Changing CSRS Into FERS
Posted on April 26, 2012
In the mid-1980’s, Social Security was going broke, as was the Federal government. And the retirement program for all Federal employees was in the cross-hairs of voters who thought it cost too much and was too generous to retirees.
I was thinking about the transition to the current Federal Employee Retirement System as I picked up a letter sent to my wife from the Thrift Savings Program.
The TSP was a part of the reform effort from that period in history when Ronald Reagan was President, Bob Dole was Majority Leader and Tip O’Neill was Speaker of the House.
I ran across a fascinating history of that period written by Jamie Cowen in a back issue of the Employee Benefit Research Institute magazine. (http://www.ebri.org/pdf/briefspdf/EBRI_IB_07-2011_No359_FERS86.pdf) Cowen was a staff member of former Senator Ted Stevens, a driving force behind the reform initiative at that time, and his insights into how a major reform of an entitlement program is informative.
In coming up with a plan to fix Social Security, Congress decided in 1983 that a huge chunk of Americans, Federal workers, had to start contributing to the system by paying the FICA tax. The Civil Service Retirement System predated Social Security. It was enacted in 1920 as a way to encourage older workers to leave the workforce. Before that time, Federal workers would stay at their jobs until they died. Maybe that legacy is why we have so many Senators who stay in office until they are 90.
CSRS was nice program. Federal employees didn’t have to rely on Social Security because they got a nice pension, so they didn’t pay into Social Security. But that didn’t actually work, because as it turned out, Federal retirees wouldn’t just sit back and do nothing when they retired from the Federal government. They would often get another job, which meant they would start paying into Social Security for that job, and lo and behold, they would get both their pensions and a Social Security check.
Ted Stevens and his loyal staff went to work to change that system. In an odd bit of bad luck for Stevens but good luck for the Federal retirement system, the Alaska Senator lost a leadership race to Bob Dole, and decided to turn his entire attention to fixing the retirement system.
What Stevens and his team decided to do was hold a bunch of stakeholder forums, where they got some buy-in from all of the interest groups who cared about Federal pensions. As is their typical strategy, the Labor Unions vociferously opposed all reform.
But somehow Stevens was able to come up with a strategy of replacing the CSRS system with the less costly FERS system. Unlike the simple CSRS system, where if you work for a certain period of time, you get a certain system, FERS has a three-pronged approach.
Federal employees are now required to pay into Social Security from the get-go, and they are eligible for Social Security benefits. They also get a defined pension, but at a far reduced rate from the heyday of CSRS. And they get access to a Thrift Saving Plan (which is like a 401k plan). The Federal government matches up to 5 percent of a Federal employees salary and the employee could set aside 5 percent more of his or her salary.
Despite the initial opposition from Big Labor, the transition has proven to be a success. The new retirement system is very popular with Federal employees and it is far less costly than the old system. By some estimates, the current system is 25% less expensive than the old system would have been.
Stevens was able to use some clever parliamentary tactics to get this plan agreed to by both the House and the Senate. He had a good relationship with his counterpart in the House, Bill Ford, who happened to be a liberal Democrat. And he was able to get buy-in from the Reagan Administration, which initially had serious reservations.
Obviously, there are some parallels between how the old bulls changed the Federal retirement system and how policy makers should think about changing our current entitlement program.
First, there needs to be the political will on both sides of the aisle to make serious changes.
Second, for folks who rely on the current program, there should be assurances that nothing will change for them.
Third, to sweeten the change, some new element should be added that could create greater wealth or health potential. Whether that element is a private savings account, access to a better health care option or tax breaks for deciding not to take the benefits (while continuing to contribute to the system), something needs to make the new system a more enticing choice for the younger generations.
Fourth, policy makers shouldn’t scared off by those who complain about any change to the status quo. The status quo is not acceptable and no matter how violently some groups might protest change, they have to acknowledge that change is necessary.
It is possible to change retirement systems. It has been done before. It can be done again.