One proposal would replace the current premium-sharing structure for FEHB and PSHB with a voucher that would not be subject to income and payroll taxes. Image: Doidam 10/Shutterstock.com
By: FEDweek StaffFollowing are sections of a Congressional Budget Office report on options for reducing annual federal deficits regarding potentially shifting more of the costs of federal retirement benefits onto employees and more of the costs of health insurance benefits onto enrollees, including both active employees and retirees.
Increase Federal Civilian Employees’ Contributions to the Federal Employees Retirement System
The federal government provides most of its civilian employees with a defined benefit retirement plan through the Federal Employees Retirement System (FERS). The plan provides eligible retirees with a monthly benefit in the form of an annuity. Those annuities are jointly funded by the employees and the federal agencies that hire them. Employees’ contributions are counted as federal revenues. Nearly all federal employees participate in FERS and contribute a percentage of their salary toward their future annuity. Most people who were hired before 2013 contribute 0.8 percent, most people hired in 2013 contribute 3.1 percent, and most people hired in 2014 or later contribute 4.4 percent. About half of all federal civilian employees fall into the last category.
Under this option, most employees enrolled in FERS would contribute 4.4 percent of their salary toward their retirement annuity. The increase in the contribution rates (of 3.6 percentage points for employees who enrolled in FERS before 2013 and 1.3 percentage points for those who enrolled in 2013) would be phased in over four years. The dollar amount of future annuities would not change under the option, and the option would not affect employees hired in 2014 or later who already contribute 4.4 percent. Agencies’ contributions would remain the same under the option.
Adopt a Voucher Plan and Slow the Growth of Federal Contributions for Federal Employees’ Health Benefits
The Federal Employees Health Benefits (FEHB) program provides health insurance coverage for federal workers and annuitants, including current and retired employees of the Postal Service, and for their dependents and survivors. Under the program, the government covers up to 75 percent of the cost of enrollees’ premiums for active non-postal employees and annuitants. The Postal Service Health Benefits (PSHB) program, a separate program within FEHB, provides benefits for postal employees, annuitants, and dependents. Government contributions for participants in that program are determined by collective bargaining agreements.
Both the FEHB and PSHB programs would be affected by this option. It consists of two alternatives to replace the current premium-sharing structure with a voucher that would not be subject to income and payroll taxes. Under both alternatives, the value of the voucher in 2027 for each type of coverage (self only, self plus one, and family) would be equal to the government’s average expected contributions to FEHB or PSHB premiums in 2026, adjusted to remove the effects of inflation. Under the first alternative, the value of the voucher in 2027 and each subsequent year would be determined using the projected rate of inflation as measured by the consumer price index for all urban consumers (CPI-U). The second alternative would index the voucher to the chained CPI-U, which is another measure of inflation designed to account for changes in spending patterns and to address several types of statistical biases that exist in the traditional CPI measures. Since 2001, the chained CPI-U has grown by an average of about 0.25 percentage points per year more slowly than the traditional CPI-U. Both alternatives would slow the growth of government contributions to FEHB and PSHB premiums because premiums are expected to increase more quickly than the alternative measures.
Government spending on premiums for annuitants and postal workers is classified as mandatory spending, whereas spending on premiums for other federal employees is classified as discretionary. Both alternatives would reduce mandatory spending for the FEHB and PSHB programs because the federal government would make smaller payments for premiums for annuitants and postal workers than it would under current law. The alternatives would also decrease mandatory spending because some FEHB and PSHB participants would leave the program. The net effect of those disenrolled participants on changes in mandatory spending would be small relative to savings from the vouchers.
Revenues would also be affected because some people would leave the program and would instead obtain other employment-based coverage through a spouse. That change would reduce federal tax revenues by shifting some of those spouses’ compensation from taxable wages to tax-favored health insurance, according to estimates by the staff of the Joint Committee on Taxation and the Congressional Budget Office. Both alternatives would also reduce discretionary spending by lowering federal agencies’ payments for FEHB premiums for current employees and their dependents if appropriations were reduced to reflect those lower payments.
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