The Congressional Budget Office has issued a report on a range of potential changes to the federal retirement system that could give legislators a starting point when considering significant changes for federal retirees in the 2018 budget and beyond.
Both Republicans and the president have proposed their own ideas on ways to cut federal retirement benefits to achieve new cost savings.
Both are looking for aggressive savings, with the president’s 2018 budget request including four specific changes to the current federal retirement system to try to save more than $4.1 billion in 2018 and roughly $200 billion over the next 10 years.
The House Budget Committee, for its part, included similar recommendations in its 2018 request, albeit with a more modest estimate for cost savings. The committee’s budget includes reconciliation instructions to the House Oversight and Government Reform Committee to find $32 billion in cost savings over the next 10 years through changes to federal retirement.
A Federal News Radio report spells out specifics on those five proposed changes, with the latest CBO study on federal retirement benefits coming at the request of the chairman of the House Oversight and Government Reform Committee.
According to the report, a spokesman for Rep. Trey Gowdy, R-South Carolina, declined to comment on either the CBO report or the committee’s next steps on federal retirement.
The five potential changes in the CBO report are made up of three options changing federal employee pension plans and two that would replace it altogether with larger contributions to the Thrift Savings Plan.
In its report, the CBO sought to identify how much the government would spend or save in the short term and long term, and any potential impacts on recruitment and retention.
In its summary of the report, the CBO wrote, “Lawmakers have expressed interest in examining the current structure of retirement benefits to ensure that the government provides adequate compensation to attract and retain skilled employees while not paying more than needed to accomplish that goal.”
Here are the five options covered in the report, along with the CBO’s evaluation of their effects.
5. Increase employee contribution rates for current Federal Employee Retirement System (FERS) participants to 4.4 percent.
This would result in “slightly lower retirement income” for federal retirees under this option.
While federal employees hired prior to 2013 currently contribute 0.8 percent toward their pensions, while employees hired in 2013 contribute 3.1 percent and workers hired after 2013 contribute 4.4 percent, under this option future employees would also contribute 4.4 percent.
Short term, this would save about $47 billion in cash for the government between 2018 and 2027, while over 75 years, the government would spend about 3 percent less on pension and TSP contributions.
“Most of the revenue increases would occur in the years immediately following implementation, with a peak in 2021 (the last year of the phase-in period),” CBO wrote in the report. “Revenue increases would build up and then gradually increase as employees hired before 2014 leave federal service.”
While this option wouldn’t have much impact on agencies’ ability to recruit new talent, since it only suggests changes for current employees, CBO pointed out that it could affect the government’s ability to retain top talent.
In the report, it said, “The most experienced highly qualified employees would be the most likely to resign because of a rise in the employees’ contribution rate,” adding, “That is in part because the most experienced employees have served long enough to be eligible for FERS pension immediately upon leaving the federal workforce and are forgoing pension payments by remaining in federal service.”
4. Lower pension contributions for employees hired in 2013 or after; and have all employees contribute 0.8 percent to their pensions.
Under this option, agencies would end up contributing more toward the pensions of employees hired after 2013.
Short term, the government would spend $32 billion on retirement costs between 2018–2027, while its net costs would increase by 13 percent over the next 75 years, compared to the current system.
“Revenues would drop in 2018, the year of implementation, and continue to decline gradually,” the report says. “As a result, net outflows would increase in 2018 and gradually increase over time. However, they would eventually decline as a share of GDP, as the size of the federal workforce declines as a share of the total U.S. workforce, CBO projects.”
While current pay would increase for federal employees hired in 2013, the CBO says that retiree income would experience only a modest increase—but that might only happen if employees choose to stay on the job longer.
This option would be better for recruitment and retention, the CBO says, since lowering employee contribution rates would make the pension plan more appealing to workers who aren’t sure how long they plan to stay in federal service.
3. Change the method for calculating the pension formula; use an average of an employee’s highest five years of earnings rather than the current highest three years.
This would save the government some serious money, lowering retirement cost spending by $3 billion over the next 10 years.
In addition, the CBO predicts that spending on TSP and pension contributions would drop 3 percent over the next 75 years. It writes, “Because Option 3 would affect only future pension recipients, the savings would increase gradually over time as more federal employees retired under the new rules, and then decline slightly as a share of GDP.”
Because it only hits employees’ future pension payments, this change would have no effect on employees’ income or retirement contributions—but the CBO does predict “modest reduction[s]” in retirees’ income.
It could also make it a little tougher for agencies to recruit and retain top talent—but it could be the lesser of evils among some of the other options, the CBO says.
It writes, “First, research indicates that past changes in retirement benefits have had less effect on recruitment and retention than past changes in salaries,” adding, “Second, lower pension payments would make the mix between current pay and retirement income offered by the federal government more like that offered by private-sector employers.”
2. Eliminate the pension plan; increase the government’s automatic TSP contribution to 8 percent of an employee’s salary, with a 7 percent government match.
This plan would only impact new employees, as current employees and their agencies are already contributing to their pensions.
Both this option and the fifth one below would have similar impacts on government revenues and cost savings, the report finds, with the federal government spending more on retirement under these options compared to current law during the first 10 years of implementation.
According to the CBO, savings would be delayed, coming much further into the implementation than for the other options under consideration.
However, both options would hinder agencies’ ability to recruit and retain qualified employees.
And while workers would bear more risk without a pension, some prospective employees may enjoy the flexibilities that a defined contribution plan might give them, the CBO writes. “Many prospective employees who are uncertain how long they will stay in federal service might prefer the agency’s additional contributions over the pension because they could keep most of the agency’s contributions no matter when they left the federal workforce,” the report says.
1. Eliminate the pension plan; increase the government’s automatic TSP contribution to 10 percent of an employee’s salary; eliminate the employer’s match.
As with the plan above, this would only hit new employees not yet contributing to a pension.
Recruitment and retention would be affected, although some would-be government employees might seek the flexibility provided by a DC plan instead of a pension.
And of course the payoff for the government would come much later than for some of the others.