U.S. Government to Cut Benefits for Hundreds of Thousands of Retirees Covered by Underfunded Multi-employer Private Pension Plans, But It Will Not Cut Benefits for Retirees and Surviving Spouses of the U.S. Government Even Though the Civil Service Retirement and Disability Fund is Underfunded by $800 Billion

Government paves way for multi-employer pension plan cuts

June 16, 2015

AP - The government is preparing to cut benefits over the next few years for hundreds of thousands of retirees covered by underfunded multi-employer private pension plans.

The Obama administration announced on Wednesday that well-known mediator Kenneth Feinberg review applications from pension plans under a law passed last year. The law would cut benefits as a last ditch means to stave off insolvency of troubled plans such as the huge Teamsters Central State Fund.

The new law earned mixed reviews from the unions whose members are covered by such defined benefit plans, including construction workers, Teamster truckers and food service workers.

The Teamsters and AARP opposed the law when it passed last year as part of a government-wide spending bill. But other unions saw it as a solution that was preferable to plans becoming insolvent and getting a federal bailout.

Treasury Secretary Jacob Lew named Feinberg, an attorney, to review applications for fairness. Feinberg has administered the compensation funds for claims from the Deepwater Horizon oil spill and from families of victims of the 9/11 terrorist attacks.

Feinberg said the job is a "very, very difficult, challenging assignment" and said he won't accept compensation for the task.

More than 10 million people are covered by 1,400 or so multi-employer plans, but about 1 million of those are covered by plans expected to run out of money in coming years. They would be eligible under the new system that would cut benefits to people already in retirement.

People 80 years old and over are protected from any upcoming cuts, while those over 75 are partially protected.

Federal Employees’ Retirement System: Budget and Trust Fund Issues Congressional Research Service Summary 

The Federal Office of Personnel Management has estimated the normal cost of the FERS basic retirement annuity at 12.7% of payroll. Employee contributions for FERS employees first hired before 2013 are set in law at 0.8% of pay, so the contributions of federal agencies [taxpayers] are equal to 11.9% of basic pay for these employees [taxpayers contribute 11.9% and the federal employee contributes only 0.8% toward his/her pension]. For employees first hired (or rehired with less than five years of FERS service) in calendar year 2013, employee contributions are set in law at 3.1% of pay, so the agencies’ contributions [taxpayers] for these employees are equal to 9.6% of basic pay [taxpayers contribute 9.6% and the federal employee contributes only 3.1% toward his/her pension]. If the assumptions underlying these cost estimates prove to be accurate, FERS will be “fully funded.”

March 24, 2014

Congressional Research Service - Most of the civilian federal workforce is covered by one of two retirement systems [additionally, they have a Thrift Savings Plan, which is similar to a 401k, and has about $250 billion in combined accounts]:

(1) the Civil Service Retirement System (CSRS) for individuals hired before 1984 or
(2) the Federal Employees’ Retirement System (FERS) for individua ls hired in 1984 or later.

FERS annuities are fully funded by the sum of employee [whose income comes from taxpayers] and employer contributions [taxpayers are the employers] and interest earned by the Treasury bonds held by the Civil Service Retirement and Disability Fund (CSRDF).

The federal government makes supplemental payments [from taxpayers] into the CSRDF on behalf of employees covered by the CSRS because employee and agency contributions [from taxpayers] and interest earnings do not meet the full cost of the benefits earned by employees covered by that system. 

The Office of Personnel Management (OPM) estimated that in FY2014, obligations from the CSRDF would total $80.0 billion, of which $79.4 billion will represent annuity payments to retirees and survivors. Other outlays consist of refunds, payments to estates, and administrative expenses. Obligations from the fund are projected to increase by 3.4% to $82.7 billion in FY2015, of which $82.1 billion will represent annuity payments. OPM estimated that receipts to the CSRDF from all sources would be $95.3 billion in FY2014 and $98.5 billion in FY2015. The year-end balance of the CSRDF was projected to increase from $848.5 billion at the end of FY2014 to $861.8 billion at the end of FY2015.



