Impact of budgetary hit to federal retirement weighed

December 9, 2013

Requiring federal employees to pay more toward their retirement benefits would have an uncertain effect on recruitment of new workers but likely would spur some current employees to leave earlier than they would have otherwise, according to a recent analysis done for Congress.

Increasing the required contributions, and the potential impact of doing so, has been under consideration in negotiations over budget levels for the remainder of the current government fiscal year and for fiscal 2015.

(Kim Hong-Ji/Reuters)
(Kim Hong-Ji/Reuters)

One potential approach would be to require employees to contribute 1.2 percent of salary more toward their toward their benefits. The Obama White House has raised that idea several times, with a proposed three-year phase-in. Other proposals, by House Republicans, would require a still larger increase, potentially of about 5.5 percentage points; some of those have specified a multi-year phase-in  as well. The White House has estimated that a 1.2 point increase would produce $20 billion for the government over 10 years. The Congressional Budget Office puts the figure slightly lower, at $19.3 billion, while specifying that it assumes the increase would not apply to certain employees already paying at a higher rate.

Those hired into federal jobs in 2013 and later generally pay 3.1 percent of their salaries toward their Federal Employees Retirement System benefits, compared with 0.8 percent for FERS employees hired previously. FERS employees also pay the standard Social Security payroll tax of 6.2 percent.

Those first hired before 1984 generally are under a separate system, the Civil Service Retirement System, that does not include Social Security. They pay 7 percent of salary toward their federal retirement benefits. Both FERS and CSRS employees in addition pay 1.45 percent of salary toward Medicare.

Federal employee organizations and some Democratic members of Congress continue to speak out against raising retirement contributions, arguing that federal employees already have done more than their share for deficit reduction, with three years of salary rate freezes and sequestration-triggered unpaid furloughs. They also argue that the increase would affect the quality of the federal workforce and the services it provides to the public.

“To continue targeting one group to carry the burden of fixing our deficits is absolutely unacceptable,” said a statement last week from House Democratic Whip Steny Hoyer of Maryland. “This denigration of our nation’s federal employees doesn’t just harm our ability to recruit and retain the top-notch workforce needed to serve the American people – it harms the American people who access the services of our government.”

In an analysis released in November, CBO said that because an increase in required contributions “would not change the compensation of federal employees hired after 2012, it would probably not affect the quality of new recruits.” However, it added that “some new recruits could be particularly susceptible to competition from private-sector employers.”

CBO said the impact on the retention end could be more clear: “An argument against this option is that it would reduce the number of highly qualified federal employees by motivating some of them to leave for the private sector and by encouraging some of them to retire earlier . . . some highly qualified federal employees have more lucrative job opportunities in the private sector than in the federal government. More of those employees would leave for the private sector under this option.”

CBO’s analysis was based partly on its conclusions regarding how federal pay stacks up against that of the private sector. In a 2012 report using data from before salary rates were frozen starting in 2011, CBO said that federal employees were 2 percent ahead overall, with those having lower levels of education farther ahead but those with higher levels of education behind.

Studies done by others using differing methods and differing data sets have reached widely varying conclusions regarding pay comparability.  The Government Accountability Office concluded last year that none of them is definitive.

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