Delivered on: Thursday, April 24, 2025
To Watch on YouTube, CLICK HERE
Legislative Plans Targeting Federal Benefits
Proposed changes looming over the federal workforce (+ RIF updates).
- PROPOSALS: Reviewing the scope of benefits changes being considered
- AUDIENCE: Determining who is affected by each proposed change
- EFFECT: Evaluating the financial impact of proposed changes
- RIF UPDATES: Exploring the latest downsizing efforts and timelines
Download Handouts: CLICK HERE
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Prefer to read instead? A Transcript of this Webinar is Below:
Hello, everyone and welcome to the FedImpact retirement webinar today. Boy, there has been a lot going on in the federal space here in the last quarter or so. I know all of you are feeling the direct effects and the ripple effects of all of this with respect to government downsizing and the threats of your jobs.
Aside from that, there are other changes that are pending through Congress right now trying to figure out how to reduce some spending in other areas, of course, federal benefits being one of them. And so, today's webinar is going to cover those big ideas and proposals that are out there as far as the concepts of them and what it ultimately means for each one of you.
Legislative Plans Targeting Federal Benefits
Today's webinar is going to talk all about those proposed changes that are looming over all of you, as well as talking a little bit about the RIF updates. Each of you are in different agencies who have different schedules of how all this is happening, but we've got some great resources for you. You guys know me.
I'm Chris Kowalik, the founder of ProFeds. I'm delighted that I get to do sessions like this where we get to take various things that are very timely and affect the vast majority of the federal workforce and be able to talk about them, and to do so from a place of just transparency of what we know, what we don't know, because both of those things are important and help people to put some numbers in some context so that you can get your hands wrapped around what each of these things are really going to mean to you in the event that they pass through Congress.
Regardless of the topic, I am always delighted to be able to train more federal employees and get them thinking about the bigger impact of these decisions.
But today's session is one that is more unsettling to a lot of people, and so I'm going to do my very best to be very clear and candid about how these things work, how we expect them to work in the future with respect to these proposed changes. And then areas where we just don't know, I'm going to tell you that too.
Agenda
Here's our agenda. We're going to talk about some of the proposals. When I say the word proposal, this is a pretty loose term. Most of these are concepts or ideas of how Congress can trim some of the spending that happens with respect to federal employees.
In the grand scheme of things, there are not tried and true written proposals that clearly define what is being proposed, when it's going to be enacted, who it affects, who it doesn't. There's a lot of ambiguity still, unfortunately, but I want to talk about the scope of the benefits changes that are being considered, at least that are on the table. Next, we'll talk about the audience. If we know who's affected for each of the proposed changes, we'll tell you.
Again, still a lot of ambiguity on any grandfathering and how all this is going to work. Next is the effect. This is the part that I tend to focus on most because I want you to understand the financial impact that these proposed changes have. Change isn't always necessarily bad. I think in light of everything going on, the expectation is that they are bad and that they're not in your favor.
And while that might be true, how much it's actually going to change for you is going to be important so you can understand the ultimate effect that it's going to have on your finances. And then next, we'll talk about those RIF updates. And none of this is in this particular order, but I know the RIF updates with respect to downsizing and all of that are top of mind for so many of you. And your timelines are all going to be a little bit different because you're with different agencies, but I want to give some good resources for you to be able to focus on.
What This Webinar Will NOT Cover
What this webinar will not cover, I want to be very clear. We're not here to talk about the politics behind all of this, and whether you hate or love Trump, you hate or love DOGE, it's really irrelevant in this webinar. You can have those conversations privately.
In this webinar, we're simply going to talk about those financial aspects of the actual effect that these changes or these proposed changes may have on you. And I'll also add that although I'm going to give you some resources on the RIF, this is not the webinar where we're going to answer tons of questions about VERAs and VSIPs and DSRs and severance pay and the DRP 2.0 and all of that.
We've done a lot of training on that. In fact, we've done it in the past and we're going to do it again next month in our webinar coming up. But today's session is going to be about these proposed changes or concepts that very well may affect you. And so, I will appreciate if you keep those questions nice and tight to those topics so that we're able to get to as many questions today as we can.
Government Downsizing is Top of Mind
I promised you I was going to give you some RIF training and some resources for you. The government downsizing is top of mind for all of us. It's probably what you're thinking about the vast majority of your day, if I'm being honest, because there's so much in play right now. And this was such a chaotic or a bombastic start to the year that it's got everybody in a little bit of a tailspin. I've done a lot of training on RIF.
We started with the DOGE, kind of preparing for the DOGE concept back in late January. We did that webinar right after the deferred resignation offer was originally made just a couple of days after that. And then we transitioned into our RIF training series because I found that there was so much misinformation out there of the confusion between the different programs.
DRP was thrown in there, and that is a brand new concept and one that most people had never even considered before. That threw a wrench in everything. But that RIF training series is a 22-part video series. These are really short videos.
Most of them are between five and 10 minutes long where I talk about a particular segment of the downsizing so that you can get a little bit more granular in getting right to the videos that you have questions about versus an hour long video that may be more comprehensive, but that you're trying to weave through and get the answer to the very specific question that's on your mind.
That 22-part series, you can see the link for that here at fedimpact.com/RIF-training-series. You will see all of those videos right on our site. They could also be found on YouTube. Next up are our FedIimpact fact sheets. There was so much bad information going on out there in the federal workspace regarding the four main parts of the RIF and pre-RIF process.
