Last month, President Trump presented his proposed budget for the 2018 fiscal year, and as expected, the proposal drew plenty of controversy. Much of the attention went to cuts in entitlement programs like Social Security, which are meant to make up for tax cuts and increased defense spending.
Yet what many missed in the Trump budget were proposals that would affect the retirement benefits of federal workers. Although many Americans consider federal benefits to be quite generous, the budget would affect not only retirement savers in the public sector, but also the tens of millions of private-sector workers who are counting on some assistance to get by in retirement.
What the budget does to federal workers
The Trump budget includes two key provisions with respect to federal workers. First, the budget requires federal employees who are part of the Federal Employees Retirement System to make larger employee contributions toward their defined-benefit program than they currently do. Depending on when workers were hired, they currently contribute 0.8% to 4.4% toward the Civil Service Retirement and Disability Fund. That leaves the federal government to contribute up to 13% in order to provide enough funding to make future pension payments.
The budget seeks to equalize the amounts that workers and the government pay toward federal pensions. The method the budget uses is to increase the federal worker contribution percentage by a single percentage point each year, gradually phasing in the increase until contributions are split about 50-50 between the federal government and employees. The Office of Management and Budget estimates that those moves will save the federal government $72 billion over the next 10 years.
The other major change that the budget proposes is on the benefit side. Currently, federal workers have pension benefits that are indexed for inflation. For retirees in the Federal Employees Retirement System, the budget would eliminate cost-of-living adjustments entirely. For those in the Civil Service Retirement System, reductions in COLAs would amount to half a percentage point annually. In addition, the calculation method would factor in the worker's five highest-paid years, rather than the three highest-paid years, which would reduce benefits. The OMB projects that these benefit adjustments would reduce spending by $77 billion in the next decade.
Should private-sector workers worry?
Many proponents of the budget argue that these changes are long overdue, given the changes in the landscape of private-sector employee benefits. Only a small percentage of private-sector workers get pension coverage at all, and more employers have been freezing or eliminating private pensions in favor of 401(k) plans and other defined-contribution retirement arrangements. In that light, asking federal employees to contribute more to get less seems less draconian than the changes private-sector workers have endured.
Opponents, meanwhile, point to the inequity of cutting taxes for the general public while imposing what amounts to a much larger tax on federal workers. Some argue that the result would be a flight of federal employees back to the private sector, draining the government of experienced workers at a time when maximizing productivity will be essential due to broader budget cuts.
At first glance, it might seem that the proposal would have no effect on private-sector workers. Yet the proposal reflects the ongoing evolution of thought regarding retirement benefits, opening the door to cuts for workers who have already made career commitments with the expectation of receiving financial support in retirement. Younger workers who are hired without such benefits have plenty of time to develop their own retirement savings plans, but when changes are made to the benefits of those who are late in their careers or already retired, there's little they can do to adjust their financial planning.
The Trump budget didn't start the trend toward fewer employee benefits, but it does represent the latest move down that path. The message that every American worker should hear loud and clear is that relying on promises made by any employer -- public or private -- is a dangerous thing to do, and you're better off making contingency plans to protect yourself no matter what happens.