Washington Post Reporter Ed O’Keefe discusses how federal pensions might be targeted by a bipartisan fiscal commission:
After years of fighting for and against it, the White House and congressional negotiators are seriously discussing the possibility of forcing at least some federal employees to pay more towards their retirement pension.
As colleague Lori Montgomerywrote in Sunday’s Post, “The generous pension system enjoyed by millions of federal workers from clerks to senators and judges has emerged as a key target in negotiations between Vice President Biden and congressional leaders looking to restrain the growing national debt.”
How would it happen? Both sides are tight-lipped on specifics, but President Obama’s bipartisan fiscal commission, Republicans and outside groups are pushing at least five substantive proposals. Here are the basic details:
1.) The president’s fiscal commission recommended using a federal employee’s highest five years of earnings to calculate benefits for new retirees — whether they’re in the older Civil Service Retirement System or the Federal Employee Retirement System, which is used for federal employees who joined after 1986. Currently both systems use the highest three years of earnings, but the commission said using the top five years would bring benefits calculations in line with the standards used by private sector employers. Savings would total $500 million in 2015 and $5 billion through 2020.
2.) The fiscal commission also suggested defering Cost of Living Adjustments (COLA) for retirees in the current system until age 62. This would also apply to civilian and military retirees who retire at an earlier age. In place of COLA, the system would provide a one-time catch-up adjustment at age 62 to bring benefits on par with the amount that would have been paid if full COLAs had been in effect. Taxpayers would save $5 billion in 2015 and $17 billion through 2020.
3.) Finally, the commission recommends adjusting the ratio of employer/employee contributions to federal employee pension plans to equalize contributions. The government would save $4 billion in 2015 and $51 billion through 2020.
4.) The cenrist think tank Third Way also believes feds and the government should contribute equally to FERS, arguing the government is far more generous than private-sector companies. The government contributes 12.7 percent of payroll to retirement accounts while private employers contribute about 5.3 percent. Evening the payments would save $114 billion over ten years, $271 billion over 20 years, and $702 billion by 2050, according to the group.
House Republicans are pushing a modified version of Third Way’s plan, suggesting employees and the government should contribute equally — 6 percent each. But because federal workers currently contribute 0.8 percent, the change would amount to more than a 5 percent pay cut.
5.) Sens. Tom Coburn (R-Okla.) and Richard Burr (R-N.C.) in March introduced a bill that would end FERS’s defined benefit pension for new employees beginning in 2013. The bill would still give federal workers Social Security payments and access to the Thrift Savings Plan with matching funds intact. Current feds and retirees would not be affected, but the changes also would apply to future lawmakers and their staffers.
Coburn and Burr argue that FERS is currently underfunded by nearly a billion dollars and CSRS by $673 billion, but the Congressional Research Service said last fall that the funds will be able to meet their obligations “in perpetuity.”
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Wait – Per #2, do Federal retirees continue to receive COLA adjustments on their pension payments?
Also, tend to agree with #4 – I worked for an organization whose benefits were extremely generous…and promoted “hangers on”‘ – people who probably should retire, but who are padding their retirement by sticking around long after their motivations (and corresponding contributions) are gone. Lowering the amount (a) potentially limits that behavior and (b) creates more opportunities for performance-based bonuses (instead of automatic benefits). Cut the long-term, incentivize the short-term.
@Andrew to answer your question federal retirees would continue to receive their COLA adjustments. All this would do is delay the COLA payout until age 62. Our concern with proposals for federal employees covered under FERS paying more into their defined benefit pension is that these proposals would require employees to contribute approximately 7% of salary to their defined benefit pension (instead of .8% contributed now). As a result, employees would have to contribute more than 18% of salary for retirement benefits:
For most federal employees, 18.2% is too much to spend on retirement. Their current living expenses, i.e. housing, transportation, food, child care, clothing, etc. would make that amount impossible. So they would be forced to withdraw their contributions to the TSP, in order to have enough to contribute 7% to their defined benefit pension. By removing their contributions to the TSP, they would lose out on future earnings of their own savings, as well as the 5% government match. The increased contribution to the defined benefit pension coupled with the loss of the government match to the TSP would effectively be a 10-12% pay cut.
Seems like the idea of being a leader and demonstrating what ‘pension’ benefits companies should provide is no longer a goal. It is true very few companies are offering pension benefits, but that does not bode well for retirees in the future. Our economy has benefited from the large number of seniors who had enough retiement income/resources to meet their expenses, but we still have excessive government costs associated with seniors. Can’t imagine what the costs are going to be in 20 years when most people retire with social secuirty and a small 401k/TSP only. We have seen the ‘risk’ associated with 401k. Already with FERS the pension benefit is limited compared to CSRS, and many federal employees do not realize they MUST save in TSP to have decent pension. These new proposals will produce retirees needing government subsidies in 20 years. Of the proposals the only one I find tolerable is switch to 5 years versus 3 years. This may encourage a small number of employees to work longer when they receive a promotion very near retirement, but for most employees when reaching retirement age they have reached the top of their pay grade and so are only receiving COLA increases in pay, and those are now gone, at least for the next 2 years.
