oversight

Federal Employees' Compensation Act: Analysis of Proposed Program Changes

Published by the Government Accountability Office on 2012-10-26.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States Government Accountability Office

GAO            Report to the Committee on Education
               and the Workforce, U.S. House of
               Representatives


October 2012
               FEDERAL
               EMPLOYEES’
               COMPENSATION ACT

               Analysis of Proposed
               Program Changes




GAO-13-108
Contents


Letter                                                                                    1
              Summary of Findings                                                        7
              Single Compensation Rate (Revised FECA)                                    7
              Reduction at Retirement Age (Reduced FECA)                                 8
              Concluding observations                                                   10

Appendix I    Federal Employees’ Compensation Act                                       13



Appendix II   Objectives, Scope and Methodology                                         54
              Section 1: Data Sources                                                   54
              Section 2: Analysis of Effects of Compensating Total Disability
                FECA Beneficiaries At a Single Rate Regardless of Having
                Dependents                                                              57
              Section 3: Comparison of FERS and Total Disability FECA Benefits
                under Current and Reduced FECA                                          64

Appendix IV   GAO Contact and Staff Acknowledgments                                     76



Tables
              Table 1: Data Sources Used in Analysis                                    55
              Table 2: Distributions of covariates in matched wage replacement
                       analysis sample                                                  60
              Table 3: Distributions of covariates in matched FECA-FERS
                       analysis sample                                                  67


Figures
              Figure 1: Distributions of key characteristics of matched FECA
                       beneficiaries and federal employees                              59
              Figure 2: Distributions of key characteristics of matched FECA
                       beneficiaries and FERS annuitants                                66
              Figure 3: Components of FECA and FERS Retirement Packages                 70




              Page i                          GAO-13-108 Federal Employees' Compensation Act
Abbreviations
CPDF         Central Personnel Data Files
COLA         cost of living adjustments
FECA         Federal Employees’ Compensation Act
FEHB         Federal Employees Health Benefits
FERS         Federal Employees Retirement System
GS           General Schedule
iFECS        Integrated Federal Employees’ Compensation System
MBR          Master Beneficiary Record
OWCP         Office of Workers’ Compensation Programs
TSP          Thrift Savings Plan
USPS         U.S. Postal Service


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Page ii                                  GAO-13-108 Federal Employees' Compensation Act
United States Government Accountability Office
Washington, DC 20548




                                   October 26, 2012

                                   The Honorable John Kline
                                   Chairman
                                   The Honorable George Miller
                                   Ranking Member
                                   Committee on Education and the Workforce
                                   United States House of Representatives

                                   The Honorable Tim Walberg
                                   Chairman
                                   The Honorable Lynn Woolsey
                                   Ranking Member
                                   Subcommittee on Workforce Protection
                                   Committee on Education and the Workforce
                                   United States House of Representatives

                                   In 2010, the Federal Employees’ Compensation Act (FECA) program paid
                                   $1.9 billion in cash benefits to federal workers who sustained injuries or
                                   illnesses while performing federal duties.1 The U.S. Department of Labor
                                   (Labor) administers FECA and bases FECA benefits on an employee’s
                                   wages at time of injury and whether the employee has eligible
                                   dependents. In addition, consideration is given to the beneficiary’s ability
                                   to work after the injury.2 Specifically, beneficiaries unable to return to
                                   work—total disability beneficiaries—who have an eligible dependent are
                                   compensated at 75 percent of gross wages at the time of injury and those
                                   without an eligible dependent are compensated at 66-2/3 percent. These
                                   benefits are adjusted for inflation and are not subject to age restrictions.
                                   Some policymakers are concerned about the level of FECA benefits,
                                   especially compared to the retirement benefits under the Federal




                                   1
                                    The receipt of FECA benefits is generally the exclusive remedy for being injured on the
                                   job and a federal employee is prohibited from suing his or her employer or recovering
                                   damages for such injury under another statute.
                                   2
                                    Beneficiaries who are determined to have some wage earning capacity—partial disability
                                   beneficiaries—are compensated based on the difference between wages at the time of
                                   injury and wages that Labor determines they are able to earn. Those with a dependent are
                                   compensated at 75 percent of this difference and those without an eligible dependent at
                                   66-2/3 percent of the difference.




                                   Page 1                                  GAO-13-108 Federal Employees' Compensation Act
Employees Retirement System (FERS), which generally covers
employees first hired in 1984 or later.

A proposal by Labor to revise FECA includes the following changes to the
benefits for future total and partial disability beneficiaries:3

   Set initial FECA benefits at a single rate (70 percent of applicable
    wages at time of injury), regardless of whether the beneficiary has
    eligible dependents.4

   Convert FECA benefits to 50 percent of applicable wages at time of
    injury—adjusted for inflation—once beneficiaries reach the full Social
    Security retirement age.

To consider the effects of these proposed changes, we evaluated (1)
What would be the effect of Labor’s proposal to compensate total
disability FECA beneficiaries at a single rate regardless of having
dependents? and (2) How would FERS and total disability FECA benefits
in retirement compare under current FECA and Labor’s proposed FECA
revision?

To address our objectives we conducted simulations to compare (1)
FECA benefits with actual take-home pay in 2010, and (2) FECA benefits
with actual FERS benefits in 2010.5 We limited the analysis in this report
to FECA beneficiaries, federal workers, and federal annuitants covered
under FERS.6 This report does not cover employees or FECA
beneficiaries who worked at the U.S. Postal Service (USPS)—they will be
covered in an upcoming GAO report. We examined the effects of the
proposed FECA revisions on those FECA beneficiaries who were



3
 The proposal analyzed is Labor’s “Federal Injured Employees’ Reemployment Act of
2010” technical assistance discussion draft, January 13, 2011. The proposed changes
would not affect the benefits of current FECA recipients.
4
 Generally, the proposal decreases benefits for beneficiaries with dependents and
increases benefits for those without dependents compared to the current program.
5
 The analyses were based on snapshots in 2010 and did not consider any cumulative
effects of the proposed FECA revisions on lifetime income.
6
 Partial disability beneficiaries—who have some capacity to earn wages— were beyond
the scope of this work, in part because Labor does not keep data about their total income
(including any earnings) in an electronic database.




Page 2                                  GAO-13-108 Federal Employees' Compensation Act
considered to be totally disabled, i.e., they had no wage earning capacity.
FECA benefits were not designed to increase at a rate comparable to pay
increases an individual could have received through step increases or
promotions (career growth) if he or she had never been injured.
However, our analysis factors in career growth to provide a comparison
between FECA benefits and the take-home pay the beneficiary could
have received, absent an injury.

We considered certain subgroups, including those based on the presence
of a dependent, the extent of missed income and career growth
(measured by General Schedule (GS) level ranges: 1-4, 5-8, 9-12, and
13-15),7 GS level at time of injury (measured by GS level ranges), and
years of service. To conduct our simulations we used 2010 data from the
Integrated Federal Employees’ Compensation System (iFECS), 1988-
2010 data from the Central Personnel Data Files (CPDF);8 2010 FERS
annuitant data; 2000-2012 Thrift Savings Plan (TSP) data; and Social
Security benefit data from the Master Beneficiary Record (MBR). We
determined that the data we used were sufficiently reliable for the
purposes of the report.

To consider the effect of compensating total disability FECA beneficiaries
at the single rate of 70 percent —which we refer to as “revised FECA”—
we conducted a simulation that compared the extent to which FECA and
the proposed revision would replace a beneficiary’s take-home pay. Since
we cannot observe a FECA beneficiary’s missed career path and missed
wages, we analyzed a set of federal workers who had never been injured
and who were employed at the end of fiscal year 2010. We matched
recent total disability FECA beneficiaries to these federal workers in order
to ensure the two sets were similar.9 Our match was based on work-
related characteristics—such as employing agency and blue collar versus
white collar classification—as well as on personal characteristics that may
be important in terms of career and wage growth—such as date and age



7
 GS ranges were based on income (2010 dollars): GS 1-4 (<$27,431), GS 5-8 ($27,431-
$41,562), GS 9-12 ($41,563-$71,673), and GS 13-15 (≥$71,674).
8
 The analysis in this report is limited to those agencies covered by the CPDF. The CPDF
does not cover all civilian federal workers, for example, USPS is not represented in the
CPDF. Forty-three percent of FECA beneficiaries in 2010 worked for USPS.
9
 For more details on the similarity of the matched sets of FECA beneficiaries and federal
workers, see appendix II.




Page 3                                  GAO-13-108 Federal Employees' Compensation Act
when starting their federal careers, as well as wage histories prior to the
injury. Once we matched the two sets, we simulated injuries on the
uninjured federal workers, timed to coincide with the corresponding FECA
beneficiary’s injury. From that point forward, we only considered the
matched set of federal workers—and not the FECA beneficiaries—in our
analysis.10 Based on the federal workers’ actual wages at the time of the
simulated injury, we calculated their hypothetical FECA and revised
FECA benefits, which we simulated based on gross wages at the time of
injury. We applied cost of living adjustments to project the initial benefits
to 2010. Having determined the 2010 FECA benefits (simulated) and
2010 earnings (actual) for each of these federal workers, we were able to
calculate the proportion of 2010 take-home pay11 replaced by the
simulated FECA benefit, or wage replacement rate.12

By using 2010 take-home pay, we factor missed career growth into the
wage replacement rates we calculate. Although, as mentioned above,
FECA was not designed to compensate for missed career growth, we
used a matching methodology that allows us to measure the adequacy of
benefits with respect to the counterfactual. Specifically, we capture the
extent to which FECA beneficiaries are able to maintain the standard of


10
  We focus solely on the federal worker because doing so is more precise than comparing
the benefit of the FECA beneficiary to the earnings of the matched federal worker. By
considering only the federal worker, we are able to capture the wage replacement rate,
the proportion of take-home pay replaced by FECA, in a way that meaningfully accounts
for career growth while avoiding undue imprecision in wage replacement rates that could
be attributed to salary differences between the federal worker and the matched FECA
beneficiary.
11
  We defined take-home pay as gross wages reduced by mandatory retirement
contributions and federal and state income taxes (assuming a single dependent) and did
not take discretionary deductions into account.
12
   Policymakers can target wage replacement rates; however, there is no consensus on
the appropriate wage replacement rate for workers’ compensation programs, such as
FECA. Such decisions involve balancing the goals of benefit adequacy and incentives to
return to work. In 1972, the National Commission on State Workmen’s Compensation
Laws endorsed a move towards 80 percent of spendable pay or take-home pay. A 1998
GAO report on FECA also cited this 80 percent benchmark; see GAO, Federal
Employees’ Compensation Act: Percentages of Take-Home Pay Replaced by
Compensation Benefits, GAO/GGD-98-174 (Washington, D.C.: August 1998). In 2004, a
report by the National Academy of Social Insurance used two-thirds of gross wages as a
target replacement rate for workers’ compensation programs. See H. Allan Hunt, editor,
Adequacy of Earnings Replacement in Workers’ Compensation Programs, A Report of the
Study Panel on Benefit Adequacy of the NASI Workers’ Compensation Steering
Committee (Washington D.C.: 2004).




Page 4                                 GAO-13-108 Federal Employees' Compensation Act
living they would have had absent an injury. Alternatively, one could use
a method that does not account for missed career growth. For instance,
our 1998 FECA report calculated wage replacement rates by comparing
FECA benefits to take-home pay at the time of injury, adjusted for
inflation. That approach measured the degree to which beneficiaries were
able to maintain the standard of living they would have had at the time of
injury.13 The availability of additional data and the improved methods
employed in our current analysis allow us to present an assessment of
the adequacy of benefits that includes career growth.14

Similarly, to compare FERS to total disability FECA benefits, we again
relied on a matching technique, and conducted our analysis for both
current FECA and the proposal to reduce benefits at retirement age,
which we refer to as “reduced FECA.” Since we cannot observe the
FERS benefits a FECA beneficiary would have received absent an injury,
we matched recent total disability FECA beneficiaries with similar FERS
annuitants to compare outcomes. This approach captures retirement
benefits in the counterfactual case of having never been injured and is
consistent with the approach we used in the first objective of this report
and in our February 2012 FECA report, which compared FECA benefits
to retirement benefits under the Civil Service Retirement System.15 As
before, we simulated injuries for the matched set of FERS annuitants and
calculated their hypothetical FECA benefits—at current FECA
compensation rates and the proposed reduction to 50 percent of
applicable wages, once a beneficiary reaches retirement age.16 We
projected these simulated FECA benefits to 2010 and compared these
FECA benefits, supplemented by a TSP annuity, to the actual FERS



13
 See GAO/GGD-98-174.In part because of the data available at the time of the report,
GAO/GGD-98-174 calculated wage replacement rates that did not account for missed
career growth; instead, it accounted for cost of living adjustments for federal workers and
FECA beneficiaries. The report found that, on average, FECA benefits replaced over 95
percent of wages at the time of injury for beneficiaries, including both postal and non-
postal beneficiaries.
14
 For additional discussion of the merits of accounting for missed career growth in
assessing the adequacy of benefits, see Hunt, 2004.
15
 See GAO, Federal Employees’ Compensation Act: Benefits for Retirement-Age
Beneficiaries GAO-12-309R (Washington, D.C.: February 6, 2012).
16
 For further details on how we conducted the match and subsequent analysis, see
appendix II.




