Federal Benefits Update

If you haven’t yet heard of the threats to federal benefits contained in President Trump’s 2018 budget proposal, you haven’t been paying attention.  However, if you’re receiving the Solutions for the Workplace monthly newsletter, the odds are good that you’re aware of the danger on the horizon.

Most of the proposals are a re-hash of those that have been presented in the past and have gotten nowhere.  The Congressional Budget Office, the Simpson-Bowles Commission and budget proposals coming from the House of Representatives have made the same or similar proposals over the last several years.  The difference is that now the same party controls both houses of Congress and the Presidency, making the changes somewhat more likely to be enacted.  Note that I used the modifier “somewhat” in the previous sentence; it’s no slam dunk to enact such major changes to long-time benefits.

There have been many articles written in federal news sources that outline the changes, but not many that analyze them, their chances of enactment and how federal employees should react if the changes are actually put into place.  This article will attempt to provide some analysis and perspective to the proposals.  We will begin with a general look at how likely they are to be enacted.

Though both houses of Congress and the Presidency are controlled by the same party, this doesn’t mean that every Republican proposal has a good chance of being enacted exactly as it was proposed.  In fact, it doesn’t mean that they have a good chance of being enacted at all.  Consider:

  • The margin of control in the Senate is two votes (three if you consider the fact that the Vice-President has a tie-breaking vote). Several Republican senators have shown some independence when it comes to hewing to the party line, so there is no guarantee that these proposals will get through the Senate.  Republicans hold a margin of (give or take) 40 votes in the House, but there are some districts where a Republican representative has a large number of federal employees or retirees as constituents.
  • Some proposals can be seen as stalking horses for attacks on other, more widely held and popular, benefits. The assault on cost-of-living adjustments for federal retirees might presage an attempt to change the COLA that applies to Social Security and other government inflation-indexed payments.  Remember what happened to the Obama-Boehner attempt to change to the “chained CPI” as a method of determining COLAs?  It fell flat once representatives realized how many Social Security recipients lived in their districts.  I expect that AARP, the big dog of lobbying groups, will actively fight these proposals.
  • If some of the proposals see the light of day, “grandfathering” is extremely likely. Almost every change to federal benefits over the last several decades has provided for the grandfathering of current employees, or employees hired before a certain date.

Another big thing to consider is the fact that those who will have to make these changes will be affected by them too.  If your high-three is changed to a high-five, your Congressperson’s will be also.  If a retiree’s COLA is done away with, so will that of retired elected officials (generally called lobbyists).

Now we’ll take a look at the proposals one at a time.

First, we’ll examine the proposed change from a high-three to a high-five in computing federal annuities. You may not remember, but CSRS had a high-five computation decades ago.   This won’t have as big an effect as it appears, though it will negatively impact those who are affected.  Let’s assume a prospective retiree is making $100,000 five years before retirement and receives annual raises of 1.5%. Under a high-three formula a CSRS retiree would receive a pension of $58,818 and a FERS retiree (1% factor) would receive $31,370. With a high-five formula substituted, the CSRS pension would be $57,949 ($869 less) and the FERS pension (1% factor) would be $30,906 ($464 less). This proposal might have a chance – if it is applied prospectively.  Working slightly longer (boo!) could easily make up for this loss.

Second, we’ll look at the elimination of the FERS COLA and the reduction of the CSRS COLA by .5%.  I have no idea why the proposals treat the two retirement systems differently; though I can speculate that because CSRS retirees are a vanishing breed – there’s more to be saved by targeting the larger number of FERS retirees.  There is precedent for lowering COLAs, as the FERS COLA is not as generous as either the CSRS or Social Security COLAs once the inflation rate passes 2%.  But we must remember, when FERS was introduced, anyone hired before the effective date of the new system was grandfathered into CSRS.

I believe that there will be more and stronger pushback on this proposal than on any of the others for a couple of reasons.  1) The elimination of the FERS COLA will have the largest impact of any of the proposals on the future financial security of federal retirees.  In a press release last month, NARFE stated that (assuming 3% inflation) the average FERS retiree would lose $23,430 in ten years and the average CSRS retiree would lose $12,598 over the same time.  2) As alluded to in the bullets earlier in this article, the elimination of the FERS COLA could be seen by many as the first step in messing with the Social Security COLA.  Many people who are not personally affected by the elimination of the FERS COLA will be concerned about what might happen to their inflation-indexed benefits in the future.

