Publisher's Perspective

Please forgive the comparison of federal employees and retirees to mules, but carrots and sticks are the natural image that comes to mind when examining how political leaders are dealing with retirement-related issues these days.

What’s worse, those applying the carrots seem to be trying to make the animal go in a different direction than those applying the sticks. No wonder the result is confusion.

On the one hand are good government groups, generally aligned with federal employee organizations and some (mainly but not exclusively) Democratic members of Congress who are concerned about a potential wave of retirements of experienced federal workers. Their idea is to keep those employees around on the argument that the government’s efficiency will drop off sharply without them.

The result has been passage in recent years of policies to enable employees to phase into retirement by removing a disincentive to switch to part-time work late in a career, and to encourage some of those already retired to come back. Most recently, the Obama administration repeated a proposal, first raised in 2010, to allow “phased” retirement as described in the story above.

On the other are certain think tanks and some (mainly but not exclusively) Republican members of Congress who think that the government is over-layered and would run more efficiently with fewer employees, experienced or not. The idea is to reduce employment on the argument that the government’s efficiency will increase sharply without them. The result has been passage in recent years of policies to restrict the amount of money available to agencies generally, which in turn will encourage them to get more employees to leave for retirement or other reasons.

The thinking is employee behavior can be steered either by carrots (incentives, from the first group) or sticks (disincentives, from the second group).

Agencies naturally have come out confused, but the budgetary restrictions they face are real. Thus, many have returned to a practice that was common the last time the government engaged in a significant downsizing, early retirement and buyout offers.

In early retirement offers, employees become eligible to retire sooner than under standard rules, at age 50 or above with at least 20 years of service, or at any age with at least 25 years. Buyout offers are payments of up to $25,000—for older, higher-paid and longer-service employees, almost always the maximum—for employees to leave, either through retirement or resignation. Typically, the two are offered together, since many employees face a reduction in their annuities if they take early retirement and would not accept the offer without a buyout payment that at least partially makes up for the difference.

The coming months and even years will tell how successful that strategy proves to be. Many employees talk a good game about leaving the instant they can, but in practice it doesn’t work that way. About a quarter of federal workers already are eligible to retire, and yet they keep coming back to work day after day, year after year.

The government meanwhile is eying another set of policy changes due to a current poor fiscal situation and the projections of much worse to come after the baby boom generation starts retiring in earnest and starts drawing money out of—rather than paying money into—the Social Security and Medicare programs.

Under Medicare, eligibility for benefits typically begins at 65, although there are circumstances in which it begins earlier. Under Social Security—again, generally speaking—the earliest age of eligibility is 62, although there is a reduction for beginning as young as that age. The “full” benefits retirement age is currently 66, and eventually it will phase up to age 67, under current law. As it phases up, the penalty for starting as early as 62 will increase accordingly.

The issue is that those retirement ages were set in a long-ago past, based on much shorter life expectancies. Shortly after Social Security was created, in 1940, life expectancy for a 65-year-old was 14 years. Today, it’s 20 years.

There’s also the issue of the discrepancy between the two programs, which paralleled each other until the Social Security age started phasing upward a decade ago under terms of a law passed in the ‘80s.

Raising the Medicare eligibility age to 67 to match the scheduled increase in Social Security’s age would reduce expenses in the program by 5 percent per year, the Congressional Budget Office recently estimated. Meanwhile, raising the Social Security reduced benefits retirement age to 64 and the full benefits retirement age to 70, if having separate ages in the two programs remains acceptable, would reduce that program’s cost by 13 percent.

Such changes would be either incentives to stay in the workforce or disincentives to begin drawing benefits, depending on how you look at it. How would people respond? Under Medicare, CBO said that only about 5 percent of people affected would lose health insurance coverage; the rest would be eligible for health insurance elsewhere, such as through a former employer. That group would include most federal retirees, who continue FEHB eligibility in retirement even after they become eligible for Medicare. Others would simply continue working longer to keep health insurance as active employees.

Raising the Social Security ages would cause some persons to remain in the workforce longer, although not everyone could do so for health reasons and some might not need to do so for financial reasons. It also would worsen the consequences of losing a job at older ages, since older persons in general often have more trouble than younger persons in finding work.

In dollar terms, CBO estimated, raising the Medicare age as described would save $148 billion over 10 years. It estimated 10-year savings of $144 billion in savings from raising the minimum retirement age, $120 billion from raising the full benefits age. In addition, the government would reap higher revenues from collecting more payroll taxes from those continuing to work longer.

Set aside the incentives for individuals for a moment, and consider the incentive of political leaders to act when a budgetary opportunity like that is dangled in front of them.