Reconciliation Options: Federal Employment Reforms

As Congress prepares for a reconciliation bill, the House Committee on Oversight and Government Reform reported out a list of reforms to federal employment that meet the committee’s budget reconciliation instructions, which require no less than a $50 billion net deficit reduction. The proposals include many commonsense changes and would improve accountability and efficiency while also reducing gaps between federal and private sector compensation and employment practices.

Budget Reconciliation Changes from the Committee on Oversight and Government Reform

The Committee on Oversight and Government Reform (OGR) released the following policy proposals in legislative text for budget reconciliation:

Raise FERS Employee Contribution Requirements. This change would equalize the contribution rate of all federal employees in the Federal Employee Retirement System (FERS) to 4.4 percent of pay. Currently, federal employees hired before 2013 pay just 0.8 percent of their pay into FERS, those hired in 2013 pay 3.1 percent, and those hired after 2013 pay 4.4 percent. This change would primarily affect federal employees hired before 2013 as they would have to pay 3.6 percent more of their pay into FERS. It would not affect anyone hired after 2013.

Since the same formula for calculating FERS benefits applies to all federal employees, regardless of when they were first hired, it only makes sense that all federal employees pay the same contribution rate. Reported Deficit Reduction = $30.801 billion.

Eliminate The FERS Annuity Supplement. Currently, federal employees who have worked for at least 20 years for the federal government and who retire between ages 57 and 62 receive a FERS annuity supplement on top of their regular FERS benefit. This windfall special retirement supplement essentially allows some federal retirees to receive their future Social Security benefit up to 10 years earlier than non-federal employees, with the money for those extra-early Social Security benefits coming straight from taxpayers as opposed to employees or their government agencies.2

There is no rationale for forcing taxpayers to fund an unearned, windfall early retirement supplement on top of federal employees’ already generous FERS benefits and thrift savings plan (TSP) accounts. This supplement should be eliminated. Reported Deficit Reduction = $10.113 billion.

Use High-5 Years Average Pay for Calculating Federal Pension Benefits. Currently, federal employees’ pensions benefits—either through the FERS or the older Civil Service Retirement System (CSRS)—are based on the average of employees’ highest three years of earnings. This leads to artificially high earnings calculations, and thus pension benefits, and some agencies intentionally game the system by boosting employees’ earnings in their final years.

Basing pension benefits on employees’ highest five years of earnings would more accurately reflect their average earnings and would result in relatively small changes for most federal employees. Reported Deficit Reduction = $3.1 billion.

Option for Newly-Hired Federal Employees to Serve in At-Will Employment. Most private sector employees are considered “at will” and can be fired at their employer’s discretion, though still subject to legal protections against discrimination, retaliation, etc. In contrast, federal employees serve under a plethora of special civil service protections. Coupled with federal employee union contracts and practices, all of these so-called protections make it incredibly difficult, costly, and time consuming to discipline or dismiss poor performers or even recalcitrant federal employees. This proposal gives newly-hired federal employees a choice between selecting to serve as at-will employees—forgoing civil service protections—or paying an additional five percent of their pay into FERS.

Accountability is severely lacking in the federal government and excessive civil service protections and problematic union practices and contracts should be reformed or eliminated. Ideally, and ultimately in the future and outside of the reconciliation bill at hand, policymakers should make these reforms and apply them to all federal employees. In the short-term, this reconciliation proposal would improve accountability and efficiency and generate new federal revenues.  Reported Deficit Reduction = $4.541 billion.

Implement a Filing Fee for Merit System Protection Board (MSPB) Claims and Appeals. Each year, federal employees and their unions file over 5,000 appeals to the MSPB, challenging personnel actions taken by federal agencies, such as furloughs, firings, performance-related discipline, and reductions in force. Yet, the outcomes indicate that many of these appeals lack merit and instead waste agency resources and taxpayer dollars. For example, only two percent to three percent of all initial appeals resulted in a reversal of agencies’ personnel actions. This policy would require those filing appeals with the MSPB to pay the same filing fee of about $350 required by individuals who initiate civil actions in district courts. The fee would be refunded to employees who win their appeals.

Too many federal employees file frivolous claims with the MSPB, wasting agencies’ time and taxpayer resources, while also causing agency management to avoid necessary personnel actions to avoid losing the time and resources necessary to comply with appeals. A modest fee would reduce frivolous claims and improve accountability and efficiency in the federal workforce.  Reported Deficit Reduction = $3 million.

