A budget resolution was recently approved by the Senate, instructing a House committee to slash $50 billion in federal spending from federal employee benefits. Here’s what we know about the proposal, the next steps, and what it could mean for your federal employee clients and their retirement plan.
Need to speak with a federal benefits specialist? Schedule a meeting.
Senate Sends Budget Instructions to House for Consideration
The House Committee of Oversight and Government Affairs has authority over federal employee benefits. With Senate approval, the proposed spending cuts were sent to the committee to deliberate and eventually draft legislation. The budget resolution included suggested changes to current federal laws that would reduce government spending by pushing more costs to the employees and retirees. Below are the recommendations and how each would impact the financial lives of the federal workforce.
Increase Contribution Rates for All FERS Employees
At the moment, there are three distinct groups of federal employees under the Federal Employee Retirement System (FERS). Those hired before 2013 contribute 0.8% of their paycheck to their pension fund and if hired in 2013, they contribute 3.1% to FERS. All federal workers who started in 2014 or later contribute 4.4%. One of the suggested ways to cut federal spending in the Senate’s resolution is to change the rate for all employees to 4.4%, thus reducing the amount the government has to pitch in for future pension expenses.
How this affects feds: Contributing more to FERS could mean having less money for the TSP, college savings, or their daily budget. With a $100,000 salary, 0.8% means contributing just $800 annually for a guaranteed lifetime FERS annuity after retiring.
Changing High-3 Average Salary to High-5
When calculating a federal retirement benefit amount, you multiply the years of creditable service by either 1.0% or 1.1% and then multiply the resulting product by the “high three” salary. The high-3 is an average of the highest paid consecutive 36 months of their federal career – typically their last three years of pay. Changing the high-three to a high-five would add 24 months to the average, thus resulting in a reduced pension amount.
How this affects feds: Other than having less retirement income due to a reduced FERS annuity, the change may prompt some federal workers to adjust their retirement plan by moving their retirement date earlier. Because the calculation is done when applying for retirement, it is unlikely the change to a high-5 factor for those who already retired. Figuring out if retiring early with a high-three or working more and retiring after the high-five goes into effect might become a crucial step when developing a plan for your clients’ retirement from the federal government.
Changing the FEHB Program into a Voucher-Based System
Premiums for FEHB have been increasing steadily over recent years and it could get even more expensive for federal employees. In the proposal, two ideas were mentioned: either reducing the portion of premiums that the government covers or transition FEHB into a voucher system. Currently, the federal government pays 72 to 75% of a federal employee’s health premium. As for the vouchers, it would drastically change how federal employees can access healthcare, providing vouchers for specific services or insurance packages.
How this affects feds: Healthcare is getting more expensive across the country and FEHB and PSHB (postal service health benefits) premiums have reflected this. Having to pay a larger part of their premium, or moving to vouchers, would drastically shift the retirement strategy for most federal workers.
Check out the FERS Basics Online Course!
Other Proposed Cut to Federal Benefits and Rights
The proposal also recommended eliminating the special retirement supplement (SRS) for FERS retirees under age 62, charging unions for time spent servicing employees, and making the federal workforce pay for certain civil service rights like collective bargaining.
How this affects feds: The SRS is crucial component of federal retirement planning for those who retire before they are able to collect social security. This would be particularly detrimental for special provisions retirees (law enforcement, firefighters, and air-traffic controllers) who are required to leave federal service at age 56 or 57 and can retire at age 50 with at least 20 years of service, or at any age with 25 years.
Have questions? Send us a message!
Responses