The FERS annuity supplement will end. We do not know when, we do not know whether existing employees will be “grandfathered,” and we have no real idea how much money will be saved by terminating this benefit. Nevertheless, we are fairly certain it will end. (See Cutting the Deficit By Altering Federal Retirement Contributions)
Given the uncertainties, compounded by the complexities of calculating the individual supplement, is it possible to make informed projections to be used for planning by individual employees? Yes, but these projections are not definitive. Projections must be taken with a grain of salt, as it were. (See FERS and the Special Retirement Supplement for more information on the FERS retirement supplement.)
For eligible employees, what factors determine the amount of the monthly supplement?
- Age: The salary history runs from age 22 through the year before the employee’s retirement. Also, if the retiree retires on a VERA, he can be as young as 45 or so, and his supplement will not start until he reaches his MRA (Minimum Required Age).
- Years: Must be FERS service, rounded to nearest whole number. Used as numerator in (xx/40). Example: employee with 23 FERS years would receive (23/40), or 57.5% of his calculated age 62 benefit.
- Salary: In figuring the supplement, all basic salaries from age 22 through the last full, calendar year before retirement are used. None of these salaries, however, can exceed the Social Security maximum for the applicable year.
- Deeming: For any year where the employee was not on the payroll for the entire year his salary is “deemed.” Deeming is multiplying the “average total wages” (ATW) for the year by the percent the employee’s first year salary differs from the average total wages for that specific year.
- Indexing: All salaries through two years prior to retirement are indexed, to account for general wage increases over the years.
- The lowest five salaries are dropped, the remaining salaries are totaled, and the total is then divided by number of months, in order to arrive at the Average Indexed Monthly Earnings, or AIME.
- A three-tier formula is applied to the AIME and the result is the full retirement benefit, officially termed the “Primary Insurance Amount,” or PIA. This is reduced by 76% in order to arrive at the age 62 benefit.
- The supplement is (years of FERS service / 40) * the age 62 benefit. Example: the calculated age 62 benefit is $1,200 and years of FERS service are 27. (27/40 = 0.675, or 67.5%. Multiply 1,200 by 0.675 and the supplement, in this case, is $810.
According to the Social Security Administration, the maximum age 62 benefit in 2013 is $1,923. A 61-year-old who was hired on January 1, 1982 and subsequently placed into FERS, and who earned the maximum every year from then until his 2013 retirement would have tenure of 31 years, which would entitle him to (31/40), or 77.5% of the age 62 benefit: $1,490.
So much for the high end. For the low end, I am using 20 years FERS service, retirement (VERA) at age 57, and basic salary each year same as ATW for the year. My computer tells me this person would have an age 62 benefit of $1,219 with a supplement of $609.
At this point, it is up to the individual employee to estimate where he might fall on the highest to lowest continuum. Remember the range: $1,490 at the high end vs. $609 at the other end. The midpoint of these two, for whatever it is worth, is $1,049.50.
How much will the Government save by abolishing the supplement? The only practical way that would yield a reasonable approximation would be to tally and analyze supplement determinations from the last year or so, and then project into the future. But only the Office of Personnel Management (OPM) has the statistics necessary for such a task. So, at this point we simply have no idea how much the government will save. But whatever the savings is, policy makers from both political parties are certain this initiative will be worthwhile
One incidental savings is noteworthy. Our friends at the Office of Personnel Management will no longer have to spend three hours or so on each supplement calculation. This will have a dramatic, positive effect on the OPM backlog! When the supplement is gone, those retiring will find their final annuity determination is considerably faster. It is an ill wind that blows nobody good.
What will the cost of terminating the supplement be? This is just my opinion, but I believe Government employment will become significantly less attractive, particularly to the most skilled, who have little trouble finding work elsewhere. This cost can hardly be measured but it will be felt within the government and the services that it provides. Wait for it.
Chapter 51 of the CSRS & FERS Handbook is the basis for most of the above.