Half of Americans Don’t Have a 401(k) or Pension; Federal Employees Have Both as Part of a 3-Tiered Retirement Plan

Pension Benefit Cuts Planned at T.V.A., Breaking a Federal Firewall

March 3, 2016

New York Times - Politicians in states around the country have moved in recent years to rein in the pensions of government employees, which in many cases had become more generous and less risky than those of their private sector counterparts.

Now that movement may be breaching yet another firewall: the pensions of federal employees.

On Thursday, the board of the Tennessee Valley Authority Retirement System, the pension program for roughly 11,000 workers and 24,000 retirees at the venerable New Deal-era agency, approved a tentative plan to lower the system’s funding shortfall by reducing benefits.The plan will be implemented later this year if the T.V.A.’s management and board go along with it.

The immediate impetus for voting on the changes was a proposal put forth in December by William D. Johnson, the agency’s chief executive, who argues that demographic trends and the retirement system’s historical generosity make it unsustainable. Mr. Johnson’s proposal, a modified version of which the board embraced, called for shifting many employees from a pension that guarantees a fixed level of benefits, a feature of most federal employees’ retirement package, to a 401(k) plan. It would have also lowered the cap on cost-of-living increases even for current retirees, effectively cutting a benefit they had already earned.

But what has elevated an increasingly common debate about pensions into a larger controversy about inequality is Mr. Johnson’s decision to exempt from the cutbacks the benefits that he and other executives receive through a supplemental retirement plan. (Their benefits in the general T.V.A. pension plan would be subject to the same cuts as other workers.)

That is particularly galling to union officials at the T.V.A., who point out that Mr. Johnson’s total compensation in 2015 was approximately $6.4 million, which is believed to be the highest pay for any federal employee in the country. President Obama earns a salary of $400,000.

Moreover, Mr. Johnson’s plan runs counter to common practice in the private sector.

“By and large, people tend to run their supplemental executive plan in parallel with the qualified plans,” said George H. Bostick, who recently retired as the Benefits Tax Counsel at the Treasury Department, referring to the plans that cover most workers. “If they’re reducing benefits prospectively in a qualified plan, they’re reducing benefits prospectively in the supplemental plan as well.”

The T.V.A. retirement system was substantially overfunded as of the late 1990s, when a booming stock market was fattening its investment accounts.

Thereafter, several developments conspired to throw it some $6 billion out of balance. The costs of an extra benefit that the agency added when times were flush were starting to rise, as was the ratio of retirees to employees. The bursting of the stock market bubble in the early 2000s and the financial crisis of 2008 dented its investment returns. And while the agency has long contributed the minimum amount that the retirement system asks for each year, it has frequently not contributed much more.

“The TVARS board has two numbers,” said Les Bays, who worked for 33 years at a T.V.A. coal plant and is a former chairman of the T.V.A. Retirement System board, a mix of representatives from the ranks of workers and management. “There’s the recommended number, and the other is called the minimum contribution, which is not actuarially sound.”

Many T.V.A. workers and retirees say that this chronic reluctance to make sufficient contributions is the biggest culprit of today’s shortfall. As evidence, they point to some of the T.V.A.’s peers in the private sector, which improved the funding position of their pension system over much of the same period that the public power agency’s was deteriorating.

“We gave T.V.A. a loan,” said Gay Henson, the president of the local International Federation of Professional and Technical Engineers affiliate, which represents engineers and other high-skilled workers like scientists at the T.V.A. “This is the thanks we get for it.”

Mr. Johnson protested that the comparison with private sector competitors was inappropriate because they could more easily raise rates on their customers to cover pension shortfalls.

“We’re a community development organization with a social mission, which is to make electricity to do a lot of good things,” he said. He described the users of the electricity the T.V.A. provides as “nine million of the poorest people in America.”

Mr. Johnson, who came to the T.V.A. in 2013 after working his way up the ranks to become chief executive of the investor-owned utility Progress Energy (now a part of Duke Energy), has generally won favorable reviews. That includes a 2015 report by the liberal Economic Policy Institute saying the agency appeared to be “on a more sustainable financial path” under his leadership.

The 401(k) plan Mr. Johnson proposed as part of a package that will save the retirement fund some $700 million over 20 years is generous compared with its private sector equivalents. The company would contribute 6 percent of each worker’s salary every year, then offer a 100 percent match for individual contributions, up to another 6 percent. (The T.V.A. plans to close the remaining $5.3 billion shortfall largely through rate increases.)

As for the suggestion that he should not spare the supplemental pension plan that executives receive, known as SERP, Mr. Johnson dismissed the idea as mere symbolism. 

“We can do away with SERP, cut executive pay in half, and it doesn’t change the $6 billion at all.”

