Dan Adcock, legislative director for the National Active and Retired Federal Employees Association, said he doesn't buy that unfunded liabilities are a sign the pension plans are unsustainable. (Staff file photo)
Two years of pay freezes and no pension adjustments haven't made federal employees and retirees very happy, but they have had one benefit: eliminating part of the retirement systems' unfunded liabilities.
The Federal Employees Retirement System at one point was predicted to be about $9.7 billion in the red. But the Office of Personnel Management on Oct. 7 told Federal Times that due to freezes in pay and cost-of-living adjustments, FERS has not only eliminated its unfunded liability, but is now projected to be in surplus for 2011. This is because the cost of future pension payments will be lower than originally expected.
The older Civil Service Retirement System is still carrying a massive unfunded liability, however, of $663 billion when fiscal 2010 began.
OPM refused multiple requests from Federal Times to release the amount of the FERS surplus it claimed at the beginning of fiscal 2011 and the updated unfunded liability for CSRS.
OPM said it cannot release those numbers until they are finalized and first submitted to other agencies, the White House and Congress.
Sens. Tom Coburn, R-Okla., and Richard Burr, R-N.C., in March introduced legislation that would eliminate the FERS defined benefit pension for future employees, citing FERS' unfunded liability as evidence that the government can't afford such plans.
Coburn spokeswoman Becky Bernhardt said the elimination of the FERS unfunded liability does not change the senator's opinion that the defined benefit pension should go away.
Coburn believes pensions are outdated and reinforce careerism, she said, and that the Thrift Savings Plan provides enough of a nest egg for a comfortable retirement.
Dan Adcock, legislative director for the National Active and Retired Federal Employees Association, said the evaporation of the FERS unfunded liability should help weaken the argument for killing federal pensions.
But Adcock said he doesn't buy that unfunded liabilities are a sign the pension plans are unsustainable.
"The overall concept of an unfunded liability is a red herring," Adcock said. "The trust fund can pay benefits as far as the eye can see."
How the system works
One thing is beyond dispute: There is a multibillion-dollar hole in the government's pension fund. But the unfunded liability is essentially a hangover from a problem that was supposed to be solved 25 years ago, when the government began to wind down CSRS.
The generous CSRS plan was designed with a major flaw: All of its future costs were not covered by the combination of agencies' contributions and employees' contributions, which amount to 14 percent of payroll. Those combined contributions, along with interest generated by the Treasury securities they are invested in, cover only the so-called "static normal cost" of the pension program — that is, the cost of future pensions that employees would receive if they got no future pay raises or pension COLAs. Since employees do get pay raises and retirees do get COLA adjustments, the amount being contributed into the fund falls way short of what is needed. That shortfall amounts to roughly 12 percent of payroll.
FERS was created in 1986, retroactive to 1984, and was supposed to be entirely self-funded.
From that point on, all new employees were placed on FERS; CSRS became a closed system. OPM estimates the last retiree or surviving dependent covered by CSRS will die around 2070, at which point the program will be shut down.
The government regularly re-examines its assumptions on interest rates, inflation, contribution rates and other trends affecting CSRS and FERS' future funds. Sometimes those long-term economic assumptions have to be revised, and if rates of return are underperforming, for example, the government can find a slight underfunding even in FERS.
OPM's actuaries in June 2010 dropped several assumed rates down after one of those re-examinations. As a result, OPM this month increased the amount agencies must contribute to FERS from 12.5 percent to 12.7 percent.
FERS has run surpluses before, such as in 2006, when it had a $5.3 billion surplus. Adcock said the government's slight adjustments to the plan's contribution rates, and slight variations in future economic assumptions, keep FERS' projected future liabilities varying slightly between surpluses and underfunding.
One positive for the government is that current FERS employees are contributing to the fund and not drawing benefits, Adcock said.
The government puts money contributed to the Civil Service Retirement and Disability Fund into bonds and securities backed by the Treasury Department. The interest from those investments also helps cover some of the cost, and is projected by OPM to continue building over at least the next several decades.
But that still leaves a large unfunded CSRS liability. The government covers the remainder of those costs with supplemental payments from Treasury, amortized over 30 years. Those payments are roughly $30 billion per year.
Safety in assets
OPM had almost $759 billion in retirement fund assets at the beginning of fiscal 2010, largely in the form of bonds and securities. The only way the government's $600 billion-plus unfunded liability would ever become a problem would be if all employees in the government were to retire at once and demand their pensions, or if the government were to go out of business, neither of which can happen.
"Private-sector businesses are required by law to prefund and set aside money for future benefits in case they go out of business," said John Palguta, vice president for policy at the Partnership for Public Service. "The expectation is that the government is not going to go out of business. I've literally had this conversation for several decades, and it's getting attention now because of the bad economy and huge deficits."
President Obama last month proposed increasing the amount all federal employees contribute to their pensions — by 0.4 percent each year for three years — and using the additional contributions to pay down the unfunded pension liability.
But there's no evidence to suggest federal pension plans are a financial bomb waiting to go off. That was defused when CSRS was ended, and since FERS is legally required to be fully funded, the unfunded liability will fade over time.
OPM and outside observers such as Adcock and Palguta aren't the only ones saying the system is sound. The Congressional Research Service has published several reports in recent years on federal pension programs, all of which concluded the programs are on solid ground.
"Although the civil service trust fund has an unfunded liability, it is not in danger of becoming insolvent," CRS said in a January report.
Audit firm KPMG has consistently given OPM's financial statements and retirement programs unqualified opinions, meaning they found no significant problems.
And the Government Accountability Office said in a 1995 report that CSRS' flaws, which resulted in the unfunded liability, were resolved with the creation of FERS.
"Provisions have been made for the retirement fund to always have sufficient budget authority to cover future benefit payments," former Assistant Comptroller General Johnny Finch said at a House hearing.