Pre-RIF, we're talking VERA, VSIP where agencies are trying to get people to voluntarily leave, and then we have discontinued service retirements and severance pay, which are our involuntary versions of this where the government says, “You don't have a choice. This your time. You're officially getting laid off.” I did a fact sheet for each one of these topics to address the rules and the frequently asked questions.
And when I say frequently asked, I am serious because we looked back to all the RIF training series, all the emails we got, all the social media comments, and we found all of those threads where there was consistently misinformation about how these programs worked, what was going to be expected by employees, what they can get now, what they might get later, what do they give up by taking one or the other, all sorts of things that were legitimately frequently asked.
We put those fact sheets together for your benefit. I encourage you save both of these links to the RIF training series and the fact sheets so that you can go back after today's session and go get those. In fact, we'll drop those into the Q&A area so that the whole group has access to those. These are helpful.
Don't get mired down in these right now during today's session. Just keep these in mind to be able to circle back to, and by all means, sharing these with your coworkers who are experiencing the same kind of frustration and anxiety about how all of this is happening. Share these with them so that they're able to get their minds clear on what's really coming. Let's transition. We're now going to be away from the RIF process and the pre-RIF process and talk about today's material. These legislative plans targeting federal benefits.
Observations
When it comes to Congress, of course, we have a wide variety of different benefits that they have considered changing over all these years. In this particular case, in the times we are in right now, we have the House, the Senate, and the White House all controlled by Republicans. And again, we're not here to talk about the politics of all of this, but it certainly makes the possibility for more sweeping changes to happen since all three of those areas are controlled by one party.
And this would be true if it was the Democratic Party. Congress has, both the House and the Senate have taken some steps to pave the way for bigger legislation that's more specific to come down the pike. They've already gone through what they call a budget outline that essentially is getting some of these ideas on the table of things they should be considering, and then they move into budget reconciliation where now we're talking about the legal aspect of things where laws are being implemented or changed.
And that, of course is the part everybody's worried about, right? Because we can talk all we want in an outline, but until things actually happen, we don't know how to react. Most of these proposals or ideas are very vague, and I just say that they're simply on the table. They're not being enacted yet.
There's not been a vote them yet. Just the idea is there and it's being considered. And so, all of the uncertainty as to the magnitude of what these changes will ultimately make for everyone and the timing of when they're supposed to happen is causing everyone to lose their minds because there's so much ambiguity that because there's no certainty, we're all making it up and we're making it up really negative.
And who knows? Maybe they surpass our expectations of how negative it might really be, but at the end of the day, we have to at least understand what's in play and then figure out what we're going to do about it.
We'll talk a little bit more about that today. Historically, when new legislation passes for federal employees, whether it's good or bad, there's normally some sort of grandfathering that happens to determine who's really going to be affected. We see that throughout pretty much every federal benefit that's out there. If this thing happened before this date, these are the rules.
If it happened after this date, these are the rules. We see that very commonly when we think of deposits and redeposits, how much you're contributing to the retirement system, which retirement system you're in serves your FERS. All of those are based on laws that were passed that put a stake in the ground as of this moment in time or set moment in time, whatever it is, this is the new rule.
The challenge right now is because there's a lack of specificity on what's on the table because we're just not that far down the road for most of these.
We don't know what any of that grandfathering might be. For benefits that are sweeping changes, are we talking about everyone, both employees and retirees that might be affected? Do they grandfather those who are already retired? We don't know for most of these areas. And then other times, we're going to see a delay in implementation.
They may say, “Hey, we're going to change the rule, but it only affects those people who are hired after the date of the legislation.” To Congress, that doesn't provide any kind of immediate cost savings, and that's what they're looking for.
I don't know how much of this delayed implementation we might see, but that's always something available to Congress to take some of the sting out of the changes that are being made and still know that from a future standpoint that there's some cost savings down the road.
Proposed Ideas To Modify Federal Benefits
Let's talk about the proposed ideas to modify federal benefits, those that are on the table and what we should be looking at.
Change the Pension Formula to use the “High-5” Average
I'm going to start with the one that we get tons of questions about and it is to change the pension formula to use the high-five average.
I have had ProFeds open since 2009 and this change, this proposed change has been on the floor of the House or Senate since before I started ProFeds 16 years ago. This is not a new concept. It is one that gets resurrected nearly every year. It'll pass one chamber, but not the other, and then it fizzles out and we move on.
I don't know that that's what's going to happen this time, but I want to talk a little bit about what this ultimately means. When we think about the high-five average, this is the highest five years of consecutive earnings that an employee had during their career, and this is in place of the high-three average that we all know and love, and that's part of the pension calculation that we've known for many years.
A long time ago, I had an employee say, “Well, high-five, that's great. That's more years that they're counting because it's a higher number.” No, no, that's not how averages work. That ultimately means we're going to be taking those lower years of earnings and include it in that average, which of course we'll bring that average down. As far as those who might be affected, those who are already retired are not expected to be affected. Those pensions are set.
I suppose there's an opportunity for a change to those who are already retired, but that would be against every other way that laws in the past have been enacted for changing federal benefits. They don't go back and change those who are already retired, but it's also unclear who might be grandfathered into the current rules.
They may say anybody who retires by X date is under the high-three, which would be an incentive for people to go ahead and retire by that point, which is what the administration is looking for. That's certainly a possibility.
They may also say, “As of the date of legislation when it passes, boom, anyone who retires after that date is under the high-five.” It's very possible. That's not to scare anybody into rushing to retire because if the numbers don't make sense to retire, whether it's the high-three or the high-five, you probably need to stick around or have some other plan to be able to have the income that you need in retirement.
