Millions of American lives have been upended as the COVID-19 virus outbreak continues. The U.S. economy has been ripped apart, small businesses in particular are suffering, unemployment claims have shot up in recent weeks and the stock market has tanked to its lowest level in seven years.
Fortunately, federal employees continue to be paid. But for those federal employees — who at the start of 2020 intended to retire within the next one to five years — the question becomes how will the COVID-19 virus crisis impact their retirement plans?
This column will discuss some of the more important issues generally affecting federal employees — and in particular those employees who intend to retire within the next five years.
Federal retirement applications delay
With the majority of the federal workforce either telecommuting or highly encouraged to telecommute during this time, it is extremely unlikely that an employee who had planned to retire in the immediate future (one or two months from now) will be able to retire. This is because an employee cannot retire without being officially “checked out” by the individual’s supervisor or official-in-charge of his or her office.
Under normal circumstances, an employee has to submit his or her retirement application in person to someone in the Personnel or Human Resources Office. The retirement application will then be sent to OPM’s Retirement Processing Office in Boyers, PA. It is rather doubtful that any of these tasks can be accomplished when the overwhelming majority of federal agency offices are “empty” while employees telework from home.
The good news is that federal employees continue to be paid. They can pay their bills; they can continue to contribute to the Thrift Savings Plan (TSP); and they have full insurance (health, dental, vision coverage) for themselves and for their families. They need not file for unemployment benefits. Many employees will be eligible to receive a payment from the government as part of the $2 trillion stimulus program. But retiring from federal service in the very near future (in the next month or two) is not recommended nor practical.
Just as the U.S. economy recovered following the “great depression” in the 1930’s and after the “great recession” during 2008-2009, the U.S. economy should eventually recover after the “great cessation” (as economists are calling what is currently happening to the US economy) as a result of the COVID-19 virus crisis. The difference in the current situation is the speed with which the COVID-19 virus and the accompanying economic downturn has spread worldwide. Congress has passed and President Trump has signed into law a $2 trillion stimulus program to assist individuals and small businesses.
When federal employees eventually return to their “desks in the office”, hopefully in the near future and working as they were before the COVID-19 virus situation took hold, employees should consider the following with respect to how a post- COVID-19 economy could affect their retirement:
Pay increases and the cost of benefits
With the $2 trillion stimulus program, added to an already ballooning federal budget deficit, it is highly likely many federal programs will be frozen with respect to funding. Federal employee government-wide pay increases will likely be smaller – perhaps non-existent for a few years – and employees will likely pay more for their benefits, in particular health insurance.
Those employees who want to retire within the next one to five years will likely not get much of an increase in their salaries during the concluding years of federal service, resulting in smaller high-three average salaries used in the computation of their CSRS or FERS annuities. CSRS and FERS annuitants will likely see lower cost-of-living adjustments (COLAs) with increasing cost for health benefits including federal employee health insurance and for Medicare Part B.
The COVID-19 virus crisis could eventually impact employees’ future Social Security retirement benefits. Three things federal employees should consider with respect to Social Security. First, during 2020, it is highly likely that the Social Security program will collect lower than expected payroll (FICA) taxes. The FICA payroll tax is a 12.4 percent tax is imposed on earned income (wages, salaries, net self-employment income) (but not investment income).
During 2020, the FICA tax is imposed on all earned income up to $137,700 of earned income with any earned income above $137,700 FICA tax exempt. Because of the number of U.S. businesses shut down and the number of laid off U.S. workers expected during 2020, it is likely that many workers will have less earned income in 2020 than they did in previous years.
Less earned income means in turn that the Social Security program will collect less in FICA payroll taxes during 2020. Collecting less in FICA payroll taxes is bad news for the Social Security program for two reasons. First, the FICA payroll tax is the “engine” of the Social Security program. During 2018, Social Security payroll taxes generated $895 billion of the $1 trillion Social Security revenue collected. The taxation of Social Security benefits and interest income earned on Social Security’s asset reserves together account for another $118 billion. A significant decrease in payroll tax collection during 2020 will weaken Social Security.
