Federal employees could once again find themselves on the short end of the budget reduction stick if Congress looks to compensation and benefit cuts as a way to buffer the impacts of sequestration.

The Congressional Budget Office presented a deficit reduction analysis to the joint House/Senate Budget Committee during the group's second public meeting last Wednesday. The committee is tasked with crafting a spending plan for the coming year and replacing the automatic across-the-board cuts from sequestration is expected to be part of that deal.

The CBO analysis includes more than 100 proposals for lowering the deficit but it's those affecting federal employees that are among the most impactful. CBO official concede they may also be among the most difficult.

"To put the federal budget on a sustainable long-term path, lawmakers would need to make significant policy changes--allowing revenues to rise more than would occur under current law, reducing spending for large benefit programs to amounts below those currently projected, or adopting some combination of those approaches," the analysis noted.

Capping pay increases

One of the deficit-reduction proposals is to cap civilian and military pay increases, according to CBO. Those caps could save as much as $78 billion through 2023.

Federal pay raises are set at 0.5 percentage points below the annual rate of increase in the Employment Cost Index. The CBO report recommends reducing that amount by an additional 0.5 percentage points from 2015-2013 to cut federal outlays by $53 billion.

The proposal would decrease the cost of operating the government without diminishing services, CBO notes.

"Moreover, compensation for federal civilian employees makes up roughly 15 percent of federal discretionary spending and it is difficult to attain a significant reduction in that category without constraining personnel costs," the analysis said.

On the negative side, CBO said it would make it more difficult for the government to recruit and retain qualified workers, especially employees with advanced degrees and skills.

"Recent research suggests that although federal workers with less education are paid more than private-sector workers in comparable occupations, federal workers with professional and advanced degrees are paid less than their private-sector counterparts," and capping the increases would widen that gap.

The proposal assumes employees receive an annual raise, something that hasn't occurred during the pay freeze that's currently in its third year. That freeze may end this year, however, as President Barack Obama has recommended a 1 percent pay raise for 2014.

The rest of the savings would be found from placing a similar limit on military pay increases that are also based on the ECI.

Reducing the size of the federal workforce

Pay isn't the only thing being examined by CBO. The analysis also looks at the impact of cutting the size of the federal workforce.

The report recommends using attrition to cut the overall size of the federal workforce to save about $43 billion through 2023. It recommends reducing the government workforce by 10 percent by limiting federal agencies to one hire for every three workers that leave. The president would be able to exempt certain agencies and about two-thirds of the workforce - mostly the Department of Defense - would be off limits so the total reduction would be around 70,000 employees.

The cuts would encourage agencies to work more efficiently and eliminate services that are not cost-effective. It would also eliminate a number of managerial and supervisory positions that, in some cases, CBO said "hamper performance."

CBO concedes, however, the federal workforce is already stressed by years of cost-cutting and "further reductions could impede the government's ability to fulfill parts of its mission."

Laundry list of suggestions

The proposals are just two of about 100 CBO suggests as Congress looks at reducing its budget.

The analysis said many of the choices will be difficult but necessary to achieve significant reduction.

"Lawmakers face difficult trade-offs in deciding how quickly to carry out policy changes that will make the path of federal debt more sustainable," it noted.

"On the one hand, waiting to cut federal spending or to raise taxes would lead to a greater accumulation of debt and would increase the magnitude of the policy adjustments needed. On the other hand, implementing spending cuts or tax increases quickly would weaken the economy's current expansion and would give people little time to plan for and adjust to the policy changes."