More than 48,000 federal retirees took $1 billion in lump-sum pension payments last year even though congressional changes in tax rules wound up costing the retirees an estimated $300 million in federal taxes on the pension payments for 1987.
Retirees who elected the lump-sum option -- which provides an amount equal to all the money they contributed to the government pension plan while working -- took a lifetime reduction, ranging from 8 percent to 15 percent, in their annuities. For some longtime, high-salaried retirees, the lump- sum payments were worth $70,000 or more, though the average payment was less than $30,000.
Congress originally promised that the lump-sum payments would be tax-free, but has since changed the rules twice. The lump-sum option was first authorized as part of the law creating the Federal Employees Retirement System. At that time Congress said the lump-sum payments represented previously taxed worker contributions to the retirement program.
But the Tax Reform Act of 1987 declared that only a small portion (about 10 percent) of the lump-sum payment came from previously taxed employee contributions, meaning that retirees who took the lump-sum option had to pay taxes on about 90 percent of the total amount received.
Even with that change more than half of the people retiring last year elected to take the lump- sum option.
Late last year Congress once again revamped the lump-sum pension rules. The latest change says that workers retiring this year can get only 60 percent of the total lump-sum payment this year. The remaining 40 percent will be paid to them in 1989.
Although the change was designed to raise revenue, it will actually mean that many people who retire this year will pay less in taxes because their payments will be spread over two years, and taxed at new, lower rates. The split payments will be in effect until October 1989 unless Congress extends the system. Otherwise, workers retiring late in 1989 will again be eligible for full lump-sum payments.
Meantime, in an effort coordinated by the Senior Executives Association, several 1987 retirees are planning to sue the government seeking to overturn that portion of the Tax Reform Act that makes a major portion of the lump-sum payments subject to federal taxes. If they win that battle -- which could take a long time -- it could mean big tax refunds for most or all of the 1987 retirees who took the lump-sum option.
The Army Materiel Command will offer early retirement to an estimated 15,000 civilian employees between Feb. 1 and March 31. About 400 staff members here will be eligible for the early out.
Under the plan okayed by the Office of Personnel Management, staff members -- with some exceptions -- can leave early on immediate pensions at age 50 with at least 20 years' service, or at any age after 25 years' service. Annuities will be trimmed 2 percent for each year a retiree is under age 55. Excluded from the early out are employees in hard-to-fill jobs that are paid special higher rates. They include engineers and scientists in Grades 5 through 12, and most clerical employees in GS 6 and below.