Federal Workers' Compensation: Issues Associated With Changing Benefits for Older Beneficiaries
Published: 2011-05-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: This testimony discusses issues related to possible changes to the Federal Employees' Compensation Act (FECA) program, a topic that we have reported on in the past. At the end of chargeback year 2010, the FECA program, administered by the Department of Labor (Labor) paid more than $1.88 billion in wage-loss compensation, impairment, and death benefits, and another $898.1 million for medical and rehabilitation services and supplies. Currently, FECA benefits are paid to federal employees who are unable to work because of injuries sustained while performing their federal duties, including those who are at or older than retirement age. Concerns have been raised that federal employees on FECA receive benefits that could be more generous than under the traditional federal retirement system and that the program may have unintended incentives for beneficiaries to remain on the FECA program beyond the traditional retirement age. Over the past 30 years, there have been various proposals to change the FECA program to address this concern. Recent policy proposals to change the way FECA is administered for older beneficiaries share characteristics with past proposals we have discussed in prior work. In August 1996, we reported on the issues associated with changing benefits for older beneficiaries. Because FECA's benefit structure has not been significantly amended in more than 35 years, the policy questions raised in our 1996 report are still relevant and important today. This statement will focus on (1) previous proposals for changing FECA benefits for older beneficiaries and (2) questions and associated issues that merit consideration in crafting legislation to change benefits for older beneficiaries. This statement is drawn primarily from our 1996 report in which we solicited views from selected federal agencies and employee groups to identify questions and associated issues with crafting benefit changes. In that report, we also reviewed relevant laws and analyzed previous studies and legislative proposals that would have changed benefits for older FECA beneficiaries..
section_title: What GAO Found
paragraphs: In summary, we have reported that the perception that many retirement-age beneficiaries were receiving more generous benefits on FECA had generated two alternative proposals to change benefits once beneficiaries reach the age at which retirement typically occurs: (1) converting FECA benefits to retirement benefits and, (2) changing FECA wage-loss benefits by establishing a new FECA annuity. We also discussed a number of issues to be considered in crafting legislation to change benefits for older beneficiaries. Going forward, Congress may wish to consider the following questions in assessing current proposals for change: (1) How would benefits be computed? (2) Which beneficiaries would be affected? (3) What criteria, such as age or retirement eligibility, would initiate changed benefits? (4) How would other benefits, such as FECA medical and survivor benefits, be treated and administered? (5) How would benefits, particularly retirement benefits, be funded?

section_title: Letter
paragraphs: I am pleased to be here today to comment on issues related to possible  changes to the Federal Employees’ Compensation Act (FECA) program, a  topic that we have reported on in the past. At the end of chargeback year  2010, the FECA program, administered by the Department of Labor  (Labor) paid more than $1.88 billion in wage-loss compensation,  impairment, and death benefits, and another $898.1 million for medical  and rehabilitation services and supplies. Currently, FECA benefits are  paid to federal employees who are unable to work because of injuries  sustained while performing their federal duties, including those who are at  or older than retirement age. Concerns have been raised that federal  employees on FECA receive benefits that could be more generous than  under the traditional federal retirement system and that the program may  have unintended incentives for beneficiaries to remain on the FECA  program beyond the traditional retirement age. Over the past 30 years,  there have been various proposals to change the FECA program to address  this concern. Recent policy proposals to change the way FECA is  administered for older beneficiaries share characteristics with past  proposals we have discussed in prior work. In August 1996, we reported  on the issues associated with changing benefits for older beneficiaries.  Because FECA’s benefit structure has not been significantly amended in  more than 35 years, the policy questions raised in our 1996 report are still  relevant and important today.
My statement today will focus on (1) previous proposals for changing  FECA benefits for older beneficiaries and (2) questions and associated  issues that merit consideration in crafting legislation to change benefits for  older beneficiaries. This statement is drawn primarily from our 1996 report  in which we solicited views from selected federal agencies and employee  groups to identify questions and associated issues with crafting benefit  changes. In that report, we also reviewed relevant laws and analyzed  previous studies and legislative proposals that would have changed  benefits for older FECA beneficiaries. For purposes of this testimony, we  did not conduct a legal analysis to update the results of our prior work, but  instead relied upon secondary sources such as the Congressional Research  Service (CRS). The work on which this testimony was based was  conducted 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 and conclusions 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.
