Organizations representing federal employees argue that feds have made a large enough contribution toward deficit reduction and that political leaders should look elsewhere for a route away from the fiscal cliff. They point to changes already enacted as costing employees more than $100 billion collectively.
However, various proposals have remained active during the run-up to the cliff, in particular as Washington tries to avoid automatic cuts in many federal programs that otherwise will hit in January. On idea currently prominent involves changing to the “chained” Consumer Price Index, a less-generous inflation measure for increasing payments under a variety of programs, including federal retirement.
Following are 10 questions about what has been enacted, the additional proposals and their impact.
Q. Federal employee salary rates have not been increased since January 2010. What has that cost them?
A. The most commonly cited total dollar figure is one released by the White House in late 2010, when President Obama endorsed freezing rates at 2010 levels for 2011 and 2012, a plan that Congress quickly agreed to. In that announcement, the White House estimated that the two-year freeze would save the government – and cost employees – $2 billion in the first year, $28 billion over five years and $60 billion over 10 years.
Whether federal employees “already” have contributed $60 billion toward deficit reduction because of that freeze is a matter of semantics. That amount hasn’t come out of the collective federal employee pocket yet, but over time it will, because each year salary rates will be lower than they would have been.
Another issue involves assumptions about what employees would have received otherwise. Military personnel received a 1.4 increase in 2011 and 1.6 percent in 2012. For many years, the two types of raises had been equal; the only exceptions involved some years in which the military received higher raises.
Yet another complication is that despite the freeze on rates, many employees have continued to receive raises on promotion, for performance, or on successfully completing waiting periods used in some federal salary systems for advancement up the steps of a pay grade.
Q. What about 2013?
A. Obama this year proposed that federal employees receive a raise of 0.5 percent in January 2013; the budget plan said a permanent freeze “is neither sustainable nor desirable.” The budget said that compared with the 1.7 percent raise indicated by a pay law’s formula, the saving would be $2 billion in 2013 and $28 billion over 10 years.
The 2013 raise situation remains unsettled. Obama later in 2012 proposed – and Congress again agreed to – delaying the increase at least until April 2013. Obama called for paying a 0.5 percent raise at that time, and employee organizations want it made retroactive to January.
However, the salary rate freeze also could be continued for the entire year. A House-passed budget plan, which the Senate did not consider, called for keeping rates unchanged through 2015.
Meanwhile, military personnel are set to receive a 1.7 percent raise in January.
Q. While pay rates are frozen, won’t employees be effectively suffering a pay cut through paying higher contributions toward retirement?
A. First, some background: Under current rules, employees under the Federal Employees Retirement System pay 0.8 percent of salary toward a civil service retirement benefit, plus the standard Social Security payroll tax – typically 6.2 percent of salary, but 4.2 percent this year. Those under the Civil Service Retirement System do not pay Social Security taxes; instead, they pay 7 percent of salary toward their civil service benefit.
A law enacted this year required that for those first hired into the government, or who are returning to federal employment with less than five years of prior federal employment, in calendar year 2013 or later will have to pay 3.1 percent of salary toward their FERS civil service benefit rather than 0.8 percent. (That provision will not affect the CSRS employees since that system covers those first hired before 1984.)
The Congressional Budget Office estimated a cost to those future employees of $100 million in the first year, reaching $3.3 billion in 2022, for a 10-year total of $15.5 billion.
It’s again a matter of definition whether federal employees as a group “already” have suffered from that increase. No one has paid it yet. Future employees will pay it but not current employees, except those who leave government with fewer than five years of service and return sometime in the future.
Note: Those are required payments for defined benefit retirement plans and are separate from the voluntary investments that employees may make in the Thrift Savings Plan, a 401(k)-style defined contribution plan.
Q. What about proposals to increase retirement contributions from current employees?
A. Various plans have been in circulation for years and have remained under discussion this year. Obama twice has proposed, including in his budget plan earlier this year, to increase the required contributions by current employees by 1.2 percent of salary phased in over three years. The budget estimated a $27 billion 10-year cost to employees.
