Federal Employees' Compensation Act: Analysis of Benefits Under Proposed Program Changes
Released: 2013-07-10T00:00:00

Letter

Background

FECA provides cash benefits to eligible federal employees who suffer temporary or permanent disabilities resulting from work-related injuries or diseases. Labor’s Division of Federal Employees’ Compensation in the Office of Workers’ Compensation Programs (OWCP) administers the FECA program and charges agencies for whom injured employees worked for benefits provided. These agencies subsequently reimburse Labor’s Employees’ Compensation Fund from their next annual appropriation. FECA benefits are adjusted annually for cost-of-living and are neither subject to age restrictions nor taxed. USPS increaseshas large FECA program costs. At the time of their injury, 43 percent of FECA beneficiaries in 2010 were employed by USPS, as shown in table 1.

One way to measure the adequacy of FECA benefits is to consider wage replacement rates, which are the proportion of pre-injury wages that are replaced by FECA. Wage replacement rates that do not account for missed career growth capture the degree to which a beneficiary is able to maintain his or her pre-injury standard of living whereas wage replacement rates that account for missed career growth capture the degree to which a beneficiary is able to maintain his or her foregone standard of living (i.e., standard of living absent an injury). Data limitations can preclude calculating wage replacement rates that account for missed career growth; however, doing so provides a more complete story of the comparison between an injured worker and his or her counter-factual of having never been injured. Wage replacement rates can be targeted by policy-makers; however, there is no consensus on what wage replacement rate policies should target.

FECA and Retirement under FERS

FECA beneficiaries receive different benefits past retirement age than workers who retire under a federal retirement system. Specifically, under FERS, federal retirees have a benefit package comprised of three components: the FERS annuity, which is based on years of service; the TSP, which is similar to a 401(k); and Social Security benefits. FECA benefits do not change at retirement age and beneficiaries cannot receive a FERS annuity and FECA benefits simultaneously. In addition, FECA beneficiaries cannot contribute to their TSP accounts post-injury, but they can receive benefits accrued from contributions made to their TSP accounts prior to being injured. In addition, Social Security benefits attributable to federal service are offset by FECA.

Partial and Total-disability

If an individual has an extended disability and no current capacity to work, OWCP determines that he or she is a total-disability beneficiary and calculates long-term FECA benefits as a proportion of the beneficiary’s entire income at the time of injury. In 2010, 31,880 FECA beneficiaries received long-term total-disability cash benefits.

Alternatively, if an individual recovers sufficiently to return to work in some capacity, OWCP determines that he or she is a partial-disability beneficiary and reduces his or her FECA benefits from the total-disability amount. For such partial-disability beneficiaries, OWCP calculates long- term benefits based on any loss of wage earning capacity (LWEC), as compared to their pre-injury wages. A beneficiary’s LWEC may be based on the difference between their pre-injury wages and their actual post-injury earnings if the beneficiary has found employment that OWCP determines to be commensurate with their rehabilitation. Alternatively, OWCP constructs a beneficiary’s LWEC based on the difference between pre-injury wages and OWCP’s estimate of what the FECA beneficiary could earn in an appropriate job placement (constructed earnings). In 2010, 10,594 FECA beneficiaries received long-term partial-disability cash benefits.

FECA Operations

In addition to our work on FECA benefit levels, we have also conducted work on program integrity and management. We have identified several weaknesses in these areas. Most recently, in April 2013, we found examples of improper payments and indicators of potential fraud in the FECA program, which could be attributed, in part, to oversight and data- access issues. We also found that FECA program requirements allow claimants to receive earnings, and earnings increases, without necessarily resulting in adjustment of FECA compensation. We recommended that the Secretary of Labor assess the feasibility of developing a cost-effective mechanism to share FECA compensation information with states. Labor agreed with the recommendation and stated that it will undertake a review to determine whether such data sharing and reporting is feasible.

