December 2014, Volume 28, Number 6
November Election Results and the Impact on Feds and Retirees
Republicans will gain control of both chambers of Congress in January 2015. This change in Senate leadership will be of concern to federal employees, especially as it relates to their benefits.
Even though federal employees have already contributed $138 billion towards deficit reduction through pay freezes and increases in retirement contributions, with the current federal debt at almost $18 trillion, Congress will look for ways to reduce the federal debt, with the federal workforce being the most likely mechanism.
The new Congress could make federal pay and benefits a prime target over the next two years, particularly in the following areas.
1. Retirement Pensions
Retirement contributions have already been raised twice since 2012 as a way to reduce federal spending. In 2012, Congress passed a bill to increase the contribution rate by 0.8 percent for new hires as of Jan 1, 2013. As part of the 2013 budget deal, federal employees hired after Jan. 1, 2014 are paying an additional 0.5 percent of their salaries towards their pensions.
Recently Darrell Issa, R-Calif., and Paul Ryan, R-Wis., sent a letter to the Congressional Budget Office asking for evaluations on potential overhauls to the Federal Employee Retirement System, including adjusting the retirement contribution of federal employees. The CBO has yet to respond to the letter, but will probably do so early next year before the next round of budget talks take place.
2. Federal Pay
Federal employees did not receive a pay raise for three straight years beginning in 2011. They received only a 1-percent raise in 2014, and will receive the same in 2015.
3. Sequestration and Ryan Budget
The recent budget deal struck by Rep. Ryan and Sen. Patty Murray, D-Wash., provided agencies some relief in 2014 and 2015 from the mandatory budget caps implemented by the 2011 Budget Control Act, also known as sequestration. Sequestration was designed as a 10-year program, meaning that during the next budget talks in 2016, sequestration and significant budget cuts will be on the table again.
Previously, agencies used the options of unpaid furlough days and hiring freezes to combat the budget cuts. Once again these will be potential options affecting federal employees. Although Ryan is likely to step down as chair of the House Budget Committee, his budget legacy will live on and will now have more support in the Senate.
Ryan’s previous budget proposals called for federal employees to pay 6.35 percent of their paychecks toward their pensions, advocated the adoption of the chained-consumer price index, and eliminated the Social Security Annuity Supplement. They would also have based pensions on employees’ high-5 rather than high-3 and called for a 10 percent reduction in the federal workforce.
Recent CROmnibus Spending bill
The spending bill passed by Congress on Dec. 13 averts a shutdown and keeps the Government funded through September 30, 2015.
The bill included a 1-percent pay raise for all federal employees and included a provision that would cut pensions for current retirees; however, it will NOT affect Foreign Service pensions, nor FERS or CSRS pensions.
Even though Foreign Service pensions are not at risk, this does set a bad precedent and is something we will keep a close on eye with the help of other federal unions.
2015 Cost-of-Living Adjustment
In 2015 the cost-of-living adjustment for federal annuities and Social Security beneficiaries will be 1.7 percent.
The purpose of the COLA is to ensure that the purchasing power of Social Security and federal annuity benefits is not eroded by inflation. It is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers from the third quarter (September 2013) of the last year a COLA was determined to the third quarter (September 2014) of the current year. If there is no increase, then the COLA will be zero, which happened in 2010 and 2011.
This will be the third straight year that federal retirees and Social Security recipients will receive historically small increases in their COLA. Last year the increase was a mere 1.5 percent. Since the COLA is less than 3 percent, retirees in both the Foreign Service Retirement and Disability System and the Foreign Service Pension System will receive the same increase of 1.7 percent. If the increase were more than 3 percent, the computation for the two systems would have been different.
The 2015 COLA increase took effect on Dec. 1 and will be reflected in the first annuity payment in January 2015.
In recent years there have been discussions about changing the formula used to determine the COLA from the CPI-W to the less generous chained-CPI. President Obama did not include the change in his most recent budget request, but now that Republicans have control of both the House and Senate, they are likely to seek to switch to the chained-CPI.
