Federal retirement expert, Chris Kowalik, shares her candid insights on how the CSRS Offset program works, and what employees under this program can expect once they retire from federal service.
What you will learn:
- Definition of who is considered a CSRS Offset employee, and how this program came to be.
- Learn how the CSRS pension is calculated differently for CSRS Offset employees, and what eligibility rules they follow.
- See how the Social Security benefits of CSRS Offset employees may be impacted.
Listen to the episode or read the transcript below.
Links and Resources Mentioned:
- Give your feedback on this episode
- Podcast on the Windfall Elimination Provision mentioned in this episode
- Social Security’s “Substantial Earnings” table (2-page PDF)
About Chris Kowalik
Chris Kowalik is a federal retirement expert and frequent speaker to federal employee groups nationwide. In her highly-acclaimed FedImpact Workshops, the FedImpact Podcast, and the FedImpact Webinars, she empowers employees to make confident decisions as they plan for the days when they no longer have to work. Chris’ candid and straightforward nature allows employees to get the answers they need and understand the impact these decisions have on their retirement.
Transcript of This Episode
Scott: Hello and welcome to this episode of Fit Impact. Candid insights on your federal retirement. I’m Scott Thompson with www.myfederalretirement.com and I’m here today with Chris Kowalik with Pro Feds, home of the federal retirement impact workshop. Today’s episode, we’re going to focus on the CSRS offset program.
Now, surprisingly we get a lot of questions on this program even though it impacts a relatively small number of federal employees. Chris, I know you’ve got a lot to share with us today.
Chris: I sure do. Thanks so much Scott, and you’re right. It’s amazing how many questions we receive through our podcast feedback and even that we get in the retirement workshops about the CSRS offset program. So, very happy to bring a little clarification to our listeners today.
Scott: Okay good. I suppose a natural first step is to define who is considered a CSRS offset employee so we know exactly who this material will apply to. So, who does this material apply to today Chris?
Chris: Yeah, great question. So the definition of a CSRS offset employee is someone who has spent at least five years under the regular CSRS program, so they were vested under that. They left federal service for at least a year. And then, when they came back, it was after the time that the first program was created.
Most people realize the first program, they require those employees to contribute to social security. So with that, they’re going to require the CSRS … the new CSRS offset employee to not only contribute to CSRS but also to social security. So, kind of a little strange but that’s the definition of a CSRS offset.
Scott: Okay. And that’s pretty unusual for a CSRS employee to contribute to social security, isn’t it?
Chris: It is. It is pretty unusual. Contributing or not contributing to social security is really one of the core differences between the CSRS and the FRS programs. So it’s not all that common for CSRS employees to contribute as a condition of their employment. Now another big difference is how much these employees contribute to the CSRS retirement fund.
A regular CSRS employee contributes 7% of their pay each and every pay period. But a CSRS offset employee only contributes .8%. So a very, very big difference. But that’s not really the end of the story here. The amount they contribute to social security is 6.2% just like a FRS employee. So when we add those two things together, we’re still coming up to the 7%. It just so happens that CSRS offsets contribute to two different systems just like FRS do. The regular retirement system and then the social security program.
Scott: Okay. Very interesting. Now can you help us work through the calculations so we know how CSRS offset employees are different?
Chris: Yeah. To best understand a CSRS offset, I think it’s helpful to put into context with a regular CSRS employee so we can really highlight the differences.
Scott: Okay. That sounds like a good place to start to give us some perspective.
Chris: Yeah. As we mentioned before, regular CSRS employees do not pay into social security as a condition of their service. They simply have their CSRS pension and then whatever they have managed to save into the TSP on top of that.
Unlike FRS employees, CSRS employees are not incentivized to contribute to the thrift savings plan. So there’s no matching.
Scott: Okay. From an eligibility standpoint, how are CSRS offset employees treated differently?
Chris: With CSRS offset employees, they follow normal CSRS rules for eligibility purposes. Most employees are familiar with the basic eligibility requirements for a full retirement. That would be an age and a service year combination. So we have at least age 62 with at least five years of service, at least age 60 with at least 20 years, or at least age 55 with at least 30.
So, with respect to the pension calculation for an offset, it’s the same as a regular CSRS employee but with a little bit of a twist that we’ll talk about today. Now, beyond the eligibility aspects, now we have to look at how the pension itself is different for a CSRS offset than a regular CSRS employee.
