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An "In Your Face" Entitlement - FERS
I don’t think there is anyone who looks at the issue of entitlements in
the US who is not gravely concerned about the direction we are on.
Economists of all stripes, damn near everyone in D.C. and a long list of
academics have all highlighted the problems. But the same groups that
are raising red flags are misleading us on when and how this problem
will affect us.They say/think it is a tomorrow problem. Actually it is
hitting us today.
I want to focus on the Federal Employees Retirement System (“FERS”).
This is a retirement program for federal workers. The program is similar
to Social Security in a number of ways.
-FERS collects money from government workers and their employer.
-The program pays benefits to eligible workers and their families.
-FERS has a trust fund. Currently there is $775b of Special Issue
Treasury securities in the fund. This is equivalent to 6% of our total
debt and is therefore a very big deal. FERS holds as much of our paper
as do the Chinese and the Federal Reserve.
-FERS is running a cash flow deficit. This is a new phenomenon. FERS is
converting itself into a defined contribution plan that will address
some of the problems. However the cash drain experienced in 2010 will
not be reversed in the foreseeable future. It will increase. Some
numbers from OMB:
The benefits paid in 2010 will come to $70b. Therefore total revenue
exceeds expenses by a tidy $28b. This is the conclusion presented to the
public. Clearly there is no problem with FERS. They are running a
surplus! I look at it exactly the other way around.
Note: In fiscal 2010 our deficit was $1.3 trillion.
Total expenses were $3.4t. Therefore ~40% of all federal expenses were
funded by debt. I will use this percentage when adjusting for the FERS
impact on our debt profile.
Cash out at FERS was $70b. Cash in was only $4.0b. The difference of
~$66b is the real measure of what is happening at FERS. They are sucking
down cash. A substantial portion of the deficit is funded with debt
creation.
(A) The $17b of payments by Agencies is a paper transfer from the
government agency that is the employer. Treasury turns this script into
cash. Treasury has no money as we are running a deficit. The pro rata
share that becomes debt is $7b (17*.40). The entire payment is
recognized as a current budget expense.
(B) The $42b of interest is a non-cash item. It is just script.
Think of it as borrowing from a HELOC. If you don’t pay cash each month
they just add it on to the principal. In D.C. they call it the
Intergovernmental Account (IG). Interest paid whether in script or cash
is a current expense.
(C) The $32b of General Fund transfer is paid by Treasury. Again,
Treasury will have to borrow $13b of that (32*.40) from the public to
make the cash available to FERS so it can cash the retirement checks.
The whole thing hits the budget.
(D) The money from Treasury (17 + 32 = 49b) is still short 17b
from the 66b cash deficiency . Where does that come from? Treasury of
course. FERS sells $17b of those Special Issue securities it holds back
to Treasury. Once again, Treasury has to go to the public market to come
up with this entire shortfall. This results in an increase in Debt Held
by the Public (“DHBP”) and a decrease in the IG account. But this $17b
does not find its way onto the current budget.
By my count:
-FERS had a 2010 on budget cost of $89b.
(A+B+C) =17+42+32=89
-FERS increased 2010 total debt by $62b.
(A*.4) +(100% of B)+(C*.4) = 7+42+13=62.
FERS caused an increase in the all-important DHBP of $37b.
(A*.4)+(C*.4) +(100% of D) = 7+13+17=37.
I pick on FERS as it is a little known entitlement program. They paid
out only $70b last year. Their big sister, Social security will lay out
$700b. But in 2010 FERS had a larger impact on DHBP and total debt than
SSA. In my book if you’re adding to the debt load you're adding to the
problem.
In our big economy FERS won’t sink us. But it is just one piece of the
puzzle on entitlements. When you put all of the pieces on the table and
study them you would see that all of programs have their lines crossing,
FERS is just the first to “cross over” in a big way. Cash is
going to be King in the future. All entitlements will be eating cash.
The problem is that there is absolutely no way to make them paygo
without busting the economy. We are in the first year of a losing battle
with entitlements. It will go on for another fifteen years or so. Blame
the baby boomers. I expect that is exactly what we will do.
