Federal retirement expert, Chris Kowalik, provides some clarity on how some FERS employees who retire prior to age 62 may receive the Special Retirement Supplement (SRS).
- What is the FERS Special Retirement Supplement?
- Who is eligible to receive it — and who is not eligible
- How to calculate the benefit amount of the SRS
- How soon will will a retiree start receiving payments from the supplement?
- How getting another job after federal service will affect your SRS benefit
SCOTT: Welcome everyone. This is another episode of “FedImpact: Candid Insights on Your Federal Retirement”. I’m Scott Thompson with MyFederalRetirement.com and I’m here today again with Chris Kowalik of ProFeds, which is home of the Federal Retirement Impact Workshop. In today’s episode, we’re going to focus on a topic that we get a ton of questions on, and that’s about the FERS Special Retirement Supplement. Chris – it’s always great to have you here!
CHRIS : Wonderful – always great to be with you, Scott! Really quick before we get started, I want to give some kudos to a ton of our podcast listeners who have also attended our live workshops that we hold throughout the country. We’ve had employees driving 3, 5, sometimes 8 hours to get to our workshops all because of this podcast. I’m super impressed that they saw the importance of getting their head on straight for retirement planning, and really making it happen!
CHRIS: To see a list of the workshops that we have that are open to the entire federal audience, all of our listeners can go to http://www.FedImpact.com/learn-more. For those of you listening, if you decide to come to one of our workshops, be sure to mention that you heard about it on the podcast! If you don’t find your city right away, be sure to sign up so that you’re notified when a workshop is announced in your area.
Ok…on to the topic at hand…I’m glad we’re going to be talking about the Special Retirement Supplement benefit today, because I hear so much misinformation when I’m talking with employees at our workshops about this topic. Today’s episode will help to clarify some important points – especially for those employees who think they might be eligible to receive this benefit once they retire.
SCOTT: Before we jump head first into this topic, would you mind giving our listeners a little background on the Special Retirement Supplement?
CHRIS: You bet. I’m going to rewind back to the mid-80s when the only retirement program that existed for federal employees was CSRS. Most of our listeners have a basic understanding of the CSRS program, but let me give you the two most basic aspects: The first is that employees contribute more each pay period, but they also get a higher pension (as compared to FERS employees that we see today). The second characteristic of the CSRS program is that the vast majority of CSRS employees do not pay into Social Security.
In the mid-80s, the Social Security program was facing some pretty serious funding issues. At the same time, we had all of these employees covered under CSRS who were not paying into Social Security. This was one of the main reasons that FERS was created, so that this large group of workers could begin paying into the Social Security program instead of just their civil service pension.
In walks FERS. So now we have the FERS program. Today, we know that FERS employees still have a pension, but it is considerably less that their CSRS counterparts. And of course, they also contribute to Social Security.
Many of our listeners may be familiar with OPM’s “3-legged stool” analogy as they tried to explain the 3 different components of the total FERS package. 1- the pension, 2- Social Security at age 62 or later, and 3- The Thrift Savings Plan. Those are the big 3 legs, and really where the Special Retirement Supplement got its start.
SCOTT: Let’s fast forward to today. Can you tell us how the Special Retirement Supplement fits in with all of this?
CHRIS: Well I tell you the background of the Social Security program becoming a big part of the FERS program, because that is what ultimately led to the creation of the Special Retirement Supplement. You see, many FERS employees find themselves eligible to retire from FERS PRIOR to age 62, so they’re not eligible for Social Security, yet. And since Social Security is such an important leg to that 3-legged stool, the Special Retirement Supplement is what is supposed to balance things out for an employee in this situation (where they’re retiring earlier than age 62).
SCOTT: Can you give us an idea of who qualifies for the Special Retirement Supplement?
CHRIS: First and foremost, an employee must be under the age 62 to receive this benefit (it’s not paid to anyone from age 62 and older). So that’s one of the first requirements.