The total annual income of the CSRDF will in crease from $94.8 billion in FY2012 to an estimated $158.8 billion in FY2025 and to $1.1 trillion in FY2090. The total expenses of the fund are projected to rise more slowly, increasing from $73.9 billion in FY2012 to an estimated $115.0 billion in FY2025 and to $715.8 billion in FY2090. Consequently, the assets held by the CSRDF also are projected to increase steadily, rising from $829.1 billion in FY2012 to an estimated $1.3 trillion in FY2025 and $13.7 trillion in FY2090. Expenditures from the CSRDF currently are about 38% as large as federal expenditures for the salaries and wages paid to federal employees. Pension expenditures are projected to decline relative to the government’s wage and salary expenses, beginning around FY2020. By FY2090, the expenditures of the CSRDF are estimated to be only about 30% as large as the government’s expenditures for wage and salary payments to employees.

Because CSRS retirement benefits have never been fully funded by employer and employee contributions [all of which comes from the taxpayers], the CSRDF has an unfunded liability. The unfunded liability was $789.9 billion in FY2012. According to actuarial estimates, the unfunded liability of the CSRDF will continue to rise until about FY2025, when it will peak at $855.9 billion. From that point onward, the unfunded liability will steadily decline and is projected to turn into a surplus of $29.5 billion by FY2090. Actuarial estimates indicate that the unfunded liability of the CSRS does not pose a threat to the solvency of the trust fund. Unlike the Social Security trust fund, there is no point over the next 80 years at which the assets of the Civil Service Retirement and Disability Fund are projected to run out.

FERS Information

Congress created the Federal Employees Retirement System (FERS) in 1986, and it became effective on January 1, 1987. Since that time, new Federal civilian employees who have retirement coverage are covered by FERS.

FERS is a retirement plan that provides benefits from three different sources: a Basic Benefit Plan, Social Security and the Thrift Savings Plan (TSP). Two of the three parts of FERS (Social Security and the TSP) can go with you to your next job if you leave the Federal Government before retirement. The Basic Benefit and Social Security parts of FERS require you to pay your share each pay period. Your agency withholds the cost of the Basic Benefit and Social Security from your pay as payroll deductions. Your agency pays its part too. Then, after you retire, you receive annuity payments each month for the rest of your life.

The TSP part of FERS is an account that your agency automatically sets up for you. Each pay period your agency deposits into your account amount equal to 1% of the basic pay you earn for the pay period. You can also make your own contributions to your TSP account and your agency will also make a matching contribution. These contributions are tax-deferred. The Thrift Savings Plan is administered by the Federal Retirement Thrift Investment Board.

For more information about TSP, see their website (external link). See the SSA website (external link) for more information about the Social Security portion of your retirement benefit. This website covers the Federal Employees Retirement System. Through the menu links on the left, you can find information about the following FERS retirement topics:

• Eligibility – The main eligibility requirements for the common types of retirements.
• Computation – How your retirement annuity is computed.
• Creditable Service – Rules showing the civilian and military service that can be used to compute your FERS retirement benefits.
• Planning and Applying – It's never too early to start planning for retirement in order to ensure it goes smoothly. Here you will find information to help ensure your retirement starts well.
• Early Retirement – Explanation of the minimum retirement age and early retirement if your agency under goes a “reduction in force” or you are involuntarily separated other than for cause.
• Types of Retirement – Learn about the age, service requirements and considerations affecting the various types of retirement.
• Deferred – If you are a former Federal employee who was covered by the Federal Employees Retirement System (FERS), you may be eligible for a deferred annuity at age 62 or the Minimum Retirement Age (MRA).
• Survivors – When a Federal employee dies, monthly or lump sum benefits may be payable to survivors. Learn about these Survivor benefits here.
• Military Retired Pay – Adding military service to your civilian service
• Service Credit – Payment to increase your annuity for civilian service when no CSRS retirement deductions were withheld or were refunded or for military service after 1956.
• Former Employees – Options if you leave your Government job before becoming eligible for retirement.

Related:

• Federal Employees' Database of Salaries 
• In 2011, Taxpayers Will Pay $19 Billion to Fund Federal Pensions, While Federal Employees Will Contribute Only $1 Billion