Clarification @AFG, please–Do federal employees have mandatory contributions to Social Security, defined benefit plan, AND a thrift savings plan (is that like a 401(k)?)
@Margaret – federal employees under the Federal Employees Retirement System (FERS) have a mandatory 6.2% salary deduction to contribute to Social Security, currently a 0.8% salary deduction contributed to their defined benefit pension plan and a contribution to the Thrift Savings Plan (TSP). With the TSP they are automatically enrolled with a 1% salary deduction but aren’t required to contribute more than that. However, most federal employees under FERS contribute 5% or more to a TSP account in order to get the total government match (government matches dollar-for-dollar for first 3% of contributions, then 50 cents on the dollar for the 4th and 5th percent of contributions). Generally speaking, most federal employees pay approximately 12% of their salary for retirement benefits (social security, defined benefit plan, AND TSP). To answer your other question, yes the TSP is similar to a 401K.
Since when is the point to get federal benefits “in line” with the private sector? When the *pay* is in line with the private sector, then let’s talk about the benefits. The whole purpose of a more generous benefit package is to offset the 25%-or-so disparity in pay with the private sector – otherwise competent and talented people would persue public service in even fewer numbers. Public sector workers suffer from lower pay and lower prestige than the private sector, and now the benefit package – besides altruism the only real incentive to public sector work – is going to be “on par” with the private sector? What’s the incentive? “Come work for the government: Where your personal sacrifices are only surpassed by you financial ones!”
Quick correction — FERS aplies to federal employees hired on or after January 1, 1984, not 1986 as stated in the article.
I fear coming across like a wet blanket here. My apologies in advance.
Is anyone surprised by this? This isn’t the first bit of personal wealth that the Federal government has been borrowing against and history has many examples of governments confiscating personal wealth to make up for shortfalls in the national treasure.
Taxes aside, we have been deficit spending (charging our credit card) since 1971. Not even withholding taxes (that only began in 1943) could keep up with our spending. At some point (I believe within our life times), we have to pay for it.
What really disappoints me is that I come in contact with people all the time who seem to not want to understand or act on the problem. Despite mounting evidence and an almost predictable toppling of dominoes, many people in key leadership positions seem disengaged.
David Walker has been talking about this for years in his Fiscal Wake-up Tour. He resigned his post as the Comptroller General of the United States and the head of the GAO so he could pursue this problem in ways he couldn’t as an official with the GAO. I joined the government specifically to help implement a program that would Transform the way we conduct regular business – but from where I sit, progress is slow, or even moving backwards.
There is hope. We have technologies like cloud computing and Web 2.0 that can shave hundreds of Billions from our spending and still move us forward technologically. We have the knowledge (but not the political will) to re-tool the way we interact with one another and the information in our environment – that can shave hundreds of Billions more. Done right, we can strengthen the 29.6 million small businesses in the United States (that already fuel 50% of America’s economy and represent 52% of all US jobs). We can encourage and give them incentive to find ways to give back without sacrificing profit – to create wealth and improve communities at the same time.
I do believe that our American spirit has the capacity to rise above individual selfishness and avoid this train wreck, but I wish we’d start already. I really hate watching us dig ourselves deeper into a hole every year. The climb out is only getting harder.
To piggyback on David’s post below, David Walker and Pete Peterson’s documentary IOUSA is great. I’m not saying you have to accept the conclusions presented (it is a bit alarmist, I concede), but it definitely raises the problem of our federal debt in a way that forces the discussion. Parts of it are available here: http://www.iousathemovie.com/
Stephanie – I had not seen this IOUSA video until you posted it. Now that I have, thank you!
If anyone asks what I have been doing for the last seven years, I can confidently say that I have been on the pointy end of the spear for the Defense portion of what you find in this video. I established the Defense Business Transformation program within the Military Health System Component (Army, Navy and Air Force), and ran this program for five years. I personally (along with my teams) reviewed more than $1 Billion in investments and made recommendations that resulted in sending $200 Million worth of unnecessary or ill formed projects home. For the last two years, I have been with the Business Transformation Agency – an experience I’d rather not discuss.
That said, the thing that stands out in my memory is:
This attitude likely comes from years of habit and an aversion to pain, but it is real and it is causing us to do things we shouldn’t be doing.
Way to go screw us over. One Month my pay is 42% less then equal privite industry engineer with over 20 years experience and now I am an over paid lazy federal worker looking to get screwed out of my retirement thanks you one and all