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How Will Federal Retirement Benefits Be Affected During Government Downsizing?
Presented by
FEBA
Presented by
FEBA
The White House issued a directive on Wednesday, February 26th, instructing federal agencies to prepare for significant workforce reductions by March 13, 2025. This follows the Postal Service’s offer of up to $15,000 in early retirement incentives in January. With these developments, a reduction in the federal workforce appears imminent. The Department of Government Efficiency (DOGE) has prioritized cutting federal spending, and it is expected that workforce downsizing will take place within the next two weeks.
For federal employees, understanding how these changes may impact their retirement benefits is crucial. Let’s start with an overview of federal employee retirement benefits. Below is an overview of the six key retirement benefits available to federal workers, along with considerations for each.
1. Pension Plans: CSRS and FERS
Federal employees fall under one of two pension systems:
- Civil Service Retirement System (CSRS): Applies to those who began federal service before January 1, 1984, provided federal employees with an annuity based on a percentage of the average of their three highest-earning years of employment.
- Federal Employee Retirement System (FERS): Covers most current federal employees and offers a pension that, while lower than CSRS, includes Social Security benefits and the Thrift Savings Plan (TSP).
The FERS pension formula calculates benefits as 1% of the high-three average salary multiplied by years of service. For employees retiring at 62 or older with at least 20 years of service, the percentage increases to 1.1%.
For example, an employee aged 62 with 20 years of service and a high-three average salary of $70,000 would receive approximately $15,400 annually ($1,283 per month) in pension benefits.
2. Social Security
FERS employees contribute 6.2% of their earnings to Social Security, with the government matching this amount for a total of 12.4%. To qualify for benefits, employees must accumulate 40 quarters (10 years) of eligible work.
Social Security benefits are based on the highest 35 years of earnings. While payments can begin at age 62, this is considered early retirement, leading to reduced benefits. The longer an employee waits (up to age 70), the higher the monthly payment.
Calculating social security is more complicated with CSRS employees, who should consult a financial adviser who specializes in federal retirement to see if they qualify for Social Security.
3. Thrift Savings Plan (TSP)
The TSP, the government’s version of a 401(k) plan, includes five core investment funds: G, C, I, F, and S. Additionally, there are the Lifecycle funds which are a blend of the five core funds and are tailored to specific retirement timelines.
The TSP is one of the most important and beneficial of the federal retirement benefits but also tends to be confusing for many federal employees.
Key TSP Benefits:
- Generous government matching: Up to 5% of salary
- High contribution limits: Employees should monitor these limits on the TSP website
- High liquidity: Unlike pensions and Social Security, retirees control their withdrawals
While the TSP is a great accumulation tool during working years, it presents limitations as you draw closer to retirement. TSP investment funds have limited diversification, which are essential to pay close attention to when nearing the pre-retirement and income phases. Employees should consult a financial expert who truly understands TSP, its options, and rules that apply to maximize their TSP strategy.
4. Federal Employee Health Benefits (FEHB)
The FEHB program provides health coverage, with the government covering 72% of the cost. Employees can maintain their FEHB coverage into retirement if they have been enrolled for at least five consecutive years before retirement. This also applies to covered family members who can be added during open enrollment or during major life events.
A common misconception is that FEHB costs increase in retirement. In reality, the annual deduction is simply split over 12 monthly pension payments instead of 26 paychecks, making each deduction appear larger. However, post-retirement deductions are taken after taxes, unlike during employment.
5. Survivor Benefits
If a federal retiree passes away, their spouse may be eligible for survivor benefits, although these calculations vary between FERS and CSRS and can be difficult to calculate. Employees should consult a financial adviser to understand their specific benefits.
6. Federal Employee Group Life Insurance (FEGLI)
FEGLI offers various life insurance options:
- Basic Coverage: Low-cost while employed but becomes expensive in retirement
- Option A: Pays a fixed $10,000
- Option B: Covers up to five times salary, but costs rise every five years
- Option C: Provides optional coverage for family members
Now that we’ve covered the basics by reviewing the six federal retirement benefits, let’s touch on the latest updates issued by The White House.
