With the release of the 2020 budget from the Trump Administration, there are many cuts proposed. However, even with the ‘Analytical Perspectives’ release, many questions have been left unanswered. The budget has four main proposals;
– Basing the yield of the G Fund on a short-term T-bill rate.
– Adjusting FERS payments, so the employing agency and employee share the equal burden. This could include an elimination of cost of living adjustments.
– Since most term employees never receive the defined benefit annuity, the defined contribution benefit will expand through the TSP.
– For those who retire before the Social Security eligibility age, the FERS Special Retirement Supplement will be removed. Also, a High-5 system will be used rather than High-3 for annuity calculations.
Aside from the expansion of the defined contribution benefit, these proposals can be simplified as ‘cuts.’ With the G Fund change, the FRTIB strongly opposes and suggests this will render the G Fund almost worthless – they’re also confident that it won’t pass.
When it comes to reducing or eliminating the COLA for current and future retirees, we could say this is a breach of trust after employees spend many years working hard for the government. Shouldn’t a deal be a deal? We hear similar stories in the private sector where new business owners take over and raid pension funds. For many on the Hill who support this type of policy, they agree that it should ONLY affect new hires.
For term employees, the proposal acknowledges the fact that they can work for four years without seeing the benefit of a defined contribution plan. Instead, the idea is to lose the FERS pension but offer an improved TSP along with significant employer matching contributions.
Perspective Means Everything
How will this changed be viewed? As the start of a negative spiral that ends with a replacement of the FERS pension plan for all current employees? Or a simple means to provide those with a term appointment with more support? This perspective will almost certainly decide its fate.
Compared to the private sector, we know that federal retirement benefits play an important role. The private sector has actually eliminated defined benefit pension plans since they came with a heavy cost. Sadly, we still have a huge retirement savings deficit in the US, and this is something that needs to be addressed to prevent an over-reliance on Social Security.
What about increasing employee contributions for FERS? While it might not affect the recruitment of new employees, it would reduce the pay of existing employees. Therefore, we could see an exodus of experienced, skilled, and qualified individuals. Again, a potential solution could be to leave existing employees and start new workers on an improved TSP instead. In fact, the CBO offered two potential solutions.
With employer matching contribution boosted, this would allow flexibility when leaving the government and significant retirement funds. Rather than paying 4.4% of their salary to the FERS pension, it could go straight into the TSP.
Growing Issue of Retention
No matter what happens with the retirement system, it seems it’s getting harder to hold onto mid-career employees. With smaller wages and pay incentives compared to the private sector, the government needs recruiting tools, and an attractive TSP could be an option.
Of course, the primary concern of this plan is that future administrations will notice the attractive TSP and target it in future budgets, and we’ll be back in the same position. Between the existing TSP and FERS setup and an improved TSP, we believe the latter would be more popular with new recruits. Perhaps there’s an opportunity to offer it as an option to assess the interest?