United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on Civil Service, Committee on

Government Reform and Oversight,

House of Representatives

August 1998 FEDERAL EMPLOYEES’

COMPENSATION ACT

Percentages of

Take-Home Pay Replaced

by Compensation Benefits

GAO/GGD-98-174

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-279234 

August 17, 1998

The Honorable John L. Mica

Chairman, Subcommittee on

 Civil Service

Committee on Government Reform

 and Oversight

House of Representatives

Dear Mr. Chairman:

This report responds to your request for information on workers’

compensation benefits for lost wages provided to workers with job-related

injuries under the Federal Employees’ Compensation Act (FECA) (5 U.S.C.

8101 et seq., as amended). Specifically, you asked for information on

(1) percentages of take-home pay that FECA benefits replaced1

 for

beneficiaries on the long-term rolls2

 who were receiving full benefits;

(2) career patterns of workers in selected occupations that were the same

as the occupations of FECA beneficiaries, which might indicate the extent

to which beneficiaries’ injuries affected their career progression

prospects; and (3) beneficiaries’ characteristics such as current age, age

when injured, compensation benefits paid in 1997, and pay at the time of

injury adjusted to 1997 pay levels. As agreed with your office, we did not

assess the fairness, adequacy, or equity of the benefits provided nor did we

compare or contrast the different methods—gross pay or take-home

pay—by which workers’ compensation benefits are calculated under

federal or states’ workers’ compensation laws.

In calculating percentages of take-home pay replaced by FECA benefits, we

estimated gross pay and net take-home pay for over 23,250 beneficiaries

who were receiving full FECA wage-loss compensation benefits of either

66-2/3 or 75 percent3

 of their gross pay as of June 1997. These beneficiaries

lived in 19 states, 4 of which did not have a state income tax.4

 We

estimated injured workers’ gross pay at the time of their injury using

1

Unless otherwise noted, when we refer to the percentage of take-home pay replaced by FECA benefits

(i.e., replacement rate), we are referring to the workers’ gross pay at the time of their injuries, adjusted

to 1997 pay levels less deductions for retirement contributions and federal and state income taxes, if

applicable, and compared with amounts of FECA benefits received in June 1997.

2

Beneficiaries on the long-term rolls are those with permanent disabilities or with injuries that have

lasted or are expected to last for prolonged periods (over 1 year).

3

Beneficiaries without dependents receive benefits based on 66-2/3 percent of pay. Beneficiaries with

at least one dependent receive benefits of 75 percent of pay.

4

One state with an income tax did not tax income from salaries and wages. We included this state as

one of the four without an income tax.

Page 1 GAO/GGD-98-174 Workers’ Compensation Benefits
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information on current FECA benefits, FECA cost-of-living increases, and

average pay comparability increases for active workers. Like workers’

compensation organizations, we defined take-home pay as gross pay less

mandatory deductions for retirement and Medicare contributions and

federal and state income taxes. To estimate take-home pay, we had to

make assumptions about spouses’ income and beneficiaries’ dependents

and deductions for income tax purposes. FECA benefits are not subject to

federal or state income taxes.

For workers in (1) letter carrier and postal distribution occupations with

the United States Postal Service, (2) nursing positions with the

Department of Veterans Affairs (VA), and (3) air traffic control (ATC)

positions with the Federal Aviation Administration (FAA), we obtained

information on their career patterns and potential merit increases and

promotions from agency officials familiar with their career progression to

compare with available profile information for beneficiaries in the same

occupations at the time of injury. We obtained profile and compensation

benefit information on injured workers on FECA’s long-term rolls from the

Department of Labor’s automated information systems used to manage

FECA claims and pay FECA beneficiaries. Appendix I contains a detailed

description of our scope and methodology.

We requested written comments on a draft of this report from the

Secretary of Labor. Labor’s comments are discussed at the end of this

letter and reprinted in appendix IV. We performed our work from October

1997 to July 1998 in accordance with generally accepted government

auditing standards.

Results in Brief For the more than 23,250 beneficiaries on the long-term rolls for whom we

developed replacement rates, we estimated that FECA benefits replaced, on

average, over 95 percent of the take-home pay beneficiaries would have

received had they not been injured. Estimated replacement rates ranged

between about 76 and 136 percent. Compensation benefits equaled

between an estimated 80 and 99 percent of take-home pay for about

70 percent of these beneficiaries and amounted to 100 percent or more in

29 percent of the cases.

Under assumptions5

 we needed to make to compute beneficiaries’ income

taxes and retirement contributions, replacement rates tended to be higher

5

For our principal analyses, we assumed that beneficiaries (1) claimed standard deductions for income

tax purposes; (2) receiving the FECA dependent benefit, had a spouse with no taxable income; and

(3) participated in the Civil Service Retirement System (CSRS).

Page 2 GAO/GGD-98-174 Workers’ Compensation Benefits
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for beneficiaries who (1) received higher amounts of pay before their

injury, (2) were injured before 1980, (3) received the FECA dependent

benefit, and (4) lived in states with an income tax. Using different

assumptions to show their effect on replacement rates, beneficiaries with

more exemptions or deductions for income tax purposes would have had

lower replacement rates because these rates generally decrease as taxable

income decreases. Beneficiaries with a spouse who had taxable income

would have higher replacement rates because replacement rates generally

increase as spousal income increases. Single and married beneficiaries

who had no income subject to income taxes while working—generally

those with low incomes—would have replacement rates of about 73 and

82 percent, respectively.

Our analyses showed that about 70 percent of all beneficiaries were over

40 years old when they were injured, and the average adjusted pay of

beneficiaries in the selected occupations approximated the average pay of

active workers in the same occupations. These characteristics might

suggest that the beneficiaries were not in the early stages of their careers

at the time of their injuries. However, we were unable to determine the

extent to which beneficiaries’ career prospects were diminished by their

on-the-job injuries because our analyses were limited to readily available

data. Occupational data were available for only about one-third of the

beneficiaries we analyzed, and data were not readily available on

beneficiaries’ career progression up to the time of their injuries.

Further, career patterns of individuals depended on a multitude of

personal and employment factors as well as the specific jobs in which

individuals are employed, according to agency officials familiar with

career patterns of workers in selected Postal Service, FAA, and VA

occupations. Profile information on FECA beneficiaries in these and other

occupations is given beginning on page 9 and in appendix III.

Characteristics of the more than 23,250 beneficiaries for whom we

developed replacement rate information and for approximately 6,800 of

the other 11,460 FECA beneficiaries6

 on the long-term rolls who received

FECA wage-loss compensation benefits of either 66-2/3 or 75 percent of

their gross pay were

• About 65 percent of these 30,000 beneficiaries were over 55 years old, and

the average age of these 30,000 beneficiaries was 61, as of June 1997.

6

See appendix I for details on which beneficiaries were included in our analyses.

Page 3 GAO/GGD-98-174 Workers’ Compensation Benefits
B-279234 

• At their date of injury, almost 70 percent of them were over 40 years old,

and their average age was over 45 years old.

• In June 1997, their annual compensation benefits averaged $26,220, and

their average gross pay at the time of injury adjusted to 1997 pay levels

was $34,833.

Background The relationship between nontaxable workers’ compensation benefits

received by workers who were injured on the job and their income at the

time of injury has been the subject of discussion among workers’

compensation analysts for a long time. According to the 1972 Report of the

National Commission on State Workmen’s Compensation Laws,

“A basic objective of a modern workmen’s compensation program is to provide protection

to workers against loss of income from work-related injuries and diseases. To achieve this

goal, the program must carefully weigh the worker’s interest in substantial income benefits

against factors such as the loss of incentive for rehabilitation, which some believe may

occur if income benefits are too high.”

The 1972 National Commission’s Report recommended that workers’

weekly benefits should replace at least 80 percent of their spendable

weekly earnings, subject to a state’s maximum weekly benefit. As states

increased workers’ compensation benefits following the National

Commission’s report, an issue arose as to whether benefits were so high

that incentives for injured employees to return to work might be impaired.

Workers’ compensation program analysts are reluctant to take a position

on what the “correct” level of workers’ compensation benefits should be,

leaving that matter to the judgment of legislators. According to a 1985

Workers Compensation Research Institute7

 report, legislatures in many

states must walk a fine line between benefits that are high enough to

provide adequate income, but not so high as to discourage an employee’s

return to work when he or she is no longer disabled.

In addition to discussions about the appropriateness of workers’

compensation programs’ benefit levels, some observers have made the

point that beneficiaries with long-term or permanent disabilities who were

injured early in their careers may have lost promotions or other

opportunities to increase their pay relative to the compensation benefits

they may be currently receiving.

7

The Workers Compensation Research Institute is a not-for-profit research organization whose mission

is to provide objective information about public policy issues involving workers’ compensation

systems.