In summary, we have reported that the perception that many retirement- age beneficiaries were receiving more generous benefits on FECA had  generated two alternative proposals to change benefits once beneficiaries  reach the age at which retirement typically occurs: (1) converting FECA  benefits to retirement benefits and, (2) changing FECA wage-loss benefits  by establishing a new FECA annuity. We also discussed a number of issues  to be considered in crafting legislation to change benefits for older  beneficiaries. Going forward, Congress may wish to consider the following  questions in assessing current proposals for change: (1) How would  benefits be computed? (2) Which beneficiaries would be affected? (3)  What criteria, such as age or retirement eligibility, would initiate changed  benefits? (4) How would other benefits, such as FECA medical and  survivor benefits, be treated and administered? (5) How would benefits,  particularly retirement benefits, be funded?
subsections: section_title: Background
paragraphs: FECA is administered by Labor’s Office of Workers’ Compensation  Programs (OWCP) and currently covers more than 2.7 million civilian  federal employees from more than 70 different agencies. FECA benefits  are paid to federal employees who are unable to work because of injuries  sustained while performing their federal duties. Under FECA, workers’  compensation benefits are authorized for employees who suffer temporary  or permanent disabilities resulting from work-related injuries or diseases.  FECA benefits include payments for (1) loss of wages when employees  cannot work because of work-related disabilities due to traumatic injuries  or occupational diseases; (2) schedule awards for loss of, or loss of use of,  a body part or function; (3) vocational rehabilitation; (4) death benefits for  survivors; (5) burial allowances; and (6) medical care for injured workers.  Wage-loss benefits for eligible workers with temporary or permanent total  disabilities are generally equal to either 66-2/3 percent of salary for a  worker with no spouse or dependent, or 75 percent of salary for a worker  with a spouse or dependent. Wage-loss benefits can be reduced based on  employees’ wage-earning capacities when they are capable of working  again. OWCP provides wage-loss compensation until claimants can return  to work in either their original positions or other suitable positions that  meet medical work restrictions. Each year, most federal agencies  reimburse OWCP for wage-loss compensation payments made to their  employees from their annual appropriations. If claimants return to work  but do not receive wages equal to that of their prior positions—such as  claimants who return to work part-time—FECA benefits cover the  difference between their current and previous salaries. Currently, there  are no time or age limits placed on the receipt of FECA benefits.
With the passage of the Federal Employees’ Compensation Act of 1916,  members of Congress raised concerns about levels of benefits and  potential costs of establishing a program for injured federal employees.  As Congress debated the act’s provisions in 1916 and again in 1923, some  congressional members were concerned that a broad interpretation  threatened to make the workers’ compensation program, in effect, a  general pension. The 1916 act granted benefits to federal workers for  work-related injuries. These benefits were not necessarily granted for a  lifetime; they could be suspended or terminated under certain conditions.  Nevertheless, the act placed no age or time limitations on injured workers’  receipt of wage compensation. The act did contain a provision allowing  benefits to be reduced for older beneficiaries. The provision stated that  compensation benefits could be adjusted when the wage-earning capacity  of the disabled employee would probably have decreased on account of  old age, irrespective of the injury.
While the 1916 act did not specify the age at which compensation benefits  could be reduced, the 1949 FECA amendments established 70 as the age at  which a review could occur to determine if a reduction were warranted.  In 1974, Congress again eliminated the age provision.
subsections: section_title: Federal Retirement Systems
paragraphs: Typically, federal workers participate in one of two retirement systems  which are administered by the Office of Personnel Management (OPM):  the Civil Service Retirement System (CSRS), or the Federal Employees’  Retirement System (FERS). Most civilian federal employees who were  hired before 1984 are covered by CSRS. Under CSRS, employees generally  do not pay Social Security taxes or earn Social Security benefits. Federal  employees first hired in 1984 or later are covered by FERS. All federal  employees who are enrolled in FERS pay Social Security taxes and earn  Social Security benefits. Federal employees enrolled in either CSRS or  FERS also may contribute to the Thrift Savings Plan (TSP); however, only  employees enrolled in FERS are eligible for employer matching  contributions to the TSP.
