Don’t Panic! Last week, FedSmith’s Ian Smith blogged about a report from the Congressional Budget Office (CBO) that affected federal benefits and retirement. If this report was a recording, it could be called “Fed-Basher’s Greatest Hits,” because it dusted off threats to federal benefits that we’ve been hearing about for years, maybe even decades. CBO is “covering” hits from solo artists, Paul Ryan, Tom Coburn, Darrell Issa and others. Duets, such as Simpson and Bowles, are having their hits re-done by the CBO as well.
The CBO is not made up of elected representatives, so they will not have to face irate voters if their recommendations are implemented. Despite the CBO’s claim of non-partisanship, the head of the CBO is appointed by Congress. On its website, it says it does “…not make policy recommendations,” though I’m not sure what else you would call their recent report.
What do we know about all of the previous threats? We know that most of them never happened. The one notable exception is the three year pay freeze (a recommendation of Simpson- Bowles). Let’s look at other CBO recommendations (oops, I mean suggestions) that could affect federal benefits for civilian employees. In the pre-retirement seminars I deliver to federal agencies for my company, Federal Career Experts, I take time to discuss all potential threats to our benefits and what they might mean to us if implemented. I also give my thoughts about whether or not the recommendations have a realistic chance of being implemented.
Switch from a high-three to a high-five in computing federal retirements. I first heard of this when I was a 25 year old letter carrier, and I’m now eligible for Medicare and it hasn’t happened yet. I have two thoughts on this suggestion. First, I don’t think that Congress will implement it now, as they’ve chosen not to do so for the last 40 years. Second, as the change to a high-five would hit Congressional pensions as well, even if Congress were to implement it, they would grandfather in all current employees.
Reducing the annual “comparability increase” for federal employees. Puh-leeze! This recommendation is a joke – just like our annual “comparability increase” is a laugher! Since when have feds ever gotten the amount recommended by the so-called “pay agent?” Reducing a formula that is never followed makes no sense.
Reduce the size of the federal workforce through attrition. We’ve heard this before from Simpson-Bowles and Congressman Ryan. We have also seen times where the federal workforce has shrunk, most notably during the Clinton administration. Of course the CBO suggestion (remember, they say they don’t make “recommendations”) exempts roughly two-thirds of federal agencies. Also, Congress has a penchant for creating agencies in response to perceived needs – consider the Transportation Security Administration and the Consumer Financial Protection Bureau. Though Congress might give lip service to this suggestion, it would never be fully implemented.
Reduce the annual “elective deferral limit” to plans such as the TSP and lower the annual contribution to IRAs. Do away with “catch-up” contributions. In 2015 a federal employee who has attained the age of 50 (or will attain it during the year) can contribute a total of $24,000 to the TSP and $6,500 to an IRA. The CBO suggestion would change that limit to $15,500 for the TSP and $5,000 for IRAs. I must assume that this is designed to increase current tax revenue by limiting the opportunities for tax deferred savings. This will likely lead individuals who can afford to “max out” in their tax deferred account to invest in taxable accounts. In taxable accounts gains will be taxed as they are realized, but likely at the lower rate for qualified dividends and long-term capital gains. Money in qualified tax deferred plans will be taxed in the future at the (likely) higher rate for ordinary income. Not only is this recommendation short-sighted, it makes it harder for hard-working Americans to save for retirement. Not only will hard-pressed American savers oppose this, I suspect the Investment and financial planning industries would as well.
Use the so-called “chained CPI” to determine cost-of-living adjustments for Social Security and other federal inflation adjusted benefits (like our pensions). There are 64 million reasons why this won’t happen. That’s the number of Social Security recipients and they are all old enough to vote. Back in 2013 it appeared that all the forces were lined up to implement this change. The White House Budget, the House of Representatives Budget and Simpson-Bowles all called for the current method of calculating COLAs to be changed to use the chained CPI. In an appearance on “Your Turn” with Mike Causey, I called this the “kiss of death trifecta” and speculated that it would be implemented that year. I hadn’t counted on the cowardice of our elected representatives; they did nothing in this area. I bet they were counting votes; even in the safest Congressional district, an incumbent is always susceptible to a primary challenge.
In addition, changing Social Security on a piecemeal basis is a recipe for disaster. Any attempts to “save” Social Security require a holistic approach that will require shared sacrifice. Given today’s hyper-partisan environment, a holistic, bi-partisan solution seems out of reach.
Raise the full retirement age for Social Security. This has been done once before and might be done again as part of a holistic “fix” for Social Security. Decades ago the full retirement age was increased to 67 for those born in 1960 or later; the CBO would have us increase the age to age 70 for those born in 1977 or later. This is far more severe than the recommendations of Simpson-Bowles, who called for raising the age to 69 by 2075. This changes the rules late in the game for many people currently in the workforce. As this affects those who are not yet on Social Security, there are more than 64 million reasons why this won’t happen.
Reduce Social Security benefits for new beneficiaries by 15%. This would affect anyone who turns 62 in 2020 or later; even those who reach 62 in 2016 will take a hit, albeit a smaller one. This doesn’t affect me, but it is patently unfair. It consists of changing the rules late in the game. When a 56 year old individual who had developed a financial plan based on receiving unreduced Social Security in six years has to work longer or live on less, it just isn’t right. In an era where most new hires do not have access to pensions, and where retirement savings is up to the individual, cutting a lifetime, inflation adjusted source of income is unconscionable.
I started this article with the words “don’t panic.” because I feel that the CBO suggestions are unlikely to happen. As I wrote it, I found myself getting outraged about the continued assault on the benefits of, not only federal employees, but all wage-earning, hard-working Americans. I don’t want to take that tone of outrage out of this article, but I do believe that the suggestions of the committee generate more heat than light and are unlikely to go anywhere.
Several years ago, in an editorial, the Federal Times said: “Congress rarely moves quickly or makes…significant policy changes that take immediate and full effect.” So, don’t panic, don’t lose sleep, and be confident that if changes come, there will be ample time to react and make decisions on what you will do.
John Grobe’s latest book, The Answer Book on Your Federal Employee Benefits, has just been released by LRP Publications. The book is written in an easy to understand question and answer format and covers all areas of federal benefits from the perspective of an employee at various stages of their career. Order your copy at shoplrp.com.