National Active and Retired Federal Employees Association (NARFE) Budget Cut Threats

1. National Active and Retired Federal Employees Association (NARFE) Budget Cut Threats in the 112th Congress (2011-2012) 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 112th Congress (2011-2012)

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): 2000-2008

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. 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. Increase Employee Contributions to CSRDF *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 17

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.  • 1985 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