He defended the SERP as critical to “being able to attract talent at the executive level.”

T.V.A. is unusual among federal agencies in that the law birthing it mandated that it take on certain features of the private sector. Most prominently, it is supposed to pay market rather than Civil Service wages. (According to the T.V.A., Mr. Johnson is paid well below the median of his private sector peers. Ms. Henson says salaries for engineers and other high-skilled workers average $87,500 and top out at roughly $133,000.)

But this amalgam of private and public sector features has created a kind of loophole that could leave rank-and-file workers more vulnerable to pension changes than even private sector workers.

Under federal law, for example, a private sector company that underfunds its pension plan for several years could face large excise taxes and other penalties, Mr. Bostick said.

Government agencies like the T.V.A. are not subject to these restrictions, however. Workers and union officials say Mr. Johnson and his predecessors have been able to earn private sector wages without observing the rules that are supposed to keep corporate executives in line.

“There is nothing regulating them to handle their pensions properly, except management’s good graces,” said Gregory J. Junemann, the international president of the engineers’ union.

Frustrations boiled over on both sides as Thursday’s vote approached. At a meeting in early February, Mr. Johnson fumed at Ms. Henson for pleading her case to congressional aides during a trip to Washington the week before.

“He told her if we wanted to play that game, he could win that battle,” said Faye Headrick, a representative of a second union who was present. Mr. Johnson said “he had more friends in Congress than any of us had, so go ahead and do it.”

Mr. Johnson denies the comment, but acknowledges that the meeting was tense and that he was frustrated by accusations from Ms. Henson and some of her colleagues. 

“I was meeting with people who had called me a criminal out to line my own pockets at the expense of employees here,” he said. “That’s blatantly false and insulting. I reacted appropriately to that statement.”

As for the unions’ concerns about changes to the pension program, he said the decision by the retirement board was ultimately out of his hands: 

“I obviously don’t control them, or that vote, nor do I want to.”

Half of Americans Don’t Have a 401(k) or Pension; Federal Employees Have Both as Part of a 3-Tiered Retirement Plan

U.S. News & World Report
November 30, 2009

Fewer than half of U.S. workers participate in any kind of employment-based retirement plan. Just 40.4 percent of employees utilized a 401(k) or pension in 2008, down from 41.5 percent in 2007, according to a recent study by the Employee Benefit Research Institute. That translates to about 63.7 million workers who saved for retirement through a workplace program last year, considerably below the 67.1 million employees who participated in 2000.

Part of the problem is that only 50.6 percent of Americans work for an employer that sponsors a retirement savings plan. But even among full-time workers between the ages of 21 and 64, the group most likely to be offered a retirement plan at work, just 54.8 percent utilized the retirement account or pension plan, down from 55.3 percent in 2007.

Significantly more public-sector employees (75 percent) participated in a retirement plan than private-sector workers (41 percent). And employees on the verge of retirement between the ages of 55 and 64 participated in higher numbers (55 percent) than young workers age 21 to 24 (19 percent). Among large employers with 1,000 or more workers, 56 percent were saving for retirement through a workplace plan, compared to 16 percent at companies with 10 or fewer employees.

That leaves 78 million Americans who work for an employer or union that did not sponsor a retirement plan and 94.1 million workers who did not participate in a plan, the study found. Craig Copeland, a senior research associate for EBRI and author of the study, says additional decreases in retirement plan participation are possible in 2010.

The continued freezing of traditional pensions and shift to self-directed 401(k) retirement plans may continue to diminish the use of retirement savings plans, he writes. But the growing incidence of companies automatically enrolling workers in 401(k) plans unless they opt out could contribute to retirement account participation remaining near the level it is now.

Federal Employees Retirement System (FERS):

Federal employees have stools with three legs made of solid mahogany. In the FERS, government employees contribute 0.8 percent of pay while their employing agencies [taxpayers] put in 11 percent of pay. On top of that, federal employees can contribute to a Thrift Savings Plan and get a 5 percent matching contribution from their employing agency [taxpayers]. This match is immediately vested to boot. According to the CRS report, "All participants in FERS are immediately vested in their own contributions and in government matching contributions to the TSP, as well as any investment earnings on these contributions." And the third leg for most federal employees is Social Security. If it gives you any comfort, they contribute to FICA to the same extent that everyone else does. [Going postal over federal pensions, Bankrate.com, March 25, 2011]

New legislation aims to cut federal pensions for all new employees hired after 2012, citing a need to bring benefits in line with those in the private sector. Sen. Richard Burr, R-N.C., on Thursday introduced a bill (S. 644) that would eliminate the pension portion of the Federal Employees Retirement System for all new government hires beginning in 2013. The legislation would not affect Thrift Savings Plan benefits and agency-matching contributions. Nor would it affect FERS pensions for current federal employees and retirees. It would, however, apply to members of Congress. [Senator Proposes Cuts to Federal Annuity Benefits, Government Executive, March 18, 2011]

