Federal Pensions: Budget Solution
A cap on COLAs would bring the US back from the brink
TREASURY Secretary Robert Rubin - in an attempt to avoid surpassing the debt limit until Congress and the president work out a budget compromise - is doing some unusual financial footwork. His moves are mainly a series of bookkeeping entries by which the government borrows from civil service retirement funds and promises to repay the amount, with interest, at some later date. By doing this, Mr. Rubin will be able to continue financing the operations of the federal government.
A more permanent solution to the budget crisis lies in the retirement system from which Rubin is ''borrowing'' the money to run the government. It may come as a surprise to some that the federal pension system, currently the nation's fourth largest entitlement, is ''rich'' enough to give its parent, the federal government itself, a loan. Consider, however, that this system has amassed $1.8 trillion in mostly unfunded gross liabilities. This year alone, federal pension outlays totalled $65 billion.
The real surprise is that while the federal government is teetering on the brink of default, the excesses of the federal pension system continue, unabated by the budget impasse. The solution is staring both Congress and the administration in the face, but they are too busy lobbing rhetorical bombs at one another to notice it. Meanwhile, the country is going further into debt, paying out pension benefits as they come due and committing itself to repaying the money ''borrowed'' from the trust fund - plus interest.
Reforming the pension system of retired civil and military workers should be the centerpiece of a budget compromise. Instead of accusing each other of destroying Medicare and arguing over whether the budget should be balanced in seven or nine years, Congress and the president should focus on the excessive cost-of-living adjustments (COLAs) granted on federal pensions. That could go a long way toward solving the budget crisis, demonstrating to world markets that the US can put its fiscal house in order and signaling voters that Congress and the president know the budget debate is about not just politics, but the financial future of the country.
I was in the Congress when federal pensions were first indexed in 1963. The legislation was an attempt to remove politics from the yearly debates over the amount of ad hoc increases. Congress voted to put federal pensions on an automatic escalator - they were to be increased by the same percentage as the official inflation indicator, the Consumer Price Index (CPI).
Congress never stopped to think that many federal retirees collect more than one pension (i.e., Social Security, a civil service pension, or a veteran's pension, to name a few) and so would get more than one COLA. In fact, three-fourths of civil service retirees and all military retirees get more than one federal pension. Nor did Congress consider the more than 100,000 federal retirees who get single pensions larger than that of the average retired congressman, and, in turn, get excessively large COLAs.
As the years go by and the indexed pensions compound repeatedly, most federal pensioners are being compensated not for the cost of living, but for the cost of living it up. Take my case, for example. I retired from 20 years of congressional and civil service in 1973. My pension then was $1,560 a month. Today, it is $6,200 a month. I retired from over 30 years in the military in 1976 and began collecting a pension of $550 a month. Now, it is $1,435 a month. When I was old enough to really retire in 1980, I drew a Social Security benefit of $620 a month. It has reached $1,229 a month. When my wife, a civil service retiree herself, passed away in 1989, I began collecting a widower's annuity of $620 a month. That benefit is currently $808 a month. All told, I am now receiving $9,672 a month in federal pensions. Next year, every dollar of it will increase by another 2.6 percent.
But we federal retirees do not need or deserve COLAs on limitless amounts of pension income to keep up with the cost of living. After all, I am only one person - with only one ''cost of living.'' COLAs ought to be granted only on that portion of federal pension income (from any and all federal pensions) equivalent to the maximum Social Security benefit, currently $1,199 per month for an individual age 65 and $1,799 for a qualified couple. Doing so would eventually cut the federal pension bill by about 50 percent. Furthermore, it would bring equity to a system that makes well-to-do federal pensioners richer at taxpayers' expense.
In 1978, I participated in a conference under the auspices of the Aspen Institute. Participants included John Macy, former chairman of the Civil Service Commission, Dick Bolling, former House Democratic leader, and Elmer Staats, former comptroller general. Our study of the issue revealed that early retirement plus full indexation were driving the country into bankruptcy.
A cap on COLAs is a requisite step in reining in our national arrears. Congress and the president ought to wake up to the crisis of federal pension COLAs and the imposition it places on the budget and future generations of Americans. If they had done so two decades ago, at about the time of our conference, the current budget crisis would probably never have taken place. And if they do so now, our impending national bankruptcy can at least be postponed, and hopefully averted.