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lynneybee
your pension contributions have been transferred by Timmy and Benny to the Wall Street casino operators, so that adequate bonuses could be paid to those who have destroyed the country.
do you work for the CIA lynnybee? I'm becoming suspicious.
Hi Lynne,
If I were you I would not worry a bit. The very last thing that will be impacted is FERS. You have a promise that they will pay you X dollars in Y years or Z dollars over your life (annuity). That promise is money good. Worry about something else.
bk
thank you, Mr. Krasting. i'm so grateful for this website, ZEROHEDGE. i'm so much smarter now, the education has made me the smartest 60-year old mom & grandma in the city !!!
I would if the "C" fund hadn't kicked me in the balls, or should I say that I kicked myself in the balls with that one.
Love these one legged ass n ball kickin' contests. Best -
- Layne
PS I wonder what the self directed asset allocation mix change has been within the TSP aspect of FERS over the past three years? hmmm Must be a shift of several tens of billions .. and how these allocations stack up against the moves within 401K systems generally. Same goes for loans and emergency withdraws.
According to TSP, 400k eligible participants contribute nothing over the agency 1%.
Sounds like much of the private sector... I wonder how many of these used to contribute and what that run rate is within the system?
From 2007 CRS Report For Congress
http://www.senate.gov/reference/resources/pdf/RL30631.pdf
"Because of the uncertain tenure of congressional service, FERS was designed,
as CSRS had been, to provide a larger benefit for each year of service to Members
of Congress and congressional staff than to most other federal employees. Members
of Congress also become eligible for retirement annuities under CSRS and FERS at
an earlier age and with fewer years of service than most other federal employees.
However, Members of Congress and congressional staff pay a higher percentage of
salary for their retirement benefits than do most other federal employees.
As of October 1, 2006, 413 retired Members of Congress were receiving federal
pensions based fully or in part on their congressional service. Of this number, 290
had retired under CSRS and 123 had retired either with service under both CSRS and
FERS or with service under FERS only. Members who had retired under CSRS had
completed, on average, 20 years of federal service. Their average annual CSRS
annuity in 2006 was $60,972. Those who had retired under FERS had completed,
on average, 16.3 years of federal service. Their average retirement annuity in 2006
(not including Social Security) was $35,952. The average age of retired Members
of Congress receiving retirement annuities in 2006 was 79 for those who had retired
under CSRS and 69 for those who had retired under FERS."
Members of congress enjoy a classic defined benefit pension program that kicks in after serving one term in office. No where else, except the C Suite do folks vest after either 2 or 6 years depending on office.
For 411 concerning other federal employees please see comments above.
Are you lumping in CSRS with FERS Bruce? FERS is a basic 1% program with the attributes of an 401K plan, while its predecessor, the CSRS is a pure, old fashioned defined benefit plan. FERS kicked off about 20 years ago, so there aren't many retirees on it yet while CSRS is where the real expenditures are happening. In no way is FERS like SSA Bruce, but CSRS sure reminds me of many state, county & local pension systems...
http://search.opm.gov/search?sort=date%3AD%3AL%3Ad1&output=xml_no_dtd&ie...
http://search.opm.gov/search?sort=date%3AD%3AL%3Ad1&output=xml_no_dtd&ie...
This is written based on information from Congressional Research. The report is titled, "Federal Employment Retirement System:Budget and Trust Fund Issues.
So they lumped everything together as I did. The transfer from general revenue is a CSRS issue. Tks Miles
Pleasure.
It seems many local governments (and their investors), be they here, or all levels of the public sector elsewhere could garner much quality 411 about the effects of "run off" from public pensions under the "new hires move to a new system" conversation since US federal civil servants made the move and we are seeing the end stages of this run off effect (one of the reasons these data sets are getting cross pollinated I think).
Regardless, the switch from CSRS to FERS (one of the follow on effects of the last effort to save SSA from the '80s since CSRS employees neither contributed to or received SSA.. and that's a few million contributions that can be mapped and actuarialized over time giving rise to all sorts of accounting .. ahh .. benefits) may provide some intrepid souls with the inspiration to do some digging as the questions surrounding the restructuring of defined public sector pensions grow out of necessity. A worthy topic once we consider there are a few trillions involved that effect most of our public sector, and others, armed or otherwise and of course, the debt issued by these folks.
