Changing the benefit calculations for participants in the $443 billion Federal Employees Retirement System, Washington, and changes in the taxation of carried interest are two of 115 policy options that would help reduce the federal budget deficit over the next 10 years, said a report from the Congressional Budget Office released on Thursday.
The CBO cited the doubling of federal debt since 2007 as the primary driver behind issuing the report, which is intended to inform lawmakers. It is the latest of a periodic series of reports offering policy options; this newest edition intended to help reduce the deficit from 2017 to 2026 either through spending reductions or revenue increases.
Among the policy options presented in the report is one that would affect participants in FERS who retire in January 2018 or later. The option includes two alternatives for spending reduction on FERS.
The first alternative would change the calculation of retirees’ annuities on the basis of participants’ five consecutive years with the highest earnings from three consecutive years, which the report said would save a total of $2 billion from 2018 to 2026, with annual savings reaching $500 million in 2026 and continuing to rise thereafter.
The second alternative would be to eliminate the special retirement supplement. Participants who retire before the age of 62 receive the supplement until they reach the age of 62, at which point they are eligible to receive Social Security benefits. The SRS, according to the report, is “approximately equal to the Social Security benefits that the workers earned during their service under FERS.”
Those participants who have at least 30 years of service and have reached age 56 or 57, or have served at least 20 years and are at least age 60, are eligible to retire early.
The elimination of the SRS, according to the report, would save a total of $5 billion by 2026.
Another key option would be to treat carried interest as ordinary taxable income, which the report said would produce an estimated $20 billion in total revenue over the next 10 years. General partners in hedge funds, private equity funds and real estate funds currently receive carried interest tied to a percentage of profits and it is taxed as investment income.
The report said an argument in favor of this option “is that carried interest could be considered performance-based compensation for management services rather than a return on the capital invested by the general partner.”
Among the remaining 113 options presented in the report are a change to the computation of initial Social Security benefits to pure price indexing from wage indexing.
That change would link the growth of initial benefits to changes in the consumer price index rather than the current method of linking the growth to the rise in average wages. According to the report, pure price indexing would save a total of $114 billion through 2026.
The full report is available on the CBO’s website.