Page 4 GAO/GGD-98-174 Workers’ Compensation Benefits
B-279234 

Under FECA, workers’ compensation benefits for those who are totally

disabled are 66-2/3 percent of wages for workers without dependents and

75 percent of wages for workers with one or more dependents. These

benefits are not subject to federal or state income taxes. Most states’

workers’ compensation programs provide benefits ranging from 60 to

72 percent of gross wages.8

 Six states use a percentage of spendable

earnings9

 (ranging from 75 to 80 percent) rather than wages as the basis

for computing compensation benefits.

The Department of Labor’s Office of Workers’ Compensation Programs

(OWCP) is responsible for administering FECA and adjudicating claims

submitted on behalf of injured workers. For the year ending June 1997,

FECA costs totaled about $1.9 billion—$1.3 billion for compensation

benefits, $444 million for medical benefits, and $125 million for death

benefits. For this period, OWCP paid medical benefits in about 238,450

cases, death benefits in over 6,260 cases, and compensation benefits in

over 78,060 cases. Of these 78,060 cases, 51,265 were on the long-term

rolls, as of June 1997. In these 51,265 cases, about 34,700 totally disabled

individuals were receiving FECA wage-loss benefits at either the 66-2/3 or

75 percent rate.

Analyses of

Take-Home Pay

Replacement Rates

For the more than 23,250 beneficiaries included in our analyses, we

estimated that FECA benefits replaced, on average, over 95 percent of the

take-home pay they would have received had they not been injured. Figure

1 shows percentages of beneficiaries whose FECA benefits resulted in

various ranges of take-home pay replacement rates.

8

Our report entitled Workers’ Compensation: Selected Comparisons of Federal and State Laws

(GAO/GGD-96-76, Apr. 3, 1996) discusses and compares federal and state workers’ compensation laws

in more detail.

9

Spendable earnings (take-home pay) for working employees are computed by taking an employee’s

before-tax earnings at the time of injury and subtracting Social Security taxes and federal and state

income taxes. The taxes are taken from published withholding tables that are based on average tax

rates, given an employee’s actual exemptions and a standard deduction.

Page 5 GAO/GGD-98-174 Workers’ Compensation Benefits
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Figure 1: Percentages of Beneficiaries

and Their Take-Home Pay Replaced by

FECA Benefits as of June 1997

1.2%

Under 80 percent of take-home

pay

28.8% • 80 to 89 percent of take-home pay

40.9%•

90 to 99 percent of take-home pay

•29.1%

Take-home pay of 100 percent or

more

Note: In calculating these replacement rates, we assumed that beneficiaries (1) claimed standard

deductions for income tax purposes; (2) receiving the FECA dependent benefit, had a spouse

with no taxable income; and (3) participated in CSRS.

Source: GAO analysis of OWCP data.

Beneficiaries’ estimated take-home pay replacement rates ranged from a

low of about 76 percent to a high of 136 percent depending on when they

were injured, their pay when injured, and whether they had dependents or

lived in a state with an income tax. To calculate federal and state income

taxes to use in computing beneficiaries’ take-home pay, we had to make

assumptions regarding the amount of taxable income earned by a

beneficiary’s spouse and the number of exemptions and amounts of

deductions claimed for income tax purposes. Although OWCP’s automated

databases identified beneficiaries receiving FECA dependent’s benefits,

they did not contain information on spouses’ income, additional

exemptions, or additional deductions.

Page 6 GAO/GGD-98-174 Workers’ Compensation Benefits
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Under our assumptions, replacement rates were affected by

(1) beneficiaries’ dates of injury, (2) pay levels and progressive income tax

rate structures, (3) benefit rates based on the absence or presence of

dependents, and (4) beneficiaries’ states of residence. The effects of these

variables on replacement rates are summarized below and discussed in

more detail in appendix II.

Length of Time on

Long-Term Rolls Increases

Replacement Rate

In general, the older the date of injury, the higher the replacement rate.

The older dates result in higher replacement rates because over long

periods of time, FECA cost-of-living increases10 exceeded general schedule

(GS) pay increases that individuals would have received had they not been

injured. To illustrate in one case, a worker with an injury date just before

March 1, 1996, would have received the March 1, 1997, FECA cost-of-living

increase of 3.3 percent. Workers who had not been injured would have

received a general schedule pay increase averaging 3 percent in

January 1997. In another case, a worker injured in January 1970 would

have received FECA cost-of-living increases through March 1997 and, in

absolute numbers, these increases would have totaled 139.5 percent of

compensation. General schedule pay increases for workers who had not

been injured would have averaged 118.7 percent of pay over the same

period. The replacement rate for a single person receiving FECA benefits of

$20,000 in June 1997 in the first case would be 83.6 percent of take-home

pay, whereas, in the second, older case, it would be 101.3 percent of

take-home pay.

Higher Pay Levels and

Progressive Income Tax

Rates Increase

Replacement Rates

Because the federal government and many states have progressive income

tax rate structures, workers generally pay taxes at higher rates as their

taxable income increases. In our analyses, applicable federal income tax

rates ranged from 15 to 31 percent of taxable income and state income tax

rates ranged from 0.5 to 9.3 percent of taxable income. For beneficiaries

who earned higher pay, nontaxable FECA benefits replaced pay that would

have been subject to higher tax rates. FECA benefits replaced an estimated

91 percent of take-home pay for beneficiaries whose pay before the injury,

adjusted to 1997 pay levels, was under $20,000. For beneficiaries with pay

over $60,000, FECA benefits replaced over 105 percent of take-home pay.

10Starting in 1966, FECA provided for adjustments in compensation benefits based on the Consumer

Price Index. These cost-of-living increases are provided to injured employees who stopped work on

account of an injury more than 1 year prior to the effective date of the increase. In contrast, general

schedule pay increases, although specified by statute, generally emerge from budget negotiations each

year.

Page 7 GAO/GGD-98-174 Workers’ Compensation Benefits
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FECA Dependent Benefit

Increases Replacement

Rates

Replacement rates for FECA beneficiaries receiving the dependent benefit

averaged an estimated 97 percent compared with 92 percent for

beneficiaries who did not receive this benefit. FECA authorizes an

additional 8-1/3 percent in benefits for beneficiaries with dependents. If

these additional benefits were not provided, some beneficiaries’

replacement rates would be lower because their take-home pay would be

compared with a compensation benefit of 66-2/3 percent rather than

75 percent of gross pay.

State Income Taxes

Increase Replacement

Rates

Replacement rates for beneficiaries who lived in states that taxed income

were, on average, an estimated 96 percent compared with about

94 percent for those living in states with no income tax. Like federal

income taxes, income taxes that workers paid to states before they were

injured would serve to further reduce their take-home pay, thereby

increasing the portion of take-home pay replaced by nontaxable FECA

benefits.

Different Assumptions

Would Change Estimated

Replacement Rates

To calculate take-home pay replacement rates, we made certain

assumptions about beneficiaries based on data that were readily available

to us. The effects of using different assumptions on spouses’ income,

numbers of exemptions, and amounts of deductions are summarized

below and discussed here and in more detail in appendix II.

Spouse’s income. In estimating replacement rates for beneficiaries with a

spouse, we assumed that their spouses did not have taxable income. If

spouses had income, replacement rates could be higher. The presence of a

spouse’s income results in a higher effective rate of tax on the income

earned by the beneficiary returning to work. A higher effective tax rate

means that the returning worker’s take-home pay could be lower and,

therefore, the ratio of FECA benefits to take-home pay could be higher.

Number of dependents (exemptions). In computing federal income taxes,

we assumed that beneficiaries who received augmented FECA benefits had

one dependent and that the dependent was a spouse. In 1997, each

exemption claimed was worth $2,650 in computing taxable income.

Replacement rates would have decreased by about 1.5 percent for each

additional exemption. For example, the replacement rate for a married

worker with 1 child (3 exemptions), with income of $30,000, would have

been 89.3 percent compared with 90.7 percent for a couple (2

Page 8 GAO/GGD-98-174 Workers’ Compensation Benefits
B-279234 

exemptions). We did not assume additional exemptions for age or

blindness.

Tax deduction amounts. In computing income taxes, we assumed that

beneficiaries would have claimed federal standard deduction amounts of

either $4,150 if single, or $6,900 if married. If these individuals had

itemized deductions that were either double or triple the standard

deduction amounts, their take-home pay replacement rates would have

been lower than our estimates by percentages ranging from about 2 to

7 percent depending on (1) whether they were single or married and

(2) their pay before being injured.