Let’s assume that we have a regular CSRS employee who ends up with a high three of 50,000 and 30 years of service. Just to give us some numbers to work with here. When we throw into that, or all of that information into the CSRS pension formula, we come up with a pension of $28,125 per year. So we’ll kind of keep that number in mind.
Remember that a regular CSRS employee will not get social security, at least not based on their CSRS work.
Scott: Okay. Well, I have a feeling that it’s going to get more complicated when we add in the offset [crosstalk 00:05:12].
Chris: Yeah. Typically, it does get a little bit more complicated. This one’s not too bad. Now that we know what a regular CSRS employee would receive in their pension. So that $28,125 example per year, let’s see how it compares to a CSRS offset. Because a CSRS offset employee is required to also contribute to social security, they expect a social security benefit at age 62, of course.
But there is a catch. The catch is in the word offset. So the CSRS offset. That’s just a fancy word for penalty. Now we have to figure out what the penalty is. That is going to be based on the number of years that an employee was considered an offset as opposed to a regular CSRS and the amount of social security that they are going to receive. So those two numbers are going to play a factor in this formula.
To calculate the penalty, or the offset, here’s the formula. We’re going to take the amount of the social security benefit that that CSRS offset expects at the age of 62 and we’re going to multiply that times the number of years that they served as an offset employee where they were contributing to social security. And we’re going to divide that number by 40.
Let’s say we have an employee who has a social security benefit at age 62 of $1,200 per month. And they also have 25 years as an offset employee. And that is 25 years from the date they returned to federal service and began paying into social security. So they would have had at least 5 years of regular CSRS time, they went away and from the time they came back to federal service they spent 25 years before they retired.
So in this scenario, the penalty would be calculated at $1,200 a month times 25 years divided by 40. And that would come up with a monthly benefit, or in this case a monthly penalty, of $750 per month. That $750 per monthly per month will be taken out of the CSRS pension that we described. That seems like a bit of a raw deal for these folks but keep in mind that they’ll also be able to draw the actual $1,200 a month social security that we just used in that calculation.
So while they’ll get a penalized CSRS pension, they’re also drawing that social security benefit. So they come out pretty far ahead of a regular CSRS employee when we really compare them side by side. If we go back to the original scenario that we had a regular CSRS employee that had a pension of $28,125 per year, had they been an offset, we would have penalized that pension by $9,000 a year. That’s the $750 a month that we just calculated times 12 months per year. So that comes out to $9,000.
So the pension itself would be dropped from $28,125 down by $9,000. So we have now a pension of $19,125. And then we would add to that the social security benefit that they are going to receive. Which in this case, on a yearly basis, is a little over $14,000 per year. That’s the $1,200 times 12 months.
So, adding the two together. We take that $19, 125 of the pension plus the social security benefit of the $14,400 and we have a combined amount of $33,525. So this CSRS offset employee is better off than a regular CSRS by about $5,400 a year. When all things considered, CSRS offset comes out ahead.
Scott: Wow! I’m not sure that’s what most people expected Chris. Many folks have thought that CSRS was always the best program but it sounds like CSRS offset is even better. Now that we know how the pension is calculated and penalized, are there other ways that CSRS offset employees are treated differently for any other benefit?
Chris: Yeah. There’s one other way that CSRS offset employees may be treated differently. And it has to do with social security. I know we’ve already looked briefly at social security and the way that it’s going to be calculated for the penalty but there’s another way that they might be impacted as well.
For all of our listeners today, I encourage you to listen to the podcast on the Windfall Elimination Provision. That will give some deeper details than what we’re going to review in this section but CSRS offsets are a special category so we want to make sure that we cover this specifically for that.
For the sake of time, I’ll give some basic highlights today. But, again, the full episode on the Windfall Elimination Provision will give much more detail. To make it easy, we’ll put the link for the podcast in the notes below where everybody pushes the play button to listen. We’ll put it right down there so everybody can access it pretty quickly.
Here’s a quick summary of the Windfall Elimination Provision. For a regular CSRS employee who finds themselves eligible for social security benefits because of work they did outside of the government; they’re social security benefit is penalized because they draw what they call a generous pension from CSRS. Without getting into too many specifics in this episode, the penalty will be one of two numbers. It will either be half of the social security benefit that they’re expecting at 62. Or up to $428 per month. That’s the penalty.
It’s not fair, it’s not right. But that’s what the law is right now and that’s of course what we have to teach.
Scott: Okay. So would CSRS offset employees be subject to that Windfall Elimination Penalty also?
