Furloughing federal workers is bad idea; Reform pensions instead

ADVERTISEMENT
For taxpayers, the furlough approach will be a lose-lose since the agencies who use furloughs are customer-facing, personnel heavy-ones. That means cutting back on food inspectors at USDA and FBI agents and prosecutors at the Department of Justice. Instead of reducing costs, food prices might spike as inspections backlog and shortages occur. Slower investigations and trials cost more not less.

Furthermore, the powerful federal employee unions have threatened to sue for back wages if furloughs happen. Federal employee unions have been particularly good at beating government lawyers in court so the any short term savings may be paid out plus damages and court fees.

The furlough-first approach to sequester is a lemon but Congress still has the chance to make lemonade. Federal employees cost too much but cutting back their hours ignores the real cost driver – benefits. The nonpartisan Congressional Budget Office found that benefits for federal employees are as much as 70 percent more costly than the private sector. Crucially, these benefits are more costly but not necessarily more generous. The current structure actually discriminates against the vast majority of our veterans by denying them a pension entirely and rewards civilian employees only for longevity.

Both civilian and military retirement systems use a traditional defined benefit system, the same system driving states like California and Illinois into junk-bond status. The civilian system, Federal Employee Retirement System (FERS), has three-parts: Social Security, a traditional defined benefit pension called the Basic Benefit, and a 401(k) called the Thrift Savings Plan (TSP). Presently, federal employees contribute .8 percent of their salary while agencies contribute 12 percent toward the cost of their defined benefit plan or $15 for every $1 an employee puts in. New employees will contribute 3.1 percent or $1 for every 4 the government contributes.

Civilian employees only ‘vest’ or become eligible for benefits under the defined benefit plan if they serve more than 5 years. Moreover, these contributions are simply transferred to a ‘trust fund’ tied to Treasury Bonds and idly wait for beneficiaries to draw them out. The value of the benefits grows arbitrarily as employees increase their time in government. In addition, every civilian employee can participate in a 401(k) where the government matches employee contributions up to 5 percent.

The retirement system for military servicemen and women is even more outmoded and expensive – costing taxpayers’ $50 billion annually. The military pension system only applies to career personnel with 20 plus years of service. Only 17 percent of service personnel will ever receive a payment from this system while those who benefit are eligible to double-dip by entering federal civilian service, often in their same role within the Defense Department, where they collect a military pension and a civilian salary simultaneously. Meanwhile, the hundreds of thousands of young combat veterans from Iraq and Afghanistan have no military pension available to them.

Across the federal government, retirement benefits for employees will cost taxpayers’ $120 billion in FY2013. If nothing is done, this figure will grow rapidly over the next decade and federal pensions may cost more than $2 trillion over the next decade. This will come directly from tax revenues since there is no program to grow the value of the contributions in the defined benefit programs, just to shuffle funds in and out of the Treasury.

If the FERS defined benefit pension program was phased out entirely, as Senator Tom Coburn has proposed, so that new employees take part only in Social Security and the TSP the government would save $85 billion over 10 years.

The liberal Center for American Progress’s plan to switch to a 401(k) for military personnel with less than 10 years of service, endorsed by then- Defense Secretary Leon Panetta, could save $15 billion this year. Under this plan, new service members would receive 16% of base pay in their 401(k). Those over 10 years would have the choice transition to a 401(k) or retain their current benefits.

For federal civilians, a similar system with an 8 percent salary match (twice the private sector average) for all new employees and those with less than 10 years of service would yield another $15 billion in savings in the first year. If older employees were asked to contribute a more equal share toward their pension (7% per employee, 7% per agency) as the moderate think tank the Third Way has proposed, taxpayers would save an additional $10 billion this year alone.

Paradoxically, these changes would actually increase the real dollar value of every employee’s retirement fund or leave it unchanged while saving the taxpayers billions.

The savings would be even more dramatic over the next 10 years, saving the taxpayer as much as $1 trillion dollars.

Instead of furloughs and a 20 percent pay cut, Congress should give federal employees more power over their own retirement and save the taxpayers’ a trillion dollars in the meantime.

Kennedy is a visiting fellow with the Maryland Public Policy Institute.

More in Healthcare

Financial kickbacks from industry to physicians are a bad idea for patients

Read more »