For beneficiaries who did not have taxable income while working either

because they had low income, large deductions, or multiple dependents,

replacement rates would have been about 73 percent if single, or about

82 percent if married. For beneficiaries who did not owe income taxes,

their take-home pay would be gross pay minus deductions of 8.45 percent

for retirement and Medicare benefits. The relationship between FECA

benefits (either 66-2/3 or 75 percent of gross pay) and take-home pay

would be the same (about 73 or 82 percent, respectively) at all pay levels.

Career Patterns for

Workers in Selected

Occupations

We were unable to determine whether beneficiaries’ career progression

patterns were affected by their on-the-job injuries. Our analyses showed

that about 70 percent of all beneficiaries were over 40 years old when they

were injured, and the average adjusted pay of beneficiaries in the selected

occupations approximated the average pay of active workers in the same

occupations. These characteristics might suggest that the beneficiaries

were not in the early stages of their careers at the time of their injuries.

However, our analyses were limited because occupational data were

available for only about one-third of the beneficiaries and because data

were not readily available on beneficiaries’ career progression up to the

time of their injuries.

Career pattern information we obtained from agency officials for workers

in selected occupations who were in the same occupations as selected

FECA beneficiaries included in our analysis—letter carriers, postal

distribution workers, registered nurses, practical nurses, nursing

assistants, and air traffic controllers—indicated that career patterns can

vary widely. These occupations were selected because they were either

the occupations (1) that were the most frequently identified in the OWCP

information we analyzed or (2) for which many beneficiaries were likely to

Page 9 GAO/GGD-98-174 Workers’ Compensation Benefits
B-279234 

be employed by the same agency. Career pattern information obtained

from the above officials and information on FECA beneficiaries from OWCP’s

records are discussed in the following sections.

Letter Carrier and Postal

Distribution Occupations

According to FECA data, at the time of injury, the average age for the 1,897

letter carriers and postal distribution workers we could identify was about

42 years old. The pay of these workers at the time of injury adjusted to

1997 pay levels averaged $35,054 and $36,588, respectively.

According to Postal Service officials, workers in letter carrier and postal

distribution crafts are covered under union contracts with Postal Service

management. Entry-level pay in March 1997 for workers in these crafts

was $26,375 and $22,404, respectively. Upon completing contractual

waiting periods, these workers would automatically receive longevity-step

increases. Workers would normally progress from entry-level pay to

maximum pay within the same grade in 12.4 years. For letter carriers

whose entry level is grade 5, maximum pay was $36,863 as of March 1997;

for postal distribution workers whose entry level is grade 4, maximum pay

was $35,118. In addition to their basic pay, these workers may also receive

premium pay for night or Sunday work.11

Postal Service officials told us that most letter carriers and postal

distribution workers remain in the same pay grade throughout their

careers. They usually receive longevity-step pay increases and twice yearly

cost-of-living increases. As of September 1997, almost 80 percent of about

52,650 postal distribution workers were at grade 4 and almost 50 percent

of the 40,877 workers in this pay grade were in the highest step. For the

approximately 201,500 letter carriers, about 85 percent (172,590) were at

grade 5 and of these, over 70 percent (123,250) were in the highest step.

Nursing Occupations As table 1 shows, the average ages and adjusted pay of the 445

beneficiaries in nursing occupations approximated the average ages and

pay of both VA and non-VA nurses.

11Because FECA compensation benefits are based on gross pay amounts that may include premium

pay for night or shift differentials and for Sunday and holiday work, Postal Service workers’ pay

adjusted to 1997 pay levels may be somewhat inflated when compared with the maximum basic pay of

letter carriers and postal distribution workers.

Page 10 GAO/GGD-98-174 Workers’ Compensation Benefits
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Table 1: Pay and Age Information for

Workers in Nursing Occupations

Occupations FECA dataa VA data

OPM data for

non-VA nurses

Registered nurses 185 32,643 7,066

Average age 48.6 46.7 46.5

Average pay $43,254 $47,530 $44,623

Practical nurses 127 9,294 2,056

Average age 47.4 44.8 47.4

Average pay $27,577 $27,514 $25,576

Nursing assistants 133 10,095 1,346

Average age 46.9 46.0 44.9

Average pay $24,937 $23,614 $22,023

aInformation on beneficiaries’ ages at time of injury and pay at time of injury adjusted to 1997 pay

levels.

Source: GAO analysis of FECA, VA, and Office of Personnel Management (OPM) information.

The entry level for most of VA’s registered nurses in clinical practice is

generally somewhere between the equivalent of a GS-6 and GS-8, according

to a VA official familiar with the typical career patterns of VA nurses.

Licensed practical nurses generally start at the equivalent of a GS-4, and

nursing assistants are generally hired at the equivalent of a GS-3.

According to the official, registered nurses with a bachelor of science

degree generally advance to the equivalent of a GS-11 in 3 to 5 years; nurses

without a bachelor’s degree generally advance to the equivalent of a GS-9.

Nurses who reach the equivalent of a GS-12 would usually have a bachelor

of science degree and function in positions with responsibilities beyond

the staff nurse. These additional responsibilities would include being a

nurse manager, head nurse, care manager, or instructor. Furthermore, for

nurses to advance beyond the GS-12 level, they generally would have to

have a master’s degree. In addition to clinical practice, some VA registered

nurses become involved in education and training, administration, or

research activities for which they would generally be paid at the GS-12 or

GS-13 levels. According to VA pay information, about 700 of VA’s 32,600

registered nurses serve in executive, supervisory, or management

positions with pay equivalents in the GS-14/15 range.

The VA official told us that over a 3- to 5-year period, the highest grade to

which VA’s nursing assistants would likely advance would be the

equivalent of a GS-5. Most nursing assistants would be at the GS-4 level.

Within about 2 years, VA’s licensed practical nurses could reach the

Page 11 GAO/GGD-98-174 Workers’ Compensation Benefits
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equivalent of a GS-5 and within 4 to 5 years a GS-6. Most practical nurses

would function at the GS-5 level. To receive higher pay, some nursing

assistants would change career patterns and work as radiological or

medical technicians, or as physical therapists. Some practical nurses

return to school to become registered nurses or transfer to other VA

departments.

Air Traffic Control (ATC)

Occupations

For the 74 beneficiaries we identified in ATC occupations, FECA information

showed that at the time of injury, their average age was 39.4 and their

average pay adjusted to 1997 pay levels was $68,074. According to 1997

OPM information, individuals in ATC occupations averaged almost 42 years

of age with average pay of over $65,230. About 43 percent of these

individuals were at the GS-14 level with average pay of about $74,750.

According to an FAA official, most individuals in ATC occupations begin

their careers as GS-7s. About 75 percent of these individuals have ATC

responsibilities at either air route traffic control centers or at FAA towers

or terminals. Other individuals in ATC occupations serve as flight service

station specialists and have responsibility for providing pilots with

weather briefings and receiving flight plans filed by airlines and pilots. The

size and type of FAA facility at which air traffic controllers serve generally

determine their typical career patterns. According to the official,

controllers stationed at air route traffic control centers and the busier

airports would generally reach the GS-14 level. Those serving at smaller

airports would generally reach the GS-12 or GS-13 level depending on the

amount of air traffic serviced by the facility.

FECA and OPM information for individuals in additional occupations is

shown in appendix III.

Profiles of FECA

Beneficiaries

For the more than 30,000 beneficiaries we profiled, annual compensation

benefits averaged about $26,220, and the current value of their gross pay

before they were injured averaged $34,833. About 70 percent of the

beneficiaries were over 40 years old when injured. As of June 1997, about

65 percent were over 55 years old. About 73 percent of the beneficiaries

had a spouse or at least one dependent. For about 90 percent of the 30,000

beneficiaries, the current value of their pay before they were injured was

under $50,000 after adjusting for pay comparability increases.

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Figure 2 contains profile information on the percentages of beneficiaries

with and without dependents, by age ranges when they were injured and

as of June 1997, by amounts of annualized workers’ compensation

benefits, and by amounts of pay received at the time of injury adjusted to

1997 pay levels.

Figure 2: Profile Information on

Selected FECA Beneficiaries on the

Long-Term Compensation Rolls as of

June 1997

Source: GAO analysis of OWCP data.

In addition, over 18 percent (5,549) of the more than 30,000 beneficiaries

lived in states that did not have an income tax. As of June 1997, about

Page 13 GAO/GGD-98-174 Workers’ Compensation Benefits
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74 percent of the beneficiaries lived in the same state as the one where

they were injured.

Agency Comments

and Our Evaluation

We obtained written comments on a draft of this report from the

Department of Labor. Labor commented that the report did a good job of

describing the various assumptions and methodology we used to develop

the replacement rate estimates and was very clear on how changes in each

individual assumption would generally affect the replacement rates for

classes of workers.

