Federal Contractor Pensions Protected at Taxpayers’ Expense
Taxpayers may be surprised to learn that they are currently bankrolling the retirement plans of profitable, private sector companies. With a record-breaking national debt, a sinking economy, and millions of Americans facing losses to their own retirement accounts, taxpayers should not be on the hook for tens of billions of dollars for private contractor pensions and benefits.
In April 2011, the Government Accountability Office (GAO) issued a report recommending that the Department of Energy (DOE) comprehensively review how it manages contractor postretirement benefit costs. Under federal accounting standards, the government is responsible for paying certain costs of these benefits, which include pensions and healthcare. The GAO report noted that “DOE’s costs for reimbursing contractor pension and other postretirement benefits have grown since 2000 and are projected to increase in coming years.” Over the past 10 years, DOE’s annual costs have ranged from $43 million in 2001 to $750 million in 2009. They have increased by an average of 8 percent annually and should increase by 9 percent annually over the next five years.
The GAO stated that “DOE has limited influence over contractor pension and other postretirement benefit costs. For example, contractors sponsor benefit plans and, as a result, control the types of benefits offered to their employees and the strategies for investing pension plan assets. DOE nevertheless ultimately bears the investment risk incurred by the contractors.” This is a great deal for the companies but a raw deal for taxpayers.
While the GAO has produced an estimate for DOE pension costs, there is no similar estimate for other agencies such as the Department of Defense (DOD), which uses many of the same contractors as DOE. While DOE relies on contractors for 90 percent of its workload and DOD has a much smaller percentage of its much larger budget going toward such expenditures, the liability for DOD contractors will also be in the tens of billions of dollars.
A November 12, 2011 New York Times article urged Congress to “stop reimbursing the costs of pensions and other retirement benefits at huge, and hugely profitable, defense contractors. Over 10 years, such a move could save an estimated $30 billion – the amount by which these pensions are collectively underfunded.” The article also noted that Lockheed Martin showed “reimbursements of $3.45 billion over the last five years: $3.1 billion came from United States taxpayers. During that period, the company generated $21.8 billion in operating profits.”
Since the 1980s, corporations have steadily eliminated defined benefit pension plans and replaced them with defined contribution retirement options. Much of the transition away from defined benefit plans is due to the macroeconomic risks that these plans pose for companies across the country. The combination of low interest rates, which raise the value of pension liabilities and stock market declines, have made these plans far more difficult to manage and far riskier for the average company to maintain. Additionally, the increase in life expectancy has exacerbated the challenge of managing defined benefit pension funds. These growing management challenges have spurred some state and local governments to move away from defined benefit plans to defined contribution accounts, further indicating the difficulty in managing defined benefit plans. Even the federal government changed its retirement plan from defined benefit to defined contribution in 1987.
While the trend has clearly been toward defined contribution pensions, companies that contract with the federal government have continued to offer defined benefit plans. One reason for this is that because the risks are absorbed by the federal government through contribution reimbursements. If federal agencies were to require in contracts that any new employee had to be covered by a defined contribution plan, these risks would be eliminated and costs could be more reasonably budgeted in the year that the contract work is performed.
On December 7, 2011, Senate Armed Services Committee Chairman Carl Levin (D-Mich.) and Ranking Member John McCain (R-Ariz.) sent a letter to the GAO asking the agency to examine the cost of postretirement benefit reimbursement at the Department of Defense (DOD). Their letter requested “an estimate of how much DOD has paid its contractors to backfill their pension plan shortfalls over the past 10 or so years,” a “projection of future liabilities,” an evaluation of “options for limiting DOD’s liability for contractor pensions, including but not limited to the options of eliminating reimbursement for all or some defined plans,” and the savings that could be achieved from implementing the various options.
It is anticipated that GAO will merge their concerns with an earlier request on the same subject matter from two other members of the Senate Armed Services Committee early in 2012, and release the final report later in the year. In the meantime, CAGW plans to send 14 agencies Freedom of Information Act requests in order to obtain more information on the cost of contractor pensions and benefits.
As members of Congress look for ways to cut spending in the face of a massive $15 trillion national debt, contractor pensions must be on the chopping block. There has never been a more opportune time to demand that private sector, profitable companies take greater responsibility for funding the pension plans of their employees.
— Erica Gordon