Proposed FECA Revisions Would Reduce Median Wage Replacement Rates and Increase the Difference between Total-Disability Beneficiaries With and Without a Dependent

Our simulations of the effects of compensating non-USPS and USPS total-disability beneficiaries at the single rate (regardless of the presence of dependents) of either 66-2/3 or 70 percent of wages at injury, reduced the median wage replacement rates. Median wage replacement rates overall, and within the subgroups we examined, were generally lower under the 66-2/3 percent compensation proposal.

Proposed Single Rates Would Reduce Wage Replacement Rates

Compared to the current FECA program, both proposals reduced 2010 median wage replacement rates for total-disability non-USPS and USPS beneficiaries, as shown in figure 1. The decreases in the overall median wage replacement rates were due to the greater proportion of beneficiaries who had a dependent—73 percent of non-USPS beneficiaries and 71 percent of USPS beneficiaries. Beneficiaries with a dependent received lower compensation under both proposals whereas beneficiaries without a dependent saw their compensation increase or stay the same.

As shown in the middle group of bars in figure 1, the results of our simulation indicate that median wage replacement rates for USPS beneficiaries were generally higher than those for non-USPS beneficiaries. In both cases, the wage replacement rates account for missed income growth, as they are simulated based on 2010 take-home pay. All else equal, FECA beneficiaries who would have experienced more income growth—from the time of injury through 2010—had lower wage replacement rates than did those beneficiaries who would have experienced less income growth absent their injury. In general, USPS beneficiaries missed less income growth due to their injury than did non- USPS beneficiaries. Consequentially, USPS beneficiaries had higher wage replacement rates than non-USPS beneficiaries. For example, 4 out of 5 USPS beneficiaries in our analysis would have had less than 10 percent income growth had they never been injured. In contrast, 2 out of 5 non-USPS beneficiaries would have had less than 10 percent income growth, absent an injury.

Under our simulations, both proposals increased the difference in wage replacement rates between beneficiaries with and without a dependent, increasing the magnitude and reversing the direction of the difference in median wage replacement rates, as shown in figure 2. Had we been able to account for the actual number of dependents, beneficiaries with dependents would have had lower wage replacement rates and thus the difference between median wage replacement rates would have been smaller under FECA and larger under both proposals.

For other beneficiary subgroups we examined, the proposals did not reduce wage replacement rates disproportionately to the reduction in the overall median. However, we found that under current FECA policy and both proposals, wage replacement rates for some beneficiaries, such as those who, due to injury earlier in their careers, missed out on substantial income growth, were substantially lower than the overall median. FECA was not designed to account for missed income growth and thus total- disability beneficiaries who missed substantial income growth had lower wage replacement rates—outweighing the cumulative effect of FECA’s annual cost of living adjustments—as shown in figure 3.

Years of Service Play a Key Role in the Comparison between FECA and FERS Benefits

Current Median FECA Benefit Packages Exceed 2010 FERS Benefit Packages

According to our retirement simulation comparing current FECA benefits to FERS benefits, we found that the overall median FECA benefit package (FECA benefits and TSP annuity) for both USPS and non-USPS FECA beneficiaries was greater than the current median FERS retirement benefit package (FERS annuity, TSP annuity, and Social Security). Specifically, the median FECA benefit package for non-USPS beneficiaries was 32 percent greater than the current median FERS—and 37 percent greater for USPS FECA beneficiaries. This implies that in retirement, FECA beneficiaries generally had greater income from FECA and their TSP in comparison to the FERS benefits they would have received absent an injury.

Increased Years of Service Were Associated with Increased FERS Benefits Relative to FECA Benefits for 2010 Annuitants

Although the overall median FECA benefit was substantially higher than the median FERS benefit for 2010 annuitants, the difference between the two varies based on years of service. Our simulations showed that median FECA benefit packages were consistently greater than median FERS benefit packages across varying years of service; however, the gap between the two benefits narrowed as years of service increased. This occurred in large part because FERS benefits increase substantially with additional years of service. For example, under our simulation non- USPS beneficiaries whose total federal career would have spanned less than 10 years had a median FECA benefit that was about 46 percent greater than the corresponding FERS benefit. In contrast, non-USPS beneficiaries whose total federal career would have spanned 25-29 years had a median FECA benefit that was 16 percent greater than the corresponding FERS benefit. For USPS beneficiaries, those whose total federal career would have spanned less than 10 years had a median FECA benefit that was about 65 percent greater than the corresponding FERS benefit, while beneficiaries whose total federal career would have spanned between 20 and 24 years had a median FECA benefit that was 23 percent greater than the corresponding FERS benefit.