This anticipated impact, we know that with the high-five, we're going to ultimately reduce the pension calculation for most employees because this is a component of the pension formula and when we plug in a lower number, we're naturally going to get a lower output. Like most of the things that we talk about in these webinars and at our workshops and in the podcast and all that, we have to put some numbers to all of this to make this sense.
Example
Here we're going to look at an example of an employee who plans to retire at the end of 2025, and they want to see what that difference is, like what difference does a high-five versus a high-three make in their actual FERS pension? Here we've got the last three years of earnings for that employee, and yours might be different.
This assumes the actual pay raise that happened over these last three years. You can plug in your own numbers and get a sense of what your high-three is going to be. But if we looked at somebody who today makes a little over $103,000, their high-three average over the last three years is $100,000. Of course, it's very possible that you made your highest three years of earnings at someplace other in your career than the end, but most of the time, it's right here at the end of your career that you would be making your highest three years of earnings.
That's the high-three, but if we look at the high-five, we still have the same three years that we talked about before, the 2023 through 2025, but we're also going to tack on those lower years of earnings in 2021 and 2022. We add all of those numbers up, divide by five, and we come up with a high-five average of $96,229.
That number by itself doesn't really mean anything. What you need to understand is how that number's used in the actual calculation of the pension. Many of you are familiar with this process. For those of you who might need a little bit of a brush-up, let's talk about this. In order to give that high-five number or frankly that high-three number any context, we have to look at the calculation that it's going to be used in.
Let's give this average, whether it's the high-three or the high-five, a little bit of context. The pension formula that it's going to be used in, we're going to start with the 1% formula. Many of you're familiar with this, but again, I'll walk you through it just to make sure we're all clear.
The calculation using the 1% figure is for people who are retiring under the age of 62, regardless of how many years of service they have, or they retire at least 62, but have less than 20 years of service under their belt when they leave. 1% formula for those falling under these two categories.
Let's see what it looks like with some numbers. Let's take a look at the high-three example. If we have a FERS employee who's 61 years old, so they're going to fall under this 1% formula.
Let's say they have 30 years of service and a $100,000 high-three, we would take that $100,000 times 1% times 30 years of service, and we would come up with a starting pension of $30,000 per year. The high-five on the other hand, same concept as far as the formula, but we're going to plug in some different numbers.
We still have somebody who's 61, 30 years of service, but now we have a $96,229 high-five. We're going to plug in that $96,000 times 1% times 30, and we come up with a starting pension of $28,869 per year. This gives you an idea of what difference the high-five makes versus the high-three in the calculation.
There could have been many years throughout the last couple of decades that they could have enacted the high-five where there would've been no substantive change for those people who are about ready to retire because there were plenty of years in there where no pay raises were given, we were on a pay freeze. And so, who cares if you add another two years if it's at the exact same pay level, it's not affecting much of anything?
Of course, that's not the scenario we're in right now, but there is a difference between that high-three and the high-five as far as what it spits out in the actual pension calculation. Remember I said there were two different formulas. We talked about the 1% formula. Let's talk about the 1.1% formula.
This is reserved for employees who retire at least age 62 and have at least 20 years of service. You must meet both of these in order to get the 1.1% formula. Here's how it looks. The high-three, same scenario. The only thing we've changed in this high-three calculation is that we've made this person 62, they still have 30 years of service, $100,000 high-three, and instead of $30,000 a year, it's now $33,000 per year.
A 10% increase to the pension by meeting the 62 with 20 requirement. This is a nice perk. It's really, really tough for me to encourage somebody who's 57 and eligible to retire to wait until 62 to get this. But boy, if you're 60, 61 years old and you can hang on a little while longer, this is a nice little financial incentive when you get to this gate.
But again, this is the high-three average. The high-five, same concept. We're going to continue to use that $96,229 high-five, multiply that by 1.1% times 30 years, and we come up with 31,756 per year. This gives you an idea of how big of an impact, and you might feel like this is a huge impact. You might feel like this is a small impact. Everybody's got their parameters here, but I do want you to understand how this works.
Of course, you can plug in your own numbers here. Just make certain that when you're thinking about how many years of creditable service that you have that you're only including those years that are actually going to count for retirement purposes and not including that temp time that doesn't count, or that military service that you haven't bought back, just so you're sure these numbers are accurate.
Increase FERS Retirement Contribution Rates
The next concept on the table is requiring FERS employees to increase their retirement contribution rates. You're going to fork over a little bit more towards your pension each and every pay period. The proposed change is to require all FERS employees to contribute 4.4% of their salary into FERS each pay period. Their bi-weekly version of their salary, we're going to take that times 4.4%. Every single pay period, that much of your pay is going to go into funding your FERS pension.
Who it might affect? Employees hired prior to 2013, all of those employees are contributing less than 1% right now. They're contributing 0.8% of their salary into FERS. Those hired specifically in 2013, they contribute currently 3.1%. Those people who are hired in 2014 are already contributing 4.4%, so it's not going to affect that group.
However, with the proposed consideration, it is unclear if there's going to be any kind of phase-in to gradually increase those required contributions into FERS. Keep in mind, we're not talking about the Thrift Savings Plan at all. That's a completely separate program. This is simply to fund your pension.
It's unclear are they going to do that over five or 10 years? Is it going to be something that's going to be enacted in 2026 and everyone's going to feel that crunch right away? I suppose we'll see. As far as the anticipated impact, this is going to have a pretty big ripple effect.
An employee, of course, has to make those additional contributions into FERS without any extra benefits being paid upon retirement. It's not like you're going to contribute more in, you're going to get more later in your pension. You're essentially reducing your take-home pay now, and you're no better off in the future for having made all of those contributions.
