You have reported this correctly. Even though contributions to government retirement systems are often mandatory it is not considered a tax. These contributions are still retirement plan contributions which your wife will get back or receive a benefit from once she retires. If they are pre-tax contributions then your wife's wages in box 1 have already been reduced.
Your tax due probably decreases when you indicate that these are mandatory state or local taxes because the amounts are transferred to your Itemized Deductions as a state/local tax. Unfortunately, this is not the correct tax treatment for these contributions.
