Benefits: These retirement cut proposals threaten millions of federal workers

Dan Caplinger, The Motley Fool Published 10:00 a.m. ET June 12, 2018

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Find out how the White House is looking to make major benefit cuts.
There’s a lot of debate about the differences in working conditions that public-sector and private-sector workers face. Some private-sector workers who have seen many of their employee benefits deteriorate or disappear entirely over the years believe their public-sector counterparts get benefit packages that are too expensive for taxpayers to maintain. Public-sector employees can point to base salaries that have historically often been lower than what they could make in the private sector as a justification for additional benefits to make up the difference.  Recently, the White House issued a new threat to federal worker benefits that added to the controversy. A letter [opens PDF] from the director of the administration’s U.S. Office of Personnel Management to House Speaker Paul Ryan laid out a series of proposals for legislation that would make reductions to many of the retirement benefits that federal workers who are eligible for the Civil Service Retirement System (CSRS) or Federal Employees Retirement System (FERS) receive. The moves would help to narrow budget deficits, but opponents argue that federal workers have already sacrificed through pay freezes and compensation adjustments that have lagged what their private-sector counterparts receive. Here’s a closer look at the four proposals that lawmakers might consider in the near future.

1. Requiring larger employee contributions toward benefits
Historically, many private-sector companies offered pension benefits that employees didn’t have to pay for with contributions of their own. Many employers have simply phased those pensions out in favor of 401(k) plans that put more of the onus on retirement saving on the worker. However, public-sector pensions often call for at least modest employee contributions to support payments. Currently, most longer-tenured employees who are part of FERS pay 0.8% of their pay into the program, with those hired after 2012 paying either 3.1% or 4.4%.

Under the proposal, employees under FERS would see their contribution percentages rise by 1 percentage point per year until they reached 7.25% of pay. That works out to half of the total pension cost of 14.5% under the program. That matches up with the way Social Security payroll taxes are allocated 50/50 between employee and employer, but over time, the fact that some workers would pay an additional 6.45% of their salaries would lead to effective pay cuts of thousands of dollars each year while leaving actual benefit payouts unchanged. This measure would cut deficits by an estimated $69 billion over the next 10 years, with further savings beyond that point.

2. Lengthening the calculation period for determining pension amounts
Under current law, CSRS and FERS workers have their pension benefits determined by taking the highest average annual amount of pay over a consecutive three-year period, typically at the end of their careers when most workers’ earnings are highest. The new proposal would lengthen that period, requiring averages taken over a consecutive five-year period.

The result of the longer calculation period will generally be to reduce the average, which in turn would lead to a lower starting payout that will then persist throughout retirement. Proponents of the measure can point to the way Social Security calculates benefits using a full 35-year earnings history rather than the latest few years, although pensions in the private sector have historically determined benefits in a manner similar to the current public pension rules. The measure would save an estimated $6 billion over the next 10 years.

3. Cutting cost of living adjustments for pensions
Just as Social Security has cost of living adjustments for retirees, pension benefits for federal workers currently are increased along with the rate of inflation. This helps to ensure that those payments keep up with the regular living expenses that recipients face.

The proposal would reduce CSRS cost of living adjustments by half a percentage point and eliminate them entirely for FERS benefits. The total reduction in benefits would amount to an estimated $50 billion over the next decade, with further savings expected beyond that point.

4. Elimination of supplemental annuities
FERS provides some workers with supplemental annuity benefits if they leave service before turning 62 and becoming eligible for Social Security benefits. The supplement is intended to approximate what a corresponding Social Security benefit would be. The proposal would eliminate most of these payments, resulting in about $19 billion in savings over the next 10 years.

Look to Washington
The White House only has the ability to suggest legislation, not to pass it, so it’s now up to the House to decide what the next steps for these proposals will be. With many calling for deficit reduction, it’s likely that these or similar proposals will find their way into bills considered by legislators. Federal workers will likely fight the proposals hard, but it’s certainly possible that they’ll have to endure these cuts if their proponents successfully navigate opposition in Congress to get those bills passed.  If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more…each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.

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