For the people who were hired in 2013 and specifically 2014 and later, this is an example of the phase-in that the government gave or the delayed implementation that the government gave when they made this change over a decade ago.
They essentially said, “Hey, it's probably unfair for us to do this to employees who have been with us for a long time. How about we just apply these new rules to brand new hires?” And that's what they did. Will they do that again here?
I doubt it. If this passes, it is with the explicit intent to take people who are currently not contributing 4.4% and bring them up to that level. I suppose they could surprise us, but this is a good example of that delayed implementation that happened a decade ago, and now we're seeing over half of the federal workforce has less than 10 years of service.
I found that mind-boggling when I saw that stat, but half of the employees are already contributing 4.4% of their salary into FERS, and so it's simply catching up the rest of the group to that level. Let's put some numbers to this.
Example
Let's say we have an employee who plans to keep working and they're just curious, “Man, if I stay on and I keep contributing to FERS, how much am I going to have to pay?” Let's say we use that current salary of $103,000 that we used in our high-three example, and up to this point, they've been paying 0.8% into FERS, which is about $824 per year.
If they move to the 4.4% level, it's $4,500 a year. The ripple effect that I expect to see happen is many employees will be forced to reduce their TSP contributions because now they're paying so much more into the FERS pension. It's going to have to give somewhere, and TSP is the least painful place for it to come from, at least in the short term.
Long term, it will hurt you. But short term, when you're thinking about how to pay your bills and all of that, it's hard to cut nearly $4,000 from your spending budget every year. If you can, great. But that's hard for a lot of people. This is definitely a big increase in one that will hurt the pocketbook both today and down the road because if it causes you to save less in the TSP, you are not positioning yourself to have ultimate control over your retirement.
Reducing or Eliminating the Special Retirement Supplement
Let's talk about reducing or eliminating the special retirement supplement. I was trying to think of an image for the special retirement supplement as I was building these slides, and this is the best image that I can come up with. You've got your time where you retire before 62, and then you have this chasm, this area where you're not drawing social security because you're not eligible for it yet at 62. But what happens in the middle?
Well, for federal employees, what happens in the middle is the FERS supplement. This is the “bridge payment” that helps get you from the time that you retire from government service under the age of 62. It bridges you over to social security when you're eligible at 62. You don't necessarily have to take it at that point, but at least it's filling that gap, so to speak.
The proposed change is to either reduce or eliminate the SRS altogether. Of course, this would be a pretty sweeping change, and I want to point out a couple of things on the special retirement supplement. FERS employees who retire with an immediate, non-disability pension prior to the age of 62 are eligible for the supplement.
This includes employees who are fully eligible to go, those who take an early out under the VERA and the discontinued service retirement, those who are laid off during a RIF, but still meeting the reduced retirement eligibility with 20 or any age with 25 years.
All three of those categories of employees are eligible for the special retirement supplement because they have an immediate pension, and it also has to be that non-disability version of the pension. We have no idea who might be grandfathered into the current rules.
For instance… And this is not intended to scare anybody, but it just speaks to the ambiguity of where we're at right now. It's very possible that those people who took the deferred resignation and are going to be done with government service on September 30th, maybe they get the special retirement supplement or maybe they don't. It's hard to know.
Is this something that they push off well into the future? Is this something they change for future hires and leave the current people alone who have already been hired? I don't know, and it pains me to say that because you guys look to us for some answers to all of these things, but I suspect in the coming weeks, we are going to start to see some of this take shape.
We might not like what we see, but at least we'll have something to work with with respect to how it's really going to affect people.
This was another stat that when I really started digging into the numbers, I was surprised that over half of all federal employees retire prior to age 62. That means over half of them are eligible for the special retirement supplement. And we need to exclude disability pensions and all of that that don't qualify here, but it's kind of an interesting stat that so many people retire prior to that age and at least for some amount of time are eligible for the special retirement supplement.
I do want to make a special note though that those who are our special category employees, so law enforcement officers, firefighters, and air traffic controllers, those people are typically fully eligible to retire in their late forties or early fifties. They're really going to be affected by the loss of the special retirement supplement because they were anticipating receiving it for a much longer period of time after they retired.
Examples
We have to figure out first what the special retirement supplement is, how do we calculate it? How do we know how much we're going to lose? The formula itself is we will take the anticipated social security benefit that someone is expected to receive at age 62. We're going to multiply that by the number of years of FERS service that they had.
This does not include any CSRS time or any military service, and we're going to divide that number by 40 and that gives us the benefit of the special retirement supplement. We're going to use a little bit of an example here just to make a few points. We're going to show somebody who's got 30 years of service and let's say four of those were military years.
We know those four years aren't going to count in this calculation. And when we look at the social security benefits statement at age 62, we're seeing $1,200 a month. Yours might be higher, it might be lower. That's what we're going to use in our calculation here.
In order to come up with the special retirement supplement amount, we're going to take that $1,200 a month of social security benefit that's expected at 62. We're going to multiply that by the number of years of FERS service or 26, and we're going to divide that number by 40. 40 is a constant in this formula.
We don't need to explain where the 40 came from, but know that it's always part of that formula. When we do that math, we come up with $780 a month or about $9,300 a year that someone is expecting to receive from the supplement. And it's worth noting that the supplement has no cost of living adjustment on it. Once it's calculated at the time that you retire, it stays that same amount up until 62 when it stops.
Example 1
Let's take a look at a couple of examples. Example number one is that we have a regular FERS employee who is fully eligible to retire at 57. They've got their 30 years of service and they're ready to go.
