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Cuts target fed workers, execs

By Barbara Whelehan · Bankrate.com
Friday, September 23, 2011
Posted: 6 pm ET

President Barack Obama's plan to reduce the deficit by $3 trillion over 10 years includes provisions that would trim the health and retirement benefits of federal employees -- military and civilian. Guess what else it would do? It would reduce the amount government pays toward the annual compensation for top executives of publicly traded companies. Yup, you read that right. Your tax dollars help shore up the livelihoods of the best-paid people on the planet.

As fellow blogger Kay Bell notes in her post yesterday, the president's plan is much ado about nothing that will likely pass Congress. But it's interesting to see what retirement planning cuts the administration deems important.

First, let's look at the provisions for federal workers. To lay the groundwork for the changes, the carefully worded report acknowledges that federal benefits are more robust than those in the private sector.

"Some estimates put the split between employer and employee contributions in the private sector at 55 percent paid by employers and 45 percent paid by employees (combining defined benefit and defined contribution plans), whereas on average, federal employers pay 67 percent of contributions to the Federal Employees Retirement System (FERS), while employees pay 33 percent."

An attempt at equity

Those percentage numbers are questionable. Be that as it may, the provisions would impose costs on federal employees as a way to narrow the gap between the private and public sectors.

  • Federal employees would increase their contribution to FERS by a total of 1.2 percent. This would occur gradually, starting with a 0.4 percent increase annually over three years beginning in 2013. Currently government employees contribute 0.8 percent of pay while their employing agencies contribute the rest. The cost of FERS to the federal government ranges from 11.7 percent to 18.9 percent of pay, according to a recent CRS Report for Congress. The proposed increase in employee contributions wouldn't reduce the amount the government contributes to pensions. The amount agencies contribute would be unchanged, but additional moneys would be allocated toward the pension's unfunded liabilities. Also, the government would not offer the FERS annuity supplement for new employees. Savings: $21 billion over 10 years.
  • Initiate a $200 fee beginning in 2013 for the military's health insurance coverage called TRICARE-For-Life. Currently most seniors over age 65 pay $2,100 annually for a "medigap" policy while military retirees pay nothing, according to estimates in the report. The fees would gradually increase in step with those paid by individuals under age 65 in the TRICARE program. Savings: $6.7 billion over 10 years.
  • Increase TRICARE pharmacy benefit co-payments for families of active duty members and military retirees. Savings: $15.1 billion in mandatory funds and $5.5 billion in discretionary funds over 10 years.
  • A commission should be set up to develop recommendations for reforming the military retirement system. Currently in the nondisability program, only those with 20 years in the military are eligible for retirement benefits. Any major changes should grandfather provisions for those currently serving in Iraq and Afghanistan. Savings: to be determined.
  • Abolish the formula used to calculate executive compensation of federal contractors' executives and tie it instead to the cap of the salary of federal employees at the executive level, currently about $200,000. Savings: None offered in the report, but I'm assuming it's significant.

How fortunes are made

It's no secret that executives in general are well paid, so it's no surprise that the executives of the firms that do business with the federal government also get paid handsomely. But I wasn't aware of the extent to which taxpayers contribute to their wealth. It's all laid out in black and white on page 21 of the report, titled, "Living Within Our Means and Investing in the Future: The President's Plan for Economic Growth and Deficit Reduction." I'll save you the trouble of opening that large pdf file. Here's the relevant excerpt:

"Each year, the government is required to establish a dollar cap on the amount that the government will reimburse federal contractors for the compensation they pay to their senior-most executives under cost-based contracts, which account for roughly $160 billion each year. The cap does not limit how much contractors pay their executives -- only how much the government will reimburse them. A statutory formula sets the government's reimbursement cap to the annual compensation for the five top management employees at publicly traded companies with annual sales over $50 million. The cap started at $250,000 in 1995, but rose to $693,951 last year in line with the rapid growth of private sector executive compensation over the past 15 years. Application of the current statutory formula could push the reimbursement cap to $750,000 for 2011. However, the administration believes the government is reimbursing too much for contractor executives, and the cap's amount cannot be justified. As a result, the administration proposes to abolish the formula and instead tie the cap to the salary of senior-most federal officials -- specifically, Executive Schedule Level I, currently approximately $200,000. Setting the cap at this level will bring greater parity between federal and contractor executives' compensation."

What do you think? Do you think these retirement provisions are fair? How do you feel, knowing that your tax dollars are currently helping to pay wealthy executives?

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3 Comments
don donaghy
November 15, 2011 at 6:39 pm

The "preference" for the use of contractor services rather than civil service employees goes back to the Eisenhower administration. In theory, it was meant to "gear down" the size and the locked-in job security of the civil service from the levels of WWII. Good idea, however, technology got in the way. The nature of the civil service changed. "Job security" was overtaken by technology and austerity. Hiring by the government was restricted, and reliance upon the private sector was not only encouraged, but was necessary as there was no feasible way for the agencies to "catch up" with the technological advancement. The result was some reduction in numbers, but less oversight. Now, Washington's answer is to cut back to service and prior commitments to CS. Good luck .

Angela
September 30, 2011 at 6:41 pm

How do you feel, knowing that your tax dollars are currently helping to pay wealthy executives?

I don't like it, but politicians and Republicans overall have the delusion that private industry knows more than the federal government. Yeah they know more, specifically how to rip off the federal government & this is just one example of it.

US government employees can and do perform the same jobs at lower rates of pay than those fancy contractors receive. Yet the trend is to get rid of the government employees and replace them with with more and more contractors receiving the inflated salaries.

Bill
September 25, 2011 at 9:32 am

Yes