Retirement Readiness: Strengthening the Federal Pension System

1/25/2012

Federal Workforce, U.S. Postal Service and Labor Policy

Chairman Ross, Ranking Member Lynch, and members of the Subcommittee, thank you for this opportunity to provide testimony on behalf of the 150,000 federal employees represented by the National Treasury Employees Union (NTEU). NTEU is also proud to be part of the Federal-Postal Coalition, which is providing separate testimony at today’s hearing.

The federal employees represented by NTEU are dedicated, experienced and well educated individuals who diligently work to accomplish their agencies’ missions with declining resources. They are budget analysts overseeing multi-billion dollar budgets; physicians undertaking cutting edge research to cure deadly diseases; law enforcement officers guarding our borders, and scientists safeguarding our food and water supplies. They tend to be more experienced and have more years of education than private sector workers. Fully 51 percent have a college degree compared with an estimated 35 percent of private sector workers. Twenty percent have advanced degrees compared with 13 percent of private sector workers.

The size of the federal workforce has declined from one federal worker for every 78 U.S. residents in 1953 to one federal worker for every 147 residents in 2009. This fact alone shows just how much smarter and harder federal employees are working. Consider this – in 1995, the Internal Revenue Service (IRS) had a staff of 114,018 to administer our tax laws and process 205 million returns. Today, the IRS employs just over 94,000 and processes approximately 236 million much more complicated tax returns than it handled in 1995.

It serves no one to belittle the work of the federal workforce and ultimately, it is the public that loses when the federal government is unable to retain – or recruit the best employees. It is well past time that, as a nation, we understand and agree on that.

In late 2010, Congress enacted a federal pay freeze for 2011 and 2012. That pay freeze is estimated to reduce federal spending and the deficit by more than $60 billion over the next ten years. However, before other groups have even contributed a dime to deficit reduction efforts, some in Congress have returned to attack the federal pension system and attempt to squeeze an additional $65 billion in cuts from this middle class group of taxpayers.

In the 1980’s, Congress worked to reform and modernize the federal retirement program. Twenty-five years ago, the Federal Employees Retirement System (FERS) was created to replace the original Civil Service Retirement System (CSRS) and address its growing unfunded liability. FERS solved that problem, and, helped save the Social Security system, as well, at a critical juncture in its history. The retirement age, annuity calculation, cost of living adjustment formula and basic benefit formula are all less generous than the earlier CSRS retirement system. FERS is fully funded and financially sound with no unfunded liability. Today, FERS is frequently pointed to as a model by a diverse group of pension experts.

Most federal employees must work 30 years and reach 55 years of age before becoming eligible for an unreduced annuity. Members of Congress, who pay slightly more toward their retirement and receive a slightly higher pension, can retire after 20 years of service at the age of 50 with an unreduced annuity. In 2007, the average monthly annuity payment to workers who retired under the FERS system was $944 each month – less than $12,000 annually. It is also important to keep in mind that federal employees contribute 12% of their pay into all three parts of their retirement system to achieve a modest retirement income. This is not the hallmark of an overly generous retirement system. To listen to some critics of the FERS program, you would think that the program is opulent. It is not.

In announcing your hearing, Mr. Chairman, you indicated that you would seek to turn the federal pension program into a “cost-affordable defined contribution pension system”. It is difficult to see how this plan fits the title of this hearing. Study after study shows that defined contribution systems do not provide adequate retirement income. The testimony of Mr. Andrew Biggs of the American Enterprise Institute indicates that “(F)inancial advisors generally recommend a “replacement rate” of 70 to 80 percent of final earnings for an adequate retirement income.” He then suggests that a 32% replacement rate would be adequate for federal employees – less than half what he acknowledges financial advisors recommend.

Defined benefit plans are a good fit for a workforce that is highly educated and slightly older than the general workforce. It is an excellent tool to recruit and retain skilled workers. That is why so many governmental entities provide defined benefits. Rather than try to eliminate a well-designed system that meets the goals for which it was created, Congress should be considering the impact of millions of workers in defined contribution plans who will have to seek out federal poverty programs when they retire due to inadequate replacement income.

DEFICIT REDUCTION AND FEDERAL EMPLOYEES

In December, as part of the Payroll Tax Holiday Extension legislation, the House passed changes to the federal retirement program that were nothing less than draconian. Ironically, the Social Security payroll tax holiday these cuts were designed to fund would not even benefit nearly 600,000 federal employees in the CSRS retirement system who do not receive – or contribute to - Social Security.

Even more ironic is the fact that increasing employee pension contributions with no corresponding increase in benefits is little more than a tax – a selective tax on federal workers that is scored as revenue by CBO. It is difficult for me to explain to NTEU members why Members of Congress – especially those who took a pledge NOT to raise taxes - have suddenly carved out an exception for federal workers. Apparently the pledge not to raise taxes does not apply to those who serve our nation.

The leadership of the House of Representatives would rather cut the pay and retirement benefits of federal workers than increase taxes by even the smallest amount for the extremely wealthy. The theory behind the payroll tax holiday is that it puts money directly into the hands of working Americans and is an important and much-needed economic stimulus. However, freezing the pay and increasing the pension contributions for middle class federal workers across the country while continuing to protect the income and benefits of the most affluent members of our society defeats the purpose of the stimulus.

