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

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

3 Budget Threats “ 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

4 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 112 th Congress ( )

5 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

6 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

7 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.

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

9 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

10 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.

11 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.

12 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.

13 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.

14 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.

15 Health Care Index Gov’t Share of FEHBP Premiums Current 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

16 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 Grows  Government Share Shrinks  Premiums Become Increasingly Unaffordable

17 FEHBP Enrollee Share: Current Law vs. Indexing Proposal

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19 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

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

21 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 premiums Less than 20 years of service pays greater share Pay 2% more for every year less than 20 years

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

23 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 House  One Vote Short in Senate Spending Could Not Exceed Revenue Spending Capped at 20% of Gross Domestic Product

24 Budget Cut Threats QUESTIONS AND ANSWERS