The U.S. government could be swamped with retirements in the next few weeks as senior employes try to beat a proposed pension tax change deadline in the president's tax reform bill.
One provision of the bill would subject annuities that start in 1986 to immediate taxation. Right now, federal, state and local government workers (and others who contribute toward their retirement) have a time period after they retire when their annuities are not taxed.
The tax reform bill before Congress would change all that.
Federal personnel officials say they've had a steady stream of questions about the proposed pension tax for some time. But they say the number of queries from anxious workers jumped after an item was published here Sunday about House action on the proposed change.
"Everybody is asking what is going on, and 'Should I get out now?' " a personnel officer said, "and all we can tell them is the legislative situation, which is about as clear as mud."
About a fifth of the government's 2.8 million employes are currently eligible to retire. In fiscal year 1983, the last year for which statistics were available, nearly 81,000 employes retired.
Federal employes contribute 7 percent of their salaries to the retirement fund. They pay taxes on those contributions as part of their gross income.
Currently, when employes retire, the pensions aren't taxed until the individuals get back whatever they put in (since that money has already been taxed). On average, it takes about 18 months for a retiree to recover those contributions. During that period the annuity is untaxed. The tax-free period can be as long as three years.
Many civil servants use the tax-free period to cash in stocks or bonds, or to work at other jobs so that income from those sources will be taxed at lower rates than if their annuities were also counted as income.
President Reagan's tax reform bill proposes that annuities that begin in 1986 be taxed from the first day. The amount of pension subject to taxation would be prorated based on actuarial life expectancy.
Persons already drawing federal pensions, or those who retire before the deadline, would not be subject to the change. That is the important and tricky part.
Last week the House Ways and Means Committee approved the pension tax change, over the objections of local members of Congress, the Senior Executives Association (whose relatively high-paid members would be especially hard hit) and federal and postal unions.
This is where the deadline uncertainty comes in: The House bill says feds who retire by Dec. 31 could retain the current tax-free period. The administration plan would require feds to retire by Dec. 3, giving them even less time to make a decision.
Persons retiring after the deadline (whatever it is) would be subject to the new rules, and immediate pension taxes, if the tax reform package becomes law.
Some Congress-watchers believe it will be summer before any reform bill is passed. But when it passes is less important than the effective dates and deadlines. That is why it is important for federal employes who want to have a tax-free period for their annuities to do some serious thinking.
But please don't rush out and retire based on this information alone!
A lot could happen to tax reform, including nothing. The bill may be stalled, delayed or never approved. It could get a new effective date, or a new deadline could be set for federal workers. Nobody knows what will happen.
But you should keep an eye on the progress of the tax reform bill, and also inquire at your agency's personnel/retirement office about your options.