While extending the payroll tax cut through the end of last year, members of Congress last fall took what many feel was a long overdue whack at the cost of their retirement plan. They bumped up the rate at which federal employees contribute to their pension plan, saving an estimated $15 billion over the next 11 years.
They also made sure that none of the increase applied to themselves. Anyone in service before the law went into effect would pay into the pension plan at the old rate.
For all the talk you hear from Capitol Hill about running government more like a business, Congress has a retirement plan that would make any Fortune 500 executive blush. Members can retire younger, having contributed fewer of their own dollars, than almost any worker in the country -- even more than the generous terms other federal workers get.
At a time when traditional pensions are disappearing and many workers are struggling to save for retirement, the Federal Employees' Retirement System, an old-school defined benefit pension program, pays 215 former congressmen and women an average of $39,576, for an average of 16 years of service, according to a recent Congressional Research Service report.
That's about what the average private-sector worker makes in retirement from all sources after a lifetime of work, according to the Employees Benefits Research Institute. The average income that worker gets from a pension is about $8,800 -- if they have one. In 2010, fewer than 15 percent of private sector employees were enrolled in a defined-benefit pension.
"It's not keeping pace with what's happening in the private sector," said Veronique de Rugy, a senior researcher with George Mason University's Mercatus Center. "It's not sustainable."
It's inaccurate, in fact, to refer a single retirement plan, since any senator or representative elected after 1986 has access to three: Social Security, a 401(k) program that matches 5 percent of their contributions up to $17,500, and FERS, which as the name implies covers anyone paid from the federal till.
FERS alone is a plan any U.S. worker would envy. As Jim Kessler, co-founder of the think tank Third Way and a former congressional aide, said, "It's not wrong to have three plans, but the matching is one-to-one for two of them and the other [FERS] is one-to-14."
As a result, all federal employees get a return on their FERS contributions at a rate that's almost double what other workers do. (See chart.) But thanks to a faster accrual rate granted to elected employees -- how fast the value of their benefits pile up -- members of Congress even get a higher percentage payout on FERS for the same time served than other federal workers do.
According to calculations by Pete Sepp, executive vice president of the National Taxpayers Union, who has been tracking congressional benefits for decades, an executive branch employee with 10 years of service and who is retiring at age 62 this year would begin his pension at roughly $15,600. But a member of Congress of identical age, salary and service would begin at approximately $26,600, reflecting his higher contribution. But for his extra $11,000 in the first year's benefit, the lawmaker will have contributed only $8,350 more to the plan.
Defenders of the system point out that elected politicians have less job security than appointees like our executive branch workers. Sepp doesn't buy it. "Not only do you get a lot more in benefits for the extra you pay," he said, "but how many Cabinet secretaries stay in government for even eight years?"
Some critics say congressional retirement plans are not only too numerous and too generous, but the wrong kind. One of them is Republican Rep. Mike Coffman, who has put forward a bill with a fellow Coloradan, Democrat Jared Polis, that would end FERS.
"It makes no sense for Congress to continue to reward itself using taxpayer dollars, with a defined benefit plan when ... much of the country has moved to a defined contribution plan like a 401K," Coffman said in a statement earlier this year.
But as Washington is consumed with the sequester, the chances that Coffman and Polis' bill, or the $25 million we spend to support our congressional retirees, will get much notice. More pundits have teed off on the fact that our senators and representatives -- the very people charged with averting the automatic cuts to the federal budget -- are among the few federal employees who won't be touched by them.
Congress didn't enjoy plush pensions until 1946, when it was thought that a gold-plated plan would induce members to cede their seats to young men who had been galvanized by the war. But if the current deal is no longer gold-plated, said Sepp, "it's silver-plated, and it hasn't been attractive enough to get them rotated out of office."
Washington Lawmakers' Pensions: The Envy of a Nation
As 2012 draws to a close, people in or nearing retirement face a stunning set of uncertainties about their finances and even basic health and retirement benefits. Congress has left Washington for the Christmas break without passing any measures to delay or soften the effects of the so-called fiscal cliff. Perhaps it might still act before the end of the year, but don't count on it. Odds are that the new Congress that takes office next year will take action to prevent the very worst outcomes. But after years of gridlock, should we really expect things to get better?
