Bush seeks to end retirement penalty for part-time service

In the 2007 budget unveiled last week, President Bush proposed $85 million over the next 10 years for a series of federal retiree initiatives that his administration is compiling into a legislative proposal.

The proposed Federal Retirement Improvement Act includes language to remove penalties on annuities when employees in the Civil Service Retirement System move to part-time positions at the end of their careers, Office of Personnel Management officials said.

CSRS pensions are based on employees' average salary in their three top-earning years, multiplied by a factor representing their years of service. A law passed in 1986 changed the rules to prevent part-time employees from switching to full-time employment for the last three years of service and receiving a fully funded annuity.

That law has had the unintended effect of penalizing employees moving from full-time to part-time service, because any pre-1986 service is valued taking part-time work into account, even though all the service may have been full-time.

The administration's legislative proposal would fix that. An identical proposal was put forth in preliminary versions of the 2003 Federal Workforce Flexibility Act but was not included in the final version of that law.

Dan Adcock, legislative director of the National Active and Retired Federal Employees association, said he wishes the new proposal, which would only affect employees who retire after it becomes law, would go further.

"We certainly think that fixing the part-time issue is a step in the right direction," Adcock said. "But for the bill to be equitable to everyone, it should also include those who are already retired."

The initiative would cost $162 million over 10 years, all of which will go to paying higher annuities for CSRS employees who move to part-time service before retiring. After the $85 million in new funding proposed, the remaining $77 million would be funded through two cost-saving programs, under the Bush proposal.

One is to bar some air traffic controllers from receiving beefed-up retirement packages, akin to the special retirement benefits that federal law enforcement officers receive, if the controllers haven't served continuously. The president predicts $32 million over 10 years in savings from this change.

Another is a plan to reduce overlap in payments from the Federal Employees Retirement System and Social Security to employees who go on disability, which would save $45 million over a decade.

Bush also wants a rule change allowing federal employees to contribute money from cash bonuses to their accounts in the Thrift Savings Plan, the federal version of a 401(k) retirement savings account.

Right now, only base pay can go toward TSP savings. This proposal would bar agencies from matching cash bonus contributions, making it cost-neutral.

As of this year, there is no TSP limit on the amount employees can contribute to their accounts, but the Internal Revenue Service has a $15,000 limit for all these types of plans. Participants age 50 and older can contribute an additional catch-up contribution of $5,000.

The final two proposals, also cost-neutral, according to OPM, involve military service credit for civil service retirements. The administration wants to clarify that employees who receive military annuities for time served cannot also receive civilian annuity credit. The administration also wants to make clear that time in military academies is creditable toward retirement.

All of these proposals require congressional approval. OPM would not say when legislation incorporating the ideas would be sent to Capitol Hill.