Charles Chieppo is a research fellow at the Ash Center of the Harvard Kennedy School.E-mail: Charlie_Chieppo@hks.harvard.edu
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 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.
The original version of this post mistakenly said the Federal Employees Retirement System has a $5.7 trillion unfunded liability. In fact, the analysis cited in the post found that it is all federal retirement programs combined, including civilian and military pensions and health care, that have the $5.7 trillion liability. This updated post corrects that error.