Labor also suggested that our analysis might have been better informed, if

instead of assuming that all beneficiaries receiving augmented benefits

had a nonworking spouse, we could have used readily available data and

statistical sampling techniques to develop replacement rate estimates that

took into consideration the incidence of dual earners, the amounts of

income earned by these couples, and estimates of the number and

distribution of additional dependents by household. Labor added that in

general it might have been more useful if we had offered some estimates

based on likely combinations of assumptions and that varying assumptions

one by one, while it illustrated an impact or tendency, was probably

misleading when applied universally to all cases.

In view of the time constraints we faced when we started this assignment,

we chose to develop take-home pay replacement rates based on a

methodology that was similar to those that had been used in other

workers’ compensation studies, such as those conducted by the Workers

Compensation Research Institute. We agree with Labor that it may have

been possible to develop a more refined estimate of the overall

replacement rate had we used other sources of information to make

additional assumptions about FECA beneficiaries. We also agree that had

we developed and analyzed likely combinations of other assumptions, we

could have presented different estimates of take-home pay replacement

rates. However, we believe that our methodology provided a useful overall

replacement rate estimate that was based on reasonable assumptions.

Because we recognized that our result was dependent on the different

assumptions we made, we both acknowledged this and provided a set of

analyses that illustrated the sensitivity of our result to alternative

assumptions.

Had we developed alternative estimates using additional data or

combinations of alternatives as Labor suggested, those estimates would

Page 14 GAO/GGD-98-174 Workers’ Compensation Benefits
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have been dependent on limitations inherent in these additional sources of

data and any further assumptions about the beneficiary population. In any

event, the alternative replacement rate estimates suggested by Labor may

or may not reflect FECA beneficiaries’ actual replacement rates. For

example, regarding marital status, we assumed that all beneficiaries who

received the augmented dependent benefit had a spouse because the

automated database did not distinguish between beneficiaries who were

married or unmarried. Although the presence of spousal income would

influence replacement rates, income of other dependents generally would

not. Because an unknown number of beneficiaries may not have had a

spouse, but rather a dependent such as a child or parent, we chose not to

estimate the amount of income that may be associated with an unknown

number of spouses. Recognizing that this would tend to understate our

replacement rate calculations, we supplemented our primary analysis with

examples of how changes in assumptions on spousal income would affect

our replacement rate calculations, but we did not intend that the examples

be applied universally to all cases.

Labor also provided several other suggestions for expanding our analysis.

These suggestions and our detailed responses to them are contained in

appendix IV.

As agreed with your office, unless you announce the contents of this

report earlier, we plan no further distribution of this report until 10 days

after its issue date. At that time we will send copies of this report to the

Chairmen and Ranking Minority Members of the House Committee on

Education and the Workforce and its Subcommittee on Workforce

Protections; the House Committee on Government Reform and Oversight

and its Subcommittee on Government Management, Information, and

Technology; the Senate Committee on Governmental Affairs and its

Subcommittee on International Security, Proliferation and Federal

Services; other interested congressional committees and members; the

Secretaries of Labor, Transportation, and VA; the Postmaster General of

the United States; and the Directors of the Office of Management and

Budget and OPM. Copies will be made available to others on request.

Page 15 GAO/GGD-98-174 Workers’ Compensation Benefits
B-279234 

Major contributors to this report are listed in appendix V. Please contact

me at (202) 512-8676 if you or your staff have any questions concerning

this report.

Sincerely yours,

Michael Brostek

Associate Director

Federal Management and

 Workforce Issues

Page 16 GAO/GGD-98-174 Workers’ Compensation Benefits
Page 17 GAO/GGD-98-174 Workers’ Compensation Benefits
Contents

Letter 1

Appendix I 

Scope and

Methodology

20

Replacement Rates 20

Career Patterns 25

Characteristics of Beneficiaries 26

Apppendix II 

Additional

Information on

Factors and

Assumptions

Affecting

Replacement Rates

28

Dates of Injury Influenced Replacement Rates 28

Higher Pay and Progressive Tax Rates Increased Replacement

Rates

30

Augmented Benefits Increased Replacement Rates 32

Different Income Tax Assumptions Change Replacement Rates 33

Appendix III 

Comparison of FECA

and OPM Information

for Individuals in the

Same Occupations

40

Appendix IV 

Comments From the

Department of Labor

41

Appendix V 

Major Contributors to

This Report

45

Tables Table 1: Pay and Age Information for Workers in Nursing

Occupations

11

Table II.1: Replacement Rates Based on Date of Injury 28

Page 18 GAO/GGD-98-174 Workers’ Compensation Benefits
Contents

 Table II.2: Cumulative Amounts of Cost-of-Living and Pay

Comparability Increases for Selected Beneficiariesa

 From Date of

Injury to June 1997

30

Table II.3: Average Take-Home Pay Replacement Rates for

Beneficiaries at Various Pay Levels Before Their Injury as of

June 1997

31

Table II.4: Replacement Rates Based on Different Deduction

Amounts

36

Table II.5: Percentages of Returns Claiming Itemized Deductions

and Average Amount of Deductions Claimed for Single and

Married Income Groups

38

Table II.6: Number of Exemptions Influences Take-Home Pay

Replacement Rates

39

Figures Figure 1: Percentages of Beneficiaries and Their Take-Home Pay

Replaced by FECA Benefits as of June 1997

6

Figure 2: Profile Information on Selected FECA Beneficiaries on

the Long-Term Compensation Rolls as of June 1997

13

Figure II.1: Comparison of Cost-of-Living and Average Pay

Comparability Percentage Increases

29

Figure II.2: Influence of State Income Tax Rates on Replacement

Rates

32

Figure II.3: Replacement Rates for Beneficiaries Under Different

Dependent and Benefit Rate Assumptions

33

Figure II.4: Replacement Rates for Beneficiaries With Spouses

with Different Amounts of Taxable Income

35

Figure II.5: Deduction Amounts Influence Take-Home Pay

Replacement Rates

37

Abbreviations

ATC Air traffic control

CSRS Civil Service Retirement System

FAA Federal Aviation Administration

FECA Federal Employees’ Compensation Act

FERS Federal Employees Retirement System

GS general schedule

IRS Internal Revenue Service

OPM Office of Personnel Management

OWCP Office of Workers’ Compensation Programs

VA Department of Veterans Affairs

WEC Wage-earning capacity

Page 19 GAO/GGD-98-174 Workers’ Compensation Benefits
Appendix I 

Scope and Methodology

Replacement Rates To estimate the percentages of take-home pay replaced by FECA benefits,

we first identified, for the “chargeback year”12 ending in June 1997,

beneficiaries on the long-term rolls who received unreduced wage-loss

compensation benefits and the dollar amounts of their benefits. Because

collecting this information from beneficiaries’ case files maintained in

OWCP’s district offices would have been time consuming and expensive, we

used OWCP’s automated claims management and compensation payment

systems to obtain this information. We did not independently verify the

data obtained from these automated systems.

We then estimated beneficiaries’ take-home pay by calculating the current

value of their pay at the time of injury and deducting amounts for

retirement benefit contributions and federal and state income taxes.

Various workers’ compensation organizations define take-home pay as the

difference between an employee’s estimated gross wages less deductions

for the employee’s share of mandatory retirement contributions; federal

income taxes; and, if applicable, state income taxes. We did not take into

consideration discretionary deductions that employees could take for

items such as thrift savings plan contributions, health and life insurance,

and savings bonds because they are not commonly taken into account in

workers’ compensation take-home pay calculations. For our calculations,

we made assumptions about beneficiaries’ federal retirement plan

participation, marital status, numbers of dependents, amounts of

deductions to determine taxable income, and spouses’ incomes. Finally,

we estimated beneficiaries’ replacement rates by dividing their FECA

benefits by their take-home pay.

Of the approximately 78,000 beneficiaries who received compensation

benefits for the year ending in June 1997, 51,265 were on OWCP’s long-term

rolls. OWCP had placed most of these 51,265 beneficiaries into one of the

following three wage-earning capacity (WEC) categories based on the

extent of their disability.

No WEC. In general, totally disabled beneficiaries who have little or no

reemployment potential. These beneficiaries receive unreduced workers’

compensation benefits.

WEC undetermined. Beneficiaries with temporary total disabilities who also

receive unreduced workers’ compensation benefits. Labor’s procedures

call for it to review the status of these cases once a year.

12A chargeback year is the FECA billing year for which accumulated benefit outlays are billed to

employing agencies for whom injured employees once worked.

Page 20 GAO/GGD-98-174 Workers’ Compensation Benefits
Appendix I 

Scope and Methodology

WEC established. Beneficiaries who received reduced compensation

benefits because they were partially disabled and either were working or

had the ability to work. Compensation benefits are determined by a

formula that takes actual or potential earnings into consideration.

