Some Federal Employees Will Miss Out on a Proposed Tax Break

The new agreement on taxes, if it becomes law, would create a tax break for federal employees (and other Americans) who pay into Social Security. But what about those who are under the older CSRS system?

One of the most frequently asked questions this week comes from readers who are presumably covered by the CSRS retirement system. The question asked by a number of readers usually reads this way: “The budget compromise between the President and Congress includes a one year reduction in social security withholding (6.2% to 4.2%). In effect, this will be a 2% pay increase for everyone who pays into social security. As a CSRS employee I don’t pay into social security. Many teachers and state workers also don’t pay into social security. Will there be anything for us?”

As noted in the question being asked, federal employees coverfed under the older Civil Service Retirement System (CSRS) do not pay into Social Security.

The proposal to extend the Bush-era tax breaks unveiled by Mr. Obama this week would offer a tax cut for most Americans. The deal would end the Making Work Pay credit, which gave a tax reduction of up to $400 to workers with low and middle incomes. That credit will be replaced by a 2 percent decrease in the payroll tax for Social Security for people of all incomes. 

So will CSRS employees get a two percent decrease in their taxes?

No they will not get a tax break like this.

There are reportedly more than six million federal, state and local government employees who do
not pay into Social Security at all. Instead, they pay into public
pension systems such as the Civil Service Retirement System (CSRS). So if the agreed proposal announced by the President becomes a law, these employees
will lose the $400 credit and would not obtain a benefit from the
payroll tax cut. 

As most readers know, the federal government has been moving its work force into Social Security through the FERS retirement system since the 1980’s. However, there were still 600,000 employees excluded from Social Security as of 2007. 

A White House spokeswoman acknowledged this week that the current version of the plan could result in a higher tax bill in 2011 than 2010 for some government employees.

And, no doubt, this will make those readers who are CSRS feel a little better: The White House is stressing that the tax plan would nonetheless spare them a much steeper increase that would have resulted if no deal had been struck and all the Bush tax cuts were allowed to expire on Dec. 31. 

While those under CSRS will not be impacted by paying more taxes than they have paid in the past, based on comments from readers so far, there will still be plenty of outrage from these feds who do not like being treated differently than those under FERS–even though they do not pay into Social Security.

Some under the newer Federal Employees’ Retirement System (FERS) will probably see this as a break for them and a payback, of sorts, for those under the defined benefit pension system which is often seen as more generous and more secure compared to the newer FERS system.

In any event, the tax deal is not yet finalized and, presumably, the federal employees unions who spent a great deal of time and money to elect President Obama will use the influence this may have given to them to try and change this provision before it goes into effect. 

Once more information becomes available, we will pass it along to our readers.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47