Back in December, the House passed a bill that would offset a one-year extension of the payroll-tax cut with, among other things, a reform of the federal pension system. With only a few weeks left until the payroll-tax cut extension expires, the issue is back on the table.
As I have said before, ideally the cut should be offset with a reduction in Social Security benefits. However, a structural reform of the federal pensions is also an option. In particular, a reform option that would get rid once and for all of the defined-benefit plans would be a great improvement.
The vast majority of full-time civilian federal workers receive roughly half of their retirement compensation through their defined-benefit pension plans (the rest comes from Social Security). The defined-benefit plans promise workers a guaranteed stream of income through retirement, based on earnings and time served, not actual savings toward retirement. As employers in the private sector already know from high-profile defaults such as LTV Steel’s, the promise of guaranteed income based only on earnings and time served is a recipe for fiscal disaster. While nearly 100 percent of full-time civilian federal employees receive some form of defined-benefit pension, only 22 percent of pensioned workers in the private sector are afforded this benefit.
As Peter Orszag explained a few months ago, in the private sector defined-benefit plans are largely a thing of the past:
In 1985, a total of 89 of the Fortune 100 companies offered their new hires a traditional defined-benefit pension plan, and just 10 of them offered only a defined-contribution plan. Today, only 13 of the Fortune 100 companies offer a traditional defined-benefit plan, and 70 offer only a defined-contribution plan.
Also, there are important differences between private and public defined-benefit plans. Look at this chart:
I used the data from the Office of Personnel Management (via the Congressional Research Service) and the Census Bureau 2012 Statistical Abstract to compare federal and private defined-benefit pension systems. Specifically, this chart compares the amount employees pay into their defined-benefit pensions relative to the amount that beneficiaries take out. In 2008, federal annuitants and survivors who participated in defined-benefit plans received benefits of nearly 20 times the amount current employees paid in. The data from this snapshot are consistent with the path of federal defined-benefit plans, which rely heavily on government and agency contributions for the bulk of their funding.
For every five cents that came into civilian federal defined-benefit pension plans in 2008, one dollar was paid out. Clearly, so great a gap has serious financial repercussions. In this case, since the employer is the federal government, American taxpayers are ultimately on the hook.
This explains why each year the fund which manages the defined-benefit components of the federal pension system, the Civilian Service and Retirement System and Disability Fund, receives massive transfers from the federal government (agencies, interest from federal Treasuries, as well as contributions from the general fund). As of FY 2008, the fund had an unfunded liability of $635 billion. According to the Congressional Research Service, this unfunded liability is projected to continue to increase until it peaks at $809 billion in 2030.
Whether it is part of a deal to extend the payroll-tax cut or something else, it is time to reform the system.
Just curious, does this account for the fact that Federal workers contribute to a defined contribution plan (the Federal Employees' Retirement System)? I am not disputing the post here, but would like to know how the FERS/Thrift Savings Plan figures in to these calculations.
For some reason, my Captcha says "the cat lady."
Reply to this commentLinkReport AbuseThis chart only looks at the defined benefit part of the retirement benefits. For older employees that's roughly 100 percent of their benefits. For younger retirees, it is roughly half of their benefits (in 2011 some $1,010 per month), the other half being SS benefits. In addition, for the younger retirees they get what their contribute to their 401K like plans.
Reply to this commentLinkReport AbuseAs a feddle gummint employee...shoot, I'm one of the few actual workers...I'll note not only that I'm All Right, Jack, but that this imbalance persists even after the reform in the early 1980s, closing off the Civil Service Retirement System program.
Putting Feds under Social Security, it scaled the defined benefit "back." Not too much, I don't suppose.
Cordially...
Reply to this commentLinkReport Abuse"The vast majority of full-time civilian federal workers receive roughly half of their retirement compensation through their defined-benefit pension plans (the rest comes from Social Security)."
That's incorrect. Under FERS-- in effect for nearing 30 years, covering most federal employees-- there are *three* components to federal civilian retirement: SS, the defined-benefit pension, and then the Thrift Savings Plan, analogous to the private sector 401K.
The numbers I've seen to make the defined benefit benefit healthy are as little as a 5% salary cut per worker. I wonder if those numbers are correct, but that's a very small price to pay for the benefit.
If, however, the defined benefit was eliminated entirely, the question then becomes whether anything replaces it (namely, are contribution ceilings for the TSP then raised accordingly?).
Anyway, as a federal employee with many years left to go before retirement, I'm not counting on the pension being there when I retire. That said, if the money I pay into that program simply evaporates, I believe I, and other covered employees, would be getting an unfair outcome. Far better to reform the pension now-- or eliminate it entirely-- allowing whatever "savings" are accrued to be redirected into our Thrift Savings Plans.
Reply to this commentLinkReport AbuseThe problem with public or private "defined benefit" pensions and benefits, as they have been constituted until recently, is that they are NEITHER capitalistic NOR socialistic. They are not capitalistic, in that they are not a return on (mandatory) investment. We agree on that, I presume? And, they are not socialistic, in that they are not based on the principle of "from each according to ability, to each according to need." (Whether or not you like socialism, I think we agree that its principle is violated.) Instead, "defined benefits" are, as others have rightly noted, a form of Ponzi Scheme, not a form of insurance or legitimate investment return
I have elsewhere noted that the "Greatest Generation" has been greatest only insofar as it milked the greatest amount of retirement benefits from the following generations, as well as real estate appreciation. Thus, it is no coincidence that a nearby luxury resort hotel, which served the big-spender middle class in the 1960s (not rich, but big-spender blue collar) serves the same people who are now elderly, but not the following generations, who cannot afford it.
A rational compromise would be to take the best of capitalism and socialism, and calculate retirement on a per-generation basis. That is, individuals would be classed into cohort groups based on a yearly rolling basis. Upon retirement, individuals could get benefits according to the accumulated input of the cohort (capitalism, not burdening the following generations), but distributed according to need (socialism).
This re-works retirement benefits into a form that is not too unlike actuarial accounting.
I would also propose that public and private sectors ALL contribute, and get benefits from, a common pool. No more separate public retirement systems! This would also encourage productive workers to move back and forth between public and private.
Reply to this commentLinkReport AbuseMs. de Rugy conveniently ignores the fact of a SS offeset which applies to the defined beneift feature of both the CSRA and FERS plans. There are many SS recepients whose benefits exceed those of a retired federal employee whose earned SS benefits have been reduced (or made non-existant) due to this offset. Federal employees, both active and retired, are the great whipping boy of those who apparently want to see federal service become the mockery they have always assumed it to be..
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