Overpaying FERS Annuity Supplements?

What is the FERS annuity supplement and how is it calculated? The author says that OPM is over-paying FERS annuity supplements because of differences in how OPM calculates the supplement from how the Social Security Administration calculates payments.

What is the FERS annuity supplement?

As defined by the Office of Personnel Management (OPM), this supplement is paid in addition to gross monthly Federal Employees Retirement System (FERS) annuity benefits.

The FERS annuity supplement represents what you would receive for your FERS civilian service from the Social Security Administration (SSA) and is calculated as if you were eligible to receive SSA benefits on the day you retired. Eligibility for the annuity supplement continues until the earlier of:

  • The last day of the month before the first month for which you would be entitled to actual social security benefits, or
  • The last day of the month in which you reach age 62.

And here is where it starts to get more complex.

By law, the FERS annuity supplement is calculated the same way the Social Security benefit is calculated but with several exceptions.

  • The person’s age is assumed to be 62, the point at which the Social Security benefit is first payable
  • Only FERS earnings after age 21 are included – military and other earnings are not counted
  • For any calendar year in which the person was not in pay status as a Government employee for the entire year, the salary is “deemed.” (One exception is when the employee is on leave without pay for no more than six months.)
  • Once the hypothetical, age-62 Social Security benefit has been calculated, it is prorated in accordance with the employee’s years of service, with 40 being the denominator. For example: a person retiring with 27 years FERS service would receive a supplement of (27 / 40), or 67.5%, of the age-62 benefit.

These exceptions are all incorporated in Chapter 51 of OPM’s CSRS & FERS Handbook and provided for in the applicable US Code and Code of Federal Regulations.

But there are two other differences in the handbook, which are contrary to Social Security procedure and which are not in the code or the regulation.

First, before calculating the “Average Indexed Monthly Earnings” (AIME), Social Security excludes up to five years of salaries. For example, if a person has 36 years of earnings, then one year – the lowest – is excluded. If there are 37 years, the two lowest are dropped, 38 years mean three years of earnings can be omitted, etc. Dropping low years has the effect of increasing the average.

(The above procedure is performed after the earnings have been indexed, to make them comparable to current wages.)

For the annuity supplement, the five lowest years are excluded in all cases, even where the number of elapsed years is less than 36. For example, if the retiring employee is age 58, the elapsed years would be age 22 through age 57, or 36 years. Social Security would drop the one lowest earnings year, but OPM drops the FIVE lowest. This makes the supplement more than it would be otherwise.

Second, the Social Security procedure is that in ALL CASES the total earnings are divided by 420, which is the number of months in 35 years. But for the FERS supplement, OPM uses actual years/ months. Example: for the 58-year-old in the previous example, Social Security would divide the earnings by 420, but OPM subtracts five years from 36 years, and then divides by (31 * 12), or 372. Again, this makes the supplement significantly more than it would be otherwise.

The differences described above mean OPM is over-paying FERS annuity supplements.

How much? When OPM notifies the retiree of the amount of the supplement, there are no accompanying details, or justification. It is simply “trust me.” Without actual cases to work with, it is difficult to estimate how much employees are being overpaid, but the total overpayments are undoubtedly substantial.

In these times of increasingly serious deficit concerns, perhaps OPM should consider doing the calculations in accordance with the law. This will mean the annual subsidy to the retirement fund, appropriated by Congress, will be millions less. Taxpayers will benefit.

About the Author

Robert Benson served 35 years in various Federal agencies, as both a management analyst and IT specialist. He is a graduate of Northwestern University.