FEDweek

Report Sees Mixed Impact on Employees from Retirement Changes

Much of a new CBO report on options for reducing federal retirement benefits focuses on projections of government outlays and technical matters; however, the report does point out that such changes would affect the attractiveness of federal employment.

Regarding recruitment, it says: “Because the value of the pension grows with the number of years of service, the pension attracts workers who anticipate a long career in the federal government but not workers who do not expect to remain in federal service for a long time. In contrast, TSP probably enhances recruitment among a broader group of workers because employees are eligible for federal contributions of up to 5 percent of their salary regardless of their age and tenure.”

Regarding retention, it says: “For midcareer employees, the pension benefit provides an incentive to stay in government in order to qualify for a larger pension. By contrast, that incentive is limited for workers who are early in their careers because they will have to work for the govern-ment many more years before they retire … TSP probably provides an incentive to stay in government at most points in a career because the value of the benefit does not depend on how long the worker has been employed or how far from retirement he or she is.”

For example, it says that requiring all FERS employees to contribute the same 4.4 percent of salary toward retirement as those hired after 2013—most FERS employees pay 0.8 percent—would have no impact on recruitment because all new hirees would pay at the higher rate regardless. However, turnover would increase as more of those already eligible for retirement and those reaching eligibility in the years just ahead would decide against staying on the job and continuing to pay in at a higher rate for a benefit that is no higher.

Returning the rate to 0.8 percent for everyone meanwhile “would enable the government to recruit and retain a more highly qualified workforce by increasing both current pay and the value of the pension plan (net of the employees’ contributions) for workers who were hired recently as well as those who will be hired in the future.”

CBO said that basing future annuities on the high-five salary years rather than three would have only a small impact on recruitment since the difference would seem small to prospective employees and they would be unsure whether they would stay long enough to earn an annuity in any case. But it would increase turnover among midcareer employees, who “would have less incentive to remain until they are eligible for a pension because that pension would be smaller” while potentially encouraging late-career employees to work longer to make up the loss in value.

And CBO concluded that replacing the defined benefit portion of FERS for new hirees with an enhanced TSP benefit likely would improve recruitment because newer employees would be seeing a greater immediate cash value in their benefits rather than the promise of an uncertain future annuity benefit. That likely would increase retention for the early years of their careers for the same reason, it said, although at mid-career and afterward they would have less incentive to stay than currently when employees see an annuity as within their reach.