March 9, 2007Last week, we began our exploration of the effects of shifting to part-time work on federal retirement benefits. In that column, I promised that this week we'd look in more detail at how part-time employment is treated under the Civil Service Retirement System and the Federal Employees Retirement System. So here goes.
The FERS Calculation
Calculating a FERS basic annuity benefit that includes part-time service under FERS is actually pretty simple. The first step is to compute the basic annuity benefit as if the employee had worked full-time (using the full-time pay rates for the highest three years of salary and crediting service as if the employee worked full-time). Then the part-time schedule is used to pro-rate the benefit.
Suppose Robert was approved to work a part-time schedule of 32 hours per week during his last five years of federal service. And suppose that he will be retiring at age 60 with 20 years of service (from 1988 to 2008). His high-three average salary rate is computed using full-time rates, even though he only works 80 percent of a full-time schedule. Let's assume the high-three average works out to $68,000.
Here's the formula for computing the FERS basic benefit:
So, the initial computation of Robert's FERS basic benefit would be:
Since Robert worked 32 hours per week for the last five years of his career, the computation of his actual hours would work as follows:
Total actual hours worked = 39,625 hours
So, the bottom line is that Robert would be entitled to the following FERS benefit:
Because the law for computing annuities with part-time service changed in 1986, CSRS retirements that include part-time service are computed using both an old set of rules and a new one. All service performed before April 7, 1986, is computed under the old rules; service on or after that date is credited under the new regulations.
Under the old rules, service is computed as if it were full time, but using the actual high-three salary, not the full-time equivalent. Under this approach, employees could work most of their career part-time and switch to full-time for the last three years and their whole retirement would be computed as if they had been full time.
The new rules are the same as those governing FERS. Service is computed as if it were full time, using full-time equivalent of the high-three. Then, the annuity is pro-rated based on the part-time hours worked.
Let's look at an example.
Suppose Pat was approved to work a part-time schedule of 32 hours per week during her last five years of government service. And assume that, by the time she retires, she will have completed 30 years of service (from 1978 to 2008), and accumulated 1,044 hours of unused sick leave (six months' worth). She will be retiring at age 55.
Pat will have two high-three average salaries used to determine her retirement benefit. One will be computed using her "actual" salary (say, $54,400) and the other using her full-time salary rates (even though she only works 80 percent of a full-time schedule). Assume her "full-time" high-three average salary is $68,000.
In computing Pat's retirement, her career must first be divided into service before and after April 7, 1986. She has seven years, nine months and six days of service before that date. (The six months of sick leave credit is added to the pre-4/7/86 component and the leftover days are carried to the post-4/6/86 component.) She has 22 years, nine months of service after 4/6/86. (There were no leftover days since the six days from the pre-4/7/86 component were added to the 24 days left on the post-4/6/86 component, which equals one month).
Here's how the computations work:
2087 x 22.75 (22 years and 9 months) = 47,479.25
45,364.25 / 47,479.25 = 0.95
$30,557.50 x 0.95 = $29,030
Now consider this: If Pat would have worked part-time before April 7, 1986, her retirement would have been computed as if she had worked full time her entire career, and would've come out to $38,930 per year. If she would have worked part time after April 6, 1986, but before her high-three period, her total retirement would have increased to $37,402 per year.
In all three of the above situations, Pat worked part time only five years of her 30-year career. The difference in her retirement benefits -- as much as $3,202 per year, or $267 per month -- had to do with when she worked part -time in relation to the change in the law. That's why I wouldn't recommend that anyone covered under CSRS switch to a part-time schedule in the three years prior to retirement.
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.
March 9, 2007