As budget conference committee chairs Patty Murray and Paul Ryan appear to be moving closer to a partial sequester-replacement deal, reports suggest such a deal could include an increase in federal civilian retirement contributions. Increasing the amount federal workers pay toward their retirement benefits to more closely align with the private sector would be a sensible reform that could improve the fiscal situation. But there is a risk that policymakers would double-count the saving, in which case such reform would actually increase the deficit. This double-counting is highly technical, easily hidden, and perhaps unintentional. But it must be avoided.
|The Cost of Double-Counting Retirement Savings|
|Saving from Increasing Worker Contributions from 0.8 to 2.0||+$20 billion|
|Cost of Reducing the FY2014 Sequester by $20 billion||-$20 billion|
|Cost of Replacing Intragovermental Transfers with Discretionary Spending*||-$20 billion|
|Total Net Budgetary Impact||-$20 billion|
*This would take place through a three step process. First, retirement contributions owed by the federal agencies would fall, saving $20 billion. This in would lead to $20 billion in lower offsetting receipts into the retirement trust funds, costing $20 billion. Finally, the $20 billion of "headroom" created from the lower contributions would allow more direct spending from the discretionary budget, costing an additional $20 billion.
- Keep the Discretionary Headroom, but Ignore the New Receipts. Policymakers could allow higher worker contributions to create headroom within the budgetary caps for agencies. With workers contributing more toward their retirement, agencies could contribute less and could therefore spend more for other important purposes. From a policy standpoint, this approach (assuming the President’s policy of $20 billion) would be virtually identical to reducing the sequester cuts by $2 billion per year. To avoid double-counting, the new receipts could not be used to directly reduce the size of the sequester nor counted toward any deficit reduction goal.
- Count the New Receipts, but Adjust the Discretionary Caps. If policymakers wanted to use the new receipts from increasing federal retirement contributions to reduce sequestration cuts or reduce deficits, they could prevent additional unintended discretionary spending by reducing budgetary caps in an amount equal to the value of the increased discretionary headroom. In our example using the President’s policy, policymakers would reduce the pre- and post-sequester budgetary caps by $2 billion per year and not count any savings from that reduction for any purpose. This approach could be taken in concert with short-term sequester relief, though any reducing in the size of those cuts must come after the cap adjustment described above.
- Count the New Receipts, but Hold Agency Contributions Constant. Rather than making an adjustment to budgetary caps, lawmakers could simply prevent agencies from reducing their contributions in order to create headroom in the first place. Under this approach, new government receipts could be used for sequester relief or deficit reduction and no unintended additional discretionary spending (beyond that sequester relief) would be allowed to take place. To avoid “overfunding” the FERS program, agencies could be allowed to reduce their contributions toward FERS but required to pay the difference toward the CSRS program, which is currently underfunded by over $750 billion.