Details Revealed on Proposed Benefits Cuts

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By on March 18, 2019 in Pay & Benefits, Retirement with 0 Comments

Vertical stacks of coins that get smaller as they go from left to right with the letters 'pension' sitting on top of the stacks depicting a shrinking pension or annuity/benefits cuts

The FY 2020 White House budget proposal put forth a number of suggested cuts to federal employees’ benefits as well as a proposed pay freeze for 2020. Many of the benefits cuts were just line items found within the budget proposal with no details. However, these details have been now published by the Office of Management and Budget.

Why are the Cuts Being Proposed?

Many federal employees may wonder what the logic is behind these proposed reductions to their benefits. The document published today explains that federal workers’ benefits have become overly generous with what is generally available in the private sector, so it is an effort to bring them more in line:

A Congressional Budget Office (CBO) report issued in April 2017 found that, based on observable characteristics, Federal employees on average received a combined 17 percent higher wage and benefits package than the private sector average over the 2011-2015 period. The difference is overwhelmingly on the benefits side. CBO found that Federal employees receive on average 47 percent higher benefits and 3 percent higher wages than counterparts in the private sector. In CBO’s analysis, these differences reflect higher Federal compensation paid to individuals with a bachelor’s degree or less, with Federal employees with professional degrees undercompensated relative to private sector peers. (emphasis added)

For details on the CBO report, see Federal Employees: Overpaid or Underpaid?.

What Cuts are Being Proposed?

Many of these reductions to benefits have been proposed in past budget blueprints. To date, none have been enacted, but the 2020 budget proposal notes that they are being put forth again for the reasons mentioned above.

Paying More for FERS Benefits

Federal employees under the Federal Employee Retirement System (FERS) would contribute more to to their annuity benefits “so that employees and their employing agency pay an equal share of the employee’s annuity cost.” The change would be phased in at a 1% increase each year.

Also, cost of living adjustments (COLA) would be reduced or eliminated for existing and future federal retirees, and the Special Retirement Supplement would be eliminated for those federal employees who retire before their Social Security eligibility age.

A change would be made from a high-3 to a high-5 for annuity calculations which the budget says is “a common private sector practice.”

Reducing the G Fund Interest Rate

The G Fund interest rate would be modified so it is instead based on a short-term treasury bill rate rather than the current medium term rate. “G fund investors benefit from receiving a medium-term Treasury bond rate of return on what is essentially a short-term security,” says the budget proposal.

New Proposals

Eliminate the Defined Benefit Annuity for Term Employees

One new proposal in the 2020 budget not seen before is to create a defined contribution benefit program for term employees through the TSP in lieu of the defined benefit annuity. The budget says this is being done because the existing annuity benefit offers little value to these employees since they rarely are in the positions long enough to realize the annuity:

The portion of the Federal workforce least well-served by the existing hybrid retirement system are the roughly 70,000 term employees who are hired for an initial period of up to four years. The existing system discourages term hires, because their terms will fall short of the five years necessary to become vested in the defined benefit program.

Combining Sick Leave and Paid Holidays

Another proposal that was not mentioned in previous budgets is to combine sick and holiday leave into one paid time off category. This too is a move to better resemble private sector practices and one that would “grant employees maximum flexibility.”

While the move would reduce the total number of leave days, a new short term disability insurance policy would be introduced as an additional benefit to protect employees.

Why is Another Pay Freeze Being Proposed?

The budget analysis explains the rationale for proposing another pay freeze in 2020 as well. In short, it is because the existing pay system rewards longevity over performance, something not favored by the Trump administration:

Across-the-board pay increases have long-term fixed costs, yet fail to address existing pay disparities or tar- get mission critical recruitment and retention goals. The Administration therefore proposes a pay freeze for Federal civilian employees for calendar year 2020.

The Administration believes in aligning pay with an employee’s performance where possible. The existing Federal salary structure rewards longevity over performance. This is most evident in the tenure-based “step-increase” promotions that most Federal employees receive on a fixed, periodic schedule without regard to whether they are performing at an exceptional or merely passable level. (They are granted 99.7 percent of the time.) The Budget proposes to slow the frequency of these step increases, while increasing performance-based pay for workers in mission-critical areas.

2020 Budget Proposal: Details on Benefits Cuts

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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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