Policymakers Must Not Double-Count Retirement Savings

As budget conference committee chairs Patty Murray and Paul Ryan appear to be moving closer to a partial sequester-replacement deal, reports suggest such a deal could include an increase in federal civilian retirement contributions. Increasing the amount federal workers pay toward their retirement benefits to more closely align with the private sector would be a sensible reform that could improve the fiscal situation. But there is a risk that policymakers would double-count the saving, in which case such reform would actually increase the deficit. This double-counting is highly technical, easily hidden, and perhaps unintentional. But it must be avoided.

In short, double-counting could occur if policymakers increased retirement contributions made by federal employees for sequester or deficit reduction but also allowed government agency contributions to fall (which would happen automatically if not prevented). Assuming the funds from the worker contributions went toward sequester relief, lawmakers would essentially be using the same money twice – once to reduce the size of the sequester cut and again to effectively allow additional discretionary spending under the caps. This double-counting would be unacceptable. Funds from higher civilian retirement contributions can be used to reduce the deficit, buy down the sequester, or create headroom within the sequester, but the same funds cannot be used for two of those purposes at once.
Below we explain the gimmick in more detail and outlines ways to avoid it.
The Basics of Federal Retirement Contributions
Currently, most federal workers are required to contribute 0.8 percent of their salary toward the Federal Employee Retirement System (FERS), while federal agencies contribute an additional 11.9 percent. That 12.7 percent is deposited into a trust fund used to pay a defined-benefit pension to federal workers after they retire. Federal worker contributions remain fixed as a percent of their wages, while agency contributions are adjusted as necessary to ensure retirement benefits are fully funded from an accounting standpoint.
Two major groups of federal retirees currently contribute more than the standard 0.8 percent contribution. The first group includes most workers covered by the old Civil Services Retirement System (CSRS), who pay 7 percent of their wages and receive a much more generous retirement benefit; importantly, these workers do not pay taxes into nor receive benefits from the Social Security program. The second group includes federal workers hired in 2013 (or beyond), who contribute 3.1 percent of their salary toward the retirement system as a result of changes in the Middle Class Tax Relief and Job Creation Act of 2012.
How Federal Retirement Contributions Are Counted
Accounting for federal retirement contributions under the budget is complicated, but incredibly important. Contributions deducted from the worker’s salary are generally (though not always) scored as revenue, even though they much more closely resemble an “offsetting receipt" as opposed to a tax.
Contributions from federal agencies, on the other hand, are an intragovernmental transfer. In most cases, this transfer is recorded as a discretionary outlay by the agencies, and a mandatory offsetting receipt to the Civil Service Retirement and Disability Fund (CSRDF). In other words, one part of the government spends the money, and another part of the government receives it. The transfer has no net effect on the deficit, although it does shift money from the discretionary portion of the budget to the mandatory portion.
This shift is quite important, because when one area of discretionary spending goes down – particularly when discretionary budget caps are in place – it creates room for the appropriation of additional spending. That new spending, unlike the federal retirement contributions, will have a net impact of the deficits. In other words, when budget caps are in place, lowering agency retirement contributions will likely increase total spending and deficits. And importantly, agency contributions will automatically be lowered when contributions from federal workers increase; unless a new law directs agencies not to lower their contributions.
How Federal Retirement Reforms can be Double-Counted
Higher retirement contributions by federal employees can be double-counted when policymakers take advantage of the fact that higher worker contributions are both scored as more revenue and allow agencies to spend less money on retirement benefits. Essentially, policymakers can pocket the new revenue for deficit reduction or sequester relief and still allow agencies to replace intragovernmental transfers (notional spending) with real spending. The result – the same money would be used twice and the deficit would increase.
It is perhaps easiest to demonstrate this with a concrete example. Let’s assume policymakers enacted the President’s proposal to increase most worker retirement contributions from 0.8 percent today up to 2 percent (holding harmless new workers who already pay 3.1 percent).
The direct effect of that policy would be an increase government receipts by about $2 billion per year, or $20 billion over ten years. However, the necessary agency contributions would also be reduced from 11.9 percent to 10.7 percent. If lawmakers continued to appropriate discretionary funding up to the budgetary caps, they could use this headroom to spend $2 billion more per year – wiping away the budgetary gains. The net effect of increasing contributions would be zero. If policymakers also used the $20 billion in new receipts to reduce the sequester, they would be double-counting, perhaps unintentionally using the same $20 billion to replace part of the sequester and to further increase actual discretionary spending.
The Cost of Double-Counting Retirement Savings
  Ten-Year Savings
Saving from Increasing Worker Contributions from 0.8 to 2.0 +$20 billion
Cost of Reducing the FY2014 Sequester by $20 billion -$20 billion
Cost of Replacing Intragovermental Transfers with Discretionary Spending* -$20 billion
Total Net Budgetary Impact
-$20 billion

