Changes You Can Believe In
By Tammy Flanagan
January 16, 2009
Every year, there are changes in the way Social Security, Medicare and federal retirement benefits are calculated. Likewise, there are changes affecting federal salaries, the Thrift Savings Plan and other programs. All of these will factor into your long-term retirement planning efforts.
Let's take a look at some of the specific changes this year.
The average federal pay increase for 2009 is 3.9 percent. Here's a link to the 2009 General Schedule locality pay tables.
For those employees working under the National Security Personnel System, keep in mind that the increase consists of three parts:
- Performance-based payouts in the form of base salary increases, bonuses, or a combination of both.
- An NSPS general salary increase of 1.74 percent, which is equal to 60 percent of the GS increase.
- An increase to local market supplements equal to the increases to GS locality pay rates.
Taxes. The Social Security payroll 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 $106,800 this year, up from $102,000 in 2008. This means that employees who earn more than $106,800 and who pay the 6.2 percent FICA tax will pay an additional $297.60 in FICA taxes this year. CSRS-Offset employees will pay the full 7 percent CSRS contribution once they exceed the maximum taxable wage for FICA, so they will not see a difference in their biweekly retirement/FICA withholding other than a shift from FICA to CSRS retirement on their leave and earnings statement. The Medicare tax applies to all wages.
Cost of Living Adjustment. The latest COLA is 5.8 percent for Social Security benefits and Supplemental Security Income payments. Social Security benefits were increased by 5.8 percent beginning with the December 2008 benefits, which were payable in January 2009.
Quarters of Coverage. The amount of earnings required to earn a credit of Social Security coverage in 2009 has increased to $1,090, up from $1,050 in 2008. For those who already have more than the 40 credits (sometimes referred to as quarters) of earnings required to be eligible for Social Security, this change won't mean anything. But for people with less than 40 credits, it will take an additional $160 in earnings in 2009 to pick up four more credits.
Earnings Limit. The earnings limit for Social Security beneficiaries younger than full retirement age (65 to 67, depending on year of birth) and for people receiving the FERS Retirement Supplement will be $14,160 in 2009, up from $13,560 last 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 full retirement age. Here's more information about the earnings test and Social Security's Retirement Insurance Program.
Medicare Part B
The monthly premium for Part B, covering physician care and outpatient services, remains $96.40 in 2009, the same as it was in 2008. This premium represents only 25 percent of the cost of Part B; the government pays the rest for most Medicare beneficiaries.
As in 2007 and 2008, about 4 percent of Part B enrollees with higher incomes will pay a higher premium based on their income last year. In 2009, if you file your taxes as "married, filing jointly" and your modified adjusted gross income is more than $170,000, you will pay a higher Part B premium. For all other types of filing status, if your modified adjusted gross income is more than $85,000, you will pay a higher Part B premium. If your income has gone down because of the death of your spouse, a divorce, or some other circumstance, you should contact Social Security to have your premium adjusted. Here's a fact sheet that explains the higher premiums.
CSRS and FERS
Here's the rundown on annual changes to the two federal retirement systems:
CSRS Basic Retirement Benefit. Civil Service Retirement System survivor annuity benefits and retirement annuity benefits were increased by 5.8 percent on Jan. 1 (this was the December payment). That's the highest annual increase since 1982. CSRS annuitants (including CSRS Offset) received the full increase as long as they had been receiving benefits for at least one year prior to Dec. 1, 2008.
FERS Basic Retirement Benefit. Federal Employees Retirement System basic retirement annuity benefits and FERS survivor annuity benefits were increased by 4.8 percent. FERS cost-of-living adjustments are not provided until an annuitant turns 62, except for disability and survivor benefits, and those for certain specific groups of employees (such law enforcement officers, firefighters and air traffic controllers). FERS disability retirees get the adjustment, except when they are receiving a disability annuity based on 60 percent of their high-three average salary. Also, under FERS, if you have a CSRS component, the component is subject to the CSRS COLA calculation. FERS survivors receive the FERS increase on their entire annuity, even where component service is involved.
Variable Interest Rate. The rate on interest for service credit payments, refunds and voluntary contributions will be 3.875 percent for 2009, down from 4.75 percent in 2008. This is good news if you owe money to the retirement fund, but not so great if you have money invested in the fund in the form of voluntary contributions. To learn more about service credit payments and voluntary contributions, see Deposits and Credits (June 20, 2008) and Voluntary Benefits (May 5, 2006).
Children's Survivor Annuities. These payments increased 5.8 percent on Jan. 1. The 2009 rate for a child with one parent surviving will be $469 per month. A child with neither parent living will receive $563 per month. The benefit of a surviving child of a FERS employee or retiree will be offset by the Social Security children's benefit, if payable.
Death Benefits. When a FERS employee dies, a surviving spouse (or eligible former spouse) could be eligible for the basic employee death benefit. This is equal to 50 percent of the employee's final annual pay (or high-three 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, 2008, and Nov. 30, 2009, that payment will be $29,722.95.
Thrift Savings Plan
The Internal Revenue Service annual limit on what employees can contribute to their Thrift accounts will be $16,500 for tax year 2009, a $1,000 increase from 2008. FERS employees need to be sure not to exceed the $16,500 limit before the end of the year so they won't lose matching agency contributions. The limit on catch-up contributions for 2009 will increase by $500, to $5,500. Here are some frequently asked questions about TSP contributions and limits.
In addition, a new law places a one-year suspension on receiving a required minimum distribution payment from an individual retirement account or defined contribution plan in 2009. This law only will affect participants who have turned 70 ½ years old. Here is a TSP notice on this provision.
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.
For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.
By Tammy Flanagan
January 16, 2009