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United States Government Accountability Office: 


Before the Subcommittee on Workforce Protections, Committee on 
Education and the Workforce, House of Representatives: 

For Release on Delivery: 
Expected at 10:00 a.m. EDT: 
Thursday, May 12, 2011: 

Federal Workers' Compensation: 

Issues Associated With Changing Benefits for Older Beneficiaries: 

Statement of Daniel Bertoni, Director:
Education, Workforce, and Income Security Issues: 


Chairman Walberg, Ranking Member Woolsey and Members of the Committee: 

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.[Footnote 1] 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.[Footnote 2] 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? 



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.[Footnote 3] 
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.[Footnote 4] 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.[Footnote 5] 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.[Footnote 6] In 1974, Congress again eliminated the age 
provision.[Footnote 7] 

Federal Retirement Systems: 

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.[Footnote 8] 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.[Footnote 9] 

Proposals to Change Benefits for Older Beneficiaries: 

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. 
[Footnote 10] 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 

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.[Footnote 11] 

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. 
[Footnote 12] 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.[Footnote 13] 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. 

Questions and Issues to Consider if Crafting FECA Changes: 

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? 

How Would Benefits Be Computed? 

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. 

Which Beneficiaries Would Be Affected? 

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. 
[Footnote 14] 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. 

What Criteria Would Initiate Changed Benefits? 

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. 

How Would Other Benefits, Such As FECA Medical Benefits Or Survivor 
Benefits, Be Treated and Administered? 

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. 

How Would Benefits, Particularly Retirement Benefits, Be Funded? 

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. 

Concluding Remarks: 

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. 

GAO Contact and Staff Acknowledgments: 

For further information about this testimony, please contact Daniel 
Bertoni at (202) 512-7215 or 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. 

[End of section] 

Related GAO Products: 

Federal Workers' Compensation: Better Data and Management Strategies 
Would Strengthen Efforts to Prevent and Address Improper Payments. 
[hyperlink,]. Washington, 
D.C.: February 26, 2008. 

Postal Service Employee Workers' Compensation Claims Not Always 
Processed Timely, but Problems Hamper Complete Measurement. 
[hyperlink,]. Washington, 
D.C.: December 20, 2002. 

Oversight of the Management of the Office of Workers' Compensation 
Programs: Are the Complaints Justified. [hyperlink,]. Washington, D.C.: July 
19, 2002. 

U.S. Postal Service: Workers' Compensation Benefits for Postal 
Employees. [hyperlink,]. 
Washington, D.C.: May 9, 2002. 

Office of Workers' Compensation Programs: Further Actions Are Needed 
to Improve Claims Review. [hyperlink,]. Washington, D.C.: May 9, 

Federal Employees' Compensation Act: Percentages of Take-Home Pay 
Replaced by Compensation Benefits. [hyperlink,]. Washington, D.C.: August 
17, 1998. 

Federal Employees' Compensation Act: Issues Associated With Changing 
Benefits for Older Beneficiaries. [hyperlink,]. Washington, D.C.: August 
14, 1996. 

Workers' Compensation: Selected Comparisons of Federal and State Laws. 
[hyperlink,]. Washington, D.C.: 
April 3, 1996. 

Federal Employees' Compensation Act: Redefining Continuation of Pay 
Could Result in Additional Refunds to the Government. [hyperlink,]. June 8, 1995. 

[End of section] 


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

[2] GAO, Federal Employees' Compensation Act: Issues Associated With 
Changing Benefits for Older Beneficiaries, [hyperlink, (Washington, D.C.: Aug. 
14, 1996). 

[3] Employees eligible for FECA benefits could also be eligible for 
retirement disability benefits from the Office of Personnel Management 
or Social Security Disability Insurance benefits from the Social 
Security Administration. Depending on which benefits employees are 
entitled to, employees might have to make an election between them. In 
many cases in which individuals receive benefits from different 
programs simultaneously, one benefit would likely be offset against 
the other. 

[4] The maximum monthly FECA compensation payment cannot exceed 75 
percent of the basic monthly pay for a GS-15, step 10 employee ($129, 
517 per year as of Jan. 2, 2011). In general, OWCP continues to pay 
claimants the difference between their current salary and the salary 
they were earning at the time of their injury for as long as this 
difference exists and their medical work restrictions remains the 
same. (FECA benefits are indexed to the cost of living.) OWCP would 
not continue to pay this difference for claimants who quit their job 
without good cause (for example, if they quit because they did not 
like their work hours). 

[5] 39 Stat. 742. 

[6] 63 Stat. 854. 

[7] Public Law No. 93-416. 88 Stat. 1143. According to Senate Report 
93-1081, the Committee on Labor and Public Welfare stated that (1) the 
provision requiring the review of compensation was an unnecessary 
burden on both the injured employees and the Secretary of Labor (who 
had the authority to conduct the review); (2) age 70 had no bearing on 
one's entitlement to benefits; and (3) such a provision was 
discriminatory. FECA currently does not include a provision to change 
benefits based on retirement age. 

[8] Under CSRS, a worker with at least 30 years of service can retire 
at the age of 55; a worker with at least 20 years of service can 
retire at the age of 60; and a worker with 5 or more years of service 
can retire at the age of 62. The FERS minimum retirement age for an 
employee with 30 or more years of service is 55 for workers born 
before 1948. A worker who has reached the minimum retirement age and 
has completed at least 30 years of service can retire with an 
immediate, unreduced annuity. A worker with 20 or more years of 
service can retire with an unreduced annuity at age 60, and a worker 
with at least 5 years of service can retire at age 62 with an 
unreduced annuity. 

[9] Pub. L. No. 108-92, 117 Stat. 1160 (2003). 

[10] The replacement rate for a federal worker who retires with 30 
years of service under CSRS is 56.25 percent. FERS accrual rates are 
lower than the accrual rates under CSRS because employees under FERS 
pay Social Security payroll taxes and earn Social Security retirement 
benefits. Estimating replacement rates under FERS is complicated by 
the fact that income from two of its components--Social Security and 
the TSP--will vary depending on the individual's work history, 
contributions to the TSP, and the investment performance of his or her 
TSP account. 

[11] Federal Employees' Compensation Reform Act of 2011, S. 261, 112TH 
Cong. (2011). 

[12] 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 

[13] Some argued that changing benefits for older beneficiaries 
violates protections against age discrimination contained in federal 
law by forcing them into accepting retirement benefits or a reduced 
annuity at a certain age. 

[14] One conversion decision concerns whether to exempt injured 
workers who are ineligible for federal retirement benefits. Ineligible 
workers include, for instance, those without 5 years of federal 
service under CSRS, those who have withdrawn retirement contributions, 
temporary workers, and state and local police covered under special 
FECA provisions. 

[End of section] 

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