Under both CSRS and FERS, the date of an employee’s eligibility to retire  with an annuity depends on his or her age and years of service. The  amount of the retirement annuity is determined by three factors: the  number of years of service, the accrual rate at which benefits are earned  for each year of service, and the salary base to which the accrual rate is  applied. In both CSRS and FERS, the salary base is the average of the  highest three consecutive years of basic pay. This is often called “high-3”  pay.
According to CRS, an injured employee cannot contribute to Social  Security or to the TSP while receiving workers’ compensation because  Social Security taxes and TSP contributions must be paid from earnings,  and workers’ compensation payments are not classified as earnings under  either the Social Security Act or the Internal Revenue Code. As a result,  the employee’s future retirement income from Social Security and the TSP  may be reduced. Legislation passed in 2003 increased the FERS basic  annuity from 1 percent of the individual’s high-3 average pay to 2 percent  of high-3 average pay while an individual receives workers’ compensation,  which would help replace income that may have been lost from lower  Social Security benefits and reduced income from TSP.
section_title: Proposals to Change Benefits for Older Beneficiaries
paragraphs: Concerns that beneficiaries remain in the FECA program past retirement  age have led to several proposals to change the program. Under current  rules, an age-eligible employee with 30 years of service covered by FERS  could accrue pension benefits that are 30 percent of their average high-3  pay and under CSRS could accrue almost 60 percent of their high-3  average pay. Under both systems benefits can be taxed. FECA  beneficiaries can receive up to 75 percent of their preinjury income, tax- free, if they have dependents and 66-2/3 percent without dependents.  Because returning to work could mean giving up a FECA benefit for a  reduced pension amount, concerns have been raised by some that the  program may provide incentives for beneficiaries to continue on the  program beyond retirement age.
In 1996, we reported on two alternative proposals to change FECA  benefits once beneficiaries reach the age at which retirement typically  occurs: (1) converting FECA benefits to retirement benefits, and (2)  changing FECA wage-loss benefits to a newly established FECA annuity.
The first proposal would convert FECA benefits for workers who are  injured or become ill to regular federal employee retirement benefits at  retirement age. In 1981, the Reagan administration proposed  comprehensive FECA reform, including a provision to convert FECA  benefits to retirement benefits at age 65. The proposal included certain  employee protections, one of which was calculating retirement benefits on  the basis of the employee’s pay at time of injury (with adjustments for  regular federal pay increases). According to proponents, this change  would improve agencies’ operations because their discretionary budgets  would be decreased by FECA costs, and, by reducing caseload, it would  allow Labor to better manage new and existing cases for younger injured  workers. A bill recently introduced in Congress includes a similar  provision, requiring FECA recipients to retire upon reaching retirement  age as defined by the Social Security Act.
The second proposal, based on proposals that several agencies developed  in the early 1990s, would convert FECA wage-loss compensation benefits  to a FECA annuity benefit. These agency proposals would have reduced  FECA benefits by a set percentage two years after beneficiaries reached  civil service retirement eligibility. Proponents of this alternative noted that  changing to a FECA annuity would be simpler than converting FECA  beneficiaries to the retirement system, would result in consistent benefits,  and would allow benefits to remain tax-free. Proponents also argued that a  FECA annuity would keep the changed benefit within the FECA program,  thereby avoiding complexities associated with converting FECA benefits  under CSRS and FERS. For example, converting to retirement benefits  could be difficult for some employees who currently are not participating  in a federal retirement plan. Also, funding future retirement benefits could  be a problem if the FECA recipient has not been making retirement  contributions. Labor recently suggested a change to the FECA program  that would reduce wage-loss benefits for Social Security retirement-aged  recipients to 50 percent of their gross salary at the date of injury, but  would still be tax-free. Labor’s proposal would still keep the changed  benefit within the FECA program.
