Federal Employees' Compensation Act:

Effects of Proposed Changes on Partial Disability Beneficiaries Depend on Employment After Injury

GAO-13-143R: Published: Dec 7, 2012. Publicly Released: Dec 7, 2012.

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What GAO Found

Compensating total disability FECA beneficiaries at the single rate of 66-2/3 percent of wages at the time of injury, regardless of the presence of dependents, produced similar results to our previous analyses of compensating them at the single rate of 70 percent. Both proposals reduced median wage replacement rates—the percentage of take-home pay replaced by FECA—and the 66-2/3 percent proposal resulted in somewhat larger reductions. Both proposals altered the relative equality in wage replacement rates between beneficiaries with and without a dependent, resulting in relatively lower median wage replacement rates for beneficiaries with a dependent. Additionally, under current FECA policy and both proposals, wage replacement rates for some beneficiaries, such as those who missed out on substantial income growth, were substantially lower than the overall median.

How partial disability beneficiaries fare under the proposed FECA revisions affecting benefits prior to, and in retirement depends on a few key factors, including their post-injury earning capacity as determined by Labor, ability to find work and have actual earnings, and total years of federal service. In our case studies of seven partial disability beneficiaries, we found that under current policy and the proposed revisions to benefits prior to retirement, beneficiaries with constructed earnings—Labor’s estimate of what a beneficiary could earn in a suitable job—had substantially lower post-injury total incomes (FECA benefits plus work earnings at the time their benefits were set) relative to their wages at injury, than did those with actual earnings. Since the workforce participation of partial disability beneficiaries can change over time, how they might fare under the proposals can also vary over their post-injury careers. With regard to the effects of the proposed reduction of FECA benefits at retirement age, the earning capacity of partial disability beneficiaries also plays a key role in determining how they may fare. In our seven case studies, beneficiaries with high earning capacities had potential FERS benefit packages that were substantially higher than both their current or reduced FECA benefit levels and thus would likely not be affected by the proposals due to their election of retirement under FERS. These beneficiaries had relatively lower FECA benefits prior to retirement than did those with low earning capacities. The beneficiaries with low earning capacities would generally be likely to choose to continue receiving FECA benefits past retirement age. Partial disability beneficiaries who choose to remain on FECA past retirement age currently receive lower benefits in retirement than otherwise identical total disability beneficiaries, and their FECA benefits would be reduced under the proposals.

Why GAO Did This Study

In 2010, the Federal Employees' Compensation Act (FECA) program paid $1.9 billion in cash benefits to federal workers who sustained injuries or illnesses while performing federal duties. The U.S. Department of Labor (Labor) administers the program and bases FECA benefits on an employee’s wages at time of injury, his or her ability to work after the injury, and whether he or she has eligible dependents. Specifically, beneficiaries unable to return to work—total disability beneficiaries—who have an eligible dependent are compensated at 75 percent of gross wages at the time of injury and those without an eligible dependent are compensated at 66-2/3 percent. Beneficiaries who Labor determines have the ability to return to work after their injury—partial disability beneficiaries—are similarly compensated at 75 percent or 66-2/3 percent of the difference between wages at the time of injury and post-injury wage earning capacity (either based on actual earnings or Labor’s estimate of what a beneficiary could earn in a suitable job—constructed earnings). FECA benefits for all beneficiaries are adjusted for inflation and are not taxed or subject to age restrictions, and thus some policymakers are concerned about the level of FECA benefits.

We recently reported on the effects of a proposal by Labor to revise FECA benefits for future total and partial disability beneficiaries by, among other things:

• setting initial FECA benefits at a single rate (70 percent of applicable wages at time of injury), regardless of whether the beneficiary has eligible dependents; and

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

After our work was under way, the Senate passed a revision to FECA similar to Labor’s proposal, with some exceptions, including setting initial FECA benefits at a different single rate (66-2/3 percent of applicable wages at time of injury), regardless of whether the beneficiary has eligible dependents.

Because our previous work focused on how the Labor proposal affected total disability beneficiaries, we were asked to answer the following questions:

(1) What would be the effects of compensating all total disability FECA beneficiaries at the single rate of 66-2/3 percent?

(2) What is known about partial disability FECA beneficiaries and how they may fare under proposed FECA revisions?

To consider the effect of compensating total disability FECA beneficiaries at the single rate of 66-2/3 percent, we used the same methods as in our prior FECA reports that analyzed Labor’s proposal for non-postal and postal beneficiaries covered under the Federal Employees Retirement System (FERS). To place our findings in context, this report presents results for the 66-2/3 percent compensation rate alongside our prior results for the 70 percent compensation rate. We conducted a simulation that compared the extent to which benefits under FECA and the proposed revision would replace a beneficiary’s pre-injury take-home pay. FECA benefits were not designed to increase at a rate comparable to pay increases an individual could have received through step increases or promotions (career growth) if he or she had never been injured. However, our analysis factors in career growth to provide a comparison between FECA benefits and the take-home pay the beneficiary could have received, absent an injury. Due to differently structured benefits and data limitations, we used different methods to analyze partial disability beneficiaries and how they may fare under proposed FECA revisions. We reviewed 7 partial disability beneficiary case files to examine how their post-injury employment outcomes varied (e.g., re-employed by the federal government, re-employed in the private sector, unemployed) and changed over time.

For more information, contact Andrew Sherrill 202-512-7215 or sherrilla@gao.gov .

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