Federal Retirement Contributions and Pension Calculations: More Changes Coming?

Will the amount a federal employee must contribute to a future pension go up in the near future? Will the computation for calculating the amount of the pension contribution change from a “high three” to a “high five”?

No one knows with any certainty what will emerge from Congress on these issues. But, with the massive federal deficit that is still increasing by hundreds of billions per year, the bruising budget battles looming in Congress in the near future, and the wide divide between Republicans that generally want to reduce the deficit and decrease government spending and Democrats that generally want to increase spending and continue deficit spending, anything is possible.

For Fiscal Year 2016 (October 1, 2015 – September 30, 2016) the  Federal budget deficit will be about $474 billion. The deficit exists because federal spending, budgeted at $about $4 trillion, is higher than projected government revenue of about $3.525 trillion. While political leaders like to tout that the current deficit is about a third of the record budget deficit of $1.4 trillion in fiscal year 2009, the reality is that the federal red ink in the budget is still growing fast despite record government revenue. With the current federal debt standing at about $17.8 trillion, the growing federal deficit will likely be looming large in budget negotiations.

Some readers will recall the Bipartisan Budget Act of 2013. This law requires federal employees hired after January 2014 to pay 4.4 percent of their salaries into the Federal Employees Retirement System (FERS). Federal employees hired before 2013 contribute 0.8 percent and those hired in 2013 pay 3.1 percent. (See Budget Agreement To Increase Pension Contributions for New Employees)

And, more recently, the Republican Budget for 2016 would also increase retirement contributions and change the computation for annuity payments from a “high three” to a “high five”. (See GOP Budget Calls for Increased Retirement Contributions)

The language in the 2016 budget proposal states that: “In keeping with a recommendation from the National Commission on Fiscal Responsibility and Reform, this budget calls for Federal employees—including Members of Congress and congressional staff—to make greater contributions toward their own retirement.”

While the deficit commission created by President Obama turned out to be political theater rather than a significant effort to balance the budget, there were substantive proposals in the Commission’s report that are still around and may come back to life during budget negotiations this time around. To refresh your memory, here are the highlights of these recommendations:

  • Freeze federal salaries, bonuses, and other compensation at non-Defense agencies for three years
  • Freeze federal salaries, bonuses, and other compensation at the Department of Defense for three years
  • Cut the federal workforce by 10% (2-for-3 replacement rate)
  • Use highest 5 years to calculate civil service pensions
  • Ask federal workers to contribute 1/2 the cost (not 1/14th) of their retirement annuity contribution
  • Reform COLA payments for civilian & military early retirees to adopt a “more accurate measure of savings” to achieve savings
  • 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

High Three vs. High Five: What Does That Mean?

For many federal employees, the biggest change would be changing retirement calculations from a high three to a high five calculation.

Your high-three average salary  is the “largest annual rate resulting from averaging an employee’s rates of basic pay in effect over any period of 3 consecutive years of creditable civilian service, with each rate weighted by the length of time it was in effect.”  (See How is My “High-3 Average Pay” Calculated?) Changing this formula would modify this to the high-five average instead of the high-three average salary.

The change would, in effect, reduce the retirement payment received by most federal employees. There are too many differences in individual situations to know how everyone would be impacted. Author Robert Benson calculated that the difference for most people would be a reduction between 2% and 5%. (See High Five vs. High Three: Is There a Difference In Your Retirement Annuity?)

Image of Congressman Bruce Westerman (R-AR)

Congressman Bruce Westerman (R-AR)

Moreover, legislation has been introduced in Congress this year in a separate bill to change the retirement calculations from a high three to a high five effective in January 2017. This bill does not have a significant chance of passage but, in the budget negotiations that will presumably lead to the federal budget for the next fiscal year, and the Republican budget proposal seeking an increase to federal retirement contributions, it would not be a major surprise to see an increase in retirement contributions on the horizon. Congressman Bruce Westerman (R-AR) wrote that “This bill would simply change the formula for determining pension benefits for civilian federal employees from the best-earning three years to the best-earning five years of service. The bill ensures that the program employees of the federal government have paid into for their careers is available in retirement and sustainable for future generations.” The provisions of the bill would save $3.1 billion over 10 years according to the Congressional Budget Office.

As one would expect, federal employee unions and organizations such as the National Active and Retired Federal Employee Association (NARFE) will be lobbying to prevent changes to the federal retirement system. As one example of concern among these organizations, Richard Thissen, president of NARFE called the Republican budget “a direct attack on effective government that hits federal employees hard and threatens the retirement security of every federal employee….[T]he budget sends a powerful message to federal employees and to taxpayers that government workers do not matter, and that the federal government is an employer of last resort.”

The National Treasury Employees Union (NTEU) writes that the proposals to increase pension contributions and changing annuity calculations “equates to a pay cut for federal workers. Pension contributions for newer employees have already been increased twice in just two years. In recent years, federal workers have done more than their fair share to reduce the deficit by contributing $159 billion toward budget savings. Once again, federal employees are being targeted disproportionately by those who do not value and respect what they do,” according to NTEU President Colleen Kelly.

Federal employees, particularly those planning for retirement in the near future, should pay close attention to these issues that will play out in Congress in the next several months.

© 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.