Exploring Federal Pay for Cuts

As our Budget Simulator grows in popularity, more and more people have taken the spending challenge to voice how they would like to see government spending cut. One popular suggestion has been that something be done regarding federal pay and benefits, which have fared relatively well in this economy while the private sector has felt the stronger sting of the recession.

Truth be told, federal employees do quite well for the most part. In fact, a recent USA Today analysis found that in a job-to-job comparison, a typical federal employee is paid about 20% more than his private sector counterpart.

It is true that much of this difference is due to differing levels of education attainment, as Peter Orszag explains here. But in addition to high wages, federal employees receive extremely generous benefits. Among them are a very generous health care plan, life and disability insurance, two types of retirement benefits (a DB pension and a 401(k)-type plan with a match), and a significant amount of paid time off. Not to mention flexible work schedules and a level of job security unheard of in the private sector.

The gap between federal and private employees has worsened some as the recession has taken hold. Over the past two years, government wages have grown 4.5% while private wages have grown only 2.2%. Over the last year, private wage have actually fallen. In other words, government wages have maintained strength over the course of the recession, while private sector wages have suffered.


Source: Bureau of Economic Analysis, National Income and Product Accounts Table, 6.6D

One recent analysis actually found that 19% of civil servants earn salaries above $100,000 – compared to 14% before the recession. Few other industries have been so lucky. To us, this suggests that federal compensation might be an area ripe for reform.

And military compensation must be on the table as well as civilian compensation. The 2008 Quadrennial Review of Military Compensation found that service members made a larger salary than 80 percent of comparable civilians. And a Defense Department sponsored study by CAN Corp. found in 2006 that enlisted service members made over $13,000 more (including benefits) than their civilian counterparts. Officers were found to make almost $25,000 more.

To be sure, we cannot solve our debt woes just by reining in on federal wages and benefits. If the pendulum swings too far in the other direction, the quality of our federal workforce could suffer.

Still, there are a number of ways we could begin to pare back some of the generosity in federal compensation. Some of the options highlighted below could help produce savings for our fiscally-strapped government:

Policy Option Savings (billions)
Reduce military pay raises by 1 percent for five years $15
Calculate federal pension benefits based off five years of earnings to conform with private sector $4
Base COLAs for federal and military pensions and veterans' benefits on alternative measures of inflation $23
Increase federal employees' contributions to pension plans $9
Reduce benefits under the federal employees' compensation act $2
Freeze federal civilian pay for 1 year $30
Freeze federal civilian pay for 3 years $90
Base federal retirees' health benefits on length of service $1
Adopt a voucher plan for the Federal Employees Health Benefits Program $33
Increase health care cost sharing for family members of active-duty military personnel $7
Introduce minimum out-of-pocket requirements under TRICARE for life $40
Increase medical cost sharing for military retirees who are not yet eligible for Medicare $25
Require copayments for medical care provided by the Dept. of Veterans Affairs to enrollees without a service-connected disability $7
Remove tax exclusions on certain allowances for federal employees abroad $18
Remove the tax exclusions of military pay and benefits $68
Remove tax exclusions on veterans' disability compensation and pensions $43

Some of these options deal with pay directly. A one-year freeze on federal civilian pay (in other words, no cost of living adjustment) would save $30 billion over the next decade and restore much of the growing wage disparity resulting from the recession. We estimate a three-year pay freeze could save three times that. And simply tying basic military pay raises to 0.5 percentage points below the Employment Cost Index (the measure used for calculating wages and salaries of private-sector workers), for five years rather than 0.5 percentage points above it, could save $15 billion.

Pension benefits can also be reformed. In the private sector, where defined benefit pensions still exist, benefits tend to be based off of five years of earnings – yet public pension benefits are calculated off of three years, which does not usually capture as big of a range of earnings. Meanwhile, federal employee contributions to their pensions tend to be low, and benefits are adjusted annually based on an inaccurate measure of inflation. Correcting these issues, together, could save more than $35 billion dollars over a decade.

And then there is health care. Federal, military, and veteran health benefits are driven by the same factors as Medicare, yet were left untouched in health reform. Some reforms to the Federal Employee Health Benefits (FEHB), such as replacing it with a voucher program, could save over $30 billion. Meanwhile, introducing some cost sharing and premiums into the military TRICARE program – which hasn’t seen either rise in even nominal terms since its creation – could save over $70 billion.

Finally, there’s the matter of tax expenditures. The tax code itself subsidizes federal workers in a number of ways. For example, many benefits and allowances, and even some types of direct pay, are exempt from taxation for members of the military. The same is true for many federal workers living abroad. And veteran’s pension and disability benefits also seem to get a special place in the tax code. Taken together, these benefits will cost taxpayers about $130 billion in lost revenue over the next decade.

To be sure, even adopting every one of the policies together would still only reduce the deficit by less than $400 billion over the next decade. That isn’t nearly enough to stabilize our debt or get deficits under control. But it would be a great start, and certainly one worth considering.