The Trump administration will begin moving into agencies quickly after the inauguration to implement new priorities. Some of these changes are likely to impact the federal retirement program. If enacted, these would impact current and future federal retirees.
Many of the specific cuts to be pursued were included in the 2017 budget proposals adopted by the Republican Study Committee (RSC). The RSC budget plan would reduce federal spending by $8.6 trillion over the next decade.
Proposed Retirement Changes Impacting the Federal Workforce
Some of these cuts would come at the expense of the federal workforce. Keep in mind, none of these items are now a reality. Rather, they are items likely to be pursued in coming months. As proposals move through the legislative process, changes are very likely to occur.
This is a summary of some of the items that would impact many FedSmith readers.
From “High Three” to “High Five”
One proposal that surfaces occasionally would change the federal retirement annuity program. Currently, an employee’s annuity is calculated by using the highest three years of earnings. This is commonly referred to as the “high three.” The report recommends changing this calculation to using the highest five years of earnings instead of the high three.
Higher Retirement Contributions
Another change would require all federal employees to contribute more towards their retirement. The Middle Class Tax Relief and Job Creation Act of 2012 required new federal employees to contribute more towards their retirement. No changes were made for current federal employees. This proposal would treat all federal workers in the same way.
The Middle Class Tax Relief and Job Creation Act requires federal employees hired after January 2014 to pay 4.4 percent of their salaries into the Federal Employees Retirement System (FERS). Federal employees hired before 2013 contribute 0.8 percent and those hired in 2013 pay 3.1 percent. (See Budget Agreement To Increase Pension Contributions for New Employees)
The rationale for this is in the 2017 Blueprint for a Balanced Budget.
“Under FERS, federal workers contribute only 0.8 percent of their pay, while the taxpayers contribute 11.7 percent of employees’ salaries. A CBO report found that, on average, federal civilian employees receive 48 percent more in benefits than the average private-sector employee with similar characteristics.”
The Chained CPI and Your Future COLAs
Another proposal is to use the “chained CPI.” This refers to the way in which inflation is calculated over a period of time.
Many federal programs rely on a measure of inflation to determine benefit levels. Usually, this is done using changes in the consumer price index (CPI). Since 2002, the Bureau of Labor Statistics has published the Chained Consumer Price Index (chained CPI). This budget proposal would use the chained CPI to determine benefit levels.
While the consumer price index (CPI) deals with the rise and fall of expenses for fixed items, a “chained CPI” also considers choices people may make as a result of behavioral changes. For example, if the price of beef goes up, many people will buy chicken instead. It may be a substitute for beef that costs less. Also, when the price of a product goes up, people will probably buy less of that product.
This change would be felt by federal retirees. The chained CPI would generally provide a lower cost of living adjustment (COLA) each year. The budget proposal notes that the change would save “taxpayers $177 billion in total over the next ten years, with the majority of that amount going toward making Social Security solvent….” Some of that $177 billion is money that would pay higher retirement benefits.
A switch to the chained CPI is often considered a more accurate measure of inflation. That system will not as accurately reflect increased costs for older Americans. (See What is the Chained CPI and How Would It Impact Your Retirement?)
While the Chained CPI and changing the high three to high five are significant for federal retirees, which is the most significant? Here is a quick summary from federal retirement expert Ann Vanderslice. (See Which Has More Impact on Retirement Income: High Five or Chained CPI?)
“While federal employees tend to get anxious about the prospect of changing the current high three annuity formula to a formula that uses the high five average salary, this change would not have the greatest impact on a federal retiree’s long term income. The greater impact would result from the proposal to move to a chained CPI.
When you think that the chained COLA would impact not only federal pensions but Social Security, the proposal to move to a chained CPI is a significant proposal that could impact your future retirement income.”
The new administration has in mind a number of changes in government priorities. We do not know what priority will be given to changes in the federal retirement program. As proposals are made, this will become more apparent and an estimate of the probability of passing changes such as these will be possible.