President Obama proposed increasing contributions for all federal defined benefit plans - including FERS and other retirement systems for CIA and Foreign Service employees - by 0.4 percent per year for three years, beginning in 2013, after the two-year pay scale freeze ends. (Win McNamee / Getty Images)
The Obama administration's deficit reduction proposal hikes federal employees' retirement contributions by 1.2 percent — less painful than plans advanced this summer by the administration, Republican lawmakers and the deficit reduction committee.
Robert Tobias, director of American University's Institute for the Study of Public Policy Implementation, said that while it's too soon to tell exactly how federal benefits will be cut, Obama's proposal will likely represent the floor for future negotiations.
"It certainly could have been worse," Tobias said. "This is going to be the minimum" that is cut from federal benefits.
The White House on Sept. 19 proposed increasing contributions for all federal defined benefit plans — including the Federal Employees Retirement System, the Civil Service Retirement System, and other retirement systems for CIA and Foreign Service employees — by 0.4 percent per year for three years, beginning in 2013, after the two-year pay scale freeze ends.
And the FERS annuity supplement, paid to retired employees who are not yet eligible for Social Security benefits and provides what an employee would receive for his federal service if he had been eligible, would also be eliminated for new employees.
The savings from those changes — estimated to be $21 billion over 10 years — would be put toward unfunded liabilities of the federal retirement plans.
President Obama called the changes to federal retirement plans "modest" in a Sept. 19 statement in the White House's Rose Garden.
The deficit reduction plan "achieves these savings in a way that is fair — by asking everybody to do their part so that no one has to bear too much of the burden on their own," Obama said.
Obama said his proposal, which he sent to the so-called supercommittee of 12 lawmakers that is tasked with finding at least $1.5 trillion in deficit reductions, would cut $3 trillion from the deficit.
The American Federation of Government Employees blasted Obama's plan as a "$21 billion tax increase on federal employees [and] a stunning violation of the president's promise not to raise taxes on families earning under $250,000." AFGE said the proposal is especially unfair since it comes on the heels of a two-year freeze to federal pay scales, which the administration said would save $60 billion over a decade.
"This is a double whammy for federal employees, who are facing the same economic hardships as most other Americans," AFGE National President John Gage said. "Enough is enough."
National Treasury Employees Union President Colleen Kelley sent a letter Sept. 20 to the supercommittee calling the changes "ill-advised and inequitable," and said they would lead to "an exodus of our most highly-trained and experienced workers."
Tobias said this could hurt the federal workforce down the road. Employees who are near or at retirement age will leave rather than pay higher amounts, he said. And he expects the government will have a hard time recruiting top workers to replace them — not only because of the higher contribution rates, but also due to the pay freeze, budget cuts and agencies being increasingly expected to do more with less.
John Palguta, vice president for policy at the Partnership for Public Service, agrees the government is likely to see a spike in retirements, but he doubts it will hurt recruitment. Most new workers focus on their pay, not retirement benefits or contribution rates, Palguta said. And he said the fact that the federal government even still offers a defined benefit pension places it head and shoulders above most companies, many of which have dropped pensions in recent years.
"1.2 percent less hurts, but it's not an amputation," Palguta said. "It's more like a major muscle cramp. We're still going to be able to attract people."
But Palguta warned that it could get worse. Several Republican lawmakers — some of whom think feds are vastly overcompensated — are eyeing deeper cuts to federal benefits.
Sen. Tom Coburn, R-Okla., for example, wants to eliminate the FERS pension altogether for new hires beginning in 2013. Rep. Paul Ryan, R-Wis., wants FERS employees to contribute half the cost of their pensions, which would amount to a 5 percent pay cut. The White House's deficit reduction commission, chaired by former Sen. Alan Simpson and former White House Chief of Staff Erskine Bowles, suggested basing federal pensions on the average of an employee's five highest annual salaries — the so-called "high-five" — instead of using the current high-three formula, and using the so-called "chained consumer price index" to set lower cost-of-living adjustments for pensions.
During the debt ceiling negotiations this summer, the White House was considering steeper contribution increases for new federal employees, a transition to the high-five pension formula and the chained CPI. It is possible some or all of those proposals could resurface in the coming months.
Last week, the White House also proposed overhauling the six-decade-old General Schedule system. The administration pointed out the GS system was created for a workforce of clerks and other lower-grade employees doing routine tasks that didn't require specialized skills.
It offered no details on what it wants to replace the current system with, but it called for a new commission of lawmakers, labor and management group leaders, private-sector representatives and academic experts to craft a new system.
The administration said civil service changes are needed because many federal employees think the GS system is incapable of dealing with poor performers or rewarding innovation, and previous efforts to reform it have failed.
"To manage the complex work agencies perform today in order to meet the needs of the American people, federal managers and employees need a modernized personnel system that reflects the reality of the 21st century," the White House said. The administration said agencies must offer compensation that reflects what the market offers employees, encourages career development and mobility across agencies, addresses poor performers fairly and consistently, and motivates better performance with the best evidence-based practices from the public and private sectors.
Palguta said the proposed commission is a silver lining in the administration's proposal. He and other federal experts have long called for civil service reform that updates the GS system.
The Federal Managers Association and Senior Executives Association are cautiously optimistic about the commission's chances for making improvements, and hope involving Congress in the process will increase the chances of getting substantive changes written into law.
"Our groups have always been open to scrapping the General Schedule and looking at new methods of performance management," FMA government affairs director Jessica Klement said. But "the devil's in the details. I have a lot of concerns with the General Schedule and the way you're promoted based on tenure, not necessarily your performance. I don't think the General Schedule rewards high performers well, and I think it deals with poor performers poorly."
Tobias agreed that it's time to reconsider the GS system. But he worries that with the current toxic political environment and esteem for federal employees at a low point, putting Congress in charge of the effort is risky and could end up just cutting federal pay and benefits.
"In today's environment, the federal employee has become a whipping boy, and is equated with large government," Tobias said. "If Congress were to enter this in a strategic way, as opposed to coming at it with a political agenda, then something good might come of it. But today, the probability [of lawmakers putting politics aside] is not large."