Cutting the Deficit By Altering Federal Retirement Contributions

One way to reduce the gaping federal deficit: Raise “non-tax revenue” by increasing employee contributions to federal employee pension programs.

A few days ago, FedSmith published an article entitled “The Future of Your Federal Retirement Benefits.” Many readers consider their federal retirement program to be one of the biggest benefits, probably the biggest benefit, to being a career federal employee. Not surprisingly, the article generated almost 300 comments from readers, many of them expressing some degree of frustration, fear or anger at significant changes to the federal retirement program.

As with any legislative or budget proposal, it is not possible to know what will emerge from the legislative process.

In this case, President Obama’s budget proposal, and a program championed by the House Budget Committee Chairman Paul Ryan, both proposed increasing the amount of money to be contributed by federal employees toward their future retirement. There are significant differences between the two plans but either one would impact any federal employee impacted by one of the proposals.

While the proposal on increasing the amount that a future retirement under the federal program is not of widespread interest outside of the federal community, the topic is gaining more attention.

The federal government needs more money or, at least, it wants a lot more money to spend because current federal spending is driving the country deeper into debt every day—despite historically high tax revenues flowing into the nation’s Treasury. While we read soothing headlines and press releases about how the debt is going down more than it has ever gone down in a short period of time, the federal government is still hundreds of billions of dollars short of receiving what it is spending each year. In other words, the amount of new debt is not as high this year because in the past few years we have had deficits of over a trillion dollars per year but now we are only increasing the debt by a few hundred billion.

Here is a quote from the Wall Street Journal that addresses this issue of now having enough money for the federal government to match expenditures:

“When Congress faced a shortfall in highway funds last year, it turned to an unlikely source of money to help fill the gap: It raised the premiums businesses pay for an obscure federal safety-net program that backstops their workers’ pension plans.

Now, budget negotiators in both parties are again looking to premiums, user fees and other nontax revenue as they try to soften the effect of a new round of automatic federal spending cuts set to kick in at the start of the year.”

So what, you may be asking, does this have to do with the federal retirement program? Unfortunately, it is directly relevant as the government is looking for any possibility of receiving more money to cover spending. That is where the federal retirement program comes into play. The Journal lists five ways that haven been proposed to raise money to reduce the deficit. Here is the list of prime candidates based on the President’s budget proposal:

  1. $20 billion from requiring federal workers to contribute more to their pensions
  2. $2.4 billion from the disposal of surplus federal real estate
  3. $18 billion from raising airline-security fees
  4. $50 billion from raising Medicare premiums for higher-income seniors
  5. $25 billion from raising federal safety-net premiums for businesses that have defined-benefit pension plans

Keep in mind that the $20 billion saved over ten years is based on the more conservative increase proposed in the president’s budget plans. The Ryan plan would actually save $132 billion over 10 years instead of $20 billion. The plan proposed by Paul Ryan would require federal employees to increase their retirement contribution by about 5.5%. The Obama plan would increase the federal employee portion by 1.2%.

Both plans would also eliminate the supplemental retirement payments for future federal employees.

This approach of bringing more money into the federal treasury is called increasing “non-tax revenue.” In other words, the government wants more money but raising taxes is politically difficult and not attractive to elected officials with national elections coming up in 2014. The  furor over the problematic roll out of the new health care law, the taxes in this law and large increases for some Americans in their health care insurance premiums now coming into focus for those Americans who are impacted is probably also creating new political considerations for candidates currently in Congress.

The  new approach of raising non-tax revenue “seems to be rather politically attractive,” said retired Sen. Judd Gregg, a former top Republican on the Senate Budget Committee according to the Journal article.

Chances are, if there is any agreement on the budget, it is likely to include reducing some tax deductions as well as increasing “non-tax revenue.” William Hoagland, formerly an influential Republican budget aide who now works at the Bipartisan Policy Center told the Journal that a deal can be reached “that includes minor entitlement and other savings, as well as changes to federal pension programs, fees and other revenue.” (Emphasis supplied)

In short, while many in the federal community were hoping the proposals to alter the federal retirement programs would fade into obscurity, that is not likely to happen in the near future. Those who are contemplating their financial plans for the coming years will want to pay close attention to how these proposals may impact your financial future.

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