Simply put, a switch to the chained-CPI is a cut to your benefits. At first, the reduction is only a modest amount, but over time it will compound to a loss of thousands of dollars a year. While savings will continue to decrease and health care costs will continue to rise, this loss will be felt acutely by seniors who rely on Social Security and their annuity.
Any proposed change to the formula used to calculate the COLA needs to be carefully considered, so that COLAs continue to reflect accurately seniors’ spending power without harming the retirement security of lower-and middle-class Americans.
Thrift Savings Plan Changes
Contribution Limits in 2015
The IRS elective deferral (contribution) limit for employees participating in the Thrift Savings Plan will rise from $17,500 to $18,000 in 2015. That limit applies to the combined total of regular TSP and Roth TSP contributions. Since there will be 26 paydays in 2015, full-year employees who wish to make the maximum contribution via level biweekly payments should set their contribution at $693 per pay period effective Dec. 15, 2014 (pay date Jan. 8, 2015), via the Employee Express website.
The TSP over 50 catch-up contribution limit for 2015 will rise from $5,500 to $6,000. Catch-up contributions do not count against the $18,000 elective deferral limit. To qualify to make catch-up contributions, you must:
- be age 50 or older, or turn 50 during the calendar year in which the contribution is deducted from pay;
- be in a pay status;
- not be in a six-month non-contributory period after taking a financial hardship withdrawal; and
- be making the maximum regular TSP contributions (i.e., $18,000) for the year in which you are making the catch-up contributions.
Know Your Contribution Limits
Employees should remember the annual $18,000 contribution limit when deciding how much to contribute each pay period. The TSP system will not allow a contribution to be processed that will cause the total amount of employee contributions for the year to exceed the annual limit. In addition, agency matching contributions are limited to the first 5 percent of basic pay contributed each pay period, and no agency matching contributions are made in pay periods when there is no employee contribution.
For More Information
The TSP website (www.tsp.gov) features general information, forms, and publications including the booklet “Summary of the Thrift Savings Plan” which describes the TSP in detail.
Also, AFSA as part of our Federal Benefits Speaker Series hosted a seminar on TSP in Feb. 2013. The video and PowerPoint slides used during the presentation can be found at www.afsa.org/retiree.
10 Ways to Get the Most of Social Security Benefits
Here are 10 suggestions for individuals to get the most of their future Social Security retirement benefits.
1. Do not start taking Social Security retirement benefits too early
While a "fully insured" individual -- someone who has at least 40 credits of Social Security -- can elect to receive their Social Security retirement benefits as early as age 62, it is advantageous to delay the start of one's retirement check to at least their "full retirement age" (FRA). If economically possible, perhaps delaying the start of retirement benefits until age 70. By waiting to start receiving their benefits, the benefits keep increasing each year, as illustrated in the following example:
For someone born between 1943 and 1954 and whose FRA is age 66, a $15,000 annual benefit at age 62 would be a $20,000 annual benefit at age 66. If the individual delays the start of benefits until age 70, the annual benefit would be $26,400.
For federal annuitants, it would perhaps make more sense to draw down their Thrift Savings Plan (TSP) or IRA balances in order to allow them to postpone collecting Social Security retirement benefits.
2. There is no "marriage penalty" when it comes to Social Security
Contrary to a common misconception, there is no "marriage penalty" or "offset" when it comes to Social Security. When both spouses are entitled to Social Security benefits, each spouse can collect full benefits. However, there is an alternative if one spouse earned much more than the other spouse. Under the dual entitlement law, the spousal benefit is set at 50 percent of the higher earning spouse's benefit amount. For example, if a higher earning spouse is getting $30,000 a year in Social Security benefits and the lower earning spouse's benefits would be $10,000 a year, then the lower earning spouse is entitled to 50 percent of the higher earning spouse's benefits, or $15,000 a year.