Page 5                                   GAO-13-108 Federal Employees' Compensation Act
benefit packages.17 The FERS benefit package includes the FERS
annuity, Social Security benefits, and TSP annuities.18 However, FERS
had only been in place 26 years in 2010, so we do not capture a fully
mature system.19 Over time, FERS benefits would likely increase as some
annuitants would have longer federal careers, so our calculation likely
understates future FERS benefits. Since Labor’s proposal would only
affect future FECA beneficiaries, we conducted a final simulation to
account for a mature FERS. In this simulation, we examined the effects of
missing part of a 30-year career due to injury. Specifically, we used the
same annuitants as above and extended their work histories to cover a
30-year period, which allowed us to estimate retirement benefits based on
a 30-year career given their wage histories. Again we simulated injuries
and calculated hypothetical FECA and reduced FECA benefits.20

We conducted this performance audit from January to October 2012 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives.

On July 3, 2012, and September 19, 2012, we briefed your staff on the
preliminary results of this study; this report formally conveys the
information provided in those briefings (see app. I for the briefing slides).




17
  FECA beneficiaries cannot receive FECA benefits concurrently with the FERS annuity.
Further, Social Security benefits attributable to federal service are offset by FECA after
retirement.
18
  We assumed that individuals chose a single life TSP annuity that was not adjusted for
inflation.
19
  By mature FERS, we mean a retirement system in place at least 30 years to give a full
range of income levels and investment growth. Our current data has limited observations
on FERS annuitants with more than 25 years of service. Without taking account of the
mature system, we understate the future FERS benefit.
20
  We then simulated different scenarios by varying the percentage an individual
contributed to the TSP and the rate of growth for TSP balances.




Page 6                                   GAO-13-108 Federal Employees' Compensation Act
                      Under our simulation, compensating all beneficiaries at 70 percent of
Summary of Findings   wages at the time of injury reduced the overall median wage replacement
                      rate—the percentage of take-home pay replaced by FECA—from 80 to 77
                      percent. In comparing wage replacement rates of those beneficiaries with
                      and without a dependent, we found that beneficiaries with an eligible
                      dependent had a median wage replacement rate that was 3 percentage
                      points greater than that of beneficiaries without a dependent under
                      current FECA. The proposed revision increased the magnitude and
                      reversed the direction of this difference—beneficiaries with an eligible
                      dependent had a median wage replacement rate that was 6 percentage
                      points less than that of beneficiaries without a dependent. With regard to
                      Labor’s proposal to reduce FECA benefits at Social Security retirement
                      age, we found that in 2010, the median FECA benefit package (FECA
                      and TSP) was 32 percent greater than the median current FERS benefit
                      package (FERS, TSP, and Social Security) and that Labor’s proposal
                      would result in the reduced FECA package being 6 percent less than the
                      FERS package. Our final simulation of a mature FERS system—intended
                      to reflect future benefits of federal workers with 30-year careers—found
                      that the median FECA benefit package was on par or 10 percent less
                      than the median FERS retirement benefit package, depending on TSP
                      contributions. Under the mature FERS simulation, the median reduced
                      FECA benefit package was 31 or 35 percent less than the median FERS
                      benefit package, again depending on TSP contributions.

                      Our results are detailed below:


                          According to our simulation, compensating all total disability FECA
Single Compensation   
                          beneficiaries at the revised rate of 70 percent of wages at the time of
Rate (Revised FECA)       injury resulted in an overall reduction in the median percentage of
                          take-home pay replaced by FECA. Specifically, under the current
                          program, FECA replaced 80 percent of 2010 take-home pay and
                          under the revision FECA replaced 77 percent. We also considered the
                          effect of the proposal on beneficiaries with eligible dependents in
                          comparison to those without, as the proposal equalizes their
                          compensation rates. We found that current FECA, which
                          compensates beneficiaries with a dependent at a higher rate than
                          those without a dependent (75 versus 66-2/3 percent), replaces 81
                          and 78 percent of take-home pay for beneficiaries with or without a
                          dependent, respectively. This 3 percent difference in median wage
                          replacement rates is less than the difference in compensation rates in
                          part because FECA benefits are not taxed, whereas wages are. Thus,
                          a worker with dependents would have more tax deductions and



                      Page 7                            GAO-13-108 Federal Employees' Compensation Act
                      greater take-home pay—the augmented FECA compensation
                      accounts for this difference to some extent. Equalizing FECA
                      compensation rates does not account for these tax-related differences
                      in take-home pay. Equalizing FECA compensation rates at 70 percent
                      regardless of eligible dependents results in a larger difference in
                      median wage replacement rates between beneficiaries with and
                      without a dependent (76 and 82 percent, respectively).21

                     In addition, we examined the effects of this proposal on various
                      subgroups and found that compensating all beneficiaries at 70
                      percent of wages at the time of injury generally reduced median wage
                      replacement rates. However, we found no reductions in any one
                      subgroup that were disproportionate to the overall revision. We did
                      see wide variation in the proportion of take-home pay replaced by
                      FECA (and the proposed revision) within subgroups—wage
                      replacement rates ranged from just over 50 percent to about 90
                      percent. For example, beneficiaries who missed substantial career
                      and income growth because of their injury had lower median wage
                      replacement rates than those who missed relatively little career and
                      income growth. For those who missed substantial career growth,
                      FECA replaced a smaller proportion of their 2010 take-home pay
                      because the FECA cost of living adjustments do not keep pace with
                      missed GS step increases and promotions. However, FECA was not
                      designed to account for such GS step increases and promotions.


                      According to our retirement simulation comparing current FECA
Reduction at     
                      benefits to FERS benefits, we found that the overall median FECA
Retirement Age        benefit package (FECA benefits and TSP annuity) was 32 percent
                      greater than the current median FERS retirement benefit package
(Reduced FECA)        (FERS annuity, TSP annuity, and Social Security). This implies that in
                      retirement, FECA beneficiaries generally had greater income from
                      FECA and their TSP in comparison to the FERS benefits they would
                      have received absent an injury. However, because FERS had only
                      been in place 26 years in 2010, we are not capturing the “mature”
                      FERS benefit—and it is likely that we are understating the potential



                 21
                   Because actual wage replacement rates for beneficiaries with a dependent may be
                 lower than simulated due to our assumption of a single dependent, the difference in
                 median wage replacement rates between those with and without a dependent may be
                 smaller under FECA and larger under the proposed revision.




                 Page 8                                 GAO-13-108 Federal Employees' Compensation Act
     FERS benefit.22 We also found that under current FECA, median
     FECA benefit packages were consistently greater than median FERS
     benefit packages across varying years of service. However, as years
     of service increase, the gap between the two benefits narrowed. For
     example, beneficiaries whose total federal career would have
     spanned less than 10 years had a median FECA benefit that was
     about 46 percent greater than the corresponding FERS benefit. In
     contrast, beneficiaries whose total federal career would have spanned
     25-29 years had a median FECA benefit that was 16 percent greater
     than the corresponding FERS benefit. This occurred in large part
     because FERS benefits increase substantially with additional years of
     service.

    Reducing FECA benefits once beneficiaries reach retirement age to
     50 percent of wages at the time of injury would result in an overall
     median for the reduced FECA benefit package (reduced FECA plus
     the TSP) that is about 6 percent less than the median FERS benefit
     package. This implies that under the proposed reduction, FECA
     beneficiaries would have similar income from their FECA benefit
     package in comparison to their foregone FERS benefit. In addition,
     reduced FECA benefits were generally less than FERS benefits
     across varying years of service.23 However, as years of service
     increase, the gap between the two benefits widens. For example,
     beneficiaries whose total federal career would have spanned less
     than 10 years had a median reduced FECA benefit that was about 2
     percent greater than the corresponding FERS benefit. In contrast,
     beneficiaries whose total federal career would have spanned 25-29
     years had a median reduced FECA benefit that was 19 percent less
     than the corresponding FERS benefit.

    In our simulation of a “mature” FERS coupled with the assumption
     that individuals have 30-year federal careers, we found that the
     median FECA benefit packages were either on par with or less than
     median FERS benefit packages—depending on the amount an
     individual contributes toward their TSP account for retirement.



22
  Because few people in our dataset had more than 25 years of federal service at the time
of retirement, we do not capture those who would choose to work 30 or more years in the
federal government before retiring.
23
  In other words, under the proposed reduced FECA, beneficiaries would have less
income in retirement than they would have had absent an injury.




Page 9                                  GAO-13-108 Federal Employees' Compensation Act
                   Specifically, under a scenario where there is no employee contribution
                   and the employing agency contributes 1 percent to TSP, the median
                   FECA benefit package is about 1 percent greater than the median
                   FERS benefit package. However, under a scenario where each
                   employee contributes 5 percent—and receives a 5 percent agency
                   match—the median FECA benefit package is about 10 percent less
                   than the median FERS benefit package. Using the same simulation,
                   we found that the median reduced FECA benefit package was less
                   than the median FERS benefit package—regardless of the simulated
                   contributions to TSP accounts.24 Specifically, under a scenario where
                   there is no employee contribution—and a 1 percent agency
                   contribution—the median reduced FECA benefit package is about 31
                   percent less than the median FERS benefit package. Under a
                   scenario where each employee contributes 5 percent—and receives a
                   5 percent agency match—the median reduced FECA benefit package
                   is about 35 percent less than the FERS benefit package.


               FECA continues to play a vital role in providing compensation to federal
Concluding     employees who are unable to work because of injuries sustained while
observations   performing their federal duties. However, concerns about the level of
               FECA benefits have increased interest in reforming the program. While
               reducing the level of benefits could be achieved, doing so would have
               implications for the adequacy of benefits, both during a beneficiary’s
               foregone working years and after the beneficiary reaches retirement age.

               Equalizing FECA compensation rates between those with and without
               eligible dependents could reduce benefits for some beneficiaries;
               however, doing so results in disparity in the degree to which beneficiaries
               with dependents can maintain their standard of living relative to those
               without an eligible dependent. This disparity is attributable to differences
               in tax deductions for dependents and would be compounded over time.
               An alternative approach might be an across-the-board reduction in FECA
               compensation, which could keep replacement rates relatively equal


               24
                 While our simulation assumes 30 years of federal service and captures the effects of
               being injured at some point within a 30-year federal career, it does not reflect the actual
               federal workforce, where careers may not span 30 years. To the extent that federal
               workers work less than 30 years, we overestimate the FERS benefit package. To the
               extent that they work more than 30 years, we underestimate the FERS benefit package.
               On balance, with some working more and some working less, it is uncertain whether our
               results underestimate or over estimate the actual outcome.




               Page 10                                   GAO-13-108 Federal Employees' Compensation Act
between beneficiaries with and without dependents. Yet this type of
approach could adversely affect the adequacy of benefits for those with
relatively low wage replacement rates, such as beneficiaries who missed
substantial career growth. However, the FECA benefit structure was not
designed to take missed career growth into account.

Once FECA beneficiaries reach retirement age, their FECA benefit
package (FECA benefit and TSP annuity) may be greater than the current
FERS benefit package—and reducing FECA at retirement as Labor has
proposed would bring FECA more in line with current FERS. However, as
any changes to FECA would affect beneficiaries in the future, it is
important to note that as FERS matures over time, our analysis suggests
that differences between the median FECA benefit package and the
FERS benefit package diminish. Specifically, our simulation showed that
the FECA benefit package may be on par or less than the FERS benefit
package, and the reduced FECA benefit package would be substantially
less than FERS. A clearer picture of how FECA and FERS will actually
differ will be possible as FERS matures.

In short, there are no quick fixes. Our analyses demonstrated that there
are policy levers that can be adjusted in order to achieve reform.
However, consideration needs to be given to the impact the change will
have on the adequacy of benefits and the ensuing fairness across
beneficiaries, both at the time of injury and over the lifetime of the
beneficiary. Reducing FECA benefits could have a substantial impact
over time on individuals who cannot work and may have limited options to
replace income in response to benefit reductions.




Page 11                         GAO-13-108 Federal Employees' Compensation Act
We provided a draft of this report to the Department of Labor, the Office
of Personnel Management, the Social Security Administration, and the
Thrift Savings Investment Board, and they did not have any comments.


As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from its
issue date. At that time, we will send copies of this report to relevant
congressional committees, the Secretary of Labor, the Director of the
Office of Personnel Management, the Commissioner of Social Security,
the Executive Director of the Thrift Savings Board, and other interested
parties. In addition, the report will be made available at no charge on the
GAO web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact
me at (202) 512-7215 or sherrilla@gao.gov. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made key contributions to this report
are listed in appendix III.




