Under current rules, those employees covered by the Federal Employees Retirement System (FERS) and who retire before age 62 under an immediate retirement are eligible to receive the FERS Special Retirement Supplement (SRS) annuity. The SRS annuity is in addition to the FERS annuity, the Thrift Savings Plan (TSP), and Social Security benefits that a retired FERS employee receives during retirement. Under recent budget proposals , the SRS annuity could be eliminated sometime in the near future. This column discusses the effect of eliminating the SRS annuity will have on FERS employees, and why in general FERS employees should not include the FERS supplement annuity as one of the determining factors for them to retire from federal service.
Who is Eligible for the FERS Special Retirement Supplement and How It Is Calculated?
Social Security retirement benefits are an important part of the FERS retirement. But FERS annuitants are entitled to receive their Social Security retirement benefits no earlier than age 62.
Since many FERS employees retire before age 62, the Office of Personnel Management (OPM) automatically provides an annuity supplement – the SRS annuity – to those FERS employees who retire before age 62. The SRS annuity ends automatically when a FERS annuitant becomes age 62. To be eligible for the SRS annuity, a FERS employee must retire under an immediate (non-disability) retirement, meeting one of the following age and service requirements:
1. Early retirement provisions – age 50 with 20 years of service, or any age with 25 years of service. Note that under the FERS early retirement rules, the SRS annuity will commence when a FERS annuitant (who retires before usually before age 55) reaches his or her minimum retirement age (MRA) (ages 55 to 57, depending on what year the annuitant was born). The only exception is for those FERS employees who retire as an air traffic controller, firefighter or a law enforcement officer.
2. Minimum retirement age with at least 30 years of service; or
3. Age 60 with at least 20 years of service.
Those FERS employees who leave federal service before they are eligible to retire and opt for a deferred retirement, or those FERS employees who retire under the “MRA + 10” (postponed) retirement, are not eligible for the SRS annuity.
OPM calculates the SRS annuity supplement by estimating the amount of a FERS employee’s Social Security benefits that are attributed to the employee’s FERS service. The formula for the SRS annuity calculation is:
(Estimated employee’s Social Security annual benefit at age 62) x (employee’s years of service under FERS)/40
The following example illustrates:
Charles, a FERS employee with 25 years of service, retired on April 29, 2017 at age 60. His Social Security benefit at age 62 is estimated to be $12,000 per year.
Charles’ SRS annuity is calculated to be:
$12,000 x (25/40), or $7,500 per year.
Note the following regarding the SRS annuity: (1) It does not receive any cost-of-living adjustment (COLA) – it remains the same; (2) it is fully taxable for Federal and state income tax purposes; and (3) it is a subject to an “earnings” test; in particular, the same “earnings” test that Social Security recipients younger than full retirement age and who are working are subject to. For example, during 2017 a FERS annuitant receiving the SRS annuity and who is working can earn no more than $16,920 annually without losing any of the SRS annuity. For every $2 the annuitant earns above $16,920, the annuitant will lose $1 of the SRS annuity. In the example above, if Charles decides to work after retiring from Federal service on April 29, 2017 and earns more than $50,760, he will lose his entire SRS annuity.
What Are the Consequences for FERS Employees If Congress Eliminates the FERS Supplement?
Two observations about the SRS annuity: (1) It does not amount to much, perhaps 25 to 40 percent of the FERS annuity; and (2) it is temporary and stops when a FERS annuitant becomes age 62. FERS employees should therefore not use the SRS annuity as a determining factor on whether to retire from Federal service.
Instead, it is probably in the best interest of a FERS employee with at least 20 years of service to continue working in federal service to at least age 62. This is because: (1) By continuing in Federal service the employee can contribute additionally to the TSP; (2) by continuing to work in Federal service until at least age 62, the employee will add 1.1 percent of the employee’s high-three average salary for every additional year of service. FERS employees who retire before age 62 receive one percent of the employee’s high-three year average salary for each year of service. Employees who retire at age 62 or older with at least 20 years of service benefit from a permanent 10 percent “bonus” in their FERS annuity as a result of the 1.1 percent accrual factor.
