President Reagan's forthcoming budget is expected to propose a major restructuring of the Civil Service retirement system that would limit cost-of-living increases in benefits, reduce benefits of those who in the future retire before age 65 and increase the employe's pension contribution from 7 percent to 9 percent of pay.
The changes are designed to save the government about $1.9 billion in the first year alone.
The Civil Service plan is part of series of proposals under consideration to reduce federal spending and cut the anticipated $206 billion federal deficit for fiscal 1986. Others involve reductions in farm subsidies, restrictions on veterans' health benefits, cuts in federal grants to the states and localities, and curbs on Medicare and Medicaid.
In California yesterday a senior White House official said President Reagan also may revive the idea of abolishing the Education Department.
The Civil Service retirement changes would affect about 1.9 million retirees and dependents, including at least 70,000 in the Washington area, plus future retirees. In fiscal 1983 the system paid $20.3 billion in benefits.
Congressional and administration sources said yesterday that the Civil Service plan, which resembles two previous Reagan proposals is expected to contain these key features for those who were in the system before Jan. 1, 1984:
* Full cost-of-living increases for retirees would be paid only on the first $10,000 to $12,000 a year in benefits. The exact figure would be determined later. Benefits in excess of that amount would also be raised 55 percent of the increase in the cost of living. Retirees now get the full cost-of-living adjustment applied to their full pension. By law, the nation's 1.4 million military retirees must receive the same cost-of-living treatment as civil servants.
* For future retirees, the initial benefit would be based on average pay for the civil servant's highest five years of earnings, instead of the three highest years. This change would cut pension benefits for many people.
* In the future, anyone retiring before age 65 would have his pension reduced by 5 percent for every year below 65 that his age is. At present, anyone can retire with full pension at 55 after 30 years of service. This change would be phased in. Those now 55 or over would not be subject to the reduction; those now 50 who retire at 55 would have their pensions cut by one-quarter. Persons who are 45 or under would be subject to the full reduction for each year they retire before age 65.
* The current employe contribution to the retirement system of 7 percent of pay would be increased over two years to 9 percent.
All these changes would apply to those in the existing Civil Service retirement system, which was closed to new entrants on Jan. 1, 1984. Anyone entering federal employment after that is covered by Social Security and will also receive a supplementary federal pension that Congress must enact this year.
Two plans to shape the new supplementary pension system are under consideration by the Office of Management and Budget and the Office of Personnel Management. Both would cost the government 17 percent of payroll for the employes involved, one-third less than the old system.
One plan, which sources said is favored by the OPM, would be similar to the old system. The retirement age would be 62 to 65, the same as Social Security. Benefits would be based on years of service and salary. However, the final benefit would be integrated with Social Security benefits, so that the combined final pension would be similar to what a worker in private industry receives from Social Security and a reasonably good private pension.
The other proposal, said to have some support in the OMB, is a "defined contribution" plan. Instead of using a formula based on salary and years of service to compute benefits, the government would put in a certain contribution each year for each employe. When the employe leaves, he receives the total of these contributions plus interest. Employes might be permitted to make contributions of their own to boost their accounts.
Sources also said the OPM is likely to propose restrictions on sick leave and vacation for federal employes.
In another development, OPM Director Donald J. Devine notified all heads of nondefense departments and agencies that "President Reagan has decided to press for further reductions" in the federal work force.
"Additional reductions are to be achieved primarily through attrition," he said and stressed, "There will be no across-the-board freeze in employment in order to force attrition." He added, however, that he doesn't want to see a hiring speedup in "anticipation" of cuts.
Meanwhile, White House officials acknowledged yesterday that a task force chaired by presidential counselor Edwin Meese III is investigating major cuts in veterans' benefits.
But deputy White House press secretary Marlin Fitzwater said reductions are being considered as part of an across-the-board review and may not be included in the fiscal 1986 budget that Reagan will submit to Congress early next year.
Among the possible reductions being examined is a proposal to exclude veterans from getting free medical care for disabilities not related to their service. Such veterans could receive care, but they might be charged fees based on their ability to pay. This would strip about 90 percent of veterans of the right to free medical care on a bed-available basis at age 65.
Veterans Administration officials said yesterday that they also were ordered to project how much could be saved if the VA treated only the service-connected ailments of veterans and not "systematic ailments" that often develop because of such injuries.
"In other words, you could treat a veteran who had part of his arm amputated, if he complained about a problem with that arm," a VA official said. "But you couldn't treat him for possible circulatory damage that might have been caused by the amputation. This is the narrowest possible definition of VA medical care for veterans."
Other possible changes include giving veterans vouchers for medical treatment and letting them buy medical care with it.
Democratic members of congressional veterans' committees, including Sen. Alan Cranston (D-Calif.) and Rep. G.V. (Sonny) Montgomery (D-Miss.), as well as the American Legion and Paralyzed Veterans of American yesterday sharply criticized the administration for considering these changes.
"It's misguided and wrong," Montgomery said.
Under current law, one of every two American men 65 and older will be eligible for VA medical benefits by 1990. Under current eligibility rules, the VA's $26 billion budget would have to be increased 61 percent to meet demand, a recent VA study indicated.
The White House unsucessfully tried to block release of the VA study before the election. Democratic critics said questions being raised by the White House signal Reagan's intention to deal with the growing rolls by reducing eligibility, instead of increasing spending.