Under the current rules, they would be eligible to receive that $9,360 per year from age 57 until they reach the age of 62. For them, it's a total of $46,800 over that five-year span. That's somebody being fully eligible to retire and choosing to leave at 57.
Example 2
Example number two is something that a lot of you might be getting into these days, and that is if you're a regular FERS employee and decide to take a VERA so that early out or you're forced to take the discontinued service retirement with a true RIF, you retire at age 50 with 30 years of service.
This is what things are going to look like. I need you to understand though, the special retirement supplement for VERAs and DSRs starts at your minimum retirement age, which for most of you will be 57. Currently, that employee under the current rules would be eligible to receive that exact same amount, the $9,360 per year from 57 until reaching 62.
Nothing is paid to them with respect to the supplement between 50 and 57. But from 57 to 62 up until the time they reach that age, they will receive the supplement.
It's the exact same dollar amount that they otherwise would have received had they waited to retire and be fully eligible. We could argue that if they kept working, their social security would've been a little bit higher, and so that changes the formula and you all would be right, but I want to give just some apples-to-apples examples here for everybody to appreciate what's similar and what's different between these options.
Example 3
We have a law enforcement officer under FERS who is fully eligible to retire at 48 with 25 years of service. They're currently eligible to receive $9,360 a year from 48 until they reach age 62. For them, it's a total of $131,000 that they would receive over that many years.
It's a little bit of a disproportionate effect and we could all argue law enforcement officers make more money or their social security's going to be higher. Again, all of those things might be true, but because they were expecting to receive this for a much longer period of time before reaching age 62, and the loss of the SRS will be especially painful for that group of people.
Reduce or Eliminate Cost of Living Adjustments.
Most of you have heard us talk about COLAs with respect to CSRS and FERS pensions, and we know that CSRS get COLA and FERS get diet COLA. You don't get the full increase that your CSRS counterparts do. And at this point, if we're thinking of eliminating COLAs altogether, I think all of us would take diet COLA over no COLA all day long.
But let's see from a long-standing view of how COLAs affect a pension over time, how that's really going to affect a FERS pension. The idea here is to reduce or eliminate COLAs that are applied to those CSRS and FERS pensions each year. Every October, the CPI-W is released for the Bureau of Labor Statistics and that determines the cost of living adjustment applied for retirees under CSRS and FERS.
It applies to social security recipients and a number of other things, but it applies that following year. December for January's payment is how those numbers are applied. The way that this consideration, this plan is written is that this would affect both CSRS and FERS, but again, we don't know who might be grandfathered.
They may say, “For everyone who was already retired as of this date, you continue to get COLAs. For everybody who retired after that date, there are no more COLAs.” Or perhaps there's some sort of dwindling period where the COLAs continue to reduce over time. We'll have to wait and see what really shakes out.
This is all part of the negotiation tactics that Congress uses when they're trying to pass this legislation, and I call it wheeling and dealing on the floor where they're on the floor of the House or Senate, they're trying to get something passed and someone doesn't like a section of the legislation and they say, “Well, I'd be okay with this if this was a delayed implementation or if this left alone the people who are already in,” or whatever it might be.
That's how all of this legislation passes, whether it has anything to do with federal benefits or not. We're going to have to see how the details really shake out. But here's the impact. If your pension doesn't continue to rise over time in retirement, you're essentially losing your purchasing power of your money. Inflation as it happens each and every year, it continues to erode or eat up the value of your money.
And here's the problem, if you don't have enough money in your pension, you end up taking more money from accounts like the TSP because you have a standard of living in retirement, and we're not talking about fancy showboating all over the place. This is just you living your normal retirement life and enjoying it. If you want that standard of living, you're likely going to need to take more money out of your Thrift Savings Plan or your spouse's 401(k) or IRAs or other types of accounts that you've used to save over all these years.
The worry that we have, of course, is that if we eat into that money too soon in retirement, that we have a spiral effect to where you run out of money before you run out of life, and that's a place nobody ever wants to be. That is the biggest fear of retirees is running out of money and they're worried about things like health insurance, and that's the big one that everybody's worried about because of the rising cost of premiums and healthcare in general.
But things like this where now the income stream that you have is simply not keeping pace with inflation, it never beat inflation. It was always either at the inflation level or lower. Again, that's the diet COLA that FERS retirees got that lower amount, that inflation. But in this case, the big worry is that you end up tapping into those other resources sooner than you really should.
Inflation Compared to COLAs
Let's take a look at inflation compared to COLAs over the last 20 years. We look backwards 20 years, the average US inflation each year has been 2.62%. Some years, it's been much higher, some lower, that's how averages work. But CSRS retirees, their COLAs were 2.62% because again, it's based on the actual inflation number of the CPI-W.
The Consumer Price Index for Wage earners is determined every October by the Bureau of Labor Statistics, I mentioned this a few minutes ago and that determines how the CSRS pensions are going to change the following year. So, 2.62%, but FERS, this is the diet COLA, there were plenty of years within that 20-year period where you didn't get the Full COLA. You got the diet COLA and now your average is at 2.19%.
FERS were already lagging behind their CSRS retiree counterparts, but at least there was something keeping up with the inflation. I will share with you that most private pensions, there aren't many of them left active today, but the ones that are still paying today for people who have long since retired, they don't have any cost of living adjustments.
That's very normal for a pension. And so, the fact that you do have cost of living adjustments on your CSRS or FERS pensions is great and it has been great for all these years, but it might be coming to an end. Let's take a look at how these are really going to play out in our numbers.
