January 16, 2012

Federal Versus Private Defined Benefit Pension Funding

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This week, Mercatus Center Senior Research Fellow Veronique de Rugy uses data from the Office of Personnel Management (via the Congressional Research Service) and the Census Bureau’s 2012 Statistical Abstract to compare federal and private defined benefit pension systems. Specifically, this chart compares the amount employees pay in to their defined benefit pensions relative to the amount that beneficiaries take out. In 2008, federal annuitants and survivors who participated in defined benefit plans received benefits nearly 2 times the amount current employees paid in. The data from this snapshot are consistent with the path of federal defined benefit plans, which rely heavily on government and agency contributions for the bulk of their funding.

For every 35 cents that came into civilian federal defined benefit pension plans in 2008, one dollar was paid out. Clearly, such a large gap has serious financial repercussions. Since the employer is the federal government, American taxpayers are ultimately on the hook.   

The vast majority of full-time civilian federal workers receive defined benefit pension plans as part of their compensation. Defined benefit plans promise workers a guaranteed stream of income through retirement, based on earnings and time served, not actual savings toward retirement. As employers in the private sector already know from high profile defaults such as LTV Steel’s, the promise of guaranteed income based only on earnings and time served is a recipe for fiscal disaster. While nearly 100% of full-time civilian federal employees receive some form of defined benefit pension, only 22% of pensioned workers in the private sector are afforded this benefit.

That’s why each year the Civilian Service and Retirement System and Disability Fund, the fund which manages the defined benefit components of the federal pension system, receives massive transfers from the federal government. This means that taxpayer funds pay for the retirement benefits of federal employees, and not for other things. As of FY2008, the fund had an unfunded liability of $635 billion. According to the Congressional Research Service, this unfunded liability is projected to continue to increase, peaking at $809 billion in 2030.