Guest Article

(From the May 29, 2012 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Phased Retirement for Federal Employees Would Cut Federal Spending, According to CBO Report

A report from the Congressional Budget Office (CBO) estimates that over the period 2013–2022 direct spending by the Federal government would decrease by $427 million and revenues would increase by $24 million if Federal employees were permitted to elect a phased retirement, as recently proposed in a bill now before the House of Representatives. As introduced, the bill would allow Federal employees eligible for full retirement to elect a "phased retirement" by which they could work part time and, during that time, receive proportionately-reduced retirement annuity payments.

H.R. 4363, cited as the Federal Employee Phased Retirement Act, would allow Federal employees who are eligible for full retirement to elect to continue working half-time (i.e., 50 percent) in an appointed position. Through regulation, the Office of Personnel Management (OPM) could establish other "working percentages," which could be as low as 20 percent and as high as 80 percent. Generally, at least 20 percent of a phased retiree's working hours would need to consist of mentoring. While drawing a partial salary, the phased retiree would also receive his or her civil service retirement annuity—under the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS)—reduced in proportion to the phased retirement. The full annuity would be multiplied by the phased retirement percentage (i.e., the difference between 100 percent and the working percentage). Later, at full retirement, the reduced annuity would be increased by an amount equal to the working percentage multiplied by the annuity payable at full retirement (with that annuity calculated as though the individual was employed full-time in the position occupied during the phased retirement).

Under the bill, Federal employees would be permitted to make only one phased retirement election. Once elected, phased retirees would be permitted to elect full retirement at any time under procedures prescribed by the OPM. Phased retirees would also be permitted to terminate the phased retirement and return to full-time work under procedures prescribed by the OPM and the employing agency. Phased retirees would continue to accrue retirement benefits during phased retirement, and could transfer from one position to another as long as the transfer did not cause a change in the working percentage.

In analyzing the bill, the CBO assumed that 1,000 Federal employees per year would elect phased retirement for a period of three years before electing a full retirement. (These numbers are based on the assumptions that were used by the OPM in its assessment of the proposal.) The phased retirees would continue making contributions toward their retirement plan, and their employing agencies would also continue making corresponding contributions toward the retirement plans on behalf of the phased retirees. The report concluded that over the period 2013–2022:

Among other relevant factors, the report explains that most CSRS employees contribute 7.0 percent of salary toward retirement while most FERS employees contribute 0.8 percent. More contributions would be collected from a CSRS employee who remains employed in phased retirement than would be collected from a new employee covered by FERS. The bill has been referred to the House Oversight and Government Reform Committee.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2012, Deloitte.