Protect the Integrity of Federal Employee Health Benefits (FEHB). The federal government has a massive improper payments problem, and this includes federal benefits that may be provided to individuals who are not eligible to receive them. The ensure that only federal employees and their eligible family members can receive federal employee health benefits, this proposal would require a comprehensive audit—which could include checking marriage certificates and birth certificates—of federal employee dependents included on FEHB plans.

It is commonsense that the federal government should only provide federal employee health benefits to individuals who are eligible to receive them, and a comprehensive audit would ensure that this is the case.  Reported Deficit Reduction = $1.5 billion.

Trump Has Set the Stage for Significant Federal Workforce Reduction

Almost immediately upon taking office, the Trump Administration took action to reduce the size of the federal workforce. For starters, an estimated 75,000 federal employees, representing about 3.2 percent of the federal workforce, accepted the Trump Administration’s buyout offer and will be removed from the federal payrolls on October 1, 2025. Moreover, the Trump Administration has been issuing agency-specific reductions in force, some of which are being challenged in court.

The net change in employment from the Administration’s actions is still to be determined, but will almost certainly amount to at least a five percent reduction in federal employment, and potentially well above a 10 percent reduction. Although media reports insinuate that such reductions are unprecedented, the Clinton Administration also significantly reduced the size of the federal workforce, including an 8 percent reduction over its first two years, and a cumulative reduction of nearly 19 percent over the course of Clinton’s eight years in office.

Building on prior EPIC estimates, we estimate that a 10 percent reduction in the federal workforce would reduce federal spending by $491 billion between 2025 and 2034. Congress could lock federal workforce reductions and subsequent savings by factoring into agencies’ budgets at least a 10 percent overall reduction in the federal workforce.

Beyond Reconciliation: Additional Savings Through Federal Employment Efficiencies

In addition to the OGR’s budget reconciliation reforms, there are other steps that Congress can take to improve the efficiency of the federal workforce, and to make it more competitive with the private sector. A couple examples include:

Replace current paid leave system with more flexible paid time off policy. Between paid vacation, sick leave, and federal holidays, federal employees currently receive between 37 and 50 days—the equivalent of up to 10 weeks—of paid leave per year.¹ In contrast, private sector employers offer significantly fewer days of paid leave, and many have been replacing separate vacation leave and sick leave allotments with more flexible Paid Time Off policies. A typical private sector PTO policy provides between 14 and 24 days of paid leave per year.  Policymakers should transition federal employees from the current system of separate paid vacation and paid sick leave² to a more flexible paid time off, or PTO policy that provides between 16 and 27 paid days off per year (in addition to the 11 federal holidays). This would generate $108 billion in savings between 2025 and 2034.³

Right-size retirement contributions. Among private sector workers who have access to employer-sponsored retirement savings accounts, a typical employer contribution is between three percent and five percent of workers’ pay. In contrast, the federal government provides up to a five percent contribution to federal employees’ Thrift Savings Plan (TSP) retirement accounts and up to 18.4 percent of employees’ pay into the Federal Employees Retirement System (FERS) pension plan, for a combined 23.4 percent.

Instead of, or in addition to the OGR’s recommendation to equalize federal employees’ FERS contributions at 4.4 percent of pay, increasing all federal employees’ share of current contributions by 2.2 percent each would generate an estimated $71 billion in new revenues between 2025 and 2034.4

Instead of mandating an increase in federal employees’ FERS contributions, policymakers could instead provide an option for federal employees to avoid higher FERS contributions by instead accepting proportionally smaller future FERS benefits. This option could be particularly helpful to younger federal employees who are often paying off student loans, seeking to buy a home, or starting a family and need higher pay today more than they will need future pension benefits.

Conclusion

The federal workforce is out of sync with the private sector and would benefit from a reduction in size, more competitive compensation, and improved accountability and efficiency. The OGR’s reconciliation policies provide many commonsense changes to generate $50 billion in deficit reduction necessary for reconciliation. These changes are a big step in the right direction towards improving efficiency and accountability in the federal workforce. Additional changes, including locking in the Trump administration’s workforce reductions that are already underway, and adding other compensation changes to bring federal employment in line with the private sector would make the federal workforce more efficient and could generate over $500 billion in savings over the next decade.