Best of Both Worlds

My horoscope said I'm in a position to lead a confused person by the hand today. So that's just what I intend to do -- at least if it's the retirement coverage plan called Civil Service Retirement System Offset that's confusing you.

CSRS Offset is a version of CSRS established for employees who have 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.

Let's look at some commonly asked questions about CSRS Offset:

Why was CSRS Offset created?

It has its roots in the 1983 changes to Social Security. Among them was a requirement that federal employees hired on or after Jan. 1, 1984, must be covered by Social Security. That raised issues about what to do with employees who returned to federal service after they had previously been covered under CSRS. Congress eventually set retirement deduction rates for CSRS Offset employees in the 1986 Federal Employees' Retirement System Act.

Some employees who have completed five years of civilian service are not under CSRS Offset. What specifically causes an employee to have that coverage?

The usual way employees become covered by CSRS Offset is by having a break in their federal service. If a federal employee resigned after being vested under CSRS (that's where the five years of service comes in), and then returned to government after 1983 and after a break in service of at least one year, they would be rehired under CSRS Offset. At that point, they would be given a six-month window to evaluate whether to join the Federal Employees Retirement System or remain under CSRS Offset.

At least that's the way it's supposed to work. There have been situations where these kinds of employees were erroneously placed under CSRS coverage-or, in some cases, were automatically placed into FERS without the choice of remaining in CSRS Offset. In these cases, employees may later challenge their retirement coverage under the Federal Erroneous Retirement Coverage Corrections Act of 2000. But that's a subject for another column. Is Offset more like CSRS or FERS?

CSRS. Unlike FERS employees, those covered under Offset receive no matching or automatic agency Thrift Savings Plan contributions. Computation of retirement benefits follows CSRS rules, with a reduction occurring after retirement at age 62 (or at retirement if employee retires at age 62 or later).

CSRS Offset employees contribute 7 percent of their basic pay toward retirement (Some employees in certain occupations, such as law enforcement, pay 7.5 percent or 8 percent.). The difference is that this contribution to the CSRS retirement system is reduced by Social Security taxes (6.2 percent of wages up to $94,200 in 2006).

For example, if an employee has a salary of $50,000, his or her annual retirement contribution would be $3,500. But instead of the entire sum going to CSRS, $3,100 (6.2 percent) would be transferred to Social Security.

How much is the offset to the CSRS benefit?

Two formulas are used to compute the reduction for Offset retirees. As noted above, the offset doesn't occur until the retiree is eligible for Social Security. If the individual retires prior to age 62, the unreduced CSRS benefit is paid until 62. If the individual retires at 62 or later, the offset is computed at the time of retirement. (Important note: If an employee is not eligible for a Social Security benefit, there is no offset in his or her CSRS annuity.) The amount of the offset is whatever figure is smaller using the following formulas:

• The Social Security Administration computes a hypothetical benefit amount after removing the employee's covered federal CSRS Offset earnings from the record. SSA gives OPM the correct rates and the hypothetical rates. OPM uses the difference to compute the potential offset of the CSRS pension.
• OPM computes the amount by multiplying the Social Security benefit to which the individual is entitled by a figure obtained by dividing the employee's total years of offset service by 40.

• The $650 that the Social Security Administration computes is attributable to the Offset Service; or
• 15 years of Offset service/40 x $800 = $300

Will being in Offset improve Social Security benefits?

Yes. Since CSRS Offset employees are paying the full Social Security tax on wages, they are adding valuable earnings to their Social Security record. This will increase benefits in a number of ways:

• Social Security computes benefits using an average of an employee's highest 35 years of earnings. Having fewer $0 earning years in the computation will make the average wage higher -- and therefore the benefit, too.
• There is an exception to the Windfall Elimination Provision -- under which Social Security benefits are reduced for retirees who spent much of their careers working for organizations that did not withhold Social Security taxes -- for workers having more than 20 years of substantial wages covered by Social Security. Being in CSRS Offset is not an automatic exception to the Windfall Elimination Provision, but having more Social Security covered wages may help.
• CSRS Offset employees are exempt from the Government Pension Offset, which affects a spouse's entitlement to certain Social Security benefits.
• Social Security pays benefits to the employee and his or her dependents. Having a higher Social Security benefit may help financially dependent family members who are eligible.

