Every year when the President releases his budget proposal, FERS employees and retirees wonder what kind of impact there may be regarding their benefits.
Let’s look at each proposed change and its potential impact on retirement.
If an extended pay freeze is enacted, it may cause your earnings potential to be permanently lowered. It’s very hard to make up the difference from your stagnant earnings during a pay freeze.
You may also receive less TSP FERS match over your career.
Also, if your career earnings are lowered, your High-3 may be lower, therefore, causing your monthly FERS pension payments to be less. Ultimately, this could cause more withdrawals from your TSP to make up the difference.
High-3 to High-5
Currently, the FERS pension calculation is based on your High-3 average, which is your highest average basic pay you earned during ANY 36 consecutive months in your career under FERS. These are often your final 3 years of service but can be an earlier period.
A change to a High-5 would likely mean the calculation would extend to a 60 month, or 5-year average. This could reduce your FERS pension by a small amount. Again, this could cause you to withdraw more from your TSP to make up the difference.
Paying More into FERS
Impact: None to Low
FERS employees automatically contribute a percentage of basic pay into FERS each pay period. This provides a monthly FERS pension in retirement.
The amount you contribute is based on which FERS system you’re in. In the past 10 years, there were 2 more retirement systems added to FERS:
- FERS Contribution: .8% (FERS employees hired between 1/1/84-12/31/12)
- RAE (FERS) Contribution: 3.1% (RAE=Revised Annuity Employee), (FERS RAE employees hired between 1/1/13-12/31/13)
- FRAE (FERS) Contribution: 4.4% (FRAE=Further Revised Annuity Employee), (FERS FRAE employees hired on or after 1/1/14)
The proposed increase for FERS contributions could cause FERS employees to contribute substantially more. FERS RAE and FRAE employees may have to contribute more as well.
Thrift Savings Plan
These changes could mean less take-home pay which could force you to reduce TSP contributions to make up the difference. Lower contributions can cause you to lose some FERS TSP match.
Eliminating FERS COLA
The FERS COLA is calculated by the U.S. Department of Labor and is based on the change in the Consumer Price Index (CPI) for Urban Wage Earners and Clerical Workers from the 3rd quarter average of the precious year to the 3rd quarter average of the for the current year.
The current FERS COLA is applied as follows:
- If the CPI increases by less than 2%, the FERS pension is increased by the actual CPI
- A CPI increase of 2%-3% means the FERS pension increase is capped at 2%
- If the CPI increases by more than 3%, the FERS pension is increased by the actual CPI minus 1%
The current calculation may cause you to withdraw more from your TSP to cover expenses because the FERS COLA may not actually keep up with rising costs.
A COLA elimination would have a severe impact on retirement because the FERS pension payment would be frozen from the start of retirement. Again, drawing more from your TSP is a concern. You may risk running out of savings during your lifetime.
Eliminating FERS Supplement
Impact: Severe for those retiring under age 62
This Supplement, also known as the Special Retirement Supplement, provides an additional monthly pension to retirees who meet specific criteria:
- Minimum Retirement Age with 30 years creditable service, OR
- Age 60 with 20 years of creditable service, OR
- FERS special provisions
This supplement helps “bridge the gap” between early retirement and Social Security eligibility at age 62. The calculation is based on the number of years of service and is a percentage of your Social Security benefit estimate at 62. The Supplement ends when you reach 62.
The elimination of this would have a severe impact on an early FERS retiree because it could cause you to withdraw more from your TSP during the years before Social Security eligibility.
Reducing G Fund Interest Rate in TSP
The risk of this could vary. If your TSP portfolio is high-risk and much of your TSP is allocated to the G Fund, this could cause a lower performance and a reduced TSP balance at retirement. Other TSP investors may choose to invest more in the F, C, S, and/or I Funds. Depending on market volatility this may or may not work out well.
FEHB Share of Cost
Impact: None to Moderate
The government pays a large portion of the cost of FEHB and the employee/retiree pays a smaller share. The share of the cost of some FEHB plans could be increased for plans that don’t meet certain criteria performance metrics. This could cause the retiree to pay more for FEHB coverage or change to a different plan.
Annual/Sick Leave Changes
Currently, unused sick leave is added to creditable service and could increase your monthly FERS pension payment. Annual leave is paid out in a lump sum payment at retirement.
If both were combined, employees may have less paid time off and may no longer receive credit towards FERS pension calculation and/or may no longer receive a lump sum annual leave payment at retirement.
This may create a mild impact on FERS retirement but may necessitate more savings for the first few months of retirement while OPM is finalizing your FERS retirement application because annual leave payout may be lower or no longer offered.
Understanding how all, or any one of, these proposed changes could impact your retirement is important, so you can make sure you are prepared. The last thing you want to have happened is deplete your savings well before you were planning.