The 'Fiscal Cliff' and Your Paycheck

What impact will the recent “fiscal cliff” legislation have on you as a federal employee?  Will you be better off hanging around or retiring?  Should you dust off your résumé and look for work elsewhere or should you just hunker down and ride it out?  Is the brouhaha surrounding the resolution of the manufactured fiscal cliff crisis much like what Shakespeare’s Macbeth called “…[a] tale told by an idiot, full of sound and fury, signifying nothing.”?

There is no one-size-fits-all answer to these questions (except perhaps the last one).  Employees at different stages of their careers will make different decisions.  In this article we will look at the changes one at a time.

First we’ll look at the federal income tax increase (from 35% to 39.6%) on those with incomes over $400,000 (single) and $450,000 (joint).  I bet you can count the number of federal employees or retirees (excluding members of Congress) who are affected by this on the fingers of one hand.  According to OPM, the average federal salary in 2010 was $76,231.  With salaries having been frozen since then the average hasn’t increased by much.  CNN tells us that only 0.6% of the population will have incomes high enough to be hit by this tax increase.

The limitation of itemized deductions for those with incomes over $250,000 (single) and $300,000 (joint) will affect a few additional employees.  You would have to be looking at a highly paid fed with a highly paid spouse to reach an income of $300,000.  The vast majority of federal employees will not lose any deductions.  Even fewer retirees will be affected.

One change that will hit federal employees is the end of the “payroll tax holiday.”  Employees who have Social Security deducted from their salary (FERS and CSRS Offset) will now be paying the normal 6.2% Social Security tax, rather than the 4.2% they have paid for the last two years.  Our average federal employee will have about $58 more withheld for Social Security each pay period.  The payroll tax holiday was called a “holiday” for a reason; it was not designed to be a permanent reduction in the amount that workers pay in Social Security taxes.

The elimination of the payroll tax holiday will not hit retirees (unless they work during retirement), because payroll taxes are not taken from pension income (CSRS or FERS), TSP payments, or Social Security.

The permanent inflation indexing of the Alternative Minimum Tax should help many middle and upper income federal employees and retirees.

The making permanent and indexing of the $5,120,000 unified exemption for the Federal Estate Tax will impact few feds (except perhaps some of the aforementioned members of Congress).

What other items are changing for employees and retirees going in to the New Year?

  • Health insurance premiums are going up; however they go up equally for employees and retirees.
  • Retirees are getting a 1.7% COLA and employees may receive a 0.5% pay increase in late March; however, over the long haul, COLAs and federal pay increases even out.

It does not appear that the Round 1 decisions made in DC over the New Year’s holiday will have much effect on federal employees’ decisions as to whether they should remain a federal employee, retire, or seek work elsewhere.

But wait! The main thing that was done by the agreement on the “fiscal cliff” was to postpone decisions on many items, including some that threaten federal employees and their benefits.  As a result, the one thing that remains the same is uncertainty about federal pay, benefits and retirement.  Some of the major items that can affect federal employees and retirees and still remain outstanding are:

  • Will Congress overturn the 0.5% pay increase for current federal employees?  The House has already done so.  The Senate is not expected to agree.
  • Will retiree’s COLAs (as well as all other inflation indexed federal benefits) be computed using a less generous “chained” Consumer Price Index?  President Obama and Speaker Boehner agreed on this a couple of years ago, but it was not implemented then due to lack of agreement on other issues.  Although it was part of the President’s plan in the Round 1 discussions, it did not clear the Senate.
  • Will retirement contributions be raised for current employees?  There is still some sentiment to do so.
  • Will the dreaded high-five ever happen?  It has been threatened for decades and was backed by both House Republicans and the Simpson-Bowles commission.

Federal employees and retirees cannot sit back and assume they got off scot-free.  They dodged a haymaker in the first round, but their enemies in Washington will come storming out of their corner when the bell signals the second round; and it looks like the second round will be upon us soon as discussions over the debt ceiling commence.

Will all of these items get resolved in Round 2 or Round 3?  Don’t bet on it.  It doesn’t appear that any side in the political battle has the power to deliver a knockout punch.  We may be in for a fifteen-rounder with a split decision.

John Grobe’s latest book, The Answer Book on Your Federal Employee Benefits, has just been released by LRP Publications. The book is written in an easy to understand question and answer format and covers all areas of federal benefits from the perspective of an employee at various stages of their career. Order your copy at shoplrp.com.

