They Want Me to Pay Seven Times More Toward My Retirement?

on April 8, 2011 with

[S]ince the proposed path to prosperity asks federal employees to contribute 1/2 of their defined benefit, from 0.8 percent of payroll, has anyone figured what percent of payroll that would entail? The effect of doubling to 1.6% of payroll would be significantly different than requiring employees to contribute, say, 16% of payroll. So what does the 1/2 of defined benefit work out to in terms of actual contribution? You could do a real service by providing that info.

This topic has been given little attention. In their draft report last November, the National Commission on Fiscal Responsibility and Reform really did make this request:

Ask federal workers to contribute ½ the cost (not 1/14th)

The commission noted this change would save \$4 billion in 2015, and \$51 billion by 2020.

So, how much are we talking about in terms of actual contribution? Let’s do an example.

• An employee’s salary is \$74,000.
• This provides him with \$2,836, in gross pay, every two weeks. His current contribution of 0.8% results in \$22.68 being withheld from his check.
• If \$22.68 is 1/14th of the cost of his annuity, then 7/14th , or one half, would be seven times more, or (7 * 22.68).
• This works out to \$158.76, or 5.6%,  per pay period.

If the percent withheld were simply doubled, then the new 1.6% withholding would be \$45.37, but this is not what the commission proposed. They would like for feds to “…contribute ½ the cost.” If my arithmetic is correct, this means each employee must pay seven times more!

That’s the bad news. In the final draft of their report, released in December, the commission changed their verbiage to:

Adjust the ratio of employer/employee contributions to federal employee pension plans to equalize contributions.(recommendation 4.1, page 46)

Did someone see that the increase was seven fold? Did they shy away from repeating this, due to the negative impact? Did they see the folly of asking employees to voluntarily accede to such a huge increase?

This is just my opinion, but I believe that this proposal, if enacted, combined with the cost-cutting high-five instead of high-three, will make the FERS pension so unattractive, employees will seek ways to opt out. One way to opt out is to resign.

(The author developed the benefits software at fedbens.us.)