The most difficult, non-intuitive parts of calculating the FERS annuity supplement are deeming and indexing. Once you’ve got these, the rest is comparatively simple – although lengthy – arithmetic.
The employee sometimes was not in pay status for all of a calendar year, at one time or another since the year of his 22nd birthday. When this happens, his salary for the entire year must, by law, be “deemed,” or legally fabricated. For example, the employee may have resigned in September of 1990 and returned in April of 1991. The salaries for both 1990 and 1991 would require deeming. How does one deem a salary?
Take the employee’s salary for his first, full year of FERS employment, not to exceed the Social Security maximum for the year. Divide this salary by the Social Security “average total wages” (ATW) for the year. The result is the “earnings ratio” to use in deeming salaries.
In 1985 – his first, full calendar year as a FERS employee – Joe made $21,429. Average total wages for 1985 were $16,822.51. Divide 21,429 by 16,822.51 and the result – 1.27383 – is the factor you will use for deeming salary in any year where Joe was not in payroll status for the entire year. Joe took 7 months LWOP (leave without pay) in 1995, when ATW was $24,705.66. So, for 1995 you would multiply 24,705.66 by 1.27383 in order to determine Joe’s deemed salary for the year: $31,471 (rounded).
For the final 2 calendar years before retirement, salaries are not indexed. For retirements in 2016, the first year for indexing is 2013.
After deeming salaries where necessary:
- List salaries – deemed or actual – for all years beginning with the year the employee turned 22 and ending with the year prior to his retirement. Be sure not to exceed the applicable Social Security maximum for each year.
- Adjust (“index”) each salary for inflation, so it is comparable to wages two years before the retirement. This is done by dividing the Average Total Wages (ATW) for 2014 by the ATW for the year in question, and then multiplying the applicable salary by the resulting fraction. Example: 1996 salary is 56,595, ATW for 2014 is 46,481.52 and ATW for 1996 is 25,913.90. 46481.52 /25913.90 = 1.79369. Multiply the 1996 salary by 1.79369 and the indexed salary becomes $101,514.
- Delete the five lowest indexed salaries. .
- Total the remaining salaries and divide by (number of remaining years x 12). The result is called the Average Indexed Monthly Earnings, or AIME.
- Apply the three-tier formula Social Security uses to arrive at the Primary Insurance Amount, or PIA, which is for full retirement age.
- Reduce the PIA in accordance with the retiree’s age.
- Divide the result by 40 and multiply by the number of years of FERS service, rounded to the nearest whole number. This is the employee’s annuity supplement.
Is it any wonder Reg Jones, benefits columnist for the Federal Times, said “(T)he formula for calculating the SRS (special retirement supplement) is too complicated for mere mortals to execute”?
Why would a person want to go through this lengthy, intricate process?
- He wants to know how much his supplement will be, and the usual short cut – an estimate based on another estimate – is not satisfactory.
- He knows that when OPM calculates his interim retirement payment, they will omit the supplement, leaving it until the final determination, months down the road. If, however, OPM receives a good estimate in his retirement package, at the outset, they may include the supplement in the interim payment!
The usual short cut is the annual projection of the age-62 benefit, produced by Social Security. This projection makes assumptions about future earnings, includes military and other non-FERS earnings (which are not allowed), and also counts earnings before age 22 (also not allowed).
Readers can get the 100% free, full-featured software for calculation of the supplement from [email protected]. When all the needed data is at hand, this tool produces the needed report in under 3 minutes.