Federal Workers Face Slashed Benefits to Pay for Trump Tax Cuts

Federal workers whose benefits have long been an attraction for government service are confronting a new reality as GOP lawmakers advance legislation shrinking their health and retirement plans to help pay for Trump’s proposed tax cut extensions.

Public-sector unions are scrambling to muster a political strategy to defend their members and retirees against a House reconciliation package threatening to eliminate early-retirement supplemental funding, reduce pension payouts, and gut civil service protections. Benefits advisers, meanwhile, tell Bloomberg Law they’re experiencing unusually high call volumes as workers contemplate retiring early or working later if the package passes Congress.

“They’re kind of eroding what it means to be a federal worker,” said Tammy Flanagan, a benefits counselor and former federal law enforcement staffer. “It seems like working in the federal government will be no different than working in the private sector. Well, maybe different because you get less pay and worse benefits.”

The proposed tax-cut offsets approved by the House Oversight and Government Reform Committee late last month are the latest blow to federal workers who have faced mass layoffs, funding cuts, and office closures during President Donald Trump‘s first 100 days in office.

Retirement industry observers had feared congressional Republicans would put private-sector 401(k)s on the chopping block, something lawmakers toyed with doing when the Tax Cuts and Jobs Act made its way through Congress during Trump’s first term. In character with the Trump administration’s agenda, critics allege, Congress is proposing to put some of the burden of paying for the tax cut extensions on the 2 million Americans who work for the government each day.

“They’ve done what they could to make the federal government an undesirable employer, and this is just doubling down on that effort,” said Daniel Horowitz, acting legislative director for the American Federation of Government Employees, the nation’s largest US government worker union.

Earned Benefits

The proposed legislation, which cleared the House oversight committee on a nearly party-line 22-21 vote, seeks to reduce the federal deficit by at least $50 billion. The largest savings component would involve workers contributing a flat 4.4% rate for their pensions, which could significantly reduce experienced employees’ take-home pay.

Workers hired before 2013 currently contribute less than a percent of their salary into the Federal Employee Retirement System.

Elsewhere in the proposal, the government would entirely eliminate the FERS annuity supplement, which bridges the income gap for workers who retire before age 62. The policy would recalculate annual retirement income by factoring in the top five years of a worker’s salary instead of the top three.

The proposal is “unfair” to workers whose benefits were already vested, or earned, said John Hatton, vice president of policy and programs at the National Active and Retired Federal Employees Association.

“This would be rolling back earned retirement benefits based on past service,” Hatton said. “For somebody who’s about to retire, they would be taking a hit to what they would have been making if they retired the day after something like this became law.”

Federal worker benefits “are not a gift; they are earned,” said Ohio Rep. Mike Turner, the sole oversight committee Republican to oppose the proposal during the April 30 markup hearing.

Turner’s Republican colleagues argued that federal worker benefits outpace those in the private-sector and that their proposal brings parity at a moment of what committee chair James Comer (R-Ky.) called “generational opportunity” to reduce federal spending.

Limited Appeal

Public pension reform targeting accrued or vested benefits has become a touchy subject in several states as a body of contract-law has formed in the wake of legislative pension downsizing efforts since 2000.

Public pensions aren’t protected from cuts the same way private-sector funds are, so state workers have sought to overturn state laws reducing their earned pensions by challenging them under the so-called California Rule, a 1955 California Supreme Court decision that interpreted workers’ pensions as a contract that couldn’t be modified after the day they were hired.

At least a dozen states have formally codified some form of the California Rule into state law, according to a Pew study of state reform limits, but those protections wouldn’t apply directly to federal workers, since the federal government is exempted from the Constitution’s contracts clause. The Fifth Amendment’s takings clause has been tested in pension rights cases, but it’s unclear how it would apply to congressional action.

The only other major change Congress has made to pensions in the past was under the 2013 Bipartisan Budget Act, which created three separate tiers of FERS contribution rates according to when a worker was hired. Higher rates were applied to new workers—not existing ones.

Benefits reductions will next go before the House Budget Committee, which is tasked with assembling bills into a reconciliation package that will have to be approved by the House and Senate. Advocacy organizations are focused on stopping the package “before that happens,” said Hatton. It’s “too early to talk about a legal strategy,” he said.

“This doesn’t just undermine people’s retirement benefits,” Hatton added. “It undermines their morale.”