Congress and Your Federal Employee Retirement

Should a federal employee retire now to avoid unpleasant changes that may be implemented in new legislation?

A new document pertaining to the 2018 federal budget has been published by the Republican Study Committee that will interest future federal employee retirees in several significant ways.

The RSC is caucus of House. Its budget proposal is more conservative than other reports. It would provide for the deepest budget cuts to try and curtail the growing federal spending evident in the deficit which now stands at just under $20 trillion.

Proposed Retirement Changes

Here is a quote from the report:

This budget would make several reforms to the federal employee retirement system. First, instead of basing the amount of a retiree’s benefit on the highest three years of earnings, the benefit would be calculated from the highest five-year period. The Special Retirement Supplement (SRS), which provides additional benefits for retirees younger than 62 but who had a long federal work history, would be eliminated.

High Three to High 5

A proposal often articulated (but never implemented thus far) is to change a federal employee’s retirement calculation from the three highest years of an employee’s salary to the five highest years of an employee’s salary.

We have received numerous queries from readers asking whether they should change their planned retirement data based on this specific proposal. The reason for the question is because it has been mentioned by several groups with regard to the 2018 budget.

Anyone who tells you they can predict what legislation Congress will pass and how it will be worded in its final format is trying to sell you something you probably do not need and you will be wasting your money. Even though several groups have made this proposal, it is still a long way from being enacted.

Moreover, based on what Congress has done with federal employee pay and benefits over the last several decades, a future retiree’s worst fears will probably not be realized. Congress has not elected to implement this often proposed change in the 40 years I have been involved with the federal retirement system.

In all likelihood, such a proposal would have a more limited impact as many people already working for Uncle Sam are likely to be “grandfathered.” Such a change may apply only to future federal employees and not to current employees.

If the proposal does pass, it is unlikely to be as drastic as some readers fear. Here is a calculation by John Grobe, a FedSmith author with considerable in-depth experience in working with the federal retirement system, on the difference such a change would make to an individual employee:

Let’s assume a prospective retiree is making $100,000 five years before retirement and receives annual raises of 1.5% for the next five years.  He will have 30 years of service when he retires. Under a high-three formula, a CSRS retiree would receive a pension of $58,818 and a FERS retiree (1% factor) would receive $31,370.  With a high-five formula substituted, the CSRS pension would be $57,949 ($869 less) and the FERS pension (1% factor) would be $30,906 ($464 less).  COLAs would compound the difference over time.

In any event, making a decision to retire based only on the high five proposal may not be wise. Keep in mind that Members of Congress are covered by the federal retirement system. I would cynically observe Congress is less likely to change their own benefits than they would be if it only impacts employees of the Executive Branch of government.

In other words, the proposal may not pass and probably is unlikely to pass; it may not be applicable to all future retirees anyway; and it may not be as drastic as some fear it will be.

Federal Retirement Supplement

The Federal Employee Retirement System (FERS) applies to most current federal employees.

As with many government benefits, the federal retirement system is very complex.

The Special Retirement Benefit is a unique benefit for some federal employees. It sounds simple. It is not simple. It is difficult to calculate. But, as far as some in Congress are concerned, it is expensive and would be easy to eliminate if there is sufficient support in the House and Senate to pass a new law.

The Special Retirement Supplement (SRS) used under FERS provides additional benefits for retirees younger than 62 but who have had a long federal work history. It would be eliminated under this latest proposal.

The Special Supplement is not available to any federal employee. It does not apply to employees under the older Civil Service Retirement System (CSRS). It is only available to some under FERS.

A federal employee under FERS has to reach the Minimum Retirement Age (MRA). This age is different for different people. For those born in 1970 or later, the MRA is 57. For those born before 1948, the MRA is 55. For others, it differs depending on when they were born.

The Special Supplement is a payment supplementing income between the time you retire and when you become eligible for Social Security Benefits.

Some FERS employees qualify for an MRA+30 retirement before turning 62. At that time, their Social Security benefits begin. The federal government provides the FERS Supplement payment to “bridge” the gap between their retirement date when Social Security payments start. The Special Supplement generally equates to between 66%-75% of the Social Security benefit.

So, if a federal employee has reached his MRA and has 30 years of service or has 20 years of service and is 60 or older, that employee can request the Special Supplement.

This is the benefit that some in Congress would like to eliminate. It would impact the future pension payments for some federal employees and would eliminate an option that is now available to some federal employees under the FERS system.

Bottom Line

Some readers ask if they should retire now to prevent being impacted by future Congressional changes.

Generally, that is not a good idea unless you were planning to retire anyway. There are too many unknown factors to make a reasonable decision without more information.

We do not know what changes will be made to the federal retirement system, if any. When changes appear more likely to pass into law, there is usually time to make a more informed decision based on actual legal changes rather than acting out of a fear of possible changes in the future.

There is also likely to be a “grandfathering” feature if these changes should come to pass.

Best of luck in making the decision on your future retirement based in your specific interests and circumstances!

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