How Third Way Revolutionized the Federal Pension System (and Saved Hundreds of Billions)

By 2012, states were struggling to close enormous budget gaps caused by the Great Recession—mainly because tanking local government fiscal reserves had sunk to new lows. The cement blocks dragging them down? Their government employee pension systems.

We thought this might apply to the federal government, too—and when we looked closer, we found a system that was crying out for reform. Specifically, we were alarmed by the strain that aging Baby Boomers would put on the federal pension system, fearing it would crowd out funding for key government investments.

We discovered an arcane rule written in 1986 mandating that for every $13 the federal government contributed to the pension system, employees were only required to put in $1. Even the most generous private retirement sector plans didn’t offer this high of an employer match.

Once we isolated the problem, we developed a proposal to gradually shift this balance from 13:1 to 1:1, and we built a bipartisan coalition to pass it. In one of the most significant fiscal deals of the Obama era, Congress passed legislation in 2012 phasing in our recommendation over a period of three years.

This saved billions and showed that the federal government was capable of starting to address its own pension problems.