OIG Report: Using U.S. Postal Service-Specific Assumptions for Calculating the Federal Employees Retirement System Liability
This report presents the results of our self-initiated review of Using U.S. Postal Service-Specific Assumptions for Calculating the Federal Employees Retirement System (FERS) Liability (Project Number 13BG015FT000). Our objective was to review the assumptions used for the Postal Service’s FERS liability calculation and determine what effect those assumptions may have on the FERS liability calculation estimate. See Appendix A for additional information about this review.
The FERS is a pension program offered to employees of the Postal Service and federal agencies. The Postal Service and its employees contribute to the pension program for future benefits. The U.S. Office of Personnel Management (OPM) administers the FERS and reported that as of September 30, 2012, the Postal Service had fully funded its FERS liability and was overfunded by $3 billion. The U.S. Postal Service Office of Inspector General (OIG) previously analyzed funding levels and provided comparisons to the federal government, military, state governments, and corporations. Those comparisons supported the Postal Service’s funding of its pension liabilities at 105 percent.
Previous recommendations focused on legislation to refund the current surplus and address future surpluses. In fiscal year (FY) 2013, the OIG issued two white papers addressing the causes of the FERS surplus.1 The white papers focused on the calculations behind the FERS liability. The OIG contracted with Hay Group, an independent actuarial firm with expertise in Postal Service pension benefits, to identify whether there were characteristics of Postal Service employees that distinguish them from other federal employees. Using the research results, we analyzed the extent that those characteristics contribute to the FERS surplus and impact the FERS liability.
Demographic differences between Postal Service and other federal employees impacted the calculation of the FERS liability estimate. Specifically, Postal Service employees have distinguishing employee characteristics (salary growth, termination, retirement, disability, death, and life expectancy) that the OPM does not take into consideration when applying actuarial assumptions. When calculating the FERS liability using actuarial assumptions specific to the Postal Service, the liability is reduced by $9.5 billion. Using assumptions that more closely align with Postal Service employees causes the FERS liability to decrease from $90.5 billion to $81 billion, resulting in a total surplus of $12.5 billion.
We believe the Postal Service’s FERS liability should be calculated using actuarial assumptions specific to accurate estimate of retirement liabilities that are more likely to match future retirement benefits actually paid.Postal Service employees. This approach provides a more accurate estimate of retirement liabilities that are more likely to match future retirement benefits actually paid.
Postal Service-Specific Assumptions
Characteristic and demographic differences between Postal Service employees and other federal employees impact the projected FERS liability. Specifically:
Postal Service employees have received smaller pay increases than assumed, general increases have been lower than predicted, and Postal Service employees have fewer steps in their pay scale than typical federal employees. Consequently, Postal Service employees reach the top step more quickly and salary growth ceases, effectively reducing the FERS liability.
The demographic characteristics and career patterns of Postal Service employees are different from those of federal employees. Postal Service employees are less likely to leave their positions and withdraw from the FERS, less likely to take early retirement, yet more likely to die while employed or retire on disability. The overall effect reduces the FERS liability.
The OPM projected improved mortality rates for federal employees, which increased the FERS liability. However, when considering only Postal Service employees, the mortality improvements for retired men ages 55 to 64 were significantly lower at 0.3 percent compared to 1.7 percent for the OPM’s projections. Overall, the mortality improvement for retired men was 1 percent for Postal Service employees compared to the OPM’s 2 percent projection. For retired females, the mortality improvement was slightly higher at 1.5 percent for Postal Service employees compared to the OPM’s 1.2 percent projection. The combined effect of these differences reduces the FERS liability.