Proposed Retirement Benefit Cuts Could Hurt TSP Contribution Levels

Employees would have less disposable income left for voluntary investments in their retirement, TSP official notes.

Officials at the 401(k)-style retirement savings plan for federal employees fear that President Trump’s proposal to increase employee contributions to the Federal Employees Retirement System will lead feds to reduce voluntary saving for retirement.

If approved by Congress, Trump’s fiscal 2018 budget would require federal workers to contribute an additional 1 percent more to FERS each year over a period of six years. The measure is one of several changes to federal employee retirement programs proposed by the Trump administration.

During the monthly meeting of the Thrift Savings Plan board earlier this week, external affairs director Kim Weaver said the increase in required contributions could cut into the disposable income workers could invest in their retirement through the TSP.

“We don’t really have a lot of specificity obviously because we don’t quite know how people will respond to the proposal,” Weaver said. “But it’s logical to assume that people have other pulls on their income that may have an impact on what they put into TSP. Not knowing what the final outcome of budget discussions are going to be, we might be able to do some modeling later on.”

Officials at the National Active and Retired Federal Employees Association said the contribution increase could exacerbate the issue of employees—particularly young and low wage workers—not saving enough early on in their careers. And it could depress recruitment and retention efforts at a time when a large portion of the federal workforce is approaching retirement eligibility.

“The Trump budget could have a disproportionate impact on lower wage workers,” NARFE Secretary-Treasurer Jon Dowie said. “Requiring employees to pay more for the same retirement annuity would inevitably mean employees will have less income available to contribute to the Thrift Savings Plan. That proposal alone could undermine the basic structure of the ‘three-legged stool’ which comprises civil service retirement: Social Security, a modest defined benefit annuity and the [TSP].”

On another matter of concern to federal retirees, Weaver said she has received assurances from the Office of Management and Budget that the Trump budget proposal would not alter the interest rate of the TSP’s government securities (G) fund, which is currently statutorily set at 2.25 percent per year. But since lawmakers have floated cutting the G Fund’s rate of return as recently as 2015, it’s something she plans to keep an eye on as the budget moves through Congress.

“What happens next in the House or Senate is a totally different process, so we’ll continue to watch very closely to see how that plays out,” Weaver said. “Obviously, we would strongly, strongly oppose any change to the G Fund interest rate.”