Also impacting the attack on the COLA is the fact that FERS is a fully funded (i.e. prepaid) system and changing the COLA might be viewed as taking property without compensation.  For your entire career you (and Uncle) have been paying the “normal cost” of your future FERS pension.  This normal cost has factored in features such as a COLA, a computation based on a high-three, and receipt of the Retiree Annuity Supplement.  You’ve already paid for the benefits that the President’s budget wants to take away!

I wouldn’t bet on this change happening, certainly not without extensive grandfathering of existing retirees and employees.  But what if it did? How could we prepare ourselves for this?  Consider that many of you have household emergency kits in case of a natural disaster or other calamity.  It is unlikely that you will be affected by a disaster – but you’re prepared nonetheless.  My emergency kit for the disaster of losing my COLA would be to (immediately, if not sooner) start socking more money aside in my TSP.  If I’m already fully funding my TSP, I would fully fund IRAs.  If I’m also fully funding IRAs, I would look at saving money in taxable accounts.  This way, I’ll have some extra resources to make up for the lack of a COLA and, if the threat ends up being blocked, I’ll have more money to enjoy in retirement.

A third threat is to increase FERS retirement contributions by 1% a year for the next six years while reducing the government contribution by the same amount.  There would be no concomitant increase in benefits.  This would equalize the amount that employees and the government are contributing towards retirement.  The proposal does not say whether the increase will be applied equally to FERS, FERS-RAE and FERS-FRAE employees, or whether the increases will stop when contributions are equalized.  I would hope that it was the latter.

This threat was not made to the few remaining CSRS employees, as their contributions are already equal to those made by the government.  This fact also provides some precedent for equal contributions for FERS employees.

As your household budget has only a certain amount of money, if your income is reduced 6% because of making higher contributions for your FERS annuity, there will have to be budgetary adjustments if this change is made.  Those who are not focused on their retirement may be tempted to cut back their TSP contributions by an equal amount and not touch the operating household budget; don’t be that person.  Try to make budget adjustments in areas that will not affect your retirement security.

A fourth threat is to eliminate the Retiree Annuity Supplement (RAS) for FERS employees.  The RAS is a payment that is made to FERS employees between their Minimum Retirement Age (MRA) and age 62.  Special Category employees are entitled to the RAS upon retirement, regardless of their age.  Elimination of the RAS has been suggested in the past for regular FERS employees, but not for those in special category positions.  The RAS is paid by OPM, but is based on the portion of an age 62 Social Security benefit that is due to their FERS civilian service.

This will not impact any FERS employees who retire at the age of 62 or older, but will affect those who retire earlier (generally those who started federal employment at a younger age).  Let’s look at a retiree who started with the federal government at age 26 and chose to retire 30 years later at their MRA of 56; their high-three salary was $100,000.  Their RAS would be approximately $1,125 per month, which would result in a total of $81,000 in payments if they collected the RAS up until they turned 62.  That is a significant loss and would be hard to plan for.

This represents a “perfect storm” for federal retirement and benefits.  If all are passed, you will have to pay more money for a worse pension: one that has no COLA, that doesn’t provide a supplement to those who retire before 62, and that is calculated using a high-five salary.

Those of us who are current employees or retirees can take a certain degree of solace in the fact that, even if these “reforms” are implemented, it is very likely that we will be grandfathered and will escape the brunt of the cuts.

What is somewhat disturbing about the proposed changes is that most of them seem like logical and prudent steps to take to those individuals who do not have benefits like those we have.  Those who support the changes will talk about “bringing federal benefits in line with those in the private sector.”  Many will not remember when federal benefits were in line with private sector benefits.  It’s the private sector benefits that have changed (e.g., disappeared or gotten far less generous), not the federal ones.  We want to advocate against the rush to a lowest common denominator for retirement and benefits in America and advocate for an improvement in benefits for those who work in the private sector.  We do not want to return to the America of a century or more ago when profits all accrued to the few and working people received little in the way of benefits. Write your elected representatives and support groups like NARFE that fight tirelessly to support our earned federal benefits.

In addition, continue to pay attention to these threats and inform others of them.  Subscribe to a newsletter like Fedsmith, or become a subscriber of FERSGUIDE.

Thank you to Guest Writer and Federal Retirement Expert John Grobe for contributing this article.