The Social Security Board of Trustees has predicted that 2020 will be the first time since 1982 that the program pays out more than it collects. Earlier this year, the net-cash outflow for 2020 was predicted to be about $4 billion, small compared to Social Security’s current $2.9 trillion in asset reserves. But less FICA payroll tax collected during 2020 will likely result in a larger net-cash outflow in 2020.
Second, the most direct effect the COVID-19 virus crisis might have on Social Security is on its cost-of-living adjustments or COLAs. Social Security’s COLA compares the average third quarter reading of the Consumer Price Index for Urban Wage Carriers and Clerical Workers, (CPI-W), in the current year to the average third quarter reading of the CPI-W in the previous year. An increase in the CPI-W reading from one year to the next results in Social Security beneficiaries receiving a positive COLA. If the CPI-W reading declines from one years to the next, no COLA is passed along to beneficiaries.
Numerous spending categories factor into the CPI-W. While there has been an increase in recent months with regard to housing, medical care, and food costs, energy prices have fallen. Considerably weaker energy prices compounded with recessionary fears could well result in a low or zero COLA in 2021 and 2022. The same COLA used for Social Security recipients is used for CSRS and FERS annuitants. This means that it is likely that CSRS and FERS annuitants in the next few years will likely see less COLA on their annuitants at a time they will be paying more for FEHB health insurance and Medicare Part B.
Third, as a result of the COVID-19 virus, beneficiaries’ interaction with Social Security personnel may be limited to telephone and online. In-person interactions with Social Security personnel may be extremely limited as the Social Security Administration reduces its field offices. Those employees close to retirement who have questions about their Social Security benefits may be limited as to how much direct contact they can have with Social Security Administration (SSA) employees. The good news is that current and future beneficiaries can do much through the SSA online portal.
Thrift Savings Plan
Federal employees should consider their Thrift Savings Plan (TSP) as an investment for the long term – between now and the time they or a loved one no longer needs the TSP, which is unfortunately death. As such, employees should in general invest their TSP contributions with the investment goal of “growth”, ideally having the majority of their TSP account invested in the three stock funds – the C, S, and I funds. Stocks have shown that over time they can overcome inflation and short-term downturns in the U.S. and world economies.
This investment recommendation is true for newly hired employees; it is true for mid-career employees; and it is true for those employees close to retirement within the next one to five years.
No doubt a dramatic stock market plunge (as has happened over the last month) can delay one’s planned retirement depending on how long the decline lasts. But the delay in one’s retirement from federal service with the current “great cessation” should not be extended a delay as the one many older federal employees experienced during the “great recession” of 2008-2009. Some of those employees delayed their retirement from federal service for as much as five to 10 years.
An employee who is 60 today and who is planning to retire at age 65 may need to delay retirement to age 67 – not age 75. But employees who do plan to retire within the next five years should not start selling out of the TSP stock funds into the “safer” TSP bond funds – the G and F funds – whose investment performance will be marginal at best as a result of lower interest rates. Now is the time for all employees to stick to their long term investment goals and not perform any “panic selling, especially those employees who plan to retire within the next five years.
All federal employees
All federal employees — including those who would like to retire within the next one to five years – should view this time as a “buying” opportunity for stocks and stock funds like the C, S, and I funds.
The stock market should recuperate its losses sometime in the future just like it has done numerous times in the past. To make things easier to understand, employees should go back and think about the 2008 – 2009 stock market downturn when the Dow Jones Industrials Average sunk to a low of 6,500 on March 9, 2009. But also remember what the Dow Jones Industrials Average was 11 years later in February 2020 (at the time the COVID-19 virus started to affect the U.S) when the Dow Jones Industrials Average was nearly 29,000. Looking back, the period 2008-2009 was a great opportunity to invest in stocks, as stocks were, in a sense, “on sale”.
With patience and no “panic selling” into “super safe” investments (for example, U.S. government money market accounts yielding well under 1 percent) in order to “stop the (investment) bleeding”, an investor’s portfolio would have earned a 14.6 annualized return over the nearly 11 year period. By the investment rule “rule of 72’s”, the investor’s portfolio account would have quadrupled in value over 11 years, just by “hanging in there” and not panicky selling. While past investment performance is no guarantee of future investment return, much can happen over an 11 year period. This should be an investment lesson for all TSP participants at this time.