We obtained information on 30,057 beneficiaries on the long-term rolls

who either did not have a WEC or had an undetermined WEC and whose last

two benefit payment checks for the 1997 chargeback year were for the

same amount. We selected cases in which the last two checks were the

same to eliminate cases in which beneficiaries received either lump-sum

payments or payments for only a portion of the 4-week period normally

covered by a payment.

For our analyses, we excluded FECA beneficiaries who (1) were expected

to receive benefits for relatively short periods before returning to work;

(2) received schedule awards;13 (3) had established WECs; (4) lived

overseas; or (5) received FECA benefits that were less than the minimum

authorized under FECA because they were part-time or nonfederal

employees (e.g., Civil Air Patrol).

In many cases, the calculation of take-home pay replacement rates

required the computation of individual states’ income taxes. To limit the

number of states for which we needed to make these calculations, we

limited our replacement rate analyses to about 75 percent of the 30,057

beneficiaries selected. We chose states where the largest number of these

beneficiaries resided as of June 1997, until we had selected enough

states—19—to include about 75 percent of beneficiaries. We then

developed replacement rate information for 23,257 beneficiaries

(77 percent), who resided in 19 states, 4 of which did not have an income

tax.14

Beneficiaries’ actual pay at the time of injury could not be efficiently

determined because this information is only available from beneficiaries’

case files located in OWCP’s district offices. We therefore made several

calculations to estimate the current value of beneficiaries’ take-home pay.

First, we recomputed beneficiaries’ workers’ compensation benefits to

reflect benefits received at the time of injury by reducing their June 1997

13Schedule awards are benefits for the permanent loss of, or loss of use of, certain parts or functions of

the body. Benefits are calculated on the basis of schedules in the law that specify the number of weeks

employees are to receive benefits.

14We categorized one state as a nonincome tax state because, although it had an income tax, it did not

tax income from salaries and wages.

Page 21 GAO/GGD-98-174 Workers’ Compensation Benefits
Appendix I 

Scope and Methodology

benefits by the amount of periodic cost-of-living allowances they received.

Second, based on this recomputation of benefits received at the time of

injury and whether they had at least one dependent as of June 1997, we

calculated employees’ pay before their injury based on either the 66-2/3 or

75 percent benefit level. Third, by increasing employees’ pay at the time of

injury by average federal pay comparability increases15 authorized since

then, we calculated the current value of beneficiaries’ pay16 at the time of

injury. Fourth, from this amount, we made deductions for retirement

benefit contributions; federal income taxes; and, where applicable, state

income taxes in computing the current value of beneficiaries’ take-home

pay. Lastly, we compared current FECA benefits received to these

take-home pay amounts to determine take-home pay replacement rates.

Postal Service, blue-collar, and certain other federal employees are in pay

plans that differ from the general schedule plan that covers most federal

civilian workers. In computing the current value of workers’ pay before

the injury, we used OPM information on average federal pay comparability

increases applicable to the general schedule because OWCP’s automated

databases did not contain sufficient information to identify either the

occupations of over two-thirds of the beneficiaries we analyzed or the pay

plans of beneficiaries.

From OWCP and OPM information, we determined FECA benefit levels, the

presence or absence of dependents, whether the beneficiary resided in a

state with an income tax, and beneficiaries’ estimated pay at the time of

injury. However, to develop our estimates of take-home pay replacement

rates, we also needed to make assumptions regarding beneficiaries’

retirement and Medicare contributions, numbers of exemptions, amounts

of itemized deductions (if taken), and spousal income. Changing the

assumptions would change the estimated ratio of FECA benefits to

take-home pay. The assumptions we made in calculating take-home pay

replacement rates for our principal analyses follow. While information was

not readily available to support different assumptions, we used different

assumptions about numbers of exemptions, income tax deductions, and

spousal income to illustrate how they could influence take-home pay

replacement rates.

15We used average pay comparability increases because in some years pay rate increases were not the

same for all employees. For example, beginning in 1994 federal workers received different

locality-based comparability adjustments based on disparities between federal and nonfederal salaries

where they worked.

16About 4 percent of the employees were injured before 1966, the first year in which cost-of-living

increases were paid under FECA. Because this percentage was relatively small, we did not adjust for

pay increases received before 1966. If we had considered pre-1966 pay increases, take-home pay

replacement rates would have been lower.

Page 22 GAO/GGD-98-174 Workers’ Compensation Benefits
Appendix I 

Scope and Methodology

Retirement and Medicare contributions. We assumed that all beneficiaries

participated in CSRS and Medicare and that total deductions for these

programs were 8.45 percent. Our profile information indicated that a high

percentage of FECA beneficiaries on the long-term rolls were over 55 years

old or were injured many years ago. Because the Federal Employees

Retirement System (FERS) was not established until 1986, we assumed that

most beneficiaries would have been CSRS participants.

Under both CSRS and FERS, deductions for retirement and Medicare benefits

totaled 8.45 percent. Under CSRS, deductions in 1997 were 7 percent for

retirement benefits and 1.45 percent for Medicare benefits. Under FERS,

deductions were 6.2 percent for Social Security retirement benefits,

0.8 percent for a FERS annuity, and 1.45 percent for Medicare benefits.

However, under FERS, the 6.2 percent contribution for Social Security

retirement benefits applied to only the first $65,400 of pay in 1997. Thus,

take-home pay under our assumptions would be understated for the

relatively small number of FECA beneficiaries whose 1997 pay was over

$65,400 and who were in FERS. In these cases, replacement rates would be

lower.

Exemptions (dependents). In those cases in which FECA beneficiaries

received augmented FECA benefits of 8-1/3 percent, the database did not

indicate the exact number of dependents because the benefit is the same

whether the beneficiary had one or more dependents. We assumed that

such beneficiaries had only one dependent and that the dependent was a

spouse. We made this assumption based on the average age of the

beneficiaries analyzed and to simplify our tax and take-home pay

calculations. In cases where there is more than one dependent, and

therefore more exemptions for tax purposes, take-home pay would be

higher and the replacement rate would be lower. Appendix II, table II.6

shows the effects of different exemption assumptions on take-home pay

replacement rates. Because few beneficiaries were injured and added to

the long-term rolls after they were 65 years old, we did not consider

whether additional exemptions for age or blindness may have applied in

computing take-home pay.

Itemized deductions. In our computations of federal and state income

taxes, we used federal and state standard deduction amounts for both

single and married beneficiaries except in cases where state taxes could

have exceeded federal standard deduction amounts. In these cases, our

computations of federal income taxes used itemized deductions based on

state income tax amounts rather than standard deduction amounts. To

Page 23 GAO/GGD-98-174 Workers’ Compensation Benefits
Appendix I 

Scope and Methodology

support our use of the standard deduction for computing income taxes, we

used 1995 Internal Revenue Service (IRS) information on tax filers who

itemized deductions to show that lower income tax filers generally did not

itemize deductions. Appendix II, table II.4 shows how the use of different

itemized deduction amounts in computing federal income taxes would

reduce take-home pay replacement rates. Appendix II, figure II.5 shows

the range of take-home pay replacement rates by amount of pay for single

and married beneficiaries claiming different deduction amounts.

Spousal income. We assumed that if a FECA beneficiary received the

dependent benefit, the dependent was a spouse. For our principal

analyses, we assumed the spouse had no income. If spouses did have

income, the beneficiaries’ effective take-home pay replacement rates

would have been higher. Examples of the effect of spousal income on

take-home pay replacement rates are shown in appendix II, figure II.4.

In estimating federal income taxes for our principal analyses, we generally

computed taxable income by deducting amounts for federal standard

deductions (i.e., $4,150 for a single individual or $6,900 for a couple filing a

joint return) and exemptions (i.e., $2,650 for each exemption) from

beneficiaries’ gross pay adjusted to 1997 levels and applied 1997 federal

income tax rates. Because over 25 percent of the FECA beneficiaries

analyzed were single and because the average age of all beneficiaries

analyzed was 61, we did not consider the effects of earned income tax

credits17 in computing federal income taxes. If we had considered this

credit for eligible FECA beneficiaries, effective take-home pay replacement

rates would have been lower.

In computing take-home pay for FECA beneficiaries who resided in states

with an income tax, we took into account amounts the states allowed for

standard deductions, spousal exemptions, and, where appropriate, other

deductions or tax credits that were based on gross income in computing

state income taxes. We obtained information on 1997 state income tax

rates, exemptions, and standard deductions from the Research Institute of

America’s All States Tax Handbook and individual state’s income tax

forms and instructions. The residents of some states could be subject to

county or city income taxes. However, we did not attempt to identify and

17In 1997, tax filers with earned income under $25,760, if there were one qualifying child, or $29,290, if

there were more than one qualifying child, may have been eligible for an earned income tax credit that

would have either reduced their taxes or enabled them to receive a cash payment from the federal

government. The amount of the credit would have depended on the filer’s income and could have

amounted to as much as $2,210, if there were one qualifying child, or $3,656, if there were more than

one qualifying child.

