Beware the “Retirement Tsunami”

Immediately following Donald Trump’s oath of office, his campaign proposal Contract with the American Voter became an action plan. The second item listed is the President’s declaration that he would pursue “a hiring freeze on all federal employees to reduce the federal workforce through attrition (exempting military, public safety, and public health).” The hiring freeze ended last April, but agencies remain under pressure from the administration to reduce their personnel in the short and long term.

Workforce reduction is a familiar pledge. In recent history, there have been numerous presidential efforts to cut the number of federal workers, but few of them have been successful. Trump, however, has picked an opportune time to downsize the federal workforce—especially through attrition. According to a recent GAO report, more than one in every three employees will be eligible for retirement by the end of Trump’s first presidential term.

Linda Springer, Director of the Office of Personnel Management (OPM) under George W. Bush, warned of the coming “retirement tsunami” back in 2006. Springer predicted, based on workforce demographics, that 60% of federal employees would be eligible for retirement in the ensuing decade, and that 40% would retire. She was correct in 2006 about the growing number of retirement-eligible employees, but wrong about the number who would leave government. Current federal workers have simply held onto their jobs for longer. As a result, the number of federal employees aged 55 or older has climbed steadily.

Whereas the Bush Administration expressed concern over the number of potential retirements, Trump’s leadership team has embraced the opportunity to cut the workforce. White House issued in April requires agencies to identify and facilitate personnel reductions, including through retirements. With more than 28% of the current workforce aged 55 or older (according to OPM data), it’s possible that the Trump Administration can meet its reduction targets simply from natural attrition.

No specific downsizing goal has been publicly established, but for a clue we can look to a bill that Office of Management and Budget (OMB) Director Mick Mulvaney sponsored when he was a congressman. The Federal Workforce Reduction Through Attrition Act, introduced in 2015, targeted a 10% reduction compared with 2013 levels to be achieved through attrition. Mulvaney’s bill never made it to a vote, but it provides insight into the mindset of the person leading Trump’s workforce reduction efforts.

Is downsizing of this magnitude possible? As it turns out, the Clinton Administration achieved a 14% reduction in federal civilian employment during its first 4-year presidential term, the product of the National Partnership for Reinventing Government initiative. Employment was reduced another 5% during Clinton’s second presidential term. In total, the federal government’s civilian workforce shrank by 434,000 persons between 1993 through 1998.

In contrast, federal employment has only declined about 10,000 workers through the first year of Trump’s presidency. However, agencies just submitted their “Agency Reform Plans” this past fall. They are still being reviewed by OMB and won’t fully take effect until FY 2019. With the tide of retirements so clearly in Trump’s favor, we can expect the rate of workforce downsizing to accelerate as the year and the Trump term wear on.

Implications for Federal Leasing

Though specific downsizing targets have not yet been established, we can be certain that these workforce cuts will amplify the effects of the Obama era’s Reduce the Footprint initiative already underway. In fact, the two efforts go hand in hand. OMB is calling for agencies to identify “restructure and merge” activities to realign their workforce towards greater efficiency. These changes to the very structure of federal agencies will be catalysts for workplace reconfiguration that will drive costly space redesign. That, in turn, will erode the price advantage lessors enjoy when competing to renew their federal tenants.

So, reductions in the size of the federal workforce could ultimately trigger a chain of events that make federal tenants more difficult for incumbent lessors to retain. A still more troubling aspect of workforce reduction looms. To the degree that employment reductions cause vacant seats to open up in the government’s owned inventory, those seats will be filled first, siphoning occupancy from leased space.

One mitigating factor is that federal workforce reductions traditionally result in increased federal contracting, and some of those contractors will occupy the same space vacated by the federal employees they replace. Further, reductions will not affect all agencies equally. As noted in in the graph above, Homeland Security and a few other agencies tend toward younger workforces and elements of that agency’s mission will likely be exempt from downsizing in any case. Administration efforts to downsize will be more energetic in some agencies than others. Knowing the specific reduction pressures on the agencies each lessor works with seems key to anticipating future space demand.

The “retirement tsunami” has not yet arrived and perhaps intervening events will cause it to dissipate. Meanwhile lessors must keep attrition by retirement on their radar because federal retirement demographics and Trump’s efforts to reduce the size and scope of the federal government are very real.

Want Capitol Markets articles delivered straight to your inbox?