The 2018 fiscal budget proposed by the Trump Administration, titled “The New Foundation for American Greatness,” is seeking a major reduction in federal retirement benefits. The proposed changes could decrease an employee’s take-home pay with higher annuity contributions. The plan also calls to eradicate cost-of-living adjustments (COLA) for current and future Federal Employee Retirement System (FERS) retirees.
While many federal employee union groups have vowed to fight to the proposed changes, Public Sector Retirement Specialists are still concerned by the possible elimination of COLA and increasing employee contributions. The combination of these two proposals has the potential to greatly impact when employees are financially ready to retire.
Charging More and Providing Less in Return
If approved, over the next 10 years the reduction in federal retirement benefits would save the government approximately $3.6 trillion. Changes to federal benefit plans alone could save more than $4.1 billion in 2018 and an estimated $149 billion by the year 2028. The Trump plan would, however, result in federal employees being required to contribute far more of their income towards their federal retirement benefits while reducing the benefit that the employee receives during retirement.
The budget proposes an increase in employee contributions to FERS by 1 percentage each year until they match the government’s contribution. On average, this increase would take six years to accomplish and result in an overall out-of-paycheck increase of approximately 6 percent. Federal employees hired after 2013 would realize the smallest increase as they are already required to contribute more than those hired prior to 2013. Additionally, this increase would only apply under FERS as Civil Service Retirement System (CSRS) employees are already seen as contributing a share equal to the government match. It’s important to note, however, that most Financial Planners will recommend a retirement savings rate of at least 10 percent in order to prevent an income shortfall during retirement.
Another key change would completely dissolve the inflation-protection that both current and future FERS retirees receive. Starting at age 62 FERS retirees now receive a cost-of-living adjustment (COLA) if the Consumer Price Index (CPI) is 2 percent. If the CPI is between 2 and 3 percent, a 2 percent COLA is applied. Should the CPI climb above 3 percent, they receive the CPI increase minus 1 percent. A reduction of 0.5 percentage points off the COLA for CSRS retirees is also indicated. The proposed plan will alter how many federal and civil service employees envision spending their retirement years and result in difficult budgeting decisions as the purchasing power of their federal annuity decreases.
The Good News
For nearly 2 million civilian federal employees there is a reason to applaud the proposed budget. The plan includes a 1.9 percent pay raise in 2018 for civil servants. Although this figure is slightly less than the 2.1 percent raise that employees received this year, it’s still more than the 1.6 percent increase Obama had proposed. The proposed budget also includes the introduction of a six-week paid parental leave program that would be extended to both new mothers and fathers, as well as adoptive parents. As many are aware, the President’s daughter, Ivanka Trump, has been a vocal advocate for paid parental leave and likely heavily influenced the proposed child care plan.
An Uphill Battle
The proposed reductions to FERS benefits have been met with fierce opposition from Democrats and union leaders alike. Some have dismissed the cuts as nothing more than punishment for those who have contributed to their country through federal service. Even those that supported President Trump for office now believe that he has broken his campaign promise to protect the retirement benefits of government employees.
The Trump administration has defended the proposed reductions in FERS benefits as being in line with the president’s goal to rein in federal government spending and to bring federal retirement benefits more in line with the private sector.
It’s Just a Proposal
While the White House has requested the changes take effect as of the fiscal year 2018, which begins October 1st, it’s important to remember that the president’s budget proposal is just that, a proposal. The budget is still in congressional appropriations committee review, and ultimately Congress controls what bills it sends for the president’s signature. If nothing else, the proposed budget should be viewed as a statement of the Trump administration’s priorities. Furthermore, similar federal retirement benefit cuts have been proposed by past administrations, most have died or been drastically altered by Congress. The potential for a reduction in federal retirement benefits should, however, urge federal employees to begin saving more than the 5 percent Thrift Savings Plan (TSP) agency match and likely plan on working until age 62 or later.