The Foreign Service Journal, April 2024

AFSA NEWS Members occasionally ask AFSA about two seemingly unfair aspects of federal retirement benefits. One a˜ects retirees covered by the Foreign Service Pension System (FSPS)—the so-called “new” system for people hired after 1983. The other concerns retirees covered by the Foreign Service Retirement and Disability System (FSRDS)—the “old” system for people hired before 1984. Below is an explanation of each aspect and why it is unlikely that Congress will ever revise them. Diet COLA When Congress created FSPS and its parallel Civil Service retirement plan 40 years ago, it gave those retirement systems a lower annual Cost of Living Adjustment (COLA) than is given to retirees covered by FSRDS and its parallel Civil Service plan. Congress did that in recognition of significant di˜erences between the old and new retirement systems. The only benefit in the old system is a monthly pension, but that pension is higher than for those covered under the new system (for example, 70 percent of the high-three average salary after 35 years of service under the old system, versus 49 percent under the new). Since that is the only federal retirement income received by those participants, Congress decided to give those pensions a full COLA each year. However, participants in the new systems receive significant additional retirement income from outside the pension. FSPS participants (unlike FSRDS) receive Social Security, which is adjusted annually for inflation. More significantly, FSPS participants (unlike FSRDS) receive free government matching payments into their Thrift Savings Plan. At retirement, those matching funds typically comprise 30 percent of the participant’s TSP balance. Additionally, if TSP participants invest a significant portion of their portfolio in the stock market, over time the growth of their portfolio will far outpace inflation. Thus, since FSPS participants enjoy the added benefits from Social Security and TSP, Congress decided that FSPS pensions merited a lower annual COLA than FSRDS participants receive. If Congress opted to change that by raising the FSPS annual COLA, it would increase outflows from the Foreign Service retirement trust fund. To keep the fund solvent, Congress would have two options: enlarge the federal deficit by increasing payments from the U.S. Treasury into the trust fund, or require current employees to contribute more of their salary into the trust fund. WEP and GPO A second piece of federal retirement law was also adopted by Congress 40 years ago. It applies to people covered by FSRDS or its parallel Civil Service retirement plan who, before and/ or after their federal service, worked in the private sector long enough to earn Social Security benefits. Their Social Security retirement benefits are subject to the Windfall Elimination Provision (WEP), and any Social Security spousal or survivor benefits are subject to the Government Pension O˜set (GPO). Both provisions lower their Social Security payments from what they otherwise would have been. The reason for this reduction dates back to Social Security’s founding in the 1930s. Congress designed Social Security to give lowerincome workers a higher percentage of their income back as Social Security benefits than higher-income workers get. Thus, for example, someone with average annual lifetime earnings of $40,000 gets a significantly higher percentage of those earnings back in Social Security payments than does someone with average lifetime earnings of $150,000. This is done to help lower-income workers cover essential costs of living such as food and shelter. Because Social Security calculates average lifetime earnings by looking at 35 years of earnings covered by Social Security, all the years that FSRDS employees did not pay into Social Security show up as zero earnings in Social Security’s calculations. This makes them look like lower-income workers, which they were not. WEP and GPO remove that windfall in their Social Security benefit calculation to restore the equitable distribution of benefits between higher and lower income levels. Were Congress to repeal those provisions, it would increase outflows from the Social Security trust fund. As things stand now, the Congressional Budget O£ce projects that Social Security trust fund reserves will be depleted in 2033. At that point, Social Security benefits will need to be reduced, Social Security taxes will need to be increased, and/or benefits will need to be funded in part by borrowing and increasing the federal deficit. Repealing WEP and GPO would advance the date of Social Security insolvency. n Two Quirks in Federal Retirement Benefits RETIREE VP VOICE | BY JOHN K. NALAND AFSA NEWS Contact: 46 APRIL 2024 | THE FOREIGN SERVICE JOURNAL