BECAUSE FEDERAL pensions are a matter of more than passing concern in this town--and because they cannot be ignored at a time when budget cuts and Social Security reform are high on the congressional agenda--we thought we would set the record straight on a few facts about what they cost, who pays for them and how they relate to the Social Security system. Judging from the mail we received recently when we suggested that Social Security coverage should be extended to federal workers, there is considerable confusion about these matters.
Government pensions are a large and growing burden to the taxpayer. This is because the pensions are generous and the payroll contributions made by federal workers cover only a small and declining part of their cost. It is true that federal employees contribute 7 percent of their total salaries each year to their retirement funds. But it is also true that the full cost of their expected pensions is estimated by the Civil Service Retirement fund actuaries to be more than five times that amount. In other words, if federal workers really paid for half the cost of their own pensions, as most of them believe they do, they would have to set aside 18 percent of their salaries each year for this purpose.
Because employee contributions cover only a small fraction of the costs of the retirement fund, the Treasury must make up the difference. Part of this is covered by matching contributions from the budgets of each federal agency. Most of it, however, comes from a large (over $11 billion in 1980) and growing tap on general revenues.
Federal employees also receive generous treatment from the Social Security system. While they are working for the federal government they pay no Social Security taxes at all. If they work for part of their lives in the private sector, as over half of them do, they may receive generous Social Security benefits in addition to their federal pensions. Part of their Social Security benefit is a fair return on their payroll taxes. Most of it, however, is properly described as a "windfall"--an unintended subsidy. This is because the Social Security benefit formula gives to persons with typically low earnings benefits that are much higher relative to their contributions than it pays to people with high average earnings.
Since federal employees have usually worked relatively few years in the private sector, or held part-time jobs in addition to their federal work, their average lifetime earnings counted by Social Security are low, and the benefits they receive are very high compared with their contributions. Federal pensioners thus benefit unfairly--to the tune of almost $1 billion a year--from provisions in the Social Security law intended to help the poor while, at the same time, they escape sharing in the cost of those provisions throughout most of their working lives.
It is, of course, perfectly reasonable for federal workers, like most workers in well-established private firms, to have a pension plan that assures them a better retirement income than that afforded by Social Security alone and to have their employer pay a major share of their retirement costs. But it is also perfectly reasonable for their employer--the general public--to consider whether some correction might not be in order for a system that not only compares favorably with the best private industry plans but also allows its beneficiaries to collect bargain-rate benefits from Social Security as well.