Cuts to Federal Retirement System: Evaded or Merely Postponed?

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By on November 29, 2017 in Pay & Benefits, Retirement with 0 Comments

Retirement newspaper headline with dice and stock market graphs

On 10/26/17 the House of Representatives (narrowly) passed the Senate’s 2018 budget resolution.  Fortunately for federal employees, one of the more popular subjects swirling around the 2018 budget was an element that ultimately didn’t make it in: no cuts to federal retirement benefits were included in this resolution.

The urgency felt in DC to make changes to current tax policies took precedence over the appetite for slashing federal retirement benefits.  But, how long can this ravenous hunger go unfed?

The Senate’s version of the 2018 budget resolution did not include cuts to the federal retirement system.  For expediency and to avoid specific reconciliation instructions, the House of Representatives voted to adopt the Senate’s version of the 2018 resolution.

Nature of the threat that was narrowly eluded

The House’s plan initially suggested measures to prompt the House Oversight and Government Reform Committees to develop legislative proposals.  The Oversight and Government Reform Committee’s mandate would have been to reduce the federal deficit by $32 billion over 10 years through alterations to federal employee benefits.

How close did the House come to passing these cuts?  Well, the House’s budget resolution DID clear the chamber in early October.  Even though the blueprints the House laid out were vague, it seems fair to assume cuts would have hit (at least) the Special Retirement Supplemental (SRS) and the defined federal benefits pension/annuity.

While cuts to federal employee benefits have been avoided in this budget, uncertainty still runs rampant among countless feds.  They ask what the future will hold concerning their long-standing, long-planned for and long-anticipated retirement benefits.

The Dangerfields

Rod and Rhonda Dangerfield (not their real names) are a married couple that are both long-term federal employees.  Each has over 30 years of federal service and are both 56 years old.

The Dangerfields are at a tipping point concerning their impending retirement decisions.  They are feeling outside pressure to move up their planned departure from federal service.  They are struggling with stepping down sooner than planned or sticking to their initial planned exit date.  Their original “plan” had them working two more years and receiving the SRS from that time until they reached 62 years old (the standard and generally mandatory end date for the SRS).

Admittedly, they are concerned about the potential for reductions, alterations, and losses to any of their promised retirement benefits.  However, they are currently focused on the SRS and its potential to alter their short-term retirement plans.

While all potential retirement cuts are cause for trepidation, they express that their immediate concern is the possible elimination of the SRS.  While they were pleased no retirement reductions were attached to the 2018 budget, they understand and fear Congress could still enact cuts utilizing other legislative measures.

What is the SRS?

The Special Retirement Supplement (SRS) is a unique benefit to FERS employees’ retirement income that has recently received a great deal of scrutiny.  It potentially allows FERS employees to obtain a temporary income stream when they retire until they reach the age of 62.  Not every FERS employee will qualify as they have to meet specific requirements (See the pamphlet; Information for FERS Annuitants, review section 3 for details).

The monthly amount of the SRS can be substantial and may significantly impact a FERS employee’s retirement plan.

Questions

For the Dangerfields, the SRS would account for a combined total of approximately $3,600 per month for 4-years:

  • Rodney – current annual earnings = $112,000, federal employee for 32 years (80% of a “lifetime career” as a federal employee, 40 years is considered a lifetime career). = $2,487 SSA estimated monthly benefit at age 62.  $2,487 x 80% = $1,989 monthly SRS benefit until age 62.  
  • Rhonda – current annual earnings = $87,000, federal employee for 30 years (75% of a federal employee career) = 2,230 SSA estimated monthly benefit at age 62.  $2,230 x 75% = $1,672 monthly SRS benefit until age 62.
  • $1989 + $1,672 = $3,661
  • When combined with their pension ($5,055 monthly combined), the SRS would represent 42% of their income until age 62.

If the SRS is removed from their retirement income sources, it will be expected to delay their retirement plans for those 4-years.  So, they have begun asking questions:

1. What is the likelihood Congress will revisit reductions in federal retirement benefits/SRS before the Dangerfield’s retire?

A point in federal employees’ favor is that several Congressional leaders have expressed their opposition to any proposal that would damage federal retirement benefits.  Yet, not in feds’ favor, others have remained fervent in their efforts to make changes to the Federal benefits packages.  Example: Many on the House Oversight and Government Reform Committees have conveyed a deep-seated desire in making MAJOR modifications to both federal pay and federal benefits.

