2012   Financial Report of the United States Government

Notes to the Financial Statements

Note 15. Federal Employee and Veteran Benefits Payable

Federal Employee and Veteran Benefits Payable as of September 30, 2012, and 2011
 
Civilian
Military
Total
(In billions of dollars)
2012
2011
2012
2011
2012
2011
Pension and accrued benefits 1,772.3 1,619.7 1,482.0 1,361.3 3,254.3 2,981.0
Post-retirement health and accrued benefits 328.1 342.5 833.3 842.3 1,161.4 1,184.8
Veterans compensation and burial benefits. and burial benefits N/A N/A 1,761.6 1,533.7 1,761.6 1,533.7
Life insurance and accrued benefits 47.2 44.6 10.6 11.1 57.8 55.7
FECA benefits 27.0 24.2 8.6 8.3 35.6 32.5
Liability for other benefits 0.8 1.6 2.5 2.9 3.3 4.5
Total Federal employee and veteran benefits payable 2,175.4 2,032.6 4,098.6 3,759.6 6,274.0 5,792.2

Change in Pension and Accrued Benefits
 
Civilian
Military
Total
(In billions of dollars)
2012
2011
2012
2011
2012
2011
Actuarial accrued pension liability, beginning of fiscal year 1,619.7 1,632.9 1,361.3 1,262.7 2,981.0 2,895.6
Pension Expense:
Expected normal costs 36.3 36.8 34.3 24.9 70.6 61.7
Interest on pension liability during the period 74.4 78.3 64.8 62.6 139.2 140.9
Prior (or past) service cost from plan amendments or new plans 0.1 - - - 0.1 -
Actuarial (gains)/losses (from experience) 9.7 (70.6) (3.2) 0.1 6.5 (70.5)
Actuarial (gains)/losses (from assumption changes) 109.6 15.9 77.2 62.0 186.8 77.9
Total pension expense 230.1 60.4 173.1 149.6 403.2 210.0
Less benefits paid (77.5) (73.6) (52.4) (51.0) (129.9) (124.6)
Actuarial accrued pension liability, end of fiscal year 1,772.3 1,619.7 1,482.0 1,361.3 3,254.3 2,981.0

Change in Post-Retirement Health and Accrued Benefits
 
Civilian
Military
Total
(In billions of dollars)
2012
2011
2012
2011
2012
2011
Actuarial accrued post-retirement health benefits liability, beginning of fiscal year 342.5 355.5 842.3 904.7 1,184.8 1,260.2
Post-Retirement Health Benefits Expense:
Prior (and past) service costs from plan amendments - - (31.9) (15.9) (31.9) (15.9)
Normal costs 13,8 14.5 21.4 24.0 35.2 38.5
Interest on liability 16.4 17.8 41.7 45.8 58.1 63.6
Actuarial (gains)/losses (from experience) (21.2) (17.9) (12.3) (1.1) (33.5) (19.0)
Actuarial (gains)/losses (from assumption changes) (9.8) (13.8) (6.8) (94.0) (16.6) (107.8)
Total post-retirement health benefits expense (0.8) 0.6 12.1 (41.2) 11.3 (40.6)
Less claims paid (13.6) (13.6) (21.1) (21.2) (34.7) (34.8)
Actuarial accrued post-retirement health benefits liability, end of fiscal year 328.1 342.5 833.3 842.3 1,161.4 1,184.8

The Government offers its employees life and health insurance, as well as retirement and other benefits. The liabilities for these benefits, which include both actuarial amounts and amounts due and payable to beneficiaries and health care carriers, apply to civilian and military employees.

OPM administers the largest civilian plan. DOD administers the largest military plan. Other significant pension plans with more than $10 billion in accrued benefits payable include those of the Coast Guard (DHS), Foreign Service (Department of State), TVA, USPS, and HHS.

