Proposed Changes to Cost of Living Adjustments Could Mean a Major Win for PBGC

June 14, 2017

The employee retirement landscape continues to evolve as private companies are providing less compensation in the form of retirement benefits. This shift away from defined benefit programs and cost-of-living adjustments for annuities is part of that evolution. By comparison, the Federal Government continues to offer a very generous package of retirement benefits consistent with the goal of reining in Federal Government spending in many areas, as well as to bring Federal retirement benefits more in line with the private sector

 –Budget of the U.S. Government, Fiscal Year 2018

In their efforts to reduce spending, and to line up Federal retirement benefits “with the private sector,” the White House has proposed eliminating its cost-of-living adjustment (COLA) employees covered by the federal employees retirement system (FERS), a change that is estimated to save over half a billion dollars in just the next fiscal year. Although this budget would eliminate COLAs for future retirees, current retirees would be mostly protected, only having their COLAs cut by 0.5%.

This budget also requires FERS members to contribute a minimum of 1% to their annuities for six years, in addition to adjustments being made to the way in which retirement benefits are calculated for FERS-covered employees. Lastly, this budget would eliminate “the supplement for employees who retire younger than age 62, when Social Security eligibility begins,” (Trump’s Budget Would Drain Federal Workers’ COLAs). However, despite the seemingly harsh cuts to federal retirement benefits, according to the Congressional Budget Office (CBO) federal employees will still be receiving benefits far more generous than those offered by the private sector, so there is no real reason to suspect that these changes will hamper the Government’s recruiting and retention efforts.

Although this proposal may seem like a loss for federal employees, it is a definite win for the Pension Benefit Guaranty Corporation (PBGC). According to ASPPA’s article, FY ’18 Would Raise Fresh Revenue for the PBGC, this budget would:

  • “make changes to PBGC premiums that would raise $21 billion;
  • Accelerate the plan year 2027 payment date for both single and multiemployer premiums by one month while reversing a prior change in the payment date for plan year 2025 premiums;
  • Provide that none of the funds available to the PBGC for fiscal year 2018 shall be available for obligations for administrative expenses in excess of $424,417,000; and
  • Allow no more than $98,500,000 through Sept. 30, 2022, for costs associated with the acquisition, occupancy, and related costs of headquarters space.”

And, this budget would also make adjustments to PBGC premiums that would raise an additional $16 billion over the budget window, and would be able to fund the multiemployer program for the next 20 years (ASPPA, FY ’18 Would Raise Fresh Revenue for the PBGC). When lumped together, these changes spell out massive savings and revenue for the PBGC.

However, with its many proposed budget cuts and revenue adjustments, the Budget remains a highly controversial topic in D.C. We still have yet to see whether or not it will be supported in Congress, where both House and Senate members are being pressured by federal employee unions and other constituent groups to shut it down. All there is to do now is sit back and see what D.C. decides next.

 

For further reading:

Trump’s Budget Would Drain Federal Workers’ COLAshttp://asppa-net.org/News/Article/ArticleID/8705/Trump%e2%80%99s-Budget-Would-Drain-Federal-Workers%e2%80%99-COLAs

FY ’18 Budget Would Raise Fresh Revenue for the PBGC: http://asppa-net.org/News/Article/ArticleID/8706/FY-%e2%80%9918-Budget-Would-Raise-Fresh-Revenue-for-the-PBGC

By Chandler Julian, CPA, QKA, AIF

Chandler serves as the firm's Chief Financial Officer.

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