Andrew Sherrill
Director
Education, Workforce, and
  Income Security Issues




Page 12                            GAO-13-108 Federal Employees' Compensation Act
Appendix I: Federal Employees’
                Appendix I: Federal Employees’ Compensation
                Act



Compensation Act




          Federal Employees’
          Compensation Act:
     Analysis of Proposed Program Changes

             Briefing to Congressional Staff:
    Committee on Education and the Workforce
     United States House of Representatives
                        July 2012
                           and
                     September 2012



                                                                                               1




                Page 13                                GAO-13-108 Federal Employees' Compensation Act
                                                       Appendix I: Federal Employees’ Compensation
                                                       Act




Introduction

•       In 2010, the Federal Employees’ Compensation Act (FECA) program paid $1.9 billion
        in cash benefits to federal workers who sustained injuries or illnesses while performing
        federal duties.
•       The US Department of Labor (Labor) administers FECA and FECA benefits are
        generally based on an employee’s wages at time of injury and whether the employee
        has eligible dependents.1
•       Since FECA benefits are adjusted for inflation and are not taxed or subject to age
        limitations, some policymakers are concerned about the generosity of FECA benefits,
        especially compared to the retirement benefits under the Federal Employees Retirement
        System (FERS), which generally covers employees first hired in 1984 or later.
•       A proposal by Labor to revise FECA includes the following changes to the benefits for
        total and partial disabilities (changes would not affect current FECA recipients):2
            •    Set initial FECA benefits at a single compensation rate (70 percent of applicable wages at
                 time of injury), regardless of whether the beneficiary has eligible dependents.3
            •    Convert FECA benefits to 50 percent of applicable wages at time of injury—adjusted for
                 inflation—once beneficiaries reach the full Social Security retirement age.
1   FECA beneficiaries with eligible dependents receive 75 percent of applicable wages at time of injury; those without dependents receive 66-2/3 percent.
2   The proposal analyzed is Labor’s “Federal Injured Employees’ Reemployment Act of 2010” technical assistance discussion draft, January 13, 2011.
3   Generally, the proposal decreases benefits for beneficiaries with eligible dependents and increases benefits for those without dependents.               2




                                                       Page 14                                               GAO-13-108 Federal Employees' Compensation Act
                      Appendix I: Federal Employees’ Compensation
                      Act




Key Objectives


1. What would be the effect of Labor’s proposal to compensate
   total disability FECA beneficiaries at a single rate regardless of
   having eligible dependents?


2. How would FERS and total disability FECA benefits in
   retirement compare under current FECA and Labor’s
   proposed FECA revision?




                                                                                                     3




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Scope and Methodology: Scope


Scope and Methodology

•   This briefing focuses on federal workers covered under FERS, FERS annuitants, and total
    disability FECA beneficiaries.
        •    Partial disability beneficiaries—who have some capacity to earn wages—were not included in the scope of this work.
        •    Workers and beneficiaries at the U.S. Postal Service (USPS) were not included in this work (details on 5).



•   To determine the effects of proposed FECA revisions, we compared (1) simulated FECA
    benefits for a set of federal workers to their actual earnings in 2010; and (2) simulated FECA
    benefits to FERS benefits in 2010.4


•   We examined the effects of the proposed FECA revisions on total disability FECA
    beneficiaries overall, and within subgroups, including those based on the:
        •    Presence of an eligible dependent
        •    Extent of missed income and career growth—defined as moving from one GS level range to the next5
        •    GS level at time of injury (measured by GS level ranges)
        •    State tax rates and overall tax liabilities (e.g., exemptions and deductions)
4 The comparisons focused on 2010 and did not consider any cumulative effects of the proposed FECA revisions on lifetime income.
5 We defined GS ranges based on income (2010 dollars) as follows: GS 1-4 (<$27,431), GS 5-8 ($27,431-$41,562), GS 9-12 ($41,563-$71,673), and GS

13-15 (≥$71,674).                                                                                                                                  4




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Scope and Methodology: Data


Scope and Methodology (cont’d)


•   To address the key objectives, we analyzed:
          • 2010 Integrated Federal Employees’ Compensation System (iFECS) data
          • 1988 – 2010 Central Personnel Data Files (CPDF)
              •   The CPDF does not cover all civilian federal workers; for instance, USPS is excluded—which
                  accounted for 43% of FECA beneficiaries in 2010.
          • 2010 FERS annuitant data
          • 2000-2012 Thrift Savings Plan (TSP) data
          • Social Security benefit data from the Master Beneficiary Record (MBR)


•   We determined the data we used to be sufficiently reliable for the purposes of this
    report.




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Scope and Methodology: Objective 1


Scope and Methodology (cont’d)

•    To determine how compensating all beneficiaries at 70 percent of wages at the time of injury would
     affect beneficiaries, we compared the proportion of take-home pay replaced by FECA under the
     current program and the proposed revision. Specifically we took the following steps:
        •     We matched recent total disability FECA beneficiaries who worked for agencies represented in the
              CPDF and were covered under FERS to similar workers who had never been injured and who were
              employed at the end of fiscal year 2010.


        •     To simulate FECA benefits for the matched set of federal workers, we timed our simulation of
              injuries to coincide with the injury for the corresponding FECA beneficiary—and calculated their
              hypothetical FECA benefits as of fiscal year 2010. We:
                •   Calculated initial FECA benefits as a percentage of gross wages at time of injury under FECA (75 and
                    66-2/3 percent for beneficiaries with and without an eligible dependent, respectively) and the proposed
                    revision to compensate all beneficiaries at 70 percent.
                •   Projected initial benefits to 2010 using the cost of living adjustments (COLA) for FECA.

        •     To compare FECA benefits with actual earnings, we calculated wage replacement rates as the
              percentage of 2010 take-home pay replaced by simulated 2010 FECA benefits.

        •     The wage replacement rate, as defined above, captures actual career growth because it compares
              simulated FECA benefits to actual earnings in 2010.6
6 Consistent with GAO/GGD-98-174, we defined take-home pay as gross wages reduced by mandatory retirement contributions and federal and state

income taxes (assuming a single dependent) and did not take discretionary deductions into account. In part due to a lack of data, the wage replacement
rates in GAO-98-174 captured cost of living increases, not career growth. See GAO, Federal Employees’ Compensation Act: Percentages of Take Home         6
Pay Replaced by Compensation Benefits, GAO/GGD-98-174 (Washington, D.C.: August 1998). For more details on our methodology see appendix II.




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                                                      Act




Scope and Methodology: Objective 2


Scope and Methodology (cont’d)

To compare FERS benefits to FECA and the proposed reduction to 50 percent at retirement, we:
•      Matched recent total disability FECA beneficiaries who were at least 55 years old, worked for agencies represented in the
       CPDF, and were covered under FERS to similar FERS annuitants who were receiving FERS benefits as of June 2010.7
         •     We limited our analysis to those who had complete data.


•      To simulate FECA benefits for the matched set of federal annuitants, we timed our simulation of injuries to coincide with the
       injury for the corresponding FECA beneficiary—and calculated their hypothetical FECA benefits in retirement as of fiscal
       year 2010. We:
         •     Calculated initial FECA benefits as a percentage of gross wages at time of injury under FECA and projected benefits to 2010; and
         •     Annuitized the estimated TSP balances at time of injury.
                • To calculate hypothetical TSP balances, we used the TSP balances of the corresponding FECA beneficiary at the time of his/her
                    separation from the federal workforce (approximately the time of injury).
          •   Calculated hypothetical FECA benefits under the proposal to reduce FECA benefits once the beneficiary reaches Social Security retirement
              age and recalculated FECA as 50 percent of gross earnings at time of injury and projected benefits to 2010.

•      Calculated total FERS benefits of the matched set of FERS annuitants, including:
         •    FERS annuity;
         •    Social Security benefit; and
         •    Annuitized estimates of TSP balances at the time of separation from the federal government (retirement).

•      Compared FERS benefits to current FECA and the proposed FECA reduction.
•      Since FERS is not yet a mature system, we also simulated a mature system consisting of 30 years of federal service, using the work
       histories of matched FERS annuitants.8
7We assumed that Social Security benefits were attributable to federal service and therefore offset by FECA. We did not have data on non-federal
employment, thus we did not include any additional Social Security benefits. This results in an underestimate of retirement income for FECA beneficiaries.
8 By mature FERS, we mean a retirement system in place at least 30 years to give a full range of income levels and investment growth. Our current data
has limited observations on FERS annuitants with more than 25 years of service. Absent a mature system, we underestimate the FERS benefit.
                                                                                                                                                             7




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                                                         Act




Background


How FECA Works

•       Labor’s Division of Federal Employees’ Compensation in the Office of Workers’
        Compensation Programs (OWCP) administers the FECA program with a goal of having
        claimants recover and return to work in a sustained capacity following an injury.
            •    OWCP charges agencies for whom injured employees worked for benefits provided. These
                 agencies subsequently reimburse Labor’s Employees’ Compensation Fund from their next
                 annual appropriation.


•       FECA provides cash benefits and other benefits to federal employees who suffer
        temporary or permanent disabilities resulting from work-related injuries or diseases.
            •    Cash benefits include payments for wages lost when employees cannot work because of
                 work-related disabilities due to traumatic injuries or occupational diseases.9
            •    Other benefits include vocational rehabilitation and medical care for injured workers,
                 including medical expenses associated with the workplace injury.
                    •   For medical expenses unrelated to this injury, FECA beneficiaries who opt to remain in the Federal
                        Employees Health Benefits (FEHB) plan have the same benefits and premiums as federal workers.
                    •   OWCP deducts beneficiaries’ premiums from FECA benefits and pays the employing agency’s
                        premiums.
9   Cash benefits also include schedule awards for loss of, or loss of use of, a body part or function; death benefits for survivors; and funeral expenses.

                                                                                                                                                              8




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Background


FECA Benefit Calculation

• FECA benefits for total disability beneficiaries are a proportion of gross
  wages at the time of injury.
         •     FECA beneficiaries with eligible dependents receive 75 percent; and
         •     FECA beneficiaries without dependents receive 66-2/3 percent.10

• Benefits are adjusted annually for cost of living increases and are not
  taxed.11

• Total disability beneficiaries include:
         •     those individuals whom OWCP has determined to have little or no reemployment
               potential based on file reviews.
         •     those individuals for whom extended disability is anticipated. These beneficiaries
               receive total disability benefits while OWCP evaluates the potential for re-
               employment.

10 At the time of injury, wage replacement rates are greater than FECA compensation rates. For example, given a dependent and gross wages of 50,000, the

FECA benefit is $37,500 (75%). Assuming 15% taxes, take home pay would be $42,500, and the wage replacement rate would be 88% (37,500/42,500).
11 FECA benefits are adjusted using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), as are Social Security benefits.
                                                                                                                                                           9




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Background


Proposed FECA Revision


• Labor’s proposed “Federal Injured Employees’ Reemployment Act of
  2010” Technical Assistance Discussion Draft Dated January 13, 2011:
        • Covers: Total and partial disability FECA beneficiaries.
        • Proposed revisions—which would not affect current FECA
          beneficiaries—include:
                • Beneficiaries would no longer receive augmented compensation for having
                  eligible dependents, and the basic rate of compensation for total and partial
                  disability would be set at 70 percent of applicable wages for all beneficiaries;
                • Compensation at full Social Security retirement age would generally be reduced
                  to 50 percent of applicable wages at time of injury—adjusted for inflation—for
                  all beneficiaries; and
                • FECA claimants would not receive continuation of pay for the first 3 days of
                  temporary disability, except when disability would exceed 14 days.12

12Currently employing agencies are required to pay eligible FECA claimants their regular salary for 45 days to prevent a disruption in pay. In 2006, FECA
was amended to require USPS employees to use 3 days of their own accrued sick or annual leave (or leave without pay) before receiving continuation
of pay. However, available data does not allow for analysis of any related cost savings that may have resulted from this change.                            10




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                                                    Act




Background


Wage Replacement Rates Are a Measure of the
Adequacy of Workers’ Compensation Benefits
• Wage replacement rates are used to measure adequacy of benefits.
         •    Wage replacement rates that do not account for missed career growth capture the degree to
              which a beneficiary is able to maintain his or her pre-injury standard of living.
               • FECA and other worker’s compensation programs were not designed to account for
                  missed income due to career growth.
         •    Wage replacement rates that account for missed income growth capture the degree to
              which a beneficiary is able to maintain his or her foregone standard of living.
               • Data limitations can preclude calculating wage replacement rates that account for
                  missed income growth; however, doing so provides a more complete story of the
                  comparison between an injured worker and his or her counter-factual of having never
                  been injured.

• Wage replacement rates can be targeted by policy makers.
         •    There is no consensus on what wage replacement rate policies should target.
         •    In 1972 the National Commission on State Workmen’s Compensation Laws endorsed a
              move towards 80 percent of spendable pay or take-home pay.
                • GAO/GGD-98-174 also cited this 80 percent benchmark.
         •    In 2004, a report by the National Academy of Social Insurance used two thirds of gross
              wages as a target replacement rate for workers’ compensation programs.13
13 H. Allan Hunt, editor, Adequacy of Earnings Replacement in Workers’ Compensation Programs, a Report of the Study Panel on Benefit Adequacy of the

NASI Workers’ Compensation Steering Committee (Washington, D.C.: 2004).
                                                                                                                                                       11




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Background


Benefit Ratio

• A benefit ratio compares the benefits of one program to the benefits of another.


• We define the FECA to FERS benefit ratio as:

               • Benefit ratio = FECA Benefit/FERS Benefit
                    • and express it as a percentage.


• If FECA benefits are:
    •   Greater than FERS benefits, the benefit ratio is greater than 100.
    •   Equal to FERS benefits, the the benefit ratio is 100.
    •   Less than FERS benefits, the benefit ratio is less than 100.


•   For example:
    •   A benefit ratio of 130 means FECA benefits are 30 percent greater than FERS benefits.
    •   A benefit ratio of 90 means FECA benefits are 10 percent less than FERS benefits.

                                                                                                              12




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Background


FERS and the Interaction of FERS and FECA

•     Federal Employee Retirement System Act of 1986 generally covers federal employees
      initially hired on or after January 1, 1984.
          •    As of September 30, 2009, about 85 percent of the federal workforce was covered by FERS.