In our 1996 report, however, we identified a number of issues with both  alternative proposals. For example, some experts and other stakeholders  we interviewed noted that age discrimination posed a possible legal  challenge and that some provisions in the law would need to be addressed  with new statutory language. Others noted that benefit reductions would  cause economic hardships for older beneficiaries. Some noted that  without the protections of the workers’ compensation program, injured  employees who have few years of service or are ineligible for retirement  might suffer large reductions in benefits. Moreover, opponents to change  also viewed reduced benefits as breaking the workers’ compensation  promise. Another concern was that agencies’ anticipation of reduced costs  for workers’ compensation could result in fewer incentives to manage  claims or to develop safer working environments.
section_title: Questions and Issues to Consider if Crafting FECA Changes
paragraphs: We also discussed in our 1996 report a number of issues that merit  consideration in crafting legislation to change benefits for older  beneficiaries. Going forward, Congress may wish to consider the following  questions as it assesses and considers current reform proposals: (1) How  would benefits be computed? (2) Which beneficiaries would be affected?  (3) What criteria, such as age or retirement eligibility, would initiate  changed benefits? (4) How would other benefits, such as FECA medical  and survivor benefits, be treated and administered? (5) How would  benefits, particularly retirement benefits, be funded?
subsections: section_title: How Would Benefits Be Computed?
paragraphs: The retirement conversion alternative raises complex issues, arising in  part from the fact that conversion could result in varying retirement  benefits, depending on conversion provisions, retirement systems, and  individual circumstances. A key issue is whether or not benefits would be  adjusted. The unadjusted option would allow for retirement benefits as  provided by current law. The adjusted option would typically ensure that  time on the FECA rolls was treated as if the beneficiary had continued to  work. This adjustment could (1) credit time on FECA for years of service  or (2) increase the salary base (for example, increasing salary from the  time of injury by either an index of wage increases or inflation, assigning  the current pay of the position, or providing for merit increases and  possible promotions missed due to the injury).
Determining the FECA annuity would require deciding what percentage of  FECA benefits the annuity would represent. Under previous proposals  benefits would be two-thirds of the previous FECA compensation benefits.  Provisions to adjust calculations for certain categories of beneficiaries  also have been proposed. Under previous proposals, partially disabled  individuals receiving reduced compensation would receive the lesser of  the FECA annuity or the current reduced benefit. FECA annuity  computations could also be devised to achieve certain benchmarks. For  example, the formula for a FECA annuity could be designed to  approximate a taxable retirement annuity. One issue concerning a FECA  annuity is whether it would be permanent once set, or whether it would be  subject to adjustments based on continuing OWCP reviews of the  beneficiary’s workers’ compensation claim.
section_title: Which Beneficiaries Would Be Affected?
paragraphs: Currently most federal employees are covered by FERS, but conversion  proposals might have to consider differences between FERS and CSRS  participants, and participants in any specialized retirement systems.  Other groups that might be uniquely affected include injured workers who  are not eligible for federal retirement benefits, individuals eligible for  retirement conversion benefits, but not vested; and individuals who are  partially disabled FECA recipients but active federal employees. With  regard to vesting, those who have insufficient years of service to be vested  might be given credit for time on the FECA rolls until vested. There is also  the question of whether changes will focus on current or future  beneficiaries. Exempting current beneficiaries delays receipt of full  savings from FECA cost reductions to the future. One option might be a  transition period for current beneficiaries. For example, current  beneficiaries could be given notice that their benefits would be changed  after a certain number of years.
section_title: What Criteria Would Initiate Changed Benefits?
paragraphs: Past proposals have used either age or retirement eligibility as the primary  criterion for changing benefits. If retirement eligibility is used,  consideration must be given to establishing eligibility for those who might  otherwise not become retirement eligible. This would be true for either the  retirement conversion or the annuity option. At least for purposes of  initiating the changed benefit, time on the FECA rolls might be treated as if  it counted for service time toward retirement eligibility. Deciding on the  criteria that would initiate change in benefits might require developing  benchmarks. For example, if age were the criteria, it might be  benchmarked against the average age of retirement for federal employees,  or the average age of retirement for all employees. Another question is  whether to use secondary criteria to delay changed benefits in certain  cases. The amount of time one has received FECA benefits is one possible  example of secondary criteria. Secondary criteria might prove important  in cases where an older, injured worker may face retirement under the  retirement conversion option even when recovery and return to work is  almost assured.
section_title: How Would Other Benefits, Such As FECA Medical Benefits Or Survivor Benefits, Be Treated and Administered?