Page 24 GAO/GGD-98-174 Workers’ Compensation Benefits
Appendix I 

Scope and Methodology

take these types of taxes into consideration in computing FECA

beneficiaries’ take-home pay because it would have been time consuming

and expensive to do so. If applicable, deductions for these taxes from pay

would serve to increase take-home pay replacement rates.

Our comparison of FECA benefits with the current value of take-home pay

did not take into consideration beneficiaries’ projected salary growth that

might have resulted from merit pay increases or promotions had they not

been injured. Assumptions about beneficiaries’ potential promotions

would have been very speculative. Also, other studies we reviewed in

developing our replacement rate methodology did not consider future

promotion potential to be a factor in calculating replacement rates.

Career Patterns To obtain information on the career patterns of workers in selected

occupations that were the same as the occupations of FECA beneficiaries,

we first used occupational code data from OWCP’s automated systems to

identify the most frequently coded occupations of FECA beneficiaries.

Usable information on beneficiaries’ occupations was available for only

9,900 of the 30,057 workers we analyzed. According to an OWCP analyst,

Labor has required agencies to furnish occupational code information for

injured workers since October 1986. However, many of the cases that we

analyzed were established before then.

For the 9,900 FECA beneficiaries for which occupational code information

existed, over 550 different occupations were represented. As agreed with

your office, we developed career pattern information for workers in the

following occupations—letter carrier, postal distribution, nurses, and air

traffic controllers. We selected these occupations because they were

either the occupations (1) that were coded the most frequently or (2) for

which many beneficiaries were likely to be employed by the same agency.

We interviewed officials from the Postal Service, FAA, and VA who were

familiar with the career patterns of employees in these occupations. We

supplemented and compared this information with readily available

personnel data on active employees obtained from either these agencies or

OPM. In addition, for workers in other frequently cited occupations, we

compared aggregate age and pay information from OPM’s Central Personnel

Data File18 with FECA information on beneficiaries with the same

occupations. Due to time constraints, it was beyond the scope of our

review to analyze the many factors that could be involved in determining

18The Central Personnel Data File is an automated information system containing individual records

for most federal civilian employees. Information on an employee’s date of birth, occupation, and basic

pay is included in this system.

Page 25 GAO/GGD-98-174 Workers’ Compensation Benefits
Appendix I 

Scope and Methodology

the extent to which beneficiaries’ career progression was affected by their

injuries.

Characteristics of

Beneficiaries

To determine beneficiaries’ FECA benefit amounts, current ages, ages when

injured, and other characteristics, we relied on data from OWCP’s

automated claims management and compensation payment system. We

developed information on beneficiaries’ characteristics for 30,057

beneficiaries—nearly 23,250 beneficiaries for whom we developed

replacement rate information and approximately 6,800 of the remaining

11,460 beneficiaries on the long-term rolls who were receiving FECA

wage-loss compensation benefits of either 66-2/3 or 75 percent of gross

pay.

We did not verify the information on beneficiaries’ characteristics

obtained from OWCP’s automated systems. According to OWCP officials, they

generally believed the information from these systems to be highly reliable

when used in the aggregate. For purposes of our analyses, we used the

date of injury for computing FECA benefits and pay at the time of injury. An

OWCP analyst told us that information on effective dates of some

beneficiaries’ pay rates may not always be available or accurate because

beneficiaries may have (1) been on and off the rolls over a period of years

or (2) suffered from occupational diseases rather than traumatic injuries.

Our work was done in Washington, D.C., between October 1997 and

July 1998 in accordance with generally accepted government auditing

standards. We requested comments on a draft of this report from the

Secretary of Labor. Labor’s comments are summarized at the end of the

letter and are presented in full in appendix IV.

Page 26 GAO/GGD-98-174 Workers’ Compensation Benefits
Page 27 GAO/GGD-98-174 Workers’ Compensation Benefits
Apppendix II 

Additional Information on Factors and

Assumptions Affecting Replacement Rates

The following sections discuss in more detail the factors and assumptions

that influenced the estimated replacement rates presented in the letter.

Dates of Injury

Influenced

Replacement Rates

More recently injured beneficiaries generally had lower replacement rates,

on average, than those who were injured many years ago. Over the years,

FECA benefits were increased by cost-of-living allowances that exceeded

general schedule pay comparability increases that beneficiaries would

have received had they not been injured. Table II.1 shows average

replacement rates based on year of injury and the number of beneficiaries

injured during each period.

Table II.1: Replacement Rates Based

on Date of Injury Dates of injury Number of beneficiaries Average replacement rates

After 1989 4,408 90.2

1985 to 1989 5,674 90.3

1980 to 1984 3,669 90.2

1975 to 1979 4,204 98.6

1970 to 1974 3,170 108.5

Before 1970 2,132 105.8

Source: GAO analyses of OWCP data.

Since 1966, FECA cost-of-living and general schedule pay comparability

increases have generally differed in amounts and effective dates. Amounts

of cost-of-living or pay comparability increases to which beneficiaries

would have been entitled depended on their dates of injury. Figure II.1

compares FECA cost-of-living increases with pay comparability increases

for each year from 1966 to 1997.

Page 28 GAO/GGD-98-174 Workers’ Compensation Benefits
Apppendix II 

Additional Information on Factors and

Assumptions Affecting Replacement Rates

Figure II.1: Comparison of Cost-of-Living and Average Pay Comparability Percentage Increases (1966 to 1997) 

Cost-of-living and pay comparability increases

0

5.00

10.00

15.00

20.00

1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1997

Calendar year

Cost-of-living increases

Pay comparability increases

Source: GAO analysis of OWCP and OPM information.

Table II.2 shows the cumulative amount of cost-of-living and pay

comparability increases that beneficiaries injured before selected dates

would have received through June 1997.

Page 29 GAO/GGD-98-174 Workers’ Compensation Benefits
Apppendix II 

Additional Information on Factors and

Assumptions Affecting Replacement Rates

Table II.2: Cumulative Amounts of

Cost-of-Living and Pay Comparability

Increases for Selected Beneficiariesa

From Date of Injury to June 1997

Increases between January 1970 and June 1997

Beneficiaries injured before

January

Sum of FECA

cost-of-living increases

(percent)

Sum of average pay

comparability increases if

not injured (percent)

1970 143.9 118.7

1975 110.0 91.8

1980 71.1 62.1

1985 40.4 40.2

1990 27.3 27.6

1995 8.5 8.0

aCost-of-living increases are provided to injured employees who stopped work on account of an

injury more than 1 year prior to the effective date of the increase.

Source: GAO analyses of OWCP and OPM data.

Higher Pay and

Progressive Tax Rates

Increased

Replacement Rates

Replacement rates vary for workers receiving different amounts of pay.

Because federal and many state tax rates are progressive, higher pay levels

generally mean higher taxes. Higher tax rates reduce take-home pay,

thereby increasing replacement rates. Conversely, in states with no state

income taxes, replacement rates for beneficiaries with the same income

would be lower than they would be in states with an income tax.

In 1997, for single individuals, federal income tax rates were 15 percent on

taxable income up to $24,650, 28 percent on taxable income up to $59,750,

and 31 percent on taxable income up to $124,650. For married individuals

filing jointly, federal income tax rates were 15 percent of taxable income

up to $41,200, and 28 percent of taxable income up to $99,600.19

Table II.3 shows that average replacement rates generally increased as

beneficiaries’ pay increased. Higher pay would generally be subject to

higher income tax rates, which cause an increase in replacement rates.

19While higher federal income tax rates exist for single and married taxpayers, these rates would

generally not apply to federal workers unless they had income from sources other than their salaries

or their spouses had taxable income.

Page 30 GAO/GGD-98-174 Workers’ Compensation Benefits
Apppendix II 

Additional Information on Factors and

Assumptions Affecting Replacement Rates

Table II.3: Average Take-Home Pay

Replacement Rates for Beneficiaries at

Various Pay Levels Before Their Injury

as of June 1997

Current value of pay Number of beneficiaries

Average replacement

rate

Under $20,000 1,407 90.7

20,000 to 29,999 7,204 94.9

30,000 to 39,999 9,293 95.1

40,000 to 49,999 3,019 95.8

50,000 to 59,999 1,074 100.1

60,000 to 69,999 654 105.7

70,000 to 79,999 349 107.4

80,000 and over 257 106.5

Source: GAO analysis of OWCP data.

