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For years, analysts have raised concerns about the generosity of the retirement and other benefits available to federal employees. This memorandum looks at federal employee benefits and how they compare with those of employees of large private-sector firms. The analysis was undertaken as background in support of ongoing Congressional Budget Office (CBO) analytical work for the Congress.

R. Mark Musell of CBO's Special Studies Division prepared the memorandum under the supervision of Arlene Holen. Kristin McCue and David Torregrosa assisted with the analysis. Joseph R. Antos, James L. Blum, Linda Bilheimer, Sandra Christensen, Paul Cullinan, and David M. Delquadro, all of CBO, provided helpful comments on early versions of the report. Outside CBO, valuable comments and assistance were provided by Lex Miller of Watson Wyatt & Company, Ron Gebhardtsbauer at the American Academy of Actuaries, Carolyn Merck at the Congressional Research Service, and Margaret Wrightson and Jennifer Cruise at the General Accounting Office.

Sherry Snyder edited the manuscript, and Leah Mazade proofread it. Sharon Corbin-Jallow prepared the memorandum for publication, and Laurie Brown prepared the electronic version for CBO's Web site (www.cbo.gov).
 
 

SUMMARY

INTRODUCTION

• Method of Analysis
• Qualifications of the Analysis

HOW FEDERAL AND PRIVATE-SECTOR BENEFIT PACKAGES COMPARE IN TOTAL

RETIREMENT BENEFITS

• The Federal Retirement Systems for Civilian Employees
• Results of the Comparisons

HEALTH INSURANCE BENEFITS

HEALTH INSURANCE BENEFITS FOR RETIREES

LIFE INSURANCE BENEFITS

SICK LEAVE AND DISABILITY BENEFITS

HOLIDAYS AND VACATIONS

COMPARING PAY AND BENEFITS

APPENDIXES

A - Analytic Method and Detailed Results
B - Alternative Comparison
 

TABLES
S-1.	Comparison of the Annual Value of Federal and Private-Sector Benefits for Five Hypothetical Employees
1.	Comparison of the Annual Value of Federal and Private-Sector Benefits for Five Hypothetical Employees
2.	Comparison of the Annual Value of Federal and Private-Sector Retirement Benefits for Five Hypothetical Employees
A-1.	Firms Included in the Watson Wyatt & Company Database, by Size and Industry
A-2.	Assumptions Used to Value Defined Benefit Retirement Plans
A-3.	Comparison of the Annual Value of Federal and Private-Sector Health Insurance Benefits for Five Hypothetical Employees
B-1.	Comparison of the Annual Value of Federal and Private-Sector Benefits for Five Hypothetical Employees
B-2.	Assumptions Used to Value Defined Benefit Retirement Plans

 
 

SUMMARY

The federal government and many private firms provide various benefits as part of their employees' compensation. This analysis compares federal government and private-sector practices covering retirement, health insurance, and other major employee benefits. It complements a 1997 analysis in which the Congressional Budget Office (CBO) compared federal and private-sector pay. That analysis found that, on average, the federal government pays less than private-sector firms for similar jobs. It also offered evidence that low pay means that the government sometimes accepts less experienced workers.

Results and Conclusions

The analysis compares the dollar value of benefits that various types of hypothetical employees earn in a year. The employees vary by age, income, and years of service, thus providing a broad comparison. The values represent only the portion of benefits that employers provide, not those that employees pay for directly. Comparisons are constructed to isolate differences in benefit values that arise solely from differences in provisions of the benefit plans.

On that basis, the analysis suggests that employee benefits represent a significant portion of the compensation packages of both the federal government and the large private firms covered by this analysis. Depending on age, salary, length of service, and retirement plan, benefits range from 26 percent to 50 percent of pay for federal employees and from 24 percent to 44 percent of pay for employees of the large private firms. In most cases examined, the value of the employee benefit package offered by the federal government exceeds the value of comparable benefits offered by private firms. The federal advantage can reach 7.2 percent of pay (see Summary Table 1). The analysis also indicates the following:

• Federal workers covered by the Federal Employees Retirement System (FERS) have somewhat higher benefits, overall, than employees of large private firms. The benefits of FERS employees are also more generous than those of their counterparts who are covered by the Civil Service Retirement System (CSRS).
  
