FERS employees who retire prior to age 62 are entitled to an annuity supplement, either immediately or upon attaining the MRA (Minimum Required Age). The supplement is based on a hypothetical Social Security benefit.
Calculation of the supplement requires a lengthy, intricate series of steps. Some believe the supplement can equal, or even exceed, the amount of the annuity itself. Can this be true?
To help find the answer, calculate the maximum supplement possible in 2010 and compare this to the corresponding annuity.
The primary factors in calculating the supplement are:
- Age. The older a person is at retirement, the longer the period of “elapsed years.” Elapsed years begin at age 22 and run consecutively through the year before retirement. An employee is credited with salaries, either actual or ‘deemed,’ for each of the elapsed years. For a 61-year-old, from age 22 through 60 is a 39-year span.
- Length of FERS service. Each year earns 1/40th of the hypothetical age-62 benefit. The earliest possible year of FERS employment is 1982. The maximum length of FERS service in 2010 is 28 years, rounded. Twenty-eight divided by forty is 0.7, or 70%.
- Salary. Salary has less impact than you might expect, because the “cap” for each year’s salary in the computation is the Social Security maximum for the year. Thus, a high-earning employee might receive no more in his supplement than an employee with somewhat lower salary figures.
- Allowing credit for the maximum salary for all years in the 39-year span results in a total, after indexing, of $3,567,156.
- Subtract the five lowest years (Social Security would allow just four to be subtracted) and the adjusted total is $3,271,022.
$3,271,022 by 408 (this is the number of months), and the AIME (Average Indexed Monthly Earnings) is $8,017.
- Apply the three-tiered formula for the full retirement benefit and the Primary Insurance Amount, or PIA, is $2,423. The 25% age-62 reduction yields a monthly figure of $1,817.
Apply the 70% pro-ration for the 28 years of FERS service and the net annuity supplement becomes $1,271.
Comparing An Annuity to the Maximum Supplement
Maximum salaries for 2007-09 were $97,500, $102,000, and $106,800. These total $306,300 for the final three years, or a high-three average salary of $102,100. The 28 years, at 1.0% for each year, earn 28% of the high-three. Twenty-eight percent of $102,100 is $28,588, or a monthly annuity of $2,382.
The $2,382 annuity is substantially more than the $1,271 supplement.
Note that the difference could easily be greater, for two reasons. First, the employee’s actual salaries during the final three years might well be a good deal more than the arbitrary maximums imposed by this procedure, in which case the annuity would be higher, also. Second, the employee might have had military service, with each year increasing his annuity another 1.0%.
The Social Security formula favors low earners, with a higher percent of the AIME for the retiree. If the total salaries in the above scenario had been 43% lower, then the annuity would have been $1,363 and the supplement $1,002. The annuity is still higher, but the supplement is, proportionately, closer (73.5% vs. 53.3%) to the annuity.
So, in 2010 it appears it is not possible for the supplement to exceed, or equal, the annuity.
In years to come retirees will in many cases have more than 28 years FERS service, meaning they will receive proportionately larger supplements. Under current law, however, they will never be able to collect more than 97.5% of the age-62 benefit.
The variables can be tweaked in various ways but it appears the FERS annuity supplement will always be significantly less than the annuity.