•     FERS has three elements:
          •    Social Security
          •    FERS basic retirement annuity, which is based on an employee’s length of service and highest average
               basic pay earned for three consecutive years of service.14
                • The FERS annuity increases with years of service.
          •    TSP
                • Similar to a 401K.
                • Employing agency contributes an amount equal to 1 percent of employees’ salary automatically and
                    matches employee contributions up to a maximum agency contribution of 5 percent.

•     FECA beneficiaries:
          •    Receive Social Security benefits; however Social Security benefits attributable to federal service are
               offset.15
          •    Do not receive a FERS annuity while receiving FECA.
          •    Cannot contribute to the TSP but maintain their pre-injury account balances.


14 Employees with 20 or more years of federal service who retire at the age of 62 or later accrue annuity benefits at a rate of 1.1 percent for each year of

service; most other eligible employees accrue annuity benefits at a rate of 1 percent for each year of service.
15 FECA offsets the Social Security benefits that are attributable to federal service after a beneficiary reaches Social Security retirement age. Social

Security benefits not attributable to federal service are not offset.
                                                                                                                                                               13




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Summary of Key Findings (Objective 1)


•     Under our simulation, compensating all beneficiaries at 70 percent of gross wages at the
      time of injury reduced the overall median wage replacement rate—the percentage of
      take-home pay replaced by FECA—from 80 percent to 77 percent.


•     The proposed revision increased differences between the median wage replacement
      rates for those beneficiaries with and those without eligible dependents.16


•     While the proposed revision generally reduced wage replacement rates of beneficiaries
      in the subgroups we examined, we found no reductions that were disproportionate to the
      overall reduction in median benefits; however, wage replacement rates varied within the
      subgroups based on worker characteristics.17



16 Findings in objective 1 are specific to pre-retirement outcomes. Throughout this objective, we refer to the matched set of federal workers as “beneficiaries”

when discussing their simulated benefits; and we refer to these same individuals as “workers” when discussing their actual careers.
17 Subgroups we examined showed variation in the extent of missed income and career growth, GS level at time of injury, and state tax rates.
                                                                                                                                                                   14




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                                                   Act




Finding 1: Wage Replacement


Proposed Revision Reduced 2010 Median Wage
Replacement Rate from 80 Percent to 77 Percent
                                                                                            Figure 1: Wage Replacement Rates Under FECA

• Under our simulation, the                                                                 and the Proposed Revision


  proposed revision decreased the
  overall median wage replacement
  rate by 3.1 percentage points.


• About half of total disability
  beneficiaries had 2010 wage
  replacement rates between 71 and
  87 percent under FECA
  and between 69 and 84 percent
  under the proposed revision.18
                                                                                              Source: GAO analysis of simulation results.

18 Very few FECA beneficiaries had wage replacement rates over 100 percent—2.2 and 1.3 percent of beneficiaries under FECA and the proposed revision,

respectively. Most of these workers had declines in actual income from the time of their simulated injury through 2010. Beneficiaries could have wage
replacement rates over 100 percent for other reasons, including FECA cost of living increases and high tax liabilities.                                 15




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Wage Replacement: Median Rates


Proposed Revision (cont’d)

• The overall decrease in the median wage replacement rate was due to
  the greater proportion of beneficiaries with a dependent and the relative
  magnitude of the changes.
     •   Those with a dependent (n=4,011) had a 5 percentage point decrease in
         compensation rate—from 75% to 70% under the proposed revision—and their
         wage replacement rates decreased, as expected.
     •   Those without a dependent (n=1,456) had a 3-1/3 percentage point increase in
         compensation rate—from 66-2/3% to 70% under the proposed revision—and
         their wage replacement rates increased, as expected.

         Policy Implication:
         Compensating all FECA beneficiaries at 70 percent of wages at
         the time of injury would likely result in a decrease of the median
         wage replacement rate. Under our simulation the median wage
         replacement rate decreased from 80 to 77 percent.

                                                                                                              16




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Wage Replacement: Median Rates


Equalizing FECA Compensation Rates Alters the
Relative Equality in Wage Replacement Rates
   Figure 2: Median Wage Replacement Rates For Beneficiaries with and without a Dependent




                                                                                                                      Source: GAO analysis of simulation results.


  The proposed revision increased the magnitude, and reversed the direction, of the difference in wage
  replacement rates between beneficiaries with and without a dependent.
          •Under FECA, beneficiaries with a dependent had a median wage replacement rate that was 3.5 percentage points
           higher than did those without dependents.
                • Had we accounted for the actual number of dependents, beneficiaries with a dependent would have lower wage
                  replacement rates, and the difference between wage replacement rates would be smaller. As a result, under
                  FECA these replacement rates are relatively similar.19
          •Under the proposed revision, beneficiaries with a dependent had a median wage replacement rate 5.8 percentage points
           lower than did those without dependents.
                • Had we accounted for the actual number of dependents, the difference between wage replacement rates would
                  be greater.
          •Currently, lower tax liabilities partially offset the augmented benefits (75 vs. 66-2/3 percent) for beneficiaries with a
           dependent.
19 Our data did not include information on the number of dependents, so we assumed a single dependent. All else equal, having more dependents would

generally increase take-home pay (because of smaller tax liabilities) and therefore result in lower wage replacement rates. For information on the relationship
between number of dependents and wage replacement rates, see 27.                                                                                                    17




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Wage Replacement: Median Rates


Equalizing FECA Compensation Rates (cont’d)



Policy Implication:

Currently, FECA replaces similar percentages of take-home pay for beneficiaries with or without a
dependent. The proposal to compensate all beneficiaries at 70 percent of gross income at the time of
injury results in unequal wage replacement rates.

This occurs because FECA benefits are not taxed, whereas wages are. Tax deductions for dependents
allow individuals with dependents to keep a greater proportion of their earnings, i.e., have greater take-
home pay.

As a result, equalizing FECA compensation rates at 70 percent—or any other percentage—results in
FECA replacing a smaller proportion of take-home pay for beneficiaries with a dependent than it
replaces for beneficiaries without a dependent.




                                                                                                               18




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Wage Replacement: Subgroups Examined


Proposed Revision Did Not Disproportionately
Affect Subgroups We Examined
• While the overall median wage replacement rate was around 80 percent, wage
  replacement rates for some beneficiaries in the subgroups we examined were
  substantially lower.
• The proposed revision generally reduced wage replacement rates of
  beneficiaries in the subgroups we examined; however, we found no reductions
  that were disproportionate to the overall reduction in median benefits.
• Under both FECA and the proposed revision, we found variation in wage
  replacement rates between beneficiaries, based on:
    • Extent of missed career growth;
    • Extent of missed income growth;
    • GS level at time of injury; and
    • State tax rates and overall tax liabilities.


                                                                                                           19




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Wage Replacement: Subgroups Examined


Missing Out on Career Growth Resulted in Lower
Wage Replacement Rates
 Figure 3:
 Median Wage
 Replacement
 Rates by Career
 Growth for
 FECA and a
 Proposed
 Revision


 Source: GAO
 analysis of
 simulation results.
 Note: Missed
 career growth,
 or career growth
 absent an injury,
 is captured by
 moving from one
 GS level category
 to the next after
 the time of the
 simulated injury.



•       Among workers who remained in the same GS category from the time of their simulated injury through 2010, median
        wage replacement rates were about 9-15 percentage points higher than for those who advanced a full GS category.20
            •      For example, under FECA the median wage replacement rate for workers with less career growth in GS 9-12 was about
                   15 percentage points higher than that of workers who experienced greater career growth from GS 9-12 to GS 13-15—
                   84.5 percent to 69.7 percent.21
20
 About 74 percent of workers stayed in the same GS category from time of simulated injury to 2010 and 24 percent advanced a full GS category.
GS ranges were based on income (2010 dollars): GS 1-4 (<$27,431), GS 5-8 ($27,431-$41,562), GS 9-12 ($41,563-$71,673), and GS 13-15 (≥$71,674).
21
 Because of missed career growth, beneficiaries who were on FECA longer had lower wage replacement rates.                                         20




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Wage Replacement: Subgroups Examined


Missing Out on Career Growth (cont’d)


• Actual wage growth through GS step increases and promotions
  outweighed FECA’s annual cost of living adjustments—generally
  higher than those for federal workers (1990-2011)—and resulted
  in lower wage replacement rates for beneficiaries who missed
  substantial career growth.
     • Because of missed career growth, beneficiaries who were on
       FECA longer had lower wage replacement rates.
     Policy Implication:
     Because FECA was not designed to account for missed career growth,
     its cost of living increases do not keep pace with GS step increases and
     promotions. Those beneficiaries who miss out on career growth due to
     their injury have lower wage replacement rates than those who do not.

                                                                                                           21




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Wage Replacement: Subgroups Examined


Missing Out on Income Growth Resulted in Lower
Wage Replacement Rates
Figure 4: Median
Wage Replacement
Rates by Income
Growth




Source: GAO analysis
of simulation results.
                                                                                                  Intervals do not include upper endpoints.

•      Wage replacement rates declined as missed income grew.
           •      Among the 92 percent of workers who experienced income growth in their careers,22 wage
                  replacement rates under FECA ranged from about 87 percent down to about 52 percent.
           •      More workers had 0-9 percent income growth than any other range; their median wage
                  replacement rate under FECA was about 87 percent.
22   The remaining 8 percent—420 workers—experienced a decline in income.

                                                                                                                                              22




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Wage Replacement: Subgroups Examined


Missing Out on Income Growth (cont’d)




Figure 5:
GS Level
Groupings
by Percent
of Missed
Income
Growth




Source: GAO
analysis of
simulation
results.
                                                                                                             Intervals do not include upper endpoints.

•      Most workers whose injuries caused them to miss 0 to 9 percent growth in income were injured at higher GS levels:23
          •     30 percent were injured at GS levels 1-4 or 5-8.
          •     70 percent were injured at GS levels 9-12 or 13-15.

•      Most workers whose injuries caused them to miss greater than 60 percent growth in income were injured at lower GS levels:
          •     60 percent were injured at GS levels 1-4 or 5-8.
          •     40 percent were injured at GS levels 9-12 or 13-15.
23   GS ranges were based on income (2010 dollars): GS 1-4 (<$27,431), GS 5-8 ($27,431-$41,562), GS 9-12 ($41,563-$71,673), and GS 13-15 (≥$71,674).

                                                                                                                                                         23




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Wage Replacement: Subgroups Examined


Missing Out on Income Growth (cont’d)


•      Actual income growth outweighed FECA’s annual cost of living adjustments—generally higher than
       those for federal workers (1990-2011)—and resulted in lower wage replacement rates for
       beneficiaries who missed substantial income growth.24
           •    Because of missed income growth, beneficiaries who were on FECA longer had lower wage
                replacement rates.




               Policy Implication:
               Because FECA was not designed to account for missed income growth,
               its cost of living increases do not keep pace with missed income growth.
               Those beneficiaries who miss out on income growth due to their injury
               have lower wage replacement rates than those who do not.

24   In general, wages grow faster than prices.

                                                                                                                               24




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Wage Replacement: Subgroups Examined


Lower GS Levels at Time of Injury Were
Associated with Lower Wage Replacement Rates
 Figure 6: Median Wage Replacement Rates by GS Level at Time of Injury




 Source: GAO analysis of simulation results.



        Median wage replacement rates were lower for beneficiaries injured at
        lower GS levels (i.e., those with lower incomes).25
25   GS ranges were based on income (2010 dollars): GS 1-4 (<$27,431), GS 5-8 ($27,431-$41,562), GS 9-12 ($41,563-$71,673), and GS 13-15 (≥$71,674).

                                                                                                                                                       25




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Wage Replacement: Subgroups Examined


Lower GS Levels at Time of Injury Were
Associated with Lower Wage Replacement Rates
• Those injured at lower GS levels had lower median wage replacement rates
  because of missed career growth and tax liabilities.
          •     A higher percentage of beneficiaries injured at lower GS levels were workers who advanced a
                full GS category from the time of their simulated injury through 2010.
                  • About 63 percent of beneficiaries injured at GS 1-4 advanced a full GS category,
                     compared to 38 and 18 percent, respectively, of beneficiaries injured at GS 5-8, and GS
                     9-12.26
          •     Because tax liability increases with income, beneficiaries at lower GS levels generally pay
                lower taxes and thus take home more of their gross pay if not injured; FECA benefits thus
                replace a smaller percentage of take-home pay.

         Policy Implication:
         Workers who were injured at lower GS levels had lower wage replacement
         rates—that is FECA replaces a smaller portion of their take-home pay—than
         did those injured at higher GS levels. This difference occurs at initial
         compensation and can grow over time.
26   GS ranges were based on income (2010 dollars): GS 1-4 (<$27,431), GS 5-8 ($27,431-$41,562), GS 9-12 ($41,563-$71,673), and GS 13-15 (≥$71,674).

                                                                                                                                                       26




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Wage Replacement: Subgroups Examined


State Taxes and Tax Liabilities Were Associated
with Limited Variation in Wage Replacement Rates
    Figure 7:
    Median Wage
    Replacement
    Rates by
    State Tax




    Source: GAO
    analysis of
    simulation results.



•        Lower taxes yield higher take-home pay, and are thus associated with lower wage
         replacement rates.27
•        Median wage replacement rates:
             •       grow as taxable income increases (e.g., spousal income);
             •       decline as tax exemptions and deductions increase (e.g., for dependents, mortgage interest); and
             •       were generally lower for workers in states with lower tax rates.
27   FECA benefits are not taxed.

