September 3, 2010Last week's column about the best time to apply for Social Security prompted some comments and questions from employees who are covered under the Civil Service Retirement System Offset.
CSRS Offset is a version of CSRS established for employees who completed at least five years of civilian federal service creditable under CSRS, but who also have come under the Social Security system at some point. Individuals covered under CSRS Offset pay Social Security taxes and a reduced CSRS contribution. CSRS retirement and survivor benefits are offset by the value of the Offset service in their Social Security benefits.
Those under CSRS Offset are neither in the pure CSRS system, nor are they covered under the newer Federal Employees Retirement System. Their system is closer to what CSRS includes, with the added benefit of full Social Security coverage. Some have called this the "best of both worlds." Others have just called it confusing.
Most people under CSRS Offset once were in CSRS, but had a break in their federal service. If they were rehired after 1983 (with a greater than one year break in service), then they were required to start paying Social Security taxes. If they had at least five years of civilian service under CSRS, they then were placed in CSRS Offset and given the option of ultimately switching to FERS.
Let's look at an example. Suppose Bob was a federal employee covered under CSRS from 1980 to 1992. He left federal service in 1992 to work in private industry until 2008, when he was rehired to a government position. At that point, he was no longer entitled to pure CSRS coverage. So Bob's agency rehired him under CSRS Offset. Then he was given a six-month window to decide whether to join FERS or to stay in CSRS Offset. He should have been provided with the FERS Transfer Handbook to help him make his choice.
For most employees, this decision is complicated, since the choice can affect retirement eligibility, survivor's benefits, Thrift Savings Plan participation, cost-of-living adjustments, calculations of retirement benefits and other factors. For the purposes of argument, let's assume Bob chose to remain under CSRS Offset and did not switch to FERS.
At the end of the year, Bob will have a total of 7 percent withheld from his basic pay for CSRS and Social Security taxes, which is the same withholding he would have had under CSRS alone. But his CSRS contribution (0.8 percent) will be lower than the CSRS standard and his Social Security withholding (6.2 percent) will be higher. If Bob's salary exceeds the maximum Social Security taxable wage limit ($106,800 in 2010) at some point in the year the Social Security withholding will stop. But he will continue to pay 7 percent into CSRS for the remainder of the year. If he's a law enforcement officer or firefighter, he'll contribute 0.5 percent more toward retirement than other employees under CSRS and FERS.
Bob also can contribute to the TSP like other CSRS employees. He will not receive agency automatic or matching contributions.
He can retire with an immediate CSRS benefit under the same age and service requirements as other CSRS employees: at age 62 with five years of service, 60 with 20 years, or 55 with 30 years. If Bob has at least five years of civilian service and is 62, he is eligible for deferred retirement benefits.
The Offset Difference
At retirement, CSRS Offset benefits are computed by the Office of Personnel Management in the same manner as they would be for any retiring CSRS employee. Full CSRS annuity benefits are paid until age 62, when the employee becomes eligible for Social Security. Then there's a recomputation to determine how to "offset" the CSRS benefit. For those who already have turned 62 at retirement and qualified for Social Security, the computation takes place only once, when their retirement claim is finalized at OPM.
The offset computation takes into account the years the employee was paying Social Security tax and was covered under CSRS Offset. It is not a reduction of the employee's entire Social Security benefit, just the portion that was earned during their Offset service.
The basic concept of the CSRS Offset program is to provide the same retirement income, whether it comes only from CSRS or from a combination of CSRS and Social Security. If participants are receiving Social Security benefits, the combination of the reduced CSRS retirement and the Social Security benefit always will be at least the amount they would have received if they had been rehired as pure CSRS.
The one disadvantage to CSRS Offset is if an employee decides to delay receiving Social Security benefits until after he or she turns 62, the CSRS benefit will be reduced even though the employee might not be receiving the Social Security benefit.
Two computations are performed to determine the amount of the offset. The lesser of the two is applied to the CSRS benefit, resulting in a reduced annuity.
The first computation is simple: Years of offset service times Social Security benefit divided by 40.
Let's use Bob's situation again as an example. Remember, he was rehired under CSRS Offset in 2008. Let's say he plans to retire in 2018 at 62. At that time he will have about 10 years under CSRS Offset. Let's assume his Social Security benefit is computed as $12,000 per year at that time (keeping in mind it could be affected by the Windfall Elimination Provision). So here's the offset calculation:
10 times $12,000 divided by 40 = $3,000 per year
The second computation, which will come from the Social Security Administration, will be his Social Security benefit without the 10 years of offset service included. Let's say that in Bob's case, this would add up to $7,500 instead of $12,000 -- a difference of $4,500. The lesser of these two computations is the $3,000 from the first computation. Therefore, his CSRS retirement will be reduced by $3,000 per year.
If Bob decides to apply for Social Security retirement, he would be entitled to $12,000 a year -- more than making up for the loss of $3,000. If he chooses to delay receiving his Social Security retirement, however, because he decides to work outside government or he simply doesn't want to take the reduction in his Social Security benefit for applying at 62, then his CSRS benefit still will be reduced.
If Bob had been rehired as pure CSRS, and remained exempt from Social Security coverage, then his Social Security benefit would have been computed on 10 fewer years of Social Security-covered wages. Those 10 years of federal employment possibly would have been his highest wages of his career, since they occurred at the end.
If he continues working past his full Social Security retirement age (65-67, depending on his year of birth), then Bob could begin receiving his Social Security benefit, since there's no earnings limit once he reaches his full Social Security retirement age. Federal employees can't begin receiving their CSRS (or FERS) retirement benefits if they still are working for the government (unless they're in the reemployed annuitant program).
If Bob is married and his wife (or qualified ex-spouse) did not work outside the home or has a very small Social Security benefit of her own, his Social Security coverage can provide spousal benefits while they are both living, not just a survivor's benefit.
Retiring under CSRS Offset provides an exception the Government Pension Offset provision of Social Security. This means if Bob had a very small Social Security benefit (perhaps based only on his CSRS Offset service) and his spouse had a much larger benefit, he would be entitled to the higher of the two. Had he retired under pure CSRS, the spousal Social Security benefit would have been reduced by two-thirds of his CSRS retirement, usually eliminating any entitlement to spousal benefits.
Finally, remember that Social Security benefits are partially tax-free, but the only part of the CSRS benefit that is not taxed is the portion represented by employee contributions. Some states exempt Social Security benefits from state income tax, but not federal retirement benefits. Some states exempt both. Here's a list of state income tax rules as they apply to federal retirement benefits.
CORRECTION: In its original version, this column said that when a CSRS Offset employee turns 62, there is a recomputation of benefits to determine how to offset the Social Security benefit. The recomputation is actually to determine how to offset the CSRS benefit. The column has been updated to correct the error.
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.
September 3, 2010