paragraphs: In addition to changing FECA compensation benefits, consideration  should be given to whether to change other FECA benefits, such as  medical benefits or survivor benefits. For example, the 1981 Reagan  administration proposal would have ended survivor benefits under FECA  for those beneficiaries whose benefits were converted to the retirement  system. Another issue to consider is who will administer benefits if  program changes shift responsibilities—OPM administers retirement  annuity benefits for federal employees, and Labor currently administers  FECA benefits. Although it may be advantageous to consolidate case  management in one agency, such as OPM, if the retirement conversion  alternative were selected, the agency chosen to manage the case might  have to develop an expertise that it does not currently possess. For  example, OPM might have to develop expertise in medical fee schedules to  control workers’ compensation medical costs.
section_title: How Would Benefits, Particularly Retirement Benefits, Be Funded?
paragraphs: For the retirement conversion alternative, another issue is the funding of  any retirement benefit shortfall. Currently, agencies and individuals do not  make retirement contributions if an individual receives FECA benefits;  thus, if retirement benefits exceed those for which contributions have  been made, retirement funding shortfalls would occur. Retirement fund  shortfalls can be funded through payments made by agencies at the time of  conversion or prior to conversion. First, lump-sum payment could be  made by agencies at the time of the conversion. This option has been  criticized because the start-up cost was considered too high. Second,  shortfalls could be covered on a pay-as-you-go basis after conversion. In  this approach, agencies might make annual payments to cover the shortfall  resulting from the conversions. Third, agencies’ and employees’  contributions to the retirement fund could continue before conversion,  preventing shortfalls at conversion. Proposals for the FECA annuity  alternative typically keep funding under the current FECA chargeback  system.  This is an annual pay-as-you-go system with agencies paying for  the previous year’s FECA costs.
In total, these five questions provide a framework for considering  proposals to change the program.
section_title: Concluding Remarks
paragraphs: In conclusion, FECA continues to play a vital role in providing  compensation to federal employees who are unable to work because of  injuries sustained while performing their duties. However, continued  concerns that the program provides incentives for beneficiaries to remain  on the program at, and beyond, retirement age have led to calls for the  program to be reformed. Although FECA’s basic structure has not  significantly been amended for many years, there continues to be interest  in reforming the program. Proposals to change benefits for older  beneficiaries raise a number of important issues, with implications for  both beneficiaries and federal agencies. These implications warrant  careful attention to outcomes that could result from any changes.
Mr. Chairman, this concludes my prepared statement. I would be pleased  to respond to any questions that you or other members of the committee  may have at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: For further information about this testimony, please contact Daniel  Bertoni at (202) 512-7215 or bertonid@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this testimony. In addition to the individual named above, key  contributors to this testimony include Patrick Dibattista, H. Brandon  Haller, Michelle Bracy, Tonnye Conner-White, James Rebbe, Kathleen van  Gelder, and Melinda Bowman.
section_title: Related GAO Products
paragraphs: Federal Workers’ Compensation: Better Data and Management Strategies  Would Strengthen Efforts to Prevent and Address Improper Payments.  GAO-08-284. Washington, D.C.: February 26, 2008.
Postal Service Employee Workers’ Compensation Claims Not Always  Processed Timely, but Problems Hamper Complete Measurement.  GAO-03-158R. Washington, D.C.: December 20, 2002.
Oversight of the Management of the Office of Workers’ Compensation  Programs: Are the Complaints Justified. GAO-02-964R. Washington, D.C.:  July 19, 2002.
U.S. Postal Service: Workers’ Compensation Benefits for Postal  Employees. GAO-02-729T. Washington, D.C.: May 9, 2002.
Office of Workers’ Compensation Programs: Further Actions Are Needed  to Improve Claims Review. GAO-02-725T. Washington, D.C.: May 9, 2002.
Federal Employees’ Compensation Act: Percentages of Take-Home Pay  Replaced by Compensation Benefits. GGD-98-174. Washington, D.C.:  August 17, 1998.
Federal Employees’ Compensation Act: Issues Associated With Changing  Benefits for Older Beneficiaries. GGD-96-138BR. Washington, D.C.: August  14, 1996.
Workers’ Compensation: Selected Comparisons of Federal and State Laws.  GGD-96-76. Washington, D.C.: April 3, 1996.
Federal Employees’ Compensation Act: Redefining Continuation of Pay  Could Result in Additional Refunds to the Government. GGD-95-135. June  8, 1995.
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