Bruce:
This is tremendous. Please try to post this on the Angry Bear Blog.
The FASAB is the accounting advisor for the federal government.
Here is their explanation:
From the Aug./ Sept 2010 newsletter:
"The predominant source for earmarked funds with very large negative position, such as civil service retirement funds, comes from general fund appropriations and not dedicated collections. Accordingly, the predominant source of funding might be a potential solution from excluding those funds from the category of earmarked funds.
In other words, FASAB is considering taking the retirement funds out of the "earmarked funds" category and putting it into the same category as other "unfunded" entitlements, such as food stamps and Medicaid.
This is on page 6.
Go to: http://fasab.gov/pdffiles/fasab_newsletter_issue_122_aug-sept_2010.pdf.
Here is another explanation from the GPO in a paper entitled "Analytical Perspectives, Budget of the U.S. Government, Fiscal Year 2009:"
Page 345 "Since many years will pass between the time when benefits are earned and when they are paid the trust funds will accumulate substantial balances over time. These balances are available to finance future benefit payments , but only in a bookkeeping sense. The funds are not set up to be pension funds. When trust fund holdings are redeemed to authorize the payment of benefits, the Department of Treasury will have to finance the expenditure in the same way as any other Federal expenditure: by using then current receipts , by borrowing from the public, or by reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not , by itself, increase the Government's ability to pay benefits.Go to: http://www.gpoaccess.gov/USbudget/fy09/pdf/spec.pdf.
Don Levit
Tks Don, you have it correct. The "money" in the trust funds is just a promise to tax someone in the future or to borrow from yet someone else. So there really is no exit from the funds without a big cost. It is not like having a true savings account with bonds from IBM in it. It is just IOU's. And those IOU's have to be collected and they are coming due.
So pray tell, are US bonds just a just an IOU or are they somehow superior to debts owed to the American people?
the question of payment is not the issue. "define a benefit" then you're mind will be opened. "money itself is an IOU." that's the essence of a "fiat currency."
Cut federal salaries in half, and many problems are solved. It's only a matter of time.
Cut salaries? Your joking. That is not in the cards at all. There is a long range plan for FERS this is it. Not how the number rise every year for the next 75. Note that FERS will own 18T debt (equal to more than all the debt that is now outstanding). Expenses will rise every year as will. It is a truly crazy plan.
privatize the Postal Service. That shaves off 800,000 employees. That's at least 1 trillion a year once you factor in how they will contribute to the economy. They have nothing do to and haven't had any mail for over 10 years now. All you need are coffee shops and greeting cards and "they'll be paying taxes instead of sucking them in" since people "still love mail."
Most of the "mail" I get is adverts and every last piece goes straight into the trash unopened and unread. If all the adverts I've tossed in my 63 years were added up it would amount to a small forest of trees. Why don't the tree huggers ever mention this total waste? Just make the advertisers pay first class rates and this nonsense would vanish instantly.
I'm with you, Atilla
Tree huggers. Why not get on this shtick? What've they been doin' but bustin' nuts about the decibel level of Sun Lite crisp bags or some such nonsense as compared toall the junk mail floating about. And you're damned right, simple "free market" type approach. Make it expensive to mail the stuff. No quantity discounts, cheap transits. Bingo! Gone, along with a few hundred thousand dangerously homicidal postal workers. Although, maybe keeping them locked up in the PO is safer, come to think about it.....
Check the stats -- unless I am misinformed, fast-food workers are the cause of way more workplace violence than postals. "Am I wrong?" So why don't we call workplace massacres by their proper name -- "going mcnuggets"!