There's a lot going on the right-hand side. Follow along with me. If we take $10,000 a year pension, let's just give some easy flat numbers here and we're going to inflate it over 20 years. From 2006, $10,000 a year pension began, and now we're going to look at what the value of it is in 2025. If we look at where the red box is, if we simply inflate that $10,000 by the actual inflation rate of 2.62%, that $10,000 that started in 2006, today would be worth $16,346.
The CSRS column, that one just to the right of the red box has the exact same numbers in it because remember, CSRS retirees get the actual inflation amount applied to their pension and FERS retirees get that diet COLA. They're about $1,000 behind in this growth. They're only at $15,092.
But what I need everyone listening to understand is if they knock off COLAs completely, then that $10,000 remains $10,000 forever and it just doesn't go as far the longer in retirement you actually go. Just like I mentioned a few minutes ago, if you've got assets in the TSP or other investment assets, you're likely going to start to tap into those sooner than you otherwise should because you're going to need to make up for the fact that your pension is now behind this bar.
It should be $16,000 or $15,000, but it's still only $10,000 or whatever your number might be. That's a big deal with respect to finances because we don't have any compounding interest or compounding adjustments that are happening and that is going to seriously erode the purchasing power of your money.
Move to a Voucher System for Health Insurance (FEHB)
Next up, this is a really unpopular topic. Just remember I am not the one who came up with this idea, so don't be upset with us, we're just explaining how it works.
The idea of a voucher system for health insurance under the FEHB program, right now, you are under a premium share where the government picks up about 72% of the overall premium when they average it out across the entire workforce. Some plans are better, some plans are worse, but 72% is the average.
And of course, there are some maximums that we're going to talk about today too. Here's the proposed change. It's to eliminate the current 72% cost share and replace it with a flat dollar amount in a voucher. You get to decide, do you want to select a plan that fits within that dollar amount?
Are you willing to pay some more out of pocket? Are you willing to take that really high plan that you've had and enjoyed for all these years and keep it knowing that you have to pay more out of pocket? That's the whole idea behind the voucher system that instead of giving a percentage of the premium, they are simply going to give a flat dollar amount and you get to decide how far it goes.
Who it might affect, everybody who's covered under FEHB, but we don't know who's going to be grandfathered. Maybe they leave current retirees alone and continue to pay that percentage. Maybe they phase this out, maybe this is something that they do for brand new hires, although there's even a call for eliminating FEHB in retirement for all new hires. Who knows how that's going to go?
We'll talk a little bit more about that here towards the end. As far as the anticipated impact, there's going to be a significant increase in the amount of money that you're going to have to pay for your health insurance unless you're going to switch plans. That is just the long and short of it. The government share is going to be considerably lower.
You're going to see that here, an example, and that here's probably the worst part or at least a bad part about all this, that what's floating around is the idea that with the voucher that the increase to the voucher amount each year is tied to inflation and not to the rising cost of your FEHB premiums.
When we think of inflation, we are at 2.83% over the last 10 years, but over those same 10 years, your FEHB premiums have gone up by 5.66%, and last year, the average FEHB premium increase was 13.5%. There's going to be a lot of mismatching on price and how that voucher rises over time, and we're going to have to see what ends up coming out in a bill or presumably a law when it's passed. But this can be pretty significant.
Example
I want to talk about an example here, and I've got some outdated information here and it'll make a little bit of sense as I explain it. The actual amount of the vouchers have not been announced. It was interesting, the Congressional Budget Office did a study on the FEHB voucher concept back in 2016. This is not a new concept.
I'm going to use the numbers that they used back then in this study knowing that the likelihood that these vouchers will be higher than what they're listed here is probably pretty good. In that study, these are the voucher amounts that they used.
For Self-Only individuals, we are looking at $6,100, for Self Plus One at $13,200 and for a Self Plus Family plan at $14,000 for the year. In my example that I'm going to show you, I'm going to use these numbers knowing that these are outdated, but nothing else has been released as far as the anticipated voucher amount. My hope is that they're higher than these numbers.
Let's start with the Blue Cross Blue Shield plan for 2025. In this case, I've chosen to use Blue Cross Blue Shield because 60% of federal employees are enrolled in one of these six plans. It's one that's very common, obviously good name recognition, and most of you just statistically are going to have one of these plans.
But this concept applies to all of them. The total cost you see that we've got filled in there, these are pretty substantial costs for the year. Of course, the government doesn't pay all of it and neither do you. There's a cost share. That's the current model that we have. In the current model, the government is going to pay their share and you are going to pay your share.
Of course, you do this on a bi-weekly, and so these numbers that you're seeing highlighted might not look familiar to you, but if you put them in the 26-pay period version, you're likely going to recognize these right from your pay stub. One thing you'll notice as far as what the government pays, they pay the exact same amount for the high plans, the standard plans as they do the low plans because for the Blue Cross Blue Shield plan, they are maxing out the government contribution. That is the most.
There's a cap as to how much they're willing to pay for Self-Only, Self Plus One and Self Plus Family. And both of these plans, even though they're very different, they're both expensive enough that it's maxed out the dollar amount that the government's willing to pay on your behalf. If you want that standard plan, you are paying all of the difference in that premium.
And this is not a plug for Blue Cross or anything like that, or a defamation of Blue Cross. It just is what it is. And these are very popular plans with this, but I wanted to point that out because I didn't want you to think there's an error there on the slide. In fact, the government pays the exact same amount whether you're in the standard or the basic plan. It's a good talking point at least to make sure that we realize we are really maxing out the government's plan for providing this health insurance.
