Should the Costs of Federal Employee Pensions Be Calculated Differently?

A change in methodology could make it easier to understand the long-term impact of proposed reforms to retirement benefits, but would introduce greater uncertainty, CBO says.

The Congressional Budget Office said last week that changing how the agency scores the cost of federal employee pensions could provide lawmakers with better estimates when compared to other retirement policy options, but it also would rely on more uncertain economic projections.

CBO Director Keith Hall submitted a written follow-up to testimony he gave to the Senate Budget Committee last month as part of a hearing on the cost of government, stemming in part from CBO’s recent report comparing compensation of federal workers with their counterparts in the private sector, which spurred controversy among lawmakers, unions and employee groups.

Specifically, Chairman Mike Enzi, R-Wyo., asked if changing the way in which nonpartisan budget analysts score pension programs from a cash flow basis—as is currently required by law—to an accrual basis could make it easier to compare the cost of defined benefit programs with defined contribution plans.

Under the cash flow method of accounting, CBO records revenues when they are received, and it records expenses when the government pays out annuities. Under accrual-based scoring, the CBO would estimate future payments to retirees up front, as employees earn benefits over the course of their careers.

Hall wrote that such a change could make it easier for lawmakers to understand the long-term impact of proposed changes.

Under accrual scoring, "all forms of current and deferred compensation would be measured on a consistent basis, making the trade-offs between defined benefit pension plans and defined contribution pension plans clearer to policy makers,” he wrote. “By summarizing long-term budgetary effects up front, an accrual measure would give policymakers a more accurate sense of whether proposed changes to deferred compensation would increase or decrease the deficit.”

Additionally, Hall said estimates based on long-term accruals would make it easier for Congress to make changes to retirement programs for future employees without negatively affecting current feds and retirees.

“The cost of providing defined benefit annuities in the future would be recognized as employees earned those benefits,” he wrote. “By contrast, cash-based measures do not recognize such costs until after workers leave federal service, making it difficult to implement new policies that would change those costs without altering prior commitments.”

But on the other hand, a new scoring measure for pension programs could be less precise, as well as require much greater work to frequently redo estimates as economic conditions change.

“Accrual accounting also depends on decades of projections for future wages and inflation—which are highly uncertain,” Hall wrote. “The farther into the future such projections extend, the greater the uncertainty.”