December 22, 2006
This will be my last column of 2006, so I thought I'd take the opportunity to look ahead to what's going to happen in 2007. There are the usual annual changes to anticipate in Social Security, Medicare and federal retirement benefits programs. And there are a few things that folks hoped would change, but won't.
Here's a look at the key annual changes:
Medicare Part B
Taxes: The Social Security employee tax will remain at 7.65 percent (6.2 percent for FICA and 1.45 percent for the Medicare Hospital Insurance Tax) for those covered by full Social Security (employees under the Federal Employees Retirement System and Civil Service Retirement System-Offset). CSRS employees are only subject to the 1.45 percent Medicare tax. Even though the tax rate will remain the same, the amount of wages subject to the FICA tax will increase to $97,500 next year, up from $94,200 in 2006. This means that employees who earn more than $97,500 and who pay the 6.2 percent FICA tax will pay an additional $204.60 next year. The Medicare tax applies to all wages, regardless of the amount.
Quarter of Coverage: The amount of earnings required to earn a quarter's worth of Social Security coverage in 2007 will increase to $1,000, up from $970 in 2006. For those who already have more than the 40 quarters (sometimes referred to as "credits") of Social Security earnings required to be eligible for benefits, this change won't mean anything. But for individuals with less than 40 quarters, it will take an additional $120 in earnings in 2007 to pick up four more quarters.
Earnings Limit: The earnings limit for Social Security beneficiaries under the full retirement age (65-67, depending on year of birth) and for people receiving the FERS Retirement Supplement will be $12,960 in 2007, up from $12,480 this year. Once earnings exceed this limit, the benefit is reduced by $1 for every $2 over the limit. There is no limit on earnings beginning the month an individual reaches the full retirement age. For more information about the earnings test, click here. And for more on the full benefit age for Social Security, click here.
The standard monthly premium for Medicare Part B, the optional program that covers physician care and outpatient services, will be $93.50 in 2007. That's an increase of $5, or 5.6 percent, from this year. In 2007, about 4 percent of Medicare Part B enrollees with higher incomes will pay a higher Part B premium based on income. The income-related Part B premiums for 2007 will be $105.80, $124.40, $142.90, or $161.40, depending on the extent to which an individual's income exceeds $80,000 (or a married couple's income exceeds $160,000). The highest premiums will be paid by the less than 1 percent of beneficiaries whose incomes are over $200,000 (or $400,000 for a married couple).
Federal employees who are 65 and over qualify for Medicare, but if they are covered by the Federal Employees Health Benefits Program through their current employment (or if they are covered by a currently employed spouse's insurance), they do not need to enroll in Medicare Part B. For this group, Medicare is the secondary payer for medical care, and enrollment can occur when the employee (or currently employed spouse) retires without a penalty (as long as enrollment occurs within eight months of the retirement date).
Retirees age 65 and over should consider Medicare Part B and FEHBP together. Due to the premiums, this decision may involve rethinking which FEHBP plan will work best to supplement Medicare's coverage. To learn more about coordinating Medicare and FEHBP, see the following columns from earlier this year: Medicare ABCs (April 21) and More on Medicare (April 28).
CSRS and FERS
Here's the rundown on annual changes:
Thrift Savings Plan
Variable Interest Rate: The rate for service credit payments, refunds and voluntary contributions will be 4.875 percent for 2007, up from 4.125 percent in 2006. To learn more about interest on service credit payments and voluntary contributions, see these columns: Buying Retirement Credit (Feb. 10), Redepositing CSRS Funds (Feb. 17), Military Service Payback (Feb. 24) and Voluntary Benefits (May 5).
Retirement and Death Benefit COLA Increases: Children's survivor annuity payments will increase 3.3 percent on Jan. 1. The 2007 rate for a child with one parent surviving will be about $433 per month. A child with neither parent living will receive about $520 per month.
When a FERS employee dies, a surviving spouse (or former spouse) may be eligible for the Basic Employee Death Benefit. This is equal to 50 percent of the employee's final annual pay (or average pay if higher), plus a $15,000 payment that is increased annually by CSRS cost-of-living adjustments. For deaths that occur between Dec. 1, 2006, and Nov. 30, 2007, that payment will be $27,461.91.
CSRS Survivor annuity benefits and CSRS retirement annuity benefits will increase by 3.3 percent on Jan. 1, 2007. FERS basic retirement annuity benefits and FERS survivor annuity benefits will increase by 2.3 percent.
The Internal Revenue Service annual limit on what employees can contribute to their thrift accounts will be $15,500 for tax year 2007, up from $15,000 in 2006. FERS employees need to be sure not to exceed the $15,500 limit before the end of the year so they won't lose matching agency contributions. You can find additional information on these limits on the TSP Web site. The limit on catch-up contributions for 2007 remains unchanged at $5,000.
Changes That Didn't Happen
Here are the big changes that didn't happen in 2006:
Well, that's it for this year. It's been a pleasure writing the column. Thanks for the comments and questions you've posted throughout the year and for forwarding these articles to others who might benefit from the information. Best wishes for a happy holiday season and a healthy and prosperous New Year!
Additional TSP Investment Options: Despite lobbying efforts, the R Fund (real estate) and E Fund (Environmentally Conscious Fund) did not come into existence. And if the Thrift Savings Plan Board has anything to say about it, they won't start next year, either. One of the great things about the Thrift Savings Plan is its simplicity. Having five basic funds (plus the five new life cycle funds) provides some diversity, but makes it easy for participants to manage their retirement savings. If you need to be convinced on this point, see this recent Money magazine article: "The Retirement Plan Uncle Sam Has Right."
Part-Time Service and CSRS: There was a push to make a correction to the calculation of retirement for CSRS employees with part-time service during their high-three period of earnings that resulted from a 1986 change in the law. But Congress didn't make the change.
Government Pension Offset and Windfall Elimination Provision:. CSRS retirees continue to lobby for the repeal of these provisions. But it hasn't happened yet. For the full background, see these columns: Gone with the Windfall (Sept. 1) and Offsetting Penalty (June 9).
Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.
December 22, 2006