How much will federal pension cuts save?

President Trump's 2018 budget proposal includes billions in savings from cuts to federal employee retirement benefits. Does the math work?

illustration dollar sign in vise

Restructuring the federal retirement system is a focal point for Congress and the White House, and now the Congressional Budget Office has weighed in on the effects of a series of different strategies.

The budget proposed by the Trump administration identifies almost $6.5 billion of savings in fiscal 2018 alone that could be achieved by slashing federal employees’ retirement benefits. Over 10 years, the budget outlines cuts of $76 billion from retirement benefits and another $72 billion from increases in required employee contributions.

The proposal also includes eliminating cost-of-living adjustments for individuals in the Federal Employees Retirement System (FERS) and basing federal pensions on the average of an individual’s highest five years of salary rather than the highest three.

Those aspects of the administration's budget have been opposed by federal employee unions, more than 100 Democratic members of Congress and nine Republicans whose constituencies include significant federal employee and retiree populations.

In a new report requested by the House Oversight and Government Reform Committee, CBO examines five options for changing the federal retirement system. Three seek changes to the FERS pension plan, and two would replace it by enhancing the Thrift Savings Plan (TSP).

The first option would increase the contributions all FERS participants must make to 4.4. percent, the rate paid by employees hired since 2014. Under the current system, feds hired before 2013 contribute 0.8 percent of their pay toward their pensions, and feds hired in 2013 contribute 3.1 percent.

The proposed option would phase in all employees and save about $47 billion from 2018 to 2027, with peak annual savings taking place in 2021.

Because the 4.4 percent rate already applies to employees hired since 2014, CBO concluded that the option "would not affect the federal government's ability to recruit new employees" but would entail a "modest increase in the number of employees who chose to leave federal service over the next 10 years," with most departures being the government's "most experienced and highly qualified employees."

The second option would lower all pension contributions to the 0.8 percent level enjoyed by pre-2013 hires. Over 10 years, that would increase government spending by $32 billion but would help agencies' recruitment and retention efforts, especially for those who aren't committed to a lengthy civil service career.

The third option changes the pension calculation as proposed in the Trump administration's budget by averaging an employee's five highest salary years, as opposed to the current practice of averaging the three highest. This option would only affect future pension recipients.

CBO estimated that the adjustment would decrease federal retirement spending by $3 billion over 10 years and "expects a small decrease in the recruitment and retention of highly qualified workers" because of the relatively small pension reduction.

Both options four and five would eliminate the FERS pension for future hires and replace it with an expanded TSP.

The fourth option would bump the government's automatic TSP contribution to 8 percent of an employee's salary and require the government to match up to 7 percent for additional contributions, instead of the current 1 percent.

The fifth option would bump the government's automatic TSP contribution to 10 percent of an employee's salary but scrap the matching component.

Both of those options would increase net government costs over the next 10 years, but that increase would turn after about 30 years, when the employees affected by those options are expected to retire.

Furthermore, CBO said the fourth and fifth options would likely enhance recruitment and retention of early-career and retirement-eligible employees but reduce the retention of midcareer employees.

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