Proposals would Roughly Equalize FECA and FERS Benefit Packages for 2010 Annuitants

Based on our simulation, we found that reducing FECA benefits once beneficiaries reach retirement age to 50 percent of wages at the time of injury would result in an overall median for the reduced FECA benefit package (reduced FECA plus the TSP) that was about 6 percent less than the median FERS benefit package for non-USPS annuitants. Under our simulation, for USPS annuitants, the reduced FECA benefit package would be approximately equal to the median 2010 FERS benefit package. This implies that under the proposed reduction, both USPS and non- USPS FECA beneficiaries would have similar income from their FECA benefit package in comparison to their foregone FERS benefit.

In addition, under our simulation reduced FECA benefits were similar or less than FERS benefits across varying years of service. However, as years of service increase, the gap between the two benefits widened. For example, we found that non-USPS beneficiaries whose total federal career would have spanned less than 10 years had a median reduced FECA benefit that was about 2 percent greater than the corresponding FERS benefit. In contrast, those non-USPS beneficiaries whose total federal career would have spanned 25-29 years had a median reduced FECA benefit that was 19 percent less than the corresponding FERS benefit. Similarly, USPS beneficiaries whose total federal career would have spanned less than 10 years had a median reduced FECA benefit that was about 13 percent greater than the corresponding FERS benefit. In contrast, USPS beneficiaries whose total federal career would have spanned 25 to 29 years had a median reduced FECA benefit that was 20 percent less than the corresponding FERS benefit.

Median Reduced FECA Benefit Packages Would Likely Be Less Than Median FERS Benefit Packages for Federal Annuitants with 30-Year Careers

Because FERS had only been in place for 26 years in 2010, our simulation did not capture the “mature” FERS benefit that an annuitant could accrue with more years of service. Consequently, it is likely that our analysis understates the potential FERS benefit when we consider 2010 benefit levels. As a result, we conducted a simulation of a “mature” FERS that was coupled with the assumption that individuals have 30-year federal careers. Based on this simulation, we found that the median current FECA benefit packages for non-USPS beneficiaries were on par or less than the median FERS benefit package—depending on the amount an individual contributes toward their TSP account for retirement. As shown on the right sides of figures 4 and 5, under the default scenario where there is no employee contribution and the employing agency contributes 1 percent to TSP, the median FECA benefit package is about 1 percent greater than the median FERS benefit package. However, under a scenario where each employee contributes 5 percent—and receives a 5 percent agency match—the median FECA benefit package is about 10 percent less than the median FERS benefit package. Similarly, our simulation showed that for USPS annuitants, the median FECA benefit package was about 13 percent greater than the median FERS benefit package under the 1 percent agency contribution scenario, and about 4 percent less than the median FERS benefit package under the 10 percent contribution scenario.

Our simulation also found that, for both non-USPS and USPS annuitants, the median reduced FECA benefit package under the proposed changes was less than the median FERS benefit package—regardless of the simulated contributions to TSP accounts. Specifically, under a scenario where there is no employee contribution—and a 1 percent contribution from the employing agency—the median reduced FECA benefit package is about 31 percent less than the median FERS benefit package for non- USPS annuitants and 22 percent less than the median FERS benefit package for USPS annuitants. Under a scenario where each employee contributes 5 percent—and receives a 5 percent agency match—the median reduced FECA benefit package is about 35 percent less than the FERS benefit package for non-USPS annuitants and about 29 percent less than the FERS benefit package for USPS annuitants.

Effects of Proposed FECA Revisions on Partial-disability Beneficiaries Depend on Post-Injury Earning Capacity and Employment Over Time We found partial-disability beneficiaries to be fundamentally different from total-disability beneficiaries, as they receive reduced benefits based on their potential to be re-employed and have work earnings. However, there is limited information available about the overall population of partial- disability beneficiaries. They do not all find work and their participation in the workforce may change over time, and their individual experiences will determine how they would fare under the proposed revisions.

