November 13, 2013
OPTIONS FOR REDUCING THE DEFICIT: 2014 TO 2023

RevenuesOption 36

Increase Federal Civilian Employees’ Contributions to Their Pensions

(Billions of dollars) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014-2018 2014-2023
Change in Revenues 0.6 1.4 2.1 2.2 2.2 2.2 2.2 2.2 2.1 2.1 8.5 19.3

Note: This option would take effect in January 2014.

The federal government provides most of its civilian employees with an annuity in retirement through either the Federal Employees Retirement System (FERS) or its predecessor, the Civil Service Retirement System (CSRS). Those annuities are jointly funded by the employees and the federal agencies that hire them. About 85 percent of federal employees participate in FERS, and most of them contribute 0.8 percent of their salary toward their future annuities. The Middle Class Tax Relief and Job Creation Act of 2012 increased the contribution rate to 3.1 percent for most employees hired after December 31, 2012. Federal employees who are still covered by CSRS generally contribute 7 percent of their salary and accrue larger annuities. Agency contributions for FERS and CSRS do not have any effect on total federal spending or revenues because they are intragovernmental payments, but employee contributions are counted as federal revenues. (Annuity payments made to FERS and CSRS beneficiaries represent federal spending.)

Under this option, employees who enrolled in FERS or CSRS before 2013 would contribute an additional 1.2 percent of their salary toward their retirement annuities, while agency contributions would remain the same. (That increase in contributions would represent a larger share of employees’ after-tax income because the contributions are subject to federal income and payroll taxes.) The rise in contributions would be phased in over the next three years. The amount of future annuities would not change under the option, and the option would not affect employees hired in 2013 or later who already make or will make larger contributions under the Middle Class Tax Relief and Job Creation Act. The option would increase federal revenues by $19 billion from 2014 through 2023, the Congressional Budget Office estimates.

An argument in favor of this option is that federal employees receive, on average, more compensation—in terms of both wages and benefits—than private-sector workers with similar education and experience and in similar occupations. In fact, a substantial number of private-sector employers no longer provide health insurance for their retirees or defined benefit retirement annuities, choosing instead to offer only defined contribution retirement plans that are less costly; in contrast, the federal government provides a defined benefit retirement plan, a defined contribution retirement plan, and health insurance in retirement. Therefore, even if federal employees had to contribute somewhat more toward their annuities, their total compensation would, on average, still be higher than that available in the private sector.

Another argument in favor of the option is that, because it would not change the compensation of federal employees hired after 2012, it would probably not affect the quality of new recruits. Because new recruits are typically younger than other workers, and federal compensation compares less favorably to that available in the private sector for younger workers, some new recruits could be particularly susceptible to competition from private-sector employers.

An argument against this option is that it would reduce the number of highly qualified federal employees by motivating some of them to leave for the private sector and by encouraging some of them to retire earlier. Although federal employees receive more compensation, on average, than their private-sector counterparts, some highly qualified federal employees have more lucrative job opportunities in the private sector than in the federal government. More of those employees would leave for the private sector under this option.

Another argument against the option is that it would reduce the income of federal employees who have already forgone across-the-board pay increases for three consecutive years. Federal employees who have not received salary increases based on merit or length of service have seen the purchasing power of their pay fall by about 7 percent since 2010.

The option would also further accentuate the difference in the timing of compensation provided by the federal government and the private sector. Because many private-sector employers no longer provide health insurance for their retirees or defined benefit retirement annuities, a significantly greater share of total compensation in the private sector is paid to workers immediately, whereas federal employees receive a larger portion of their compensation in retirement. If that shift by private firms indicates that workers prefer to receive more of their compensation immediately, then shifting federal compensation in the opposite direction—which this option would do by reducing current compensation while maintaining retirement benefits—would be detrimental to the recruitment of federal employees. If lawmakers wanted to reduce the total compensation of federal employees while increasing the share of that compensation provided immediately, they could consider modifying the formula used to calculate federal annuities (Mandatory Spending Option 10) or making other changes.