How higher federal-retirement payments ended up in the budget deal

Correction: A previous version of this post mischaracterized Senate Budget Committee Chairman Patty Murray’s (D-Wash.) position on a White House proposal to save $20 billion by increasing federal employees’ contributions toward retirement savings. Murray did not accept that number and told Republican leaders it needed to come down, according to Democratic aides and lawmakers.

After a year of furloughs, budget cuts and uncertainty for federal workers, this much is clear in the congressional budget deal that the House will vote on Thursday: It could have been much worse.

That may not be much consolation to future hires who will contribute more to their retirement accounts or working-age military retirees who will see their cost-of-living increases pared back for the first time since the 1980s.

But the agreement between House and Senate negotiators to fund federal agencies through the fall of 2015  is not the bitter pill Republicans or even President Obama had proposed to bump up what federal employees pay toward retirement in order to save the government money.

The compromise on pensions was reached at the 11th hour, the last piece of a deal that cancels half of the sequestration spending cuts this fiscal year and restores some certainty to the budget process in the short term. It benefited from a bipartisan mood on Capitol Hill on fiscal matters, consensus among Republicans and Democrats that some change to retirement benefits should be on the table and a willingness by Pentagon leaders to avoid deeper cuts from defense spending by finding savings in military pensions, according to lawmakers involved in the negotiations.

“This was looking for ‘Where do we have common ground where we agree?’” said Rep. James Lankford (R-Okla.), a member of the Budget Conference Committee.

The question was how much more federal employees should contribute to their retirement savings, and whether their counterparts in the military should share in any increase.

The agreement calls for civilian employees hired after Dec. 31 of this year to pay an additional 1.3 percent of their salary toward their annuity, saving the government $6 billion over 10 years.  The change affects new employees with less than five years of service. Working-age military retirees will see their cost-of-living adjustment reduced by 1 percent starting in December 2015. When they reach 62, their retired pay will revert back to the full rate of inflation. This change also will save $6 billion.

The deal also allows federal workers to get their first cost-of-living increase in four years. The president proposed a 1 percent raise for January 2014 in the spending plan he released last spring. With no action in Congress to stop the increase –although Republicans pressed to continue the freeze during the budget negotiations that ended this week – Obama has announced that he plans to enact it by default with a presidential order by the end of December.

The compromise on retirement contributions was stitched together in the last 48 hours of talks, according to Lankford and Rep. Chris Van Hollen, (D-Md.), another committee member. Once higher taxes, tax loophole closures and cuts to entitlement programs were off the table, pension benefits became one of the few areas where Democrats and Republicans could negotiate.

Obama had given House Republicans, who had wanted federal employees to pay an additional 5.5 percent toward retirement savings or $130 billion over 10 years, an opening by proposing his own increase of 1.2 percent for all federal employees, yielding $20 billion in savings.

But $20 billion in a relatively modest budget package seemed excessive, Van Hollen said, especially after federal employees have had their pay frozen and been forced under sequestration to take furloughs this year of up to a week.

“The GOP argument was, ‘It’s the president’s number so you should be willing to take it,’ ” Van Hollen said. “That’s where it sat for a long time.”

He and other Democrats with large federal worker constituencies pressed for a smaller hit. They also insisted that only future hires would contribute more to their annuities. They suggested Congress look to farm subsidies instead to find savings, but the GOP rejected that idea.

Democrats agreed to less relief from the sequester cuts and to extend by two years a formula in the sequester that lowers payments to Medicare providers. They also got an agreement that  lowers the compensation level the government pays to some outside contractors. At the same time, they wanted parity in the treatment of civilian employees and military retirees, many of whom take early retirement and move onto other jobs while they receive full government pensions.

With the blessing of top Pentagon officials who have long pressed  for relief from personnel-related costs for retirement and health care, Republicans agreed to reduce the retirees’ cost-of-living increase. The pensions are a liability that continues to spiral up as Defense spending enters an era of spiraling down.

“Most every one of them are working another job,” Lankford said of officers and soldiers who retire in their early 40s. “The savings is obviously huge.” As late as Thursday afternoon, groups representing military retirees were lobbying their members to urge lawmakers to vote against the provision.

For civilians, the agreement would create a three-tiered system for pension contributions. Those hired before this year pay 0.8 percent of their salary, those hired in 2013 pay 3.1 percent and those hired after Jan. 1 would pay 4.4 percent under the budget agreement.

Lankford says it’s a start toward what he called much-needed pension reform.

“We have to strike a compromise to a level where we say we still want to have a great retirement system for our federal family,” Lankford said, “but we also have to make sure we can honor future promises.”

When the compromise was well underway, Obama called Van Hollen as the president was traveling to South Africa for Nelson Mandela’s funeral. He wanted an assurance that the White House would not propose additional pension contributions from federal employees in its next budget proposal. He got it.

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