House Republicans meanwhile have proposed even steeper increases, including one to raise the required amount by 5 percent of salary over five years. That plan passed the House in May but the Senate never considered it. CBO estimated an $88 billion 10-year cost to employees.
Q. Would employees receive a better benefit for their higher contributions?
A. No. The benefit formula for future employees who will pay higher contributions will be the same as under current law. None of the proposals to require higher contributions from current employees call for an improvement in benefits, either.
Q. What other changes have been considered?
A. The House-passed bill would have eliminated, for most retirees, a supplemental benefit paid to FERS employees who retire before age 62. That supplement is designed to replace the value of their Social Security benefit until they are eligible to begin drawing it. But that issue has drawn little attention since.
Other ideas that have been raised in the past include basing benefits on the average of the highest five years of salary rather than three and other possible changes in the formula. Those have not been active this year but always could arise.
Also under discussion is mandating a cut in federal jobs, possibly of 5 or 10 percent, which advocates say could be accomplished over several years by restricting hiring and allowing many vacancies created by normal turnover to go unfilled. That would mean more work for many of those left behind, though.
Of late, the idea coming to the forefront involves the “chained” Consumer Price Index.
Q. What would be the result of switching to the chained CPI?
A. Again, some background first: Federal retirees receive cost-of-living adjustments, not active federal employees. Although active employees often refer to their raises as COLAs, they are not linked to inflation and they are not automatic, as recent years have shown. In contrast, retirees receive COLAs, which are automatic, and are linked to the CPI for urban wage earners, called the CPI-W. That’s the same index used to set COLAs in many other federal programs, including Social Security.
A further distinction is that federal retirees under the CSRS system get the full COLA for life regardless of age. Those retired under the FERS system get the full COLA only if the CPI-W figure is below 2 percent; if it is between 2 and 3 percent, they receive a 2 percent COLA; and if it is above 3 percent, they receive 1 percentage point less. Also, COLAs are not paid to most FERS retirees until age 62.
The “chained” CPI has been considered for years as an alternative basis for benefits. It attempts to take into account changes in consumer behavior, for example substituting one type of purchase for another whose price has risen substantially. The classic example is buying more chicken when the price of beef is high.
In percentage terms, CBO has estimated that the chained CPI grows 0.25 percentage points more slowly per year than does the CPI-W. That’s consistent with other estimates putting the average difference at about 0.3 points per year.
Q. What would that mean in dollar terms?
A. One estimate, done for the National Active and Retired Federal Employees Association (NARFE) is based on a $15,000 annual benefit, about the Social Security average, and COLA adjustments of 0.3 points per year below that of current policy. Over 30 years at an average of 3 percent inflation, that person would lose about $24,000 in income, it said.
NARFE and other organizations further argue that even the currently used index does not keep beneficiaries apace with inflation because it does not take into account that older persons spend more on health care, for which costs commonly rise faster than for other expenses measured.
Q. Wouldn’t the impact on federal retirees be even larger?
A. As mentioned above, those who retire under FERS are covered by Social Security and receive benefits from it on the same terms as other American workers. In addition, the civil service benefit for which they pay the separate contributions generally is worth 1 percent of the average of their highest three salary years, per year of service. The average annual FERS annuity in 2011 was about $13,000.
Also as mentioned above, employees who retire under CSRS don’t pay into Social Security and thus don’t receive a benefit from that system for their years of federal employment. Their civil service formula, though, produces a benefit worth almost twice what a FERS retiree with a similar work history would receive. The average CSRS annuity is about $36,000 a year.
Some of those retired under CSRS do qualify for Social Security through other employment, although offsets typically reduce that benefit.
Q. When might a switch to a chained CPI happen?
A. NARFE legislative director Jessica Klement said that if the change does pass despite the objections of that organization and others, she wouldn’t expect it to be effective for January 2013, when retirees are in line for a 1.7 percent increase.
But a switch to the less generous inflation measure could happen as early as 2014, she added. “It’s very easy to get legislation passed in Washington if no one understands what it really means. I think this is one of those situations,” she said.
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