© 2016 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

About the Author

John Grobe is President of Federal Career Experts, a consulting firm that specializes in federal retirement and career transition issues. He is also affiliated with TSP Safety Net. John retired from federal service after 25 years of progressively more responsible human resources positions. He is the author of Understanding the Federal Retirement Systems and Career Transition: A Guide for Federal Employees, both published by the Federal Management Institute. Federal Career Experts provides pre-retirement seminars for a wide variety of federal agencies.

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  1. Just Saying says:

    I would love to see Fed Smith do an article about how those of us that decided to retire and have done so — our comments about retirement.  Post our comments about how it is going.  It might help people get over the fears of making the big jump into retirement.  I loved the postings of other people that are newly retired.  And again congrats on your retirement.  Now it your time to do what you want when you want.  I love the freedom I now have! 

    • TM35 says:

      Great idea to have a blog on comments about retirement! This will be helpful to many of us fearful of making the ‘big’ retirement decision.

  2. formerIRS says:

    If you re on CSRS you probably have at least 30 years, and more likely 35 to 40 years in, and probably are better off bailing out. However, if you are FERS, you have a carrot and and a stick. The carrot is the extra .1% per year. If you have 30 years you get 33%n instead of 30%. The stick is no COLA’s until 62. 

    • formerIRS says:

      I forgot to add that you have to be in for 30 years AND be 62. If anyone is close it would be a no-brainer to stay in.  As far as high 5 vs high 3 is concerned, current employees eligible would probably have an effective date that they would have be gone by. With pay freezes and miniscule raises, the difference between high 3 and high 5 would be peanuts. If there are raises again in the future, then the high 5 vs high 3 would become more significant, but not now.

    • Just Saying says:

      You are so wrong — I did and left OPM doing retirement claims — and by the way I am under the FERS retirement system — anyone wanting help I will do so — well pmcurl looks like you are working on being a death in service case how does that work for you!

  3. YesterDay4 says:

    I’m already gone, but it was management and their policies (ignor, delay, favorites) that was the final factor.

  4. Just Saying says:

    I am glad I decided to get off this sinking ship.  I retired October 31st.  To those of you that posted you are now retired, congrats and enjoy this new chapter in your life.  I sure do not miss it.  For someone who posted about us reading and replying on this article that we need a hobby — well consider those of us newly retired we do have a hobby — we are honing up on our reading skills and now have time to do what ever we want, when we want. 

    • JG4 says:

      Tips for recently retired folks… grocery shop mid week during the day! all the things you had to put off until the weekend? do it when you want… 

      • Tip_off says:

        How about going to Red Lobster at for a late lunch special. Lower prices, better on the beltline, and you’re out before rush hour!

        • JG4 says:

          Actually looking forward to the latter part of this month…. skiing mid week when the mountains are ours…=)

          • Tip_off says:

            Dang, that sounds NICE!!  Unfortunately, one of the… difficulties of having an exceptional family member as your SigO means if I go, I go alone or with someone else. 

            Oh well.  Choices, eh?  The SigO MORE than makes up for such little things.  Although, I DID enjoy the Zugspitze last time I was in FRG!  It may be one of the VERY FEW benefits of being a geographical bachelor.

  5. yikes get wheelbarrow says:

    just how much will a dollar get in a few years when we all depend on social security and it is cut to the bone-god help us

  6. groundhog day says:

    bring back payroll tax holiday
    everyone is upset
    make it permanent for working folks and they will keep up the daily grind
    otherwise the title of the bill tx payer relief bill-socks it to us in the gut yet again over and over again like groundhog day

  7. wombat1951 says:

    Was scratching my head trying to understand how Obama could grant a pay raise by executive order when up to now Congress always has to pass legislation to effect any pay raise.   Finally figured it out.   So for those interested in the arcane detail of how he could do it–  

    Obama had proposed a .5% raise.   It became part of the Continuing Resolution passed in the Sequester Budget Act.   But at the same time, a pay freeze was in place.

    All Obama did with the executive order was lift the freeze that had been put in place the same way.   This then allowed the .5% raise to go into effect as part of the CR.   Why he timed it for April instead of immediately?   No idea.

    Since FY13 is well under way — and once again without a budget thanks to the Senate — spending continues under CR and other “emergency” legislation.   Any pay raise for FY14 — which starts in October — will have to come from specific legislation passes by Congress….as per usual.

  8. Fed Up Fed says:

    For those retirees leaving the US, what about medical care? Do you return to the US for treatment or is the medical care just as good overseas? 

