Issue Briefs

Following is the section of the White House’s fiscal 2021 budget proposal describing in detail the rationale for its proposed cuts in federal employee benefits.


Increase Employee Contributions To 50 Percent of Cost, Phased In At One Percent Per Year

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This proposal would increase Federal employee contributions to the Federal Employees Retirement System (FERS) such that the employee and employer would each pay half the normal cost. For Federal workers in certain occupations, such as law enforcement and firefighting, employee contributions would increase, but the Government would continue to pay a higher share of the normal cost.

By increasing the employee share, the Federal Government’s costs would be reduced. To mitigate the impact on employees, this provision would be phased in over several years, with individuals contributing an additional one percent of their salary each year.

Justification

The Congressional Budget Office (CBO) concluded in a series of recent reports that Federal employees are, on average, compensated with combined pay and benefits higher than the private sector. Most recently, in 20171, CBO found a 17-percent disparity on average, in total compensation, between Federal employees and their private sector peers. The disparity—which varies significantly by education level—is overwhelmingly attributable to benefits. As the CBO study shows, in comparison to the private sector, the Federal Government continues to offer a very generous package of retirement benefits, even when controlling for certain characteristics of workers. At large private sector firms, only approximately 35 percent of workers had access to a combination of defined benefit and defined contribution programs.

Another benefit of this proposal is that it would generally equalize the percentage of salary that civilian workers pay toward their pension benefit. At present, newer cohorts of employees pay a higher percentage than do those with greater seniority.

The Administration has lessened the impact of the proposal to increase employee contribution to FERS, by phasing in the implementation with a one percent increase in contributions each year. In the context of the broader labor environment, the Administration believes the implementation and phasing in of retirement benefit changes would not impact the Federal Government’s recruiting and retention efforts.

Modify the Government Contribution Rate to Federal Employees Health Benefits Program Premiums

This proposal would revise the Government contribution rate to base it on a plan’s score from the Federal Employees Health Benefits (FEHB) Program Plan Performance Assessment. Currently all FEHB carriers participate in the assessment, which includes 19 measures of health outcomes, quality, and efficiency. Under this proposal, the base Government contribution would be the lesser of 71 percent of the weighted average of all health plans or 75 percent of that plan option’s individual premium. Higher performing plans would receive a five percent increase to the Government contribution, while all others would receive the base rate.

This proposal would encourage enrollment in high-performing health plans.

Justification

FEHB covers approximately 8.2 million Federal civilian employees, retirees, and their families. The Government contribution to premiums is currently set in statute at 72 percent of the weighted average of all plan premiums, not to exceed 75 percent of any given plan’s premium. Under the current structure, enrollees have few incentives to choose less expensive, higher value plans. This proposal would incentivize enrollees to select high-performing, high-value plans by making them more affordable. The proposal would also provide carriers with greater incentive to compete on price and quality, help driving down overall program costs.

Reduce Federal Retirement Benefits

This proposal would reduce the cost of Federal employee annuities via revisions to the Federal Employees Retirement System (FERS) and the Civil Service Retirement System (CSRS). The proposal would eliminate cost of living adjustments (COLAs) for FERS retirees, and would reduce CSRS retiree COLAs by 0.5 percent.

It would also eliminate the FERS Special Retirement Supplement for those employees who retire before Social Security eligibility age, calculate employees’ annuity based on the “High-5” salary years instead of “High-3” salary years, and reduce the G Fund interest rate. The employee compensation landscape continues to evolve. Private sector employers provide a smaller share of compensation in the form of retirement benefits than does the Federal Government. Recent decades have seen a dramatic shift by private employers away from defined benefit retirement programs. The Federal Government, in contrast, provides a much greater share of its employees’ compensation in the form of retirement benefits—including pension benefits and post-retirement health care benefits. The provisions of this proposal would bring Federal retirement benefits more in line with the private sector, while reducing their long-term costs.

Justification

The Congressional Budget Office (CBO) concluded in a series of recent reports that Federal employees are, on average, compensated with combined pay and benefits higher than the private sector. Most recently, in 2017, CBO found a 17-percent disparity on average in total compensation between Federal employees and their private sector peers.1 The disparity—which varies significantly by education level—is overwhelmingly attributable to benefits. As the CBO study shows, in comparison to the private sector, the Federal Government continues to offer a very generous package of retirement benefits, even when controlling for certain characteristics of workers. At large private sector firms, only approximately 35 percent of workers had access to a combination of defined benefit and defined contribution programs.

Eliminate FERS COLA, Reduce CSRS COLA by 0.5 percentFERS and CSRS COLAs for annuitants are currently determined based on statutory formulas tied to the Consumer Price Index. However, FERS annuitants are somewhat protected from economic effects, because their retirement packages include Social Security benefits and the Thrift Savings Plan (TSP)—a defined contribution plan for Federal Government employees—in addition to the FERS annuity. Eliminating the FERS COLA and reducing the CSRS COLA payments would reduce both FERS and CSRS annuity benefits, bringing compensation more in line with the private sector.

Eliminate the Special Retirement Supplement—When a FERS employee retires before Social Security eligibility age, and meets certain employment longevity requirements, they currently receive a supplement in addition to the FERS annuity and TSP payouts. This supplement partially replaces the Social Security portion of the retirement package. When private sector employees retire before Social Security eligibility age, no such supplement is provided. This proposal would eliminate this “extra” benefit, which is not typically provided in private sector annuity plans.

Change Retirement Calculation from High-3 years to High-5 years—Currently, Federal retirement annuity calculations are based on the average of the Federal employee’s three highest salary-earning years. Private sector pension companies commonly base employee annuity calculations on the employee’s five highest salary-earning years, a formula more representative of an employee’s career earnings track record. Switching the Federal employee annuity formula from a “High-3” to a “High-5” calculation would create greater alignment with the private sector.

Reduce the G Fund Interest Rate—This proposal includes a change to the G Fund, an investment vehicle available only through the TSP. G Fund investors currently benefit from receiving a medium-term rate of return on what is essentially a short-term security. Basing the yield on a short-term T-bill rate instead of the current rate (an average of medium and long term Treasury bond rates) would reduce both the projected rate of return to investors and the cost of the fund to the Treasury.

Trump Offers 1 Percent Raise, Seeks Benefit Cuts

FERS Retirement Planning Guide 2020