How is the FERS Annuity Supplement Calculated?

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By on September 24, 2018 in Retirement with 0 Comments

Close up of a woman's hands working on a calculator and writing notes as she performs financial calculations sitting at a desk

The formula for calculating the SRS (special retirement supplement) is too complicated for mere mortals to execute. 

~ Reg Jones

The most difficult parts of the calculation are deeming and indexing. Once you’ve done these the rest is comparatively simple – although quite lengthy – arithmetic. 

Deeming

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. 

Example

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 – 1.2738289 – is the earnings ratio to use for deeming salary in any year 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 1.2738289 in order to determine Joe’s deemed salary for the year: $31,471 (rounded).

Indexing

This makes all salaries comparable to salaries two years prior to the retirement year. Divide the two-years-before-retirement average total wages (ATW, from Social Security) by the ATW for the individual year, then multiply by the result. 

Example

For 2016, ATW was $48,664.73. For 1994, the ATW was $23,753.53. Divide 48,664.73 by 23,753.53, with a result of 2.0487367. Multiply the ATW for 1994 by 2.0487367, arriving at a deemed salary for 1994 of $48,665 (rounded). Do this for all salaries except 2016 and 2017. Take a break occasionally. 

After deeming salaries where necessary:

  1. 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. 
  2. Index the salaries – see above on how to do this.
  3. Delete the five lowest indexed salaries. 
  4. Total the remaining salaries and divide by (number of remaining years x 12). The result is called the Average Indexed Monthly Earnings, or AIME.
  5. Apply the three-tier formula Social Security uses to arrive at the Primary Insurance Amount, or PIA, which is for full retirement age.
  6. Reduce the PIA in accordance with the retiree’s age.
  7. 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.

In view of the above, is it any wonder Reg Jones, retirement columnist at the Federal Times, said “(T)he formula for calculating the SRS (special retirement supplement) is too complicated for mere mortals to execute”? (Federal Times, February 2005.) Jones, before his own retirement, was associate director of Retirement & Insurance at OPM. He knows!

Nevertheless, instead of using a computer for the calculations, you can construct your own workbook. After constructing the workbook, just do the calculations and fill in the blanks, being careful not to make any mistakes. Allow about three hours. 

Why would a person want to go through this lengthy, intricate process?

  • For planning purposes, he needs to know how much his supplement will be, and there is no satisfactory shortcut.*
  • He knows that his interim retirement payment will omit the supplement, leaving it until the final determination, months down the road. If, however, there is a good, hard-copy estimate in his retirement package, at the outset, they may include the supplement in the interim payment! But don’t bet on this happening.

Help

Readers can get the 100% free, full-featured software for accurate calculation of the supplement from [email protected]. (Please: no .gov email addresses.) With all the needed data at hand, and entered, this tool can produce the needed report in less than three minutes.

Detailed instructions (44 pages): Retiree Annuity Supplement Handbook

Current ATW figures, the formula (bend points) for the Primary Insurance Amount, annual maximums, and age reduction factors can all be found at www.ssa.gov. These factors are all hard coded into the free software – see above.

Why, if there is an app that does the calculations accurately, in 1/60th the time, does the government not acquire and use a similar tool? This modernization would dissolve the inventory backlog quickly. The government paid a contractor (Hewitt) $20 million to develop a computer program, a program that failed. Then the contract was cancelled, and the contractor was allowed to keep the $20 million. What is wrong with this picture?

* The Social Security estimate of the age-62 retirement benefit guesses what earnings will be in the future, until the retiree becomes 62. The SS estimate also uses all earnings from all sources, and earnings prior to age 22. In contrast, the hypothetical SS benefit of the annuity supplement does not project future earnings, uses FERS salaries only, does not use earnings prior to age 22, and deems earnings for incomplete years.  

© 2019 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.

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About the Author

Robert Benson served 35 years in various Federal agencies, as both a management analyst and IT specialist. He is a graduate of Northwestern University.

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