Another reason that a FERS employee may want to work longer is that the employee may be eligible for step increases and also government-wide pay increases, resulting in a larger high-three average salary and a larger FERS annuity.
To best illustrate the effect of a FERS employee working longer until at least age 62, consider the example of Charles above. Charles has the choice of retiring at age 60 with 25 years of service, receiving a FERS annuity and a SRS annuity equal to $7,500 per year. Assume Charles’ high-three average salary is $100,000. Charles’s starting FERS annuity (not including any unused sick leave in the calculation of the FERS annuity) is:
25 years x 1 percent per year of service x $100,000, or $25,000.
By the time Charles reaches age 62, he would have received a total of $15,000 of the FERS SRS annuity,(two years, $7,500 per year). Assume Charles was not working during this two year period and therefore did not relinquish any of the SRS annuity.
Now the question becomes: If Charles were to continue in federal service until age 62 and then retire with 27 years of service, how long will he have to live receiving the additional FERS annuity in order to recover the $15,000 he did not receive in the SRS annuity? Assume that Charles’s high-three average salary remains at $100,000 and that there is no additional unused sick leave in the FERS annuity computation.
As a result of working until age 62 and having at least 20 years of service, Charles’s FERS annuity accrual factor increases to 1.1 percent. With an additional 2 years of Federal service and assuming no change in his high three average salary of $100,000, Charles’s FERS annuity is computed as:
27 years times 1.1 percent times $100,000, or $29,700
In other words, Charles is receiving an additional $4,700 in the FERS annuity by working an additional two years and benefiting from the 1.1 percent accrual factor rather than the 1 percent factor by retiring before age 62. The question now becomes: How long will Charles have to live once he retires at age 62 to recover the $15,000 of the SRS annuity he did not receive because he retired at age 62? The answer is:
$15,000/$4,700 per year, or 3.19 years
In other words, if Charles retires at age 62 rather than at age 60 and lives to at least age 65 years 3 months, he would recover the $15,000 he did not receive of the SRS annuity.
Another example will help explain why working longer in Federal service is advantageous for FERS employees.
Same facts as above except that Diana can retire at her minimum retirement age (MRA) of 56 with 30 years of service or work until at least age 62 and then retire with 36 years of service. Assume her SRS annuity if she retires at age 56 is $7,500 per year and her high-three average salary is $100,000. Not including any unused sick leave her FERS annuity is:
30 years times 1 percent time $100,000 or $30,000.
Between MRA and age 62, Diana will receive $7,500 per year times 6 years or a total of $45,000 of the SRS annuity.
On the other hand, if Diana were to continue to work in federal service under FERS until age 62 and assuming no change in her high-three average salary of $100,000, and not including any additional unused sick leave in the computation of Diana’s FERS annuity, Diana’s FERS annuity will be computed as:
36 years times 1.1 percent times $100,000, or $39,600.
In other words, Diana is receiving annually an additional $9,600 of the FERS annuity by working an additional six years, benefiting from the 1.1 percent accrual factor rather than the 1 percent factor by retiring before age 62.
The question now becomes: How long will Diana have to live once she retires at age 62 to recover the $45,000 of the SRS annuity she did not receive because she retired at age 62? The answer is:
$45,000/$9,600 per year, or 4.69 years
Diana would have to live to at least age 66 years 8.5 months to recover the $45,000.
Note that in both examples the maximum number of years a FERS employee who retires at age 62 rather than at MRA or age 60 would have to live to recover the lost SRS annuity has been computed. The number of years will be shortened if: (1) The employee receives pay increases such as government-wide pay increases, step increases and promotions, thereby resulting in a larger high-three average salary; and (2) the employee accrues additional sick leave hours that are not used and therefore used in the computation of the FERS annuity.
Also, if the FERS employee is giving a survivor annuity to a spouse, then the recovery period is based on the lives of two people, the annuitant and the survivor annuitant.
Since most FERS employees who retire from federal service expect to live into their late 70’s or 80’s, it is therefore in the best interest of a FERS employee to work as long as possible – to at least until age 62, and forgo the SRS annuity. Working longer also means contributing additionally to the TSP, and subsequently a potential larger TSP nest egg to draw from.