Many of the 250,000 retirement-age federal workers may be panicked into retiring this month -- in some cases much sooner than they had planned -- because of the tax reform bill passed by the House.
Some agencies are expecting a 30 percent jump in June retirements as employes rush to beat a deadline that may, or may not, mean anything.
People who retire will be doing the safe thing! But they can't be sure they did the right thing.
Many retirement-age feds are being forced to make one of the most important decisions of their lives in the dark. They've had no help from official sources, including the House Ways and Means Committee, which produced the tax reform bill that has produced the panic.
The House bill would end next month a pension tax benefit affecting 17 million government employes at the federal, state and local levels, plus thousands of private sector workers who also contribute to their pension plans.
The bill would eliminate the so-called recovery rule. Under it, pensions of persons who contribute to their own retirement plans (and pay taxes on those contributions) are not taxed until the retiree gets back all his or her contributions. The tax-free recovery period can last up to three years. Typically, federal retirees recover their contributions in 18 months. Naturally, that recovery period is a major factor in retirement planning.
The House-proposed change would immediately tax a prorated portion (based on the retiree's life expectancy) of the pension. It wouldn't increase an individual's tax burden over a normal lifetime, but it would mean retirees would have to start paying taxes much sooner. Congressional sources estimate it would mean a $10,000 tax bite in the first three years for the typical retiree.
Feds are less concerned about the Senate tax reform plan because it would end the tax benefit over a two-year period, starting in 1988. So there is no deadline pressure from the Senate bill.
Fear of being caught on the wrong side of the tax change -- if the House version becomes law -- has hit many retirement-age federal workers. This column has had hundreds of calls from workers asking for retirement advice (no way!) or a guess as to what Congress will do (again, no way!).
Most of the calls are from this area. But they've also come from Defense, Labor, IRS, HUD, Air Force and State Department employes in Chicago; Boston; Philadelphia; Dayton, Ohio; Baltimore; Edwards Air Force Base, Calif.; Salt Lake City; New York City; Newark; Atlanta; Miami and London. It isn't just a Washington issue.
To make the "right" decision, retirement age workers need to know:
*Is Congress going to approve a tax reform bill?
*If so, when?
*Will the recovery elimination be part of the final tax bill?
*If so, what will be the effective date of that provision?
The answer to all four questions -- and any variations you can come up with -- is that nobody knows.
Many retirement-age feds are frantic and frustrated by the lack of answers. If they retire next month and the House version doesn't become law, they will have done the wrong thing. If they decide not to retire and the House version does become law, that will mean they did the wrong thing.
Most congressional observers are predicting that the final version of tax reform will not contain a July 1 effective date for the pension tax change. But it could. And that uncertainty could -- probably will -- drive a lot of good people out of government early, and maybe unnecessarily.