                                                                                                                           27




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Summary of Key Findings: FECA and FERS


Objective 2:
•     In our simulation comparing FECA to FERS in 2010, both overall and across most
      subgroups we looked at:
          •    The median FECA benefit package (FECA and TSP) is greater than the median
               FERS retirement benefit package (FERS, TSP, and Social Security) for FERS
               annuitants in 2010.
          •    The median reduced FECA benefit package—Labor’s proposal to reduce FECA
               benefits upon reaching Social Security retirement age—is less than the median
               FERS benefit package for FERS annuitants in 2010.28
•     Because FERS is not yet mature, comparisons of FECA and FERS benefits in 2010
      reflect limited years of service. Under our simulation of a mature FERS—consisting of a
      30 year federal career—FECA and reduced FECA were generally lower than FERS.


28 Labor’s proposed revision of FECA would reduce benefits to 50 percent of wages at the time of injury upon reaching Social Security retirement age, which

is between 65 and 67 years of age, based on birth year. To increase the size of the analysis set, we simulated benefit reductions for all annuitants, regardless
of age.                                                                                                                                                            28




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Finding 2: FECA vs. FERS at Retirement Age


Current FECA Benefits At Retirement Are Generally
Greater Than FERS Benefits for 2010 Annuitants
                                                                           Figure 8: Composition of Median Benefits for FECA, FERS, and Reduced FECA
•    The median FECA benefit at
     retirement age under the current
     program (including both FECA
     benefit and TSP) was about 32
     percent greater than the median
                                                                                                                                             Source: GAO analysis
     FERS benefit (FERS annuity, TSP,                                                                                                        of simulation results.
                                                                                                                                             Note: Percentages are
     and Social Security).29                                                                                                                 the ratio of the median
                                                                                                                                             benefit component
                                                                                                                                             (e.g., TSP) to the

        •    In our analysis, FERS                                                                                                           median overall benefit.
                                                                                                                                             These ratios may not
                                                                                                                                             sum to exactly 100%
             annuitants had a median of                                                                                                      across components,
                                                                                                                                             because the component
             about 16 years of service.                                                                                                      medians may apply to
                                                                                                                                             different workers.



•    The median FECA benefit under
     the proposed reduction was
     about 6 percent less than the
     median FERS benefit.
29 Our analysis did not include any retirement income generated by retirement accounts held outside the TSP—from work outside the federal government or from other

savings decisions. Further, our data does not allow distinction between the proportion of the TSP balance attributable to the employee’s contribution
vs. that of the government; as a result, some of the retirement benefits described are financed by reduced consumption during working years.                      29




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    FECA vs. FERS: Years of Service


    FERS Benefits Received by 2010 Annuitants with
    More Years of Service Are Closer to FECA Benefits
•     FECA benefits were consistently greater than           Figure 9: Median FECA and FERS Benefit Packages by Years of Service in 2010
      FERS benefits for varying years of service, and                                                                     Median FERS benefits may
                                                                                                                         be greater than median FECA
      reduced FECA benefits were generally less                                                                               benefits in the future

      than FERS benefits for varying years of service.
        •   The gap between current FECA benefits
            and FERS benefits narrowed as years
            of service increased.
             •   An annuitant with more years of federal
                 service had increased FERS benefits—
                 due to growth in the TSP and FERS
                 annuity from additional years worked,
                 as well as to career (income) growth.
        •   The gap between reduced FECA
            benefits and FERS benefits widened
            as years of service increased

•     FECA COLAs do not keep pace with
      the total “missed” accumulation of FERS
      retirement benefits.                                                                     Source: GAO analysis of simulation results.




                                                                                                                                              30




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FECA vs. FERS: Years of Service


Years of Service (cont’d)



• As years of service increase, FECA and FERS become more
  similar. While FERS benefits accrue at a faster rate than FECA
  benefits grow prior to retirement, it is unclear which benefit would
  be greater if there were workers who had 30 year careers.30



• In addition, current FERS benefits at retirement are generally
  greater than the reduced FECA benefit, and in a mature system
  FERS benefits may be even greater.


30 FERS had only been in place for 26 years in our 2010 data. Consequently, very few annuitants covered under FERS had 30 years of federal service

(some converted from the prior retirement system to FERS). Federal employees age 62 with over 30 years of service accrue retirement benefits at a
slightly higher rate. In addition, having 4 additional years of TSP contributions and growth can lead to greater account balances.                   31




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FECA vs. FERS: GS Level at Time of Injury


Lower GS Levels at Time of Injury Resulted in
Lower FECA Benefits Relative to FERS Benefits
                                                                                                Figure 10: Median FECA and FERS Benefit Packages by GS Level
•        For varying GS levels at the time of injury:                                           at Time of Injury

           •    Median FECA benefits were consistently greater than
                FERS benefits; and
           •    Median reduced FECA benefits were generally less
                than FERS benefits.
•        Beneficiaries injured at lower GS levels had lower FECA
         benefits relative to FERS than did beneficiaries injured at
         higher GS levels.31
           •    This relationship also exists within years of service groups; for
                instance, among workers who would have had careers that lasted
                20-25 years, the median FECA benefit ranged from 8.4 percent
                (injured at GS 5-8) to 29.3 percent (injured at GS 13-15) more than
                the median FERS benefit.32

•        Accounting for both years of service and GS level at time of
         injury, beneficiaries injured at lower GS levels who would
         have had longer careers had they not been injured received
         the lowest FECA benefits relative to FERS benefits.                                                                        Source: GAO analysis of simulation results.



    31This relationship exists because lower earners receive a higher rate of Social Security benefits than higher earners; thus, while FECA benefits grow
    proportionally based on income, FERS benefits do not because Social Security rates vary, providing a higher rate of benefits to lower earners.
    32There were not enough workers in our sample injured at GS 1-4 who would have had careers of 20-25 years to report their FECA/FERS benefit ratio.                       32




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FECA vs. FERS: Years Since Retirement


Post-Retirement FECA Benefits Grow at a Faster
Rate than FERS Benefits

• After retirement, FECA benefits increase at a faster rate than
  FERS benefits.33
          • The COLA for FECA is generally greater than the COLA for the FERS
            annuity, and under our simulation TSP annuities are not adjusted for
            inflation.



• Since FECA and reduced FECA are adjusted at the same rate,
  reduced FECA benefits would also grow faster than FERS
  benefits after retirement.
          • As a result, establishing equity between the two benefit packages at
            retirement could result in FECA eventually being greater than FERS.

33FECA and Social Security are adjusted by the same price index (CPI-W); the FERS annuities are adjusted as follows: if CPI-W < 2%, then FERS COLA = CPI; if 2 < CPI
≤ 3% then COLA = 2%; and if CPI > 3% then COLA = CPI - 1. The magnitude of the difference in benefits may be overstated due to the structure of the data set (the lack of
a mature FERS) and our assumption of a single life annuity with level payments, which does not adjust annually post retirement (an inflation-indexed annuity would).        33




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FECA vs. FERS: Simulation of Mature FERS


FECA Benefits Were on Par or Less Than FERS
Benefits Under Our Mature FERS Simulation
• Our simulation compares the FECA benefits for a beneficiary after a total of 30
  years (pre- and post-injury combined) to the FERS benefit package he or she
  would have had absent an injury after a 30-year career.


• Federal workers may retire with less than 30 years of federal service, and some
  may retire with more than 30 years of federal service. As such, our results may
  overestimate (or underestimate) FERS.


• In our simulation of the mature FERS system, FECA benefits were on par with or
  less than FERS benefits—depending on contributions to TSP—after a simulated
  30-year career. Our simulation of reducing FECA to 50 percent of applicable
  wages at retirement resulted in reduced FECA benefits that were substantially
  lower than FERS benefits after a simulated 30-year career (see figures 11 and
  12).


                                                                                                              34




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FECA vs. FERS: Simulation of Mature FERS


FECA Benefits Were on Par or Less Than FERS
Benefits Under Our Mature FERS Simulation (cont’d)
Figure 11: FECA and FERS benefits based on simulation of 30 year careers




       Source: GAO analysis of simulation results.



•   In our simulation of a mature FERS with 30 year careers and 6 percent annual growth for the
    TSP accounts, we found:

        •     The median FECA benefit package was 1 percent greater than the median FERS benefit package—assuming
              a TSP contribution of 1 percent.

        •     The median FECA benefit package was 10 percent less than the median FERS benefit package—assuming a
              TSP contribution of 10 percent.


                                                                                                                                  35




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FECA vs. FERS: Simulation of Mature FERS


FECA Benefits Were on Par or Less Than FERS
Benefits Under Our Mature FERS Simulation (cont’d)
Figure 12: Reduced FECA and FERS benefits based on simulation of 30 year careers




            Source: GAO analysis of simulation results.



•   In our simulation of a mature FERS with 30 year careers and 6 percent annual growth for the
    TSP accounts, we found:

        •       The median reduced FECA benefit package was 31 percent less than the median FERS benefit package—
                assuming a TSP contribution of 1 percent.

        •       The median reduced FECA benefit package was 35 percent less than the median FERS benefit package—
                assuming a TSP contribution of 10 percent.


                                                                                                                                       36




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FECA vs. FERS: Simulation of Mature FERS


FECA Benefits Were on Par or Less Than FERS
Benefits Under Our Mature FERS Simulation (cont’d)
•   For current FERS annuitants,              Figure 13: Median FECA and FERS Benefit Packages by Years of Service

    median FECA benefits were
    consistently greater than median
    FERS benefits for varying years of
    service.
      •   However, as years of service
          increased, FERS benefits
          grew relative to both current
          and reduced FECA benefits
          (narrowing and widening the
          respective gaps in benefits).

•   Our simulation of a mature FERS,
    which assumed 30-year federal
    careers, showed that the median
    FECA benefit package may be on
    par or less than the median FERS
    retirement package in the future.                                                              Source: GAO analysis of simulation results.




                                                                                                                                                 37




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Concluding Observations:
Wage Replacement Rates Under FECA and
Proposed Revision
•       Labor’s proposal to compensate all FECA beneficiaries at 70 percent of gross wages would reduce
        the overall median wage replacement rate from 80 to 77 percent, based on our simulation.
          • While the median wage replacement rate under both FECA and the proposed revision are
              about 80 percent, wage replacement rates for some subgroups—such as those who missed
              extensive income growth—were as low as 50 percent.

•       Since wage replacement rates are a measure of adequacy of benefits, it may be desirable to have
        similar wage replacement rates across beneficiaries.
          • Any proposal to reduce and equalize compensation rates—for example, at 70 percent—would
              disproportionately affect beneficiaries with dependents relative to those without dependents.
              Such a change would alter the relative equality of current wage replacement rates under
              FECA and result in an imbalance in the adequacy of benefits.
                    •   The ensuing differences in wage replacement rates are primarily attributable to taxes.
                    •   It is important to note that while the current program may be advantageous to beneficiaries with an
                        eligible dependent, the proposed revision would be advantageous to those without an eligible
                        dependent.

            •    An alternative approach might be an across the board reduction in FECA compensation,
                 which could keep wage replacement rates relatively equal between beneficiaries with and
                 without dependents.34
                    •   However, such a change may have a large impact on the adequacy of benefits for those with relatively
                        low wage replacement rates, such as beneficiaries who missed substantial career growth.
34   This is an illustrative example, as no such reduction was in the Labor proposal and the effects of such reductions were not considered in this report.

                                                                                                                                                              38




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Concluding Observations:
Wage Replacement Rates Under FECA and
Proposed Revision (cont’d)
• It is important to note that FECA was not designed to account for missed
  income growth or other workplace dynamics. As such, neither FECA nor the
  proposed revision can maintain a constant wage replacement rate over time.
    •   However, wage replacement rates that account for missed income growth provide
        a more complete story of the comparison between an injured worker and his or her
        counter-factual of having never been injured.


• Establishing a benefit structure that accounts for missed career growth and
  maintains constant wage replacement rates would require a nuanced approach
  to calculating and adjusting benefits over a beneficiary’s missed career, for
  example by establishing variable benefit adjustments based on standardized
  career trajectories.
    •   However, such a nuanced system may be cost intensive to research, design, and
        implement, and it is unclear whether it would be cost effective or feasible to
        implement in a fair manner.


                                                                                                         39




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Concluding Observations:
FECA and Proposed Revision Compared to FERS
•   The median FECA benefit package in retirement was greater than the median FERS retirement package in
    2010; going forward, the median FECA benefit package may be on par or less than the median FERS
    retirement package, as in our simulation of a mature FERS with 30-year careers.

•   Labor’s proposed reduction to 50 percent resulted in more equitable benefits—the median reduced FECA
    benefit package was about 6 percent less than the median FERS benefit package in 2010—yet going
    forward, the median reduced FECA package may be substantially less than the median FERS retirement
    package, as in our simulation of a mature FERS with 30-year careers.
      •   In addition, in 2010, the median reduced-FECA benefit package was substantially lower than the median FERS
          benefit package for some subgroups, including those injured at lower GS levels and those who missed longer careers.
      •   To the extent that policymakers might consider benefits that are substantially less than FERS to be inadequate, they
          may want to consider the merits of setting a minimum FECA benefit level after retirement to mitigate such an
          outcome.