3. Social Security has death benefits
When a higher earning spouse dies, the surviving spouse receives a "widow/widower" benefit equal to 100 percent of the deceased spouse's Social Security benefit. If the deceased individual at the time of death had children younger than 18 years of age, then each child is entitled to a death benefit equal to 75 percent of the deceased parent's monthly Social Security benefit.
The widow/widower benefit continues until the widow/widower dies. The children's benefit continues until the child becomes age 18 or age 19 if the child is still in high school.
4. It is possible for a lower earning spouse to collect early and then switch to a higher benefit later
In the case of a married couple in which there is a lower-earning spouse and a higher-earning spouse, the higher earning spouse can file for benefits at their FRA and then immediately request not to receive their monthly benefit. This allows their benefit amount to continue to increase at 8 percent per year until age 70. This individual can continue to work and earn a higher income, resulting in a larger Social Security retirement benefit once the benefit starts. The higher earning spouse "filed and suspended" the benefits, allowing the lower earning spouse to retire and start collecting the spousal benefit of the higher-earning spouse. The lower earning spouse will collect the spousal benefit, equal to one-half of the higher earning spouse's benefit amount. Once the lower-earning spouse reaches FRA, they can switch to their retirement benefit if it is larger than the spousal benefit.
5. Maximizing one's earnings before retirement can lead to larger Social Security benefits
The Social Security Administration calculates an individual's benefit amount in retirement by averaging the top 35 years of earnings during the individual's working life, after adjusting earlier years for inflation. What this means is that each year over 35 years an individual earns a larger salary compared to a salary earlier in their working career, the previous lower earning year is deleted from the calculation, leading to a higher overall average. This is perhaps another good reason for federal employees to work longer and earn higher salaries.
6. A widow/widower can start collecting Social Security spousal benefits on the deceased spouse's account at age 60
The amount of a widow/widower benefit will be reduced by a small amount for each month before the widowed spouse's actual retirement age of 62. After age 62, the widow/widower may switch to his or her own account. The best time to switch can be complicated and the Social Security Administration advises such people to consult with a Social Security representative before making such a decision.
7. Social Security Income and the Law
Social Security income is protected by law from most creditors, but not debts owed to the IRS, federal student loans, other federal government claimants, from alimony or child support payments.
8. Social Security income is taxed at less than other income
Single individuals with adjusted gross incomes less than $25,000 or married couples whose adjusted gross incomes are less than $32,000 do not owe federal income tax on their Social Security benefits. Above these income thresholds, the portion of Social Security subject to federal income tax increases to 85 percent of the total benefits. However, since qualified distributions from a Roth IRA and Roth TSP are not included in income, it can be advantageous to start withdrawals from non-Roth retirement accounts before starting to receive Social Security benefits, holding off on Roth withdrawals until one starts collecting Social Security benefits.
9. Marriage and Social Security
Individuals who divorce after 10 years of marriage and then remarry normally cannot receive the ex-spouse's Social Security retirement benefits at a later time. However, there is an exception - individuals who remarry after age 60. This means that a divorcee who is serious about marrying an individual who has less Social Security benefits than their ex-spouse's benefits should delay their nuptials until they are over 60 year old. In so doing, they can collect spousal benefits during retirement of 50 percent of their ex-spouse's benefits, 100 percent of the benefit if the ex-spouse is deceased.
10. Higher earning spouses should delay collecting for the sake of the lower earning spouse
If the higher-earning spouse retires early, he or she locks in a lower retirement benefit amount. If they die, their spouse will receive this locked-in amount for life. On the other hand, if the higher earning spouse does not retire early but dies before reaching FRA and before filing for their Social Security retirement benefit, then the surviving spouse will nonetheless receive a widow/widower's benefit of whatever the deceased (higher earning) spouse's benefit would have been at full retirement age.
