Reduce Pensions in the Federal Employees Retirement System

In 2015, the federal government paid pension benefits, in the form of lifetime annuities, totaling about $82 billion to civilian retirees and their survivors. Roughly 14 percent of that amount was paid through the Federal Employees Retirement System (FERS), which covers about 30 percent of federal civilian retirees and over 90 percent of current civilian employees. (Most of the other retirees and workers are covered by pensions in the Civil Service Retirement System, which is not available to employees first hired after 1983.)

Annuities in FERS are based on the average of employees’ earnings over the three consecutive years when they earned the most. Also, people who begin collecting that basic annuity when they are younger than 62 can receive the Special Retirement Supplement (SRS) until they turn 62, at which point they become eligible for Social Security benefits. The SRS is approximately equal to the Social Security benefits that the workers earned during their service under FERS. However, most employees do not receive the SRS, because most do not start collecting the basic annuity before they turn 62. To do so, employees in most occupations must have at least 30 years of service with the federal government and have reached age 56 or 57 (depending on the employee’s year of birth), or have at least 20 years of service and have reached age 60. Federal employees in law enforcement, as well as a few other groups of employees, become eligible for the annuities regardless of their age once they complete 25 years of service.

This option includes two alternatives for reducing spending on FERS, both of which would apply only to federal workers who retire in January 2018 or later. In the first alternative, the basic annuity would be calculated on the basis of an employee’s five consecutive years with the highest earnings. That change would save the federal government $2 billion over the 2018–2026 period, the Congressional Budget Office estimates. Annual savings would reach $500 million in 2026, and they would continue to grow, because an increasing fraction of retirees would be receiving benefits under the new, less generous formula as time went on. The second alternative would eliminate the SRS. That change would save the federal government $5 billion by 2026. If both alternatives were implemented, the total savings through 2026 would be $7 billion.

One argument for the option is that it would better align federal practices with practices in the private sector, where pensions are commonly based on a five-year average of earnings and supplements are rarely provided to workers who retire before they are eligible for Social Security. More broadly, the option would make the ratio of deferred compensation to current compensation in the federal government closer to the ratio in the private sector. A substantial number of private-sector employers no longer provide health insurance benefits for retirees and have shifted from lifetime annuities to defined contribution plans that require smaller contributions from employers; the federal government, by contrast, still offers many retirees health insurance, an annuity, and a defined contribution plan. 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.

An argument against the option is that reducing retirement benefits would lessen the attractiveness of the overall compensation package provided by the federal government, hampering its ability to attract and retain a highly qualified workforce. Positions requiring professional and advanced degrees might become particularly difficult to fill, because federal workers with those qualifications already receive less compensation than their private-sector counterparts do, on average. Another argument against the option is that it would reduce the amount of income that federal workers receive in retirement. In 2018, for example, using a five-year average would reduce the FERS annuities of about 55,000 new retirees by an average of roughly 2 percent. The elimination of SRS would affect a much smaller portion of new retirees, because most federal employees do not retire until after reaching age 62. However, many of the workers who did retire before 62 would see a large reduction in their income until they reached that age. That period of reduced income could exceed 10 years for employees in law enforcement and the other groups of employees who can qualify for the annuities at an early age.