2. If the SRS is on its way out, will it be reduced or eliminated before the Dangerfields retire?

I believe that is a compelling prospect.  The Dangerfields are looking to retire in 2 years.  Cuts to federal benefits are an on-going conversation within both the House Oversight and Government committees.  When this subject regains focus (possibly by spring of 2018) as a standalone debate, both committees will likely resume their benefits onslaught.  It appears the future prospect of the SRS being in place and in its current form 2 years from now is dubious. 

3. Should the Dangerfields move up their retirement plans to allow them to benefit from an expected “Grandfathered in” clause?

Arguments for any SRS alterations will undoubtedly be met with pushback from detractors.  Therefore, while changes could happen quickly, it seems probable that a “Grandfather in” clause would be part of the modifications.  

4. Can they afford to fulfill their retirement goals if they miss out on the SRS?

Not all of them.  Part of the Dangerfields’ early retirement goals was to retire in 2 years without touching any of their retirement savings (TSPs and IRAs).  Without the SRS, if they retire on their planned date, they would have no choice but to perform some early withdrawals from their retirement savings.  That would mean withdrawals of approximately $87,800.  (SRS estimates above = $3,661.  $3,661 x 24 months = $87,864).  

This unplanned withdrawal could have long-term consequences on their retirement plan.  With $87,800 withdrawn early, their long-term growth numbers will also be skewed.  This could potentially cause a shortfall late in their lives (outliving their money) or cost reducing lifestyle changes along the way to make up for the potential shortfall.

5. Will they be able to fulfill their retirement goals if they move up their retirement dates to include the SRS while it is still in play?

According to Rod, “Yes but, it is not what we were hoping for.”  As long as both qualify for their FERS pension/annuities and their SRS payments, they can meet their monthly obligations either today or in two years.  However, their last child doesn’t graduate from college for 2 more years.  They planned to start their retirement travels at that time.  According to Rhonda, “An earlier retirement means sitting around all day for two years until our youngest graduates or traveling while they are still in school.  We would prefer to stick around and continue working.”  

Like many long-tenured FERS employees, the SRS (as well as other retirement pieces) are becoming a real concern for the Dangerfields.

For many years, federal benefits have been in the crosshairs of elected officials. Each time in the past, including this most recent budget resolution, the marksmen have missed their mark. However, it seems unlikely they will stop firing at this highly politicized, low hanging target.

Elements to Consider

While members of these committees undoubtedly have their personal benefits hit-list, no one can say for sure what those modifications would look like or what their impact would be. So, how are federal employees to prepare for what they can’t see coming?

Perhaps following the intent behind the Maya Angelou quote – “Hoping for the best, prepared for the worst, and unsurprised by anything in between.”

Unfortunately, it appears many Feds fall prey to missing the big picture in these words. Many could benefit by remaining wary of only practicing the first part of Maya’s quote, “Hoping for the best…”

Recourse for ALL Feds

I don’t believe most informed feds genuinely think federal benefits will not be both politically criticized and legislatively assaulted in the near future.

Looking for a “silver lining?”  While it appears to be an uphill battle, federal employees are not powerless to contest these offensives on their benefits.

Few feds seem to embrace or even recognize the fact that there is strength in their combined numbers.  They can be content to sit back, complain and watch future benefits become only hints of what they possess today, OR they can become a considerable force to be reckoned with by taking an active stand with groups already fighting for them.

For many, uniting with their unions could be a great start.  For all feds, both past and present, they may want to check out “National Active Retired Federal Employees” (NARFE).  Both will be on the forefront of fighting against future attacks on all federal benefits.  But it cannot be overstated, the more substantial their numbers, the stronger their defenses.

Any opinions expressed in the article are those of the author alone. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  Investing involves risks, including the loss of principal.  No strategy assures success or protects against loss.  Silverlight Financial, Infinity Financial Services and its affiliates do not provide tax, legal or accounting advice. This material is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. For a list of states in which I am registered to do business, please visit www.silverlightfinancial.com.

Silverlight Financial donates free/no obligation Federal Retirement Readiness Reviews. These reviews culminate with a no cost phone consultation with founder, Randy Silvey. To personally request your FRRR email: [email protected]

© 2019 Randy Silvey. All rights reserved. This article may not be reproduced without express written consent from Randy Silvey.

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About the Author

Randy Silvey is the published author of You FIRST, Federal Employees Retirement Guide, one of the bestselling books of its kind on Amazon and Kindle. For over 14 years, he’s been educating and guiding Feds in pursuing wealthier retirement lifestyles. Randy can be reached at 816-524-1515 or visit his website at www.silverlightfinancial.com. Securities offered through Infinity Financial Services. Member FINRA/SIPC.

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