In addition to changes in take-home pay replacement rates related to

progressive federal income tax rates, many FECA beneficiaries lived in

states that also taxed income. Beneficiaries living in states with income

taxes would have less take-home pay and thus higher replacement rates.

Of the 23,257 beneficiaries for whom we developed replacement rate

information, about 17,200 lived in 15 states with a state income tax. Of

these 15 states, 3 had flat tax rates ranging from 2.8 to 5.95 percent of

income, and 12 had progressive tax rates ranging from 0.5 to 9.3 percent of

income. In addition, one state had an income tax but did not tax earnings

from salaries or wages. In computing state income taxes, we considered

exemption and standard deduction amounts allowed by the states in

making our calculations.

Our estimate of the average take-home pay replacement rate for all

beneficiaries for whom we developed information was about 95 percent;

for beneficiaries in states without an income tax, about 94 percent; and for

beneficiaries in states with an income tax about, 96 percent. Figure II.2

shows how different state income tax rates would influence replacement

rates for beneficiaries earning various amounts of pay.

Page 31 GAO/GGD-98-174 Workers’ Compensation Benefits
Apppendix II 

Additional Information on Factors and

Assumptions Affecting Replacement Rates

Figure II.2: Influence of State Income Tax Rates on Replacement Rates

Note: For these scenarios, in which no specific states’ income tax laws apply, we computed state

income taxes based on federal taxable income amounts. Using these amounts has the effect of

slightly understating amounts of state taxes paid because federal standard deduction and

exemption amounts were generally higher than amounts allowed by the states.

Source: GAO computations.

Some beneficiaries lived in areas, such as counties and cities, that also

taxed income. For our analysis, however, we did not identify or consider

amounts of income taxes paid to local jurisdictions. Had we included

these taxes, they would have further reduced beneficiaries’ take-home pay

and increased replacement rates.

Augmented Benefits

Increased

Replacement Rates

Under FECA, injured workers with one or more dependents receive

workers’ compensation benefits based on 75 percent of their pay before

they were injured compared with benefits of 66-2/3 percent of pay for

beneficiaries without dependents. Without the additional dependent’s

Page 32 GAO/GGD-98-174 Workers’ Compensation Benefits
Apppendix II 

Additional Information on Factors and

Assumptions Affecting Replacement Rates

allowance, married injured workers whose spouses did not work would

have lower take-home pay replacement rates than those who were single

because their standard deduction and exemption amounts would be higher

than single beneficiaries and thus their taxes would be lower. Figure II.3

shows replacement rates for (1) single beneficiaries and beneficiaries with

dependents based on their respective benefit levels and various pay

amounts received and (2) beneficiaries with dependents if additional FECA

benefits of 8-1/3 percent were not provided.

Figure II.3: Replacement Rates for

Beneficiaries Under Different

Dependent and Benefit Rate

Assumptions

Take-home pay replacement rates

75.0

80.0

85.0

90.0

95.0

100.0

$20,000 $40,000 $60,000

Pay at time of injury

81.7

87.5

77.8

87.4

92.5

82.2

92.5

95.9

85.3

Single-FECA benefits 66-2/3 percent

Married-FECA benefits 75 percent

Married-FECA benefits 66-2/3 percent

Source: GAO computations.

Different Income Tax

Assumptions Change

Replacement Rates

In addition to the above discussed factors that affected replacement rates,

the rates we computed would have been different if we had used different

assumptions in calculating federal and state income taxes for each

beneficiary. For example, replacement rates would have increased if we

had assumed that a beneficiary’s spouse had taxable income. Replacement

Page 33 GAO/GGD-98-174 Workers’ Compensation Benefits
Apppendix II 

Additional Information on Factors and

Assumptions Affecting Replacement Rates

rates would have decreased if we had assumed that the number of

exemptions or amounts of itemized deductions claimed for income tax

purposes were greater than the amounts we used in our calculations.

Each of these factors and the extent of their effects are discussed in more

detail in the following subsections.

Spouses’ Income Could

Increase Replacement

Rates

The presence of a spouse with income could raise the value of nontaxable

workers’ compensation benefits because the couple’s combined taxable

income had there not been an injury might be subject to a higher tax rate.

Higher tax rates equate to higher wage replacement rates. Pay earned by

married workers when they returned to work after they had been injured

would not be accompanied by additional exemptions or, in most cases,

deductions for the couple. However, additional taxable wages based on

both incomes could be subject to the same or higher tax rates than the last

dollars earned by the injured worker’s spouse. Compared with

single-income couples, replacement rates for two-income couples are

typically higher at both lower and higher incomes, according to a Workers

Compensation Research Institute study.

Figure II.4 shows for beneficiaries receiving different amounts of benefits

that the more taxable income a beneficiary’s spouse had, the higher the

replacement rate.

Page 34 GAO/GGD-98-174 Workers’ Compensation Benefits
Apppendix II 

Additional Information on Factors and

Assumptions Affecting Replacement Rates

Figure II.4: Replacement Rates for

Beneficiaries With Spouses With

Different Amounts of Taxable Income

Source: GAO computations.

More Tax Deductions

Reduce Replacement Rates

Standard deductions for 1997 federal income tax purposes for single and

joint return filers were $4,150 and $6,900, respectively. Using these

deduction amounts and our other assumptions, percentages of pay at the

time of injury adjusted to 1997 pay levels replaced by FECA benefits for

single beneficiaries and beneficiaries with dependents were 92 and

97 percent, respectively. If itemized deductions were two or three times

higher than the standard deduction amounts we used, replacement rates

would decrease by amounts ranging from about 2 to 7 percent depending

on beneficiaries’ pay. Table II.4 shows examples of changes in

replacement rates for single and married beneficiaries with pay of $30,000

or $60,000 if their itemized deductions were double or triple the 1997

standard deduction amounts.

Page 35 GAO/GGD-98-174 Workers’ Compensation Benefits
Apppendix II 

Additional Information on Factors and

Assumptions Affecting Replacement Rates

Table II.4: Replacement Rates Based

on Different Deduction Amounts Single Married Single Married

Example 1 Example 2 Example 3 Example 4

Income $30,000 $30,000 $60,000 $60,000

FECA benefits 20,000 22,500 40,000 45,000

CSRS contributions 2,535 2,535 5,070 5,070

Exemption(s) 2,650 5,300 2,650 5,300

Deductions

Standard

Double

Triple

4,150

8,300

12,450

6,900

13,800

20,700

4,150

8,300

12,450

6,900

13,800

20,700

Federal taxes

Standard

Double

Triple

3,480

2,858

2,235

2,670

1,635

600

11,692

10,530

9,368

8,028

6,135

5,100

Take-home pay

Standard

Double

Triple

23,985

24,608

25,230

24,795

25,830

26,865

43,239

44,401

45,563

46,902

48,795

49,830

FECA as a percentage of

take-home pay

Standard

Double

Triple

83.4

81.3

79.3

90.7

87.1

83.8

92.5

90.1

87.8

95.9

92.2

90.3

Source: GAO computations.

As shown, replacement rates were highest for married beneficiaries at the

higher income level who claimed standard deductions and lowest for

single beneficiaries at the lower income level whose itemized deductions

were three times the standard deduction amount. Figure II.5 shows these

differences across different income levels. Other single or married

beneficiaries whose itemized deductions were two or three times the

standard deduction amounts would have replacement rates that would fall

between these rates.

Page 36 GAO/GGD-98-174 Workers’ Compensation Benefits
Apppendix II 

Additional Information on Factors and

Assumptions Affecting Replacement Rates

Figure II.5: Deduction Amounts

Influence Take-Home Pay Replacement

Rates Take-home pay replacement rates

Pay

Standard deduction--married

Triple standard deduction--single

$10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 $100,000

70%

75%

80%

85%

90%

95%

100%

105%

110%

$10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 $100,000

70%

75%

80%

85%

90%

95%

100%

105%

110%

0%

Source: GAO computations.

The number of FECA beneficiaries who would itemize their deductions

versus those who would use the standard deduction is unknown.

According to IRS data on 1995 income tax filers with adjusted gross

incomes between $10,000 and $99,999, of the 50.9 million single taxpayers,

42.7 million (84 percent) did not itemize deductions. Of the 49.0 million

taxpayers filing jointly, 25.5 million (52 percent) did not itemize

deductions. IRS information shows that as income increases, the

percentage of taxpayers itemizing deductions increases. While average

amounts of itemized deductions increased with income, these increases

were relatively small. Table II.5 shows, for various income groups, the

percentage of returns claiming itemized deductions and the average

amounts of deductions claimed. In 1995, standard deduction amounts for

single and married beneficiaries were $3,900 and $6,550, respectively.

