Retirement Changes Could Be Coming to Federal Employees

Feb 8, 2017

Federal worker


The following proposed retirement changes, if enacted, would impact current and future federal retirees. It’s important to note that none of these are now in effect, but are likely to be proposed in the coming months. Also, as these proposals move through the legislative process, more changes are likely to occur.

Moving the High-3 to a High-5

It has been recommended that an employees’ annuity calculation be changed from the High-3 calculation to the highest 5 years of salary.

Higher Retirement Changes and Contributions

This change would require all federal workers to contribute more towards their retirement. In 2012, the Middle-Class Tax Relief and Job Creation Act required new federal employees to contribute more towards their retirement. No changes were made for current federal employees. This proposal would treat all federal workers the same way, regardless of when they were hired.

This Act requires all federal workers hired after January 2014 to pay 4.4 percent of their salaries into FERS. Federal workers hired before 2013 pay 0.8 percent and those hired in 2013 pay 3.1 percent towards their retirement.

The rationale behind this is, “Under FERS, federal employees contribute only 0.8 percent of their pay, while the taxpayers contribute 11.7 percent of employees’ salaries. A CBO report found that, on average, federal civilian employees receive 48 percent more in benefits than the average private-sector employee with similar characteristics.”

Chained Consumer Price Index (CPI) and Future COLA’s

There is also a proposal of using the chained CPI, a way in which inflation is calculated over a period. Many federal programs rely on a measure of inflation to determine benefit levels. Generally, this is done using changes to the Consumer Price Index (CPI).

The CPI deals with the rise and fall of expenses for fixed items, and the chained CPI also considers choices people may make because of behavioral changes. For example, if the price of a product increases, people will probably buy less of that product or change to a different product.

Since 2002, the Bureau of Labor Statistics has published the chained CPI. This proposal would use this instead of the CPI. Federal retirees would feel this change the most because the chained CPI would generate a lower COLA each year.

This budget proposal notes that this change would save “taxpayers $177 billion in total over the next 10 years, with most that amount going toward making Social Security solvent.” Some of that $177 billion is money that would pay higher retirement benefits.

The chained CPI is often considered a more accurate measure of inflation. However, that system does not as accurately reflect increased costs for older Americans.

So, which would be a more significant change, a change to a High-5 calculation or chained CPI?

The chained CPI would have a greater effect on the calculation of retirement annuity. Not only does it have an impact on pensions, but also Social Security.

Again, these changes are only proposals right now. Although we can expect some changes, there is no guarantee these will pass the legislative process, or pass as is.

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