I had better begin this article with a disclaimer. Military deposits do not apply to military retirees, with the exception of those who retire from the reserves (who may buy their active duty time) and those who have military retired time based on a combat connected disability.
Employees who have had military service after January 1, 1957 have the opportunity to make a deposit and have that military time count for both their CSRS or FERS retirement and for Social Security. In most instances it makes a great deal of sense to buy the military time, but there are exceptions.
Let’s look at an employee with three years of military service who is going to retire under the FERS retirement system at age 57 with 30 years of service and a high-three annual salary of $60,000.
If the employee made the military deposit (3% of military base pay plus interest) the annual annuity would be $18,000. If they did not make the military deposit the annual annuity would be $16,200. This represents a $1,800 reduction in the annual annuity. In almost every situation, the FERS employee should make the payment.
For new FERS employees, no interest is charged if the deposit is completed within three years from the date the employee first became subject to FERS. If the deposit is not completed within the three year period, interest is computed from the second anniversary of becoming subject to FERS.
Now let’s make the same employee a CSRS employee who was hired before 10/01/1982. Assuming the employee made the payment (7% of military base pay plus interest) the annuity would be $33,750 a year.
If the CSRS employee did not make the payment the annuity would still be $33,750 a year until the employee reached age 62. At age 62, the Office of Personnel Management checks to see if the employee (now a retiree) is eligible for Social Security. If they are not eligible for Social Security, their annuity will remain the same. If they are eligible for Social Security, their annuity will be reduced to $30,150, a reduction of $3,600 a year.
The CSRS employee would make the decision on whether or not to make the payment based on whether or not they think they will be eligible for Social Security at age 62. The person in our example would want to look at how many Social Security credits they will have at retirement and how many they will be likely to earn between retirement and age 62. Forty credits are required for Social Security eligibility, and, in 2010, it takes $1120 to earn one credit. Four credits can be earned with as little as $4480 of covered earnings at any time during a year. If the retiree were not going to be eligible for SS, they would not make the payment; if they were eligible (or thought they might become eligible) they would make the payment.
CSRS employees hired after 10/01/1982 are treated like FERS employees. They would have to make the payment to get credit for the military time for any purpose.
You can see that in most instances it would make sense for an employee to have made the military deposit. The deposit must be made before the employee actually retires.
