Deficit Reduction Commission Proposals Are Still Around: What Will It Mean for Your Pay and Benefits?
by Ralph Smith |
The deficit reduction commission made a number of proposals late last year, including some that would impact federal pay and benefits. President Obama has been silent on the recommendations. That may be about to change.
When the election results rolled in last November, the political landscape had changed. Voters were aware of the general nature of the fiscal problems facing the country–even though many in Congress and the administration did not want to emphasize the deficit and, instead, focused on stimulus spending, a national health care plan, and did not even get around to passing a federal budget for fiscal year 2011.
But, since the election and the advent of the new Congress, the focus has definitely shifted.
As we noted in February when the president released his proposed budget for fiscal year 2012:
“No one can predict what, if anything will happen to pay and benefits for federal employees. Last week’s events that raised the possibility of eliminating funding for within-grade increases and federal promotions did not survive the first round of the budget battle and many readers are probably breathing easier.” (See A Perfect Storm for Federal Employee Pay and Benefits)
While the President’s initial budget proposal did not cut spending in the near term, the recent negotiations on the fiscal 2011 federal budget have brought the deficit into focus. Moreover, there are now Republican proposals for cutting federal spending that have been released.
With national elections, including a presidential election, coming up in 2012, there are obviously concerns among anyone running for office about how their decisions will impact their chances to go back to Washington as an elected official.
The “perfect storm” for federal employee pay and benefits is now coming to pass.
According to the Washington Post, President Obama now plans to respond to a Republican blueprint in a speech for tackling the soaring national debt by promoting a bipartisan approach. This approach is the deficit reduction commission he appointed some time ago and which issued recommendations last December.
For federal employees, this could have signifiicant implications on your future career and short term financial situation.
When the deficit reduction commission issued its draft report in November 2010, there were numerous examples of recommendations that would save money and have an impact on the federal workforce.
Here are several examples in the report that would impact the federal workforce in varying degrees:
- Cut the federal workforce by 10% (2-for-3 replacement rate) ($13.2 billion in savings)
- Ask federal workers to contribute 1⁄2 the cost (not 1/14th) of their retirement annuity contribution.
- Switch to a more accurate measure of inflation (chained CPI) for calculating COLAs
- Raise the regular Social Security retirement age to 68 in about 2050 and to 69 in 2075
- Achieve nearly $4 trillion in deficit reduction through 2020, more than any effort in the nation’s history.Reduce the deficit to 2.3% of GDP by 2015 (2.4% excluding Social Security reform), exceeding President’s goal of primary balance (about 3% of GDP).
- Sharply reduce tax rates, abolish the alternative minimum tax, and cut backdoor spending in the tax code.
- Cap revenue at 21% of the gross domestic product and get spending below 22% and eventually to 21%.
- Ensure lasting Social Security solvency, prevent the projected 22% cuts to come in 2037, reduce elderly poverty, and distribute the burden fairly.
- Stabilize debt by 2014 and reduce debt to 60% of GDP by 2023 and 40% by 2035.
Here are recommendations that would impact the federal workforce retirement programs in the report. (See Commission Proposes “High-Three” to “High-Five” for Retirement, Pay Freeze and Changes to FEHB for Federal Employees)
REVIEW AND REFORM FEDERAL WORKFORCE RETIREMENT PROGRAMS
Create a federal workforce entitlement task force to re-evaluate civil service and military health and retirement programs and recommend savings of $70 billion over ten years.
Military and civilian pensions are both out of line with pension benefits available to the average worker in the private sector, and in some cases, out of line with each other across different categories of federal employment. The Commission recommends a federal workforce entitlement review to analyze civil service and military retirement programs in order to 1) Make program rules more consistent across similar programs, and 2) Bring both systems more in line with standard practices from the private sector. The review will have a ten-year savings target of $70 billion; recommendations of the task force would receive fast track consideration in Congress. Examples of program design reforms that the task force should consider include:
- Use the highest five years of earnings to calculate civil service pension benefits for new retirees (CSRS and FERS), rather than the highest three years prescribed under current law, to bring the benefit calculation in line with the private sector standard.
(Saves $500 million in 2015, $5 billion through 2020)
- Defer Cost of Living Adjustment (COLA) for retirees in the current system until age 62, including for civilian and military retirees who retire well before a conventional retirement age. In place of annual increases, provide a one-time catch-up adjustment at age 62 to increase the benefit to the amount that would have been payable had full COLAs been in effect.
(Saves $5 billion in 2015, $17 billion through 2020)
- Turning the Federal Employees Health Benefits Program into a defined contribution premium support program that offers federal employees a fixed subsidy that grows by no more than 1 percent over the gross domestic product each year. For federal retirees, the subsidy could pay a portion of the Medicare premium.
(Saves $2 billion in 2015, $18 billion through 2020)
Keep in mind, this report has not yet been endorsed by President Obama. However, the ideas were those of the Obama deficit commission. While he has been silent on these proposals and, if he does so in an upcoming speech as has been reported, it may be seen as a strange way to endorse the report that has already been out for months. It may be an attempt to regain the initiative as part of an election campaign strategy now that the Republican initiatives have been released, publicized and appear to be setting the tone for negotiations on the debt ceiling and the 2012 fiscal year budget discussions.
We will advise readers on the proposals impacting the federal workforce and appear to be gaining traction in Congress and the administration.
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