Chris: It depends. They might be. If they spent a lot of years as just a regular CSRS employee before leaving the government and then they came back as an offset, then they’ll likely have their social security benefit penalized by the Windfall Elimination Provision, so that penalty.
On the flip side though, if they spent a relatively short number of years as a regular CSRS but then most of their career as an offset where they were contributing to social security, then they’ll likely not suffer the WEP penalty.
Scott: Okay. Now could you give us an idea of how the penalty might apply and how it could be avoided?
Chris: Yeah. You bet! So, in general, the way the WEP penalty … to really avoid that, is to have at least 30 years of what’s called substantial social security earnings. And we’ve got a link to that on this page as well just to make it easy for everybody to reference.
If we can get an employee to have somewhere between 21 and 29 years of substantial earnings, then at minimum they’re going to start to mitigate some of that penalty. And once they get to 30 years of substantial earnings, then that penalty completely goes away.
Chris: Let’s look at an example. Example number one is we have an employee who spent the majority of their career as a regular CSRS. Let’s say we have someone who spent 20 years as a regular CSRS and then they returned as an offset and worked another 10 years. So they have a total of 30 years but most of it was as a regular CSRS employee.
If we assume that this person had no private sector social security earnings, then they’re going to get the full brunt of the WEP penalty. So, again, either the $428 a month penalty or half of their social security benefit, whichever yields a better benefit for the employee. The reason that they would get the full WEP penalty is because they didn’t have at least 30 years of substantial earnings where they contributed to social security.
Chris: That’s example one. Example number two, which is probably more common for CSRS offset employees, is if we have an employee who spent the majority of their career as a CSRS offset. Let’s assume we have someone that spent just five years as a regular CSRS, they spent five years working in the private sector with substantial earnings and then they returned to federal service as an offset and worked another 25 years.
In all, they have 30 years of substantial social security earnings. Five in the private sector, 25 on the federal side. So they’re not going to get any penalty to their social security benefit. Great news.
Scott: Okay. Many of our listeners are relatively familiar with the basic idea of the social security program, in that if a person draws social security benefits at age 62 that they are lower than if they waited until age 70.
So, every year a person waits to draw social security between ages 62 and 70 their payout each month is higher. Does that same situation hold true for a CSRS offset employee?
Chris: Yeah. The same concept holds true as far as the social security rules. So the rules themselves are not unique to CSRS offset employees. However, let’s say that we have a CSRS offset employee who retires at age 62 and they want to wait until 66 to draw social security benefits. Let’s say that’s just their voluntary choice to wait until 66 to get the higher payout.
They can do that, but their CSRS pension will still be offset or penalized by the number we talked about before. So, at 62, even though they’re not actually drawing social security benefits voluntarily, their pension is still going to be penalized as if they are.
This happens even if an employee is not actually drawing the social security benefit. Therefore, it’s likely that most CSRS offset employees are going to want to go ahead and take their social security benefit when they retire since they’re going to be penalized anyway.
Scott: Okay. Before we wrap up today, can you give us a quick recap of the CSRS offset to remind our listeners the big ways they are different than a regular CSRS employee.
Chris: Yeah, you bet! So, in that I want to talk about some ways in which they are the same. So they’re going to follow the exact same CSRS eligibility rules, they have the same pension formula but the pension is penalized based on the amount of social security they receive and the amount of time that they spent as an offset. That was the formula that we talked about before.
Now, their social security benefit may also be reduced if they didn’t spend at least 30 years of their life earning substantial social security benefits, either as an offset or as a private sector employee. And then even if a CSRS offset retiree decides not to draw their social security benefit, maybe until a later date, their pension will still be reduced or offset at 62 or retirement if that happens to be a later age.
Scott: Okay. Like I mentioned at the start of this episode, while relatively a small number of federal employees fall under the CSRS offset program, we do get a lot of questions about it on www.myfederalretirement.com. So I wanted to thank you Chris so much for bringing the clarification to this topic today.
Now, you mentioned that you love getting feedback from employees and want to encourage our listeners to interact with you. So, what kind of feedback are you looking for Chris? And where should employees visit to give you that feedback?
Chris: We always want to make sure that we’re providing helpful information that our listeners actually want to hear. So, if they have ideas on topics or just want to share their reaction to today’s content, they can visit our website fedimpact.com/feedback and share their thoughts.
Scott: Okay. Well, again it’s been a pleasure to have Chris Kowalik of Pro Feds here with us today. We invite you to stay tuned to the Fed Impact podcast to get straight answers and candid insights on your federal retirement.