  
• Federal vacation, holiday, disability, FERS, and retiree health benefits generally are more generous than benefits of the same type offered by the private firms. Federal health insurance and life insurance, however, lag behind those benefits in the private sector. How the value of CSRS benefits compares depends on the age, income, and years of service of the employees. Employees who are able to retire early do well under the CSRS program.
  
  
• For federal jobs with pay near the level of their private-sector counterparts, the advantage in employee benefits would put the value of the entire compensation package (pay and benefits together) at or above that of the private sector. For the large number of federal jobs with pay gaps above the national average of 22 percent, federal pay and benefits together would still be well below the compensation offered for similar jobs by large firms. Those jobs include many higher-graded and higher-skilled positions.

The results are consistent with findings of earlier comparisons. In a recent study of employee retirement benefits, the General Accounting Office also found FERS benefits more generous than those of both CSRS and private-sector firms. An analysis by the Congressional Research Service found, as does this analysis, that federal and private benefit packages were fairly close in value, with the federal government often offering more valuable retirement benefits but less valuable health insurance.

Method and Qualifications

Dollar values were calculated by Watson Wyatt & Company, a benefits consulting firm, in consultation with CBO. Benefit values for private firms reflect the 1996 practices of the 800 predominantly large firms in the company's database. Those firms employ almost 12 million workers. Dollar values calculated for federal employees are based on data from the Office of Personnel Management covering federal employment, benefit provisions, and participation in various benefit programs.

The benefit comparisons cover only major benefits--those that usually make up the large part of any employee benefit package. Firms may offer different benefits to different groups of employees. The benefits considered in this analysis are those that cover the bulk of the rank-and-file, white-collar workers in the federal government and the private firms.

Results reflect the predominance of large firms in the Watson Wyatt & Company database. The comparisons are therefore most relevant for many professional and other higher-level jobs for which such firms would more likely serve as a source of competition for federal recruitment.

Preparing such comparisons involves making assumptions about employee behavior, rates of inflation, and other factors. CBO tested several equally plausible sets of assumptions. The results presented are based on patterns of retirement among federal employees and on federal economic assumptions, which produce the highest federal benefit amounts. Results using assumptions based on experience in the private sector are presented in Appendix B. That alternative analysis shows the federal advantage in benefits can reach about 5.6 percent of pay.

Given the uncertainties associated with estimating benefit levels, these estimates should not be interpreted as definitive. Rather, this analysis offers new information that illustrates the general magnitude and direction of differences in the level of federal and private-sector benefits.
 

INTRODUCTION

Providing various benefits, such as retirement plans and health insurance, to supplement employees' pay is a common practice among governments and private firms. Such benefits are favored under the tax code and provide employees with a measure of economic security as well as access to health and other services. They also promote the stability of the workforce.

Analysts have criticized benefits for federal civilian employees as relatively generous when compared with practices in private firms.⁽¹⁾ In past analyses, the Congressional Budget Office (CBO) has cited such claims as a possible rationale for trimming benefits.⁽²⁾ Over the years, the Congress has considered a variety of changes in federal benefits intended to bring federal practices more in line with those of private firms. Those proposals have included delaying cost-of-living adjustments for retirement benefits and reducing the government's share of health insurance costs.

Building on an earlier analysis that compared federal and private-sector pay, this memorandum compares benefits for federal employees with those offered by a selected group of large private employers.⁽³⁾ The comparison indicates that for various hypothetical federal employees, the value of federal benefits surpasses that of the average benefits of the private firms considered. Under assumptions that make federal employee benefits look generous when compared with others, the federal advantage can reach 7.2 percent of pay.

Method of Analysis

The analysis from which those results derive compares the present dollar value of benefits earned for a year of work by hypothetical federal and private employees. The specific method for calculating those values varies from benefit to benefit. A more detailed discussion of the methods CBO used can be found in Appendix A.