Change in Civilian Life Insurance and Accrued Benefits
(In billions of dollars)
2012
2011
Actuarial accrued life insurance benefits liability, beginning of fiscal year 44.6 44.0
Life Insurance Benefits Expense:
New entrant expense 0.3 0.4
Interest on liability 2.1 2.1
Actuarial (gains)/losses (from experience) - (0.5)
Actuarial (gains)/losses (from assumption changes) 0.7 (0.9)
Total life insurance benefits expense 3.1 1.1
Less costs paid (0.5) 0.5
Actuarial accrued life insurance benefits liability, end of fiscal year 47.2 44.6

Significant Long-Term Economic Assumptions Used
in Determining Pension Liability and the Related Expense
 
Civilian
Military
2012
2011
2012
2011
FERS
CSRS
FERS
CSRS
 
Rate of interest 4.70% 4.30% 4.90% 4.60% 4.60% 4.80%
Rate of inflation 2.50% 2.50% 2.40% 2.40% 2.60% 2.50%
Projected salary increases 2.60% 2.60% 3.10% 3.10% 3.00% 3.30%
Cost of living adjustment 2.00% 2.50% 1.90% 2.40% - -

Significant Long-Term Economic Assumptions Used
in Determining Post-Retirement Health Benefits and the Related Expense
 
Civilian
Military
2012
2011
2012
2011
Rate of interest 4.70% 4.90% 4.60% 4.90%
Single equivalent medical trend rate - - 5.10% 5.20%
Ultimate medical trend rate 4.40% 4.35% 5.35% 5.25%

Significant Long-Term Economic Assumptions Used
in Determining Life Insurance Benefits and the Related Expense
 
Civilian
2012
2011
Rate of interest 4.50% 4.80%
Rate of increase in salary 2.60% 3.10%

With the implementation of SFFAS No. 33, Pension, Other Retirement Benefits, and Other Postemployment Benefits: Reporting the Gains and Losses from Changes in Assumptions and Selecting Discount Rates and Valuation Dates, agencies are required to separately present gains and losses from changes in long-term assumptions used to estimate liabilities associated with pensions, ORB, and OPEB on the Statement of Net Cost. SFFAS No. 33 also provides a standard for selecting the discount rate assumption for present value estimates of Federal employee pension, ORB, and OPEB liabilities. In addition, SFFAS No. 33 provides a standard for selecting the valuation date for estimates of Federal employee pension, ORB, and OPEB liabilities that will establish a consistent method for such measurements.

DOD's long-term ultimate medical trend rate for post-retirement health benefits liability is 5.35 percent for fiscal year 2012 and 5.25 percent for fiscal year 2011. For disclosure and comparison purposes, DOD's estimate of a single equivalent medical trend rate for fiscal year 2012 is 5.10 percent and for fiscal year 2011 is 5.2 percent, which is an approximation of the single equivalent rate that would produce that same actuarial liability as the actual rates used. Please refer to the individual financial statements of DOD for further details regarding Military Retirement Health Benefits-Medical Trend.

Civilian Employees

Pensions

OPM administers the largest civilian pension plan, which covers substantially all full-time, permanent civilian Federal employees. This plan includes two components of defined benefits. These are the Civil Service Retirement System (CSRS) and the Federal Employees' Retirement System (FERS). The basic benefit components of the CSRS and the FERS are financed and operated through the Civil Service Retirement and Disability Fund (CSRDF).

CSRDF monies are generated primarily from employees' contributions, agency contributions, payments from the General Fund, and interest on investments in Treasury securities. See Note 24—Earmarked Funds.

The Federal Retirement Thrift Investment Board administers the Thrift Savings Plan (TSP) Fund. The TSP Fund investment options include two fixed income funds (the G and F Funds), three stock funds (the C, S, and I Funds) and five lifecycle funds (L 2050, L 2040, L 2030, L 2020, and L Income). The L Funds diversify participant accounts among the G, F, C, S, and I Funds, using professionally determined investment mixes (allocations) that are tailored to different time horizons. Treasury securities held in the G Fund are included in Federal debt securities held by the public and accrued interest on the Balance Sheets. The G Fund held $153.9 billion and $139.3 billion in non-marketable Treasury securities as of September 30, 2012, and 2011, respectively.

Post-Retirement Health Benefits

The post-retirement civilian health benefit liability is an estimate of the Government's future cost of providing post-retirement health benefits to current employees and retirees. Although active and retired employees pay insurance premiums under the Federal Employees Health Benefits Program (FEHB), these premiums cover only a portion of the costs. The OPM actuary applies economic assumptions to historical cost information to estimate the liability.

Life Insurance Benefits

One of the largest other employee benefits is the Federal Employee Group Life Insurance (FEGLI) Program. Employee and annuitant contributions and interest on investments fund a portion of this liability. The actuarial life insurance liability is the expected present value of future benefits to pay to, or on behalf of, existing FEGLI participants. The OPM actuary uses interest rate, inflation, and salary increase assumptions that are consistent with the pension liability.

