Worst Case Scenario: Proposed Cuts to Federal Pay and Benefits

A “Comprehensive Policy Agenda for a New Administration in 2017” proposes changes for the federal workforce that would save about $330 billion by 2026. The proposals envision cuts to federal pay and benefits in a number of ways from changes to retirement, the federal leave program, and removing federal workers. Here is a summary.

With a new president and a new Congress coming to power after elections in November, interest groups are proposing changes. Some would have a significant impact on the pay and benefits of the federal workforce if adopted.

One of these plans now emerging is the “Blueprint for Reform” written by the Heritage Foundation. One small section entitled “Office of Personnel Management” starts on page 99 and would directly impact the federal workforce in a big way.

Perhaps this could be considered the worst case scenario for the federal workforce. Adoption of all these proposals is very unlikely. But, with a volatile electorate, candidates throughout the political spectrum seeking significant change for the country, and surprising, unpredictable events already occurring in this election cycle, predicting the future is untenable.

Government spending has increased dramatically and that drives these proposals. Federal debt has risen from about $10 trillion at the end of 2008 to more than $19 trillion today. By the end of 2016, our gross debt will have increased from 68 percent of the economy to 105 percent between 2008 and 2016, according to the Office of Management and Budget.

Heritage says these proposed changes would reduce accrued federal employee compensation costs by about 10 percent between 2017–2026. The savings would total over $330 billion by 2026.

For a broader perspective, here is a comment on the Heritage report from Jessica Klement, the Legislative Director for the National Active and Retired Federal Employees Association (NARFE):

“The report starts with the assumption that federal pay and benefits are overly generous, not in line with the private-sector, and therefore need to be decreased. This assumption is wholly inaccurate. Most federal jobs lag in pay behind their private sector counterparts. This is particularly true for our nation’s federal doctors, lawyers, engineers and senior executives. Additionally, large private sector companies with which the federal government competes for talent tend to offer benefits that the federal government does not, such as paid parental leave. If anything, the federal government should start to emulate those practices, not move further away from attracting top talent to serve our nation.

“The report recycles the same false assumptions to justify policy proposals aimed at undermining federal employee pay and benefits. It ought to be ignored for this reason….[T]he proposals will be ignored because Congress will not be doing very much business between now and the election, and only dealing with must-pass initiatives during the lame duck session. The report may have an influence on legislative proposals introduced in the next Congress. Whether those proposals have any chance of passage may depend on what happens in November.”

Determining how much federal employees should be paid is controversial, and competing studies lead to dramatically different results that purport to support the overall philosophy of the organization releasing the study. The Federal Salary Council, for example, says federal employees are underpaid by an average of 35%.

Heritage and other organizations see the situation differently. A Heritage Foundation study found that federal employees are paid 22 percent higher wages, on average, than similar private-sector employees. Their latest report notes these higher wages are possible “because the federal government operates outside of market forces that keep wages in line with productivity; it does not have to compete for taxpayer dollars and has significant advantages in its ability to finance deficits.”

Proposed Changes to Pay System

Here is a summary of the changes proposed in this report to the federal pay system.

First, Heritage notes that Within Grade Increases (WIGIs) for federal employees are virtually automatic even though they are supposed to be based on performance. Congress should reduce the amount of these “virtually automatic” increases of about 3 percent to about 2 percent so that there is a 20 percent difference between steps one and 10 of each GS grade instead of the current increase of about 30 percent.

Second, Congress should take away the automatic feature of WIGIs and make it easier for managers to withhold the increases. Congress should limit requirements to develop a Performance Improvement Plan (PIP) for all employees that do not receive step increases and also limit the appeals for employees who do not receive step increases to appealing within the agency instead of to an outside third party.

Third, managers should be provided larger performance bonus budgets to reward and retain the highest-performing employees.

Proposed Changes to Federal Employee Leave System

Federal employees receive more paid leave than most private-sector employees. A federal employee with five years of service has up to 33 days of paid leave. This includes 20 vacation days and 13 sick days, and 10 paid holidays. A typical private-sector employer offers between 19 and 23 days of paid leave and fewer paid holidays for employees who has been with the company for five years.

Congress should combine federal vacation and sick leave into a paid time off (PTO) plan. This would result in 16 days for workers with fewer than three years of service and up to 27 days for federal employees who have worked longer time periods.

Alternatively, Heritage proposes that the federal government maintain separate vacation and sick leave accounts but restrict the total leave to be similar to the “upper tier of private sector employers.” This proposal would reduce the current vacation allowance from 13 days, 20 days, or 26 days (for employees with fewer than three years of service, between three and 14 years, and 15 or more, respectively) to 10 days, 15 days, and 20 days. Additionally, annual sick leave days would be reduced from 13 days to 10 with the ability to roll sick leave over from year to year.

Proposed Changes to Procedures for Firing Federal Workers

The federal government rarely fires employees and a removal action takes about 1.5 years to implement. Here are the proposed changes from Heritage to make this system faster and easier.

  • First, the probationary period should be extended from one year to three years. It is easier to remove a federal employee during a probationary period.
  • Second, allow employees to appeal their dismissal through one forum instead of up to three different forums.
  • Third, lower the standard on the burden of proof necessary to fire a federal employee and change the requirement of proving that dismissing an employee will improve an agency’s performance to showing it is reasonable to assume firing the employee will improve an agency’s performance.

Proposed Changes to the Federal Retirement System

Private-sector employers with retirement plans usually contribute between 3 percent and 5 percent of employees’ salaries to their retirement plan. The federal government contributes up to 18 percent of employees’ pay toward both the government’s defined benefit pension (FERS) and its defined contribution plan (TSP).

Heritage proposes a transition period for federal employees into a different retirement system. The transition would grandfather employees with 25 or more years of federal service, allow employees with between five and 24 years several options, and create a new system for new hires and employees with fewer than five years of service.

First, retirement benefits would not change for federal employees with 25 years or more of federal service.

Federal employees with five or more years of service but fewer than 25 years could select one of these options:

  • Remain in the FERS system and continue to receive both FERS and TSP benefits but pay a higher share of FERS costs.
  • Maintain a frozen FERS benefit with no further FERS contributions but receive an additional 3 percentage points of matching TSP contributions, for a total government-provided contribution of up to 8 percent (4 percent automatic plus up to 4 percent matching), compared to the current 5 percent max.
  • Receive a lump-sum benefit payment equal to 75 percent of the present value of accrued FERS benefits, no future FERS benefit, and higher TSP contributions (an additional 3 percent matching, up to 8 percent total).

Federal employees with less than five years of service would no longer receive FERS contributions. They would receive a lump sum benefit equal to the contributions they have made to FERS and would receive an additional 3 percent in automatic TSP contributions.

With a minimum retirement age of 57, federal employees can leave federal service and collect health and pension benefits while working for a company in the private sector. Heritage believes the government subsidy for retiree health benefits for new hires should be eliminated. Continued access to the federal health insurance plan could continue into retirement but employees would have to pay the full cost of the insurance premiums.

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