Tom McKinney, a 20-year NARFE member who has been raising the alarm about the unfunded liability in the Civil Service Retirement and Disability Fund, will be resigning from the organization. (Staff)
Retired Army auditor Tom McKinney thinks a financial bomb is ticking in the federal employee pension system. And after waging an unsuccessful six-year campaign to get the National Active and Retired Federal Employees Association to take on what he thinks is a serious problem, McKinney — a 20-year NARFE member and one of the group’s chapter presidents in Dunwoody, Ga. — on Wednesday announced his resignation from the organization.
Since 2007, McKinney has been raising the alarm about the unfunded liability in the Civil Service Retirement and Disability Fund, which hit $761.5 billion in fiscal 2011. That three-quarters of a trillion dollars is an astounding amount for the nation’s pension system to be underfunded, McKinney said in an interview with Federal Times, and the cost of current federal retirees will inevitably be borne by generations of taxpayers to come.
“The nation can’t afford this,” McKinney said. “All this is unsustainable. Future generations are going to have to be paying for this. We’re putting them in hock right now.”
NARFE said in a statement that it “continues to believe there is no basis to fear the government will not be able to continue to pay benefits for the foreseeable future.”
NARFE National President Joseph Beaudoin called McKinney “a loyal and dedicated NARFE member” and lauded his “outstanding work” in recruitment and other areas.
“Simply put, Tom McKinney and NARFE disagree on the need for additional oversight of the trust fund,” Beaudoin said in a written statement. “It is the position of NARFE, and that of the Congressional Research Service, that the trust fund is not now, nor will it ever be, insolvent. We are sad to lose Tom as a member, and wish him all the best in the future.”
The federal pension funds’ unfunded liability is almost entirely due to a major flaw in the design of the older, far more generous Civil Service Retirement System. 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 and retirees do get COLAs, the amount being contributed into the fund falls way short of what is needed. That shortfall amounts to roughly 12 percent of payroll.
The federal government has to contribute additional payments each year to cover the shortfall. Those payments reached a record $33.2 billion in fiscal 2010, but dropped to $31.3 billion in fiscal 2011.
The government paid $336.7 billion — labeled “other government contributions” in its annual reports on the pension fund — to cover CSRS’ shortfall between 2000 and 2011.
The Congressional Research Service said in a 2011 report that despite the unfunded liability, the Office of Personnel Management projects the balance of the federal pension fund will continue to grow through at least 2080, and will at that point hold assets equal to more than four times the government payroll and 19 times total annual benefits. Based on that projection, CRS said the trust fund is not in danger of becoming insolvent.
Audit firm KPMG has consistently given OPM’s financial statements and retirement programs unqualified opinions, meaning they found no significant problems.
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 and CSRS became a closed system.
But even FERS has had its share of deficits. In fiscal 2010, FERS held a projected $12.2 billion surplus, but one year later, it had a $20.1 billion unfunded liability. OPM said in February that was primarily because interest rates have dropped, and as a result OPM lowered the interest rate it assumes will be in place in the future by 0.5 percentage points.
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. In fiscal 2011, the government hiked the amount it contributes to FERS pensions from 11.2 percent to 11.7 percent, and in October 2012, increased it further to 11.9 percent.
Sen. Tom Coburn, R-Okla., a vocal critic of the federal pension system, is concerned that unfunded FERS liabilities could force the government to increase its contribution rate further.
The total unfunded liability of the federal government’s pension systems grew by $139 billion in 2011 to hit $761.5 billion. CSRS’ unfunded liability in 2011 was $741.4 billion.
McKinney, who worked for the Army for 30 years as an auditor, said he first grew concerned about the federal pension fund’s fiscal health when he attended a NARFE seminar on it in 2007 and realized the government was paying out more than it was bringing in.
“I was told, ‘Don’t worry about it, it’s a paper entry,’ ” McKinney said. “As an auditor, my flag went up. I leaned over to my wife and said, ‘Something’s wrong.’ ”
McKinney began requesting budget documents from OPM and realized the government was subsidizing the pension fund through those “other government contributions.” He concluded that federal employees are not contributing enough to cover the costs of their pensions.
After unsuccessfully running for national president of NARFE in 2008, McKinney said he continued to push NARFE leadership to take on the issue of pension funding. He said the final straw came in March, when NARFE’s national executive board decided not to change its policy statements to support an overhaul of the federal pension system to make it more financially sound.
McKinney said he never felt pressure from NARFE to stop his campaign, and said he still counts Beaudoin as a friend. But he said he could no longer be part of an organization that ignores what he thinks is a serious budgetary problem. He will officially resign from NARFE and step down as chapter president May 4, after NARFE’s Georgia convention concludes.
McKinney, a CSRS retiree who draws a pension of nearly $70,000, said he and other federal retirees are going to have to take some tough medicine to right the pension funds’ finances. He said that retirees — and he includes himself — should take a “clawback,” or a permanent pension reduction, of 5 percent to 10 percent.
“I know that would be hard to take, but we didn’t really earn what we are earning,” McKinney said.
Active federal employees may need to increase their pension contributions, he said, and retirees may need to accept a lower method of determining COLAs known as the chained Consumer Price Index. And McKinney thinks the government needs to set up a commission to study the compensation of federal employees, which he said he would be a part of.
Newly hired federal employees’ pension contributions have already increased to 3.1 percent. President Obama has proposed increasing current feds’ contributions by 1.2 percentage points to cut the unfunded liability, and House Republicans have proposed larger increases.
McKinney said he has had reservations about airing these concerns, especially at a time when federal employees are facing furloughs and pay freezes. But it’s something that can’t be ignored, he said.
“It’s going to bring a lot of heat down on federal employees,” McKinney said. But “I have a problem with us milking the taxpayer. After American taxpayers paid for our salaries, now that we’ve retired, they’re still having to pay for our pension. It’s not right.”