The Value of an Annuity Supplement

Last week, I provided an overview of the Federal Employees Retirement System annuity supplement. This week, let’s take a closer look at how the supplement is calculated, and how it can change over time.

According to the Office of Personnel Management, the FERS supplement is computed as if you were age 62 and eligible for a Social Security benefit when the supplement begins. If you’re divorced and your FERS benefit is being apportioned to provide a benefit to your former spouse, the supplement is also divided, unless a court order specifically states not to include it. 

To calculate the value of the supplement, OPM first estimates what your Social Security benefit would be at 62. Then they calculate the amount of your creditable civilian service under FERS and reduce the estimated full career Social Security benefit accordingly.

You can estimate your Social Security benefit payable at 62 by using one of the tools available from the Social Security Administration. Then determine how many years of civilian federal service you will have at the time you retire. Time spent performing military service during a period covered by military leave with pay or leave without pay from civilian service is counted as civilian service under the 1994 Uniformed Services Employment and Reemployment Rights Act of 1994. (If your military service was performed prior to your federal civilian employment, it won’t be included in the computation of the supplement, even if you have paid a military service deposit.)

For example, if your estimated Social Security benefit at age 62 would be $2,200 and you had 30 years of service under FERS, OPM would divide 30 by 40 (0.75) and multiply that by the estimated benefit ($2,200 x 0.75 = $1,650). The result would be the approximate value of your FERS annuity supplement, before any reductions. 

Potential Reductions

The supplement is paid until you are eligible for Social Security, so it will stop at the end of the month before you turn 62. It’s your decision when to actually apply for Social Security benefits. You are not required to apply for benefits at 62, even though the supplement stops. You can wait to apply later to receive a bigger benefit. 

The supplement will not receive a cost of living adjustment, so the amount will not grow, but it could be reduced due to the application of an annual earnings test. If you’re not earning income above the annual limit, then eligibility for the supplement continues.

The earnings test is similar to the earnings limit that applies when you claim Social Security benefits before your full retirement age. The supplement is reduced by $1 for every $2 of earnings over the annual limit ($17,640 for 2019 and $18,240 for 2020). It’s possible that for some people, that would mean the supplement would be eliminated. But the FERS basic retirement benefit that is paid for the rest of your life will not be reduced.

Earnings include wages, salaries and net income from self-employment. Not included are retirement income, a lump sum annual leave payment, investment income, survivor benefits, and gifts or inheritances. For retirees who are receiving FERS benefits under special provisions for law enforcement officers, firefighters and air traffic controllers, the earnings limit doesn’t apply to earnings prior to reaching the FERS minimum retirement age.

The Earnings Test

FERS annuity supplement surveys are mailed every yeat in the spring to federal retirees who received the supplement during the past benefit year. The earnings test is always performed using the data from the previous tax year.

Current law requires that the reduction be “effective with respect to the annuity supplement payable for each month in the 12-month period beginning on the first day of the seventh month after the end of the calendar year in which the excess earnings were earned.” OPM interprets this guidance to mean from July through June. 

Let’s look at a couple of examples of how the earnings test works:

Judy retired on Aug. 31, 2019 and receives a FERS supplement of $1,450 per month. She returned to work for a government contractor in September. From September through December, she earned $25,000 in wages, exceeding the 2019 earnings limit by $7,360. Her FERS supplement will be reduced in July 2020 (for the Aug. 1 FERS payment) by $3,680 per year, or $306.67 a month, but she will continue to receive $1,143.33 a month. Suppose Judy continues working throughout 2020 and earns $75,000 during the year. When she receives her earnings survey in April 2021, her 2020 earnings will exceed the 2020 earnings limit of $18,240 by $56,760. In July 2021, her supplement will be reduced by $2,365 a month, which will result in the supplement being terminated. If Judy stops working in January 2021 and is under age 62, she should contact OPM to have her supplement restored.

Ryan retired on Dec. 31, 2019 as an FBI agent at age 52 under FERS law enforcement provisions. He is receiving a FERS supplement based on his 22 years of service with the FBI of $1,250 per month. He goes to work in the private sector in January 2020 and will earn $120,000 a year in wages. Ryan will not report his earnings to OPM until he reaches age 56 and six months (his minimum retirement age). In the year he reaches his MRA, he will start reporting his wages beginning with the month after he reaches his MRA. Ryan will continue to receive the FERS supplement until he reaches age 56 and six months.

If you’re a retiree and have questions about the supplement, OPM suggests contacting the agency’s Retirement Information Office at 1-888-767-6738.

Photo: Flickr user Marco Verch