Are Retirement Savings in the Budget Deal?

The budget conference committee is rumored to be close to a deal that includes changes to federal retirement programs, increasing the share that federal workers pay toward their own retirement funds.

Currently, most civilian federal workers are required to contribute 0.8 percent of their salary toward the Federal Employee Retirement System (FERS), while federal agencies contribute an additional 11.9 percent. That 12.7 percent is deposited into a trust fund used to pay a defined-benefit pension to federal workers after they retire. As a result of 2012 legislation, federal workers hired after 2012 pay an increased amount of 3.1 percent. 

Policymakers have two types of options to consider with regards to federal retirement benefits – either they could increase pension contributions or they could reduce pension benefits.

With regards to contributions, policymakers will need to decide if they want to apply increases to only new workers (who currently pay 3.1 percent), only existing workers (who currently pay 0.8 percent), or both. The President’s budget would generate $20 billion by increasing contributions for most current workers from 0.8 to 2.0 percent. To generate the same amount of savings from new workers, their 3.1 percent contribution would have to more than double. 

As we've explained before, policymakers need to be careful not to double count savings from increases. The money can be used to reduce the deficit, offset sequester relief, or provide headroom under the sequester – but not all three.

Instead of increasing contributions, policymakers could change the benefit formula. For example, benefits could be calculated based on a workers’ highest 5 years of pay, instead of their highest 3. Or COLAs could be disallowed prior to age 62, with a one-time catch-up that year.

These changes could apply to only the civilian system, but would save far more if applied to military benefits as well, which Defense Secretary Hagel recently explained are consuming an increasing share of the defense budget. Savings from military retirement benefits might also be a logical offset for the defense sequester, though again policymakers must be careful to avoid double-counting.

Options for Increasing Federal Retirement Contributions
Policy Ten-Year Savings
Increase contributions by current employees from 0.8% to 2.0%, as proposed by the President ~$20 billion
Increase contributions by current employees from 0.8% to 3.1% ~$40 billion
Increase contributions by new employees pay from 3.1% to 6.35% (half of the total cost) ~$20 billion
Gradually increase contributions for current and new workers to 6.35% (half of the total cost) ~$70 billion
Calculate retirement benefits based on highest 5 years, instead of 3 years, of earnings, for civilians only $4 billion
Calculate retirement benefits based on highest 5 years, instead of 3 years, of earnings, civilian and military $6 billion
Freeze COLAs for federal civilian and military retirees until age 62, then provide one-time catch up ~$20 billion
Reduce military retirement benefits from 2.5 percent of wages per year to 2 percent for new retirees ~$5 billion
Eliminate the special Social Security payment for federal retirees that retire before age 62 ~$3 billion

*Estimates based on CBO data and CRFB staff calculations.

More information about federal worker retirement reform is available in the Moment of Truth Project’s report “Shared Sacrifice: Reforming Federal Retirement Programs.” It concludes:

Federal retirement programs help to protect the economic security of those who serve in our military and work for the government, and they should continue to do so in the future. However, these programs must be sustainable, be made more equitable across the government, and savings from these programs should be included in any comprehensive deficit reduction package...