The dollar values cover only the portion of benefits that employers provide; they exclude the portion that employees pay for directly. The comparisons are designed so that differences in benefit values reflect only differences in the provisions of benefit plans. Two aspects of the comparisons, in particular, help ensure a focus on variations in benefit provisions.

First, the analysis compares the value of benefits that the same set of five hypothetical employees would earn in the federal government and the private sector. Thus, results are free of the variations in values one might expect if the comparisons covered workers with characteristics that varied between the federal and private sectors. CBO selected the age, salary, and years of service for each hypothetical employee to illustrate a variety of typical circumstances. The hypothetical employees have the following profile:
 

Second, the analysis uses a common set of assumptions about interest rates, retirement patterns, and other factors to compute the dollar values of both federal and private-sector benefits. Thus, results are free of differences that one might expect if one assumed that federal and private-sector employees behaved differently. The assumptions about behavior that the analysis used generally reflect federal experience.

Dollar values were calculated by Watson Wyatt & Company in consultation with CBO. The Bethesda, Maryland, firm specializes in analyzing employee benefit programs and has experience comparing federal and private-sector benefits. Most benefit values for private firms reflect the 1996 practices of the 800, predominantly large firms the Watson & Wyatt database covers. Those firms employ almost 12 million workers. Dollar values calculated for federal employees are based on data from the Office of Personnel Management on federal employment, benefit provisions, and participation in various benefit programs. The comparisons include two estimates of the value of federal benefits. The estimates differ primarily because of differences in the values assigned to retirement. Each estimate covers one of the government's two major retirement systems--the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS).

Qualifications of the Analysis

Employee benefit costs may vary among firms for many reasons. For example, other things being equal, a firm with older employees will probably have relatively higher benefit costs. This analysis attempts to isolate differences in costs attributable to the nature and size of the benefits offered. Accordingly, the values presented should not be mistaken for comparisons of average costs.

CBO constructed a number of comparisons, each using different, equally plausible sets of assumptions. Results proved sensitive to the assumptions used. The results presented here use analytic methods and assumptions that yield the highest dollar values for federal benefits, generally those based on the retirement behavior of federal workers. That approach makes it simpler to reject, where results warrant, claims that federal benefits are substantially more generous than those in the private sector. CBO also made a similar comparison based on assumptions that reflect private-sector, rather than federal, experience. That analysis, presented in Appendix B, also shows that federal benefits are more generous than those in the private sector, but by a smaller margin. Under the alternative assumptions, the federal advantage does not exceed 5.6 percent of pay.

The database used to generate both sets of estimates covers mostly large private firms. The required detailed data on small firms are generally not available. As described throughout the text, large firms usually offer more generous benefits than small firms. Results, therefore, should not be interpreted as representing all firms. The comparisons are most relevant for many professional and other higher-level jobs for which large firms would more likely serve as a source of competition for federal recruitment.

The analysis focuses only on the major components of the benefit packages of the federal government and the private sector. The benefits compared are retirement, health insurance, retiree health insurance, life insurance, time off for sickness and disability, and time off for holidays and vacations. Those cover most rank-and-file, white-collar employees in government and the private firms in the database. Executives and other groups of employees--for example, federal law enforcement officers--have different benefits. Both public and private organizations offer a wide range of smaller benefits--such as leave sharing, day care, and parking privileges--that are not considered in this analysis.

Given the various limitations and qualifications associated with the comparisons, the results should not be viewed as definitive estimates of federal and private benefits. The CBO analysis offers new information that suggests the general magnitude and direction of differences in employee benefits.
 

HOW FEDERAL AND PRIVATE-SECTOR BENEFIT PACKAGES COMPARE IN TOTAL

Two principal conclusions follow from the comparisons presented in this memorandum:

• The package of benefits offered by both the federal government and the private firms in the database represents a significant portion of employee compensation (see Table 1). The value of the benefit package for the hypothetical employees ranges from about 26 percent to 50 percent of pay for federal workers and from about 24 percent to 44 percent of pay for private-sector workers.
  
