Federal workers retiring next month have a last-of-a-kind chance to add thousands of dollars to their lifetime pensions, if they watch the calendar. Object is to leave while they are eligible for an about-to-expire "look-back" feature of federal retirement law. It will allow them to cash in on a 7.7 percent cost-of-living (COL) raise that went to already retired federal personnel last September.
President Carter on Friday signed a bill to eliminate the look-back benefit. But Congress at the last minute voted to extend eligibility for the 7.7 percent look-back. Purpose: to make sure that retiring lame-duck congressmen get it, too. Instead of abolishing the look-back feature immediately, as originally planned, Senate-House conferees extended the deadline for 45 days after the bill was signed into law. Carter signed it on Dec. 5, so the 45-day countdown has started.
By extending the life of the look-back into January, Congress has given many potential retirees a substantial tax break. January is always a favorite retirement month for federal workers with lots of unused leave. They get paid for it when they retire. Many choose to retire in January so that the lump-sum payments will be included as income in their first year of retirement. Federal retirement benefits are tax-free until the individual has recovered all the money he, or she, contributed to the retirement fund. Normally that takes about 18 months. For many U.S. workers there is an advantage to having their lump-sum leave payments counted as income in the first year of retirement, when normal income drips and when they have no tax liability for their pensions.
The most important financial factor for the would-be January retirees is what difference using, or losing, the look-back benefit will mean in monthly checks. Those who retire while look-back is alive will get the benefit of the 7.7 percent raise. Those who retire one day after the 45-day period is up will not get it. It is that simple. In most cases the typical federal worker would have to work another couple of years to boost his or her annuity 7.7 percent.
To give you an idea of the value of look-back, we asked the Office of Personnel Management's statisticians to give some examples of the effect of look-back on the "typical" federal worker who is eligible to retire. We took three imaginary people for our models. We assumed that all of them had 30 years' service, and were in the fifth step of their current pay grade. This is what it looks like:
A Grade 5 aide retiring before the look-back benefit is eliminated would get a monthly retirement check of $571. If that same employe retires even one day after the benefit is eliminated, his or her monthly pension would drop to $562.
A Grade 11 employe retiring before the mid-January cutoff would get a monthly retirement benefit of $1,047. If that same employe waited until the day after look-back expires, the pension would drop to $1,031.
A Grade 15 worker could get a monthly benefit of $2,074, thanks to the about-to-expire look-back feature. Once it is gone, the benefit would go down to $2,041.
The difference in the look-back benefit is $108 a year for the hypothetical GS 5; $192 for the mid-level person and $396 per year -- more than a dollar a day -- for higher grade, higher paid individuals.That may not seem like much, but to many heading into retirement every little bit helps.
The extra financial benefit also will help with future cost-of-living raises, since they are compounded. And the extension of time into January will be most helpful to people in figuring ways to cut their income tax burden. w
Federal retirement experts think that many people will decide to retire this January. About 250,000 individuals -- almost one of every 10 U. S. government workers -- is eligible to retire now. There is speculation that as many as 70,000 may quit this January to get the last look-back, which by coincidence happens to include the largest cost-of-living raise federal retirees ever have received.
The exact figures on January retirements won't be known for months. But you can count on a lot of retirement luncheons in the coming weeks, and Ronald Reagan can count on taking over a much slimmer, much younger federal bureaucracy when he moves into the White House.