Total Income Comparisons for Partial-Disability Beneficiaries Under Single- Rate Proposals Depend on the Extent to Which Each Is Reemployed

Partial-disability beneficiaries in the case studies we examined fared differently under both FECA and the proposed revisions to pre-retirement compensation, depending on the extent to which they had work earnings in addition to their FECA benefits. To consider this larger context, we conducted total income comparisons for the partial-disability case studies we examined. We defined the post-injury total income comparison to be the sum of post-injury FECA benefits and any gross earnings from employment at the time of the LWEC decision, as a percentage of pre- injury gross income.

Among the seven partial-disability case studies we examined, those beneficiaries with constructed earnings LWECs had post-injury total income comparisons that were substantially less than those with actual earnings LWECs. As shown in table 2, the beneficiaries in case studies 5- 7 had constructed earnings LWECs and had post-injury total incomes that ranged from 29 to 65 percent of their pre-injury income under current FECA policy. This range was substantially lower than the total income comparisons for the beneficiaries in case studies 1-4 with actual earnings LWECs (77-96 percent). We found that by definition, at the time of their LWEC decision, those beneficiaries with constructed earnings LWECs earned less than the income OWCP used to calculate their LWECs. Consequently, their total income comparisons—FECA benefits plus earnings, as a percentage of pre-injury wages—are necessarily lower than those with actual earnings LWECs.

We also found that beneficiaries in our case studies were affected differently by the proposed revisions to pre-retirement benefits. As expected, the beneficiaries who did not have a dependent (case studies 2, 4, and 7) experienced either slight increases or no change in their post- injury total income comparisons under the proposed revisions to pre- retirement benefits. Under both proposals, the beneficiaries in our case studies who had a dependent (case studies 1, 3, 5, and 6) experienced declines in their post-injury total income comparisons.decreases in total income comparisons were relatively small compared to the impact of not having actual earnings. For instance, the beneficiary with a constructed earnings LWEC in case study 6 experienced declines in total income comparisons of about 3 to 4 percentage points between current FECA policy and the proposals. However, the beneficiary’s total income comparisons under current FECA policy and the proposals were over 30 percentage points lower than those of the beneficiary in case study 3 who had the lowest total income comparisons of those beneficiaries with actual earnings LWECs.

Due to the importance of actual work earnings on partial-disability beneficiaries’ situations, we have previously concluded that a snapshot of post-injury total income comparisons is insufficient to predict how beneficiaries fare over the remainder of their post-injury careers. Employment at the time of OWCP’s LWEC decision does not necessarily imply stable employment over time, as beneficiaries can find, change, or lose jobs over time.

Effects of Proposals to Reduce FECA at Retirement Age Depend on Whether Partial-Disability Beneficiaries Remain on FECA or Elect OPM Retirement Benefits

We have also found that the proposals to reduce FECA benefits at retirement age would primarily affect those partial-disability beneficiaries who continue to receive FECA benefits past retirement age. As we reported in December 2012, among those partial-disability beneficiaries who stopped receiving FECA benefits in 2005-2011, 68 percent did so due to their election of OPM retirement or other benefits, such as Veterans Affairs disability benefits. At that time, Labor officials told us that because many variables affect retirement benefits, they cannot predict why partial-disability beneficiaries would potentially choose to retire instead of continuing to receive FECA benefits. Only 17 percent of partial- disability beneficiaries who stopped receiving FECA benefits were beneficiaries who died (i.e., received benefits from injury until death). These aggregate numbers do not track individual beneficiaries’ decisions to elect retirement or to continue receiving FECA benefits past retirement age, but they suggest that there is a substantial percentage of partial- disability beneficiaries that elects other benefits instead of FECA at some point post-injury.