•   Since FECA benefits may grow faster than FERS benefits after retirement, any policy that equalizes FECA
    and FERS at retirement may not maintain equity between the two benefit packages over time.
      •   Slowing the growth of FECA benefits after retirement could help maintain equity; however, doing so would erode the
          purchasing power of FECA beneficiaries over time and may leave them at risk of having inadequate income.


•   Because annuitants with more years of service have greater retirement income, it would be important to
    compare FECA to FERS once the FERS system is mature.


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Concluding Observations:
Lifetime Context of FECA
•   From our analyses, different stories emerge with implications for the “adequacy” of FECA
    benefits.
      • Our simulation of wage replacement rates indicated that FECA replaces a decreasing
        proportion of a beneficiary’s “missed income” over time, implying the beneficiary is less able to
        maintain the standard of living he/she would have had absent the injury. During this missed
        career, FECA benefits are less than the income a beneficiary would have taken home.
      • Our retirement simulation indicated that FECA benefits at retirement are greater than FERS
        benefits in the current system (not yet mature).
      • Our simulation of the mature FERS, assuming 30-year careers, indicated that FECA benefits at
        retirement may be on par or less than FERS benefits in the future.

• Any such differences would be compounded over time. It is unclear whether the lifetime
  cumulative effects of these differences result in a beneficiary being better or worse off
  financially than he or she would have been absent an injury—an outcome that depends
  on several factors, including the age of the beneficiary at the time of injury.

• While our analyses considered FECA and FERS benefits in 2010, it will be important for
  policy makers to understand the cumulative effects of these differences on FECA
  beneficiaries as they consider making changes to FECA.

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Appendix II: Objectives, Scope and
                  Appendix II: Objectives, Scope and
                  Methodology



Methodology

                  To analyze the effects of a proposed revision to the Federal Employees’
                  Compensation Act (FECA) program on non-postal federal employees1,
                  we answered two key questions: (1) what is the effect of compensating
                  total disability FECA beneficiaries at a single rate regardless of having
                  dependents, and (2) how do the Federal Employee Retirement System
                  (FERS) and total disability FECA benefits in retirement compare under
                  the current FECA benefit structure and a proposed FECA reduction at the
                  time of retirement? This appendix provides a detailed account of the data
                  and methods we used to answer these questions. Section 1 describes the
                  key data sources. Sections 2 and 3 describe the methods we used to
                  answer questions 1 and 2, respectively.


                  To answer the key questions, we used administrative data on three
Section 1: Data   populations: recent federal employees, FECA beneficiaries, and FERS
Sources           annuitants. These data came from 4 federal agencies: the Department of
                  Labor (Labor), the Office of Personnel Management (OPM), the Federal
                  Retirement Thrift Investment Board (FRTIB), and the Social Security
                  Administration (SSA). Table 1 provides an overview of each of these data
                  files. This section provides a description of each data source and the
                  steps we took to ensure their reliability.




                  1
                   We analyzed federal employees who have records in the Central Personnel Data File,
                  which is described in further detail below. This file does not contain information on
                  employees in the U.S. Postal Services as well as several other federal agencies. Results
                  of a similar analysis of postal employees will be included in a follow-on report.




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                                         Methodology




Table 1: Data Sources Used in Analysis

                                 Federal agency                            Type of information                  Years of data         Data used
Data file                        responsible            Population covered in file                              analyzed            for question
Integrated Federal Employees’    Labor                  FECA beneficiaries        Benefits and                  2010                           1&2
Compensation System (iFECS)                                                       characteristics
Central Personnel Data File      OPM                    Federal employees         Data on pay and other 1988-2010                              1&2
(CPDF)                                                                            characteristics
FERS annuitant data              OPM                    FERS annuitants           Annuity data                  2010                             2
Thrift Savings Plan data         FRTIB                  FERS annuitants and TSP balances and                    2000-2010                        2
                                                        FECA beneficiaries  withdrawals
Master Beneficiary Record        SSA                    FERS annuitants           Social Security               2010                             2
                                                                                  benefit-related data
                                         Source: GAO.

                                         Note: This analysis will only cover total disability beneficiaries. Lack of data prevents a similar
                                         analysis of those beneficiaries with some wage earning capacity.



Integrated Federal                       To obtain information on the characteristics and benefits of FECA
Employees’ Compensation                  beneficiaries, we used data from the Department of Labor’s (Labor)
System                                   Integrated Federal Employees’ Compensation Systems (iFECS), FECA’s
                                         claimant database for chargeback year 2010, which ends on June 30,
                                         2010.2 Specifically, we used information on case status (such as whether
                                         the case was closed, under administrative review, etc.); the type of
                                         compensation and medical benefits (such as whether the benefit was
                                         long-term or short-term or for medical benefits only); the amount of the
                                         benefit the beneficiary receives; and information on whether the
                                         beneficiary had a dependent.


Central Personnel Data                   To obtain information on the salaries and work histories of former and
File                                     current federal employees, we used data from the Central Personnel Data
                                         File (CPDF). The CPDF is maintained by the Office of Personnel
                                         Management, and represents the primary government source of
                                         information on federal employees. We used information from the annual
                                         status files in the CPDF. The status files consist of data elements
                                         describing all employees who were present in the federal workforce in



                                         2
                                          FECA benefits are paid out of the Employees’ Compensation Fund, and most are
                                         charged back to the employee’s agency. Labor’s 2010 chargeback year for FECA agency
                                         billing purposes ends on June 30, 2010.




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                            Appendix II: Objectives, Scope and
                            Methodology




                            September of each year, with some notable exclusions.3 These elements
                            include information on the federal employee’s adjusted basic pay,
                            agency, date of birth, education level, occupation, length of federal
                            service, and work schedule (such as full-time or part-time). We used
                            CPDF data from 1988 through 2010.4


FERS annuitant data         To obtain information on FERS annuitants, we used FERS annuitant data
                            for 2010 from the Office of Personnel Management. Specifically, we used
                            the annuity amount received by the FERS annuitant and the annuity date.


Thrift Savings Plan data    To obtain information on TSP balances for FECA beneficiaries and FERS
                            annuitants who separated from the government, we used Thrift Savings
                            Plan data from 2000 to 2010. These data are maintained by the Federal
                            Retirement Thrift Investment Board. Specifically, we used the information
                            on the TSP balance as of April 2012, the history of withdrawals from the
                            TSP account from 2000 to 2012 to calculate the balance at the date of
                            separation from federal service, and the date and amount of roll-overs
                            into the TSP account. We excluded beneficiaries with roll-overs into their
                            TSP account.


Master Beneficiary Record   To obtain information related to the Social Security benefits of FERS
                            annuitants, we used data from the 2010 Master Beneficiary Record, an
                            administrative SSA data file. Specifically, we used information on the
                            worker’s beneficiary type and Primary Insurance Amount (PIA). We




                            3
                             Specifically, CPDF coverage of the executive branch currently includes all agencies
                            except the Board of Governors of the Federal Reserve, the Central Intelligence Agency,
                            the Defense Intelligence Agency, Foreign Service personnel at the State Department, the
                            National Geospatial-Intelligence Agency, the National Security Agency, the Office of the
                            Director of National Intelligence, the Office of the Vice President, the Postal Rate
                            Commission, the Tennessee Valley Authority, the U.S. Postal Service, and the White
                            House Office. Also excluded are the Public Health Service’s Commissioned Officer Corps,
                            nonappropriated fund employees, and foreign nationals overseas. CPDF coverage of the
                            legislative branch is limited to the Government Printing Office, the U.S. Tax Court, and
                            selected commissions.
                            4
                             The 2010 CPDF data were the most recent data available for the first GAO analysis of
                            FECA, which compared FECA with CSRS annuitants. For the purposes of comparing the
                            results across the reports, we used the same year of data.




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                         Methodology




                         limited our analysis to workers who are in current pay status and retired
                         on their own account.5


Data reliability         For each of the datasets described above, we conducted a data reliability
                         assessment of selected variables by conducting electronic data tests for
                         completeness and accuracy, reviewing documentation on the dataset,
                         and interviewing knowledgeable officials about how the data were
                         collected and maintained and their appropriate uses. We determined that
                         the variables that we used from the data we reviewed were reliable for the
                         purposes of this report.


                         This section presents the methods we used to answer the question: What
Section 2: Analysis of   is the effect of compensating total disability FECA beneficiaries at a single
Effects of               rate regardless of having dependents? To answer this question, we
                         created a sample of federal employees that were employed by the federal
Compensating Total       government in September 2010 that were similar to full disability FECA
Disability FECA          beneficiaries, and we compared their actual salary levels in 2010 to a
Beneficiaries At a       hypothetical FECA benefit level the employee would have received under
                         the current and revised FECA benefit structure, if he or she had been
Single Rate              injured at the same point in time that the matched FECA beneficiary had
Regardless of Having     been injured.

Dependents

Wage replacement rate    To compare FECA benefits before and after the proposed revision, we
                         computed a wage replacement rate under each policy scenario. The
                         wage replacement rate, as we define it, is the amount of the FECA benefit
                         as a proportion of take-home pay.6 Using the wage replacement rate
                         instead of comparing the dollar value of the FECA benefit with take-home
                         pay has two main advantages. First, it is a useful way to measure benefit
                         adequacy because it captures the extent to which an individual can
                         maintain the standard of living he or she had prior to being injured.



                         5
                          Individuals with these characteristics were identified in the SSA administrative data as
                         those with an “A” for primary claimant in the field called “Beneficiary Identification Code”
                         and a “C” for current payment status in the field called “Ledger Account File.”
                         6
                          We used take-home pay to be consistent with GAO-98-174.




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                      Methodology




                      Second, it allows for easy comparison over time and across sub-
                      populations of individuals with different salary levels.


Matching population   We computed wage replacement rates for a sample of federal employees
                      working in September 2010 that resembled full disability FECA
                      beneficiaries. To select this sample, we used a multivariate matching
                      technique. Specifically, we drew a simple random sample of 10 percent of
                      federal workers in the 2010 CPDF who were covered by FERS. We then
                      matched each FECA beneficiary to the 2010 employee who was most
                      similar to him or her, based on the following characteristics: employing
                      agency; occupation type (blue v. white collar); the minimum, median, and
                      maximum basic pay level prior to the date of injury for the FECA
                      beneficiary; first year of employment; age when first employed and at
                      simulated injury; number of spells of employment; education; sex; and
                      years of service at simulated injury.7 To ensure that the matches were
                      sufficiently similar, we compared the distributions of these characteristics
                      between FECA beneficiaries and the matched federal employees. Figure
                      1 and Table 2 present the distributions of and descriptive statistics on
                      some of these characteristics for the FECA beneficiaries and the federal
                      employees after matching.




                      7
                       To construct the matched sample, we used a computer algorithm that selected the single
                      closest 2010 employee for each FECA beneficiary. The “closest” employee was
                      determined based on Mahalanobis distance, which is a function of multiple characteristics
                      of the annuitants and FECA beneficiaries. Each 2010 employee could match multiple
                      FECA beneficiaries. Collectively, these methods are known as one-to-one Mahalanobis
                      matching with replacement. This is different from another method—probability propensity
                      score matching—that is also used to select matched samples. The Mahalanobis measure
                      avoids the potential drawback of the probability propensity score because computing the
                      Mahalanobis distance does not require estimating the probability of injury for each
                      employee and FECA beneficiary. For more information on this technique and the
                      characteristics that were used in the matching process, see GAO-12-309R, page 17.




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                                         Appendix II: Objectives, Scope and
                                         Methodology




Figure 1: Distributions of key characteristics of matched FECA beneficiaries and federal employees




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                                           Methodology




Table 2: Distributions of covariates in matched wage replacement analysis sample

                                                              2010 Federal employees                               FECA beneficiaries
                                                          1st                                   3rd         1st                         3rd
                                                      Quartile       Median            Mean Quartile    Quartile     Median    Mean Quartile
Minimum income before injury (2010 dollars)             29,054         35,078 38,521           43,633     29,180     35,280 39,068      44,681
Median career income before injury (2010 dollars)       34,277         42,794 46,466           53,219     34,236     43,420 47,100      54,345
Maximum career income before injury                     37,918         48,335 52,808           61,516     38,013     48,711 53,190      62,309
(2010 dollars)
First year working                                         1983          1988          1990     1998       1982        1988    1989      1998
Years of service                                              5.5         12.5          12.7     18.8        5.4        12.7    13.1      19.5
Age in first year of work (years)                           25.4          31.8           33      39.1       25.5         32     33.3      39.8
Age in last year of work (years)                            40.3          46.5          46.1     51.9       40.8        47.3    46.9       53
Age in 2010 (years)                                         48.2          54.4          53.7     60.2         48         55      54        61
Number of employment spells                                     1             1          1.1       1           1          1      1.1        1
% Male                                                                                   55                                     54.2
% No high school degree                                                                 10.6                                    10.6
% High school degree                                                                    44.4                                    44.4
% Some college                                                                          27.9                                    27.9
% College degree                                                                        10.2                                    10.1
% Graduate degree                                                                        7.1                                     6.9
% Blue collar occupation                                                                 28                                     28.1
                                           Source: GAO analysis of OPM and DOL data.



