The White House has released its fiscal year 2021 budget proposal. As it has in recent years, the $4.8 trillion budget proposes some significant cuts to federal employees’ benefits and retirement programs.
These proposals will likely sound familiar as we have seen them in past budget proposals. To date, none of these have been enacted; they are just proposals put forth to start the budget negotiation process in Washington each year.
These are some of the suggested reductions to federal employees’ retirement benefits taken verbatim from the budget proposal that will be of most interest to federal employees.
Proposed Reductions to Federal Employees’ Retirement Benefits
Eliminate FERS COLA, Reduce CSRS COLA by 0.5 percent
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 the Thrift Savings Plan (TSP)—a defined contribution plan for Federal Government employees—in addition to the FERS annuity. Eliminating the FERS COLA and reducing the CSRS COLA payments would reduce both FERS and CSRS annuity benefits, bringing compensation more in line with the private sector.
Eliminate the Special Retirement Supplement
When a FERS employee retires before Social Security eligibility age, and meets certain employment longevity requirements, they currently receive a supplement in addition to the FERS annuity and TSP payouts. This supplement partially replaces the Social Security portion of the retirement package. 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.
Change Retirement Calculation from High-3 years to High-5 years
Currently, Federal retirement annuity calculations are based on the average of the Federal employee’s three highest salary-earning years. Private sector pension companies commonly base employee annuity calculations on the employee’s five highest salary-earning years, a formula more representative of an employee’s career earnings track record. Switching the Federal employee annuity formula from a “High-3” to a “High-5” calculation would create greater alignment with the private sector.
Reduce the G Fund Interest Rate
This proposal includes a change to the G Fund, an investment vehicle available only through the TSP. G Fund investors currently benefit from receiving 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.
As to why the budget proposes these cuts, it offers this as justification:
The Congressional Budget Office (CBO) concluded in a series of recent reports that Federal employees are, on average, compensated with combined pay and benefits higher than the private sector. Most recently, in 2017, CBO found a 17-percent disparity on average in total compensation between Federal employees and their private sector peers. The disparity – which varies significantly by education level – is overwhelmingly attributable to benefits. 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.Congressional Budget Office, Comparing the Compensation of Federal and Private-Sector Employees, 2011 to 2015, (April 2017).
Modify the Government Contribution Rate to Federal Employees Health Benefits Program Premiums
The budget proposal also recommends revising the government’s contribution rate to base it on a plan’s score from the Federal Employees Health Benefits (FEHB) Program Plan Performance Assessment.
The budget has this to say about the details of the proposed change:
Under this proposal, the base Government contribution would be the lesser of 71 percent of the weighted average of all health plans or 75 percent of that plan option’s individual premium. Higher performing plans would receive a five percent increase to the Government contribution, while all others would receive the base rate. This proposal would encourage enrollment in high-performing health plans.
As to the justification for the proposal, the budget states:
FEHB covers approximately 8.2 million Federal civilian employees, retirees, and their families. 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.