  
• The total dollar value of federal benefits is generally higher than that of private benefits. The differences in federal and private values range from a federal disadvantage of about 2 percent of pay to a federal advantage of about 7 percent of pay.

Considering individual benefits, the analysis shows that FERS offers benefits with a higher value than many private-sector retirement plans offer. The federal system also appears to offer better vacation, holiday, disability, and retiree health benefits than the private-sector firms. Retirement benefits under CSRS and federal health and life insurance benefits, however, sometimes lag behind those in the private sector.

Those results are consistent with the findings of earlier analyses. In a recent comparison of retirement benefits, the General Accounting Office also found that FERS benefits are more generous than the retirement benefits offered by private firms.⁽⁴⁾ An analysis by the Congressional Research Service found that federal and private benefit packages are fairly close in value and that the federal government in many cases offers more valuable retirement benefits but less valuable health insurance.⁽⁵⁾
 

RETIREMENT BENEFITS

Federal retirement benefits can have a dollar value much higher than that offered by many firms in the private sector, but much depends on the retirement plan and the employee being compared. Generally, retirement under FERS compares more favorably with private-sector practice than retirement under CSRS.

The Federal Retirement Systems for Civilian Employees

The Civil Service Retirement System and the Federal Employees Retirement System cover about 2.7 million employees, including employees of the U.S. Postal Service. Pension payments to 2.4 million survivors and retirees totaled over $40 billion in 1997.

CSRS was established by the Civil Service Retirement Act of 1920. The program preceded Social Security, and most federal employees in CSRS do not accumulate Social Security benefits. The plan covers most employees hired before 1984 and is closed to new members. CSRS is a defined benefit plan, in which the employer promises a benefit level at retirement. That benefit is usually determined by a formula that ties the size of the benefit to the employee's length of service and earnings.

Under CSRS, most employees may retire and begin collecting pensions without penalty at age 55 with 30 years of service, at age 60 with 20 years of service, or at age 62 with five years of service. The pension paid is a percentage of the average salary for the highest three years of earnings as a federal employee. Under the formula for determining that percentage, most employees earn up to 2 percent of the high-three average salary for each year of service. Annuities are usually adjusted annually to reflect changes in the consumer price index (CPI). Employees generally contribute 7 percent of pay toward their future benefit.

FERS was established by the Federal Employees' Retirement System Act of 1986 and covers civilian employees hired after January 1984 and others who elected to switch from CSRS. Under FERS, employees receive retirement income from three sources: the Thrift Savings Plan, a defined benefit plan, and Social Security.

The federal Thrift Savings Plan (TSP) is a defined contribution plan. Under such plans, employers generally make periodic contributions to retirement accounts set up for each employee. The level of the employer contribution is commonly set to match employee contributions according to a specific formula. Employers usually guarantee contributions but not a particular benefit level at retirement, as under defined benefit plans. The 401(k) plans offered by many employers are examples of defined contribution plans.

In TSP, federal agencies automatically contribute 1 percent of individual earnings to the plan on behalf of any worker covered by FERS. In addition, the employing agency matches voluntary employee deposits dollar for dollar for the first 3 percent of pay and 50 cents for each dollar for the next 2 percent. The entire federal contribution for employees putting aside 5 percent therefore amounts to 5 percent of pay. Employees may contribute another 5 percent of pay, but they receive no government match for that portion. The Internal Revenue Service limits contributions that both federal and private-sector employees can make to defined contribution plans. The limit is $10,000 in 1998. FERS employees currently have three options for investing their contributions: a fund indexed to common stock, a bond fund, and a government securities fund. Employees become eligible to withdraw from their TSP accounts when they separate from federal service or under certain other circumstances, including financial hardship. (Employees in CSRS may also contribute to TSP, but they can contribute only 5 percent of pay and receive no matching contribution from the government.)