Upcoming Federal Workforce Changes
Schedule F Returns
The Schedule F designation is back and affects thousands of federal employees in policymaking roles, removing them from civil service protections. When first introduced, it was estimated to impact 50,000 employees, but unions argue the number could be significantly higher.
VERA vs. RIF: Understanding Your Options
- Voluntary Early Retirement Authority (VERA)VERA allows eligible employees to retire early with immediate annuity benefits ( again, only if they are eligible). Employees should carefully assess their age, financial readiness, and planned lifestyle during retirement before opting for a VERA package. Factors to consider include:
- Their TSP savings and Social Security eligibility: Someone in their 50’s may have 10+ years before collecting Social Security benefits. This means they’d be relying heavily on their TSP earlier in retirement which may not be ideal.
- Potential reliance on TSP withdrawals before Social Security kicks in: Early-retirement TSP withdrawals mean less capital gaining compounded interest. Over time, this could have a large impact on your overall retirement funds and lifestyle options during retirement
- Whether they plan to transition into private-sector employment: Federal employees considering taking VERA and transitioning into the private sector should not take social security, even if eligible. They should also consider rolling their TSP into an IRA when they leave federal service as IRA’s are far less limitations unlike TSP or 401k plans.
- Reductions in Force (RIFs)RIFs are involuntary job cuts. Federal employees at risk of a RIF should prepare (just in case) by consulting with a federal retirement consultant to understand various pension social security, and TSP scenarios. It’s important to:
- Review their pension, Social Security, and TSP balances. Government employees would need their most current information on their TSP, pension, years of service, and average high-three salary
- Check severance pay eligibility on the Office of Personnel Management (OPM) website:
- Prepare for FEHB changes: Health benefits continue for 31 days post-separation. After that, they can request in writing within the first 60 days of their separation a temporary extension of up to 18 months. However, continuing the plan in this manner would require them to pay their own portion of the coverage, the government’s portion, and a 2% administrative fee, totaling 102% of the cost of the plan.
Next Steps for Federal Employees
Demystifying Your FEGLI
Thursday, March 20, 12:30pm ET
Free 45-Minute Webinar with Q&A Following
During the webinar, we’ll cover:
- Government Downsizing Updates
- Retirement Qualification Guidelines
- Understanding Your FEGLI Options
- Maximizing Coverage
- How To Keep Some Coverage For Free
- Determining If You’re Paying For Coverage You Don’t Qualify For
- Calculating How Much Coverage You Need
- Interactive 15-Min Q&A Session
Did You Know:
- There are 4 different types of FEGLI? They all act differently while employed and they all have different retirement options.
- One of your FEGLI options will double, triple and even quadruple in cost as you get older? Find out which one and how to avoid it!
- You can keep some of your FEGLI coverage FOR FREE in retirement!
- You may be paying for FEGLI options that you don’t even qualify for? Learn how to determine if you are and how you can possibly get a refund!
- One of your FEGLI options gets about 7x more expensive in retirement…..immediately?
Maximizing Your TSP
Thursday, March 27, 1:00pm ETFree 60-Minute Webinar with 30-Min Q&A Following
During the webinar, we’ll cover:
- Government Downsizing Updates
- Retirement Qualification Guidelines
- Understanding the TSP basics.
- Knowing the investment funds intimately well.
- Learning about contribution limits and strategies. Roth vs. Traditional. When/how to withdraw. Plus more!
- How to maximize TSP utilizing the Age-Based In-Service withdrawal.
- Forms needed for retirement: The forms you need for retirement vary depending on your specific situation and the retirement system you're a part of within the federal government.
- Interactive Q&A session
CTA link: https://webinar-registration.net/webinars/feba/registration_250327_ms.php
This content is made possible by our sponsor FEBA; it is not written by and does not necessarily reflect the views of GovExec’s editorial staff.
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