Federal Pension Systems Unfunded by Almost $800 Billion
Private sector retirement plans usually only have a tax-deferred retirement account, and it has become more common for private employers to match only the first 3%.
Federal pension systems’ unfunded liabilities skyrocket
February 20, 2013Federal Times - The unfunded liability of the federal government’s pension systems exploded in fiscal 2011 to $761.5 billion dollars — an increase of $139 billion from its fiscal 2010 deficit.
The Civil Service Retirement System once again accounted for the bulk of that unfunded liability. Its deficit grew from $634.5 billion in 2010 to $741.4 billion in 2011, according to the Office of Personnel Management’s Civil Service Retirement and Disability Fund annual report for fiscal 2012. OPM released the report at Federal Times’ request.
The Federal Employees Retirement System slipped back into the red. FERS held a projected $12.2 billion surplus at the end of fiscal 2010 — its first in four years. But one year later, FERS reported a $20.1 billion unfunded liability.
OPM said the increase in the unfunded liability was primarily due to a revision in its actuarial assumptions. Last July, OPM’s actuaries dropped its assumed future interest rate by 0.5 percentage points.
OPM said that the 24 percent increase in federal retirements in 2011 — which some experts say was the beginning of the long-awaited retirement wave — had some effect on the unfunded liability, but “did not significantly contribute” to the increase.
Sen. Tom Coburn, R-Okla., said that OPM’s latest report “raises further questions about how the federal government plans to pay for their employees’ retirement.”
“It is clear Congress should take action to ensure federal employee retirement costs are not being funded at the expense of the taxpayers or by simply borrowing more money,” Coburn said. “Moreover, we must conduct proper oversight of OPM to ensure proper accounting standards are being used to project future costs and liabilities.”Audit firm KPMG has consistently given OPM’s financial statements and retirement programs unqualified opinions, meaning they found no significant problems.
The National Active and Retired Federal Employees Association rejects assertions that unfunded liabilities are a sign that pension plans are unsustainable, as some Republican lawmakers have said.
The unfunded liability “is an actuarial estimate [and] has no effect on the government’s budget or current outlays, and is not a measure of the government’s ability to pay retirement benefits in the future,” NARFE said.Coburn and Sen. Richard Burr, R-N.C., in 2011 introduced legislation that would eliminate the FERS defined benefit pension for future employees, citing FERS’ unfunded liability as evidence that the government can’t afford such plans. That bill did not become law, but Burr’s office said he plans to reintroduce that bill.
Much of the multibillion-dollar deficit in the government’s pension fund is left over from a major flaw when Congress designed the generous CSRS pension.
All of CSRS’ future costs were not covered by the combination of agencies’ contributions and employees’ contributions, which amount to 14 percent of payroll. Those combined contributions, along with interest generated by the Treasury securities they are invested in, cover only the so-called “static normal cost” of the pension program — that is, the cost of future pensions that employees would receive if they got no future pay raises or pension cost-of-living adjustments. Since employees do get pay raises — at least under normal circumstances — and retirees do get COLA adjustments, the amount being contributed into the fund falls way short of what is needed.
This means the government [taxpayers] has to contribute additional payments each year to cover that shortfall. Those payments reached a record $33.2 billion in fiscal 2010, but dropped to $31.3 billion in fiscal 2011.
OPM created FERS in the mid-1980s to fix the CSRS funding problem and began to wind down CSRS.
FERS requires federal employees to contribute 0.8 percent of their paychecks toward their pensions, and requires the government [taxpayers] to cover the rest of the cost to avoid the accumulation of unfunded liabilities. That is why the government in fiscal 2011 hiked the amount it [taxpayers] contributes to FERS pensions from 11.2 percent to 11.7 percent, and in October increased it further to 11.9 percent.
Coburn is concerned that unfunded FERS liabilities could force the government [taxpayers] to increase its contribution rate further.
President Obama has proposed increasing the amount all federal employees contribute to their pensions by 1.2 percentage points [added to the 0.8 percent that federal employees currently contribute for a total of 2.0 percent versus the 11.7 percent that the taxpayers contribute toward their pensions] and using the additional contributions to pay down the unfunded pension liability.