Workers’ Compensation Benefits

The DOL determines both civilian and military agencies' liabilities for future workers' compensation benefits for civilian Federal employees, as mandated by the Federal Employees' Compensation Act (FECA), for death, disability, medical, and miscellaneous costs for approved compensation cases, and a component for incurred, but not reported, claims. The FECA liability is determined annually using historical benefit payment patterns related to injury years to predict the ultimate payments. These estimated payments have been discounted to present value using OMB's interest rate assumptions for 10-year U.S. Treasury notes. For 2012, a 2.29 percent interest rate was assumed in year one and 3.14 percent was assumed for year two and thereafter.

The DOL calculates the FECA liability using wage inflation factors, cost of living adjustments (COLA), and medical inflation factors (Consumer Price Index-Medical or (CPIM)). The table below reflects the compensation COLAs and CPIMs used in the estimations for various charge-back years.

Fiscal Year
COLA
CPIM
2013 2.83% 3.65%
2014 2.03% 3.66%
2015 1.93% 3.72%
2016 2.00% 3.73%
2017+ 2.03% 3.80%

Military Employees (Including Veterans)

Pensions

The DOD Military Retirement Fund finances military retirement and survivor benefit programs. The increase in the Military Retirement Pension liability is due to additional benefit accruals (normal cost), interest on the pension liability and assumption and benefit changes. Liabilities in the future will depend on expected changes due to interest and benefit accruals, future benefit changes, assumption changes, and actuarial experience.

This Fund receives income from three sources: monthly normal cost payments from the Services to pay for the current years' service cost; annual payments from Treasury to amortize the unfunded liability and pay for the increase in the normal cost attributable to Concurrent Receipt per Public Law 108-136; and investment income.

The military retirement system consists of a funded, noncontributory, defined benefit plan. It applies to military personnel (Departments of Army, Navy, Air Force, and the Marine Corps). This system includes nondisability retirement pay, disability retirement pay, and survivor annuity programs. Military personnel who remain on active duty for 20 years or longer are eligible for retirement. There are three different retirement benefit formulas that are currently being used by the military: Final Pay, High-3 Year Average, and Career Status Bonus/Military Retirement Reform Act of 1986. The date an individual enters the military determines which retirement system they would fall under and if they have the option to pick their retirement system. For more information on these benefits, see DOD's website http://www.dfas.mil/retiredmilitary/plan/estimate/csbredux.html.

Post-Retirement Health Benefits

Military retirees and their dependents are entitled to health care in military medical facilities if a facility can provide the needed care. Prior to becoming Medicare eligible, military retirees and their dependents also are entitled to participate in TRICARE, which reimburses (net of beneficiary copay and deductible requirements) for the cost of health care from civilian providers. TRICARE options are available in indemnity, preferred provider organization, and health maintenance organization (HMO) designs.

Since fiscal year 2002, TRICARE, as second payer to Medicare, covers military retirees and their dependents after they become Medicare eligible. This TRICARE coverage for Medicare eligible beneficiaries requires that the beneficiary enroll in Medicare Part B and is referred to as TRICARE for Life (TFL). Health care under TFL can be obtained from military medical facilities on an “as available” basis or from civilian providers. Military retiree health care actuarial liability figures include costs incurred in military medical facilities, as well as claims paid to civilian providers and certain administrative costs. Costs paid to civilian providers are net of Medicare’s portion of the cost.

Chapter 56 of Title 10, United States Code (U.S.C.) created the DOD Medicare-Eligible Retiree Health Care Fund, which became operative on October 1, 2002. The purpose of this fund is to account for the health benefits of Medicare-eligible military retirees, their dependents, and survivors who are Medicare eligible. The Fund receives contributions from the Uniformed Services and Treasury, as well as interest earnings on its investments and pays costs incurred in military medical facilities, as well as claims for care provided by civilian providers under TFL, administration costs associated with processing the TFL claims, and capitated payments for coverage provided by U.S. Family Health Plans.

In addition to the health care benefits for civilian and military retirees and their dependents, the VA also provides medical care to veterans on an “as available” basis, subject to the limits of the annual appropriations. In accordance with 38 CFR 17.36 (c), VA’s Secretary makes an annual enrollment decision that defines the veterans, by priority, who will be treated for that fiscal year subject to change based on funds appropriated, estimated collections, usage, the severity index of enrolled veterans, and changes in cost. Accordingly, VA recognizes the medical care expenses in the period the medical care services are provided. For the fiscal years 2009 through 2012, the average medical care cost per year was $39.0 billion.