The House-passed Payroll Tax Extension Bill would increase pension contributions for current employees by .5% for three years with a permanent increase of 1.5% continuing after that. An average federal employee would see a decrease in take-home pay of from $400 to $1150 per year by 2015. In addition, ending the FERS supplement for those not subject to mandatory retirement would have a major impact on those employees retiring before age 62. For an average employee eligible to retire at 55, this would be a loss of over $65,000 over seven years.

For new hires with less than five years of previous service, the bill would base future federal employee pensions on the highest 5 years of service instead of the current highest 3 years and reduce the multiplier used to calculate annuities. This would reduce benefits for future federal retirees by more than 40 percent. When the provision to eliminate the FERS Social Security supplement is factored in, the FERS retirement system provides little benefit to future retirees. Lost in these proposals is any recognition that FERS was the result of an exhaustive two year study by both the House and the Senate to create a new retirement system whose costs and benefits to both the employee and the employer would be reasonable. It was carefully crafted to meet the objectives of federal employee compensation policy and to have a positive impact on the federal workforce. Changing the employee contribution without changing the benefits in a similar way is simply a tax on federal employees.

Earlier this year, Republicans on the House Committee on Oversight and Government Reform suggested similar proposals to the “Supercommittee”, as they worked on their ultimately unsuccessful plan to achieve further deficit reduction. Their proposals – to change the high three to high five, increase employee contributions to FERS by 6.2%, increase employee contributions to CSRS to 10%, eliminate the FERS pension for new hires, eliminate the FERS supplement for current employees, reduce the workforce by 10%, extend the pay freeze through 2015 and eliminate step increases – added up to $375 billion in cuts over ten years. It is sad that the Committee tasked with overseeing the federal workforce seems hell-bent on destroying it.

Coupled with the two year pay freeze, these changes in the federal pension system would result in real, permanent and meaningful declines in employee take home pay and standards of living. In addition, there is little question that these changes would be a major disincentive to those contemplating joining the federal workforce in the future.

The Council for Excellence in Government & Gallup Organization reports that 60 percent of the federal government’s General Schedule employees and up to 90 percent of the Senior Executive Service will be eligible to retire in the next ten years. Whether this Subcommittee wants to admit it or not, the federal government will need to be prepared to compete for the best and brightest college graduates to fill this retirement void. Fair pay, affordable health insurance and a solid retirement program will be required to compete for and retain the talent and experience the federal government will need.

DEFINED BENEFIT PENSIONS

Critics often complain that the FERS system is out of line with private sector retirement plans. Two points are relevant here: First, there are still millions of workers in the private sector with defined benefit plans. In addition, there is strong evidence that both public and private sector defined benefit plans strengthen national and local economies. The National Institute on Retirement Security (NIRS) produced figures for 2009 that indicate that defined benefit pensions had a total economic impact of $756 billion, supported more than 5.3 million American jobs, and supported more than $121.5 billion in annual federal, state and local tax revenue.

Late last year, the Congressional Budget Office released a survey of household wealth, showing that in the years from 1979 to 2007, the share of income for the top one percent in this country grew by 275% while the middle 60 percent of the country saw their income grow by just under 40%. This rapid rise in income for the top one percent reflects, at least in part, the very large pay and compensation increases for top corporate executives. One of the ways corporations found the money to increase the compensation for top executives was to end their defined benefit pension plans for the rest of their workers.

In recent testimony before the Senate Finance Committee, the Pension Rights Center urged Congress to come up with policies that will encourage more businesses to bring back some form of defined benefit plans. Significantly, two states, Nebraska and West Virginia, both switched their public pension funds from defined benefit plans to defined contribution plans but went back to defined benefit plans “when it was revealed that the benefits provided [in the defined contribution plans] did not allow employees to retire with an adequate income.” (See “The Staying Power of Pensions in the Public Sector” by Beth Almeida and Ilana Boivie, published in the California Public Employees Program Journal, May 2009.)

Second, the decline of defined benefit plans is thanks to a combination of the economy, clever accounting gimmicks by corporations to raid pension funds, and overzealous “benefit consultants” who find new ways to use the funds for anything other than actual pensions. Because of this, more and more employees in the public and private sector are facing attacks on one of the most critical factors in maintaining a middle class lifestyle in retirement – a pension. The pensions and 401(k) s that replaced defined benefit plans will simply not provide enough retirement income for middle class Americans. This is a serious problem that must be dealt with in the near future. A recent front page story in the Washington Post indicated that the shift to 401(k) plans “put the burden of saving and investing for retirement on workers, and many were unable to do so”.

The Center for Retirement Research at Boston College has calculated that the estimated national retirement income deficit facing households in this country is between $5.2 and $7.9 trillion. NIRS has stated that “Half of the retirees who plan on drawing down their savings in their 401(k) account over their life expectancy will run out of money”. Many will simply not retire at all. Sun Life Financial’s “Unretirement Index” released in October shows that the number of American workers who feel “very confident” that they will be able to pay for basic living expenses in retirement has plummeted since September 2010. In fact, the only group that feels confident about their retirement is the group that has a lifetime guaranteed annuity, the kind found in defined benefit plans.

CONCLUSION

Federal employees are well aware of the challenges our country faces -- and as I have detailed here – have already stepped up to the plate to do their part. In addition to the $60 billion over 10 years that federal employees have contributed as a result of the 2011 and 2012 federal pay freeze, they continue to help their agencies perform their missions successfully and efficiently, even in the face of continued threats of government shutdowns. Serving America has been and will continue to be job #1 for federal employees. We don’t need a second class civil service, and we can’t afford one either.