Since those beneficiaries who elect FERS retirement would not be affected by the proposed revisions to FECA compensation at retirement age, the overall effects of the proposals on partial-disability beneficiaries should be considered in the larger context of retirement options. To do so, in our December 2012 report, we used data from the seven partial- disability case studies to simulate and compare FERS and FECA benefits and to highlight various retirement options these partial-disability beneficiaries may face. As shown in table 3, we found:

The beneficiaries in case studies 2, 4, and 6 had potential FERS benefit packages that were higher than their FECA benefits under current policy and the proposed revision—they would likely not be affected by the proposed revision.

The beneficiaries in case studies 1, 3, and 7 had potential FERS benefit packages that were lower than their FECA benefits under current policy and the proposed revision—they would likely face a reduction in FECA benefits in retirement under the proposed revision.

The beneficiary in case study 5 had a potential FERS benefit package that was lower than his FECA benefits under current policy, but higher than his benefits under the proposed FECA reduction—he would likely face a reduction in FECA benefits in retirement under the proposed revision.

Based on our prior work, we have concluded that the differences in retirement options that individual beneficiaries face stem from two key factors: (1) OWCP’s determination of their earning capacities, and (2) their total years of federal service. Partial-disability beneficiaries with greater potential for earnings from work receive relatively lower FECA benefits to account for their relatively lower loss of wage earning capacity, all else equal. In table 2, beneficiaries with: low earning capacities post-injury (case studies 1, 3, and 5) had FECA benefits that were more favorable than FERS benefits; high earning capacities post-injury (case studies 2 and 4) had FECA benefits that were less favorable than FERS benefits; and mid-range earning capacities post-injury (case studies 6 and 7) had FECA benefits whose favorability depended on their total years of federal service. Fewer years of federal service resulted in a lower FERS annuity and lower Social Security benefits attributable to federal service, all else equal.

We have also found that partial-disability beneficiaries who choose to remain on FECA past retirement age currently face lower FECA benefits in retirement as compared with total-disability beneficiaries, and would experience a reduction in benefits under the proposals. Partial-disability beneficiaries receive FECA benefits that are lower than those of otherwise identical total-disability beneficiaries to account for their potential for work earnings. As long as they work, their income is comprised of their earnings and their FECA benefits. However, once they choose to retire, partial-disability beneficiaries who choose to stay on FECA likely no longer have any work earnings and are not eligible to simultaneously receive their FERS annuity. Thus, we found that because of the way FECA benefits are currently calculated, such partial- disability beneficiaries may have less income in retirement than otherwise identical total-disability beneficiaries, and the proposals would reduce benefits in retirement without differentiating between partial and total- disability beneficiaries. The proposed reduction may serve as a long- term incentive for partial-disability beneficiaries to return to work,particularly because their initial FECA benefits are lower than those of total-disability beneficiaries.

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 federal duties and FECA benefits generally serve as the exclusive remedy for being injured on the job. Our simulations of the potential effects of proposed changes to FECA benefit levels incorporated the kinds of approaches used in the literature on assessing benefit adequacy for workers’ compensation programs, such as taking account of missed career growth. More specifically, we assessed the proposed changes by simulating the level of take-home pay or retirement benefits FECA beneficiaries would have received if they had not been injured, which provides a realistic basis for assessing how beneficiaries may be affected. However, we did not recommend any particular level of benefit adequacy. As policymakers assess proposed changes to FECA benefit levels, they will implicitly be making decisions about what constitutes an adequate level of benefits for FECA beneficiaries before and after they reach retirement age. While our analyses focused on how the median FECA beneficiary might be affected by proposed changes, it also highlighted how potential effects may vary for different subpopulations of beneficiaries, which can assist policymakers as they consider such changes to the FECA program.

This concludes my statement and I would be happy to answer any questions.

Contacts and Staff Acknowledgments

For further information regarding this testimony, please contact Andrew Sherrill at (202) 512-7215 or sherrilla@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this testimony include: Nagla’a El-Hodiri, Assistant Director; James Bennett, Jessica Botsford, Sherwin Chapman, Michael J. Collins, Melinda Cordero, Holly Dye, Michael Kniss, Gene Kuehneman, Kathy Leslie, James Rebbe, Jeff Tessin, Walter Vance, and Rebecca Woiwode.

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