Proposed Changes To Federal Retirement Benefits

The House of Representatives passed a Republican budget resolution, H.Con.Res.14, on February 25, by a narrow vote of 217-215 along party lines. This resolution paves the way for budget reconciliation to implement $4.5 trillion in tax cuts, increased funding for border security and immigration enforcement, and $2 trillion in spending cuts, including $50 billion in reductions targeting federal retirement and health benefits.

NARFE (National Active and Retired Federal Employees Association) opposed the resolution, citing its directive to the House Committee on Oversight and Government Reform to reduce at least $50 billion in mandatory spending under its jurisdiction. Since federal retirement and health benefits constitute the only major mandatory spending in this category, these cuts would primarily impact federal employees and retirees.

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In a letter to the House, NARFE National President William “Bill” Shackelford warned:

“At a time when the current administration is conducting massive and indiscriminate reductions in force and attempting to eliminate – or at least greatly erode – the merit-based civil service system, cuts to federal benefits would pile onto an already beleaguered and under-assault workforce, further undermining the appeal of public service on behalf of this nation.”

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Proposed Changes To Federal Retirement Benefits - That May Be Enacted Through the Budget Resolution:

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1. Higher Health Care Costs for Federal Employees:

The FEHB (Federal Employees Health Benefits) program would shift to a voucher system, where the government pays a flat amount that does not keep up with rising premiums, forcing employees to cover more costs.

2. Increased FERS Retirement Contributions:

All FERS employees would be required to contribute 4.4% of their salary toward retirement, with no additional benefits, significantly higher than the current 0.8% contribution for pre-2013 hires.

3. Elimination of FERS Annuity Supplement:

FERS retirees who retire before age 62 would no longer receive annuity supplement payments, which currently help bridge the gap until Social Security eligibility.

4. High-5 Calculation for Retirement Annuities:

Future federal retirees' pensions would be based on their highest five years of salary (High-5) instead of the current highest three years (High-3), which would generally lower pension benefits.

5. Additional Measures Targeting Middle-Class Public Servants:

Other options are being considered that could further reduce compensation and benefits for federal employees.

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Potential Consequences of These Changes:

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• Breaking Promises to Federal Employees: The government would renege on commitments made to employees in exchange for their service.
• Reduced Take-Home Pay & Compensation: Increased retirement contributions would effectively lower the salaries of current federal employees.
• Recruitment & Retention Challenges: Weakened benefits could deter top talent from joining or staying in federal service.
• Threats to the Merit-Based Civil Service System: Undermining federal employee benefits could weaken protections against the politicization of government jobs.

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Next Steps in the Legislative Process:

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• The House-passed budget resolution now moves to the Senate for negotiations to draft a conference agreement.
• Once a joint budget resolution is approved by both chambers, committees will develop specific legislation to implement the proposed cuts through budget reconciliation.

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These developments could significantly impact federal employees’ retirement security, health care costs, and overall compensation, making federal service less attractive in the long run.

Let us break down each of these proposed changes to federal retirement benefits, as well as recent updates, to help federal employees plan their retirement effectively.

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Federal Employee Pension Systems: CSRS vs FERS

There are two primary pension systems for federal employees: the Civil Service Retirement System (CSRS) and the Federal Employee Retirement System (FERS) i.e CSRS vs FERS.

CSRS: This system only applies to federal employees who started their service before January 1, 1984. It offers an annuity based on the average of an employee’s highest three years of earnings.

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FERS: The more common system, FERS, applies to employees hired after January 1, 1984. It combines a pension, Social Security benefits, and the Thrift Savings Plan (TSP) – the government’s version of a 401(k).

The FERS pension formula is calculated as 1% of the high-three average salary, multiplied by years and months of service. For employees retiring at age 62 or older with 20+ years of service, this percentage increases to 1.1%. For example, a 62-year-old with 20 years of service and a high-three average salary of $70,000 would receive an estimated annual pension of about $15,400, or roughly $1,283 monthly.

