BEA changed its method for recording the transactions of defined benefit pension plans from a cash accounting basis to an accrual accounting basis as part of the comprehensive revision of the national income and product accounts (NIPAs) released on July 31, 2013. This improvement reflects the most recent international guidelines for the compilation of national accounts—the System of National Accounts 2008 (2008 SNA), which recommends an accrual-based treatment of defined benefit pension plans.
Defined benefit plans provide benefits during retirement based on a formula that typically depends on an employee’s length of service and average pay among other factors. The promised benefit entitlements tend to grow in a relatively smooth manner, whereas employers’ cash contributions may be volatile or sporadic. Accrual accounting is preferred over cash accounting for compiling national accounts because it aligns production with the incomes earned from that production and records both in the same period; cash accounting, on the other hand, reflects incomes when paid, regardless of when they were earned. Thus, the accrual accounting method better reflects the relatively smooth manner in which benefits are earned by employees each period as a result of the work they perform.
The new treatment applies to all defined benefit pension plans – private, federal government, and state and local government—and this change resulted in revisions to BEA's estimates of private, federal, and state and local compensation. The directions of the revisions vary and the difference between compensation for federal and private payroll workers is narrower under the new treatment. Private, federal, and state and local employers each face different pension plan funding requirements.
For private sector plans, the Employee Retirement Income Security Act (ERISA) of 1974 includes guidelines for minimum funding rates and provides accounting incentives for the private sector to fully fund their defined benefit pension plans. However, cash contributions by private employers have tended to be fairly volatile year to year, as employers took contribution holidays when financial markets were strong and made catch up contributions when markets were weak. The revised estimates of private pension compensation from the new accrual measures tend to be smoother, though the levels are not greatly revised. For 1968-85 and for 2002-12, private pension compensation is revised down (except for 2007), while for 1986-2001, private pension compensation is revised up.
- government defined benefit pension plans were underfunded prior to the mid- 1980’s. During this time, military pension benefits were not funded through a retirement fund; rather benefits were paid through annual budget appropriations. In addition, the federal government made annual cash catch up contributions to the Civil Service Retirement Fund (CSRS) to partially amortize the unfunded liability of that pension plan. To address the underfunding of pension plans, the federal government established the Military Retirement Fund and developed a new civil service retirement system—the Federal Employee Retirement System (FERS). After the establishment of the Military Retirement Fund, the federal government began making large cash contributions to amortize the unfunded liability of the military fund, which included both unfunded liabilities for time periods before there was a fund and because the new fund is not being fully funded for new liabilities. The new civilian plan (FERS) has been funded on an accrual basis; however the federal government still pays large catch up payments for the unfunded liabilities of the legacy civilian system (CSRS).
Under BEA’s new accrual treatment for pensions, these annual catch up contributions are no longer included in compensation at the time of their payment. Instead, employer contributions for defined-benefit pensions are based on actuarial measures, which are comparable to the measures used for private plans. Federal pension compensation is revised up from 1929-1979, reflecting the accrued pension component of compensation earned by employees—despite the underfunding of plans—in those years. Beginning in 1980, federal pension compensation is revised down, because the combination of the regular cash contributions and the annual catch up contributions in those years exceeded the accrued claims to benefits.
A large number of state and local pension plans are underfunded, which means that the value of the plans’ assets is less than their accrued pension liabilities for current workers and retirees. Under BEA’s new, accrual treatment for pensions, state and local compensation is revised up for 1929-78 and for 1987-2012 , and is revised down from 1979-86.
In the event of a failure to meet the obligations of these pension plans, such as with a pension default, changes in pension liabilities and assets would be recorded in the corresponding sectorial balance sheets as a debt write-off. Specifically, the 2008 SNA recommends recording defaults as entries in the “other changes in the volume of assets” account (part of BEA's Integrated Macroeconomic Accounts.) This entry would not affect GDP: production and income would remain matched in the past periods when they were originally recorded. BEA will therefore treat defaults on pensions the same as any other default on a loan or other financial obligation.
For more information, see "Preview of the 2013 Comprehensive Revision of the National income and Product Accounts: Changes in Definitions and Presentations" in the March 2013 Survey of Current Business.