CBO Looks at Cuts to Retirement Benefits, Recruitment, Retention

The Congressional Budget Office has published a summary of various options to reduce the value of federal employee retirement benefits that are under consideration in Congress, and included in a House budget outline passed several months ago, since stalled.

Options include ending, for future hires, the FERS civil service annuity benefit and boosting the government contribution toward their TSP accounts instead—either to an automatic 8 percent of salary employer contribution with matching contributions of up to another 7 percent, or setting the automatic government contribution at 10 percent with no matching contributions above that.

While various proposals to end the defined benefit portion of FERS have suggested sweetening the TSP benefit, the CBO report is the first to put firm figures on what that might mean for affected employees.

For current employees, the report raises the familiar prospect of increasing the required contribution toward retirement of all FERS employees—in this case, to the 4.4 percent for those hired after 2013 (it is 3.1 percent for those hired in 2013 and 0.8 percent for those hired before).

CBO has looked at similar-sized increases numerous times in reports examining ways to reduce the federal deficit. However, most of the proposals raised in Congress in recent years—including in the House measure this year—would require a much steeper increase, on the order of another 6 percent of salary for most employees.

The latest report however also raises the prospect of moving in the opposite direction: rolling back the higher retirement contributions already required of those hired after 2012 so that all FERS employees would pay the same 0.8 percent that had applied up to then since the program’s inception in the 1980s.

Also included was the long-running idea of basing annuities of future retirees on the highest five consecutive salary years rather than the highest three, a provision included in numerous House-passed budget plans of recent years, including this year’s.

CBO also noted potential impacts on recruitment and retention that could arise by requiring high contributions toward retirement benefits. It argues, broadly, that the average quality of newly-hired employees tends to rise or fall depending on the amount of current pay – although it noted that the data it looked at for this portion of the report was a relatively small sample size and other factors are at play:

“CBO found that two measures of new employees’ performance declined following the 2013 reduction in current pay. First, workers hired in 2013 were less likely than those hired in 2012 to have their performance rated as “fully successful” or better by their supervisors. Second, they were more likely to be dismissed, or “involuntarily separated,” early in their careers. Those results suggest that decreases in current pay may affect recruitment, but the analysis encompasses a short period and cannot account for every factor that might have contributed to the differences in employees’ performance.”