The wallets of federal employees hired in 2014 and after will bear the brunt of the bipartisan budget deal announced Tuesday.
Newly hired employees will be required to contribute a total of 4.4 percent of their salaries toward their defined benefit pension — 1.3 percent more than employees hired in 2013 contribute and a sizable 3.6 percent more than workers on the job prior to this year pay for their retirement benefits.
Those additional costs will quickly add up for the future federal workforce.
If the proposed budget deal becomes law, new federal workers will see a total of 10.6 percent of their salaries automatically withheld from their paychecks to cover their retirement benefits.
That’s because under the Federal Employees Retirement System employees are required to contribute to both their FERS pensions and to Social Security. The tax withholding for Social Security is currently set at 6.2 percent.
“You add all those percentages up and that’s a big chunk to be taken out and nothing in return,” said David Snell, director of retirement services for the National Active and Retired Federal Employees Association, in an interview with Federal News Radio. “There’s no corresponding increase in retirement benefits.”
Will TSP participation take a hit?
As part of their full retirement package, employees can also make contributions to their 401(k)-style Thrift Savings Plan accounts, but those contributions are voluntary and not mandated by law.
The squeeze on new employees — typically younger and in entry-level positions — could lead them to take matters into their own hands, by contributing less or not at all to their TSP accounts.
“If the employees feel pinched, they’re going to cut back and might only give a small part of their pay to their TSP accounts,” Snell said. “And they could be less financially secure when they retire because of it.”
Greg Long, the director of the Federal Retirement Thrift Investment Board, which oversees federal employees’ TSP accounts, agreed that the proposal might not be good news for TSP participation rates
“Is there a concern? Yes, there is,” he told Federal News Radio. “But we can’t quantify it.”
However, one potential firewall against contribution rates dropping too severely is that, since 2010, all newly hired federal employees are automatically enrolled in the TSP at a contribution rate of 3 percent of their salaries. Employees are also eligible for a 1 percent automatic match whether they make contributions or not as well as a dollar-for- dollar match up to that 3 percent threshold.
Since launching automatic enrollment three years ago, new federal hires — who once lagged behind long-time employees — are now leading the pack when it comes to participation rates. Some 90 percent of all new hires currently contribute to their TSP accounts, compared to an overall 85 percent participation for all FERS employees.
But Congress’ proposal is “a new factor drawing on people’s limited paychecks,” Long said, and could begin to reverse that trend.
“Some people will have to make difficult choices,” he said.
About 14 percent of eligible FERS employees currently make no payroll contributions to their TSP accounts. More detailed data on participation rates is set to be unveiled at the board’s monthly meeting Monday, Long said.