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Pay, pension, politics: For Whom the Bell Tolls

When it comes to their January pay raises, many federal workers, politics notwithstanding, like it when Congress and/or the White House is controlled by Democrats.

When it comes to their inflation triggered January cost of living adjustments, many retirees, again politics notwithstanding, hope for inflation — which translates into a larger cost of living adjustment (COLA) for them.

And while these are generally true, the fact is that over the years feds have done slightly better in the pay raise department under Republican presidents than when there is a Democrat at 1600 Pennsylvania Avenue. Earlier this year, FedSmith reported that over a period of several decades, feds had an average pay raise of 3.7% per year, with 4.05% on average under GOP presidents and an average of 3.65% under a Democratic president.

Also, high inflation is generally bad, bad, bad for retirees over the long haul. Especially for the 98% of current workers who will retire under the Federal Employees Retirement System (FERS), which replaced the more generous Civil Service Retirement System (CSRS) program in the mid 1980s.

While CSRS provides a full COLA (based on the Consumer Price Index for urban wage earners), FERS has a provision that when inflation exceeds 2%, retirees get a reduced, or diet, COLA. Over time — a lifetime in retirement — that can reduce the retirees income by tens of thousands of dollars, according to the National Association of Active and Retired Federal Employees. So higher inflation (anything over 2% per year) isn’t something to celebrate.

With months left to go in the retiree/Social Security COLA countdown, it appears CSRS retirees and Social Security beneficiaries are looking at a COLA in excess of 4%. By contrast, President Biden has proposed a 2.7% raise for active duty feds while Democrats in Congress want it to be at least 3.2%.

Uncertainty over the size of the pay raise vs. the COLA (you can’t get both) is causing some feds to rethink their proposed retirement date. In some cases it would pay for them to leave government early and take a deferred retirement. That would not only make them eligible for an annuity for life indexed to inflation, but also to lifetime health insurance with Uncle Sam paying about 72%of the total premium no matter how high premiums go. But how? The magic is something called the MRA+10. Your personal minimum retirement age plus 10 years. That was the subject of yesterday’s Your Turn episode. You can listen to the entire show by clicking here.

But for a short-hand version of how the MRA works, Tammy — who now does personal retirement coaching — explains it like this:

The FERS system was designed to be more flexible and portable for federal employees who either came into federal service later in life or who leave government to pursue other interests. Under the old system, it was required that employees work for a minimum of 30 years in order to receive an immediate retirement benefit that would include continuation of insurance benefits. The only way to retire with less service would be to work until age 60 and have 20 years of service or age 62 with a minimum of 5 years of service. FERS offers the same standard eligibility as the old system with the exception of being able to retire at 55 – that is now called the “MRA” which is somewhere between 55 and 57, depending on the year of birth. However, FERS also provides an additional option for employees who may have less than 30 years at their MRA or less than 20 years at age 60, to retire with an immediate retirement and the opportunity to continue insurance coverage with as little as 10 years of service. This is the option called “MRA + 10.” There are two major considerations, however, if someone decides to take this route out of federal service. The first is that having less service will provide a smaller retirement benefit. One of the major components of the computation is length of service, so having only 10 or 15 years would not provide a substantial benefit, however, it would provide the opportunity for lifetime health insurance coverage! The other disadvantage is the age reduction that is applied when an employee retires under this type of retirement. The reduction to the benefit is 5% / year (pro-rated by the month) that the separating employee is under age 62. One way around this reduction is to resign from federal service once you have enough service and are at least the MRA, but then postpone applying for the benefit until age 60 if you had at least 20 years when you left or wait until age 62, with less than 20 years. This leads into another issue of what to do about health insurance between leaving federal service and applying for the postponed benefit when it is possible to reinstate the insurance coverage. For some, the options may include coverage under a spouse’s insurance or a new employer’s health plan. For others, it could be a combination of temporary continuation of coverage (the government’s version of COBRA) for 18 months and then the marketplace health plans until FEHB can be reinstated. Remember that FERS benefits, generally don’t receive a cost of living adjustment until age 62 and the MRA+10 retirement, regardless of whether taken immediately or postponed, is not eligible for the FERS retirement supplement that helps bridge the gap between retirement and qualifying for Social Security. Run the numbers and compare the benefits of working a few more years before deciding on this option is in order. This option works well for someone who has enough other retirement savings or additional pension benefits where they aren’t relying on a substantial federal annuity.

Nearly Useless Factoid

By Alazar Moges

After the Apollo 11 mission to the moon in 1969, the three astronauts did not come home to a grand celebration, they were forced to quarantine for three weeks in a small metal trailer because it was unknown at the time if they had picked up any germs in space that could harm themselves and others.

Source: Business Insider 

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