The ‘Fiscal Cliff’ and Your Paycheck

By • January 3, 2013 Comments

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.

© 2014 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

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About the Author (  |   )

John Grobe is President of Federal Career Experts, a consulting firm that specializes in federal retirement and career transition issues. 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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