[Federal employees also can elect to particpate in the Thrift Savings Plan: Taxpayers are required to match contributions of up to 5% of wages for each federal employee under the Thrift Savings Plan; most private companies don’t match as much. The Thrift Savings Plan (TSP) is a special account for Federal Employees. The TSP was created as part of the Federal Employees Retirement System in 1986. Most government employees (FERS and CSRS) are eligible for the TSP — even those hired before it was created.]
Flashback: Federal pensions underfunded by $673B
October 16, 2011Federal Times - Pay freezes and no pension adjustments haven't made federal employees and retirees very happy, but they have had one benefit: eliminating part of the retirement systems' unfunded liabilities.
The Federal Employees Retirement System at one point was predicted to be about $9.7 billion in the red. But the Office of Personnel Management on Oct. 7 told Federal Times that due to freezes in pay and cost-of-living adjustments, FERS has not only eliminated its unfunded liability, but is now projected to be in surplus for 2011. This is because the cost of future pension payments will be lower than originally expected.
The older Civil Service Retirement System is still carrying a massive unfunded liability, however, of $663 billion when fiscal 2010 began.
OPM refused multiple requests from Federal Times to release the amount of the FERS surplus it claimed at the beginning of fiscal 2011 and the updated unfunded liability for CSRS.
OPM said it cannot release those numbers until they are finalized and first submitted to other agencies, the White House and Congress.
Sens. Tom Coburn, R-Okla., and Richard Burr, R-N.C., in March introduced legislation that would eliminate the FERS defined benefit pension for future employees, citing FERS' unfunded liability as evidence that the government can't afford such plans.
Coburn spokeswoman Becky Bernhardt said the elimination of the FERS unfunded liability does not change the senator's opinion that the defined benefit pension should go away.
Coburn believes pensions are outdated and reinforce careerism, she said, and that the Thrift Savings Plan provides enough of a nest egg for a comfortable retirement.
Dan Adcock, legislative director for the National Active and Retired Federal Employees Association, said the evaporation of the FERS unfunded liability should help weaken the argument for killing federal pensions.
But Adcock said he doesn't buy that unfunded liabilities are a sign the pension plans are unsustainable.
"The overall concept of an unfunded liability is a red herring," Adcock said. "The trust fund can pay benefits as far as the eye can see."
How the system works
One thing is beyond dispute: There is a multibillion-dollar hole in the government's pension fund. But the unfunded liability is essentially a hangover from a problem that was supposed to be solved 25 years ago, when the government began to wind down CSRS.The generous CSRS plan was designed with a major flaw: All of its future costs were not covered by the combination of agencies' [taxpayers] contributions and employees' contributions, which amount to 14 percent of payroll. Those combined contributions, along with interest generated by the Treasury securities they are invested in, cover only the so-called "static normal cost" of the pension program — that is, the cost of future pensions that employees would receive if they got no future pay raises or pension COLAs. Since employees do get pay raises and retirees do get COLA adjustments, the amount being contributed into the fund falls way short of what is needed. That shortfall amounts to roughly 12 percent of payroll.
FERS was created in 1986, retroactive to 1984, and was supposed to be entirely self-funded.
From that point on, all new employees were placed on FERS; CSRS became a closed system. OPM estimates the last retiree or surviving dependent covered by CSRS will die around 2070, at which point the program will be shut down.
The government regularly re-examines its assumptions on interest rates, inflation, contribution rates and other trends affecting CSRS and FERS' future funds. Sometimes those long-term economic assumptions have to be revised, and if rates of return are underperforming, for example, the government can find a slight underfunding even in FERS.
OPM's actuaries in June 2010 dropped several assumed rates down after one of those re-examinations. As a result, OPM this month increased the amount agencies [taxpayers] must contribute to FERS from 12.5 percent to 12.7 percent.
