STATEMENT BY DAVID B. SNELL
DIRECTOR OF RETIREMENT BENEFITS SERVICES
NATIONAL ACTIVE AND RETIRED FEDERAL EMPLOYEES ASSOCIATION
ON BEHALF OF THE MEMBER ORGANIZATIONS OF THE FEDERAL-POSTAL COALITION
note: Full testimony below
Unfortunately, recent legislative proposals have sought to unravel this basic bargain, unfairly singling out middle class federal employees for disproportionate sacrifice. Last month, the House passed legislation (H.R. 3630) that would use cuts to federal retirement compensation of middle class federal and postal workers to pay for a payroll tax holiday. It would offset over half of the cost of the holiday ($65 billion over ten years out of a $121 billion cost3) on the backs of less than 2 percent of the nation’s workforce.4 This would add financial strain on top of the prospect of job loss through the sequestration process mandated by the debt ceiling agreement and the more than $60 billion that the federal government has already saved by freezing federal employee pay for the past two years, which itself has permanently diminished long-term annuities for recent retirees.
Attacks Based on Misguided Assumptions
The legislative attacks on federal employee retirement compensation seem to derive from: (i) the misguided assumption that most private sector 401(k) retirement plans provide adequate retirement income security – they do not; (ii) the related assumption that federal retirement benefits are overly generous – they are not; and (iii) the questionable opinion that instead of pursuing policies that would improve private sector retirement income security, Congress should pursue policies that diminish federal retirement income security – it should not.
The attacks also seem to derive substantially from the erroneous belief that federal employees are over-compensated compared to their private sector counterparts. The facts support the opposite conclusion. When comparing similar jobs, including levels of skill, experience and education, federal employees are paid less. I will discuss these issues later in my testimony.
Federal Retirement Benefit Programs – Adequate, Not Overly Generous
Federal retirement programs can provide an adequate, but not overly generous, retirement income. Rather than looking to dismantle the program, Congress should view FERS as a model for private sector reforms.
Legislative Proposals to Cut Federal Retirement Benefits Undermine Their Adequacy
H.R. 3630 would substantially reduce the retirement income security provided by FERS and effectively provide a pay cut for already underpaid federal employees (covered by both FERS and CSRS) who have experienced a pay freeze for the last two years. New employees (those with less than five years of service) would experience a 41 percent reduction in their deferred compensation because the bill would create a new system of retirement that would base retirement annuities on (i) the average of the highest five years of consecutive service instead of the highest three years, and (ii) reduce the accrual rate by more than 36 percent, to 0.7 percent. The resulting 41 percent reduction in FERS annuities would result in a new mean annuity of only $425 per month ($5,098 annually). That is barely over a third of what a minimum wage earner would make per year ($15,080), working 40 hours per week for $7.25 per hour.
New employees would also face a 3.2 percent increase in retirement contributions, while other current employees (covered by both CSRS and FERS) would face a 1.5 percent increase in retirement contributions over three years. While the tax holiday provides take-home pay increases for one year, federal employees get permanent pay cuts.
Additionally, H.R. 3630 eliminates the FERS annuity supplement, starting in 2013. This provision would result in a substantial reduction in early-retirement pay for federal employees who have dedicated their entire careers to public service and relied on receiving this supplement as part of their retirement compensation.
Unlike H.R. 3630, President Obama has only proposed changes to federal retirement programs as part of a larger shared sacrifice to reduce deficits. The President has not proposed it as an offset for an extension of the payroll tax holiday. Specifically, the President has proposed increasing retirement contributions by 1.2 percent over three years and eliminating the FERS annuity supplement for new employees only, which avoids harming long-serving employees who have planned for retirement relying on the promise of the annuity supplement.
Federal Employees Are Already Undercompensated
While federal retirement benefits provide a fair balance between current and deferred compensation, independent studies suggest that the overall compensation package that federal employees receive is below that of comparable private sector employees. Cutting retirement benefits or increasing retirement contributions would exacerbate the situation. Data collected by the Bureau of Labor Statistics (BLS) shows that federal workers are paid approximately 26
percent less, on average, than their private-sector counterparts.15 The BLS makes apples-to apples comparisons that account for differences in occupation, education, experience, skill level, scope of responsibility, length of service, age, geographic location and special requirements such as exposure to personal danger.
Federal retirement programs provide a fair balance between salary and retirement benefits, an adequate mix of guaranteed income through defined benefit annuities and individual flexibility through defined contribution savings. Instead of making them a target for cuts, they should provide a model for other retirement programs.
Federal employees ensure that the food we eat and the water we drink are safe; they protect our borders and our airways; they provide us Social Security benefits and deliver our mail; they take criminals off our streets and keep them behind bars; they care for our veterans and provide the intelligence needed to thwart terrorism; day after day, they perform the tasks needed to maintain the stability and security of our country.