National Active and Retired Federal Employees Association NARFE

National Active and Retired Federal Employees Association (NARFE) Budget Cut Threats in the 112 th Congress (2011 -2012) By Dan Adcock Legislative Director 1

Budget Threats n. Fiscal Commission Recommendations n. Threats Beyond the Commission n. Budget Enforcement 2

Budget Threats n “This is an extraordinary time that will affect us for the balance of our careers. ” John Rother Executive Vice President of Policy, Strategy and International Affairs AARP January 2011 3

n Fiscal Commission: December 2010 Reported 45 Proposals ü 11 of 18 Members Voted for the Report ü 14 Votes Required Immediate Action ü Proposals Receiving Serious Consideration in 112 th Congress (2011 -2012) ü 4

Fiscal Commission Recommendations n Create “Federal Workforce Entitlement Taskforce” ü Recommend to Congress to $70 billion in cuts to: Ø ü Examples: Ø Ø Ø ü federal civilian and military retirement benefits 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 5

Lower COLAs: “Chained Consumer Price Index for All Urban Consumers” “Chained CPI” n Use C-CPI-U instead of CPI for Urban Wage Earners and Clerical Workers (CPI-W) n CPI-W to Calculate COLAs: Social Security ü Federal Civilian Annuities ü Military Retirement Pay ü n Supporters Say: ü More Accurately Reflects “Substitution Effect” Ø Buying Chicken instead of Beef 6

Lower COLAs: C-CPI-U n Opponents (Including NARFE) Say: ü Current CPI-W Should reflect higher health care costs paid by elderly Ø Instead, C-CPI-U would further erode inflation protection. Ø n Effect on benefits: ü Lowered by 3 percent after 10 years. 7

12 -Month Percentage Change for CPI-W (Current) & C-CPI-U (Proposed): 2000 -2008 8

Highest 5 Years of Salary n Current Annuity Calculation Formula: ü Accrual Rate x highest 3 years of salary x years of service = Annuity n Proposed Formula ü Accrual Rate x highest 5 years of salary x years of service = Annuity 9

Highest 5 Years of Salary n Effect of Proposal on Future Retirees: ü CSRS annuity reduced by an average of: $1, 424 in 2010 Ø $7, 148 over five years. Ø ü FERS annuity reduced by an average of: $462 in 2010 Ø $2, 322 over five years. Ø 10

Increase Employee Contributions to CSRDF n Fiscal Commission ü “Adjust the ratio of employer/employee contributions to CSRDF to equalize contributions. ” n Translation: ü Make employees pay half of annuity cost. 11

Increase Employee Contributions to CSRDF n CSRS Current Employee Share: 7% of Payroll ü Full Normal Cost: 25. 1 percent ü Presumed Proposal: Ø Increase Employee Contribution to 12. 5 % of payroll. ü n FERS* Current Employee Share: 0. 8% of Payroll ü Full Normal Cost: 11. 5 percent ü Presumed Proposal: Ø Increase Employee Contribution to 6. 5 % of payroll. ü *FERS employees pay 6. 2 percent of their salary to Social Security. 12

Increase Employee Contributions to CSRDF n Effect of a significant pay cut ü On top of 2 -year pay freeze Added contribution would not increase annuity n Most medium/large private employers have not required their workers to make any contributions toward their definedbenefit pensions. n 13

Defer Future Retiree CSRS COLA Defer CSRS COLAs until age 62. n Instead: n ü One-time, catch-up COLA at age 62 to increase n Forgo catch-up COLA if the annuitant dies before age 62. 14

Health Care n Index Gov’t Share of FEHBP Premiums ü Current law: Average Gov’t Share: 71% Ø Average Enrollee Share: 29% Ø ü $10 a month rate hike example: Gov’t Pays: $7. 10 Ø Enrollee Pays: $2. 90 Ø 15

Index Gov’t Share of FEHBP n Under proposal: ü Government Share capped at: Percentage increase in Gross Domestic Product + 1% Ø FEHBP Premiums Estimated to Outpace this Index Ø Enrollees Pay $3, 200 More Over Five Years Ø Every Year FEHBP Premiums > GDP+1% v Enrollee premium Share Grows v Government Share Shrinks v Premiums Become Increasingly Unaffordable Ø 16

FEHBP Enrollee Share: Current Law vs. Indexing Proposal 17

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FEHBP Indexing Proposal n n Brain Child of ü Rep. Paul Ryan Ø Budget Committee Chair ü Alice Rivlin Ø Clinton Administration OMB Director FEHBP Guinea Pig: ü Medicare Part B Indexing ü Fixed subsidy 19

Threats Beyond Fiscal Commission Proposals n n FECA Reform: ü Future Participants moved from: Ø Workers Comp to Retirement Ø Significant Cut in Benefits Ø Annuity Amount Calculation Unfair Retirement Annuity COLA Cuts ü $50 billion in cuts during 1980 s and 1990 s 20

Threats Beyond Fiscal Commission Proposals n n Double TSP Contributions to Receive Full Match ü 10% of salary contribution for 5% match Future Retirees Pay Higher Share of FEHBP premiums ü Less than 20 years of service pays greater share ü Pay 2% more for every year less than 20 years 21

Budget Enforcement Proposals n n Majority Leader Eric Cantor: Deputy Majority Whip Kevin Brady: ü Use Debt Limit to Get Spending Cap ü Similar to Gramm-Rudman-Hollings ü Automatic Spending Cuts: Ø ü when the deficit exceeded fixed targets. 1985 COLA Lost to Gramm-Rudman-Hollings 22

Budget Enforcement Proposals n S. J. RES. 3, Balanced Budget Amendment ü Introduced by Sen. Orrin Hatch Approval Required Ø 2/3 of House & Senate Ø ¾ of States Ø Past Attempt: 1997 v Passed House v One Vote Short in Senate ü Spending Could Not Exceed Revenue ü Spending Capped at 20% of Gross Domestic Product ü 23

Budget Cut Threats QUESTIONS AND ANSWERS 24