Why don't employees apply for new positions and instead choose to remain unchallenged? This can happen for many reasons. Ultimately I think the fix is a culture change. This would involve a commitment to not only results orientation but a continuous learning environment. In order to foster continuous learning, it must be embedded within the business strategy of a firm. An option would be pay for performance. A way to make this happen might be to make the steps within GS levels more drastic and make the main component of completion of a step and a therefore a GS level lie in performance and work instead of seniority.
Another step would be to incorporate continuous learning within your competencies. As with every initiative, there must be buy-in of a learning organization from top execs, the director, secretary etc. The message that the federal government provides a service to its customers, the most important customers in the world, the American people, must be communicated and believed within the government. Communicate praise for good work. Empower front line staff to deliver results, to work on interesting and meaningful daily work. All energy and potential can be doused when work is not engaging. Allow teams to work together to foster an involved and inviting environment. Too often public sector work is done individually which leads to a lack of initiative and no incentive to share ideas, knowledge. It kills collaboration and causes employees to become unengaged. Ultimately, this might mean tweaking job design but is very well worth the effort.