These retirement cuts threaten millions of workers

There's a lot of debate about the differences in working conditions that public-sector and private-sector workers face. Some private-sector workers who have seen many of their employee benefits deteriorate or disappear entirely over the years believe their public-sector counterparts get benefit packages that are too expensive for taxpayers to maintain. Public-sector employees can point to base salaries that have historically often been lower than what they could make in the private sector as a justification for additional benefits to make up the difference.

Recently, the White House issued a new threat to federal worker benefits that added to the controversy. A letter [opens PDF] from the director of the administration's U.S. Office of Personnel Management to House Speaker Paul Ryan laid out a series of proposals for legislation that would make reductions to many of the retirement benefits that federal workers who are eligible for the Civil Service Retirement System (CSRS) or Federal Employees Retirement System (FERS) receive. The moves would help to narrow budget deficits, but opponents argue that federal workers have already sacrificed through pay freezes and compensation adjustments that have lagged what their private-sector counterparts receive. Here's a closer look at the four proposals that lawmakers might consider in the near future.

1. Requiring larger employee contributions toward benefits

Historically, many private-sector companies offered pension benefits that employees didn't have to pay for with contributions of their own. Many employers have simply phased those pensions out in favor of 401(k) plans that put more of the onus on retirement saving on the worker. However, public-sector pensions often call for at least modest employee contributions to support payments. Currently, most longer-tenured employees who are part of FERS pay 0.8% of their pay into the program, with those hired after 2012 paying either 3.1% or 4.4%.

Under the proposal, employees under FERS would see their contribution percentages rise by 1 percentage point per year until they reached 7.25% of pay. That works out to half of the total pension cost of 14.5% under the program. That matches up with the way Social Security payroll taxes are allocated 50/50 between employee and employer, but over time, the fact that some workers would pay an additional 6.45% of their salaries would lead to effective pay cuts of thousands of dollars each year while leaving actual benefit payouts unchanged. This measure would cut deficits by an estimated $69 billion over the next 10 years, with further savings beyond that point.

2. Lengthening the calculation period for determining pension amounts

Under current law, CSRS and FERS workers have their pension benefits determined by taking the highest average annual amount of pay over a consecutive three-year period, typically at the end of their careers when most workers' earnings are highest. The new proposal would lengthen that period, requiring averages taken over a consecutive five-year period.

The result of the longer calculation period will generally be to reduce the average, which in turn would lead to a lower starting payout that will then persist throughout retirement. Proponents of the measure can point to the way Social Security calculates benefits using a full 35-year earnings history rather than the latest few years, although pensions in the private sector have historically determined benefits in a manner similar to the current public pension rules. The measure would save an estimated $6 billion over the next 10 years. 

RELATED: Check out the best and the worst U.S. states for retirement:

10 PHOTOS
Best and worst states for retirement 2018
See Gallery
Best and worst states for retirement 2018
1. Florida – You knew it had to be high on the list, didn't you? In terms of affordability, Florida topped the list while it placed fifth in terms of quality of life, overcoming its 20th-ranked healthcare rating.

2. Colorado – Ranked second in healthcare while quality of life came in 8th place, Colorado is constrained by its 23rd-place ranking in affordability.

3. South Dakota – The home of Mount Rushmore is the second most affordable state and ranked sixth when it came to healthcare, but can't break the top half in quality of life (ranked 32nd).
4. Iowa – Not typically thought of as a retirement destination, Iowa has decent rankings across the board (9th in healthcare, 11th in quality of life and 26th in affordability).

5. Virginia – Quality of life ranks well in Virginia (9th) while affordability and healthcare rankings are above average (18th and 21st respectively).

The next five desirable retirement states after Virginia are, in order, Wyoming, New Hampshire, Idaho, Utah, and Arizona.

What about the five states with the worst rankings? In descending order, they are:

46. Arkansas – Dead last in quality of life and 45th in healthcare, Arkansas is pulled up by its 20th-place showing in affordability.

47. Mississippi – The same principle applies to Mississippi, but even more so. The state is 49thin quality of life and last in healthcare, but it ranks 10th in affordability.
48. Rhode Island – Healthcare is above average (22nd), but quality of life and affordability are poor at 46th and 48th place, respectively.
49. New Jersey – The least affordable state in the union also has below average rankings in quality of life (28th) and healthcare (33rd).
50. Kentucky – Kentucky ranks 47th in both quality of life and healthcare and only 38th in affordability, earning the Bluegrass State WalletHub's least desirable retirement state ranking for 2018.
HIDE CAPTION
SHOW CAPTION
of
SEE ALL
BACK TO SLIDE

 

3. Cutting cost of living adjustments for pensions

Just as Social Security has cost of living adjustments for retirees, pension benefits for federal workers currently are increased along with the rate of inflation. This helps to ensure that those payments keep up with the regular living expenses that recipients face.

The proposal would reduce CSRS cost of living adjustments by half a percentage point and eliminate them entirely for FERS benefits. The total reduction in benefits would amount to an estimated $50 billion over the next decade, with further savings expected beyond that point.

4. Elimination of supplemental annuities

FERS provides some workers with supplemental annuity benefits if they leave service before turning 62 and becoming eligible for Social Security benefits. The supplement is intended to approximate what a corresponding Social Security benefit would be. The proposal would eliminate most of these payments, resulting in about $19 billion in savings over the next 10 years.

Look to Washington

The White House only has the ability to suggest legislation, not to pass it, so it's now up to the House to decide what the next steps for these proposals will be. With many calling for deficit reduction, it's likely that these or similar proposals will find their way into bills considered by legislators. Federal workers will likely fight the proposals hard, but it's certainly possible that they'll have to endure these cuts if their proponents successfully navigate opposition in Congress to get those bills passed.

Read Full Story