You are way behind the times. The Post Office has been sheding employees for years. Wikipedia shows 596,000 as the current employment number - and that keeps shrinking. As for no mail, I work in a "small" USPS mail processing plant and we process 400,000+ pieces of letter mail on a typical night, (much more on a busy night) between what is being sent from our area and what is being sorted to prepare for the carriers to deliver in our area. That is just for a town of 50,000 or so and the surrounding smaller towns. As for "paying taxes instead of sucking them in", you are also woefully ignorant (to put it as kindly as possible) about the fact that the Post Office hasn't been taking taxpayer money for something like 20 years or more. Yep, totally self supporting system. As a matter of fact, the Post Office has been paying INTO the Feds to cover the cost of the CSRS employees and a recent audit showed that they have over paid by $50-$70 BILLION dollars. The Post Office is also the only government agency that is required to pre-fund its retiree benefit plan, currently to the tune of something like $5 Billion a year. Finally, my retirement under CSRS is 30% of my high 3 year average pay, plus a social security supplement equal to my age 63 equivalent retirement payment until I'm 63. Not exactly gold plated.
Sorry, no golden egg laying goose to be had here.
If we could figure out how to eliminate junk mail, you'd probably only have to process a tenth as much of that... And think of how much less tonnage of unopened mail would end up in landfills.
Grrr, Can't get the chart i want on the comment page. Sorry. Fuck technology....
I don't do electronic tech either, Bruce. That's why I wear this bag over my head.
Didn't really mean THEY would cut salaries.
Pitch forks ubber alles!
"That's why I wear this bag over my head."
Remember the Good Ole Days?
When New Orleans Aints fans used to wear bags over their heads because the Aints went 0-14 before finishing 1-15 in 1980?
Good times...
No they won't cut the salaries in half.
The dollar will get cut 75% to pay for the federal salaries. The system will stay intact. The dollar will not.
Your savings are dead. All that is happening now is that they are being cremated.
this is the best website for a real education. I love ZEROHEDGE. My husband started working for the FEDERAL GOVERNMENT in 1978 & has just retired. for all of those 30 years money was deducted from his paycheck for that retirement. why do they call this an "entitlement" if we paid into it for a long 30 years ? where did that money go ? the FEDERAL GOVERNMENT has known for years that this day of reckoning was coming. It's like Christmas ......... you have 364 days to prepare for it. I've got a really sick feeling in the pit of my stomach that I'll be starving to death......... never in my wildest dreams when I was raising our children & he was going to work at Wright-Patt AFB did I ever think it would come to this.
you are beginning to experience the overwhelming feeling of uncertainty that those of us in the private sector feel every single day of our lives.
welcome to the real world.
Don't let the word "entitlement" throw you. You paid in and you are entitled to it. People these days think of welfare as entitlements. Unfortunately, as Bruce points out, switching from CSRS to FERS wasn't good enough to forestall the cash crisis that all defined benefit plans encounter. States are worse, and municipalities are the most egregious of all. It's just that FERS is nominally massive. Lynnybee - prepare as best you can for the tough times and count it provident that you read ZH and know these things in advance. Being passive spectators is what did in most during Weimar.
don't sweat it. BB is "stickin' it to the foreigners" and right now only the "center of the earth people" have responded appropriately. I would sweat the health care plan. This is a very good start but we're still "only gettin' warm" here. Once we start talking "doctors" then you'll find "the trillions that are missing."
Unfortunately, this just like SS is a ponzi scheme. The classic ponzi scheme is when money from people who are buying "in" is transferred to people who are taking out.
Your husband's money was transferred to the then-current retirees. Meanwhile, the government accumulated a debt that it says it owes him.
Like all other ponzi schemes, it eventually collapses.
But since this is government, they can take a lot of money from people who avoided the ponzi (by force). This has the additional negative effect of bankrupting people and businesses, thus making the problem worse.
.
Not sure if FERS is the new or old system. The new system, in place since the mid(?) '80s pays a benifit that is indexed to the CPI minus 1%. So don't worry, if the FED hits its target of 2%, payments only go up 1% and the retiree's fall behind!! Of course the higher the infaltion rate the better for the retiree's, CPI up 10%, payment up 9%, much better than 2% and 1%. And SS is indexed to inflation. So, inflation we want!!
