This post was written by Bellwether Pensions Analyst Leslie Kan.
Like city and state governments, the federal government is facing rising pension costs and is dealing with them in similarly unproductive ways. Congress’ recent Bipartisan Budget Act of 2013 included controversial provisions that reduced the pension benefits for two groups: federal employees and military retirees.
Specifically, the two groups affected are new federal employees hired on or after January 1, 2014 and military personnel retiring before the age 62. Contribution rates remain the same for federal employees hired before this date, but new federal employees must now contribute 4.4 percent of their salary toward their retirement, a 1.3 percentage point increase. Cuts to military pensions, on the other hand, come from a reduction in cost-of-living adjustments or COLA. A military personnel who retires before the age of 62 will have a 1 percentage point reduction from their COLA until they reach the age of 62, whereupon the normal rates apply. The plan will not affect high ranking military officials. The pension cuts contribute to $12 billion in budget savings, $6 billion coming from retirement reductions for new federal workers and $6 billion for military personnel.
To put this into real world perspective, let’s take for example a federal employee newly hired in 2014 and salaried as a GS-09 Step 1. As a GS-09 Step 1 she makes $51,630 annually. Where her FERS (Federal Employee Retirement System) Annuity would have been 3.1 percent of her salary or $1600.53 if she were hired in 2013, under the new Budget Act, she now faces a FERS Annuity payment of $2271.72. Her costs have risen by $671.19. The jump is even steeper when we compare this to the rates for employees hired between 1984 and 2012 when the rate was 0.8%. Her annuity during the 1984 to 2012 time frame would have been $413.04. Through this lens, she is paying almost $1,900 more than if she were hired just a few years earlier.
To put the changes in military retirement benefits in context, take an example that has been well-circulated by the media: a woman enlists in the army beginning at the legal age of 18 and remains in service until she turns 38 years old. At 38 years, she has now reached the 20 year minimum to qualify for a military pension. However, she is also under the age of 62 years and therefore will receive the one percentage point COLA penalty under the new Budget Act. According to House Budget Committee staff, our military woman’s total retirement wealth would be reduced from $1.734 million to $1.626 million under the Budget Act.
So how does this relate to teacher pensions? One thing to consider are some of the overarching similarities in pension structures, particularly within the military. Certainly the military and teaching are very different professions and their retirement systems are not wholly analogous. But it is interesting to note that in both cases pension accrual is based almost completely around service time, rather than the nature or type of service performed (notwithstanding of the exemption for high ranking military officials, but even here time constitutes a main variable). The military is also subject to high turnover rates and very few employees qualify for the full retirement benefit. According to the Pentagon, only 17 percent of the military serve 20 years or more and hence qualify for a pension. The remaining 83 percent leave the service without the retirement security of a full pension. As in teaching, the majority of the military labor force will not be able to rely on the pension system providing them with an adequate retirement.
In terms of Congress’ decision: in one sense it may have been a gesture, however indirect, towards some much needed reform in public sector pensions. On the other hand, it may just have been an effort to make a deal by tweaking bloat in the system. As NCTQ and the Fordham Institute have written about, several states have put in place similar adjustments in COLA reductions or increases in retirement age for teacher pensions. However, these small tweaks and adjustments preserve the existing system’s basic structure while doing nothing to address larger human capital problems.
*Examples as calculated from the U.S. Office of Personnel and the House Budget Committee.