Page 37 GAO/GGD-98-174 Workers’ Compensation Benefits
Apppendix II 

Additional Information on Factors and

Assumptions Affecting Replacement Rates

Table II.5: Percentages of Returns Claiming Itemized Deductions and Average Amount of Deductions Claimed for Single

and Married Income Groups (1995) 

Single Married

Adjusted gross incomea

Percentage of returns

with itemized

deductions

Average amount of

itemized deductions

Percentage of returns

with itemized

deductions

Average amount of

itemized deductions

$10,000 to $19,999 8.6 $9,650 11.4 $11,435

20,000 to 29,999 18.1 8,332 20.0 11,741

30,000 to 39,999 35.6 9,282 30.7 11,536

40,000 to 49,999 50.7 10,468 47.2 11,954

50,000 to 74,999 72.1 12,491 69.1 13,247

75,000 to 99,999 83.8 17,970 86.8 16,918

aData provided for filers with incomes over $10,000 or under $100,000 because the pay for most

FECA beneficiaries would be within this range.

Source: GAO analysis of 1995 IRS data.

In general, if FECA beneficiaries were similar to all individuals filing income

tax returns in 1995, FECA beneficiaries with more pay at the time of injury

would be more likely to claim itemized deductions in excess of standard

deduction amounts than would those with lower pay. In such cases, our

replacement rates would be overstated, particularly for beneficiaries at

higher income levels. Likewise, if beneficiaries’ deductions were equal to

or greater than their income (thereby owing no tax), the replacement rate

for single and married beneficiaries would be about 73 and 82 percent,

respectively, because the relationship between take-home pay (gross pay

less retirement and Medicaid contributions) and FECA benefits would

always be the same.

More Exemptions/

Dependents Reduce

Replacement Rates

FECA beneficiaries are entitled to augmented benefits if they have one or

more dependents. However, information on the specific number of

dependents claimed by each beneficiary is not available from FECA

automated data. Beneficiaries receiving the dependent benefit allowance

who were eligible to claim more than the two we assumed in our income

tax calculations would have lower take-home pay replacement rates than

those shown in our analyses.

In 1997, taxpayers were allowed to reduce their taxable income by $2,650

for each exemption claimed on their tax return. Table II.6 shows examples

Page 38 GAO/GGD-98-174 Workers’ Compensation Benefits
Apppendix II 

Additional Information on Factors and

Assumptions Affecting Replacement Rates

of how increases in the number of exemptions would decrease

replacement rates.

Table II.6: Number of Exemptions

Influences Take-Home Pay

Replacement Rates

Income $30,000 $30,000 $30,000 $60,000 $60,000 $60,000

Number of

exemptions 2 3 4 2 3 4

Exemption

amount $5,300 $7,950 $10,600 $5,300 $7,950 $10,600

Take-home pay 24,795 25,192 25,590 46,902 47,644 48,386

Take-home pay

replacement rate 90.7 89.3 87.9 95.9 94.5 93.0

Source: GAO.

In general, each additional exemption decreased the replacement rate by

about 1.5 percent.

Other Factors Influence

Replacement Rates

In addition to the above factors, workers’ actual take-home pay could be

affected by other deductions that we did not consider in our calculations

of FECA take-home pay replacement rates because employees have a

choice of whether to have their take-home pay reduced by their share of

the cost of fringe and other benefits to which they may be entitled.

Examples of the deductions not included in our calculations of take-home

pay were employees’ thrift savings plan contributions, allotments for U.S.

savings bonds, and deductions for health, life, or disability insurance.

Typically, these deductions are discretionary. In the case of health and life

insurance, injured workers are eligible to participate in these federal

programs and could have payments for these types of insurance withheld

from their workers’ compensation benefits.

Page 39 GAO/GGD-98-174 Workers’ Compensation Benefits
Appendix III 

Comparison of FECA and OPM Information

for Individuals in the Same Occupations

Occupations

FECA information (June 1997)

OPM information (September 1997)

Number

Average age at time

of injury

Estimated current

value of pay at time

of injury Number Average age Average pay

Pipefitter 274 43.8 $39,251 3,935 47.1 $38,569

Laborer 234 43.5 26,555 4,380 39.7 22,494

Secretary 210 45.3 26,741 63,453 44.7 28,301

Material handler 164 43.6 29,058 15,347 46.5 30,208

Clerk/assistant 161 46.4 25,303 60,100 43.3 26,621

Electrician 156 46.2 39,275 2,048 46.6 42,643

Motor vehicle operator 144 47.3 31,266 6,943 48.5 30,983

Carpenter 140 44.7 34,196 2,721 48.6 35,637

Miscellaneous occupations 128 40.0 28,648 175 43.0 37,081

Custodial worker 125 47.0 24,780 11,306 47.7 22,998

Maintenance mechanic 125 45.7 34,538 11,271 47.5 35,291

Source: GAO analysis of FECA and OPM data.

Page 40 GAO/GGD-98-174 Workers’ Compensation Benefits
Appendix IV 

Comments From the Department of Labor

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See comment 1.

See comment 2.

Page 41 GAO/GGD-98-174 Workers’ Compensation Benefits
Appendix IV 

Comments From the Department of Labor

See comment 3.

See p. 14.

Page 42 GAO/GGD-98-174 Workers’ Compensation Benefits
Appendix IV 

Comments From the Department of Labor

The following are comments on the Department of Labor’s letter dated

July 20, 1998.

GAO Comments 1. Labor said we made an underlying but unstated assumption that the

state where beneficiaries currently resided was the state where they lived

when injured. Labor added that about 26 percent of the beneficiaries did

not live in the state in which they were injured, but the report did not state

how many individuals or what income groups moved from states with an

income tax to states without an income tax.

Regarding Labor’s comment that we made an unstated assumption about

beneficiaries residing in states where they lived when they were injured,

we did not need to make such an assumption. Although our profile

information showed that about 26 percent of the beneficiaries currently

lived in states that were different from the ones in which they were

injured, any differences between beneficiaries’ states of residence at the

time of injury and their current residences were not relevant to our

computation of beneficiaries’ current take-home pay replacement rates.

2. Labor suggested that our estimates of take-home pay replaced by FECA

benefits be further qualified by adding language stating that we assumed

beneficiaries had not received any promotions from the time of injury

through the present. Labor said that it was almost certain that some

percentage of injured workers would have received promotions, thus

lowering the replacement rate.

Labor is in effect saying that for at least some workers the take-home pay

replacement rates we developed were overstated because our estimated

replacement rates were based on pay at the time of injury adjusted to 1997

pay levels and did not take into consideration the possibility that some

workers, had they not been injured, would have received promotions.

Higher pay rates reflecting assumed promotions, if compared to

compensation benefits based on pay at the time of injury, would result in

lower replacement rates.

While the subject of forgone promotions may be relevant to assessing the

effects of work-related injuries on individuals’ careers, neither we nor the

workers’ compensation studies we reviewed in developing our

replacement rate methodology considered future promotion potential to

be a factor in calculating replacement rates. In addition, although some

employees may have been promoted had they not been injured, an

Page 43 GAO/GGD-98-174 Workers’ Compensation Benefits
Appendix IV 

Comments From the Department of Labor

assumption by us on which employees would have received one or more

promotions would be very speculative. Therefore, we did not consider it

necessary to further qualify our estimates of take-home pay replaced by

FECA benefits. We have revised our scope and methodology to note the

reasons why we did not make an assumption regarding forgone

promotions and merit pay increases.

3. In commenting on table II.4, Labor said that our estimated replacement

rate of 95.9 percent for a married beneficiary who was paid $60,000 and

who took the standard deduction would not be reflective of the norm for

that group because higher income individuals tend to itemize deductions.

Likewise, Labor noted that our replacement rate of 79.3 percent based on

a single person who was paid $20,000 and whose itemized deductions

were three times the standard deduction amount would not be reflective

of the norm for that group because most single people with pay of $20,000

would not be itemizing deductions. We did not intend the information in

table II.4 to be reflective of norms for those groups of individuals. Rather,

we provided these hypothetical examples to show the sensitivity of our

replacement rate analyses to different assumptions about individual

beneficiaries’ standard or itemized deductions.

Page 44 GAO/GGD-98-174 Workers’ Compensation Benefits
Appendix V 

Major Contributors to This Report

General Government

Division

Larry H. Endy, Assistant Director

Edward R. Tasca, Evaluator-in-Charge

Gregory H. Wilmoth, Supervisory Social Science Analyst

George H. Quinn, Jr., Computer Specialist

In addition to those named above, the following individuals from the

General Government Division made important contributions to this report:

Wayne Barrett, Senior Evaluator; Cathy Hurley, Senior Computer

Specialist; Kim Wheeler, Graphics; and Ernestine Burt, Issue Area

Assistant.

(410199) Page 45 GAO/GGD-98-174 Workers’ Compensation Benefits
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