March 6, 2012

The federal government has plenty of company among state governments in moving to increase employee contributions toward its retirement program, at least in a limited way, according to a Government Accountability Office report.

Under a recently signed law, those who are hired into the federal government after this year with less than five years of prior federal service will have to pay 2.3 percent more of salary for their Federal Employees Retirement System benefit than the 0.8 percent of salary that current employees pay. Current employees won’t be affected.

GAO found that half of states similarly have ordered increases in employee contributions into their retirement programs since 2008, although some increases affect only those hired after certain dates and some hikes also affecting current employees are only temporary. Those increases were largely driven by poor investment returns in recent years and expansion of benefits in prior years, and budgetary pressures “will continue to challenge their ability to provide adequate contributions to help sustain their pension funds,” it said.

The increase in the contributions by future federal employees was part of a bill extending unemployment benefits and keeping the Social Security payroll tax at a lower level through the rest of this year. The original proposal further would have affected current employees but several Washington-area lawmakers succeeded in protecting them, at least for now; federal employee organizations have warned that the threat to current employees is not over.

GAO said there are about 5 million state employees and some 14 million local employees — compared with about 2.1 million federal employees — and that about four-fifths of those are covered by defined benefit pension plans. In such plans, similar to the retirement programs that cover nearly all federal workers, annuities are paid based on years of service and salary. In contrast, it said that only 18 percent of private-sector workers are covered by such plans.

FERS-covered federal employees pay into Social Security at the same rate as other workers and receive the same Social Security benefit, in addition to their federal annuity. Typically, the combination of the Social Security and FERS contributions amount to 7 percent of salary from the employee, although in 2011 and 2012 it comes to 5 percent due to the temporary reduction in the Social Security share.

Federal employees under the older Civil Service Retirement System do not pay into Social Security but instead pay 7 percent into the federal retirement fund, which provides their entire benefit.

GAO said that among state and local plans that don’t include Social Security, the median employee contribution — the point at which half are above and half are below — was 8 percent in 2009. Of plans that do include Social Security, the median employee contribution to the state pension was 5 percent.

Of the 25 states that have increased employee contributions, five applied that increase only to future employees as the federal government has done, while the remainder applied the increase to future employees as well as some current employees. Several states that had not required employees to contribute at all began requiring at least some new employees to pay in.

States typically have more leeway to raise employee contributions than to change benefits, GAO said.

It added that many states have made benefits changes as well, including decreasing the payout formula, raising the age and/or service requirements for benefits and reducing or eliminating inflation adjustments. In most cases those changes applied only to future employees.

“From the employee perspective, these changes can mean that those in the new tier or plan will realize lower future benefits than their coworkers who continue to participate in the old plan. This could affect employee recruitment and retention over the long term, but some pension officials we spoke with expected any short-term impacts to be minimal,” GAO reported.

Various similar proposals regarding federal employee benefits are pending in Congress.