The voucher model. The concept here, remember the total cost has stayed the same. As far as what Blue Cross is going to charge to have this plan, that's not changing in this model, but what the government pays is changing, right? Remember, these are the voucher numbers that we had from the 2016 CBO study.
And same thing, what the government pays for the standard plans is the same as the basic plan because it's going to be a flat dollar amount. You may say, “Never mind, I don't actually want to be in a Blue Cross Blue Shield plan. I want to go to a different plan that maybe does fall within that voucher limit.” You can certainly do that, but it's going to be difficult to likely find a plan where the voucher covers the whole thing.
The government share isn't covering the whole thing right now. You're obviously picking up some of it, but how much the voucher ends up picking up is largely dependent on the actual plan that you're in as far as the percentage of the total premium that they're paying. Again, it won't be based on a percentage, it will be a flat dollar amount, but you get the idea.
Of course you're going to pay the difference. From the total cost, subtract out what the government's willing to pay by voucher, and you end up having the difference that you're going to pay. I just put each of those in those red boxes so that you can see the change that is likely to occur if we move to that voucher system. Again, I'm hoping that those voucher numbers are significantly higher than what they had almost a decade ago, but we'll see.
Change the TSP G Fund Rate of Return
The next concept that's being thrown around is to change the TSP G Fund rate of return. The G Fund, of course, is something that federal employees love in the TSP because it's couched as a really safe investment. And on paper, it is. It definitely you're not able to lose your principle or your earnings in the G Fund. It only goes up.
But what it doesn't go up by is the actual market inflation, the market changes that are happening that allow you to gain more money. And that's a challenge, and I'm not here to bash on the G Fund, but it has its place. But we have a lot of federal employees who have been in the G Fund for a long, long, long time in their career, and they have enjoyed a rate of return that is astronomical based on the actual risk that they have in the G Fund, which is none.
Here's the proposed change. It's to lower the G Fund interest rate to more closely resemble the short term Treasury bill instead of the long-term Treasury bill. When we think of T-bills, when we have a long-term T-bill, that has a higher interest rate that it's growing by.
There's lots of reasons for that, and we're not going to go into the financials of all of this, but the idea behind the long-term T-bill is that these are typically three, five, 10, 20, 30-year bills that you normally would put the money in and not have access to that money, at least not without some penalties for many years.
And although it probably feels that way in the G Fund where you don't actually have access to that money, you technically do. You have access to move out of the G Fund and sell your Treasury bills. They're not calling it that they're in the G Fund, but that's what it is.
You have the ability to do that at any moment in time. You have the ability to take loans, you have the ability for in-service withdrawals if you're of a certain age, all of that. What's interesting is the G Fund rate of return right now is tied to the long-term Treasury bill that a normal person would never get that rate.
And because you're federal employees and because there's this arrangement between the TSP and the Treasury, there's even a special segmented type of T-bill that the G Fund is invested in and how it works because you can get out of it at any time without penalty, which is not how long-term T-bills work.
The idea here is that it moves more to the short-term T-bill rate, which is a lower interest rate. So, your G Fund may or may not keep up with inflation.
It just depends on how things are going. But I did find it really interesting that 70% of TSP participants have some money in the G Fund. This was a shocking statistic, and that is that 40% of them have all of their money in the G Fund. Wow. We always tell people in the G Fund, there are a couple of guarantees.
The first is you're guaranteed not to lose your principal and your earnings. The second guarantee is you're guaranteed not to make much money. That's not my ploy for all of you who are in the G Fund to move out to the C and the S and the I funds, but you don't have the opportunity in the G Fund that you normally would in those more aggressive market index-based funds like the C, S and I. So, you do you. You figure out what mixture makes sense for you.
But I was surprised to see 40% have all of their money in the G Fund. Keep in mind this includes people who are already retired, and so it makes sense that they're much more conservative, but we find too many employees who got in and stayed in the G Fund for way too long early in their career when they had the opportunity to be able to make some money being a little bit more aggressive.
Here's the anticipated impact. Those who are heavily invested in the G Fund and who like just to park their money there and say, “I'm just going to take my earnings and be done with it and not have my heart sink every time I hear about the market,” those people are naturally going to see a lower account value in the TSP. It's hard to actually show an example because it's not clear how the rate will work for these special types of T-bills that the TSP has been able to negotiate versus a normal T-bill.
I don't want to give any false expectation of what that will look like, but we know it will be lower than what it is right now. As we're starting to wrap up, there are some other proposals or concerns that are out there that have been floating around. I chose not to go into greater detail on these because they're either not affecting a specific benefit, but more so your work status or it's targeting newly hired employees.
Moving from a Merit-Based System to an At-Will System
And that's not really the audience that we have here today, but let's talk through these real quick. The first is moving from a merit-based system to an at-will system or status. This concept, this is kind of harkening back to the Schedule F in the first Trump administration where he wanted to be able to make more federal employees at-will employees, meaning they could be fired and not have the same types of civil service protections.
There is a movement to be able to categorize about 50,000 policy makers as at-will employees who are intentionally there to advance the president's agenda and their policies and making them at-will status. But the broader sense of things is that moving from the current system that you have right now, which is they're calling merit-based to an at-will status, simply says, “Hey, listen, if you don't fit the bill anymore, you can be fired.” And that's really unsettling for federal employees, I understand. It's how the private sector works primarily, but it doesn't feel any better knowing that.
