Frequently Asked Questions

As an employer, the Federal Government funds retirement programs for its military and civilian employees. Uniformed personnel of the Department of Defense are covered by the Military Retirement Fund. Most other Federal employees are covered by the Civil Service Retirement and Disability Fund, consisting of two retirement systems: the Civil Service Retirement System (CSRS) and the Federal Employees’ Retirement System (FERS).

The retirement funds have three sources of income:

1. Routine payroll payments that cover the accruing costs of the future retirement benefits being earned by today’s workers;
2. Interest on investments;
3. Payments from the general treasury to amortize the unfunded liabilities of the funds. (Unfunded liabilities result from earned benefits for all retirees and current employees who had earned benefits before the fund was established. Unfunded liabilities also result from any changes to benefits that result from new statutes, such as extensions of retirement benefits or pay raises.

BEA records the routine employer payroll payments and the payments to amortize unfunded liabilities for these two funds as employer contributions for employee pension and insurance funds, which is included in compensation of employees. In the calculation of GDP, the Federal sector is measured based on the costs incurred in production, including Federal compensation of employees. Thus, these payments are included in both GDP and gross domestic income (GDI). Interest paid to these funds is recorded as Federal interest paid to persons.

The payments to amortize the unfunded liabilities are paid once a year. The payment to the Civil Service Retirement and Disability Fund occurs in September. The payment to the Military Retirement Fund occurs in October. In the national income and product account estimates, these payments are smoothed across the calendar year. Changes in these payments from one year to the next will cause a level change in the first quarter of the year. Data from the most recent Federal Budget of the United States allows BEA to estimate the annual payment prior to the actual outlay.

For other trust funds that were created in recent years, BEA records payments to amortize unfunded liabilities as capital transfers to persons. Payments to amortize an unfunded liability reflect liabilities associated with work performed in the past, so they have no relationship to current production. Capital transfers have no impact on GDP or GDI. For example, BEA records payments to amortize the unfunded liabilities of the Department of Defense Medicare-Eligible Retiree Health Care Fund (formerly known as the Uniformed Services Retiree Health Care Fund) established in 2002 and of the Postal Service Retiree Health Benefits Fund established in 2006 as capital transfers to persons. In the future, BEA may consider changing the treatment of the payments to amortize the unfunded liabilities of the Military and Civil Service retirement funds.

In August 2007, the Department of Defense Board of Actuaries approved a new amortization schedule for the Military Retirement Fund. As a result, the October 2007 annual payment to amortize the unfunded liability was $19.2 billion higher than the payment shown in the FY 2008 budget. Without a change in the amortization schedule, the Board of Actuaries reported that the October 2007 payment would have been $3.2 billion higher than that reported in the FY 2008 Budget. Consistent with the treatment of other new payments to trust funds to amortize unfunded liabilities (as described above), BEA will record the difference of $16.0 billion ($19.2 billion minus $3.2 billion) resulting from the new amortization schedule as a capital transfer to persons. As a result, the additional $16 billion in the October 2007 payment will be excluded from employer contributions for employee pension and insurance funds, compensation of employees, GDI, and GDP.