The ‘new deal’ for federal retirement: What the latest FERS proposals really mean for your benefits

A few weeks ago, I wrote about the potential changes to federal retirement benefits that are included in proposed legislation that is moving through Congress. The key word is “proposed” because since that column, there have been some changes in the bill.  

Little by little, the proposals have become somewhat less devastating and a little more fair to employees who have been planning for retirement and were worried about the rules changing at the last minute. One of the most disturbing things that have been haunting pre-retirees was the proposal to change the basis of the FERS retirement benefit from the “high-three average salary” to the “high-five.” Thankfully, that is gone and there is no longer anything to worry about for now on that topic.   

However, the elimination of the FERS supplement is still there, though it has been made less onerous.

To recap, the FERS annuity supplement is part of the FERS basic annuity benefit and is payable to employees who are eligible to retire before age 62 and are not yet eligible for Social Security retirement benefits. It is meant to replace the amount of the Social Security benefit you would have otherwise received had you retired after age 62. For that reason, the FERS annuity supplement is calculated as if you were eligible to receive Social Security benefits on the day you retire. Eligibility for the annuity supplement continues until the earlier of— 

• The last day of the month before the first month for which you would be entitled to Social Security benefits, or 

• The last day of the month on which you reach age 62. 

Most employees who retire voluntarily before age 62 and are not subject to an age reduction are entitled to receive the supplement. You may also receive the supplement if you retired involuntarily before attaining your Minimum Retirement Age (MRA) or voluntarily because of a major reorganization, reduction in force, or an early retirement for Members of Congress. However, in these three instances, you will not be eligible for the annuity supplement until you reach your Minimum Retirement Age (MRA). If you receive a deferred benefit, a disability benefit, or an immediate MRA+10 benefit, you will not be eligible for the annuity supplement. 

The FERS annuity supplement is computed as if you were age 62 and had applied for Social Security benefits. The Office of Personnel Management first estimates what your full career (40 years) Social Security benefit would be and then bases the supplement on the Social Security benefit only using your civilian service covered under FERS. For example, if your estimated full career Social Security benefit would be $2,000 and you had worked 30 years under FERS, OPM would divide 30 by 40 (.75) and multiply ($2,000 × .75 = $1,500). The result would be your FERS annuity supplement, prior to any reductions. 

According to a cost estimate prepared earlier this month by the Congressional Budget Office and using data from OPM, CBO estimates that about 21,000 new FERS retirees who do not retire under a mandatory authority are added to the annuity supplement rolls each year. In fiscal year 2025, the average annual supplement for affected annuitants would be about $18,000/year or $1,500/month, CBO estimates. Those annuitants begin to receive the supplement, on average, at age 59 and would therefore receive the supplement for about three years. On that basis, CBO estimates that eliminating the supplement for new annuitants would reduce direct spending by $10.0 billion over the 2025-2034 period.  

The latest version of the bill that was passed by the House of Representatives shifted the effective date for elimination of the FERS annuity supplement to Jan. 1, 2028. The original threat was to make the effective date coincide with the date of the law being passed which many federal employees had feared would be as early as the end of June. This pushes this threat out more than two years down the road.   

If enacted as currently written, the FERS supplement would be eliminated beginning Jan. 1, 2028, though language stipulates that any federal worker already “entitled” to retire with the supplement on that date will retain their eligibility.  One point of confusion is the word, “entitled.” Rep. Mike Turner, R-Ohio, opposed the proposal’s application to current employees. 

“Making changes to pensions and retirement benefits in the middle of someone’s employment is wrong,” he said. “Changing the rules, especially when someone has already been vested in their benefits, is wrong. Employee benefits are not a gift, they’re earned . . . I understand the need for reform, and we can certainly have changes occur for the benefits of new hires, but for current employees, to change the rules for people in the middle of the game is just wrong.” 

Based on the language of “entitlement to the supplement,” would employees covered by FERS on Jan. 1, 2028, be exempt from this change? Would it only apply to current employees who are entitled to retire before 2028? The definition of this will be clarified further if the bill is signed into law, so we may have to wait a little longer to know for sure. If you retire under a Voluntary Early Retirement Authority or Discontinued Service Retirement before Jan. 1, 2028, you are entitled to the supplement, even though you might not start receiving the supplement until after 2027 since it is not payable until you reach your FERS Minimum Retirement Age. Additionally, the proposal was clarified to show that federal employees who are subject to mandatory retirement such as federal law enforcement officers or firefighters who are subject to mandatory retirement at age 57 or air traffic controllers at age 56 would continue to receive the FERS supplement upon retirement, even if they retire before the mandatory age. 

Regardless of the interpretation, you don’t have to worry about the FERS supplement one way or the other if you are:  

• Current retirees since the new law would not affect employees who are already receiving the FERS annuity supplement. 

• An employee who is already 62 or older as of December 31, 2027, since the supplement is only available to employees who retire under age 62.  

• An employee who is retiring under a deferred retirement, disability provisions of FERS or under the MRA + 10 retirement. These types of retirement are not entitled to the FERS supplement, regardless of the age at retirement.   

• An employee who is going to continue working after retirement from federal employment, since the supplement is subject to an earnings limit (currently $23,400) that reduces the supplement by $1 for every $2 earned above the annual limit.  

One of the standards I have kept during all the years I have been educating federal employees on their retirement and insurance benefits is not to act based on proposed legislation. I’ve broken this rule slightly this year due to the number of incredible changes that have occurred in an effort to quickly downsize the federal government. However, it is important not to panic and to act based on facts rather than rumors or congressional proposals.

According to the Pew Research Center, in the nearly five decades that the current system for budgeting and spending tax dollars has been in place, Congress has passed all its required appropriations measures on time only four times: fiscal 1977 (the first full fiscal year under the current system), 1989, 1995 and 1997. And even those last three times; Congress was late in passing the budget blueprint that, in theory at least, precedes the actual spending bills. The fiscal year doesn’t start for another four months. Hopefully, the rules and changes that federal employees are facing will be clarified by then.   

The most important thing about retirement planning is to make sure you can afford to retire or if you are planning on a second career, try to be sure of your available options before you make the decision to leave your current career. Remember that working a few more years, with or without the FERS supplement, can make a difference to your future financial security. The overall average retirement age of federal employees who retired in FY2019 was 61.8 years old – almost old enough for the “real” Social Security retirement benefit, rather than the FERS annuity supplement. 

Remember that in addition to becoming entitled to Social Security benefits based on your entire career of paying into FICA, rather than only your civilian service covered by FERS, is that the FERS cost of living adjustments doesn’t kick in for most retirees until age 62 and the computation factor for regular FERS annuity benefits changes to 1.1% x years and months of service of the high-three average salary instead of 1% to 10% increase in the overall benefit for employees who have 20 or more years of service. A federal career can still be a good choice, if you can avoid being downsized out of it!