Charge Agencies For The Full Cost of Employee Benefits

Charge Agencies for the Full Cost of Employee Benefits

Background

Federal agencies should be required to pay for the total costs of
employee compensation, including a charge for future pension payments
and retiree health benefits. Agencies directly pay for the pension
benefits of civilian personnel under the Federal Employees Retirement
System (FERS), which covers federal employees first hired after 1983.
Agencies with employees covered under the older retirement system, Civil
Service Retirement System (CSRS), only pay about one-third of the
government's share of the pension cost for their employees.  Agencies
pay the health benefits for all active civilian employees, but there is
no charge for the future health cost of these employees after they
retire. Charging full costs to the agency for employees under both FERS
and CSRS and charging agencies for future health costs of their
employees would improve overall budgetary management for an agency.

Need for Change

Agencies should be charged directly for retirement benefits earned by
active employees to ensure that total costs are available for
decisionmaking and evaluating performance results. This would improve
budgetary management and the efficiency of choice between labor and
other resources and assist the decision process for performing services
internally, through franchising, or contracting out. It would make the
government account for retiree benefits on a comparable basis to the
private sector.

The CSRS pension cost averages about 25 percent of salary per employee.
The agency and the employee each contribute 7 percent of salary into the
trust fund. The total of 14 percent is only about half the cost to fund
the pension. If agencies were required to pay full normal costs for CSRS
employees, with no change in employee contributions, the agencies'
contributions would have to be increased from 7 percent to 18 percent
adding $5.0 billion to agencies' personnel costs [Endnote 1].  The
employees would still pay the remaining 7 percent.

Agencies also pay only a portion of the health insurance premiums for
their active civilian employees, with the remainder being paid by the
employee. However, agencies do not pay any of the costs for future
health benefits earned by active employees. The Office of Personnel
Management (OPM) pays the government's portion of health premiums for
civilian retirees. The annual cost of future retiree health benefits
earned by current civilian employees is estimated to be $4.0 billion
[Endnote 2]. The Department of Defense (DOD) does pay the government's
portion of current cash expenditures for retired military personnel.
However, DOD financial decisionmaking would improve if benefits that are
currently earned were counted as part of current compensation. Both
civilian agencies and DOD should pre-fund expected future liabilities.

As cost accounting standards are needed to ensure accurate value for the
dollar reporting, agencies should be charged directly for these costs to
ensure full disclosure of employee costs and to ensure that total costs
are available for decision-making and evaluating performance results.

The recommendations propose an accounting change that will better
reflect the full cost of employee benefits to the agencies. Their
implementation would not affect the unified budget deficit. Agency
discretionary funds will show larger outlays, which will be reflected in
an increase in the Civil Service Retiree and Disability Trust Fund.

Endnotes

1. U.S. Office of Management and Budget, Economic Policy Office.
Internal report based on annual estimates made by OPM actuary estimates.

2. U.S. Office of Management and Budget, Economic Policy Office.
Internal report based on a 1991 OMB study, which, in turn, was based on
OPM actuary estimates.