In addition, an influential panel of military advisors called the Defense Business Board laid out their plan in a 24-page presentation, “Modernizing the Military Retirement System,” which would eliminate the familiar system under which anyone who serves 20 years in the U.S. military is eligible for retirement at half their salary. Instead, they’d get a 401k-style plan with government contributions and have to wait until the normal retirement age. [Military Eying Radical Change to Retirement Pay, Colonel6's Blog, August 15, 2011]

If you are under the Federal Employees Retirement System (FERS) or the Civil Service Retirement System (CSRS), you can take regular optional retirement if you are 55 with at least 30 years of service; age 60 with 20 years of service; or age 62 with 5 years. If your agency offers early retirement, you must be at least 50 with 20 years of service or have 25 years of service at any age. An employee under FERS also is eligible for an immediate annuity if he/she has 10 years of service and has reached the minimum retirement age (55 if born before 1948, and gradually increasing to 57). An employee under CSRS must meet the 1-out-of-last-2 year's coverage requirement and all employees must have at least 5 years of civilian service. [Source]

If you have retired or resigned with an incentive payment and take a job in another federal agency, you must repay the entire amount of the incentive if you take a job with the Federal Government within 5 years of your separation date with the incentive payment. This repayment requirement covers any kind of employment (for example, permanent, temporary, expert, consultant, reemployed annuitant) as well as personal services contracts. You are not entitled to any placement assistance or selection priority because employees volunteer to leave Federal service with an incentive payment. Placement assistance is for employees who are involuntarily separated. [Source]

>

According to the Bureau of Economic Analysis for 2008, the average federal employee made $79,197 [the average private sector employee made $49,935]. The pension for the average employee can be calculated as follows:

$79,197 x 30 Years x 1% = $23,759
$79,197 x 40 Years x 1% = $31,678

Understanding the FERS Retirement

When we talk about your FERS Retirement, we're really talking about several different benefits. FERS (Federal Employees Retirement System) has three main components:

1. Basic FERS Pension
2. Social Security
3. Thrift Savings Plan (TSP)

Your FERS pension and Social Security will be fixed dollar amounts. But the money you get from your TSP will depend on how much you contributed and how well you managed the money.

As a FERS, you have a chance to take a more active role in managing your own retirement than CSRS do. But, that means you need to stay up-to-date on your benefits.

Here are some important things you need to know about each part of your FERS retirement...

Reductions to Your FERS Pension

There are some choices you can make that will reduce the amount of your FERS pension:

• Retiring Before Age 62 with MRA+10If you retire before age 62 on an Early FERS Retirement (MRA+10), your pension will be reduced. Your FERS pension will be PERMANENTLY reduced by 5% for every year you are under age 62. Click here to see an example of this reduction and how it might affect you
• Survivor BenefitsYour FERS Pension could also be reduced if you choose survivor benefits. Will my survivor still get my pension when I die?

Thrift Savings Plan for FERS 

Note: 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.

The TSP allows you to save pre-tax dollars in a special personal account. You can choose how to invest those dollars — although your choices are limited.

With your FERS retirement pension and Social Security, you will receive fixed amounts. But with your TSP, the amount you receive depends on how much you put in and how well you managed the money.

Your TSP contributions are optional and separate from your FERS pension.

You may also be able to get your Federal Agency [taxpayers] to contribute money to your TSP. Click here to learn more about the match the government gives FERS employees.

Social Security for FERS 

Employees covered under the Federal Employee Retirement System (FERS) are typically eligible to receive Social Security benefits when they retire. Every pay period, the Federal Government takes out 6.2% of your basic pay to put towards Social Security. But just like your FERS pension, your Social Security benefit is not based on your contributions - it is based on other factors.

According to the U.S. Social Security Administration, the Social Security taxes you and other workers pay into the system are used to pay for Social Security benefits.

You pay Social Security taxes on your earnings up to a certain amount. That amount increases each year to keep pace with wages. In 2011, that amount is $106,800.

You pay Medicare taxes on all of your wages or net earnings from self-employment. These taxes are used for Medicare coverage.

If you work for someone else	2011 Social Security tax	Medicare tax
You pay	4.2%*	1.45%
Your employer pays	6.2%	1.45%
If you are self-employed
You pay	10.4%	2.9%

Currently, U.S. citizens cannot collect Social Security benefits until age 62 (lawmakers are considering raising this age to 67 or 70). The maximum Social Security benefit at age 62 is $21,636 per individual.

* The employee contribution was temporary lowered from 6.2% to 4.2% on January 1, 2011.