Veterans Compensation and Burial Benefits

The Government compensates disabled veterans and their survivors. Veterans compensation is payable as a disability benefit or a survivor’s benefit. Entitlement to compensation depends on the veteran’s disabilities having been incurred in, or aggravated during, active military service; death while on duty; or death resulting from service-connected disabilities, if not on active duty.

Burial benefits include a burial and plot or interment allowance payable for a veteran who, at the time of death, is qualified to receive compensation or a pension, or whose death occurred in a VA facility.

The liability for veterans’ compensation and burial benefits payable increased by $227.9 billion in fiscal year 2012. Substantially all the $227.9 billion increase in the Federal Employee and Veterans Benefits Liabilities relates to 1) changes in experience related primarily to increased disability claims filed and processed for presumptive disability benefits associated with Vietnam Veterans, including Agent Orange and 2) changes in actuarial liability assumptions used to project future cash flows related primarily to higher disability claims rates.

Several significant actuarial assumptions were used in the valuation of compensation, pension, and burial benefits to calculate the present value of the liability. A liability was recognized for the projected benefit payments to: (1) those beneficiaries, including veterans and survivors, currently receiving benefit payments; (2) current Veterans who will in the future become beneficiaries of the compensation and pension programs; and (3) a proportional share of those in active military service as of the valuation date who will become veterans in the Future.

The Veterans Compensation and Burial benefits liability is a valuation of a long period of estimated cashflows. As a result, changes in long-term assumptions can have a dramatic effect on the liability. If those changes to long-term assumptions are in different directions from one period to the next, the changes to net cost from period to period are more pronounced as demonstrated over the past several years.

Change in Veterans Compensation and Burial Benefits
 
Compensation
Burial
Total
(In billions of dollars)
2012
2011
2012
2011
2012
2011
Actuarial accrued liability beginning of fiscal year 1,529.2 1,470.5 4.5 4.3 1,533.7 1,474.8
Current Year Expense:
Interest on the liability balance 69.3 69.5 0.2 0.2 69.5 69.7
Prior (and past) service costs from program amendments or new programs during the period 0.4 - - - 0.4 -
Actuarial (gain)/losses (from experience) 61.7 (14.4) (0.1) (0.1) 61.6 (14.5)
Actuarial (gain)/losses (from assumption changes) 149.2 55.6 0.1 0.3 149.3 55.9
Total current year expense 280.6 110.7 0.2 0.4 280.8 111.1
Less benefits paid (52.7) (52) (0.2) (0.2) (52.9) (52.2)
Actuarial accrued liability end of fiscal year 1,757.1 1,529.2 4.5 4.5 1,761.6 1,533.7

Significant Economic Assumptions Used in Determining Veterans Compensation and Burial Benefits as of September 30, 2012, and 2011
 
2012
2011
Rate of interest 4.31% 4.53%
Rate of inflation 2.61% 2.78%

Life Insurance Benefits

The largest veterans’ life insurance programs consist of the following:

The components of veteran life insurance liability for future policy benefits are presented below.

Veterans Life Insurance Liability as of September 30, 2012, and 2011
(In billions of dollars)
2012
2011
Insurance death benefits:
NSLI 5.7 6.2
VSLI 1.5 1.5
VRI 0.2 0.2
Other 0.7 0.6
Total death benefits 8.1 8.5
Death benefit annuities 0.1 0.1
Disability income and waiver 0.7 0.7
Insurance dividends payable 1.6 1.7
Unearned premiums 0.1 0.1
Total veterans life insurance liability 10.6 11.1

Insurance dividends payable consists of dividends left on a deposit with VA, related interest payable, and dividends payable to policyholders.

The VA supervises Servicemembers Group Life Insurance and Veterans Group Life Insurance programs that provide life insurance coverage to members of the uniformed armed services and veterans who served during the Vietnam era or thereafter. The VA also provides certain veterans and/or their dependents with pension benefits, based on annual eligibility reviews, if the veteran died or was disabled for nonservice-related causes. The actuarial present value of the future liability for pension benefits is a non-exchange transaction and is not required to be recorded on the Balance Sheet. The projected amounts of future payments for pension benefits (presented for informational purposes only) as of September 30, 2012, and 2011, were $92.8 billion and $89.2 billion, respectively.


Last Updated:  February 27, 2013