Here are eight pressing money and benefit issues that are barreling down on seniors. All of them are bad news. And while there aren't a lot of places to hide, it's important for anyone trying to build or conserve a retirement nest egg to develop contingency plans.
The Bush tax cuts expire December 31. All income tax brackets will shift upward-the 10 percent bracket disappears and the new lowest tax rate will be 15 percent. The 25 percent bracket becomes 28 percent; 28 percent becomes 31 percent; 33 percent moves to 36 percent, and 35 percent will be 39.6 percent. The capital gains tax rate will rise to 20 percent from 15 percent, and dividend taxes will soar, moving from being taxed as capital gains to being treated as ordinary income.
The AMT was aimed at preventing wealthier taxpayers from using deductions and other tax benefits to escape their fair share of taxes. However, the qualifying income levels were not indexed for inflation. Congress has thus had to enact an AMT "patch" each year to help millions of taxpayers avoid extra taxes Congress never intended for them to pay. There is now no patch in place for 2012 income taxes. That's right: the taxes that are due on this year's income. Even if Congress does something soon, tax-filing season likely will be delayed. If Congress does not approve a patch, the number of taxpayers hit by AMT payments will rise from 4 million to 34 million.
Fiscal-cliff negotiations between the White House and Republicans reportedly included the Obama administration's acceptance of a new formula for setting the annual cost of living adjustment (COLA) for Social Security beneficiaries. Called the chained CPI, it may, as supporters and many economists claim, represent a more accurate cost of living measure than the index now used to set each year's COLA. But it would also cut effective Social Security benefits by more than $20 billion a year after it has been in place for several years. It would also raise income-tax bills by reducing the size of the automatic inflation adjustments the tax brackets use to determine different income tax rates.
Estate and gift tax rules are now unusually generous. Individual estates up to $5.12 million (double that for a couple) avoid all estate taxes, and amounts above these levels are taxed at 35 percent. This is also the rate for gift taxes. Without action by Congress, the estate-tax exclusion will plunge to only $1 million in 2012, and the tax on larger estate values will be 55 percent.
Medicare taxes will rise on wealthier wage earners in 2013. This change is part of the Affordable Care Act and not part of the fiscal-cliff impasse. Medicare payroll taxes, now set at 1.45 percent of payrolls, will rise another 0.9 percent on wage incomes above $200,000 in 2013 ($250,000 for couples). These same income limits will be used to trigger a 3.8 percent annual tax on net investment income. The proceeds will be used to help fund health-reform changes.
When health reform is fully implemented in 2014, older people not yet eligible for Medicare will have guaranteed access to health insurance regardless of any preexisting conditions, at rates that are held down by rules limiting age-based premium hikes. These benefits will be delivered in large measure through new state-based insurance exchanges. These exchanges are supposed to be set up in 2013 so they can be fully operational before the end of the year. However, most states have decided not to build their own exchanges but to let the federal government do it for them. Odds of this work being done in time, let alone being done well, are seen as very small.
In 2014, health reform would provide expanded healthcare to currently uninsured, lower-income Americans through a massive expansion of Medicaid at the state level. The federal government would pay all added expenses for three years and states would never pay more than 10 percent of the expenses from the expansion. Still, many states have spurned the act's offer of expanded coverage, saying they do not like the potential for higher state expenses and the rules that come with the expanded services.
In a 1997 law, Congress tied Medicare's payments to physicians to the growth of the economy. Medicare cost increases, including physician expenses, regularly exceed overall economic growth. Under the law, Medicare payments to physicians would have to be cut each year were it not for periodic Congressional action to override the cuts. Without another fix, doctors will see a 27 percent cut in their Medicare payments next year, and an unknown number of them would stop taking Medicare patients. Like much else in Washington, the doc fix has become part of the broader fiscal-cliff debate.