From left, Sens. Richard Burr, R-N.C., and Tom Coburn, R-Okla., are the backers of a 2011 bill that would end the Federal Employees Retirement System’s defined benefit pension for new employees beginning in 2013. The bill did not become law, but Burr's office said he plans to reintroduce that bill. (Getty Images photos)
The unfunded liability of the federal government’s pension systems exploded in fiscal 2011 to $761.5 billion dollars — an increase of $139 billion from its fiscal 2010 deficit.
The Civil Service Retirement System once again accounted for the bulk of that unfunded liability. Its deficit grew from $634.5 billion in 2010 to $741.4 billion in 2011, according to the Office of Personnel Management’s Civil Service Retirement and Disability Fund annual report for fiscal 2012. OPM released the report at Federal Times’ request.
The Federal Employees Retirement System slipped back into the red. FERS held a projected $12.2 billion surplus at the end of fiscal 2010 — its first in four years. But one year later, FERS reported a $20.1 billion unfunded liability.
OPM said the increase in the unfunded liability was primarily due to a revision in its actuarial assumptions. Last July, OPM’s actuaries dropped its assumed future interest rate by 0.5 percentage points.
OPM said that the 24 percent increase in federal retirements in 2011 — which some experts say was the beginning of the long-awaited retirement wave — had some effect on the unfunded liability, but “did not significantly contribute” to the increase.
Sen. Tom Coburn, R-Okla., said that OPM’s latest report “raises further questions about how the federal government plans to pay for their employees’ retirement.”
“It is clear Congress should take action to ensure federal employee retirement costs are not being funded at the expense of the taxpayers or by simply borrowing more money,” Coburn said. “Moreover, we must conduct proper oversight of OPM to ensure proper accounting standards are being used to project future costs and liabilities.”
Audit firm KPMG has consistently given OPM’s financial statements and retirement programs unqualified opinions, meaning they found no significant problems.
The National Active and Retired Federal Employees Association rejects assertions that unfunded liabilities are a sign that pension plans are unsustainable, as some Republican lawmakers have said.
The unfunded liability “is an actuarial estimate [and] has no effect on the government’s budget or current outlays, and is not a measure of the government’s ability to pay retirement benefits in the future,” NARFE said.
Coburn and Sen. Richard Burr, R-N.C., in 2011 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. That bill did not become law, but Burr’s office said he plans to reintroduce that bill.
Much of the multibillion-dollar deficit in the government’s pension fund is left over from a major flaw when Congress designed the generous CSRS pension.
All of CSRS’ 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 cost-of-living adjustments. Since employees do get pay raises — at least under normal circumstances — and retirees do get COLA adjustments, the amount being contributed into the fund falls way short of what is needed.
This means the government has to contribute additional payments each year to cover that shortfall. Those payments reached a record $33.2 billion in fiscal 2010, but dropped to $31.3 billion in fiscal 2011.
OPM created FERS in the mid-1980s to fix the CSRS funding problem and began to wind down CSRS.
FERS requires federal employees to contribute 0.8 percent of their paychecks toward their pensions, and requires the government to cover the rest of the cost to avoid the accumulation of unfunded liabilities. That is why the government in fiscal 2011 hiked the amount it contributes to FERS pensions from 11.2 percent to 11.7 percent, and in October increased it further to 11.9 percent.
Coburn is concerned that unfunded FERS liabilities could force the government to increase its contribution rate further.
President Obama has proposed increasing the amount all federal employees contribute to their pensions by 1.2 percentage points and using the additional contributions to pay down the unfunded pension liability.