Actuarial reductions are based on economic assumptions and demographic factors, such as life expectancy. Image: LDprod/Shutterstock.com
By: Reg JonesIn my last column, I talked about the choice employees face if they had left the government, withdrawn their retirement contributions and later returned to work for the government. They must repay that money to capture credit for that earlier service time in their later annuity calculation. We looked at whether they should make the redeposit or not—and if they do, would they have to pay it as a deposit into the retirement system or could they pay it in the form of a reduced annuity?
In this column, I’ll focus on those employees who are eligible for paying it as a reduction in their annuities. But first, let’s review the eligibility rules for an “actuarial reduction.”
CSRS and CSRS Offset—In general, to get full credit for a period of refunded CSRS service, you must redeposit that money, plus interest. However, there’s an exception: if you took a CSRS refund for a period of service that ended before October 1, 1990, you have the choice of either making a redeposit or having your annuity reduced actuarially based on your age and the amount of the redeposit you owe, including interest.
FERS—Almost all FERS employees must pay a redeposit to capture past time for which they took a refund at a break in service. There is an exception, though, for those who had taken a refund covering at least five years of service under CSRS but are now under FERS; they fall under the same policies applying to CSRS/CSRS Offset employees described above.
Actuarial Reductions
Now let’s take a look at what actuarial reductions are and the impact they have on a retirement annuity. Actuarial reductions are based on economic assumptions and demographic factors, such as life expectancy. They are determined by the Board of Actuaries of the Civil Service Retirement System (which covers both CSRS and FERS).
They are expressed as “present value factors” that correspond to your age. The factors for CSRS are at federalregister.gov/d/2021-06326 and those for FERS are at federalregister.gov/d/2021-06324. They are subject to periodic minor changes.
The figure is divided into the amount of the redeposit owed to determine the dollar amount of the monthly reduction. For example, suppose you owed a redeposit of $16,000. Here’s what the actuarial reduction would be at two different ages:
Retiring at age 62
Present value factor, CSRS/FERS: 238.9/224.7
Monthly reduction, CSRS/FERS: $66.97/$71.21
Retiring at age 65
Present value factor, CSRS/FERS 215.8/204.5
Monthly reduction, CSRS/FERS: $74.14/$78.24
Note: These rates will change slightly effective October 1.
The upcoming CSRS rates are at
https://www.govinfo.gov/content/pkg/FR-2023-04-14/pdf/2023-07877.pdf
…and those for FERS at
https://www.govinfo.gov/content/pkg/FR-2023-04-14/pdf/2023-07878.pdf.
What Should You Do?
It all depends on what you owe and what you’d get in return in the form of an increased annuity by making the redeposit. As mentioned last week, your first step is to calculate the impact on your annuity if you didn’t make any form of repayment and gave up crediting for the prior service time vs. making the repayment and getting credit for that time.
Then, find out what you would owe if you did choose to make a payment. To do that, go to www.opm.gov/forms/standard-forms and click on Standard Form 2803, Application to Make Deposit or Redeposit (CSRS) or Standard Form 3108, Application to Make Service Credit Payment (FERS). Complete the form and send it to OPM (instructions are on the form).
With that information in hand, you can decide whether you’d be better off returning the money to capture that service time or not. If you decide to do so, you can pay back the money as a redeposit as described last week—or, if you are eligible, to pay it back in the form of an actuarial reduction.
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