Next, there are certain eligibility requirements. We really have two categories of people. That is those who get this benefit right away when they retire, and the other category are those who will get this benefit at some point in the future. Let’s talk about these two different categories.
Finally, if someone does qualify for the Special Retirement Supplement, they do not make an election for it, and they don’t have to pay for it. This benefit is automatic and free (as long as you otherwise qualify).
SCOTT: Those are certainly some interesting eligibility rules. Are there any specific types of retirement that cause someone NOT to get the Special Retirement Supplement?
CHRIS: Yes – I’m very glad you that you asked this. There are two notable groups worth mentioning who will NOT get the Special Retirement Supplement. That is, anyone who is retiring under a disability retirement, and anyone retiring under “MRA+10”. That MRA+10 provision retirement type is someone who has reached their minimum retirement age and they have at least 10 years of service, but they don’t have the 30 that’s required to be fully-eligible to retire. Those people who go out between 10 and 29 years of service at their MRA, they are not going to qualify for the Special Retirement Supplement.
I’m not entirely sure why the rules were written this way, but that is the way it is. If someone might be going out under one of these two retirement types (MRA+10 or the disability), we definitely want to make sure that they know they will NOT be receiving any payment from the Special Retirement Supplement. We never, ever like to see someone surprised in retirement because they thought they were going to get a benefit, but it turns out they won’t get it at all.
SCOTT: I’m sure that can come as a really unwelcome surprise to some people who weren’t clear on how this program works. Assuming we have someone who IS eligible for this benefit, can you give us an idea of how it’s calculated so a federal employee knows what to expect?
CHRIS: Yes – luckily, this is one of the easier calculations to do. Our more complex calculations are a bit harder to explain in a podcast (since we don’t have the luxury of walking someone visually through a chart or a screen). But again, this one is pretty simple for our listeners.
To calculate this, we’ll need to know how much an employee is expected to be eligible for from Social Security at the age 62 (that’s going to be on their Social Security statement). The next thing we’ll need to know is how many years of FERS service that they actually had. These are real FERS years (not military years that were maybe bought back, not CSRS years if they started under the old system), but pure FERS years of service. Let’s walk through the formula really quick.
To calculate the benefit of the Special Retirement Supplement, the formula is: We take the Social Security benefit projection at age 62, we multiply that by the number of years of FERS service, and divide by 40. And 40 is a fixed number in this formula. I get a lot of questions about why the 40. When we’re in our workshops, people are always curious why that number is there. It doesn’t have anything to do with 40 quarters or 40 credits under Social Security (although that’s a good guess). I believe that the reason that 40 is in there is because we’re looking at a person’s natural working career. We figure they get out of college about age 22 and for Social Security purposes, they expect to be done working by age 62. Now that’s not always true, but somewhere in there, and that’s 40 years. What this formula is trying to do is to say – of all of your working years, what percentage of those years were as a FERS employee? That’s the percentage of the Social Security benefit that you’re planning to get at age 62 that will be paid in the Special Retirement Supplement.
Let’s look at an example [Note chart above.] With this calculation, essentially what OPM is trying to calculate is what percentage of a person’s Social Security benefit was due to their FERS service, and they’ll receive that portion up until the time they are 62 when this benefit stops.
SCOTT: That is an interesting way to look at it, and it seems to make sense. Do I understand you correctly that this payment is paid by OPM and NOT from Social Security?
CHRIS: That’s exactly right. This payment is simply included in a retiree’s paycheck directly from OPM.
SCOTT: Is it reasonable to assume that these payments will start right away?
CHRIS: It would be reasonable to assume that, but that’s NOT actually how this works. You see, when an employee steps into retirement, there is often a very serious lag in their retirement being finalized (or what OPM calls “adjudicated”). It’s not uncommon to see 9-12 months go by before a retirement is actually finalized at OPM.
