How Proposed Federal Benefits Changes Could Impact You

Federal government workers have faced a lot of pressure, including mass layoffs, buyout offers that haven’t yet been approved or funded by Congress, and uncertainty about agency downsizings or even eliminations.

Proposed changes to the Federal Employees’ Retirement System have added to the worry and anger among federal workers.

Why FERS Changes Are A Concern

People entering government service know they are accepting lower salaries than in the private sector for stronger benefits. FERS is an important example that is difficult to duplicate.

There are three parts to FERS, according to the U.S. Office of Personnel Management. One is Social Security, a system that virtually anyone working pays into and eventually receives payments from during retirement.

The second part is the Basic Benefit Plan, a defined benefit plan, which is an increasingly rare promise in U.S. employment that provides salary-like payments in retirement. Both this and Social Security can move with someone who changes jobs, even outside of government work, and maintains the necessary payments.

The third part is the Thrift Savings Plan, something like a 401(k). At least 1% of someone’s salary comes out and goes into an account where it accumulates. The government matches the contribution and, according to the plan, after 35 years of compound interest, each dollar turns into $10. Those who can and do participate are allowed to contribute up to 5% of their income. The government matches the first 3% dollar-for-dollar and then 50 cents on the dollar.

The proposed changes to FERS would have a significant impact on saving for retirement.

These Are The Proposed Changes To FERS

Both the Congressional Research Service and Congressional Budget Office have summaries of the changes to FERS that are part of the current House of Representatives proposed budget. They include the following:

• End a retirement supplement until age 62 for most employees who retire before that age. That includes recent retirees. That amount was supposed to equal what the retiree would receive from Social Security if they were eligible at the time of retirement. When the retiree turns 62 or becomes eligible for Social Security benefits, the supplement ends. On average, each receives the benefit for three years. There continue to be mandatory retirement ages for certain types of employees, like 57 for law enforcement officers or 56 for air traffic controllers. Such people would continue to receive the supplement.
• Change the pension calculation method. Instead of calculating the benefit based on the three top-paying years of employment to determine the pension amount, FERS would use the five top-paying years. The additional two years could lower the average amount, depending on salary history. The switch takes place for new retirees starting January 2027.
• Require eligibility verification for dependents in the Federal Employees Health Benefits program and deny or remove dependents deemed ineligible.
• Increase some employee contributions.
• Require new hires to decide whether to be at-will employees, which makes it easier to fire them. Those who choose traditional status pay higher pension contributions.

The last two points are important because they significantly change the amount federal employees must contribute to FERS.

How Much More You Will Pay For FERS Contributions

The changes in contribution amounts are complicated and depend on how long someone has been a federal employee. Under the still-current law, those hired before 2018 contribute 0.8% of their annual pay. Employees either first hired in 2013 or rehired with less than five years of service contributed 3.1% of their annual pay. Those hired in 2014 or later contribute 4.4% of their annual pay.

For employees who qualify for enhanced retirement benefits and are subject to mandatory retirement — federal law enforcement officers and firefighters, Customs and Border Protection officers, members of the U.S. Capitol Police and the Supreme Court Police, air traffic controllers, and nuclear materials couriers — there is no change. They will continue to pay 1.3%. Those hired before 2013 pay 1.3%; if hired in 2013, they pay 3.6%; and if hired in 2014 or later, they pay 4.9%.

Members of Congress and congressional staff currently contribute 1.3%. That would increase to 3.1% in 2026 and 4.9% in 2027.

Regular federal employees would have to contribute 4.4% of their annual salary, no matter when they were hired, phased in between 2026 and 2027. Those hired before 2013 would contribute 2.6% in 2026 and 4.4% in 2027. Employees in 2014 or later continue to pay the 4.4% they have been contributing.

The one other employee category is the newly hired, who will have to decide between being at-will employees or not. Normally, federal employees have job security based on merit and cannot be fired for other than legally specified reasons, which makes these government jobs far safer than in the private sector. New employees who want the traditional non-at-will status will have to contribute an additional 5% of their salary to FERS. It seems to be a way to encourage or pressure future federal workers out of the protected status they have enjoyed.

The Impact On Those Not Yet Retired

These changes will affect the retirement planning for virtually all federal employees. Even those who look to enter retirement in the immediate future could feel the effects, depending on the passage of a final bill and the timing of when the changes would go into effect.

Although the benefits don’t necessarily change in theory, they do depend on the calculated average pay. The inclusion of those two extra years could lower a person’s average annual pay, depending on their pay history, meaning a drop in retirement benefits. The additional costs of premiums also mean employees have less money available for other uses, including putting into TSP for more matching funds.

Employees have a number of paths to explore, including cutting expenses, working longer than they might have planned to if possible, or making additional money on the side, either through a second job or starting a business that won’t interfere with their main job.

The longer the time before retirement, the more opportunity you have to make the necessary adjustments. Speaking with a financial advisor to plan what you need to do would be wise.

How These Changes Affect Retirees

Other than the greater scrutiny into family additions to the Federal Employees Health Benefits program, it doesn’t seem that existing retirees will face any changes in their situations.