How Safe Are Your Federal Benefits? Don't Answer Too Fast

By on March 1, 2007 in Current Events with 0 Comments

Uncle Sam needs money. Where is it going to come from? A few billion in savings could come by reducing federal benefits according to the Congressional Budget Office (CBO)

There is no shortage of options. But some of these options would hit the pockets of federal employees if they were to see the light of day. The CBO has pulled together a list of options for increasing revenue and decreasing expenses. Keep in mind, these are only options. Some have been considered before and did not get very far. But, to keep up with events that could have an impact on your financial future, remember that what Congress gives, it can also take away. Here is a quick summary of some of the more significant proposals for federal employees.
Changing Method for Determining Government Share of Health Insurance Premiums

The federal government’s share of premiums for employees and annuitants (including for family coverage) is 72 percent of the weighted average premium of all plans.

An option that could save a few billion dollars is to change this system.

The CBO says using a voucher system for the FEHB program to cover the first $3,600 of premiums for individual employees or retirees or the first $8,400 for family coverage would save a ton of money. Those amounts, based on the government’s average expected contribution in 2007, would increase annually at the rate of inflation instead of the current method. According to CBO estimates current FEHB premiums will grow three times faster than inflation. This option would reduce discretionary spending (because of lower payments for current employees and their dependents) by $100 million in 2008 and by a total of $5.1 billion over five years. As an additional benefit for the budget, this would reduce mandatory spending because of lower payments for retirees by another $4.6 billion over five years.

The obvious disadvantage is that your health insurance premiums would increase.

Another Congressional option for the federal health benefits program is to reduce the federal subsidy of premiums for retirees with relatively short federal careers while preserving their ability to participate in the FEHB program. For new retirees only, the government’s share of premiums would be cut by 2 percentage points for every year of service under 20 years. Some people would retire sooner than planned to avoid the new rule but the option would reduce spending by $155 million over five years.

Probably the major disadvantage of this option is that it would mean a substantial cut in promised benefits, for retirees with short federal careers, such as the roughly 3 percent of new retirees with 10 years of service or less.

High Three to High Five

The Civil Service Retirement System (CSRS) and the Federal Employees Retirement System (FERS)—provide initial benefits (those provided before cost-of-living adjustments are applied) that are based on the average of an employee’s highest earnings over three consecutive years. In 2008, outlays for pension benefits under the two programs will be about $62.8 billion.

Changing the method of calculating this benefit from the current high three years to the highest five years would save a considerable amount of money.

How much money would be saved? initial pensions would be about 3 percent smaller for most new civilian retirees, saving the federal government $42 million in 2008 and a total of $1.2 billion over five years. The average new CSRS retiree would receive about $1,250 less in 2008 and $6,530 less over five years than under current law. By comparison, the average new FERS retiree would receive $420 less in 2006 and $2,190 less over five years.

Even changing the method of calculation to a four year average would save a considerable amount. A four-year average would be used for CSRS and FERS. Such action would yield savings of $20 million in 2008 and $580 million over five years. The average new CSRS retiree would receive $600 less in 2008 and $3,140 less over five years while the average new FERS retiree would receive $200 less in 2008 and $1,060 less over five years.

A reason for using a longer average is that it would make the federal pension benefit closer to the practice of companies in the private sector. Companies often use five-year averages to determine a employee’s base pension according to the CBO. This change would encourage federal employees to work longer in order to boost their pensions and help the government retain some of its more experienced employees.

A disadvantage of this approach is that it would reduce the benefits package more for employees in the CSRS system than for those in the FERS system. The reason is because the defined benefit package is greater under CSRS than it is under the FERS system. Also, Federal employees under FERS participate in Social Security and receive government contributions to the Thrift Savings Plan, while those employees under CSRS do not get this benefit.
$1230 Less for CSRS and $300 Less for FERS Retirees Means Big Bucks for Uncle Sam

There are other ways to save money as well. Federal retirees get an annual cost-of-living increase based on a measure of inflation. Changing how inflation is measured could bring big savings to the government.

Federal pension payments to 4.2 million retired federal military and civilian workers and their survivors will be about $104 billion in 2007.

This option proposed by CBO would base all cost-of-living adjustments for federal civilian and military retirees and veterans’ benefits on the increase in the "chained CPI", an alternative measure of inflation developed by the Bureau of Labor Statistics.

What does this mean? The Congressional Budget Office says the chained CPI is likely to grow 0.3 percentage points more slowly per year than the standard CPI. This may not sound like much of a change but 0.3 percentage points of a big number can yield a big difference.

Here are the figures that are calculated by the CBO. Mandatory outlays would go down by $332 million in 2008 and by $6.3 billion over the 2008–2012 period. On average, a CSRS retirement annuitant would receive about $1,230 less over five years than under current law, and a FERS retirement annuitant would receive about $300 less.

An argument in favor of the change, says CBO is that the current method of calculating inflation for federal retirees overstates the increase in the cost of living and that using the alternative measure would reduce federal expenses while ensuring that benefits did not fall any lower in real terms than they were when the recipients became eligible for the programs.

A major disadvantage of this approach is that that proposed measure of inflation might understate changes in the cost of living for retirees, whose expenditure patterns are different from most Americans. Limiting COLA increases could allow the benefits received by both current and future retirees to decline over time in real terms. CSRS annuitants would be hit hardest because they are more dependent on their pensions than FERS employees. Also, these employees may have stayed with CSRS on the basis of the understanding that they would enjoy the current COLA protection.

Don’t panic after reading this summary. It does not mean that all or any of these changes will be enacted. There are a large number of options that Congress could exercise to save money and most do not directly impact the federal workforce. But ignoring the proposals may not be good for your future financial health. As budget pressures increase with the aging of the baby boomer population, and the increasing responsibility for health benefits being undertaken by the federal government, some of these proposals could look attractive to Congress as the Members consider a number of unpleasant alternatives.

© 2016 Ralph R. Smith. All rights reserved. This article may not be reproduced without express written consent from Ralph R. Smith.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters onĀ federal human resources.