Federal workers hoping to retire early next year to get a tax break are playing with financial dynamite.
In their attempt to lower their 1980 tax bite, they could lose eligibility for a 7.7 percent cost-of-living increase that Congress is likely to eliminate next month. For most people, the slightly higher taxes they would pay by retiring this year, rather than 1981, are a drop in the bucket compared with the long-range financial benefit of grabbing the 7.7 percent annuity increase while they still can. This is the picture:
At the moment more than 200,000 U.S. Workers are eligible to retire. Many of them have weeks or months of unused leave that they will be paid for at the time of retirement. Normally many federal workers wait until January to retire. That is so the lump sum leave payment is not part of their income for their last year of service. Federal retirees do not pay taxes on their annunities until they have recovered all the money they contributed toward their retirement. That usually takes 18 months.
The complication this year is that Congress is seriously considering eliminating a major "look-back" benefit for federal workers. That feature has allowed employes to get most of the COL raise that took effect before they retired, as well as the full amount of the next COL that comes due after they retire. Under the federal system, retirees get COL raises each March and September. The last COL increase was a record 7.7 percent.
Persons who retire before Congress changes the rules and before the president signs the change into law will still be able to get that 7.7 percent raise. If they retire after the change is effective, assuming Congress and the president make the change, they lose the 7.7 percent.
Many would-be retirees are asking if there is a way they can get both benefits -- the tax break by retiring next year and the 7.7 percent that is threatened by congressional action. The calendar says no.
Congress is due to return from its election recess Nov. 12. Senate-House conferees on the budget reconciliation bill (which contains the look-back wipeout) could move quickly. The House wants to have a compromise ready by Nov. 14. If that compromise includes the look-back elimination, and if Congress approves it, the bill could be on the president's desk in a matter of days following the action. Once he signs it, the look-back would be gone.
Nobody knows what schedule Congress will keep, or whether it will even act on the look-back elimination. But persons eligible to retire now should watch this space to see what is happening, and they should be prepared to retire in time to get the look-back raise of 7.7 percent.