Proposed Cuts to Retirement Benefits: What You Need to Know

The first half of 2017 was tumultuous for many retired Americans who closely followed the proposed healthcare reform bills. Along with changes to premiums (particularly for seniors) and rolled back coverage of pre-existing conditions, there were talks about cutting Medicare and Medicaid benefits that are presently offered in the Affordable Care Act. This would have affected millions of Americans who rely on these programs to cover their healthcare needs.

Now, there’s a new debate that could potentially lower the income of seniors and retired federal employees: the annual budget. There’s a section that particularly targets benefits and retirement plans that should be reviewed by any active or retired employee.

What The Proposed Cuts to Retirement Benefits Entail

In order to understand why members of Congress are debating this topic, you have to know what changes are on the table. Below is a review of what those proposed cuts look like and how Congress is responding to them.

Elimination of Cost of Living Adjustments

One of the biggest impacts facing government employees is the gutting of Cost of Living (COLA) adjustments. As inflation naturally occurs, employees across all sectors typically receive a cost of living increase to account for rising rent, food, and gas prices. The average cost of living increases vary every year and fluctuates depending on market stability. The current budget wants to cut COLA raises, at least over the next few years, by making the following changes:

• Current and future federal employees will not receive COLA adjustments.
• Current Civil Service Retirement System (CSRS) participants will receive a 0.5 percent cut in their COLA benefits.

The current president says this will save $524 million in FY 2018 and make government benefits similar to those in the private sector. However, hiring experts claim a lack of COLA adjustments will make the government less competitive as an employer, with the best talent leaving to work for private companies with better benefits.

Changes to FERS Contributions and Payouts

The team at GovExec provided a comprehensive explanation for what’s changing in the 2018 budget, but is particularly clear on the Federal Employees Retirement System (FERS) benefits. According to the new plan:

• FERS employees would contribute an additional one percent to their accounts each year over the next six years.
• The FERS annuity supplement would be eliminated for new retirees in 2018. This is expected to save the government $5 billion by 2026.
• Pensions would be based on the average of the highest five years of your salary instead of the highest three. This is expected to save the government $2 billion by 2026.

The proposed cuts to retirement benefits will affect federal employees in a few ways. Current employees won’t have as much spending money because more of their salary will enter their retirement accounts. This, combined with the elimination of COLA benefits, further reduces the overall amount of pay employees take home.

Federal employees who are looking to retire this year will see their estimated pensions reduced. By adding two additional averages (in a five-year over a three-year plan), average incomes will look smaller, which means pension benefits will be smaller.  

Again, the goal in cutting these benefits is to continue changing how the government is run to make it more like the private sector. The White House claims government employees receive a combined benefits and salary package that’s 17 percent higher than private sector employees, so these cuts are simply lowering the rates to a level of the industry standard.

Federal Retirement Is a Bipartisan Issue

Republican, democrat, and independent voters all work for the government, and every employee is concerned about their income and stability when they retire. This has made the proposed cuts to retirement benefits a bipartisan issue, as senators and representatives across the aisle petition members of Congressional leadership to reject these budget changes.  

The pushback against President Trump’s budget started in late July when a group of 100 Democratic representatives wrote to House Speaker Paul Ryan (R-Wis.) and Minority Leader Nancy Pelosi (D-Calif.) standing against the cuts. This was followed by a group of 18 mostly-Democratic senators who wrote a letter Majority Leader Mitch McConnell (R-KY) and Minority Leader Chuck Schumer (D-NY) to stop cuts to federal benefits. These senators state the proposals, “break a promise to employees and retirees who have based career planning on longstanding promised benefit calculations.”   

Shortly after the Democrats expressed their disapproval, nine Republican representatives wrote a letter to Ryan and Pelosi standing with their Democratic peers in defense of federal employee benefits. “In more ways than one, [federal employees] have already repeatedly given at the office,” House members said.

As the House and Senate continue to review Trump’s budget, opposition to the proposed cuts to retirement benefits are expected to grow, especially because both parties have actively rallied against them. However, given the past Congressional processes followed to change healthcare in America, it’s certainly possible that these cuts would pass.

Expect Heated Budget Debates This Fall

Currently, the House and Senate Republican leadership are working on a tax reform plan before they review Trump’s budget and bring it to the floor for a vote. Within the next few months, the budget will become more of a heated topic in Congress. Now is the time to start following along to make sure the proposed cuts to retirement benefits aren’t passed and to plan accordingly in case they aren’t.  

If you need help understanding the changes as they unfold, please contact us so we can help you navigate this evolving situation.