Spousal survivor annuities are based upon the annuity prior to application of the offset. However, these annuities are subject to their own offset based on the Social Security survivor benefits attributable to the CSRS Offset Service.

The spousal survivor offset applies when the survivor is eligible for both CSRS survivor benefits and Social Security survivor benefits based on the deceased's federal service covered by Social Security.

If Social Security survivor benefits are payable:

• The surviving spouse receives full CSRS survivor benefits until he or she becomes entitled to Social Security survivor benefits. This normally occurs at age 60. However, such benefits may begin before 60 if the surviving spouse is disabled or has to care for a minor child.
• When the spouse becomes entitled to Social Security survivor benefits, the CSRS survivor annuity is reduced by the amount of the survivor's Social Security benefit attributable to the period the deceased annuitant was under CSRS Offset.
• The offset of a CSRS survivor annuity stops on the date the survivor loses eligibility for Social Security survivor benefits due to any of the following reasons: The survivor becomes eligible for a Social Security benefit based on his or her own earnings under Social Security and the benefit exceeds the survivor benefit; the survivor remarries before 60; or the Social Security benefit stops because a minor child reaches age 16 and the survivor is under 60.

No. You are not required to apply for Social Security benefits at 62, but your CSRS benefit will be offset regardless of whether you apply for Social Security. If you continue to work after you retire from federal service, you may not be eligible to receive the full amount of your Social Security benefit at 62 because of an earnings limit. The limit only applies to earned income (wages and salaries). Your annuity and investment income will not count against this limit.

Your earnings in (or after) the month you reach your full retirement age will not reduce your Social Security benefits, but that is not until you are at least 65 (the retirement age is increasing for those born after 1938). However, your benefits will be reduced if your earnings exceed certain limits for the months before you reach your full retirement age.

Here's how the earnings limit works: If you are younger than full retirement age, $1 in Social Security benefits will be deducted for each $2 in earnings you have above the annual limit. (In 2006, the limit is $12,480.)

In the year you reach your full retirement age, your benefits will be reduced $1 for every $3 you earn over an annual limit until the month you reach full retirement age (the 2006 limit is $33,240). Once you reach full retirement age, you can keep working and earn all you can, and your Social Security benefit will not be reduced.

Choosing when to apply for Social Security is an important but personal decision. Regardless of the age you choose to retire, it is a good idea to contact Social Security in advance to see which month is best to claim benefits. In some cases, your choice of a retirement month could mean higher benefit payments for you and your family. Also, if you apply for a reduced benefit at age 62, you will receive the benefit longer. If you postpone applying, you will receive a larger benefit for a shorter period of time.

Why do people say that Offset coverage is the best of both worlds? For all of the reasons described above. These include increased benefits under Social Security that do not cause a dollar-for-dollar offset to the CSRS benefit. Also, a portion of Social Security benefits are tax-free (at least 15 percent, but the figure could be higher depending on the adjusted gross income of the taxpayer). Additionally, the individual may be exempt from the Windfall Elimination Provision and the Government Pension Offset, which would have reduced Social Security entitlement had the employee retired under CSRS.

Resources

• OPM's Retirement Facts 13: CSRS Offset Retirement
• Electronic Fact Sheet: How Work Affects Your Social Security Benefits (Social Security Administration)
• Electronic Fact Sheet: Government Pension Offset (Social Security Administration)
• Electronic Fact Sheet: Windfall Elimination Provision (Social Security Administration)
• CSRS and FERS Handbook, Spouse Benefits: Death of an Annuitant

• Social Security Administration: Contact Social Security three months before you turn 62 or three months before your CSRS Offset retirement if you are already 62. To schedule an appointment, you may call Social Security toll-free at 1-800-772-1213.
• Human Resources Office: Request a retirement estimate for your projected retirement date. Be sure you understand if the estimate reflects the offset that will occur at retirement (or when you turn 62 if you're retiring younger than 62).