FERS took the place of the even more generous CSRS retirement system in the mid-80's. Under CSRS, employees didn't have a 401K-like component, but they received 2% of the average of their highest three years of salary for every year they worked. So, a person with 25 years of service would get a 50% pension. Under FERS, employees get 1% pension for every year worked plus a 401K-like element where employees contribute a certain amount of their salary with a government match up to 4.5%.
If you are going to spew 'facts' then do yourself a favor and perform factual research beforehand. The first 5 years of service are 1.0% per year. Next 5 = 1.5%. After 10 years, 2%. So 25 years service is not 50%. That being said, Civil service retirement is generous to the extreme. But then again, who would want to work for Sam when doing so brings hateful remarks. I fully expect a reduction in all entitlements within the next few years. After all is said and done we will have the super rich and the rest of us. Just like in the old days. Whee!!!!
Hey retard, I worked for the federal government for 15 years and was in the FERS program. I joined just after the conversion from the CSRS. Don't know what "factual research" you performed, but like I said I was in FERS personally and know what the benefit structure is.
Well, shit-for-brains, check OPM's web site and see for yourself. 2% a year is totally wrong! (except after ten years) Maybe inattention to detail is why you don't work for them anymore.
Not all FERS are equal, if you were a clerk, or some other office help, you are one schedule, if you were a manager, or say FBI agent, then you got more.
The folks in the older system did not pay into social security and don't get it unless they qualify with another job, the FERS foks do get SS and get a SS substitute if they retire early.
No problem. The recovery will take care of it all !!
Bah..
Great analysis, Bruce, and exactly right. Now take the $120 billion interest income out of the social security flows, and see what kind of deficit you get;)
Brilliant
Social Security is forced savings that cannot be redeemed except month by month living to get it past a certain age, and it cannot be bequeathed. It is stolen wealth from the working class to pay for a few. But those who draw it are entitled to it and it is not an entitlement program like welfare. The elite choose terminology carefully -- lumping together for the undiscerning masses handouts such as food stamps, housing section 8, welfare and other "freebie" goodies with EARNED "entitlements".
if you Boomers wanted your Social Security, then you should not have spent the money elsewhere on Big Government. You allowed:
Feeling generous now? You should be, because it cost you your Social Security payments. Your money was NOT "saved" in a lockbox. You fucked that up, Robin Hood.
The. Money. Is. GONE (along with the hard-earned Social Security contributions of younger generations).
capice?
word. - "the most childish generation" who will be remembered for the genius of the internet, and the folly of oppressive big government "solutions" and unprecedented concentration of power in D.C. (and NYC) at the expense of liberty.
I beg to differ, Chop!
The baby boomers were still in school when the WW2 generation started the rot of imposing big government solutions on everything from deficit spending to entitlement programs. JFK (dictatorial Executive Orders), LBJ (Great Society, Medicare, Medicaid), Nixon (dropping of gold standard) and Carter (Chrysler bailout) were all parents of baby boomers.
you and chop both have good points. additionally, an argument could be made that ww1 changed the relationship of the u.s. government to both the states and the citizens, as well as vastly increasing its power and magnitude generally. fdr used some leftover ww1 powers to "seize the gold" and the whole alcohol and drug prohibition of the early '20's got a big boost from the heightened authoritarianism and paranoia associated with the belligerency. wars are not liberty's friend, as we have seen.
and speaking of scrip, ca.'s already using it. who's next?
good points, fellas. you know i'm just stirring the pot! ;)
That said, we have witnessed the unprecedented lack of fiscal responsibility from the majority "Baby Boomer" voter base. It really is shocking how self-serving towards one generation our policies have become.
This is "mob rules" democracy at the expense of a Constitutional Republic that was designed to protect the property of the minority. Because "income taxes" have long been over-ruled as NOT Unconstitutional, and since we have a debt-based monetary system with no balanced budget requirements at the Federal level, we now have existing generations blatantly stealing from future generations.
This is nothing short of an assault on life, liberty, and the pursuit of happiness. Should we take up arms against our oppressors? I often wonder.
We've met the enemy, and it is the emerging 'ruling class' pensioners of the Baby Boomer generation.