                                           Our matched sample allowed us to estimate the salaries FECA
                                           beneficiaries might have earned if they had never been injured. We did
                                           not use the salaries of actual FECA beneficiaries because that would
                                           have required making assumptions about their career paths and resulting
                                           salary trajectory—as salary growth would have likely included GS step
                                           increases and promotions in addition to cost of living adjustments. In
                                           order to proxy the counterfactual salary, we used the actual salaries of
                                           the federal employees whom we matched to the FECA beneficiaries.
                                           Implicitly, we assumed that the FECA beneficiaries would have continued
                                           to the career path that his or her matched employee achieved in practice.
                                           This is a reasonable assumption, given that the matched employees
                                           resembled the FECA beneficiaries on key characteristics at all times prior
                                           to the FECA beneficiaries’ injuries, including tenure and salary.




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Computing the            For the matched 2010 employees who resembled FECA beneficiaries, we
components of the wage   estimated what the wage replacement rate would have been at the end of
replacement rate         2010, assuming each employee was injured when the matched FECA
                         beneficiary was injured.8 In other words, we estimated a counterfactual
                         wage replacement rate by simulating an injury for each matched 2010
                         employee to compute a hypothetical FECA benefit. Then we computed
                         the wage replacement rate under the two policy scenarios in three steps.

                         First, we computed the hypothetical FECA benefit at the time of injury
                         under the two scenarios. Labor uses adjusted base pay to determine
                         benefits, so the formulas under each scenario are:

                         Under the current structure:

                                              0.75                             for beneficiaries with
                         dependents; and

                                              0.6667                               for beneficiaries without
                         dependents.

                         Under the proposed revised structure:

                                        0.70                                   for beneficiaries with or
                         without dependents.

                         Second, we projected the benefit amounts from the time of simulated
                         injury through fiscal year 2010, using FECA’s annual cost-of-living
                         adjustments during this period, which were based on the Consumer Price
                         Index (CPI).9




                         8
                          We did not include long-term partial disability beneficiaries in this analysis because we
                         lack data on the employment histories of partial disability beneficiaries since they began
                         receiving FECA benefits. Partial disability beneficiaries represented approximately one-
                         quarter of all FECA full and part-time beneficiaries in chargeback year 2010. We will
                         analyze this population using a different approach in a follow-on report.
                         9
                          The cost of living adjustments granted to compensation recipients under the FECA are
                         based on the “Consumer Price Index for Urban Wage Earners and Clerical Workers” (CPI-
                         W) figures published by the Bureau of Labor Statistics (BLS).




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                           Third, we computed “take home pay” by subtracting the mandatory FERS
                           retirement contribution (0.8 percent of adjusted gross pay) and tax
                           deductions from adjusted base pay for 2010:10

                                                                                0.008


                           Finally, we computed the wage replacement rate for 2010:


                                                                                                        100



Comparison of sub-groups   To understand how the change from the first to second scenario impacted
                           certain groups, we partitioned the sample into sub-groups based on a
                           number of characteristics and compared the wage replacement rate for
                           each scenario and group. The characteristics we used to determine the
                           comparison groups included: whether the employee had dependents,
                           residency state tax level, the GS level at the time of the simulated injury,
                           GS level in 2010, GS level change between the simulated injury and
                           2010, income growth between the date of the simulated injury and 2010,
                           and the number of years on FECA. Because the CPDF does not contain
                           data on whether the federal employees have dependents, the matched
                           federal worker was “assigned” dependents based on the FECA
                           beneficiary. That is, if the FECA beneficiary had a dependent, the
                           matched federal worker was treated as having a dependent.11 Also,
                           because GS levels are not consistent across all federal agencies covered
                           in the CPDF data, we did not use the GS level in the CPDF but instead
                           created categories of GS levels that corresponded with base salary in



                           10
                             We deducted payroll, federal, and state taxes using the assumption that there was no
                           spousal income; the dependent, when present, was a spouse; and the spouse was over
                           the age of 65 if the worker was over the age of 65. We did not account for other
                           discretionary deductions such as for health and life insurance payments or TSP
                           contributions. To determine federal and state income taxes, we used the National Bureau
                           of Economic Research’s (NBER) TAXSIM. TAXSIM is NBER’s FORTRAN program for
                           calculating liabilities under U.S. federal and state income tax laws from individual data.
                           The TAXSIM Model (http://www.nber.org/taxsim) simulates the U.S. federal and state
                           income tax rules.
                           11
                             We assigned only 1 dependent per worker with dependents because the data do not
                           indicate the number of dependents. This method is consistent with GAO-98-174.




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              2010.12 We then compared the wage replacement rate under the two
              scenarios by sub-group, which are presented in the body of this report.


Limitations   This analysis has several limitations. First, the assumptions that we made
              to simulate tax deductions in our computations of take-home pay (such as
              the number of dependents and other deductions) will affect our estimates
              of wage replacement rates. For example, due to data limitations, we
              assumed one dependent in instances in which there might have been
              more than one dependent. Accounting for additional dependents would
              have lowered wage replacement rates. Similarly, by assigning
              dependents based on the matched FECA beneficiary, we cannot account
              for differences in individual choices to pursue different career paths as a
              result of having dependents. However, we lacked data on the particular
              circumstances of each matched federal employee, and accounting for
              such variation would unnecessarily complicate our methods. Second,
              these analyses were limited to benefits and income in 2010 and did not
              consider any cumulative effects of the proposed FECA revisions on
              lifetime income. For example, these would include the foregone savings
              that potentially would have been accrued as a result of having a higher
              salary over the course of additional years in the workforce. Finally, we
              assume that the tenure and income earned by the actual 2010 employees
              accurately simulate what their matched FECA recipients would have
              earned if they had not been injured. Although it is reasonable to assume
              that employees having nearly identical career histories prior to injury
              would have had approximately similar career outcomes after injury, the
              validity of our results depends on the accuracy of this counterfactual.13




              12
                Specifically, we created the following categories. GS level 1-4 pertained to base salaries
              < 27,431. GS level 5-8 pertained to base salaries >= $27,431 and < $41,563. GS level 9-
              12 pertained to base salaries >=$41,563 and <$71,674, and GS levels 13-15 pertained to
              base salaries>=71,674.
              13
                Specifically, FECA beneficiaries may have unobserved characteristics, such as a
              propensity to take risk, which affect their likelihood of becoming disabled. If these
              characteristics also affect labor market decisions, then using non-disabled federal
              employees as matches may not accurately reflect the career trajectories of FECA
              beneficiaries had they never been injured.




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                       This section presents the methods we used to answer the question: How
Section 3:             do the Federal Employee Retirement System (FERS) and total disability
Comparison of FERS     FECA benefits in retirement compare under the current FECA benefit
                       structure and a proposed FECA reduction at the time of retirement? To
and Total Disability   answer this question, we selected a sample of federal annuitants, who
FECA Benefits under    were similar to recent FECA beneficiaries nearing retirement age, and
Current and Reduced    then compared FERS and simulated FECA retirement benefits for these
                       annuitants in 2010, under the current and reduced FECA benefit
FECA                   structures.14


Benefit ratio          To compare FECA benefits to FERS retirement benefits before and after
                       the proposed revisions, we computed a ratio of the retirement benefits
                       under FECA as a proportion of retirement benefits under FERS. This ratio
                       measures the extent to which the FECA benefit may or may not exceed
                       the FERS retirement benefit under the current program and proposed
                       revisions. The ratio also allows for easy comparisons between sub-
                       groups that may have different benefit levels.


Matching population    As in our wage replacement analysis, we used matching methods to
                       simulate the benefit ratio for a set of hypothetical FECA beneficiaries near
                       retirement. This was necessary because we did not know what the actual
                       FECA beneficiaries would have earned and saved towards retirement in
                       their years after being injured, if they had continued working instead of
                       being injured. To simulate what those counterfactual earnings and
                       retirement benefits would have been, we selected a set of retired federal
                       employees in 2010 that resembled FECA beneficiaries who were near
                       retirement age. Specifically, we matched FECA beneficiaries who were
                       injured recently (after 2000), who were covered by FERS,15 and were
                       older than 55—the minimum retirement age under the FERS program—
                       with federal annuitants under FERS. We used the same matching



                       14
                         FECA benefits do not change when a beneficiary reaches retirement age. However,
                       similar to other federal employees covered under FERS, a FECA beneficiary can receive
                       returns from any TSP balances accrued prior to injury. We refer to the combination of
                       FECA benefits and any TSP returns as “FECA retirement benefits.”
                       15
                         We excluded FERS annuitants with TSP balances that had “roll-ins” or “roll-overs,”
                       which comprise a relatively small proportion of the population of FERS annuitants. In a
                       prior report, we present results of a similar analysis for federal employees covered under
                       CSRS. See GAO-12-309R.




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methods as in the analysis of wage replacement, in order to produce a
sample of annuitants who were similar to FECA recipients in the following
characteristics: agency, whether the occupation is blue-collar, base pay,
first year of employment, age in the first year of employment, length of
spells of employment, years of service, age at exit, age in 2010, and
salary by tenure. To ensure that the matched annuitants were sufficiently
similar to the FECA recipients, we compared the distributions of these
characteristics for the two groups. Figure 2 and Table 3 present the
distributions of and descriptive statistics on some of these characteristics
for the FECA beneficiaries and the FERS annuitants after matching.




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Figure 2: Distributions of key characteristics of matched FECA beneficiaries and FERS annuitants




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Table 3: Distributions of covariates in matched FECA-FERS analysis sample

                                                                    FERS annuitants                                                 FECA beneficiaries
                                                        1st                                           3rd                1st                                   3rd
                                                    Quartile         Median          Mean         Quartile           Quartile         Median          Mean Quartile
Minimum income before injury (2010 dollars)             28608          34034         38448            44713             28438           34384        38576           44189
Median career income before injury                      33437          41267         45564            52510             32631           42274        45969           52895
(2010 dollars)
Maximum career income before injury                     36943          46478         50954            59285             36137           46971        51358           60421
(2010 dollars)
First year working                                       1985            1988         1990              1995              1985            1989         1990            1996
Years of service                                            6.3           11.9         11.9              16.9                5.4           11.3         11.5            16.8
Age in first year of work (years)                         34.7            40.5         41.2             47.2               34.9            40.3         41.3               48
Age in last year of work (years)                          49.6            53.6         53.6              57.7              49.3            53.3         53.4            57.3
Age in 2010 (years)                                       58.2            61.4         61.9              64.4                 57              60        61.1               64
Number of employment spells                                    1               1         1.1                 1                  1              1          1.1                1
% Male                                                                                 55.3                                                             54.9
% No high school degree                                                                11.9                                                             11.9
% High school degree                                                                   42.8                                                             42.6
% Some college                                                                         26.9                                                                27
% College degree                                                                         9.1                                                              9.1
% Graduate degree                                                                        9.4                                                              9.4
% Blue collar occupation                                                               30.4                                                             30.9
                                          Source: GAO analysis of OPM and DOL data. Finally, we simulated injuries for each annuitant at the time of his or her matched FECA
                                          beneficiary’s actual injury, calculated FECA benefits based on salary at injury, and projected the benefit forward to 2010 using the
                                          FECA cost-of-living adjustment in this period.




Computing benefit ratios                  We computed benefit ratios under two scenarios: (1) under the current
                                          FECA benefit structure, and (2) a reduced benefit of 50 percent at
                                          retirement age.16

                                          For each of these scenarios, we estimated the hypothetical FECA benefit
                                          that FERS retirees in 2010 would have received in that year. We used


                                          16
                                            Specifically, the proposed reduction calls for the FECA benefit to be converted to 50
                                          percent of the monthly pay of the employee when the injured employee reaches ‘retirement
                                          age’ as defined in section 216 of the Social Security Act, or one year after the employee
                                          begins receiving compensation, whichever is later. However, due to data limitations, we
                                          analyzed the proposed reduction at the time of the injury and inflated that amount to 2010
                                          dollars, effectively assuming that the beneficiaries are at retirement age in 2010.




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this hypothetical FECA benefit and the retiree’s actual FERS benefits—
TSP, Social Security, and FERS annuity—to calculate benefit ratios.
However, because most FERS annuitants in 2010 had not accrued 30
years of federal service (since FERS began in 1984), FERS and FECA
benefit estimates for retirees in 2010 may vary substantially from such
benefits under a “mature” retirement system. The typical FERS benefit
would be higher than our estimate of the FERS benefit because under a
mature system, most employees would retire under FERS at age 62 with
30 years of federal service. In contrast, the current population of FERS
annuitants retired at the younger ages and with shorter tenures, which
decreases their FERS benefits accordingly. For this reason, we also
conducted an analysis comparing estimated FECA and FERS benefits
under a “mature” FERS system.

To estimate FECA retirement benefits as of June 30, 2010, we added two
components—the FECA benefit and a TSP annuity.17 Computing each
component required several steps, which are summarized below and
depicted on the left side of figure 3.

    First, we computed the gross FECA benefit at the time of injury based
     on the matched FERS retiree’s adjusted pay at the time of the
     simulated injury.18

    Second, we projected the FECA benefit from the time of simulated
     injury to 2010, under each scenario, using the appropriate annual
     cost-of-living adjustment based on the Consumer Price Index (CPI).

    Third, we added the annuitized amount of the matched FECA
     beneficiary’s pre-injury accrued TSP balance to the simulated FECA
     benefit for the FERS retiree. We computed this annuity by using the
     TSP balance at the date of the matched FECA beneficiary’s injury and
     assumed that the annuitant elected a “single life annuity” without


17
  We did not add in Social Security benefits for FECA beneficiaries because any Social
Security benefits that are based on work in the federal government are deducted from the
FECA benefit. FECA beneficiaries could receive additional Social Security benefits based
on past earnings outside of the federal government. However we did not have the data to
determine the proportion of Social Security attributable to federal work. As a result, total
retirement benefits for FECA beneficiaries would be higher than those presented in the
results.
18
  The adjusted pay in the CPDF is most representative of what a worker actually received
and is the figure Labor uses to compute its benefit determinations.




