Employees hired in 2013 were envious of those hired earlier, because those who started in 2012 and earlier paid only 0.8% of their salaries for retirement, instead of the 3.1% newer employees paid. This was due to the RAE (Revised Annuity Employee) law. This law, despite its name, did not revise annuities; it revised the employee share of annuity contributions. Policy makers said “maybe nobody will notice.”
One year later, they did it again. They raised the rate once more, to 4.4%. This time, in a flair of imagination, they named the law FRAE (Further Revised Annuity Employees). The deception continued. “They missed it before – they will miss it again.”
Currently, there are a number of changes under consideration. Some of them:
- The proposed elimination of the FERS annuity supplement for those who retire under age 62.
- Congress is also considering additional increases in the contribution rate, to be phased in over a period of years.
- There is also a bill to change the final average salary to five years rather than three.
It appears we may be approaching the point at which a prudent fed would be financially better off if he/she opted out (“cashed in”) his retirement contributions. However, the only way to do this under current law is to resign and get a refund of retirement contributions. (Once you become eligible for retirement, refund is no longer an option.)
Unfortunately, refunds do not include interest which is a critical factor. Without interest, it looks like resignation in lieu of retirement would not be financially wise, at this time.
Still, it might be interesting for planning purposes to calculate how much an employee’s contributions, high-three, and annuity would be under certain assumptions. Let’s use today’s contribution rate of 4.4% and annuity rate of 1% of high-three per year of service, and a starting point of a $44,000 salary with annual increases averaging, say, 5%.
Twenty eight years of salaries would total $2,569,693 in earnings and a high-three average salary of $156,572. Twenty eight years service yield an annuity of 28% of high-three.
As far as input is concerned, the only differences among the below is the start year, but as you can see, this has a sizable impact on out of pocket contributions:
| Start Year | Rate | Contributions | Annuity | Payback Period |
|---|---|---|---|---|
| < 2013 | 0.8% | $20,557 | $48,340 | 5 months |
| 2013 | 3.1% | $79,660 | $48,340 | 1.6 years |
| > 2013 | 4.4% | $113,066 | $48,340 | 2.39 years |
Clearly, for retirement costs, prior to 2013 was a golden era for employees to start their careers. However, when combined with Social Security and maxing of Thrift Savings Plan participation, the less generous annuity terms – don’t forget the annuity supplement – are still an attractive return on investment. Just don’t dwell on the good old days!
