Important pension and retirement information for all federal employees. 

Many of our clients are federal employees. Others are married to federal employees. And everyone knows a federal employee. Knowing this, it is important to share information regarding a proposal by the Office of Personnel Management (OPM) regarding potential changes to the FERS and CSRS income and pension system.

A recent article shares details of a proposal released by OPM Director Jeff Pon, in which Pon says his objective is “to bring Federal benefits more in line with the private sector.” The proposal aims to reduce the amount of money the federal government spends each year on income and pensions for federal employees.

It is estimated that the proposal would save the federal government approximately $143 billion over the next ten years.

Some of the highlights of the proposal are:

-Eliminating the Social Security supplement for FERS retirees that choose to retire before age 62.
-Changing the calculation used to determine federal pensions from an average of the highest 3 years to the highest 5 years of pay.
-Reduce cost of living adjustments (COLA)for CSRS retirees by one half of one percent (.5%).
-Eliminating cost of living adjustments for all current and future FERS retirees.
-A freeze on federal incomes for 2019. 

One of the more intricate changes proposed involves the amount contributed to the federal pension by federal employees. Currently, federal employees contribute .8% to their federal pension. The proposal stipulates that the amount contributed by federal employees would increase by 1% annually to a maximum of 7.25% of basic pay. This measure is intended to increase the amount each employee contributes to their pension.

The data used to create this proposal comes from a report by the Federal Salary Council released in April 2018. According to this data, federal workers are paid less than their private sector counterparts. However, the Congressional Budget Office has reported that federal employees are paid roughly 3% more than those in the private sector. The article says:

“In April, a Federal Salary Council report said federal pay lags behind the private sector by about 32 percent. Last year, the Congressional Budget Office said that feds are paid 3 percent more overall than private-sector workers, but that varies widely with educational level. Those with no more than a high school education are paid about a third more than their private-sector counterparts, while those with a professional degree or more are paid about a quarter less.”

It appears this proposal will be shared in greater detail by the time of the mid-term elections, but the actual timing of implementation is still uncertain.

How will this impact your retirement scenario? 

The first thing to note is that your income could go down in coming years. If the amount contributed to your FERS pension is raised from .8% to 7.25% it means your income will be reduced by 1% annually until your FERS pension contribution reaches the 7.25% ceiling. This could mean stagnant wage growth for federal employees during the implementation period if cost of living adjustments do not offset the increased FERS pension contribution. Since the federal government is seeking to save money, it is doubtful that cost of living adjustments will increase.

More importantly is the long-term effect having no cost of living adjustment on your FERS pension will mean. Even though inflation will continue to rise, making goods and services more expensive annually, retirees receiving their FERS pension will see no growth in their income. Over several years, or a decade, this could result in a loss of purchasing power.

Does this mean a federal employee will have to work longer to ensure they have enough to live on during retirement? Will retirees have to get a job after leaving the federal government to offset the loss of cost of living adjustments to their FERS pension?

These questions can be answered by having a discussion with your financial advisor and updating your financial plan.