Of all the threats that have faced the federal retirement program over many years the one that seems to frighten feds the most is the proposal to change the formula used to compute their future annuities.
Under the current system, pensions are based on the employee’s length of service (time in government) and highest three-year average salary. Once again, the administration is talking (key word talking) about changing that formula to use the employee’s highest five-year average salary.
We’ve talked to a number of feds who are planning to retire as early as this month to beat the deadline.
The proposed change to the high-five system is just one of six or seven plans that were either in the president’s budget, or are bouncing around the House.
Many people who have been watching legislative proposals come and go for years say that as “threats” go, the high-five proposal is one of the least threatening. And not likely (again) to become law this year. But a number of feds are in panic mode.
“If the switch to a FERS high-five is approved, in your opinion, would there be time for a current federal employee to get out under the high-three average? In other words, with your best guess would there be an effective date like January 1 or would it become law immediately? I’m 60 plus and may have to leave on Sept. 29 as a high-five would greatly harm me due to a significant salary increase in 2014.” So should he be afraid? It is hiding from a mouse where there are tigers in the room?”
We asked Jessica Klement, legislative director of the National Active and Retired Federal Employees, what’s up? She’s spent years tracking legislation that impacts feds and retirees.
“There is no good answer to this question. The proposal hasn’t been introduced in legislation yet. We still don’t have a budget, and it looks like a Continuing Resolution will go until December 15th so it’s unclear at this point where the high-five falls on Congress’ to do list,” Klement said. “But I can tell that many of us are fighting to make sure this and other proposals taking aim at the federal community don’t become law.”
She added, “I know people want to know when they should retire, so they can retire before any of these things take effect. I cannot stress enough that retirement decisions should NOT be based on something Congress MIGHT do.”
Another expert pointed out that “there is no high-five bill at the current time, so there is no expected effective date.” While President Trump’s budget proposed an effective date of Oct. 1, 2017, that has not been included in legislative text at this time.
So if it did happen (and it hasn’t), and the effective date was just around the corner (which it isn’t), how bad would retiring under the high-five formula be?
According to the Congressional Budget Office, the switch from high-three to high-five would save the government (as in cost retirees) an estimated $3 billion over the next 10 years. If it happens.
By contrast, the same CBO study said that increasing employee contributions to the FERS retirement system to 4.4 percent of salary would save the government (as in cost workers) $47 billion over the same 10 year period. Currently most people under the FERS program pay only 0.8 percent into the plan.
Lots of people think that if feds are going to worry about what might happen (and in many cases has been proposed many times over the years), they should look at talk of abolishing the retirement plan completely for new hires. That would be in keeping with what a growing number of private sector firms have done.
IF that happened, feds of the future would depend upon Social Security and whatever savings they put aside in an enhanced 401(k) TSP plan.
Equally tough, though not included in the CBO report, is a proposal bouncing around the House that would eliminate the Social Security supplement for FERS employees. Currently those who retire before age 62 get a supplemental payment from the pension system. Because of their jobs (law enforcement, air traffic controllers, firefighters), many feds are forced to retire before they become eligible to get Social Security.
Most of the current proposals to curb the cost of the federal retirement program have been proposed before. Many times. Including the high-five.