Group Proposes $333 Billion in Cuts to Feds’ Pay and Benefits

Federal employees are overpaid because the government operates independently of market pressures, according to research from a conservative think tank, which proposed $333 billion in savings over the next decade aimed at federal personnel costs.

The Heritage Foundation proposed $26 billion in cuts specifically to federal employees’ pay, which researchers argued far outpaces that of the private sector. The rest of the savings came from proposed reforms to retirement benefits, paid leave and health care. Heritage fleshed out the details of the suggestions from a report it released earlier this month.

The federal government began overpaying its employees because “market forces do not discipline it,” Heritage said. In the private sector, the group argued, the productivity of the workers determines their individual value and salary. There is no completion for taxpayer dollars, however, reducing competition in government.

Heritage also took issue with the structure of the General Schedule pay scale, saying agencies are forced to choose a grade that “hypothetically corresponds to various private sector jobs.” The GS remains constant, however, whereas pay in the private sector ebbs and flows based on market conditions.

“In theory, the Office of Personnel Management constructs these pay scales to reflect market wages for similar private-sector jobs,” the Heritage researchers wrote, “but in practice, government wages frequently bear little resemblance to market pay.”

Perhaps most significantly, Heritage faulted the automatic nature of annual, across-the-board raises and within grade step increases. Employees’ ability to appeal a step increase denial to the Merit Systems Protection Board, or through a union grievance, leads managers to virtually never block the small raise. Heritage cited a 2009 Federal Times study that found just 0.06 percent of within-grade increases were denied.

To ease the burden on managers, Heritage suggested performance improvement plans no longer be required for employees denied a step increase. A denial should only be appealed within the agency, Heritage said, not to MSPB or through a grievance. Managers should instead have more leverage to give performance bonuses to top notch and in-demand employees.

The researchers also posited that while private sector workers receive on average 3 percent to 5 percent of their salaries in retirement benefits, federal employees receive 15 percent to 18 percent. Part of the disparity stems from feds’ defined-benefit pensions; just 18 percent of private sector workers receive such a perk, Heritage said.

New hires and workers with less than five years of experience should be shifted to a more generous defined contribution system exclusively -- with a maximum government match of 8 percent of employees’ salaries into their Thrift Savings Plan accounts -- while employees already retired, separated or with 25 years experience should be grandfathered into the current system, the think tank said. Those with between five and 25 years of federal service would be given three different options enabling them to either keep the same basic structure while contributing more toward their pensions, or to freeze or stop their defined benefit in favor of a more generous TSP contribution.

Those reforms would save $202 billion over 10 years, Heritage said.

The group suggested eliminating the government subsidy in the Federal Employees Health Benefits Program for retirees, saving $37 billion. It also said current employees have little incentive to shop for cheaper options on FEHBP because the government, rather than the individual, disproportionately reaps the benefits of the savings. To rectify that, Heritage proposed the government pay a flat amount equal to 72 percent of the average FEHBP premium and leave employees on the hook for the rest. The change would save an estimated $42 billion, though Heritage did not include that total in its cumulative savings due to potential volatility in the health care market. 

Heritage found the average private sector employee receives 21 days of paid leave, compared to 33 days for feds. It proposed reducing federal employees' vacation days to between 10 and 20, depending on experience, in addition to 10 paid sick days. The proposal would save $68 billion over 10 years.

Federal employee advocates condemned Heritage’s initial report, calling it out of touch with reality.

Jessica Klement, legislative director of the National Active and Retired Federal Employees Association, said federal pay lags behind industry in many sectors and large companies often offer benefits the government does not.

“If anything, the federal government should start to emulate those practices, not move further away from attracting top talent to serve our nation,” Klement said.

J. David Cox, president of the American Federation of Government Employees, called the report a “vicious” attack on the federal workforce.

“It is disgusting to advocate for cutting the pay for the people who care for our veterans, patrol our borders, and inspect our food, while showering the wealthy with billions in tax cuts,” Cox said.

Several reports over the last few years have found conflicting results when comparing federal pay to the private sector.