Understanding the Proposed Federal Retirement Benefits Cuts: FERS Changes

After the Senate approved a measure to cut federal benefits spending by $50 billion over 10 years. The proposed changes were later adjusted and approved by the House oversight committee. Now, as the bill moves to the floor of the House of Representatives for consideration, we have more insight on the cuts aimed to modify several aspects of FERS (Federal Employees Retirement System), potentially impacting the retirement benefits that federal employees have long relied upon. 

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Proposed Changes to FERS and How They Will They Affect Federal Employees

Overview of the Proposed Cuts to Federal Benefits

For starters, the plan to make all FERS workers contribute 4.4% to their pension system has been scrapped. As well, it doesn’t appear that FEHB will become a voucher system although there will be an audit of the program conducted. Items that were included in the latest bill are:

• Eliminating the FERS Annuity Supplement, or Special Retirement Supplement (SRS) for FERS retirees under 62.
• Changing the FERS High 3 average salary to a High-5 figure, lowering pension income.
• New hires will have to choose between civil service protections or a lower contribution rate to their FERS retirement. 
• Charging a fee to file a case with the MSPB (Merit System Protections Board)

Plans to Eliminate the FERS Supplement and New Exemption for Federal Workers with Special Retirement Provisions

One of the most significant proposed changes is the elimination of the FERS annuity supplement. This supplement currently provides additional income to FERS employees who retire before age 62 and are not yet eligible for Social Security benefits. The elimination of the FERS supplement would remove a critical component of the retirement benefits for federal employees who retire before age 62. It serves as a bridge between early retirement and eligibility for Social Security benefits, providing financial support during this transitional period. The House budget committee did make change that would keep the supplement for employees in positions with mandatory retirement ages, such as federal law enforcement officers, firefighters, and air traffic controllers, who are required to retire early.

Estimate your SRS amount with our FERS Annuity Supplement Calculator!

High-5 Salary for FERS Service Would Take Effect in 2028

The proposed shift from a high-3 to a high-5 annuity calculation method would reduce the overall pension benefits for many federal retirees, as it would lower the average salary used to calculate their annuity. The new revisions pushed the effective back to January 2028 so those who retire before then would still be able to use their high three average figure. The high three is multiplied by years of service and either 1.0% or 1.1 percent to compute the income amount for when feds receive the FERS benefit. Likewise, the elimination of the FERS supplement would also not impact those who retire prior to 2028. Former federal employees who accepted the deferred resignation program offer in 2025 with therefore be unaffected by either of these alterations to current law and federal retirement rules. 

Try the Federal Retirement Benefit Calculator to estimate your pension amount today. 

Other Proposed Federal Benefits Cuts to Reduce Federal Spending 

Although raising retirement contributions to FERS to 4.4% for all federal workers is no longer on the table, new hires would have their contribution rates change. In exchange for becoming an “at will” employee and thus forgoing civil service retirement system protections, they would be able to contribute less to their federal employee benefits than those who choose to retain those protections. There would also be a new fee requirement in order to file a case with the MSPB. 

What Are the Implications of Changing Annuity Calculations from High-3 to High-5?

Current Annuity Calculation Method: High-3

Under the current FERS system, annuities are calculated based on years of federal service, the average of an employee’s highest three consecutive years of salary, known as the high-3 method, typically the previous 36 months before a CSRS and FERS retirement date. This calculation method generally results in a higher annuity, as it reflects the peak earning years of a federal employee’s career. 

Proposed Shift to High-5 and Its Impact on those Eligible for the FERS Annuity

The proposed shift to a high-5 calculation method would change the basis for determining annuities to the average of an employee’s highest five consecutive years of salary. This change would likely result in lower annuities for many federal employees once they are eligible to retire, as it would dilute the impact of their highest earning years. The shift could disproportionately affect employees who experience significant salary increases late in their careers, reducing their expected retirement benefits with a lower FERS annuity. Annuities for new retirees in 2028 and beyond would be impacted based on the current legislative draft.

Looking Ahead, Planning Your Retirement, and FERS Employee Webinar

Planning for Retirement Amidst Proposed Changes in Reconciliation Bill

Amidst the proposed changes to federal retirement benefits, employees should prioritize retirement planning and financial literacy. Understanding the potential impact of  reduced benefits is crucial for making informed decisions about retirement savings and investment strategies. Employees should also consider diversifying their retirement portfolios and exploring additional savings vehicles to ensure a secure financial future. Engaging with financial advisors and participating in retirement planning workshops can provide valuable insights and support during this period of uncertainty.

Future Outlook for Federal Retirement Benefits

The future outlook for federal retirement benefits remains uncertain as policymakers continue to debate the proposed cuts. While the changes aim to address fiscal challenges, they also raise concerns about the adequacy and fairness of retirement benefits for federal employees. Ongoing discussions and negotiations will shape the final outcome, and federal employees should stay informed and engaged in the process. Advocating for fair and sustainable retirement benefits will be essential to ensuring the long-term security and well-being of federal retirees. 

Need to start planning your retirement now? Get started by attending a free online federal retirement seminar.