Thread: Proposed Changes to CSRS and FERS - CBO

You will not believe this Feb 2007 document from the CBO. I came across it while doing some research. Chapter 2, Functions 600, 650 and 700; and Chapter 3, Revenue Options are the relevant sections. I haven't had time to look up the 2008 version but I'm sure not much has changed when it comes to these things.

http://www.cbo.gov/doc.cfm?index=7821

http://www.cbo.gov/ftpdocs/78xx/doc7821/600.htm

I'm not posting the whole document, just the most alarming paragraphs. I strongly encourage you to read this and check the links as well.

Federal income-security programs provide cash or in-kind benefits to individuals. Some, such as Food Stamps, Supplemental Security Income, Temporary Assistance for Needy Families, and the earned income tax credit, are means-tested; others, including unemployment compensation and civil service retirement and disability payments, are not tied to recipients' income or assets.
Retirement and disability programs—including military retirement—constitute the largest portion of federal spending in function 600, accounting for about one-third of the category's mandatory spending.

in addition to the options in this section, see the following:
Revenue Option 13 Include Employer-Paid Premiums for Income-Replacement Insurance in Employees' Taxable Income

Revenue Option 20 Include Social Security Benefits in Calculating the Phaseout of the Earned Income Tax Credit

Revenue Option 41 Increase Federal Employees' Contributions to Pension Plans

Modify the Formula Used to Set Federal Pensions
This option would use a five-year average instead of a three-year average to compute benefits for workers who retire under CSRS and FERS after September 30, 2007... The average new CSRS retiree would receive about $1,250 less in 2008 and $6,530 less over five years than under current law. By comparison, the average new FERS retiree would receive $420 less in 2006 and $2,190 less over five years.
Under an alternative approach, a four-year average would be used for CSRS and FERS... The average new CSRS retiree would receive $600 less in 2008 and $3,140 less over five years while the average new FERS retiree would receive $200 less in 2008 and $1,060 less over five years.

One rationale for using a longer average is that it would better align federal practices with those in the private sector... The change in formula also would encourage some federal employees to work longer in order to boost their pensions...A rationale against this option is that cutting pension benefits would reduce the attractiveness of the government's civilian compensation package. In addition, this option would reduce benefits more under CSRS than under FERS because CSRS provides a bigger defined-benefit pension than FERS. Federal employees under FERS also participate in Social Security and receive government contributions to the 401(k)-like Thrift Savings Plan, while those employees under CSRS do not.

Restructure the Government's Matching Contributions to the Thrift Savings Plan
This option would restructure the TSP contribution schedule so that the government made the full 5 percent match only when employees contribute 10 percent of their salary. Specifically, federal agencies would continue to automatically contribute an amount equal to 1 percent of employees' earnings and match the first 2 percent of voluntary contributions dollar for dollar (a maximum match of 2 percent). Contributions ranging from 3 percent to 10 percent would be matched at 25 cents perdollar (a maximum match of another 2 percent). That restructuring would save $359 million in 2008 and $2.1 billion over the 2008-2012 period.
There are several rationales against implementing the option. First, a lower government match on smaller contributions could reduce some workers' incentive to participate in the TSP or to continue contributing at their current rates. Second, the government might be faulted for saving money at the expense of those employees who are least likely to contribute a higher percentage of their earnings to the TSP—young workers and others with relatively low pay. Third, changing the TSP could be considered unfair because one factor that affected many people's decision to accept employment with the government or to switch from the Civil Service Retirement System to FERS was their assumption that TSP benefits would remain the same. (note from me: isn't this one of the arguments we made about the IFT rule?)

Increase Federal Employees' Contributions to Pension Plans
Most workers covered by the Civil Service Retirement System (CSRS)—the older of the two major retirement plans for civilian employees of the federal government—are required to contribute 7 percent of their salary to their retirement fund in exchange for a defined-benefit pension. (In a defined-benefit plan, the level of benefits is set by formula and is not affected by the amount an employee contributes.) CSRS workers do not pay Social Security payroll taxes, however. Employees covered by the other main plan for federal civilian workers, the Federal Employees Retirement System (FERS), must generally contribute at least 0.8 percent of their salary toward a defined-benefit plan and pay 6.2 percent in Social Security taxes. Both CSRS and FERS employees are also allowed to make voluntary contributions (up to the Internal Revenue Service's limit of $15,500 in 2007) to the Thrift Savings Plan, the government's counterpart to a defined-contribution 401(k) plan.
This option would raise the contributions that most federal civilian workers would have to make to their defined-benefit retirement plan by 0.5 percentage points relative to current levels. The increase would be phased in over several years, starting at 0.25 percentage points in calendar year 2008, growing to 0.4 percentage points in 2009, and finally reaching 0.5 percentage points in 2010. (Those increases match the ones that the Balanced Budget Act of 1997 imposed through 2002.) Adopting those changes for federal civilian employees would boost revenues by $0.3 billion in fiscal year 2008 and by a total of $3.7 billion through 2012 (assuming that the retirement contributions that agencies made on behalf of their employees were unchanged, as was the case under the Balanced Budget Act).
The main rationale for requiring federal workers to pay more for their retirement plans is to make the government's costs for civilian pension benefits more like those of private-sector employers, without reducing the level of salary replacement that workers receive once they retire. Raising the contributions of current employees would arguably be better than cutting the benefits paid to current retirees (the approach in Option 600-3), because workers could accommodate the effective pay cut by making smaller adjustments to their spending over a larger number of years. (Some employees could choose to maintain their previous take-home pay by reducing their contributions to the Thrift Savings Plan.) (note from me: adjust your lifestyle so we can balance the budget on your back)
An argument against raising employees' retirement contributions is that the increases would be roughly equivalent to a 0.5 percent pay cut for most federal civilian workers and thus would diminish the government's compensation package relative to that of the private sector. (The large private firms that still offer defined-benefit plans seldom require employees to contribute to them.) Those factors could weaken the government's ability to attract new personnel and might cause it to have to increase cash compensation for its employees or settle for having a less skilled workforce.