The Budget Agreement Should Cut Federal Employee Pay, But Not Like This

Here's one of the problems that members of Congress faced in trying to put together a budget agreement. Republicans wanted to make federal employees pay more toward their pensions. President Obama has also proposed doing this as a part of his budget.

But Democrats generally are not very keen on this idea, and two of the most powerful Democrats in the House (Reps. Steny Hoyer and Chris Van Hollen) represent districts in Maryland with lots of federal workers whose pay they want to defend.

So Rep. Paul Ryan (R-Wis.) and Sen. Patty Murray (D-Wash.) came up with a compromise: Require higher employee pension contributions, but only from federal civilian employees who will be hired in the future.

This is a perfect approach because the losing political constituency is invisible. In fact, it's so compelling, Congress already used it once before this year, as part of the "Fiscal Cliff" deal enacted in January.

Most federal civilian employees hired in 2012 and before pay 0.8% of their salaries as pension contributions. Because of the Fiscal Cliff agreement, those hired in 2013 pay 3.1%. And if the Ryan-Murray budget agreement becomes law, workers hired in 2014 and after will pay 4.4%.

Let's be clear about one thing: A higher pension contribution isn't really a change in retirement policy. It's a wage reduction. These dollars are fungible; cutting an employee's pay by 1% or telling him he has to kick in 1% more for his (unchanged) pension leave him with exactly the same effective compensation package.

And I have no problem with a federal employee pay cut as part of a budget deal. A 2012 Congressional Budget Office study found that federal workers are compensated, on average, 16% more than comparable private sector workers. On average, according to CBO, federal workers made $52.50 per hour in wages and benefits as of 2010. If the private sector workforce were reweighted to have similar characteristics to the federal workforce (e.g., it would become much more educated and somewhat older) it would have average hourly compensation of $45.40.

It makes sense to react to that gap by restraining federal pay over time. But the austerity should fall across existing and new federal workers, not just on new hires. Indeed, that's roughly what President Obama proposed as part of the deficit-reduction package in his budget proposal: A 1.2% pension contribution increase on all federal civilian workers except the ones who had already been impacted by the 2.3% hike in the fiscal cliff deal.

Obama's plan would have saved $20 billion over 10 years. Because the Ryan-Murray agreement holds existing federal workers harmless, it will save only $6 billion, even though the hit it imposes on the workers it does affect is larger.

That said, I'm still all for this budget deal. The policy certainty it provides by unwinding part of sequestration and setting budget targets for two years is good for all sorts of Americans. As Sen. Murray pointed out when announcing the deal this week, that certainty is especially good for the federal workforce, who can be reasonably assured that there will be no government shutdowns and no sequester-driven furloughs through Sept. 30, 2015.

That's a necessary trade: Congress should benchmark federal pay to the private sector, but it should also treat its employees as a large professional employer would, which means not closing up shop and random and making employees wonder whether and when they will get their paychecks.

In future years, if the federal worker pay cut imposed by the Ryan-Murray deal becomes a problem for employee recruitment and retention, Congress can revisit it. Right now, the slack labor market (and that 16% average pay advantage) means the feds shouldn't have any problem hiring. Any future economy in which the strong labor market is causing hiring problems will probably also be an economy in which tax receipts are strong, which should make room for a federal pay raise.