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      additional add-on benefits.19 We used the formula that the TSP
      program uses to calculate the amount of the annuity.20 To compute an
      equivalent of take-home pay, we subtracted taxes from the TSP
      annuity.21

Similarly, to estimate FERS benefits as of June 30, 2010, we added three
components—the actual FERS annuity, TSP benefit, and Social Security
benefit. Computing each of these components required several steps,
which are summarized below and depicted on the right side of figure 3.

     First, we obtained the monthly FERS annuity payment as of June 30,
      2010 and converted it to an annual benefit by multiplying by 12.

     Second, we added an estimate of the annuitized amount of the FERS
      retiree’s TSP balance at the time of the worker’s separation from
      federal service.22 We did not have data on the TSP balance at the
      time of worker’s separation from federal service, so we estimated it by
      recreating a balance history going back in time from the 2012 balance
      (available in the TSP data) to the date of separation.23 To estimate the
      annuity, we assumed that the annuitant will elect a “single life annuity”
      with no add-on benefits, and used the TSP formula for computing the
      annuity.


19
  This simplifying assumption results in TSP balances greater than other TSP annuity
options, such as joint-life benefits. Further, some FERS annuitants might choose not to
annuitize their TSP balances, in which case their TSP benefits could be higher or lower
depending on their investment choices, market conditions, and the rate at which they
draw-down their account balance.
20
  We followed the methodology specified in the contract the FRTIB uses to establish life
annuities for TSP participants and beneficiaries.
21
  As with the analysis of wage replacement, we deduct federal and state income taxes
using the NBER TAXSIM model.
22
    Again, we excluded beneficiaries with roll-ins or rollovers in their TSP accounts.
23
  We created a balance for each year by beginning with the current balance in 2012,
subtracting withdrawals for each year and adjusting for growth by dividing by 1+ the
growth rate for the year. (Since 2012 was a partial year, we combined the 2011 and 2012
transactions and applied the growth rate for 2011.) We followed the same algorithm back
in time, beginning with an estimated balance at time t, adding withdrawals at time t-1 and
adjusting for growth by dividing by (1+ growth rate for time t-1). This results in an
estimated balance at time t-1. We adjusted this method to account for working a partial
year in the year of separation as appropriate. We estimated the balances using the growth
rate from the G and C funds in TSP. Because the results were quite similar, we presented
only the results of the G fund.




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    Third, we added Social Security benefits. We calculated workers’
     annual Social Security benefit by assuming that all annuitants began
     drawing Social Security upon retirement.24 We used the annuity date
     as a proxy for the retirement date. We adjusted the monthly benefit
     level to account for the timing of the receipt of Social Security
     benefits.25

Figure 3: Components of FECA and FERS Retirement Packages




a
Calculated for two scenarios: Current benefit structure and reduced benefit structure.




24
  To simplify the analysis and avoid having to account for individual choices to delay
receiving Social Security benefits, as well as compounded benefits resulting from spousal
earnings, and bulk payments from SSA, we calculated a benefit level that was based on
SSA’s primary insurance amount (PIA) as opposed to using the actual payment a
beneficiary received in a given month of 2010.
25
  Specifically, we accounted for the timing of the receipt of benefits in the calculation of
the Social Security benefit in the following way. We first computed the number of months
in early retirement—early retirement months or ERM—by subtracting the retirement date
from the full Social Security retirement age and adjusting the benefit by 0.555 percent for
each month before SSA full retirement age, up to 36 months and by an additional 0.416
percent per month for each month exceeding 36 months. In other words, if the ERM is
greater than 36, then we calculated the benefit reduction as 0.00555(36)+0.00416(ERM-
36). The monthly benefit would then be PIA – (PIA X benefit reduction), rounded down to
the nearest dollar. If the annuitant retired or separated from government service prior to
age 62, we computed their Social Security benefits as if they were 62.




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Finally, to estimate the “mature” FERS benefit package as of June 30,
2010, we used the same matched FERS annuitants that we used to
compute the FERS package above. However, for this analysis, we
simulated each of the three components of the package as though the
matched FERS annuitants’ careers spanned 30 years and they retired at
age 62.26 To simulate each of these components, we took the following
steps:

    First, we simulated the “mature” FERS annuity based on a 30-year
     work history by constructing a 30-year wage history for the FERS
     annuitant. We constructed the work history with a combination of real
     income data and imputations. Specifically, we retained the real
     income data for career years actually observed in the CPDF. We
     imputed income data for career years that were either (1) not
     observed in the CPDF or (2) non-existent because the length of the
     federal career was less than 30 years. For example, a person may
     have started working for the government in 1986 and retired early in
     2006 with 20 years of service. For this person, we imputed her
     earnings for years 21 through 30. We imputed earnings by assuming
     that income in any missing year equals the most recent observed or
     imputed income multiplied by the average yearly proportional change
     in income across the observed years.27 Building on the previous
     example, suppose the average yearly proportional change of the
     worker’s income were 2 percent. We would impute her income in year
     21 to equal her income in year 20 multiplied by (1+.02). Therefore,
     income in year 22 would equal:

                                             1    .02

and so on, to the 30th year, where          is income in year t.




26
  Using 30 years of service and retirement at age 62 is consistent with simulations
conducted by the Congressional Research Service. See, for example, Isaacs, Katelin P.,
“Federal Employees’ Retirement System: The Role of the Thrift Savings Plan,”
Congressional Research Service, January, 2012.
27
  We trimmed a small number of outliers – approximately 1 percent of the data – where
the average yearly increase exceeded 15 percent.




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We used the constructed work history to simulate the FERS annuity. We
computed the annuity with the FERS annuity formula for a federal career
of at least 30 years:


                               0.011     30
                                                          3

Where:

        represents the FERS annuity;

      represents salaries of rank t, where           is the highest salary.

Taken together the S terms should represent the “high three salaries,”
which are used to compute the FERS annuity benefit.28

     Second, we simulated the TSP annuity by using the 30-year work
      history created above to simulate 30 years of TSP contributions for
      three contribution levels. The low level was a 1 percent contribution by
      the agency only. The mid level was a 10 percent contribution where
      the agency matches the employee’s 5 percent contribution. And the
      high level was a 15 percent contribution where the agency contributes
      5 percent and the employee contributes 10 percent.

Under each of these contribution levels, we simulated three TSP growth
rates of 4, 6, and 8 percent.

For example, at time period t, the TSP balance for the mid-level
contribution with a mid-level growth rate of 6 percent would be:

TSP = (Balance(t-1) + 0.1(St))×1.06

Where:

    represents the number of years of work; and

    represents the salary in year .


28
   This formula differs slightly from the formula used in FERS, which is based on the
consecutive high-three salaries, but for most federal employees the high-three years will
likely occur in consecutive years.




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We annuitized the simulated TSP balance at retirement using the same
steps and assumptions as described in the preceding section to compute
the annuity.

    Third, we use the simulated wage history to calculate simulated Social
     Security benefits as of June, 2010. For this calculation, we assumed
     that all workers retire in 2010, at age 62, with 30 years of federal
     service; have no other creditable Social Security service; and elect to
     draw Social Security benefits immediately at age 62 (thereby
     receiving a lower benefit than they would have received had they
     waited to receive benefits until the full retirement age). We calculated
     the simulated Social Security payment by following the steps that the
     Social Security administration uses to compute Social Security
     benefits.29

    Finally, we added the simulated FERS annuity, the TSP annuity, and
     the Social Security benefit to arrive at the FERS retirement package
     under a mature FERS.

To ensure the mature FERS benefits package was comparable to the
FECA benefits package, we also simulated FECA benefits under a
“mature” 30-year time frame. The method we used to simulate the mature
FECA benefit package was identical to our method of simulating FECA
benefits in 2010 (described above) with the following two exceptions:

(1) For workers with less than 30 years of combined work and disability in
2010, we added additional years of FECA benefits so the total years of


29
  Specifically, we took the following steps. First, we set the worker’s “Social Security
wage” at the lower of the worker’s simulated wage or the maximum allowable wage under
Social Security. The maximum allowable wage in any given year can be found at
http://www.ssa.gov/oact/COLA/cbb.html. Second, we calculated the wage index for each
year from 1981-2008 by dividing the national average wage for 2008 by the national
average wage for each year from 1981 to 2008 (e.g. yielding a wage index of 1.00 for
2008 and multipliers for prior years). Third, we multiplied the “Social Security wage” by the
wage index for each year from 1981 to 2008. We did not index the “Social Security wage”
for 2009 and 2010. Third, we calculated the average indexed monthly earnings (AIME) by
summing all the indexed wages and dividing the sum by 420 (the number of months in 35
years, since SSA uses the highest 35 years of earnings to compute the benefit). Fourth,
we calculated the primary insurance amount using the Social Security bend points found
at http://www.socialsecurity.gov/OACT/COLA/bendpoints.html, which yields the worker’s
full monthly benefit. Finally, we adjusted the full monthly benefit downward because the
worker was assumed to have retired early (at age 62) following SSA’s rules on calculating
benefit reductions.




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                           combined work and disability added to 30. For example, a matched
                           annuitant who was simulated to be injured in 2005 with 20 years of
                           federal service at that time would have a total of 25 years of combined
                           work and disability in 2010. To reflect a “mature” 30-year scenario, we
                           added an additional 5 years of FECA benefits. We adjusted the additional
                           years of FECA benefits by increasing them by the average cost of living
                           adjustment received from 2000 through 2010 for the additional years.

                           (2) Similarly, we calculated balances for the TSP based on 30 years of
                           work or disability, and annuitized using the same method as we used in
                           calculation of the “mature” FERS TSP annuity, except that, as with the
                           simulation of the FECA package above, we assume that the FECA
                           beneficiary does not contribute to TSP after being injured.


Comparison of sub-groups   To understand how reducing FECA benefits at retirement age affected
                           certain groups, we compared the FECA and FERS retirement packages
                           by sub-groups. Again, we assigned a dependent to the FERS annuitant
                           based on whether the matched FECA beneficiary had a dependent. We
                           also used the same GS level categories as in objective 1. In addition to
                           these characteristics, we compared the effects of the policy revision
                           based on the number of years annuitants had been retired. To compute
                           the number of years since retirement, we subtracted the retirement date
                           from 2010.30 We then compared the benefit ratios under the two
                           scenarios by sub-group.


Limitations                This analysis has several limitations. First, the assumptions that we made
                           in calculating Social Security and TSP benefits approximate and may not
                           precisely reflect reality for any given FECA beneficiary or FERS
                           annuitant. For example, we make assumptions about how funds are
                           invested that do not account for differences in individual investment
                           choices that may result from having dependents. Nonetheless, we feel
                           that our assumptions are based on sound logic and account for available
                           data. Second, although we include an annuity based on the TSP balance
                           at the time of injury in our computation of total benefits for FECA
                           beneficiaries, we lack data on any other retirement accounts that the



                           30
                             We used OPM”s “annuity date” variable—the date at which the annuitant began
                           receiving benefits as a proxy for the annuitant’s retirement date.




                           Page 74                               GAO-13-108 Federal Employees' Compensation Act
Appendix II: Objectives, Scope and
Methodology




FECA beneficiary or FERS annuitant may have. For example, some
FECA beneficiaries could have invested their FECA cash benefits in other
retirement accounts. This might have produced greater income at
retirement for FECA beneficiaries. However, federal workers might also
choose to invest wages in a supplemental retirement account, thus
potentially offsetting this limitation. Third, as with our analysis of wage-
replacement rates, these analyses were based on an estimate of the
retirement packages in 2010 and did not consider any cumulative effects
of the proposed FECA revisions on lifetime income. These would include
the foregone retirement savings that potentially would have been accrued
as a result of having a higher salary over the course of additional years in
the workforce. In addition, our simulation of the injury process may not
accurately represent the counterfactual scenario in which FECA
recipients never became disabled. However, as with our simulation of
wage replacement rates, it is reasonable to approximate the careers that
FECA recipients would have experienced with the actual careers of highly
similar workers who did not become disabled. Finally our simulation of the
“mature” FERS package assumes a 30-year work history. In reality, some
employees will work more and some will work less than 30 years.




Page 75                              GAO-13-108 Federal Employees' Compensation Act
Appendix IV: GAO Contact and Staff
                  Appendix IV: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Andrew Sherrill 202-512-7215 or sherrilla@gao.gov
GAO Contact
                  In addition to the contact named above, the following staff members
Staff             made important contributions to this report: Michael J. Collins, Assistant
Acknowledgments   Director; Melinda Cordero, Nagla’a El-Hodiri, Erin Godtland, Michael
                  Kniss, Jeff Tessin, and Walter Vance. In addition, James Bennett, Jessica
                  Botsford, Carla Craddock, Danielle Giese, Jennifer Gregory, Gene
                  Kuehneman, Kathy Leslie, Grant Mallie, Sheila McCoy, Rhiannon
                  Patterson, James Rebbe, Suzanne Rubins, Kate Van Gelder, and Sonya
                  Vartivarian contributed to the report.




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                  Page 76                              GAO-13-108 Federal Employees' Compensation Act
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