Those of you who have read my articles on FedSmith for the last ten years know that I am not an accountant and tend to speak of economic decisions in generalities. I had significant help on this article from Dan Jamison, CPA, who is the founder of FERSGUIDE (a great resource for federal employees and retirees).
It seems like every day there’s another news article published regarding cuts to federal retirement benefits proposed in President Trump’s budget, by the Republican Study Committee and by the House Budget Committee.
It’s important to understand why none of these proposals make any sense when you consider how federal retirement benefits are funded. Yes, these monies are disbursed to annuitants after they retire, but these benefits were funded over the course of the annuitant’s federal career. It’s the funding part of this process that our lawmakers are failing to understand.
FERS
The Federal Employees Retirement System (FERS) is a fully-funded defined benefit plan. When FERS replaced the Civil Service Retirement System (CSRS), it was designed so there would be no unfunded pension liability for the plan.
The Office of Personnel Management’s (OPM) actuarial staff developed what they term “normal costs” for the expense of the benefits provided by FERS. The normal cost is divided between the employee and the employing agency. The collected normal costs are then deposited into the Civil Service Retirement and Disability Fund (CSRDF) which has a current balance in excess of $875 billion. Annuitants are then paid from the funds in the CSRDF, not out of the current year’s federal budget. This analysis does not apply to CSRS. CSRS is not a fully-funded retirement system.
The normal cost paid collectively by the employee and the employing agency is actuarially sufficient to pay for the benefits that are part of the FERS plan, including the basic FERS annuity, Retiree Annuity Supplement (RAS), COLAs and survivor benefits.
Initially, there were just two groups of FERS employees. The first, and largest group, are those covered by the regular FERS benefits. The second group is comprised of Special Category Employees (SCE), such as law enforcement officers, firefighters and air traffic controllers.
The SCE group has a richer retirement benefit under FERS because they receive 1.7% for each of their first 20 years of SCE coverage, the ability to retire much sooner and immediate COLAs after retirement. Because of the richer benefits provided to SCEs, it follows that the normal cost for SCEs is substantially higher (in fact, nearly double) than the normal cost of FERS for regular employees.
Because of this disparity in benefits and costs, OPM developed two sets of normal costs. One for regular FERS employees and one for SCEs.
The two sets of normal costs continued from the inception of FERS until 2013. Federal employees hired after 12/31/2012 were required to contribute a larger portion towards the normal cost, but receive the same retirement benefits. OPM termed these employees Revised Annuity Employees (RAEs).
Congress then made yet another change, and federal employees hired after 12/31/2013 were required to contribute an even higher share of the normal cost than RAE employees. These employees are called Further Revised Annuity Employees (FRAE).
OPM developed separate normal costs for RAE and FRAE employees that is slightly higher than the normal costs for the legacy FERS employees and SCE employees. The normal cost is adjusted on a regular basis – typically annually.
The most recent OPM Benefits Administration Letter regarding these costs for all groups of FERS employees goes into more detail.
Retired FERS Employee
Let’s first consider the case of a retired FERS employee with regular FERS benefits.
Over the course of this person’s 30-year career (for example), the employee and agency each paid their statutory share of the normal cost to OPM. The cost of providing the scheduled benefits to this employee has been fully funded over the 30 years of federal employment.
It’s not clear that our lawmakers understand this accounting relationship. If the lawmakers vote to eliminate the RAS, for example, how can they justify any cost savings? The cost of providing this benefit to annuitants has already been paid for! If our elected lawmakers move forward with the RAS elimination, then technically a refund is due to the annuitant and to the agency for a benefit that was already paid for and then taken away.
So is Congress proposing to steal $875B from current federal employees and retirees? That sure appears to be the case.
Clearly, annuitants should be “off the table” as far as benefit cuts go, because annuitant benefits have already been fully funded by a combination of employee and agency contributions. Essentially – they have already been paid for, so there is no additional cost.
On-Board Employees
Now, what about on-board employees? What about a law-enforcement officer that is 50 years old and has 19 of his/her required 20 years of service? That person and their agency have paid in 19/20ths or 95% of the cost of funding his/her retirement benefits.
Now, consider a regular FERS employee that is 10 years into a 30-year career. That person is only one-third of the way into their career. Where do you draw the line? No on-board federal employee should be subjected to a reduction in promised retirement benefits.
Future Employees
By no means am I advocating that future federal employees be stripped of their retirement benefits, but if our lawmakers truly wish to reduce the cost of the retirement benefits provided to the federal workforce, then that has to start with new hires. In that fashion, a new, lower, normal cost can be established for these newly-hired employees and they can pay a reduced amount for their reduced benefits. These new employees can then make an informed decision if they want to work in the private sector or for the federal government, now with less-generous retirement benefits. They will have a clear picture at the time they are hired of what they can expect, just as all on-board employees had a clear picture of what their promised retirement benefits were when they were hired.
All senior citizens should be alarmed by these proposed changes as well, because eliminating COLAs for federal annuitants is just the first step towards eliminating or reducing the COLA for Social Security Recipients.
Write to your elected officials. Monitor their voting record and remind them that federal employees are located all over the United States and that we vote. It’s unconscionable that our lawmakers do not understand this system well enough to understand how to change it.