The defined benefit plan under FERS, like CSRS, provides a pension that is a portion of the high-three average salary. However, most FERS employees earn pension benefits at a lower rate than under CSRS--1 percent of the high-three salary for each year of service. (The accrual rate is 1.1 percent for retirement at 62 or older with at least 20 years of service.) The age and service requirements for immediate, unreduced annuities are similar to those under CSRS, but the government will gradually increase the minimum retirement age, currently 55, under FERS. Cost-of-living adjustments (COLAs) may also be lower under FERS than under CSRS, depending on the rate of increase in the CPI.

Employee contributions toward future retirement benefits under FERS total 7 percent for Social Security and the defined benefit plan together, plus any voluntary contributions to TSP.

Results of the Comparisons

The FERS retirement benefit has a higher dollar value than does that under either the private plans in the database or CSRS. The values of the various components of the retirement plans are shown in Table 2.
 

The values represent retirement benefits earned for the current year of employment, assuming that hypothetical workers will retire, on average, at rates observed for the federal workforce. Watson Wyatt & Company computed separate values for each part of the three-part FERS. Values for FERS assume that each of the hypothetical employees has served a full career under that program, even though some values assume service greater than the length of time the program has been in existence. Values for the private sector, which represent the average for all firms in the database, are shown for both defined benefit and defined contribution plans. (Averages for each type reflect the fact that some employers have no plan of that type.) Separate values are shown for Social Security.

As described in Appendix A, the method of calculating the dollar amounts varies by type of plan. For defined benefit plans and Social Security, dollar values represent the present value of future benefits earned in the current year. Values for Social Security reflect benefit levels under current law, which could change. Values for defined contribution plans equal the employer contribution.

Federal and Private-Sector Retirement. Generally speaking, the benefit provisions of FERS and CSRS are generous compared with those of private plans in the database. Only 8 percent of the private plans, for example, provide the kind of automatic postretirement cost-of-living adjustments found in FERS and CSRS. Only about 15 percent of the private plans allow employees to retire with full pensions at age 55 with 30 years of service, as federal employees are able to do. Finally, only about 28 percent of private plans provide the kind of automatic, unmatched employer contribution that is part of TSP.

Consistent with such provisions, the dollar values of retirement benefits under FERS exceed private-sector values for each of the hypothetical employees. But why the poor showing for CSRS in the comparisons? First, some of the hypothetical employees would not have the age and service necessary to benefit from some of the more generous aspects of CSRS. For example, the federal values for the employee at age 60 with 20 years of service do not reflect the generosity of early retirement at age 55 with 30 years of service. Second, other employees (such as the employee who is age 25 with two years of service) would be eligible for early retirement and the other generous benefits under federal retirement but would not be likely to stay in government to receive them; values are discounted to reflect that. By contrast, the hypothetical employee who is age 50 with 25 years of service would qualify for early retirement and would be likely to continue in federal service until eligible to retire. For that employee, the value of federal retirement exceeds the value for private firms. Such early retirements are not unusual for federal service: voluntary retirements from CSRS for employees at ages 55 through 59 with 30 or more years of service accounted for 40 percent of all CSRS retirements in 1997.

Finally, the advantage CSRS holds when comparing individual benefit provisions, such as COLAs or early retirement, appears to be more than offset, in many cases, by the fact that many private-sector plans include Social Security and a defined contribution plan in addition to a defined benefit plan.

Qualifications of the Retirement Comparisons. Federal retirement plans would look much more generous than they do here if they were compared with those of the private sector as a whole. The private firms in the database are not representative of private practices; they offer relatively generous retirement benefits compared with many other firms. For example, all 800 firms offer some retirement program, and two-thirds offer plans that include both a defined contribution plan and a defined benefit plan to supplement Social Security. By contrast, data for 1993 from the Employee Benefit Research Institute show that only about 60 percent of all civilian nonagricultural wage and salary workers outside of government have employer- or union-sponsored retirement programs, and only about 20 percent of those participating in retirement plans have coverage under both defined benefit and defined contribution plans.

