A recent report on options for federal retirement programs stirred up a long-dormant debate over whether those benefits amount to “gold handcuffs”—and whether, even if they do, that’s such a bad thing.
“Gold handcuffs” is the concept that as a person gets farther into a federal career, the benefits awaiting at the end start to look better and better. More years of service and higher salary are accumulating toward a benefits formula based on those two variables once they meet one of the age and service combinations for eligibility.
In many cases, people begin calculating the timing and amount of their future benefits relatively early in their careers and then stay with the government the entire time to that point.
The result can be career stagnation and missed professional—and maybe personal—opportunities for growth, along with the potential for higher salary elsewhere. But it also results in something that is unfortunately rare these days elsewhere: guaranteed payments for life, inflation-adjusted, with ongoing benefits for life to a survivor—not to mention lifetime health insurance coverage for both, with the government paying the large majority of the cost.
Leaving before retirement eligibility doesn’t mean giving up on the value of an annuity entirely, of course. Under both CSRS and FERS there are provisions for “deferred” benefits starting at age 62 for those with even only five years of service (FERS provides additional combinations). But those benefits are frozen at the time of separation, not increased either for inflation or for the salary growth in a person’s former position until the start of benefits.
As a Congressional Budget Office report succinctly put it, “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 government many more years before they retire.”
After about 30 years of service, it added, the incentive to stay weakens somewhat because continuing to work provides less and less of a financial advantage each year compared with being retired.
It made those observations in the context of analyzing several potential changes to benefits, including eliminating—although only for employees hired in the future—the defined benefit portion of FERS and increasing the TSP portion. (The report focused only on FERS because those new people would be automatically put in that system in any case.)
Under one formulation, the government’s automatic contribution to their TSP accounts could be increased from the current 1 percent of salary to 8 percent, and matching contributions increased from the current 4 percent additional to 7 percent additional. Under another, the government contribution could be set at a flat 10 percent regardless of whether the individual invested personally.
CBO said that those changes actually probably would boost the government’s recruitment because those employees would be seeing more money upfront than they do currently, with the promise of more on the far horizon of retirement. And for about the first15 years of their careers, most would accrue more benefits than they would under current law, but by about year 20, they would accrue much less in benefits, “giving employees at that stage of their careers less incentive to stay.”
The report went on to say, “Federal retention rates differ substantially from those for private-sector firms, where pensions have become rare. The separation rate among midcareer employees in the private sector is about eight times higher than the rate for federal employees.
“Many factors probably contribute to higher rates of retention for federal employees. For instance, federal workers can relocate and yet continue to work for the government, as the federal government is a large employer with offices in many parts of the country. However, the pension plan probably plays a substantial role.”
In other words, what those at the beginning of their careers don’t value highly because they don’t see well, becomes clear and highly valuable later on.
They start to see that at retirement the handcuffs are broken and the gold remains.