White House Budget Plan Increases Feds’ Pension Contributions

President Obama wants federal employees to contribute 1.2 percent more of their pay, phased in over the next three years, toward their pensions.

That change would result in most federal workers contributing 2 percent to their defined benefit plan under the administration’s $3.8 trillion fiscal 2014 budget proposal. The recommendation would phase in the 1.2 percent at a rate of 0.4 percent between 2014 and 2017.

Right now, most enrollees in the Federal Employees Retirement System contribute 0.8 percent of their pay to their pensions, with the government picking up 11.9 percent of the overall 12.7 percent contribution. FERS employees also contribute 6.2 percent of their pay to Social Security as well as a percentage to their Thrift Savings Plan, the government’s 401(k)-style defined contribution program. Under the president’s proposal, the contribution for employees enrolled in the older Civil Service Retirement System would increase from 7 percent to 8.2 percent over the three-year time frame.

While the percentage that agencies contribute to pensions would decrease, the actual amount of employees’ pensions would remain unchanged, according to Obama’s budget blueprint. Agencies “would pay an additional amount toward unfunded liabilities of the retirement system that would leave total agency contributions unchanged,” the proposal stated. The White House estimated that the change would save the government $20 billion during the next decade.

The budget also would eliminate the FERS Annuity Supplement for new employees. That supplement augments the retirement benefits of feds not subject to mandatory retirement who are covered under FERS and retire before age 62, or the age at which their Social Security benefits kick in.

“These changes are expected to neither negatively impact on the administration’s ability to manage its human resources, nor inhibit the government’s ability to serve the American people,” the budget document stated.

The proposals are nothing new. Obama has called for government workers to contribute more to their retirement since 2011, when he outlined a broad deficit reduction package. He also included the 1.2 percent recommended increase in employee contributions in his fiscal 2013 budget proposal as well as the elimination of the FERS Annuity Supplement for new hires. Last year, Congress passed a law that requires feds hired after 2012 or with fewer than five years of previous federal service, to contribute 3.1 percent toward their defined benefit plan -- 2.3 percent more than what most current feds put in.

One of the more controversial aspects of the president’s fiscal 2014 budget is a proposal to switch to a less generous formula for calculating retirees’ annual cost-of-living adjustments beginning in 2015. Moving to the chained Consumer Price Index, or chained CPI as it’s known in Washington-speak, is viewed by many economists as a more accurate measure of how people substitute one item for another in the face of price increases. For instance, as the theory goes, if the price of steak rises, then people will most likely buy a less expensive item, like chicken, as a substitute. The result for federal civilian and military retirees, Social Security beneficiaries and those receiving disability insurance would be lower COLAs over time; COLAs currently are determined using a formula that takes into account increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers.

The switch to the chained CPI formula long has been on the table in deficit reduction negotiations between the White House and Capitol Hill. Still, advocates for federal retirees, as well as many Democrats, are very unhappy that Obama has included it in his latest budget blueprint.

“Don’t be fooled by economists and politicians who claim that switching to the chained CPI formula for Social Security benefits, retirement annuities and disability insurance is 'painless,’ ” said Joseph Beaudoin, president of the National Active and Retired Federal Employees Association. “While the short-term reduction in benefits may be modest, the long-term reduction will be substantial.”

NARFE, and others who oppose the change, say the chained CPI does not account for higher health care costs many seniors face, or that some already are living on a fixed income and can’t afford another cut. The proposed budget “includes protections for the very elderly and others who rely on Social Security for long periods of time and only applies the change to non-means tested benefit programs,” according to the plan. Obama also has publicly pledged to protect the most vulnerable under a switch to the chained CPI.

The president’s fiscal 2014 budget includes reforms to feds’ health benefits aimed at reducing costs to employees and the government. The administration is proposing allowing employees the option to enroll in a “self plus one” coverage option, rather than just a self or family option, and expanding health benefits to the domestic partners of federal employees and new retirees. In addition, the administration wants to give the Office of Personnel Management the power to contract with “modern types of health plans rather than being limited to the current four statutorily-defined plans reflective of the 1950s insurance market.” It would also give OPM the authority to negotiate pharmacy benefits for all FEHBP program participants. Currently, health plans participating in FEHBP contract with pharmacy benefits managers, who negotiate with drug manufacturers and pharmacies on behalf of their enrollees. OPM has said that working directly with a single pharmacy benefits manager would reduce costs to beneficiaries. Overall, the administration estimates saving $8.4 billion over the next decade by overhauling FEHBP.