Reg Jones Expert's View

On May 21, OPM issued notices in the Federal Register indicating that the present value factors for CSRS and FERS will be changed, effective October 1. The last time OPM changed the present value factors was nearly three years ago. So, what are present value factors? Why do they change? And what impact might they have on you?

Present value factors are based on economic assumptions and demographic factors. They change when an analysis done by the Board of Actuaries of the Civil Service System determines that those assumptions and factor have changed enough to warrant a revision in the tables.

Present value factors apply to:

* retirees who elect to provide a survivor annuity to a spouse they marry after they retire, and

* retiring employees who: elect the alternative form of annuity; owe certain redeposits if they received a refund of their retirement contributions before March 1, 1991; or want to get credit for certain kinds of service with non-appropriated instrumentalities.

Present value factors have a broad span. If you are under CSRS, they range from 324.2 at age 40 to 49.2 if you are 90. For those covered by FERS whose annuities aren’t increased by COLAs before are 62, it’s 214.6 to 49. The numbers for those whose annuities are increased by COLAs, the range is from 291.8 at age 40 to 204.3 at age 62, at which point the numbers for all those covered by FERS are the same.

Let me illustrate how that works in practice. Suppose you are a CSRS employee who took a refund of his retirement contributions before March 1, 1991, came back to the government, and now owe a redeposit. Now you want to find out if it would be better to redeposit that money or accept a reduction in your annuity.

Divide the present value factor for your age into the redeposit you owe, and you’ll have a figure on which to base your decision. For example, suppose you met the age and service requirements to retire (55 and 30), had a high-3 of $80,000, and owed a redeposit of $18,000 (refunded amount plus accrued interest). If you made a redeposit, your annuity would be $45,000 per year or $3,750 per month.

If you decide not to redeposit the money, the actuarial reduction would depend on your age. At age 55, your present value factor would be 253.6. So, your reduction would be $70.97 ($18,000 ÷ 253.6), resulting in a new monthly annuity of $3679.03. On the other hand, if you were age 62, the numbers would look like this: present value factor 212.1, annuity reduction, $84.86 ($18,000 ÷ 212.1), new monthly annuity, $3665.14.

Once you’ve done the arithmetic, you can make up your mind if it is better to pay in that money and have a higher annuity for the rest of your life or accept the reduction instead.