The Most Unfair Noncut of All: Federal Pensions
The pension lobby's arguments are squishy, but so far Congress has chosen to take them at face value
WHILE the rest of America takes cuts in federal programs - in everything from aid for the poor and jobless to Medicare - why are federal civilian and military pensions exempt from serious cost-cutting reform?
Federal pensions would have been reformed long ago if voters had all the facts. But the politics of federal pensions has long been dominated by special interests. Federal pensioners are highly organized, affluent, and articulate. The taxpayers who pay the pensions are unorganized and generally mute.
In practically every study so far - the Quadrennial Commission Report to the Grace Commission, studies from the Brookings Institution, Harvard University, and the American Enterprise Institute - outside experts conclude that federal pensions greatly exceed what's generally available to the same types of employees in the private sector. But every time someone suggests making ''comparability'' a fact and not just a slogan, the special interests and their allies in government go to work - using tactics of denial, diversion, obfuscation, and delay.
The most recent use of these tactics was during the Kerrey-Danforth Entitlements Commission hearings last fall. Several commission members said it would be hypocritical to recommend long-term reductions in health and retirement benefits for most Americans without doing something equally serious about federal pensions. They cited findings that federal pensions are excessive by any reasonable standard. Immediately, the Federal Government Service Task Force went to work on a rebuttal. It requested that Congressional Research Service assess these findings. CRS obligingly echoed the pension lobby line.
This line, obtained by teasing the data and papering over simple facts, is basically that federal pensions are not much more generous than private pensions; and even if they are, it's for a good reason (maybe federal workers are underpaid or private pensions are too stingy); and even if that's not really true, unfunded liabilities are a nonproblem; and even if that's not really true, pension outlays aren't big enough or growing fast enough to really concern the voting public, and so on.
None of the above are true. Let's begin with the generosity of pension benefits. In 1992, the average private pension was $599 per month - versus $1,205 for federal military retirees and $1,423 for federal civilian retirees. Thus, the typical federal benefit is 2 to 2.4 times larger than the typical private benefit.
You might object that this comparison doesn't include Social Security, in which most private retirees have participated but most federal civilian retirees have not. It turns out, however, that roughly three-quarters of federal retirees qualify for Social Security anyway - because of covered employment before, during, or after their federal work tenure. So even if you include Social Security in this comparison the census data indicate that the total benefits flowing to typical federal civilian retirees are still much larger - 1.6 times larger - than those reaching typical private pensioners. For military pensions, this is a non-issue, since military personnel are covered by Social Security while in the service.
Examine another dimension of federal generosity: earlier retirement. In 1993, on average, people who retired on Social Security did so at age 64, on private-sector pensions at age 62, and on federal civilian pensions at age 58. True, 1993 was a low year for federal retirement, but in earlier years the age has seldom been above 59. So at the very least, we're talking about a three-year gap in retirement ages. And in 1993 we're talking about a four-to-six-year gap in retirement ages.
Because of the time-value of money, the extra retirement years are enormously costly to taxpayers - adding around 50 percent to the present value of the benefit. And remember, this advantage is compounded on top of more generous monthly benefits.
Notice that we haven't dealt with the average age of military retirement. That's because it's way off the chart. Right now the average age of military retirement is 42 for enlistees and 46 for officers. This age is so low that the typical military pensioner spends more years collecting benefits (35) than earning them in the service (22). It quadruples the present-value of the benefit relative to what it would be if military personnel retired at the same age as private pensioners.
Yet another component of the federal pension advantage is COLAs. All federal pension benefits to all persons age 62 and over receive annual cost of living adjustments linked to the Consumer Price Index. (Only 5 percent of today's private pension participants are in plans that feature any sort of automatic COLA.)
The typical private pensioner must anticipate that his or her pension will lose around 30 percent of its purchasing power during retirement. The typical federal pensioner loses little or nothing.
Now the fourth dimension of federal generosity - the likelihood that you'll ever get a pension at all. If you're a former civil servant you're nearly 2.5 times more likely to be getting a pension than if you've only worked in the private sector. Some people might say: Well, private employers are too stingy; they ought to be required to offer pensions; they ought to offer better vesting and delayed retirement provisions. Maybe so. But no one doubts that this would result in lower take-home wages for private workers. In short, it involves a trade-off - the sort of trade-off that the federal pension lobby would reject out of hand.
