By Tammy Flanagan
September 25, 2009Based on the responses to last week's column on Social Security, some further explanation is in order. Let's take a look at some of your questions and comments.
If you're in your 40s, don't even plan on Social Security being around when you retire. That is the safe bet!
The truth is even if you're in your 50s or 60s now, you may not get much in the way of replacement of your income from Social Security -- and that's without any changes to the current system. Consider that the maximum Social Security benefit for someone who turns 62 this year is a little more than $24,000 per year. For someone earning a salary of $150,000 when they retire, this is only 16 percent of his or her earnings. Of course, at lower wage levels, the effect isn't as dramatic. For someone earning $44,000 (who has always worked at a similar wage level), Social Security will replace more than 40 percent of wages.
My prediction is Social Security will always be around, but those who have higher income always will be less dependent on this source of retirement benefits. Social Security is a form of insurance and not everyone gets the same benefit from the premiums paid for it.
I can retire now at 59 with more than 25 years of service. My question is, when I hit 66 and start to draw my full Social Security benefit, will it be affected by my retirement under the Federal Employees Retirement System? Someone told me that my Social Security benefits will be reduced.
If you have paid Social Security taxes during your federal career, your Social Security benefit will not be affected by your federal retirement benefit. FERS employees are not affected by the Windfall Elimination Provision or the Government Pension Offset, which can reduce Social Security retirement benefits. These provisions affect those with government pensions who were not covered by Social Security, such as employees under the Civil Service Retirement System.
How do you instruct Social Security to pay only the spousal entitlement to a dual qualified couple? The Social Security Administration states it will determine which of the spouse's entitlement is greater -- the spousal entitlement or their own entitlement -- and pay the larger one.
You can choose which benefit you wish to receive if you are entitled to receive benefits on more than one work record (spousal benefits) by delaying your own benefit application. Here are some resources to help you understand how this is done:
If my husband who is covered under FERS dies first, I get my CSRS (plus a fraction of his small FERS pension), Thrift Savings Plan investments (not worth much in the present economy) and no Social Security. This is not equal or fair. Employees who were forced into FERS ought to be able to provide for their surviving spouses to the same extent we CSRS people can.
I understand your argument, but consider this: If you had worked under FERS or in any career where you also paid Social Security taxes, your entitlement to your husband's Social Security would be affected by the amount of Social Security you had earned for yourself. Social Security spousal and widow's benefits were intended for a financially dependent spouse as a form of insurance against the loss of income through the retirement or death of the family breadwinner. This is the reason why many men don't collect Social Security from their wives. They are entitled to these benefits, but because in many cases they worked longer careers or had higher salaries, their own Social Security is greater than the benefit that their spouse has earned for them. Let's put some numbers to your example: Say your CSRS retirement is $30,000 per year and your husband is getting his retirement benefits equally divided three ways: his FERS basic benefit, Social Security and payouts from his TSP account (4 percent annually from a $250,000 investment). If you were to die first, he would be entitled to 55 percent of your unreduced CSRS benefit, or about $18,000 a year. If he were to die first, you are correct that you would not receive any of his Social Security since it would be offset by two-thirds of your CSRS benefit, due to the Government Pension Offset. You would receive the $250,000 in his TSP and 50 percent of the unreduced FERS benefit. That's $5,500 a year ($11,000 before the reduction for survivor annuity). Your survivor's benefit would be at least $15,500 year between those two benefits if you continued to withdraw 4 percent from the $250,000 investment.
If you wanted to receive exactly the same amount as he would from your CSRS retirement, you could withdraw 5 percent from the $250,000, which would be $12,500 per year. In addition, the TSP funds would still be invested and might earn more than the 4 percent being withdrawn in some years. This is a very simplistic example, so there are also other factors to consider, such as the actual performance of the investments, tax issues and the length of service and salaries each of you had during your careers. The point is survivor's benefits under CSRS and FERS are not as different as you might expect.
Being in CSRS Offset, I have to apply for Social Security at 62 (not my full retirement age), as they will start offsetting my CSRS retirement whether I apply or not.
Yes and no. If you retire under CSRS Offset, your CSRS retirement benefit will be reduced (hence the term "offset") when you are retired, and you qualify for Social Security (usually at 62, or later if you retire after you reach 62). You do not have to apply for Social Security when this happens, however. If you can afford to delay your Social Security application beyond 62, you will have a lesser reduction in your Social Security retirement and the reduction to your CSRS will not be increased.
Here's an example: Suppose Anne retires at 58 with 30 years of government service. Her last 10 years were covered under CSRS Offset and her high-three average salary is $60,000. Her retirement will be 56.25 percent (the CSRS benefit computation for 30 years of service) x $60,000, or $33,750 per year. Four years later, when Anne turns 62, her CSRS benefit will be offset by the Social Security she earned during the last 10 years of her career that were covered under CSRS Offset. This will amount to approximately 10/40 of her Social Security benefit at 62. The 10 represents her years under CSRS Offset and the 40 represents a full career from 22 to 62.
If Social Security determines that Anne's benefit is $10,000 a year at 62 because she had other wages in her career where she paid Social Security taxes, then her CSRS benefit will be reduced by $2,500 per year (10/40 x $10,000). If she can afford to take this reduction without applying for Social Security (if, for example, she's working part time or receiving payments from her TSP to make up for the loss of income), then she can wait until 65 to 67 to apply for an unreduced Social Security benefit.
Since the $10,000 was only 75 percent of her full benefit, if she waits to apply at 66 (her full retirement age), she will be entitled to about $13,340 a year for the rest of her life. She will need to evaluate her finances and her health at 62 to decide if it is best to apply for Social Security when her CSRS benefit is reduced. She should take her health into consideration because if she applies at 62, she will receive $170,000 by the time she turns 79. If she applies at 66, she'll receive $173,420 by 79. So if she expects to live past 79, waiting might be the better choice.
Finally, I should note that if you retire under CSRS (not CSRS Offset), you will not -- I repeat, not -- have a reduction to your retirement benefit when you qualify for Social Security unless you did not pay your post-1956 military service credit deposit. But that's a topic for another day. 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
September 25, 2009