Will the federal deficit impact your federal retirement?
In the past several weeks, some readers have asked variations of this question: “Is our federal retirement fully funded” or “Is the federal retirement system the same as Social Security where Treasury has to borrow more money to pay current benefits because the money in this fund has already been spent?”
Unfortunately, these are good questions. And, while the two topics may not seem related, in reality the deficit could have an impact on your future retirement. And, yes, the federal retirement program does have a large “unfunded liability.”
Uncle Sam is mired in debt. Spending by the federal government has skyrocketed and we are now spending more than one trillion dollars a year than the government receives in revenue. With all of the scary press devoted to the devastating impact on the public that will supposedly occur with sequestration, the actual cuts to the federal budget would be a relatively small amount—a 5% cut for domestic agencies and a 7% cut for the military. The sequestration would cut about $85 billion out of a federal budget that is about $3.6 trillion. In other words, the $85 billion in savings is about 2.3% of total spending. Federal agencies received an average increase in their budgets of 17% in the previous five years—not counting a $276 billion stimulus bonus.
The Unfunded Liability of Federal Retirement
What does this have to do with federal retirement payments?
Politicians are looking for a lot more money to fund the massive federal deficit. Many of our leaders do not want to cut current spending. Unfortunately, the real federal deficit is much worse that the often reported $16 trillion. Despite the current agony about the deficit and federal spending, the looming deficits for Medicare, Social Security and other federal social programs, and some 10,000 people turning 65 each day with the aging “baby boomers” reaching retirement age, the more serious federal spending crisis has not yet hit home—despite the historically low interest rates currently being paid by the government to borrow more money.
The Civil Service Retirement and Disability Fund is broke.
Because CSRS retirement benefits have never been fully funded by employer and employee contributions, the Civil Service Retirement and Disability Fund (CSRDF) has an unfunded liability. According to a recent Congressional report, the unfunded liability was $622.3 billion in fiscal y ear 2010. According to actuarial estimates, the unfunded liability of the CSRDF will continue to rise until about 2023, when it will peak at $684.8 billion.
In reality, it appears the actual deficit for the fund is higher. The unfunded liability of the federal government’s pension systems grew in fiscal 2011 to $761.5 billion dollars — an increase of $139 billion from its fiscal 2010 deficit according to a new estimate reported by the Office of Personnel Management (OPM).
As one reader asked: “What is an unfunded liability.” Here is a definition from a financial dictionary:
“Describing any liability or other expense that does not have savings or investments set aside to pay it. That is, the party responsible for paying an unfunded liability pays for it out of current income or by borrowing. The risk of an unfunded liability is that a payee may not receive that which he/she is entitled to if the payer goes through a difficult financial period. It also increases the payer’s current liabilities.”
According to a recent Congressional report, here is how your federal employee retirement is different from private companies that offer a defined benefit plan: ”
“The assets in private-sector pension funds represent a ‘store of wealth’ that firms can use to meet pension obligations as they come due. The CSRDF, however, is not a store of wealth for the federal government. The fund is required by law to invest exclusively in U.S. Treasury bonds. These bonds represent budget authority, which is the legal basis for the Treasury to disburse funds. When the CSRDF redeems the Treasury bonds that it holds, the Treasury must raise an equivalent amount of cash by collecting taxes or borrowing from the public.”
In other words, in order to distribute federal retirement payments, the Treasury Department has to pay the money from current revenue or borrow more money.
As Congress looks for ways to bring in more revenue any way that it can, federal employees will continue to feel the financial pinch. As readers know, there has been a pay freeze in effect since 2011. A bill that has passed in the House of Representatives would extend this pay freeze. New federal employees are now paying more toward their future retirement.
Last year, a bill was introduced that would end the defined benefit pension portion of the Federal Employee Retirement System (FERS) for new federal government hires starting in 2013. The bill would have left the Thrift Savings Plan in place with the current match (up to 5%) for both current and future federal workers. The bill would also apply to Members of Congress. Senators Tom Coburn (R-OK) and Richard Burr (R-NC) intend to introduce the same or a similar bill in the current Congress.
It is far from certain that such a bill will pass. Keep in mind though that the Obama administration has also proposed a 1.2 percent increase in federal employee contributions to their future retirement. The stated reason is because the “defined benefit” pensions that many government workers receive are becoming “increasingly rare,” and are available to about 21 percent of private sector employees. Moreover, private sector employees contribute nearly 50 percent of their retirement savings, while government employees pay about 33 percent.
With the pressure continuing to rise as the federal deficit continues to set new records, federal employee pay and and benefits are likely to continue to be under increasing scrutiny. It is unlikely that the federal annuity will be eliminated but in negotiations between Congress and the administration, anything can happen. In the absence of the political will or desire to make significant changes to the large federal entitlement programs that now are 62 percent of the federal budget, anything can happen and the size of the federal workforce is small compared to the number of people who receive Social Security or Medicare.
Regardless of your personal political philosophy, readers will want to track proposed changes to federal benefits. While the federal benefits program has traditionally been consistent and changes have usually been positive, we are in a new political era because of the massive deficits and the shifting political philosophy among many elected officials about the amount of spending that is acceptable by the federal government. It would be unrealistic to assume there will not be changes to federal pay and benefits in view of the large deficits. The questions are what will the changes be and who will be impacted the most.
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