However lopsided these comparisons appear, so many moving parts are involved that someone will always come up and say: But you didn't consider this or that. You didn't consider that federal employees pay into their own plans, or that they generally have higher salaries and ought to be getting higher pensions.
Clearly, what we need is some total measure of employer generosity when it comes to pensions. Well, compensation experts have developed such a measure. It is called ''normal cost.'' Normal cost is the flat percentage of pay that someone would have to contribute, throughout an employee's work tenure, to cover the cost of a lifetime pension benefit. ''Employer cost'' is the share of normal cost borne by the employer alone.
Keeping this in mind, take a look at the graph labeled ''What Employers Pay In.'' The lowest bar shows the employer cost of the typical private pension, including Social Security. This runs about 12.2 percent of payroll - 6 percent for the pension and 6.2 percent for Social Security. Now look at the CSRS (civil service) pension - at 21.3 percent of payroll, or about 75 percent more. We don't show the FERS (federal employees) pension here, but it's nearly the same. And finally look at military pensions. Including Social Security, it towers up to 42.6 percent, or about 250 percent more than the private package.
And don't forget: Our private-sector example only includes those who do receive pensions - not the half of the private-sector labor force who will not receive pensions, who save for their retirement out of their own pocket, and who include many of the same types of workers - from chefs to computer programmers - that are hired by the federal government.
This comparison, because it's measured as a percent of payroll, takes into account the higher average salaries of federal workers. The federal pension lobby says that they are compensated for sub-par salaries. But today, the average full-time equivalent salary of a federal worker is fully one-third higher than the private-sector average.
Sometimes the pension lobby turns the argument around: Despite higher salaries, they say, a lot of federal pensioners are hard up and have a difficult time making ends meet. This argument won't fly either. In 1992, only 4 percent of families with military pensions and 5 percent with civilian pensions had total household incomes of less than $15,000. For all US families, the share was 17 percent. For all families receiving Social Security, the share was 22 percent. (The graph ''How Retirees Compare,'' shows other related figures.)
Late last year, a dire warning was issued by the Pension Benefit Guarantee Corporation. The reason? Irresponsible private firms, they declared, carried $71 billion worth of unfunded pension obligations. This is a system that covers about 28 million workers. But what no one in Washington likes to talk about is the fact that federal pensions, which cover only 3 million workers, today carry an unfunded liability of $1.1 trillion. That's an unfunded liability that's 150 times greater, per worker covered, than in the private sector. And what makes this worse is that another $400 billion in federal
pension liabilities that are supposedly ''funded'' are ''funded'' in name only. It's just an accounting entry. The federal pension trust funds contain nothing but Treasury debt that taxpayers must ultimately redeem just as surely as if the liability had remained with the pension system.
When a private company incurs these kinds of liabilities, federal regulation requires that they be amortized over 30 years in the company's annual earnings statements. But if Congress had to follow the same standards, instead of the ''official'' deficit number of $255 billion in fiscal year 1993, we would have been looking at a true number of $345 billion - $90 billion higher.
The Congressional Research Service reassures us that we don't have to worry about these unfunded liabilities because the federal government will never go out of business. They've got it exactly backward. It's precisely because it will never go out of business - and because future taxpayers can always be compelled to ante up - that we must begin to take them into account. In short, if these pension promises are regarded as truly unbreakable - which is what the pension lobby keeps arguing - then proper accounting should regard them as equivalent to the national debt.
AS a representative of the Congressional Budget Office recently told a Senate subcommittee: ''Seen in perspective ... that burden does not appear unmanageable.'' True enough. Few programs, considered in isolation, can be considered entirely unmanageable. But when you're talking about outlays that today amount to $66 billion (nearly four times what the federal government spends on Aid to Families with Dependent Children) and that are expected to grow another $17 billion over the next five years, they're definitely part of the big picture.
The recent Joint Budget Resolution suggested minor tinkering with federal pensions that will amount to at most 2 percent of total benefits paid out until the year 2002. We think something more fundamental is required. If Congress is to ask the public as a whole to make real sacrifices, it cannot afford to leave federal pensions virtually off the table. Across-the-board sacrifice is fair. It is fiscally necessary. And it is a political necessity.