The federal pension system is in the spotlight thanks to the Postal Service's financial troubles. The system will likely fade back into the background soon enough, but for the moment it's interesting to take a peek behind the curtain and get a glimpse of how the system that will finance your retirement ticks.
The Postal Service's financial picture isn't pretty. It's stuck with $11 billion in debt and a tough outlook for future business. Not surprisingly, its managers are looking under every rock to cut costs. General Accounting Office analysts are helping postal managers out; they suggested a look at pension costs under the Civil Service Retirement System.
CSRS covers federal employees and postal workers hired before 1984. After that, workers were generally covered by the Federal Employees Retirement System. A key difference between the two systems is how they are funded.
Under CSRS, workers pay 7 percent of their paychecks into the government's main pension fund. Agencies match those 7 percent payments. Under FERS, employees pay only 0.8 percent of their paychecks into the pension fund, while agencies put in 10.7 percent of employees' basic pay. That higher amount of agency contributions reflects the fact that pension costs increase over time because of factors such as pay raises and cost-of-living increases.
Because CSRS doesn't take these factors into account, the amount of money agencies have put away for future retirees isn't enough to cover what they actually will be owed.
When Congress overhauled the Postal Service in 1971 so that it would work more like a business, it ordered the agency to make special payments each year to cover the added costs to the pension fund of pay raises for postal workers and cost-of-living increases for postal retirees. Congress set some very specific formulas for those payments. The Postal Service was on tap to pay more than $4 billion toward the fund next year alone.
So the GAO analysts asked Office of Personnel Management numbers crunchers (who keep track of the government pension fund) to figure out how much more the Postal Service owed to cover the pension costs of all CSRS enrollees. Actuaries can estimate how long CSRS enrollees and their survivors will collect pension benefits.
The OPM folks figured out that the Postal Service and its employees had paid $152.1 billion into the pension fund for CSRS enrollees over the past few decades. Then OPM figured out that the total cost of CSRS enrollees' and survivors' pensions will be $172.6 billion. That leaves a remainder of $20.5 billion. Then OPM figured out how much more the Postal Service would contribute under the current formulas set by Congress. That turned out to be $91.5 billion, about $71 billion more than the amount the Postal Service actually needed to contribute to the pension fund to cover all the future costs of CSRS enrollees' pensions.
So the Postal Service and OPM have calculated new formulas that, pending congressional approval, would save the Postal Service $71 billion over the next several decades-more than $2 billion next year alone.
What About Me?
No other federal agency pays those added costs to the pension fund the way the Postal Service does. Because of that, the pension fund is short about $500 billion.
The Bush administration has proposed to set up annual payments from the Treasury into the pension fund for the next 40 years to make up the $500 billion difference. The administration has also proposed that agencies put additional money into the pension fund out of their own budgets, rather than out of another central fund that covers the rising costs of pension benefits. The administration wants all agencies, like the Postal Service to at least account for the full cost of employees' pensions.
But this accounting issue has almost no meaning for federal employees and postal workers themselves. For one thing, all of the proposals and accounting plans assume that employees under CSRS will continue to put 7 percent of their paychecks into the pension fund each pay period. The plans also assume that employees will receive the benefits they expect to receive today.
Another Comparison
While the Bush administration wants to make more federal agencies recognize their full retirement costs, just as the Postal Service does, another agency offers an interesting pension comparison: the Federal Reserve.
The Federal Reserve has run its own pension system for several decades. It collected money from employees' paychecks and contributed agency money to a pension fund for many years. The main difference with the CSRS system is that the Federal Reserve put its money into an account that invests outside the government.
In 1986, the board that runs the pension fund informed the Federal Reserve that most employees and the Reserve itself would no longer have to contribute money to the fund. It had enough assets to cover all future pension benefits. The Reserve and its employees continue to pay nothing into the pension fund each year.