Where Credit Is Due
Well, you know
We all want to change the world
You say you got a real solution
Well, you know
We'd all love to see the plan
-- The Beatles
Today, I have a plan for a small revolution that could help federal employees better prepare for retirement. The changes I'm looking for wouldn't require an act of Congress, just an act of compassion. Is anyone listening?
My idea has to do with a topic I write about a lot: service credit deposits. (I hope you aren't laughing at this point, thinking I was leading up to something monumental and realizing it's the same old, same old.) Service credit issues continue to mystify and frustrate many federal employees as they prepare for retirement. If you are someone who has discovered that you have an unpaid service credit deposit that has been accumulating interest since the 1980s or earlier, then you know what I'm talking about. Lately, issues about how such payments are computed and processed have been in the news.
For the uninitiated, a service credit deposit is simply a payment that employees make to the federal retirement fund that enables them to receive credit toward their retirement benefit for certain types of previous military and civilian service.
I think employees have to be made aware of the impact of not paying such deposits from the day they are hired, rather than when they are planning to retire. It has been my experience in talking to thousands of federal employees during the past 25 years that many feds find out they're missing contributions for some of their past service near the time they want to retire, and they're shocked at how much interest has accumulated. Sometimes they discover:
- Past service simply doesn't count since too many years have gone by and the documentation of the service has been lost, shredded, flooded, deleted, or otherwise destroyed.
- Interest on the unpaid balance has grown to thousands of dollars more than the original deposit amount. In many cases, the interest is two to six times the original amount owed.
- They're not eligible for retirement, unless a deposit is paid. Unpaid deposits can affect eligibility for retirement under both the Federal Employees Retirement System and the Civil Service Retirement System in certain circumstances.
If an employee doesn't pay a deposit, his or her retirement benefit is reduced by a percentage of the unpaid balance. In some cases, the service won't be used in the computation of the retirement at all, unless the payment is made. That could lead to a reduction of $200 per month or more for even one year of service subject to an unpaid deposit.
I received an e-mail about these issues from Jennifer Jones, who works at the Internal Revenue Service. She had a couple of good suggestions:
- Agencies should address deposits and redeposits when employees are first hired. Some agencies do mention and explain military and civilian deposits during employee orientations, but generally, they don't provide specific information unless employees ask for it. They should make sure information provided to employees includes interest accrual on unpaid balances, and the effect on the employee's future retirement benefit if the deposit is left unpaid.
- The dollar amount of unpaid deposits should be noted on employees' leave and earnings statements so that they can be aware of accumulating interest penalties.
This issue is more important under FERS than CSRS. Under FERS, most federal service is not creditable for eligibility or computation of retirement benefits unless it has been subject to FERS contributions. Also, service performed after 1988 that was not subject to retirement contributions is not creditable for retirement and a deposit cannot be paid to get credit for it -- even though this service is included when computing an employee's leave service computation date. CSRS is more lenient in crediting previous service.
Jennifer suggests agencies take the extra step of determining each employee's retirement service computation date at the beginning of their federal service rather than when the employee is planning to retire.
Many agencies already offer do-it-yourself software to employees through their payroll systems to help them determine their eligibility for retirement and computation of benefits under various scenarios. Jennifer's suggestion would make these retirement projections more accurate and reliable by including information specific to the employee regarding the amount of any unpaid deposits and redeposits. This is something employees shouldn't have to figure out for themselves, or learn at a pre-retirement seminar.
Why is this issue so important? Interest on unpaid balances on service credit deposits can compound for decades. If $1,000 compounds annually at a rate of 3 percent, you'll owe $2,000 in 24 years. If that same $1,000 compounds at 5 percent, you'll owe $2,000 in a little more than 14 years. After 30 years, it could be as much as $4,000. This is the magic of compound interest -- only in this case it works against you, rather than for you.
This issue aggravates many employees who attend pre-retirement seminars. They wonder why their agencies waited until they were planning to retire to inform them that they owe money to the retirement system along with 30 to 40 years' worth of compounded interest. Even if you want to wait until you are close to retirement to pay a deposit, it would be helpful to know how much you're going to owe. The catch in implementing this suggestion is that it would require agencies to coordinate with the Office of Personnel Management, since civilian service credit deposits and redeposits are paid directly to OPM and not to the employing agency. (Military service deposits are a little easier to keep track of since they are collected by the payroll office of the employing agency.) Until there is more automation in record-keeping, this might have to wait.
In the meantime, employees should file a copy of their deposit application or application for refund of retirement contributions in their official personnel folder. If they have paid a deposit, then a copy of the receipt of payment filed in the folder would alert the agency that the deposit has been paid in full.
This service is slated to be available to all federal employees if and when OPM implements an electronic retirement processing system. When that happens, it will be a real revolution, and a great service to hardworking federal employees.
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.