  9. GCScorpio says:

    How did Nancy Pelosi get $ 39 million Tax Payer dollar given to her husbands company Starr Kiss Tuna  into the Fiscal Cliff  ? More pork to personally benifit her at our expense and they are going to lay us off and cut or pay and benifits, Pelosi also two years ago when the raised minimum wages got Semoian Islands exempt from paying minimum wage because her husbands company workers work out of Semoia.  Finestine  two years ago got the company her husband is Vice President of and a major stock holder in a multi billion dollar government contract. Why are we paying and our wages frozen and we have such a great debt ? Congress and those who own them, lie and senseless wars, no bid contracts for cronies. Then they stick it to us the working class sucker. vote them all out we could have any worse, they should pay the debt in very high taxes, the rich are the ones who benifited with there wealth tripling in the last ten years while the working class has dropped. There will be no middle class only rich and poor. Get rid of them fast there hays days at our expense have come to a end. They caused this with there pork spending to benifit them and the one who own them. They do nothing good for us they get richer on our dime all the time, vote them all out they have been in office for generations benifiting them selfs.

    • Loggie56 says:

      Now you see what being a member of Congress is all about. It’s not to make life better for the average american, but to bring home the bacon (pork) to their constituents. We as americans should demand a two term limit for all members of Congress, the same as it is for the President, Governors and Mayors. At least then their time to feed at the trough will be limited…

  10. Rcl56 says:

    I can’t wait to get out of this uncertainty that has lasted pretty much my whole 38 years govt time
    Come on Retirement – I’m done!

    • steve5656546346 says:

      Yes, it is contemptible.  

      We need to fix deficit spending, but there is no need of all of this nonsense to do so.  But then, there is no indication that the government will EVER reduce deficit spending until it is too late.  And then, what will happen to our pensions and salaries?

  11. Shorttimer13 says:

    If we go to a “high five” for retirement purposes, any thoughts that those of us eligible to retire will be grandfathered in?  (Hey, isn’t this administration all about “Hopey-Changey?”

    • grannybunny says:

      Since we’ve had our wages frozen for 2 years — in my agency, 3 — at this point, there’s no practical difference between my high-3 and my high-5.

      • JG4 says:

        Which is why I retired last year…. was only going to work 4 more years, saw the handwriting on the wall… stay and get nothing (topped out) or retire and enjoy what we have saved…. best decision we ever made… I went January 1/2012 and the wife went March 22/2012…

    • Susan says:

      New government employees (FERS-RAE) are already under “high five” for retirement purposes effective January 1, 2013.

    • guesttoo says:

      I believe there might be a short window available to leave at a high three. Politicians are going to want to see savings accrue in the short term. Grandfathering delays those savings from kicking in for decades.

  12. ReaperComing says:

    You are correct and i noticed my next take hom epay is 50.00 less but i agree it should never have stopped in firts place we must fund SS.

  13. grandma57ida says:

    This country is seriously messed up – it is no wonder people are leaving the United States to live more comfortably else where.  I was shopping the other day, this woman had six items and six WICK checks, which require six transactions from the cashier.  Then the woman produce very expensive chocolet, soda and chips, she then proceeds to pull out her food stamp card and pays for these items.  No No No and Hell No!  That is not food that is junk. 

    My spouse and I have already decided retirement, and out of the United States, because when 40% of your income goes to the government for others to live better than I do, and not have to lift a finger, there is something seriously wrong with all this.  Then again there are government electric officials that have pet projects and again waste money, instead of helping those that really need help!

    When out Vets are walking around homeless, without proper Medical Care, and housing, yet the American who drinks, and drugs and everything else illegal can’t get the help they need, you have to wonder what the ####!.

    America wake up, your government has run a muck, and it does not matter whether your choice is republician or democrat, they haven’t the slightest clue how to get us back on track.  The only good thing, is that Romey wasn’t elected, because the Bush years would be back in a heart beat, and we just can’t afford all that Bullying again.

    Sure would a sit down with the President, but imagine an ordinary person like me talking to the President, ha!

    • Passme says:

      I’m all for you leaving the US and finding a place that’s cheaper and more comfortable to live in than the US.   If you’ve not done well enough to live better than the average food stamp recipient then they need you more than we do.  You should have moved years ago before qualifying for a pension and Social Security and using up resources others could have done something with.  See ya, wouldn’t want to be ya.

      • ReaperComing says:

        Yeap no one left to work the ones left behind will kill each other for chips and soda ! LOL  Panama good place , Columbia better, Costa Rica to expensive, Argentina has same issue we have. Peuto Rico also not bad choice not a state !! Passme you will be alone! LOL

  14. Dsmith says:

    retirement time

  15. Fed_Peasant says:

    I never liked the  “payroll tax holiday.”  It was a deliberate underfunding of social security.  As I watched the spectacle of the fiscal cliff negotiations, I contemplated the bitterness & grid lock of future alterations to the social security program.  This under funding of it will certainly accelerate any fiscal problems of social security. 

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