Substantial Cuts to Federal Employee Benefits Proposed in FY 2019 Budget

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By on February 12, 2018 in Pay & Benefits, Retirement with 0 Comments

Scissors cutting a stack of dollar bills depicting pay/benefits cuts

The White House released its fiscal year 2019 budget proposal today. As expected, it contains specific proposals that would impact federal employees. One of the accompanying documents was entitled “Major Savings and Reforms” that outlined specific changes to federal employee benefits.

Reductions to Federal Retirement Benefits

Perhaps the most significant changes would be to federal retirement benefits. Many of these proposals are not new and have been floated in various budget proposals before.

Eliminate COLAs

Cost of living adjustments would be eliminated for retirees under the Federal Employees Retirement System (FERS) and reduce them by 0.5% for retired federal employees under the Civil Service Retirement System (CSRS).

The budget proposal notes that this would bring compensation for federal employees more in line with the private sector. It adds, “FERS and CSRS COLAs for annuitants are currently determined based on statutory formulas tied to the Consumer Price Index. However, FERS annuitants are somewhat protected from economic effects, because their retirement packages include Social Security benefits and TSP, in addition to the FERS annuity…”

Other Proposed Changes

  • The FERS Special Retirement Supplement would be eliminated for those employees who retire before Social Security eligibility age.
  • Annuities would be calculated based on a high-5 instead of a high-3 as is done currently.
  • The G Fund interest rate would be reduced to base the yield on a short-term T-bill rate instead of the current rate (an average of medium and long term Treasury bond rates).

Justification

The budget proposal says this about these proposed changes:

The employee compensation landscape continues to evolve. Private sector employers provide a smaller share of compensation in the form of retirement benefits than does the Federal Government. Recent decades have seen a dramatic shift by private employers away from defined benefit retirement programs. The Federal Government, in contrast, provides a much greater share of its employees’ compensation in the form of retirement benefits—including pension benefits and post-retirement health care benefits. The provisions of this proposal would bring Federal retirement benefits more in line with the private sector, while reducing their long-term costs.

The budget proposal also adds some additional detail justifying the proposed changes.

For eliminating the FERS Special Retirement Supplement, it notes that this is a unique benefit provided to federal workers. “When private sector employees retire before Social Security eligibility age, no such supplement is provided. This proposal would eliminate this “extra” benefit, which is not typically provided in private sector annuity plans,” states the proposal.

The logic behind changing the G Fund interest rate is much the same. The budget proposal states that is one only available to federal employees, and the interest rate is higher because it gets “a medium-term rate of return on what is essentially a short-term security. Basing the yield on a short-term T-bill rate instead of the current rate (an average of medium and long term Treasury bond rates) would reduce both the projected rate of return to investors and the cost of the fund to the Treasury.”

Raise Employee Portion of FERS Retirement Contributions

Another proposal from the FY 2019 budget blueprint would increase the employee share of contributions to federal employees under FERS. Specifically, it would raise the employee contributions to 50% of cost, but phase it in over several years to mitigate the impact. For certain categories of federal employees, such as law enforcement and firefighting, employee contributions would increase, but the government would continue to pay a higher share of the normal cost.

Justification

As to the reasoning behind this change, the budget report cites a 2017 Congressional Budget Office report which notes that federal employees are, on average, paid 17% more than their private sector counterparts when factoring in both pay and benefits. The bulk of this is due to the retirement benefits offered to the federal workforce, so this would bring this benefit more in line with that of the private sector.

“As the CBO study shows, in comparison to the private sector, the Federal Government continues to offer a very generous package of retirement benefits, even when controlling for certain characteristics of workers. At large private sector firms, only approximately 35 percent of workers had access to a combination of defined benefit and defined contribution programs,” reads the report.

An added benefit according to the budget blueprint is that the change would “generally equalize” the percentage of salary going towards retirement for both new and existing FERS employees. “At present, newer cohorts of employees pay a higher percentage than do those with greater seniority,” notes the report.

Changing the Government’s FEHB Contribution Rates

A final proposal of direct relevance to federal workers would change the government’s contribution rate to the Federal Employees Health Benefits (FEHB) program by basing it on a plan’s score from the FEHB Program Plan Performance Assessment.

“Currently all FEHB carriers participate in the assessment, which includes 19 measures of health outcomes, quality, and efficiency. Under this proposal, the Government contribution would range between 65-75 percent depending on a plan’s performance. This proposal would encourage enrollment in high-performing health plans,” says the proposal.

The idea behind this proposal is to reduce health care costs. It states:

The Government contribution to premiums is currently set in statute at 72 percent of the weighted average of all plan premiums, not to exceed 75 percent of any given plan’s premium. Under the current structure, enrollees have few incentives to choose less expensive, higher value plans. This proposal would incentivize enrollees to select high-performing, high-value plans by making them more affordable. The proposal would also provide carriers with greater incentive to compete on price and quality, help driving down overall program costs.

Summary

Many of these changes are not new. Some of them, in fact, were included in the Trump administration’s FY 2018 budget proposal. Some date back even further, such as the proposal to cut G Fund interest rates.

None of them have been enacted thus far as it would require new legislation from Congress to enact any of these changes. The budget simply outlines the administration’s priorities and overall philosophy as to the role of government.

Budget 2019: Major Savings and Reforms by FedSmith Inc. on Scribd

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About the Author

Ian Smith is one of the co-founders of FedSmith.com. He enjoys writing about current topics that affect the federal workforce.

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