Government Could Save Billions By Reducing Federal Pay and Benefits

New CBO report analyzes deficit reduction options, including those that would change employee compensation and retirement.

Some of the major proposals floated by lawmakers and the Obama administration to reduce the pay and retirement benefits of federal employees and service members would save the government at least $265 billion over the next decade, according to a new analysis from the nonpartisan Congressional Budget Office.

CBO detailed 103 policy options for decreasing government spending and increasing revenue over the next decade in a 305-page report released on Wednesday, including several that would affect the pay, benefits and size of the federal civilian and military workforce. The office does not make policy recommendations; it provides cost estimates of legislation and federal spending projections and analyses. The latest comprehensive report on options for reducing the deficit looks at possibilities for savings across a range of areas, including defense, health care, Social Security, taxes and veterans’ benefits, as well as federal employment.

Among the options affecting federal employees and military service members, CBO looked at:

  • Reducing annual pay increases for federal employees and service members. Capping pay increases for military personnel at 0.5 percentage points below the increase in the Employment Cost Index could save $25 billion over the next decade, while reducing civilians’ across-the-board pay increase under the 1990 Federal Employees Pay Comparability Act could save $53 billion. “Under this option, the annual across-the-board increase that would be expected to occur under FEPCA would be reduced by 0.5 percentage points each year from 2015 through 2023,” the report said. CBO, however, noted that FEPCA is not always used to calculate the annual pay raise, and the president has the authority to limit the statutory increase (and has often done so in recent years), citing a national emergency or fiscal crisis. Federal civilian employees have been under a pay freeze since 2011. Between 2000 and 2010, lawmakers approved military pay raises for the average service member that exceeded the ECI by 0.5 percentage points. Between 2001 and 2012, in inflation-adjusted dollars, per capita spending on basic pay for military personnel rose by 28 percent, according to CBO. President Obama has proposed a 1 percent pay hike in 2014 for both groups.
  • Decreasing federal pensions for employees who retire beginning in January 2015. CBO estimated that switching to a high-five average salary calculation for federal civilian annuities rather than the current high-three average pay calculation, and a 60-month average instead of the current 36-month average for military retirees, would save the government $6 billion through 2023.
  • Changing the formula for cost-of-living adjustments. Lawmakers and the administration have considered a switch to a less generous formula for determining COLAs for federal and military retirees and Social Security beneficiaries to help reduce the deficit. The so-called chained Consumer Price Index would result in lower COLAs for retirees over time and also affect veterans’ benefits and disability insurance benefits. CBO estimated switching from the current formula to the chained CPI could save $162 billion over the next decade.
  • Increasing the amount that federal employees contribute to their pensions. CBO estimated that requiring civilian workers enrolled in the Federal Employees Retirement System or the Civil Service Retirement System before 2013 to contribute 1.2 percent more to their defined retirement benefit would increase revenue by $19 billion over the next decade. Several Republican lawmakers support such an increase and Obama in his fiscal 2014 budget blueprint recommended that federal employees contribute 1.2 percent more of their pay toward their pensions, phased in at 0.4 percent over the next three years. A 2012 law requires feds hired after 2012 or those with fewer than five years of previous federal service to contribute 3.1 percent toward their pensions – 2.3 percentage points more than the 0.8 percent feds in FERS put in per paycheck for their defined benefit plan.

In its analysis, CBO discussed the implications of several other deficit reduction options that would affect federal employees, military personnel and retirees including: shrinking the federal workforce through attrition, replacing some military workers with civilian employees, and introducing enrollment fees for military retirees age 65 and older covered under TRICARE for Life.

Eliminating Cabinet departments was another area CBO explored for potential long-term savings -- one that also would have a significant impact on federal workers and personnel costs. CBO broadly assessed how much the 15 Cabinet departments spend in four categories: grants and fixed charges, such as Medicare, military pensions, and vets’ health care; contractual services and supplies; personnel compensation and benefits; and acquisition of assets, including equipment and land. “Eliminating a department and transferring its programs elsewhere could yield savings in this category if total federal employment fell as a result of the transfer,” the report stated. The analysis looked in detail at possible costs and savings associated with getting rid of or transferring programs out of the departments of Commerce, Education and Energy -- the three departments most often cited for elimination by those who support the idea.

CBO published its report online the same day that Director Doug Elmendorf met publicly with the House-Senate budget conference committee to review the economic and budget outlook and answer lawmakers’ questions. At times, lawmakers pressed Elmendorf to give the committee recommendations on what they should do or to offer his views on specific policies, which he declined to do. He did, however, offer the panel a little general advice. “I think what I would say, are that big steps are better than small steps, but small steps are better than no steps at all, and no steps at all will be better than stepping backward,” Elmendorf said, closing with, “one should not make perfect the enemy of the good.”

(Image via larry1235/