CSRS Employees: Should You Deposit Money to Cover Temporary Federal Employment Early In Your Career?
CSRS employees often ask themselves the following two questions about civilian service as they get close to retirement:
- “Should I deposit money to cover temporary federal employment early in my career?”
- “Should I re-deposit money I withdrew from my retirement when I left government service for a few years?”
This article is about the first of the two questions; whether to make a deposit for temporary time. A future article will discuss the second question for CSRS folks.
FERS employees may occasionally ask themselves the same questions, but this article is not about FERS employees – it is only about CSRS. Another future article will discuss these issues for FERS folks.
Human resources (HR) folks refer to this type of service as ‘deposit service’. That is service, usually early in your career, where CSRS retirement deductions were not taken from your pay. This service might have been as a seasonal postal worker when in college, or time spent in some types of temporary employment. Such positions are not covered by CSRS and therefore, no CSRS deduction would have been taken from your pay.
If your ‘deposit service’ ended prior to 10/01/82, the service will count towards your eligibility to retire and will count towards the computation of your annuity, regardless of whether or not you make a deposit. However, if you don’t make a deposit, your annuity is reduced by 10% of the amount you owe, both deposit and interest. Interest is charged at 3% per year.
Here’s an example: Paul was a seasonal letter carrier in Syracuse, New York for three months in the summer of 1982. He earned $2400.00 during that period of time and CSRS deductions were not withheld from his salary. Had they been withheld, they would have totaled $168.00 (7% of $2400.00). With interest at 3%, we are looking at an amount of roughly $438.00 today. If Paul did not pay the deposit, his annual annuity would be reduced by $43.80 per year or $3.65 a month.
If we were to totally disregard opportunity cost (what we could make by investing the $438), Paul would recoup his $438 in ten years. Paul wouldn’t be missing a lot whether or not he made the payment.
Now let’s say that Paul had his three months of temporary service in the summer of 1983. The service would be creditable for his eligibility to retire, but it would not be counted in the computation of his annuity. In addition, variable interest rates would be used to compute the amount he owed. Paul’s deposit amount would be roughly $1,042.00 today.
If Paul did not make the deposit, the three months of service represented by the temporary time would not be used to compute his annuity. Let’s say Paul will retire with 37 years of service and a high-three salary of $75,000. That would give him an annuity of $52,687 per year. If the three months were not used, has annual annuity would be $52,312. Once again disregarding opportunity cost, Paul would recoup his $1,042 in less than three years.
It is possible to have more than one period of deposit service, so individual computations may be more difficult than the examples above.
If you’re in a situation where you are considering making a deposit to cover temporary service, perhaps your best bet is to contact HR and ask them to compute how much you owe and what effect it will have on your annuity if you make it (or not). I would suggest that you do this well before you plan to retire, as it can sometimes be a time-consuming process.
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.