The House Ways and Means Committee has voted to close a loophole that allows U.S. workers to join the new federal pension plan for as little as one day and avoid the so-called windfall benefits law that could otherwise reduce their Social Security payments as much as $1,500 per year.
If the committee change becomes law it would have a major impact on the decision making of most federal workers who someday will collect Social Security benefits and who must, this year, make an irreversible pension choice.
The committee's Wednesday action makes the new Federal Employees Retirement System (FERS) less attractive to U.S. workers who planned to join it to avoid the Social Security benefit cut they would face if they remained in the old Civil Service Retirement System. Between now and Dec. 31, the 2 million federal workers hired before 1984 must choose between CSRS and FERS.
Many workers had indicated that they planned to join FERS because it would protect their Social Security benefits from the windfall law that applies to any federal worker eligible to retire after 1985 who gets both Social Security and a public pension.
Under the complex windfall benefit formula, Social Security payments for individuals drawing federal or public pensions are partially reduced, unless they have at least 30 years of covered Social Security service. Several thousand U.S. retirees have had their Social Security benefits reduced in part since the windfall law went into effect two years ago.
Originally, the House Social Security subcommittee had approved language that would exempt employes from the windfall reduction if they joined the FERS system and remained in it for five years. Federal employes covered by the FERS plan pay the full Social Security tax.
But the Ways and Means Committee leadership rejected the FERS five-year qualifying plan by Rep. Hal Daub (R-Neb.), forcing him to introduce a substitute plan. That plan lowers from 30 to 25 years the amount of time U.S. workers must have under Social Security-covered employment to win exemption from the windfall reduction. Daub estimates that change will exempt 20 percent of the federal work force from the windfall reduction, and reduce its impact for many others with less Social Security service.
Congress enacted the windfall law because of the major differences between the federal pension plan and Social Security. Social Security rules permitted many U.S. workers who spent relatively little time paying into it to get benefits that Congress said were excessive.
Because of a "tilt" in Social Security, lower-income individuals get relatively bigger benefits (based on their salaries) than higher-income persons who paid more into the system. Federal workers who spent only a short time under Social Security-covered employment benefit from that tilt, because their lifetime Social Security wages appear low, and they get what Congress considered to be excessive benefits.
Although closing the FERS loophole has a long way to go, it is important to federal workers, because if it happens it will change the lifetime pension decision most of them must make in the next few months. Social Security Changes
Federal workers concerned about the future of their Social Security benefits can get an update on pending changes at 1 p.m. tomorrow on radio station WNTR (1050 AM). Tom Freimuth, an aide to Daub, will explain what the committee did, and what it may mean for workers.