- The Washington Times - Monday, December 27, 2004

How does the prospect of losing up to $300 per month of your Social Security benefit grab you?

For several hundred thousand working but retirement-age civil servants, it is a real possibility. It already has happened to former feds who got a jolt when they received their first Social Security checks.

Most of the people retiring from federal or postal jobs in the next five years will be entitled to a Social Security benefit because of their work in the private sector either before they joined the government or after they leave. It is based on their own work in a private-sector job, or as the spouse or survivor of someone who will be getting a Social Security benefit. The retiring workers often have only the minimum 40 quarters of service to qualify for a monthly benefit.

But if they are due a Social Security check based on their private-sector work history, they can lose up to $3,600 per year of that payment because of the so-called “windfall” law. If they receive a Social Security spousal or survivor benefit and a federal retirement annuity, their spousal/survivor benefit can be eliminated by the so-called “offset” formula.

Congress created the windfall and offset formulas more than 20 years ago because a few high-paid feds were caught ripping off the system: They were receiving maximum civil service benefits for a long career at a high salary and maximum Social Security benefits, thanks to the welfare tilt in the system, because they worked only a short time and earned relatively little in the private sector.

Lobbyists representing feds, retired feds, schoolteachers and other public employees have worked for years to modify and/or eliminate the windfall and offset formulas.

Groups led by the National Association of Retired Federal Employees and federal and postal unions have gradually signed on a majority of House and Senate members to the cause of abolishing windfall and offset. That means if the proposals could come up for a vote, and if the politicians honored their IOUs, windfall and offset would go away — not retroactively, but for future payments to the retired and those who will someday retire.

Windfall and offset reform will be back in the next session of Congress. But unless the House Ways and Means Committee and the Senate Finance Committee agree to give the reform bills a hearing, they aren’t going anywhere. The odds are slim and none.

Retirement jolt

Tens of thousands of federal and postal workers will retire this month or in January. Those who leave this Friday, even though it’s a holiday, will be able to carry over the maximum amount of unused annual leave, and be paid for most of it at the new higher rate of pay that takes effect the first pay period on or after Saturday. They also will push those higher, maxed-out leave payments into income for the 2005 tax year.

But when they retire, most feds will be stunned to see that their payments to their health insurance premiums will go up, even though the premiums themselves may not change. The reason is “premium conversion,” which is available to workers but not to retirees.

Premium conversion allows federal and some private-sector workers to pay their portion of their health premiums with pretax dollars. The upshot is that they save anywhere from $250 to more than $1,000 a year in taxes. Because it is automatic, many working feds are unaware of the benefit and won’t find out until the day they retire.

Why? Because as soon as they retire, those with the premium conversion perk lose it. Congress must change the tax laws before the tax benefit can be extended to retirees. Like the Social Security windfall and offset changes, most members of Congress favor extending premium conversion to federal retirees. But congressional guardians of the tax code won’t clear premium conversion bills for a vote.

Backers of the change face an uphill fight again next year. That is because the change would mean a significant reduction in tax revenue if extended to feds, and an even bigger loss to the Treasury if nonfederal retirees demand equal treatment.

Thrift savings plan

Remember, the open season, when federal and military people can sign up for their 401(k) plans or increase their tax-deferred contributions, ends Friday.

Mike Causey, senior editor at FederalNewsRadio.com, can be reached at 202/895-5132 or [email protected]

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