Budget Agreement To Increase Pension Contributions for New Employees

Pension contributions paid by federal civilian workers hired after January 1, 2014 would increase by 1.3% under the new budget agreement according to reports. It would also allow OPM to create a self-plus-one option in the federal employee health program.

The Congressional budget agreement announced Tuesday evening by Congressman Paul Ryan (R-WI) and Senator Patty Murray (D-WA) would avoid a government shutdown in January and sets spending for defense and domestic programs. While the conference committee has reached an agreement, the deal must still be approved by both Houses of Congress.

The annual discretionary federal spending target would be raised to $1.012 trillion in 2014 and $1.014 trillion in 2015 with the extra money evenly divided between defense and non-defense programs.

Under the agreement, pension contributions paid by federal civilian workers hired after January 1, 2014 will increase by 1.3%. This means that the contribution amount for new FERS employees would be 4.4% of their salaries instead of the 0.8% most federal employees now pay.

The agreement creates a three-tiered system for employee contributions to their civil service pensions. Those hired before this year pay 0.8 percent of their salary, those hired in 2013 pay 3.1 percent and those hired after January 1, 2014 would pay 4.4 percent under the budget agreement if the agreement negotiated by Ryan and Murray is finalized by Congress.

To the relief of some readers, the agreement would require smaller contributions than what had been previously proposed by Congressman Ryan and also better than what had been proposed by President Obama in his 2014 budget proposal. (See The Future of Your Federal Retirement System.)

In addition to changes to federal pensions, revenue to fund the higher federal government spending contained in the agreement would come from changes to military pension programs, and higher fees for airline passengers. An extension of long-term jobless benefits, a program favored  by Democrats, is not included.

Almost a third of the savings, about $28 billion, would come from extending the sequester two years further into the future on some mandatory spending programs, including Medicare and housing vouchers.

Also, working-age military retirees would see a change in their retirement benefits. The cost-of-living adjustment would be modified equal to inflation minus 1 percent. The changes would be phased in, with no change in the current year, a .25 percent reduction in December 2014 and a .5 percent decrease in December 2015. The change would not apply to retirees who left the service because of disability or injury. It would apply to retirees under the age of 62.

In addition, the agreement would modify the automatic, across-the-board spending cuts in the sequester by $63 billion over two years. In the 2014 fiscal year, defense would be set at a base budget of $520.5 billion and domestic programs at $491.8 billion.

And, on a positive note for many readers, the agreement would allow the Office of Personnel Management to create a “self-plus-one option” in the Federal Employees Health Benefits Program. Many readers have commented that the existing system of requiring a couple to purchase a health benefits plan at the same rate as an entire family is not reasonable. Under the “self-plus-one option” this would not be required.

Congressional Approval Still Required

According to Congressman Ryan, “This agreement provides for $63 billion in additional discretionary spending in 2014 and 2015—in return for a permanent deficit reduction of $85 billion. On net, this bill reduces the deficit by $23 billion.”

The agreement still has to be approved by both the House and the Senate. The House is expected to vote before adjourning on Friday of this week for the rest of the year.  The Senate may vote next week. There are significant reasons why some in both parties will not like the compromise that has been reached. Some Democrats do not like the provisions that would raise federal employees’ pension costs and allow supplemental unemployment insurance to expire this month. Some Republicans do not like the lack of significant cuts in long term spending and consider it a mistake to lift the caps mandated by the 2011 Budget Control Act (sequestration) that  forced the government to cut back spending in 2013.

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