We published an article some time ago referring to “The Perfect Storm” for federal employee pay and benefits. Despite the pay freeze, furloughs, and a government shutdown storm, do not be fooled into thinking that the storm has passed. It hasn’t passed and the biggest hit may be yet to come.
The federal government is spending much more money every year than it receives in revenue. This is true even though revenue to the government is hitting new highs. In effect, because we are spending so much more than we have available to spend, the government borrows a great deal of money each year to cover the amount being spent. The result, eventually, is a decrease in our standard of living. The purchasing power of the American dollar goes down and more money from of the federal budget is spent on interest payments each year despite historically low interest rates and efforts by the Federal Reserve to keep interest rates artificially low. The eventual result is that cuts will be made to federal spending—either through actual budget cuts or by a decline in purchasing power.
We are now seeing proposals that would impact the current and future retirement income of federal employees. In the past, as with a federal pay freeze, proposals that would negatively impact federal pay and benefits would not have a realistic chance of passing in Congress. However, as with the pay freeze federal employees have experienced in recent years, other proposals impacting federal benefits are now under serious consideration.
Proposals for Changing the Federal Retirement System
One of the most important benefits to federal employees is the federal retirement system. Federal employees, whether under CSRS or the newer FERS system have access to a retirement system that is one of the more generous systems available to American workers. That does not mean that there are not some systems that are better, as some readers like to point out, but it is among the best retirement systems around.
So, to alter this retirement system would be a significant change for many of our readers.
With that in mind, here is what is now under consideration.
Separate proposals being offered by House Budget Committee Chairman Paul Ryan and President Barack Obama could save the government money—up to $132 billion over 10 years under the Ryan proposal. Keep in mind that if a proposal regarding federal benefits is going to save the government money, chances are it will amount to a reduction in benefits. Note that the proposal from President Obama and Congressman Ryan both contemplate an increase by a federal employees in the amount they pay toward their future retirement.
The plan proposed by Paul Ryan (R-WI) would require federal employees to increase their retirement contribution by about 5.5%. The plan would also eliminate the supplemental retirement payments for future federal employees.
The Obama plan, outlined in his 2014 budget proposal, also calls for increased retirement contributions by federal employees but the increase would increase the federal employee portion by 1.2 percentage points. The Obama proposal also would end the supplemental retirement payments for future federal employees. The Obama proposal would only save about $20 billion over a 10 year period.
Federal employees who were hired before 1984 are under the CSRS system and they now contribute about 7 percent of their salary to their retirement plan. The government contribution is about 19 percent. CSRS employees do not pay Social Security taxes or collect Social Security benefits.
Employees hired after 1984 are under the FERS system. Uncle Sam government contributes 11.9 percent and employees contribute 0.8 percent. These federal employees also pay about 6.2 percent of their salary (up to $113,700) toward future Social Security benefits. In addition, the Thrift Savings Plan can provide a substantial portion of an employee’s retirement income if the employee contributes and takes advantage of the matching contribution from the federal government. (See FERS and Your Future Retirement: How Much Will You Receive After Retirement? for more information about FERS retirement income.)
Certainly many readers, in agreement with federal employee unions, will argue that cuts to the federal retirement system would be unfair after the recent furloughs and the pay freeze imposed on the federal workforce.
The “Chained CPI” is also under consideration. The result of moving to this method of calculating the retirement cost of living increase for federal retirees would be to reduce the annual increase.
While this is not a new idea, the idea is gaining support. The president’s budget proposal now requests a chained CPI. His proposal follows a similar proposal by the House Republican Study Committee to adopt the chained CPI. With support in both parties for the measure, we can assume there is a possibility that this proposal has an increased possibility of becoming a reality.
While the usual consumer price index (CPI) deals with the rise and fall in fixed items, a “chained CPI” also takes into account the choices people may make as a result of changes in their behavior. For example, if the price of beef goes up, many people will buy chicken instead because it may be a substitute that costs less. Also, when the price of a product goes up, people will probably buy less of that product. The chained CPI takes this into account, presumably on the theory that you will survive just as well on chicken as you will on beef so do not require a greater cost of living increase.
The chain weighted CPI incorporates changes in both the quantities and prices of products. When it comes to calculating costs for multibillion dollar programs like Social Security, a chained CPI is likely to mean that benefit increases do not rise as much. Over time, benefits, payments, and pensions that are adjusted with CPI calculations could all fare differently under chained CPI rules. (See The “Chained CPI” and Your Federal Retirement Package)
Impact of Sequester
As most people are aware, the federal debt is rapidly increasing every year and now in excess of $17 trillion. Because of concern about the debt, along with disagreements about how to allocate the huge amount spent by the federal government each year, an agreement reached in 2011 resulted in future sequestration to control federal spending if no other budget agreement was reached. The 2013 sequester that received so much press coverage this year, and the subject of numerous talking points from both political parties, has not disappeared.
In fact, for those who may not have been paying attention, another round of the sequester cuts are set to occur starting in January 2014.
This year, sequestration reduced spending by $85 billion from domestic and military programs, lowering spending from $1.043 trillion to $986 billion. In January 2014, the $1.058 trillion in discretionary spending set by law in 2011 will drop to $967 billion (a drop of about $109 billion) unless there is a budget agreement of some kind reached in Congress. There is no agreement now between the two Houses of Congress on whether or how to cut federal spending. The plan the House has outlined would bring discretionary spending down to $967 billion for the year and avoid further cuts in the budget through the sequestration process. The Senate’s plan calls for considerably more federal spending than the House plan ($1.058 trillion limit on discretionary spending but with more money going to the Department of Defense than the Budget Control Act would allow to avoid sequestration).
There is no way of knowing how the budget negotiations in Congress will play out. One possibility is that there will not be any agreement and the sequestration cuts will take place automatically if both parties continue to pursue their current positions on the budget. If any agreement is reached, the federal pay and retirement package could certainly be part of that agreement and, with proposals from both parties contemplating some increase in budget contributions, any agreement could reflect changes to employee contributions and the ultimate retirement received by retirees in the future.
House Budget Committee Chairman Ryan will play a significant role in the budget negotiations. He was quoted as stating: “If this conference is used as an excuse to raise taxes, then I fear we will not be successful. We’ll take the spending cuts we have if that’s all it’s going to be.”
The Democrats, on the other hand, prefer to raise additional revenue through more tax increases.
In effect, there is wide disagreement between the parties as to how to proceed leaving the entire budget for the current fiscal year up in the air. That leaves open the possibility that sequestration, which was once thought to be so unpalatable it would force a budget agreement, may again be implemented.