FERS has run surpluses before, such as in 2006, when it had a $5.3 billion surplus. Adcock said the government's slight adjustments to the plan's contribution rates, and slight variations in future economic assumptions, keep FERS' projected future liabilities varying slightly between surpluses and underfunding.
One positive for the government is that current FERS employees are contributing to the fund and not drawing benefits, Adcock said.
The government puts money contributed to the Civil Service Retirement and Disability Fund into bonds and securities backed by the Treasury Department. The interest from those investments also helps cover some of the cost, and is projected by OPM to continue building over at least the next several decades.
But that still leaves a large unfunded CSRS liability. The government covers the remainder of those costs with supplemental payments from Treasury, amortized over 30 years. Those payments are roughly $30 billion per year.
Safety in assets
OPM had almost $759 billion in retirement fund assets at the beginning of fiscal 2010, largely in the form of bonds and securities. The only way the government's $600 billion-plus unfunded liability would ever become a problem would be if all employees in the government were to retire at once and demand their pensions, or if the government were to go out of business, neither of which can happen."Private-sector businesses are required by law to prefund and set aside money for future benefits in case they go out of business," said John Palguta, vice president for policy at the Partnership for Public Service. "The expectation is that the government is not going to go out of business. I've literally had this conversation for several decades, and it's getting attention now because of the bad economy and huge deficits."President Obama last month proposed increasing the amount all federal employees contribute to their pensions — by 0.4 percent each year for three years — and using the additional contributions to pay down the unfunded pension liability.
The Worst Pension Gap
October 12, 2011Governing.com - Public-policy types were aghast when a 2010 study estimated that states have about $1 trillion more in employee-retirement liabilities than the $3 trillion they have set aside in pension funds.
But those same policy wonks will yearn for the good old days if they take a look at federal pensions that are both underfunded and disproportionately paid for by taxpayers. Most Americans are covered by Social Security, so the amount of ink dedicated to that program's $6.5 billion shortfall comes as no surprise. Far less attention has been paid to the various federal employee retirement systems, such as civilian and military pensions and retiree health care. According to one analysis, they cumulatively face a staggering $5.7 trillion in unfunded liability.
The Federal Employees Retirement System was created in 1986 to take the place of the old Civil Service Retirement System. Civilian federal employees hired prior to 1984 remained in the old system, while those who started in 1984 or later are in the new one.
Congress decided to have employees pay the same 7 percent of salary toward retirement under both systems. But there was a catch: Those covered by CSRS don't participate in Social Security, while those under FERS do. Newer federal employees pay the standard 6.2 percent of salary into Social Security, leaving only 0.8 percent of their salaries to fund their own pensions. Most private-sector employees pay the 6.2 percent Social Security tax and contribute an average of 5.3 percent of their salaries toward retirement.
Given CSRS' massive unfunded liability, Congress mandated that FERS be self-funded. That leaves federal agencies [taxpayers] to fill the gap between those miniscule employee contributions and the amount needed to fully fund their retirement costs, putting federal taxpayers on the hook to pay $14 into the system for every dollar contributed by employees. In contrast, a study by the think tank Third Way found that employers pay 52 percent of the average private-sector retirement plan and employees pay 48 percent.
At least two steps can be taken to address the $5.7 trillion problem.
First, federal employees hired in 1984 or after should contribute more toward their retirement.
In addition to Social Security, they currently contribute 5 percent of pay into a tax-deferred account similar to a 401(k) and receive a smaller lifetime pension. Taken together, these benefits are more generous than the retirement packages offered by comparable private employers. If the federal government and its employees split retirement costs evenly, Third Way estimates that the savings would top $700 billion by 2050.
Second, to help ward off the temptation to enact policies that save money in the short term but increase liability over the longer haul, the General Accounting Office or the Congressional Budget Office should calculate the long-term costs of any programs such as early-retirement incentives that add to pension liability. Absent war or some other national emergency, Congress should cover the additional liability within three years of the programs' enactment.
The more you learn about programs like the myriad federal retirement systems, the more you realize just how important it is for national leaders to start making the hard decisions that will be necessary to return the nation to solvency.
