Are federal buyout incentives worth taking?

More than a few employees in and outside government dream of being paid to leave their jobs. In an ideal world, workers would take the money and run, as the Steve Miller Band advised in the 1976 song, to another job or to a well-deserved retirement. But this is not an ideal world, and when it comes to buyouts, federal employees might be better served to heed the wisdom in another 1970s song, The Gambler: "You've got to know when to hold 'em, know when to fold 'em."

The reality is, for most people, $25,000 just doesn't stretch as far as it once did. That's the maximum amount of cash -- before taxes -- available to eligible federal employees in buyouts, or voluntary separation incentive payments, as they are known in government jargon. After taxes, the amount shrinks to about $16,000 or $17,000, according to Arthur Stein, a certified financial planner with SPC Financial in Rockville, Md., who counts many federal employees among his clients.

For workers who are not planning an imminent retirement already and for those enrolled in the Federal Employees Retirement System -- which is the bulk of the government workforce -- taking a buyout can mean losing more money over time. "I don't think it's much of an incentive," says Stein. "The key question is can you afford to take a buyout?"

Stein says FERS employees who accept a buyout risk reduced Social Security benefits and losing the employer match in the Thrift Savings Plan, the government's 401(k)-style program. On the other hand, buyouts can be strong incentives for those planning to retire in any event, or for those employees covered under the Civil Service Retirement System. CSRS participants receive up to 80 percent of their annuity but are not eligible for Social Security or TSP benefits.

The federal buyout of $25,000, however, is "just not a lot of money," Stein says. Employees in the private sector who accept buyouts often can receive up to one year's salary. The 2002 Homeland Security Act allowed non-Defense agencies to seek buyout authority from the Office of Personnel Management when appropriate to manage the workforce, capping the pay out at $25,000. Congress is unlikely to increase that figure in the middle of a federal pay freeze and fights over government spending.

While the benefit of a buyout from an employee's perspective depends on individual circumstances, the advantages to agencies are clear. In recent months, agencies increasingly have turned to buyouts and early retirement packages as a way to save money and to avoid potential layoffs or furloughs in the face of impending budget cuts over the next decade. Agencies can combine the cash incentives with early-out options, which provide an early retirement with a reduced pension to eligible employees who are 50 or older and have 20 years of service, or those who have 25 years of service at any age. It's a more attractive option for agencies looking to downsize or reshape their workforce. It's also cheaper: Laying off employees still costs money because those workers are entitled to severance pay.

The appeal of buyouts to agencies has grown after the failure of the joint select committee on deficit reduction to agree on a plan to reduce spending by $1.2 trillion triggered across-the-board automatic spending cuts. Those cuts are slated to take effect in January 2013 unless Congress repeals sequestration. While there are no official figures available yet on how many employees accepted such incentives in 2011, tens of thousands were offered, and agencies en masse are sure to offer another round of buyouts heading into fiscal 2013.

In November, OPM Director John Berry sent a memo to agency human resources chiefs addressing the tools available to restructure the federal workforce, including buyouts, early outs, layoffs and reassignments. "The federal government is experiencing restructuring and downsizing in an increasing number of agencies," the memo stated. "As a result, some federal employees may ultimately find themselves in a position of having to transition to a new job."

The last time the government relied heavily on buyouts and early outs to reshape the federal workforce was during the 1990s as part of the Clinton administration's reinventing government initiative. The difference between then and now, however, is that agencies' use of the incentive in the 1990s was not budget-driven, but part of an overall initiative aimed at making government more efficient and streamlined. "In the 1990s, people felt they could leave the federal government and get a job," Stein says.

John Palguta, vice president for policy at the nonprofit Partnership for Public Service, says that while buyouts still are an effective incentive for "a decent number of employees," they are not as effective as they were during the Clinton years. Palguta and Stein say buyouts can be a good deal for federal employees who are eligible for retirement or have only a few years of service and not much invested in their pensions and TSP accounts.

Workers should weigh their options carefully when considering a buyout, observers say. "Federal employees still have very good benefits compared to most private sector employees, and they have better job security than your average private sector employee," says John Grobe, president of Federal Career Experts, an Illinois-based consulting firm.

Grobe spent more than two decades working at the Internal Revenue Service and took a buyout in 1997. "Anyone considering a buyout or leaving in general should sit back and focus on where they want to go, not where they want to be from," he says. "The decisions we make should be forward-looking."

Note: This article appears in the January issue of the magazine.