Increase Federal Civilian Employees' Contributions to the Federal Employees Retirement System
CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.
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This option would take effect in January 2017.
The federal government provides most of its civilian employees with a defined benefit retirement plan, in the form of an annuity, through the Federal Employees Retirement System (FERS) or its predecessor, the Civil Service Retirement System. Those annuities are jointly funded by the employees and the federal agencies that hire them. Over 90 percent of federal employees participate in FERS, and most of them contribute 0.8 percent of their salary toward their future annuity. Those contributions are withheld from employees’ after-tax income—that is, the contributions are subject to income and payroll taxes. The contribution rates for most employees hired since 2012, however, are much higher. First, 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. Then, the Bipartisan Budget Act of 2013 increased the contribution rate further to 4.4 percent for most employees hired after December 31, 2013. Agency contributions to FERS 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 beneficiaries represent federal spending.
Under this option, most employees enrolled in FERS would contribute 4.4 percent of their salary toward their retirement annuity. The contribution rate would increase by 3.6 percentage points for employees who enrolled in FERS before 2013 and by 1.3 percentage points for employees who enrolled in FERS in 2013. The increased contribution rates would be phased in over the next four years. The dollar amount of future annuities would not change under the option, and the option would not affect employees hired in 2014 or later who already make or will make the larger contributions under the Bipartisan Budget Act. If implemented, the option would increase federal revenues by $48 billion from 2017 through 2026, the Congressional Budget Office estimates. Agency contributions would remain the same.
An argument in favor of this option is that retention rates probably would not fall much for most groups of federal employees. Federal employees receive, on average, substantially more total compensation—the sum of wages and benefits—than private-sector workers in similar occupations and with similar education and experience. In fact, a substantial number of private-sector employers no longer provide health insurance for their retirees or defined benefit retirement annuities, instead offering 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 hired before 2014 had to contribute somewhat more toward their annuity, their total compensation would, on average, still be higher than that available in the private sector. In addition, because this option would not change the compensation of federal employees hired after 2014, who are already contributing 4.4 percent of their salary toward their retirement annuity, the option would probably not further affect the quality of new recruits. Moreover, that is an advantage because recruits hired after 2014 are typically younger than other workers, and younger workers are particularly susceptible to competition from the private sector where their compensation is generally more favorable.
An argument against this option is that retention rates would probably fall substantially among the most experienced and highly qualified federal employees. Employees who have served long enough to be eligible for a FERS annuity immediately upon leaving the federal workforce are forgoing annuity payments by remaining in federal service. Many of those employees might choose to retire instead of making larger contributions to the annuity on top of forgoing payments. Also, some highly qualified federal employees have more lucrative job opportunities in the private sector than in the federal government, in part because private-sector salaries have grown faster than federal salaries since 2010. More of those employees would leave for the private sector under this option.
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 right away, 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 retention of federal employees. If lawmakers wanted to reduce the total compensation of federal employees while maintaining or increasing the share of that compensation provided immediately, they could consider modifying the formula used to calculate federal annuities (see Mandatory Spending, Option 12 in this report) or making other changes to salaries and benefits.