*This would take place through a three step process. First, retirement contributions owed by the federal agencies would fall, saving $20 billion. This in would lead to $20 billion in lower offsetting receipts into the retirement trust funds, costing $20 billion. Finally, the $20 billion of "headroom" created from the lower contributions would allow more direct spending from the discretionary budget, costing an additional $20 billion.

The net impact of this gimmick? For $20 billion of new receipts, policymakers would be allowing $40 billion of new spending – increasing deficits by $20 billion in the process.
Unfortunately, this gimmick is hidden by scoring conventions which count mandatory changes as soon as they are set in motion but do not count the impact of discretionary changes until the money is actually appropriated. Indeed, the 2012 legislation which raised contributions for new workers allowed agency contributions to fall, relying on nearly $20 billion of double-counted savings with almost no notice or fanfare. Lawmakers should not allow this to happen again.

Three Ways to Avoid Double-Counting

Savings from increasing federal worker retirement contributions can be used to create headroom under the budgetary caps, to directly reduce the cuts imposed by sequester, or to reduce the budget deficit – but the same money cannot be used for more than one of these purposes.
Luckily, policymakers have several options at their disposal to prevent this double counting and responsibly allocate the savings. They include:
  1. Keep the Discretionary Headroom, but Ignore the New Receipts.  Policymakers could allow higher worker contributions to create headroom within the budgetary caps for agencies. With workers contributing more toward their retirement, agencies could contribute less and could therefore spend more for other important purposes. From a policy standpoint, this approach (assuming the President’s policy of $20 billion) would be virtually identical to reducing the sequester cuts by $2 billion per year. To avoid double-counting, the new receipts could not be used to directly reduce the size of the sequester nor counted toward any deficit reduction goal.
  2. Count the New Receipts, but Adjust the Discretionary Caps. If policymakers wanted to use the new receipts from increasing federal retirement contributions to reduce sequestration cuts or reduce deficits, they could prevent additional unintended discretionary spending by reducing budgetary caps in an amount equal to the value of the increased discretionary headroom. In our example using the President’s policy, policymakers would reduce the pre- and post-sequester budgetary caps by $2 billion per year and not count any savings from that reduction for any purpose. This approach could be taken in concert with short-term sequester relief, though any reducing in the size of those cuts must come after the cap adjustment described above.
  3. Count the New Receipts, but Hold Agency Contributions Constant. Rather than making an adjustment to budgetary caps, lawmakers could simply prevent agencies from reducing their contributions in order to create headroom in the first place. Under this approach, new government receipts could be used for sequester relief or deficit reduction and no unintended additional discretionary spending (beyond that sequester relief) would be allowed to take place. To avoid “overfunding” the FERS program, agencies could be allowed to reduce their contributions toward FERS but required to pay the difference toward the CSRS program, which is currently underfunded by over $750 billion.
Any of these three approaches would ensure the savings from increasing federal civilian retirement contributions is not double counted.
The President, in his budget, proposed the third approach. Under their plan, they write, “federal agency contributions for currently accruing costs of employee pensions would decline, [but] these Federal employers would pay an additional amount toward unfunded liabilities of the retirement system that would leave total agency contributions unchanged.”
Ideally, lawmakers would adopt one of these approaches not only for whatever new adjustment they make, but also undo the double-counting currently taking place as a result of the 2012 legislation that increased retirement contributions for new workers. At minimum, they should not make things worse.
Relying on gimmicks and double-counting not only increases the debt, but it also undermines our country’s fiscal credibility. With debt levels at their highest as a share of GDP since the aftermath of World War II, that credibility is as important now as ever. It should not be compromised.