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Congressional Budget Office outlines federal retirement reform options

Options for reforming the federal retirement system include changing employee contributions or the formula used to calculate benefits, and putting new employees into the $511 billion Thrift Savings Plan with larger employer contributions, according to a new analysis by the Congressional Budget Office.

"Lawmakers have expressed interest in examining the current structure of retirement benefits to ensure that the government provides adequate compensation to attract and retain skilled employees while not paying more than needed to accomplish that goal," the report said.

In 2016, the federal government spent $91 billion on retirement benefits for most of its civilian employees, including $70 billion for the Civil Service Retirement System, which is phasing out and has been closed to new participants since 1983, $13 billion for the Federal Employees Retirement System, in which almost all current workers participate, and $8 billion for contributions to the Thrift Savings Plan.

Net cash outflows are projected to grow by an average of about 2.8% annually between 2018 and 2027, but over 75 years they would decline sharply as a share of gross domestic product — to 0.13% of GDP in 2091 from 0.48% in 2016, CBO projects.

Three options for changing FERS include increasing the employee contribution to 4.4% of salary, mirroring the rate for employees hired after 2013. People hired before 2013 pay 0.8%, and those hired in 2013 pay 3.1%.

The federal government's ability to recruit new employees would be unaffected, CBO said, but "the option would increase the number of employees who chose to leave federal service because their current pay would be reduced. The most experienced and highly qualified employees would be those most likely to leave."

Other FERS options are decreasing the pension contribution rate to 0.8% for all employees to help with recruitment and retention, and basing benefits on a worker's last five years, instead of the current three.

CBO officials also considered two options for eliminating FERS for new employees and replacing it with larger TSP contributions. One option would eliminate the FERS pension and have the government contribute 8% salary, plus match up to 7% on employee contributions. The other option is having the government contribute 10%, with no matching.

To analyze how the changes would affect recruitment, CBO estimated the value employees place on retirement income relative to current income. "That estimate is subject to considerable uncertainty, and other estimates could reasonably be made that could lead to different conclusions about the effect that the amounts of current pay and the pension plan have on recruitment," the report said.

The report was prepared at the request of the chairman of the House Committee on Oversight and Government Reform. In keeping with CBO's mandate, the report makes no recommendations.