Perfect Storm for Federal Pay and Benefits Gains Momentum in Deficit Reduction Negotiations

With federal employees in the eye of a political storm, recommendations to increase the cost of federal benefits may be closer to reality. Here are some of the proposals any current or retired federal employee should read.

Many readers have forgotten or dismissed the Deficit Reduction Commission. President Obama established the organization with Executive Order 13531 of February 18, 2010 entitled “National Commission on Fiscal Responsibility and Reform.”

The Commission issued its report late last year (2010). There was a spate of publicity but the President essentially ignored the findings and the Congress did not implement its recommendations. Those who were paying attention probably thought it was no more than a historical footnote.

And it may have been. But the nation’s fiscal crisis is getting worse instead of better. The election last November changed the political landscape and, whether one likes the election results or not, the change in attitude on deficit reduction since Republicans took over leadership in the House of Representatives has been substantial. Deficit reduction is now back in vogue and, since Democrats have control of the White House and the Senate, the political battles are ongoing.

One development that has emerged in recent days is from the so-called “Gang of Six.” While the term sounds like a bureaucratic desire to emulate a street gang in a big city, it is a group of Senators that are trying to reach agreement between Democrats and Republicans on how to reduce the crushing federal deficit. President Obama has also just endorsed the recommendations for his own reasons.

The “Gang of Six” and Your Federal Pay and Retirement

This new activity by the “Gang of Six” is where the recommendations of the deficit commission are coming back to life.

An executive summary of the recommendations of the “Gang of Six” has been distributed and FedSmith has obtained a copy.

The very first sentence of the summary says that their plan is “consistent with the recommendations of the Bowles-Simpson fiscal commission…”

The summary is too brief to know what recommendations the Senators think should be implemented. And, we cannot know what form any final legislation will take. President Obama has spoken favorably about the Senator’s recommendations and there is some support for using the recommendations as a way to solve the debt problem.

There are a number of recommendations in the deficit commission’s recommendation that would impact federal employees. While the new report says their recommendations are “consistent with” the recommendations of the deficit commission, they will not be identical. We realize that most readers will not like these recommendations but you should know what legislation may be heading your way that would impact your financial future. So, with all the caveats we can muster, here are a few of the most significant recommendations that could impact the federal workforce.

Report Recommendations

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)
  • 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
  • Impose a three-year pay freeze on federal workers and Defense Department civilians.

Recommendations that Would Impact Federal Retirement

Here are recommendations from the report that would impact federal retirement programs.

    • 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)

Creating a More Efficient Government

Under the umbrella of adopting immediate reforms to reduce spending and make the federal government more efficient, one finds several key recommendations in the report:

  • Impose a three-year freeze on Member pay
  • Members of Congress get an automatic salary increase each year. This would be an immediate freeze on that for 3 years.
  • Reduce the size of the federal workforce through attrition.
  • On this point, the Commission recommends “doing more with less” and cutting the federal workforce by 200,000 (10 percent).
  • Reduce federal travel, printing, and vehicle budgets.
  • Eliminate all congressional earmarks

Impact On Your Retirement Annuity

No doubt, some readers are curious about how changing your retirement annuity from a “high-three” calculation to a “high-five” calculation would impact your finances.

I do not have the mathematical expertise to calculate this change. Fortunately, Robert Benson has considerably more expertise in this area. Here is his conclusion: “If the high-5 change is adopted, it appears most retiring employees will see a reduction in their annuity, compared to the current high-3 calculation. The reduction is likely to be at least 2% and possibly as much as 5%.” (See High Five vs. High Three: Is There a Difference In Your Retirement Annuity?)

Impact On Your Federal Pay

The commission recommended a three-year pay freeze. Our best guess (and it is a guess), is that this would mean a one-year extension of the existing two-year pay freeze and not a brand new three-year freeze.

While I lack the math skills to calculate the impact on federal retirement, I do not claim the expertise to calculate the impact of a three-year pay freeze on our readers either. Fortunately, John Grobe, who is an outstanding trainer on the federal retirement system, does not lack these skills.

Here is John’s analysis on this issue: “If an employee were making $100,000 at the beginning of the “freeze period,” they would still be receiving $100,000 at the end of three years. If they had received pay increases of 1.5% per year, they would have made $101,150 at the end of one year, $103,022 at the end of two years, and $104,567 at the end of three years.

Assuming that some type of pay increases resume/continue after three years, the gap of $4,567 would slowly increase as pay increases are applied. For example, if a 1.5% pay increase were granted in the fourth year, the “frozen” employee would receive $101,150 (an increase of $1,150) in year four and the “unfrozen” employee would receive $106,135 (an increase of $1,568).”

John has also made several observations about the combined impact of a pay freeze and changes to the federal retirement system. Be sure to read his article: The Financial Impact of a Salary Freeze or Retirement Computation Change On Your Future Income.

As noted above, the new report says their recommendations are “consistent with” the recommendations of the deficit commission so their recommendations are not identical – we just don’t know where the differences are. As the debt debate advances, and the latest recommendations are released in more detail, we will endeavor to keep our readers advised on the changes.

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. Follow Ralph on Twitter: @RalphSmith47