALL. You also state in the next paragraph that you are not in favor of the provision added by section 5 permitting withdrawal of retired persons from the system for severe financial hardship.
Are you still opposed to that?
Mr. MYERS. Yes.
We would still be opposed to that, but, in balance, we endorse the provisions of the bill.
Senator SALTONSTALL. Mr. Chairman, may I ask one more question? Chairman RUSSELL. Certainly. I am always frightened by this type of bill. My technical knowledge is a little skimpy but my experience over nearly 30 years has shown that despite all the protests to the contrary, when they are submitted, they wind up costing a great deal of money before they are through with them.
Senator SALTONSTALL. What disturbs me, Mr. Myers, you come before us now and say you are agreeable to this bill going forward and yet you stand by two of these objections that might involve, as the chairman has said, a cost to the Government and also provisions that you do not think are necessary.
Do I understand you to mean in this letter that you wrote on May 29, that you think the bill as it has been changed and these provisions which are still in it are sufficiently inoucuous so that you would stand behind this bill?
Mr. MYERS. Yes, Senator Saltonstall.
We think that there are certain reporting provisions that have been put in the bill so that careful attention can be paid to the operations of the program to see that it is operating soundly and to see that there is no financial loss to the Government.
We do suggest in my prepared testimony here that there be at least one other change made in the bill to tighten it up in this respect; namely, we suggest that the last sentence of section 5 should be de
leted so that there will be further reporting of the activities so that study and analysis of them can be made by the Board of Actuaries. Admiral CLAREY. That was one of the changes to which I referred in a general way, Senator, to which we have no fundamental objection. Senator SALTONSTALL. You believe, Admiral, that this will stimulate the interest of married enlisted men to participate in this plan? Admiral CLAREY. Overall, yes, sir.
We are very hopeful that this will be the case.
Senator SALTONSTALL. And it will do so without cost to the Government?
Admiral CLAREY. Yes, sir.
Senator SALTONSTALL. Mr. Chairman, I appreciate the opportunity.. I did not mean to ask so many questions.
Chairman RUSSELL. That is all right. I want you to develop all you can about the bill.
Senator SALTONTALL. I do not have any further questions.
Senator SMITH. I have no questions, Mr. Chairman.
Chairman RUSSELL. Mr. Myers, do you have any formal statement? Mr. MYERS. Mr. Chairman, I have a formal statement that I pre-. pared. It is relatively short. If time permits, I would like to go over it. It covers some of the same points that we have discussed, but it may also cover some additional material.
Chairman RUSSELL. All right, sir, if you will proceed as expeditiously as possible.
Mr. MYERS. I should like to present a brief report on the operation of the Uniformed Services Contingency Option Act program, togetherwith the unanimous views of the Board of Actuaries upon the proposed changes contained in H.R. 6668.
During the last 5 years, there has been an increase in the number of members electing to participate in the program; in the last 2 years, the increase has been substantial. There has been a slight increase in the number of retirants under the program each year, although the percentage of participation has remained about the same: at slightlymore than 10 percent of total retirements. Of course, members without dependents would have no interest in the program, and we do not know the proportion of retirants with dependents. It is generally desirable to increase participation, which would at the same time afford a broader base for the financial operations.
The operation of the program has been reasonably close to the results expected when it was inaugurated, except with respect to disability retirants with less than 18 years of service for pay purposes. For those who have retired in this category, the system has had a financial loss of about $20 million, considering both benefits paid in the past and those that will be payable in the future. The Board of Actuaries has consistently recommended that this category be eliminated from the program. We believe that there is no necessity for even the restricted participation provided in section 6 of the bill. This program designed for career servicemen should not be utilized in an attempt to fill a gap in other separately administered programs.
In the past we have recommended that the basis for participation in the program should be by advance election of 5 years, with no benefit coverage during that period or before completion of 20 years of
service. At the same time, the present limiting point of 18 years of service behind which election cannot be made would be eliminated. The bill would reopen the program to members who have completed 18 years of service, provided that their elections are not effective for retirements occurring within 3 years after the date of election. The bill would also permit changes and revocations to become effective after 3 years and would permit a member who has made a revocation to make a new election. Although these changes are not what we have recommended in the past, we believe that they will definitely strengthen the program.
We are not in favor of the provision added by section 4 permitting withdrawal of retired persons from the system for "severe financial hardship," although we recognize that the reporting requirements contained in section 5 will permit some measure of control of abuse. We fail to see that requiring members to continue to participate might violate equity since the rates are actuarially determined so that they will be equitable.
We are concerned that the provisions for correction of administrative deficiencies, contained in section 6 of the bill, may be extended beyond correction of clerical errors and incontrovertible mistakes. Any such extension would be most undesirable. Limitation of the provisions might be strengthened by adding the requirement that corrective actions must be analyzed in our annual report. This could be accomplished by deleting the last sentence of section 5.
The Board has no objection to the technical and transitional provisions included in the bill.
There is, however, one other technical point that concerns us; namely, that in the codification of the original law, one matter was made considerably less clear and precise. This could readily be handled in the committee report.
I have given your staff a statement on this point.
If we decide to pass this bill-and I do not know whether we will or not suppose we eliminated this section which you feel is less than 18 years of service. That is section 6 where you say:
We believe there is no necessity for even the restricted participation provided in section 6 of the bill.
What would happen if we eliminated section 6 of the bill and passed the rest of the bill?
Mr. MYERS. Senator Saltonstall, I think that the Board of Actuaries would definitely prefer that, although we see the disadvantage, from what you might say a public relations standpoint, in the members of the armed service not having available to some extent a privilege which they had before; namely, of coming under a system when they have less than 18 years of service.
From a financial standpoint, this would definitely, in our opinion, be an improvement.
Senator SALTONSTALL. Mr. Myers, may I ask you this question: You are speaking for the Board of Actuaries of the Uniformed Services Contingency Option Act. May I ask, most respectfully, what is your responsibility with relation to this?