About the Author
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Financial Consultant, Chartered Life Underwriter, Registered Health Underwriter, Registered Employee Benefits Consultant and Enrolled Agent in Silver Spring, MD -- and the owner of EZ Accounting and Financial Services, an accounting, tax preparation and financial planning firm also located in Silver Spring, MD. Zurndorfer is also is an instructor at federal employee retirement seminars throughout the country and writes numerous columns and books on federal employee benefits.
© Copyright 2014 My Federal Retirement. Used by permission. www.myfederalretirement.com
Changes for Social Security Benefits in 2015
Here are some other changes that will take place for Social Security next year.
As mentioned on page 2, the Cost-of-Living Adjustment in 2015 is 1.7 percent. This increase begins in January and the average retiree can expect an increase of $22 per month.
Most workers pay 6.2 percent of every paycheck into Social Security until their earnings exceed the tax cap. The maximum amount of earnings subject to the Social Security tax will increase from $117,000 to $118,500. This means about 10 million people will pay higher taxes.
Greater Earnings Limit
Social Security beneficiaries who are under age 66 can now earn up to $15,720 in 2015 before $1 in benefits will be withheld for every $2 earned above the limit. Retirees who will turn 66 in 2015 and have signed up for Social Security can now earn up to $41,880 before every $3 earned above the limit will result in $1 in benefits being withheld. However, once a retiree turns 66, there is no limit on earnings, and Social Security payments are recalculated to give the retiree credit for the withheld benefits.
The FSJ Editorial Calendar 2015
For Retirees interested in writing for The Foreign Service Journal in 2015, please view the editorial calendar at the following link http://www.afsa.org/PublicationsResources/ForeignServiceJournal/EditorialCalendar.aspx.
Submissions are accepted until 90 days before the publication date of the intended monthly issue (subject to change based on events).
Watch AFSA Events on YouTube
For the convenience of our many members who are overseas or away from the Washington area, we record all events that take place at AFSA headquarters.
They are all available to view on AFSA’s YouTube channel, www.youtube.com/afsatube. Become a subscriber in order to receive a notification each time we add a new recording!
Apply for AFSA College Aid
AFSA members’ tax-dependent children are eligible to apply for two types of college aid offered by AFSA. Visit www.afsa.org/scholar to take advantage of this membership benefit.
- Academic and Art Merit Awards: One-time-only $1,000 and $2,500 competitive awards are bestowed on 2015 graduating high school seniors. A $2,000 Community Service award is also offered this year to this group of students. The application deadline is Feb. 6, 2015.
- Financial Aid Scholarships: Based on the family’s financial situation, these individual awards range from $3,000-$5,000. The application deadline is March 6, 2015.
Not all who submit applications will receive aid. Unfortunately, grandchildren of AFSA retired members are not eligible for these awards. Please note that AFSA’s Scholarship program is completely funded by donations, not membership dues. Questions can be directed to Lori Dec, AFSA Scholarship Director, at email@example.com or (202) 944-5504.
Update your AFSA Member Profile Online
AFSA members can now create their own member profiles online. The Profile Page allows members to submit a brief bio and upload a picture that is viewable by other members. To load or revise your member profile, please follow the following steps to login to the online section of the AFSA website:
- Paste this link into your browser: ams.afsa.org/eweb/. This is a secure online environment. You may also click on the login icon in the upper right hand corner of the AFSA website. It takes you to the same webpage.
- Enter your primary email address (.gov for active duty and personal email for retirees) and password (the password is your last name if you haven’t logged in before) on the right side of the login screen.
- If you are not redirected to update your password on first login or receive an error message, click on the “Forgot Your Password” link at the bottom of the page.
- An email will be sent to your primary email address allowing you to update your password.
Once you have logged in, addition to updating your profile page, you will be able to update your primary contact information, make a donation, or purchase the new AFSA U.S. Foreign Service Commemorative coin.
We hope you enjoy this new member benefit and will search the directory for friends and former colleagues.
If you have any questions or issues, please email us at firstname.lastname@example.org
Please direct any questions that you may have to our in-house expert on retirement issues: