Cutting Federal Benefits to Align With Private Sector

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By on February 11, 2020 in Pay & Benefits with 0 Comments
Scissors lying next to a $5 bill that has been cut into pieces on a wooden surface

In a recent article entitled Task Force Proposes Eliminating FERS, we noted that a Task Force on government efficiency recommended a number of proposals that would impact the federal government’s workforce, including eliminating the Federal Employee Retirement System (FERS) and replacing it with an enhanced version of the Thrift Savings Plan (TSP).

The administration’s 2021 budget proposal builds on this series of recommendations from the Task Force. The discussion on the budget that has been released noted that the Congressional Budget Office found in a 2017 report that there “is a 17-percent disparity on average, in total compensation, between Federal employees and their private-sector peers.”

These proposals would be significant changes to the federal benefits program and are all designed to reduce federal benefits to, as noted in the budget proposal, align federal benefits more closely with the private sector.

Proposals to Change Federal Benefits Package

To change the current system and to bring federal pay and benefits in line with leading private sector practices, the Budget proposes the following changes in the federal employee benefits package:

  1. increasing employee contributions to the Federal Employees Retirement System (FERS) such that the employee and employer would each pay half the normal cost;
  2. eliminating the FERS Cost-of-Living Adjustment (COLA) and reducing the Civil Service Retirement System COLA;
  3. eliminating the Special Retirement Supplement;
  4. changing the retirement calculation from the High-3 years to High-5 years; and
  5. reducing the Thrift Savings Plan G Fund interest rate.

Eliminating or Reducing COLA’s

The budget proposal would eliminate the COLA for employees under the FERS system. It would reduce the COLA for CSRS retirees by 0.5 percent.

FERS and CSRS COLAs for annuitants are currently awarded based on statutory formulas tied to a Consumer Price Index. However, FERS annuitants are somewhat protected from economic effects because this retirement package includes Social Security benefits and the Thrift Savings Plan in addition to the FERS annuity.

As noted above, the rationale in the budget for eliminating the FERS COLA and reducing CSRS COLA payments is to bring compensation for federal employees closer to private sector benefits packages.

Eliminating the Special Retirement Supplement

When a FERS employee retires before reaching eligibility for Social Security and meets employment longevity requirements, an employee currently receives a supplement in addition to the FERS annuity and TSP payouts.

The supplement partially replaces the Social Security portion of the retirement package for federal employees under FERS.

When private-sector employees retire before becoming eligible for Social Security, a supplement similar to the one for federal employees is not provided. This budget proposal would eliminate this additional benefit that is not typically provided in private sector annuity plans.

Changing from a High-3 to High-5 Retirement Calculation

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 as the longer time is more representative of an employee’s career earnings track record.

The budget proposal states that switching the federal employee annuity formula from a “High-3” to a “High-5” calculation would create greater alignment with the private sector.

Reducing the G-Fund Interest Rate

This new budget proposal includes changing the interest rate paid to investors in the TSP’s G Fund. The G Fund is a specialized fund only available through the TSP so, therefore, it is not available to investors in the private sector.

G Fund investors currently benefit from medium-term bond interest rates on investments that are a short-term security. In other words, G Fund investors receive a higher interest rate than is normally available as there is less risk in short-term bonds.

Basing the yield on a short-term Treasury 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 cost the government less money.

Summary

In past budget proposals in recent years, similar proposals have also been made to the proposals in the 2021 budget. None of these significant changes have been included in the final budget.

Chances are the same pattern will be repeated again this year and it is unlikely these proposals will become a reality. This does not mean there is no chance that any of them will pass. It is an election year, federal employees are often thought of as having better benefits than those available to private sector employees, and predicting what will happen in Congressional negotiations on the budget are impossible to accurately predict.

© 2020 Ralph R. Smith. All rights reserved. This article may not be reproduced without express written consent from Ralph R. Smith.

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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

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