How the Bipartisan Budget Act Improves the Long Term
As we've said before, paying for temporary costs with savings that grow over the long term is very helpful for the long-term budget outlook, as it provides deficit reduction when it is most needed and after the costs have been incurred. In addition, doing so can provide up-front help for the economy. There are several policies in the Bipartisan Budget Act (BBA) that achieve this objective, saving relatively little in the first ten years but whose savings grow over time. These policies include the reduction in military pension cost-of-living adjustments (COLAs) for working-age retirees, the increase in new federal employee contributions, and the increase in Pension Benefit Guaranty Corporation (PBGC) premiums. In this blog, we'll take a look at these three provisions and do our best to estimate how much each would save in the second decade, which is one of the long-term methods of analysis we detailed in a recent paper. On net, we estimate the bill will save around $100 billion in the second decade.
- Military Pension COLAs: The military retirement system faces a significant unfunded liability. The BBA would help close that gap by reducing by one percentage point the COLA that military retirees under the age of 62 receive on their pensions. It would then provide a one-time catch-up at age 62, in order to bring pensions in line with levels they would have received without the one percentage point decrease before then. CBO estimates this provision will save $6.2 billion over ten years, although the savings grow from $150 million in 2016 to $1.3 billion in 2023. This is the type of provision that would benefit from lawmakers getting a longer-term score, since it's a policy that changes an annual index. Our estimate is that the policy would save about $25 billion in the second decade, or more than four times as much as it does in the first decade. Note that GDP is only about 50 percent higher in the second decade than it is in the first.
- Federal Employee Contributions: The Federal Employee Retirement System (FERS) also has an unfunded liability totaling $20 billion in FY 2011. For federal workers hired after 2013, they will have to contribute 4.4 percent of their income to FERS, up from 3.1 percent for workers hired in 2013 and 0.8 percent for workers hired before 2013. The FERS benefit is estimated to be worth 12.7 percent. Due to the grandfathering of existing federal workers (and those hired in the next three weeks), the ten-year score provides an incomplete picture of this provision's savings, which will grow over time as more workers are subject to the new contribution percentage. CBO estimates that the policy will save $6 billion over ten years, and we estimate it will save around $20 billion in the second decade.
- PBGC Premiums: The Pension Benefit Guaranty Corporation (PBGC) insures defined benefit pensions, funded by premiums imposed on pension plans (described here). The program currently has a $34 billion unfunded liability that, if unaddressed, would require the federal government to step in to cover underfunded pensions down the road. The BBA would increase flat-rate premiums from $49 per participant in 2014 to $64 by 2016 and increase variable-rate premiums from $9 to $19 per $1,000 of underfunding by 2016. CBO estimates that this will save $8 billion over ten years. Since the premiums are indexed to wage growth, the savings should grow over time as well, since indexing based off a higher premium will result in increasingly higher premiums in subsequent years. We estimate that in the second decade, this increase will save about $10 billion. In addition, the increased premiums will reduce the likelihood that the federal government will need to bail out the PBGC sometime in the future, which is an important benefit that isn't accounted for in these estimates.
|First- and Second-Decade Savings (billions)|
|Reduce military pension COLAs||$6||$25|
|Increase federal retirement contributions||$6||$20|
|Increase PBGC premiums||$8||$10|
Source: CBO, CRFB extrapolations
Conversely, using temporary savings is not ideal, since either, by definition, the savings won't last, or that they will become a "piggy bank" for lawmakers to offset other costs with extensions of these existing policies. Ideally, lawmakers would make savings permanent to address long-term debt. Examples of temporary savings (which last only through 2023) include the extension of the mandatory portion of the sequester for two years, the increase in airline fees that expires after 2023, and the extension of customs fees. If Congress believes that these policies are worth extending through 2023, they should have extended them permanently. Nonetheless, we are encouraged that the deal does contain a few policies which take a step toward addressing long-term fiscal challenges.