Federal benefits would also look more generous than they do here if the comparisons had considered benefits to survivors of employees, but that information was not available. The eligible surviving spouses and children of employees covered by FERS and CSRS receive annuities and other payments that are more generous than those available from private firms.

Comparisons of FERS and CSRS. For most of the hypothetical employees compared, retirement benefits under FERS have a much higher value than under CSRS. In part, that is because the government pays benefits under TSP as employees earn them. Accordingly, dollar values for TSP need not be discounted for the probability of reaching retirement age as do values for CSRS. Also, CSRS would have compared better with FERS if higher inflation assumptions had been warranted, because CSRS offers better inflation protection than FERS.

Even the defined benefit values alone under FERS are fairly close, in most cases, to the values under CSRS. The reason is that the comparisons exclude benefits covered by direct contributions from employees. CSRS offers a bigger defined benefit in total, but employees pay more for it than they pay for the defined benefit under FERS. Consider, for example, the case of the hypothetical employee age 60 with 20 years of service. Comparisons show that the value of the defined benefit under FERS is close to the value under CSRS--$2,749 compared with $3,545. By contrast, results that cover all benefits, including those paid for directly by employees, show that the value of FERS is well below that of CSRS--$2,965 compared with $5,436.

The exception to the generalization that FERS has much higher dollar values than CSRS is the case of the hypothetical employee age 50 with 25 years of service. For that case, the values of the two programs are much closer. That outcome reflects the fact that such an employee would be eligible under CSRS for the very generous option to retire at age 55 with a full pension and full protection from inflation. (Employees under FERS could also retire early but would not have that full protection.)
 

HEALTH INSURANCE BENEFITS

The Federal Employees Health Benefits (FEHB) program, which began in July 1960, provides health insurance for over 4 million federal employees and annuitants, as well as their dependents and survivors. The annual cost to the government is about $17 billion. Both the government and the employee contribute toward the cost of health insurance coverage according to a complex formula. Currently, the government pays about 70 percent of the premiums for active employees and annuitants, and the enrollees pay the balance.

FEHB has features that compare favorably with those of plans offered by leading firms. Many federal employees have a wide choice of plans and may change plans during annual "open seasons." Also, the program's participating plans offer catastrophic protection that limits employees' out-of-pocket costs for large medical expenditures. By contrast, many of the plans offered by private firms in the database include no out-of-pocket limit on employees' expenses.

Nevertheless, the value of federal health benefits is lower than the value of those offered by the 800 private firms in the sample. The amounts compared for each hypothetical employee represent the dollar value of estimated health costs covered by insurance minus any portion of benefits that employees pay for directly. Calculating those amounts involved two basic steps. First, Watson Wyatt & Company estimated a package of medical expenses for each hypothetical employee. Then, it applied the major provisions of insurance plans against those expenses to determine how much each plan would cover.

Watson Wyatt & Company estimated the packages of medical expenses using an extensive medical claims database. The database allowed them to identify expenses, in different categories of medical services, that would be typical of employees with characteristics that matched those of the hypothetical employees in the comparisons. The dollar value of health insurance for each hypothetical private-sector employee is the average cost covered by insurance for plans in the database. The dollar values for the hypothetical federal employees are the weighted averages of medical costs covered by four typical FEHB plans that together cover about half of the federal workforce (see Appendix A).

The relatively low values for FEHB, despite the program's advantages, reflect the fact that the government requires employees to pay a larger share of the cost of health insurance than do many private-sector firms. For example, although the government pays, on average, roughly 70 percent of the premiums for active employees and annuitants, about one-quarter of all firms in the database pick up the entire cost of individual coverage and about 10 percent pick up the entire cost for family coverage with up to two dependents.

A number of qualifications pertain to the comparisons of health benefits. The trend among private firms has been toward asking employees to pay an increasingly larger share of costs. Thus, the federal disadvantage estimated here may narrow in the future. Also, if the comparisons covered all private-sector employees, about one-third of whom have no health insurance, federal insurance would compare favorably. Finally, the method used for comparing employee health benefits does not capture the full value associated with the option federal employees have to pick health insurance plans best suited to their needs. Therefore, the federal benefits may actually have a higher value to employees than the comparisons suggest.