During that period of time, a new retiree is receiving these things called “interim payments”. Without going into too much detail on those interim payments, the real talking point here is that while a retiree is receiving interim payments (that is, before their retirement is finalized by OPM), they will NOT receive the Special Retirement Supplement. So it’s not going to show up in their check.
But let me be clear on something: The Special Retirement Supplement is still payable, and they’ll eventually get their money once everything is finalized. But in the meantime, that money is not hitting their bank account to be able to be used to cover expenses that they have.
SCOTT: Wow – that sounds like it would come as a huge shock to a person who is newly retired. Once everything is finalized and the retiree starts to receive the supplement payments, can they expect that to increase every year?
CHRIS: I might have some bad news for everyone listening today. There are no Cost of Living Adjustments to the Special Retirement Supplement. So when that original number is calculated (like $780/mo in our example), it stays that number until it stops at age 62.
This is true for everyone receiving the Special Retirement Supplement – no exceptions.
SCOTT: I would suspect a lot of employees who retire in their mid to late 50’s might go out and get another job once they’ve left federal service. How would a new job affect this benefit?
CHRIS: This is a question I get an awful lot of because the scenario you just mentioned is so common. Most people don’t truly retire in their mid-50’s – they go out and get another job. Here’s how it works in a nutshell… If you were to retire from federal service and you are eligible for the Special Retirement Supplement, and then you go out and get a job and make “too much” money, you might not get all (or any) of this benefit. It might ALL go away.
SCOTT: Can you give us an example to help everyone get their head wrapped around this?
CHRIS: Of course. This concept we’re talking about is called the “Earnings Test”. Again, meaning if you make too much, either some or all of your benefit under the Special Retirement Supplement will be taken away. As a side note, the exact same earnings test happens on Social Security benefit, too. They just borrowed this rule from Social Security.
There is a relatively small amount of money that someone can make that will not affect their Special Retirement Supplement. For 2017, that amount is $16,920/year. The earnings test rule says, “for every $2 above that amount that you make, you must give a $1 of the Special Retirement Supplement benefit back”.
Our listeners might be scratching their heads trying to figure out what that means, so let’s go through a quick example.
Using the calculation that we had before (that produced a benefit of $780/mo), in that scenario, once that person makes more than about $35,000, they have worked themselves right out of the Special Retirement Supplement benefit. The silver lining in this scenario, of course, is that they made $35,000. The bad news is that they had to give up about $9,000 of benefit to get it. The big takeaway I want all of our listeners to leave here with is that you can’t have your cake and eat it, too.
If you plan to go out and get another job paying $35,000 or $135,000, I want everyone recognize there is inherent value in drawing a salary by having that new money come into your bank account (that’s great!). By continuing to draw new income means you’re not taking as much money from programs like the Thrift Savings Plan (which means it can presumably it can last longer). There is a great benefit to continue to have another job.
Nobody likes surprises, and what a shocker it would be to a retiree with the expectation that you’re going to get all of this Special Retirement Supplement benefit AND the salary of your new job, only to find out that that is not really true.
SCOTT: Chris I’m sure you’ve really helped a lot of our listeners to understand the Special Retirement Supplement today. For something that seemed so straightforward, it got a little complicated along the way! Thanks so much for your insights on this topic.
Real quickly – would you mind reminding our listeners how they can attend one of your live workshops?
CHRIS: Super easy – everyone can visit http://www.FedImpact.com/learn-more to find your city. We’ll be sure to put a link to that right below the play button so it’s easy for everyone to click on. Remember, if you don’t see your city, we’ll be sure to let you know when the next workshop is announced close by you so you can attend in the future.
Thanks again everyone. I hope our talk today on the Special Retirement Supplement helped to clear up some misinformation floating around out there, and to clarify how this program actually works.
SCOTT: Well it’s been great to have Chris Kowalik of ProFeds again with us today. I’d like to ask you to stay tuned to the next FedImpact podcast episode to get straight answers and candid insights on your federal retirement.