Riding the Wave

President Obama's pay freeze might not trigger the retirement tsunami some have forecast.

As a two-year federal pay freeze takes effect, agency workforces are facing an uncertain future. Though many fear the move will spark a retirement wave, observers say it could have a much more subtle effect, causing some employees to retire while leaving others frustrated or disengaged.

President Obama in December 2010 signed an executive order authorizing a civilian pay freeze through 2012. Senior executives will not be eligible for base salary increases either, including those linked to job performance, and locality pay will remain at 2010 levels. Employees still will qualify for promotions and step increases.

Some government observers have expressed concern that failure to offer raises could contribute to a surge in departures, as the number of workers eligible for retirement grows. According to Office of Personnel Management data, 28 percent of employees could have retired in fiscal 2009, though only 8.8 percent of those who were eligible actually left government service. By fiscal 2015, nearly half of all employees will qualify for retirement, OPM estimates.

Federal managers foresee a similar trend. Of more than 1,500 managers the Government Business Council, the research arm of Government Executive, surveyed in December, nearly half believed their co-workers would be more likely to retire if a pay freeze took effect. Of the respondents eligible for retirement, however, only a third said the freeze would speed their exit from government, and nearly 20 percent said they likely would work longer than planned.

Observers think the pay freeze will affect retirement rates, but they caution it's risky to predict how great that influence will be. The move also could force out top talent and mission-critical employees who could find second careers in the private sector, they say.

"You'd be hard-pressed not to believe that this will have an impact," says Max Stier, president and chief executive officer of the nonprofit Partnership for Public Service. "The impact is likely to be on the margin. It's not going to spark a mass exodus or anything of the sort, but it is likely to impact the choices of those that are on the fence and those for whom real financial pressures exist."

In the GBC survey, some managers ready for retirement said their high-three salary, used to calculate annuity benefits, would be lower than expected due to the pay freeze, giving them little incentive to continue working in government. A few respondents said they planned to see how long the freeze would last before making any decisions, while many others said additional measures, such as changes to cost-of-living adjustments or a switch from a high-three to a high-five formula, would have a greater effect on their retirement date.

For Senior Executive Service members, private sector opportunities and the perception that the administration does not value employee contributions could push more people out the door, says Senior Executives Association President Carol A. Bonosaro. The freeze is demoralizing because it effectively fails to recognize senior executives' 2010 accomplishments, she notes.

Paul Rowson, managing director at the human resources association WorldatWork, says agencies might lose hearts and souls rather than bodies if frustrated employees continue working rather than retire. Changes in pay and how employees perceive their value can result in disengagement, he adds.

"There's always a tendency in an organization to cut too deep to the bone," he says. "In those circumstances you see all types of engagement drops and productivity drops. When pay is back on the table . . . the real big question will be what type of offering will the federal government have to reward those people for a high level of engagement and commitment after a two-year drought, or will they reward everyone equally?"

Bonosaro believes the high demands placed on SES employees, coupled with concerns about pay, could make it difficult to persuade GS-14 and GS-15 workers to seek executive positions. SES members won't let the quality of their work drop because of the lack of performance awards, however, she says.

"These executives just don't have it in them to be disengaged," Bonosaro says. "I think they can be frustrated, and it may well influence a decision to retire, but I don't think it will influence what they'll do on the job."

Stier agrees, noting money is not the primary motivator for most federal workers. Agency leadership and how well an employee's skills match the organization's mission are the key factors in engagement, he says.

The real test will occur if the freeze does in fact continue into 2012, Rowson says. "People are probably willing to endure one year," he says. "But the real question mark-pressure from the economy, coupled with frozen pay-in one or two [years] we may see people start to make their move. Eighteen to 24 months out is the real harbinger."