Among federal plans, Kaiser Mid-Atlantic, the one health maintenance organization (HMO), appears to offer benefits of higher value to younger workers than the other plans but not to older workers. The claims experience used to compute estimates indicates that this phenomenon may reflect selection of HMOs by young people expecting better coverage for prenatal and maternity care.
 

HEALTH INSURANCE BENEFITS FOR RETIREES

Most employees who retire from government with an immediate annuity are able to continue participating in FEHB and pay the same amount in premiums that they did before retirement. Comparisons put the value of federal insurance for retirees well above the value of benefits offered by the private firms in the database. For example, the value of retirement health benefits for the hypothetical employee in FERS at age 55 and with 20 years of service is more than double the average value for a similar employee at the private firms. The values compared are the annual amounts needed to fund the expected future medical benefits for federal retirees over each employee's career. In contrast to the values calculated for workers' health benefits, the values for federal retirees' health benefits cover only one plan and those for the private sector cover only selected insurance plans. Thus, results may not be representative of the results that would obtain if data from more plans had been available.

The favorable showing for federal retirees' health benefits reflects, in part, the fact that such benefits are less common in the private sector. About 65 percent of the firms in the database provide health programs for retirees. If compared with all private firms, federal retiree health benefits would look even more generous. A recent survey of all U.S. employers found that well below half provide medical benefits to retirees.⁽⁶⁾ In addition, offering health insurance to retirees is becoming less common among private firms. Five years earlier, in the 1991 database, 74 percent of employers offered retiree health programs. That downward trend is attributable to changes in accounting standards that require employers to identify the costs of future medical benefits for retirees as a liability on their balance sheets.⁽⁷⁾

The other factor that increases the value of federal retirees' health insurance compared with private benefits is the approach FEHB takes in coordinating benefits with Medicare. Medicare is the government's health insurance program for people age 65 and older and for certain others. The government and private plans usually adopt one of several standard methods of integrating their benefits with Medicare's. As described further in Appendix A, the method adopted by the federal government is relatively generous.
 

LIFE INSURANCE BENEFITS

The federal government offers its employees an opportunity to participate in a group life insurance program. Payments to survivors under the basic program equal the annual amount of an employee's pay plus $2,000. The minimum benefit is $10,000. (Additional benefits are provided for employees under age 45.) Costs are shared by the government and the employee: employees cover about two-thirds of premiums and the government one-third. Additional insurance may be purchased entirely at the employee's expense. All the private firms in the database also offer their employees some form of life insurance.

Comparisons show that the dollar value of federal life insurance benefits is below that of insurance offered by the private firms. The values compared for each hypothetical employee are the expected payouts under federal or private plans, based on the probability of death and adjusted to exclude the portion of benefits employees contribute toward directly.

The relatively poor showing for federal life insurance reflects a number of factors. About 90 percent of the private firms offer insurance entirely at the employer's expense, and many plans have higher benefits than the government's. Over half the firms, for example, offer payments of 1.5 times pay or more. In addition, many firms in the private sector offer lower premiums to younger employees. Some offer benefits free to the youngest employees. In contrast, the federal program charges the same premium to all employees. Thus, at younger ages, the federal fees in many cases exceed the value of insurance, even considering the additional benefits provided to younger workers. Comparisons covering the younger hypothetical employees therefore show a negative value for federal life insurance.
 

SICK LEAVE AND DISABILITY BENEFITS

Sick leave and disability programs replace all or part of an employee's income when illness or injury results in an inability to work. The federal government provides benefits for both long- and short-term inability to work. Full-time federal employees earn 13 sick days at full pay per year that they can use for temporary problems. For long-term inability to work, federal employees may receive annuities under FERS and CSRS. Employees under FERS may receive benefits from Social Security and the defined benefit portion of FERS, subject to rules that coordinate benefits under the two programs. Generally, annuity levels under FERS and CSRS are set to make up some portion of predisability income. Most private-sector employees are eligible for disability benefits under Social Security. Aside from that, many firms offer limited benefits. For example, even for employees with five years of service, 3 percent of firms in the database offer no sick or disability leave at full pay, 25 percent offer 10 days or fewer, and another 40 percent offer 60 days or fewer.

