Federal Retirement Benefits and the FY 2010 NDAA November 6, 2009Posted by Trice Kabundi in Analysis.
The Congressional Budget Office (CBO) recently released a cost estimate of the National Defense Authorization Act for FY 2010 (H.R. 2647), which was signed into law by President Obama last week. According to the estimate, which focused solely on mandatory costs, the FY 2010 NDAA would increase direct spending by $855 million between the FY 2010-FY 2019 period. A significant portion of the direct spending would result from changes to federal employee retirement programs, including credit for sick leave and locality-based compensation. These changes have real budgetary implications and are highlighted below.
Retirement credit for sick leave
Full-time federal employees are entitled to thirteen days of sick leave per year, and unused sick leave carries over from year-to-year. Whether or not accrued sick leave is calculated into retirement benefits, however, depends on the hiring date. Federal employees hired prior to 1984 are in the Civil Service Retirement System (CSRS) which does incorporate all accrued sick leave hours into retirement benefits. Employees hired after 1983 are in the Federal Employees Retirement System (FERS) which does not compensate for accrued sick leave. Like most places of employment, upon retirement unused sick leave hours are simply lost for those federal employees in FERS.
Understandably, as FERS employees approach retirement many opt to use their accrued sick days so they are not “wasted.” Studies have shown that FERS employees either eligible for retirement or approaching retirement used more of their sick leave hours as opposed to their CSRS counterparts. The loss in productivity costs the federal government, on average, $68 million a year.
To address this issue, Section 1901 of the FY 2010 NDAA would allow federal employees that retire prior to 2014 to add 50 percent of their remaining sick leave hours to their total years of service when calculating retirement benefits. Federal employees who retire after 2014 would receive 100 percent credit of their sick leave. The report estimated that the addition would increase the average retirement benefit by roughly $150 per year, once it is fully phased in. Approximately 13,000 federal employees are expected to retire between FY 2010 and FY 2019, and the added benefit is expected to increase direct spending by $343 million over that time period.
Approximately 41,000 federal employees living in Alaska, Hawaii and other US territories receive cost-of-living allowances (COLAs), which compensate for the higher cost of living. Federal employees living in the contiguous US, however, receive locality-based pay, designed to offset the gap between federal and nonfederal positions. The difference between COLAs and locality pay is that COLAs are not subject to federal income or payroll taxes. Locality pay, on the other hand is taxed. Consequently, COLAs are not considered in the calculation of retirement benefits while locality pay is included. Arguably, individuals receiving COLAs are at a disadvantage come retirement.
Section 1911-1919 of the FY 2010 NDAA would gradually replace COLAs with locality-based comparability payments for these federal employees. Increased retirement benefits caused by the increase in salaries would increase direct spending by a total of $276 million between FY 2010 and FY 2019. Accordingly, the increase in taxable income would increase revenues by $979 million over the same time period.