Tax Cuts, Your Future Federal Retirement and the Federal Pay Freeze

By on December 21, 2011 in Current Events, Human Resources with 55 Comments

Some of our readers have been asking: What is the status of proposed changes to the federal retirement program and an extension of the federal employee pay freeze?

These are good questions lacking definitive answers.

The Senate passed a bill that would have extended the payroll tax cut. The bill that passed in the Senate would not have altered the federal retirement system or extended the pay freeze. (See Federal Employee Pay Freeze on Tap or Not?)

And, while some involved in the political process in Washington thought the Senate bill meant that a two-month extension of the payroll tax cut meant it would easily pass in the House, that was not the case. The House Speaker has appointed people to serve on a conference committee but the Senate Majority Leader has indicated he does not intend to call the Senate back this year.

So, in effect, the good news for federal employees is that the proposed changes to the federal retirement plan have not been passed in Congress. Another bit of good news is that the proposed extension of the federal employee pay freeze has also not passed in Congress.

But, while the short-term news is favorable, the issue is not dead. We do not know if Congress will eventually pass a bill that includes the proposed changes to the federal retirement program or not. There is a good chance that some changes will eventually be made. And, for the most part, the changes that will be made will not benefit future federal employee retirees. For example, among the proposed changes are altering the retirement system to base a retirement annuity on the five highest years of federal pay instead of the highest three years. (See House Bill Would Extend Pay Freeze, Increase Retirement Contributions and The High-Five Average Salary)

Keep in mind that the House bill included provisions that would have FERS and CSRS employees contributing 0.5 percent more to their retirement for the next three years. The bill would also establish a new retirement category referred to as “security annuity employees,” which would apply to future employees and employees with less than five years of service. In effect, this would reduce the value of future retirement benefits for these employees.

The pay and compensation system for federal employees has come under much more scrutiny in the past several years. Federal employees are generally thought to have much more job security and higher pay and benefits than most Americans. While there are some arguments against this contention, polls have demonstrated that most Americans think those in the private sector work harder, make less money, and have less job security than most federal employees.

That belief, along with the heavy involvement by federal employee unions in supporting Democrats running for office, makes the federal workforce a political target when seeking ways to cut federal spending. Chances are the unions will support Democrats in the next election anyway and it gives Republicans a chance to cut back the potential strength of the unions that have become a political opponent.

So, while there are not any significant changes that have occurred in your pay and benefits this year, and there is a good chance no action will be taken in the next few days that would change this, any current federal employee would be well advised to pay close attention to legislation changes that could alter your future retirement and your current benefits.

The number of federal employees now retiring has already gone up substantially in recent months. Chances are, this number will continue to rise as many currently employed by Uncle Sam will want to take advantage of the current retirement system on the assumption that future changes may have a negative impact on their ability to retire at a later time. 

There is a chance that the conference committee will still convene in the near future. Some of the provisions from the House bill could be brought back to life in this process or some of these provisions that would impact the federal workforce can and probably will surface in new legislation again next year.

Our advice: Stay alert for changes that will impact your financial future so that you can make an informed decision that will best serve your future interests. FedSmith will keep readers advised with updates to our site throughout each day to enable our readers to keep on top of these events as they occur. 

© 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 on federal human resources.

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