As a result, the values for federal sick leave and disability benefits exceed those for the private firms. The benefits calculated for each hypothetical employee are the present value of expected employer-financed payments to employees under sick and disability programs for disabilities occurring in the current year. The comparison covers only basic benefits for sickness and disability. Employers, however, may grant related benefits not considered here. For example, the government offers paid time off for employees who serve as organ or bone-marrow donors.
 

HOLIDAYS AND VACATIONS

The federal government, like many private employers, provides its employees with paid holidays and vacations. Federal employees receive 10 paid holidays from work each year. They earn paid vacation according to length of federal service. New employees working full time earn 13 days of vacation leave per year. Employees with longer service, however, can earn up to 26 days of vacation per year.

Comparisons show that federal employees receive more generous holiday and vacation pay than do employees of private firms. Values compared are the employee's daily rate of pay times the number of days off that the employee receives. The calculations assume that employees take all leave available to them or receive cash for the current year's time off. The comparisons cover only policies for holidays and vacations, although employers may grant employees leave for other reasons. The government, for example, grants leave to employees called to court as a witness on behalf of the U.S. government, for National Guard service, and for other reasons.
 

COMPARING PAY AND BENEFITS

The 1997 CBO memorandum Comparing Federal Salaries with Those in the Private Sector concluded that, on average, the government offers about 22 percent less pay than the private sector for similar jobs. The memorandum noted, however, the wide variation in how federal and private-sector salaries compare. Higher-skilled professional, administrative, and technical jobs generally show the greatest pay disadvantage relative to the private sector. Some lower-skilled and clerical jobs, however, show little or no pay disadvantage.

Such variations, along with those identified for the five hypothetical employees, make generalizing about the federal compensation package difficult. (Gaps in pay and benefits between the federal and private sectors, measured as a percentage of pay, cannot be added.) For federal jobs with pay near the level of their private-sector counterparts, an advantage in benefits could put the value of the full pay and benefits package at or above the private sector's. But this analysis shows that not all federal employees have an advantage in benefits. Differences in the value of benefits ranged from a federal advantage of 7.2 percent of pay to a federal disadvantage of 2 percent of pay.

For the significant number of federal jobs with pay gaps near or above the national average of 22 percent, however, federal pay and benefits together would still be well below what large firms offer for similar jobs--even for federal employees with the largest relative advantage in the value of benefits. That conclusion is consistent with evidence offered in the earlier study that for some jobs, the government has to accept employees with less experience and education than do private firms recruiting for many of the same types of jobs.

1. Peter G. Peterson, Facing Up (New York: Simon and Schuster, 1993), p. 103.

2. See, for example, Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options (March 1997), p. 251.

3. See Congressional Budget Office, Comparing Federal Salaries with Those in the Private Sector, CBO Memorandum (July 1997), the findings of which are summarized in the last section of this memorandum.

4. General Accounting Office, Federal Retirement, Federal and Private Sector Retirement Program Benefits Vary, GAO/GGD-97-40 (April 1997).

5. Congressional Research Service, Federal Civil Service Retirement: Comparing the Generosity of Federal and Private-Sector Retirement Systems, CRS Report for Congress 95-687 EPW (June 5, 1995).

6. William M. Mercer, Mercer/Foster Higgins National Survey of Employer-Sponsored Health Plans (New York: William M. Mercer, 1977), p. 32.

7. The Financial Accounting Standards Board's accounting standard no. 106 requires companies to recognize the cost of retirees' health benefits in their financial statements during the periods in which employees earn the benefits. They must also recognize the liability for benefits already earned both by current retirees and active employees. The requirement took effect in 1993.

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