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National Active and Retired Federal Employees

Association (NARFE) Budget Cut Threats

in the 112th Congress(2011-2012)

ByDan Adcock

Legislative Director

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Budget Threats

Fiscal Commission Recommendations

Threats Beyond the Commission

Budget Enforcement

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Budget Threats

“This is an extraordinary time that will affect us for the balance of our careers.”John RotherExecutive Vice President of Policy, Strategy and International AffairsAARPJanuary 2011

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Fiscal Commission: December 2010 Reported 45 Proposals 11 of 18 Members Voted for the Report 14 Votes Required Immediate Action Proposals Receiving Serious Consideration in 112th

Congress (2011-2012)

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Fiscal Commission Recommendations

Create “Federal Workforce Entitlement Taskforce” Recommend to Congress to $70 billion in cuts to:

federal civilian and military retirement benefits

Examples: Increase Employee Contributions to CSRDF…….$51 billion Defer CSRS & Military COLAs to age 62…...........$17 billion Annuity Based on Highest Five Years of Salary…..$5 billion

Total……………………………………………$73 billion

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Lower COLAs: “Chained Consumer Price Index for All Urban

Consumers” “Chained CPI” Use C-CPI-U instead of CPI for Urban Wage

Earners and Clerical Workers (CPI-W) CPI-W to Calculate COLAs:

Social Security Federal Civilian Annuities Military Retirement Pay

Supporters Say:More Accurately Reflects “Substitution Effect”

Buying Chicken instead of Beef

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Lower COLAs: C-CPI-U

Opponents (Including NARFE) Say:Current CPI-W

Should reflect higher health care costs paid by elderly

Instead, C-CPI-U would further erode inflation protection.

Effect on benefits:Lowered by 3 percent after 10 years.

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12-Month Percentage Change for CPI-W (Current) & C-CPI-U (Proposed): 2000-2008

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2000 2001 2002 2003 2004 2005 2006 2007 2008

CPI-W

C-CPI-U

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Highest 5 Years of Salary

Current Annuity Calculation Formula:Accrual Rate x highest 3 years of salary x

years of service = Annuity Proposed Formula

Accrual Rate x highest 5 years of salary x years of service = Annuity

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Highest 5 Years of Salary

Effect of Proposal on Future Retirees:CSRS annuity reduced by an average of:

$1,424 in 2010 $7,148 over five years.

FERS annuity reduced by an average of: $462 in 2010 $2,322 over five years.

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Increase Employee Contributions to CSRDF Fiscal Commission

“Adjust the ratio of employer/employee contributions to CSRDF to equalize contributions.”

Translation:Make employees pay half of annuity cost.

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Increase Employee Contributions to CSRDF CSRS

Current Employee Share: 7% of Payroll

Full Normal Cost: 25.1 percent

Presumed Proposal: Increase Employee

Contribution to 12.5 % of payroll.

FERS* Current Employee

Share: 0.8% of Payroll

Full Normal Cost: 11.5 percent

Presumed Proposal: Increase Employee

Contribution to 6.5 % of payroll.

*FERS employees pay 6.2 percent of their salary to Social Security.

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Increase Employee Contributions to CSRDF Effect of a significant pay cut

On top of 2-year pay freeze Added contribution would not increase

annuity Most medium/large private employers

have not required their workers to make any contributions toward their defined-benefit pensions.

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Defer Future Retiree CSRS COLA

Defer CSRS COLAs until age 62. Instead:

One-time, catch-up COLA at age 62 to increase

Forgo catch-up COLA if the annuitant dies before age 62.

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Health Care

Index Gov’t Share of FEHBP PremiumsCurrent law:

Average Gov’t Share: 71% Average Enrollee Share: 29%

$10 a month rate hike example: Gov’t Pays: $7.10 Enrollee Pays: $2.90

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Index Gov’t Share of FEHBP Under proposal:

Government Share capped at: Percentage increase in Gross Domestic Product +

1% FEHBP Premiums Estimated to Outpace this Index Enrollees Pay $3,200 More Over Five Years Every Year FEHBP Premiums > GDP+1%

Enrollee premium Share GrowsGovernment Share ShrinksPremiums Become Increasingly Unaffordable

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FEHBP Enrollee Share: Current Law vs. Indexing Proposal

FEHBP Index Proposal

$4,000.0$4,500.0$5,000.0$5,500.0$6,000.0$6,500.0$7,000.0$7,500.0$8,000.0

2012 2013 2014 2015 2016

Years

En

roll

ee

Sh

are

Indexing Proposal Current Law

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FEHBP Index Proposal

20.0%21.0%22.0%23.0%24.0%25.0%26.0%27.0%28.0%29.0%30.0%31.0%32.0%33.0%34.0%35.0%36.0%37.0%38.0%39.0%40.0%

2012 2013 2014 2015 2016

Years

% In

crea

se

Indexing Proposal Current Law

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FEHBP Indexing Proposal

Brain Child of Rep. Paul Ryan

Budget Committee Chair

Alice Rivlin Clinton

Administration OMB Director

FEHBP Guinea Pig: Medicare Part B

Indexing Fixed subsidy

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Threats Beyond Fiscal Commission Proposals FECA Reform:

Future Participants moved from:Workers Comp to RetirementSignificant Cut in BenefitsAnnuity Amount Calculation Unfair

Retirement Annuity COLA Cuts$50 billion in cuts during 1980s and 1990s

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Threats Beyond Fiscal Commission Proposals Double TSP Contributions to Receive Full Match

10% of salary contribution for 5% match Future Retirees Pay Higher Share of FEHBP

premiumsLess than 20 years of service pays greater

sharePay 2% more for every year less than 20

years

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Budget Enforcement Proposals Majority Leader Eric Cantor: Deputy Majority Whip Kevin Brady:

Use Debt Limit to Get Spending CapSimilar to Gramm-Rudman-Hollings Automatic Spending Cuts:

when the deficit exceeded fixed targets. 

1985 COLA Lost to Gramm-Rudman-Hollings

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Budget Enforcement Proposals S.J. RES. 3, Balanced Budget Amendment

Introduced by Sen. Orrin Hatch Approval Required

2/3 of House & Senate ¾ of States Past Attempt: 1997

Passed HouseOne Vote Short in Senate

Spending Could Not Exceed Revenue Spending Capped at 20% of Gross Domestic Product

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Budget Cut ThreatsQUESTIONS AND ANSWERS