Reduce the Amounts of Federal Pensions

In 2012, the federal government paid pension benefits of about $75 billion to civilian retirees and their survivors and roughly $50 billion to military retirees and their survivors. About 85 percent of current civilian employees are accruing those benefits through the Federal Employees Retirement System (FERS), and most of the others chose to remain in its predecessor, the Civil Service Retirement System (CSRS). In both systems, the size of an individual’s annuity is based on the average of his or her earnings over the three consecutive years with the highest earnings, but the formula linking that average to the pension amount differs between the systems. Similarly, the size of a military retiree’s annuity is based on the average of his or her basic pay (not including special types of pay and allowances) over the 36 months of his or her career with the highest pay. To qualify for retirement pay, members of the military must serve in the armed forces for at least 20 years. (They can retire earlier if they become disabled.)

This option would use a five-year average for civilian retirees and a 60-month average for military retirees—instead of the three-year and 36-month averages used under current law—to compute benefits for federal workers who retire beginning in January 2015. That change would reduce annuities by about 3 percent, on average, for new retirees, saving the federal government $6 billion from 2015 through 2023, the Congressional Budget Office estimates. Because annuities are typically larger for civilian retirees in CSRS and military retirees than for civilian retirees in FERS, the former groups of retirees would tend to see the largest reductions in benefits. In 2015, this option would affect new retirees in roughly these numbers: 67,000 in FERS, 28,000 in CSRS, and 60,000 in the military’s system.

One rationale for using the longer period for determining average earnings is that doing so would better align federal practices with practices in the private sector, where pensions are commonly based on a five-year average of earnings. More broadly, this option would shift the ratio of deferred compensation to current compensation in the federal government toward the ratio in the private sector. Although a substantial number of private-sector employers no longer provide health insurance benefits for retirees and have shifted from defined benefit pension plans to defined contribution plans that require smaller contributions from employers, the federal government has not substantially reduced the retirement benefits it provides. As a result, federal employees receive a much larger portion of their compensation in retirement benefits than private-sector workers do, on average. Consequently, reducing pensions might be less harmful to the federal government’s ability to compete with the private sector in attracting and retaining highly qualified personnel than a reduction in current compensation would be.

A rationale against this option is that cutting retirement benefits would reduce the attractiveness of the overall compensation provided by the federal government, which would discourage some people from entering federal service and hamper the ability of the government to retain its current workforce. This option would have a particularly large impact on the compensation available to military personnel and civilians in CSRS. Whereas federal employees participating in FERS also receive government contributions to the 401(k)–like Thrift Savings Plan, military personnel and civilians in CSRS do not. This option would encourage some younger service members to leave the military after several years rather than remain for an entire career and receive retirement benefits, and it would cause some federal civilian employees to retire earlier than they otherwise would because additional federal service would result in smaller increases in their retirement benefits.