Our country’s financial system is in a dire state. Congress is looking at several proposals that would cut into federal employee benefits. If these cuts are enacted, how will they affect the average federal retiree? There are many cuts being proposed, but for the content of this article I want to focus on the ones that will have a severe impact on retirement. They are the following:
- Increase the personal contribution to FERS pension from .8% to 5.4%. That is seven times more than the current personal contribution. So if you are under the FERS retirement system, you would be faced with a 5% reduction in take home pay.
- Shift more health care costs to feds and retirees. The proposal would change the Federal Employees Health Benefit Program into a premium support system. Under this plan, employees would receive a fixed subsidy to cover their insurance premiums that would grow by no more than the gross domestic product, plus one percentage point, each year. Participants would cover the remaining premium cost if their plans cost more than the subsidies provide. FEHB premiums have increased an average by 7.5% since 2003. During that same period, our Gross Domestic Product (GDP) has increased on average of 3.9%. Do you see a problem here?
- Freeze federal pay until it can be reformed. How can the average family afford higher gas and oil prices, food prices, clothing prices, etc., if their income is not keeping pace with inflation?
So how does this impact the average federal employees’ retirement outlook?
The majority of federal employees that I do retirement planning for, desire the same net income during their retirement years as they have while they are employed. While initially, for most retirees this looks achievable, once we calculate inflation, particularly healthcare, longevity, and the strong possibility of future tax rate increases, we often run into trouble. I am not saying that it is not possible to have a successful retirement, however more active planning, specifically for securing future income to keep pace with taxes and inflation needs to be done.
Now, let’s consider what could happen if the FERS personal contribution is increased from .8% to 5.4%. Will FERS employees be able to continue to meet their savings needs in the Thrift Savings Plan? We know that contributing to TSP and managing the TSP portfolio is a critical component to a FERS retiree. The impact of having to reduce one’s contribution by 5% could cause severe consequences to retirement.
Healthcare costs are putting a strain on our country, and changes will need to occur. I just want to point out the consequences to a retiree if our countries GDP growth does not keep up with healthcare premiums.
It is difficult enough to plan for an average of 6% to 7% increase in healthcare premiums during your retirement years. Now, let’s imagine having an additional cost if the healthcare premiums increased by more than the subsidy provided.
Note in the period from 2003 – 2010, this would have meant an additional 2.6% increase average annual increase. Now, I may be going a little overboard here, or I may not, but if FEHB premiums continue to increase by 7.5%, and the United States growth rate going forward, averages 4%, you will be looking at an average increase in FEHB premiums of 10% per year! (7.5% hypothetical FEHB increase, less the difference of GDP plus one, assuming a hypothetical average of 4% in GDP, the amount the employee would have to subsidize is 2.5%).
The impact of the pay freeze has many worrying how they are going to keep pace with the rising cost of living that we are experiencing. The impact of an additional increase in healthcare premiums and the struggle to fund one’s retirement, is not only causing concern among federal employees, but it is enough to keep a federal employee retirement planner up at night. At this point, I think it best to digest some of these proposals before we consider the additional impact if retiree pensions and Social Security COLAs are the next target.