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Social Security: Another Key Component of Your Retirement Income

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Federal employees contribute 6.2% of every paycheck into Social Security, with the government matching that amount. This creates a combined 12.4% going into Social Security.

FERS retirees need 40 quarters of qualified employment to qualify for Social Security benefits. They can begin claiming at age 62, though doing so results in smaller payments spread over a longer period. Retiring at age 70 maximizes Social Security payments, but the retiree will receive fewer payments over time.

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The Thrift Savings Plan (TSP)

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The TSP is one of the most important and beneficial retirement tools available to federal employees. It consists of five core funds: G, C, I, F, and S, as well as Lifecycle funds, which automatically adjust allocations based on a targeted retirement year. Check out the tsp rule of 55.

The key benefit of the TSP is the government match – the government will match up to 5% of your paycheck if you contribute that amount. Unlike the pension or Social Security, the TSP offers more liquidity, giving retirees greater control over withdrawals. The contribution limits are also high, and it’s essential to stay updated with the yearly changes through the TSP website.

Although the TSP is an excellent accumulation tool, it does have limitations, particularly when it comes to the pre-retirement and income phases. Federal employees are advised to consult with a financial professional who understands the rules and options available within the TSP.

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Federal Employee Health Benefits (FEHB)

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The Federal Employee Health Benefits (FEHB) program covers a significant portion of health insurance costs, with the government paying 72% and employees only contributing 28%. Employees who’ve been covered by FEHB for at least five consecutive years can continue their coverage into retirement, including for qualified family members.

A common misconception about the FEHB in retirement is that it becomes more expensive. In reality, the deduction simply gets spread out over fewer payments, as retirees receive only 12 pension checks per year instead of 26 paychecks. Retirees must also pay for their portion of coverage after taxes.

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Survivor Benefits

If a retired federal employee passes away before their spouse, the spouse may be eligible for survivor benefits. However, calculating these benefits can be complex and generally requires the help of a qualified federal retirement consultant. Additionally, the rules for survivor benefits differ between FERS and CSRS retirees.

Federal Employee Group Life Insurance (FEGLI)

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FEGLI (Federal Employee Group Life Insurance)is a life insurance option available to federal employees, but understanding the different options can be challenging. The available plans include:

• Basic: Inexpensive while employed but increases significantly in retirement.
• Option A: Pays $10,000, with a minimal cost that increases at age 60.
• Option B: Pays up to five times the employee's salary, but becomes costly as the employee ages.
• Option C: Provides family coverage with multiples for children and spouses.

Latest Updates: Federal Employee Retirement Considerations

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Schedule F

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A recent change to federal employment is the reintroduction of Schedule F, which designates certain employees in policymaking positions as excluded from civil service protections. This may affect up to 50,000 employees, and unions argue the impact could be much greater.

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Voluntary Early Retirement Authority (VERA) vs. Reductions in Force (RIF)

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VERA is a voluntary option that allows federal employees to retire early. However, employees should carefully assess their age, retirement plans, and financial situation before deciding to take advantage of VERA. Withdrawing from the TSP early can have long-term consequences, as it reduces the capital available for compounding interest.

On the other hand, RIFs (Reductions in Force) are involuntary. Employees facing potential RIFs should consult with a federal retirement expert to understand their pension, TSP, and other benefits. RIFs could also affect health benefits and the ability to access life insurance.

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Stay Informed

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As the federal government continues to evolve, it’s crucial for employees to stay informed about the latest fers retirement changes. Federal Employee Benefit Advisors (FEBA) offers valuable resources to help employees navigate the complexities of federal retirement. Attend FEBA’s upcoming free educational webinar on March 13th to learn about federal retirement benefits and get up-to-date information on government downsizing.

Whether you’re considering a VERA, preparing for a potential RIF, or simply want more information about your federal benefits, it’s essential to work with an experienced consultant to make informed decisions about your future.