Some agencies do calculate an estimate of the annuity supplement for exiting employees. These estimates might be useful in including the supplement in interim pay, but not all agencies provide the estimates, and again, not all supplements begin with the commencing date of the annuity.
– OPM analyst, to head of Retirement Services, October 28, 2011
When Federal employees retire, they start getting what are called “interim” payments, almost immediately. These payments are approximately 60% of what appears the final, fully determined annuity will be. They are paid because even under the best of circumstances, it is several months before the case is finalized, and full payments begin.
So, what is the problem? For FERS employees under age 62 there is also an annuity supplement of hundreds of dollars, but in most cases the interim payment includes $0.0 for the supplement.
Why is this a problem?
The full annuity for a FERS retiree is not large, compared to his final salary – typically, it will be about 25-30% of the retiree’s high-three salary
The full annuity, already dramatically smaller than his salary, is further reduced by approximately 40% in the interim payment
The annuity supplement is normally $500 to $1,200 monthly, depending on salary and service time, but no part of this money is in the interim payment, a definite hardship
These reductions continue for months, while the retiree is trying to adjust to the loss of his full salary while working.
The combined effect of the above can be devastating. Second mortgages, credit rating damage, postponement of planned initiatives, quality of life issues, etc.
In the interim payment, why does OPM pay for the annuity but not for the annuity supplement? They withhold payment for the supplement because in the retirement package for the employee, agencies do not, usually, provide an estimate of what the supplement will be. Although providing an estimate is optional, it can make a significant difference to the retiree.
Why do agencies fail to provide the estimate? Calculating the amount of the supplement is quite intricate and lengthy – it calls for use of the full career earnings of the employee, as well as a series of several other complex calculations, including the three-tier formula for the Social Security benefit. Without automated help, the supplement calculation is impractical.
How about the Social Security estimate of the employee’s age 62 benefit? Can this be used? No, it cannot be used:
It makes assumptions about future earnings, which is not allowed for the supplement.
It conflates all earnings, with no breakout of the FERS earnings. Non-FERS earnings, such as private industry, military, etc., cannot be used in calculation of the supplement. If non-FERS earnings are part of the supplement estimate, the estimate would be inflated and might result in overpayments to employees.
It makes no provision for “deemed” earnings, which are an essential part of the annuity supplement.
Even if there were a separate, detailed itemization of FERS earnings, the Social Security estimate still could not be used, because of the prohibition on prediction of future earnings.
So, to have the annuity supplement included in the interim pay, agencies simply have to include an estimate for the supplement in the retirement package they submit to OPM. There is still a problem, however. The handbook requires that the supplement estimate be “reasonable.” Rule of thumb, or “ballpark” estimates are not acceptable. The only way to produce an estimate acceptable to OPM is to use dedicated computer software.
The author will provide sources for four commercial software programs that should help. If others become known, these will also be included. You can contact me for details.