The Elimination of the FERS Pension Altogether for Newly Hired Employees
This would transition them to be required to contribute to the TSP. This is certainly the way the private sector has gone as far as eliminating pensions and making 401(k)s available. I don't currently know of a private sector entity that requires people to contribute to the 401(k), although it's the natural thing for them to do to contribute more and more there.
The challenge, of course, is many of you have your FERS pension that you're contributing to, and you're maxing out the TSP. There's nothing more that you could possibly do. What happens when we have newly hired employees who don't have a pension? They're maxed out on TSP, like, what's the next thing that they do?
Of course, this requires some financial planning and financial awareness of other products and services that are available out there in the private sector, but we'll see how this one shakes out.
The Elimination of FEHB in Retirement for Newly Hired Employees
This is another thing kind of coming from the private sector. It is very unusual for health insurance to continue after someone leaves a private company, and I think they're trying to mimic some of that with respect to the FEHB program. But no doubt, this is a huge perk that you get in retirement.
Knowing that this gets taken off the table, at least for newly hired employees will make civil service a little less attractive for people to put up with some of the nonsense that you have to for all these years, knowing that at least you've got a great pension and great health insurance on the back end. If both of those things are gone, your hiring entities within the federal government may have a little bit harder of a story to tell for potential candidates.
Wrap-Up & Next Steps
Let's wrap up here. Most of these decisions that we've talked about today are completely out of your control, right? It's in the hands of Congress. We'll see what ends up happening. But let me share with you, your response to this is important. And I don't mean your reaction, like the visceral reaction that you get from hearing about these benefits or the proposed changes and DOGE and Trump and all that.
However your reaction to that is is separate from how you choose to respond because when you react, it's not in your control. When you respond, you are putting yourself back in the driver's seat, and that response, that responsible response, starts with knowing your numbers so that you can understand the impact of all these decisions. Of course, I've given some examples today. You're going to have your own situation. You're going to have your own high-three or high-five.
You're going to have your own FEHB premiums, your own special retirement supplement calculation. Start to look at those numbers and figure out what impact does this actually have on me? You're not going to be happy about it, I understand, and that can be some of your reaction, but how you choose to respond is going to be super important.
Does this mean, if these various proposals end up passing, does it mean you're going to need to find another job? You might've thought you were going to retire at 57 and be done with it, but in reality, maybe you end up going at 50 or another age and you decide, “I'm going to go on and get another job and try to shore up some of what I'm losing with respect to my government job.” Some of you might say, “You know what? Knowing what's coming on the pike, it's time to retire.” I'm not suggesting that you go down that road.
It might be the case when we think of the grandfathering and how they're going to make that line of demarcation of who these policies change and who they don't affect. But I would argue, unless you have already gone through the retirement planning process, you've met with an advisor who can show you the trajectory of your income and expenses and making sure that you feel great about the decision that you're making.
If you've done all of that, then maybe it is time to retire and you're going to go make it happen. But please don't do this from a reactionary standpoint. You might also find that it means that things are going to be a little or a lot tighter in your budget. If we start having to pay way more into FERS and way more for your health insurance while you're still employed, then chances are that money's going to come from somewhere and things are either going to have to get really tight in your budget or you're going to probably pull back on your TSP contributions.
Both have their consequences, but we have to understand what this actually means from a financial perspective. And some of you might say, “Even if those things happen, I'm going to be okay. It's maybe not ideal. It's not what I was hoping would happen, but I'm going to be okay.” What you choose to do now matters. Here's something that I'm going to share with you that I say with absolute love, and that is I don't want you to be a victim.
I don't want you to paint yourself as a victim in this process and just take whatever's coming to you. I want you to put yourself back in the driver's seat. You're going down a weird road right now with everything happening, but you have more control than you think, and the control lies in how you're responding to this, how you know your numbers, how you figure out a plan moving forward.
And that's what I really encourage each one of you to think clearly about when some of the visceral reaction dissipates. Our job here at ProFeds is to help federal employees retire with confidence. Of all the things we do, whether it's our workshop, webinars, podcasts, articles, fact sheets, scorecards, all the things that we have, it's all to shore up your confidence and put you in the driver's seat.
The best way that I can help you get your mind wrapped around all these big decisions and how all these numbers are going to play out is to get you to attend a workshop. Many of your agencies hold their own workshops. Some are good, some are maybe not so good. We have tons of agencies reaching out to us right now to be able to bring our retirement workshop to the agency. Obviously, everyone's scrambling trying to figure out what to be able to do in all of this, but these in-person sessions are all over the country.
They're out in your community. They're open for federal employees to attend at no cost. These are sponsored sessions, so the fee's already been paid. Your agency doesn't need to obligate money. You don't stroke a check. This is all covered for you, and we're going to talk about all the federal benefits topics and the decisions that you're going to be making as you make your exit from government service.
One of my favorite parts of the workshop process is that while it's great to get general information and see examples of how things work, what most people care about is how does this apply to me? What do my numbers look like? What about the things that I'm worried about? And that one-on-one help that's available following the workshop is something that is really eye-opening and exciting for a lot of employees who are trying to find some semblance of control in this process.
You can see all of the details for our workshops that are open for registration by going to fedimpact.com/attend. Again, all over the country, we're not in every city, of course, but hopefully you can find one that's close by. Of course, workshops are filling up pretty darn quickly these days given everything that's going on. We're doing our best to try to accommodate as many employees as we can.
Thank you so much for joining us. As a reminder, you can find all of the workshops that are available for registration by going to fedimpact.com/attend. And to attend the next webinar or to listen to any of the replays for our past webinars, we've got a whole library of them, you can go to fedimpact.com/webinar.
Thank you all so much. We'll see you next month.
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