TaxRebate.org.uk

Benefits Cuts and the President’s Budget

Significant and substantial changes are on the table.

There’s been a lot of news lately about the release of President Trump’s proposed budget on May 23. Of greatest concern to the readers of this column are proposals to make significant and substantial changes to the two federal retirement programs: the Civil Service Retirement System and the Federal Employees Retirement System (including modifications in 2013 and 2014 that required larger employee contributions to FERS and reduced agency contributions).

I typically don’t write about proposed changes to benefits in my column until they become law, but since there may be more support in Congress than in years past for these changes, it is worth exploring them.

The president’s budget, which is strongly opposed by groups such as the National Active and Retired Federal Employees Association, contains the following provisions:

  • Cost-of-living allowances for current and future FERS retirees would be eliminated altogether.
  • COLAs for CSRS retirees would be reduced by 0.5 percent each year from what they would have been otherwise.
  • FERS employees would see employee contributions to their annuities increased by 1 percent each year for the next six years, without any corresponding benefit increase.
  • The FERS annuity supplement would be eliminated for new retirees starting in 2018. That change would save the federal government $5 billion by 2026.
  • Federal pensions would be based on the average of the highest five years of salary instead of the highest three. According to the Congressional Budget Office estimates, that change would save the federal government $2 billion from 2018 to 2026.

According to the Congressional Budget Office, the argument in favor of these changes is that they would better align federal practices with those in the private sector. In the private sector, CBO notes:

  • Pensions are commonly based on a five-year average of earnings.
  • Supplements are rarely provided to workers who retire before they are eligible for Social Security.
  • Many employers no longer provide health insurance benefits for retirees.
  • Many companies have shifted from lifetime annuities to defined contribution plans that require smaller contributions from employers.

But CBO also notes that the proposed changes would lessen the attractiveness of the overall compensation package provided by the federal government, hampering its ability to attract and retain a highly qualified workforce. Positions requiring professional and advanced degrees might become particularly difficult to fill, because federal workers with those qualifications already receive less compensation than their private-sector counterparts do, on average.

Another argument against the president’s proposals is that they would reduce the amount of income that federal workers have to sustain themselves in their retirement years.

In 2018, for example, using a five-year average would reduce the FERS annuities of about 55,000 new retirees by an average of roughly 2 percent. The elimination of the FERS supplement would affect a much smaller portion of new retirees, because most federal employees do not retire until after reaching age 62. However, many of the workers who did retire before 62 would see a large reduction in their income until they reached that age. That period of reduced income could exceed 10 years for employees in law enforcement and the other groups of employees who qualify for annuities at an early age.

It’s worth noting that many state employee retirement plans are designed similarly to FERS. For example, Wisconsin’s public employees retirement system uses a high-three average salary and allows retirement as early as age 55 with 30 years of service. These employees also contribute to Social Security. (By the way, if you weren’t aware, the speaker of the House, Paul Ryan, is from Wisconsin.) Nationwide, 30 percent of state retirement systems use a high-three average salary computation and 50 percent use a high-five.

Under the current budget and political circumstances, it will be an uphill battle to avoid negative changes to CSRS and FERS. But remember, the budget process is divided into five stages, and we’re only at at the beginning.

  • Stage 1: President’s budget submission.
  • Stage 2: The House and Senate hold hearings on the budget and the budget committees report resolutions on the budget submission.
  • Stage 3: Twelve annual appropriations bills are developed based on the discretionary spending levels in the budget resolution. These bills must move through hearings, markups, floor consideration and House-Senate conferences.
  • Stage 4: Consideration of reconciliation legislation if the spending and revenue levels in the budget resolution require changes in existing law.
  • Stage 5: Congress takes up numerous measures authorizing the appropriation of funds for a myriad of programs.

If you’re a federal employee or retiree, I encourage you to follow this process closely and be prepared to adjust your retirement plans if necessary. For example, if you are financially and mentally prepared to retire and the demise of the FERS retirement supplement or a change from the high-three to the high-five average salary for retirement computations are included when the budget is signed into law, then be prepared to retire before Jan. 1, 2018. Congress must realize how many federal employees are eligible to retire and how these changes would cause a mass exodus of experienced and valuable federal employees from federal service.

In the 30-plus years I have been following federal retirement benefits, Congress has occasionally made changes to such benefits. Many have been positive, such as allowing credit for unused sick leave towards the FERS retirement benefit, making the Thrift Savings Plan more flexible and improving its investment opportunities, and adding additional benefits such as the Federal Employees Dental and Vision Insurance Program and Federal Long Term Care Insurance Program. (Here’s a summary of changes from 1998 to 2012.) Now the president proposes to move in the other direction.

According to the Office of Personnel Management’s 2015 annual report on the Civil Service Retirement and Disability Fund, the CSRS and FERS retirement systems are funded in a way that can pay benefits to federal retirees for the next 75 years. Dan Jamison, author of the FERS Guide, points out that longer-term employees have already paid their share for their retirement benefits and are counting on them to support their retirement. It’s just not fair to take these benefits away from them.

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