Why Do We Have CSRS Offset Employees?
CSRS Offset coverage was effectively introduced in 1987 (the same time that FERS was effectively introduced). FERS and CSRS Offset coverage exists today primarily because of some Social Security amendments that were passed by Congress in the mid-1980s.
Prior to Jan. 1, 1984, the only federal employees who paid Social Security taxes from their federal pay were employees who held appointments that were exempt from CSRS coverage (i.e. Temporary, Intermittent, TAPER, Indefinite, Term, etc.). However, the Social Security amendments of the mid-1980s were going to require all federal new hires to pay Social Security taxes, even if their appointment was permanent. These amendments were also going to require certain rehires to pay Social Security taxes upon reemployment with the federal govt.
Since federal employees under CSRS do not pay Social Security taxes, Congress needed to develop a new federal retirement system for the folks who were going to be affected by these changes. It only takes 5 years of creditable federal civilian service to be vested under a federal civilian retirement system. Although some folks were already “grandfathered” or vested under the old retirement system, some of these folks were going to have to start paying Social Security taxes as well, even if they wanted to remain under the old retirement system.
CSRS Offset employees are folks who most likely began their federal civilian career prior to Jan. 1, 1984, but they had a break in retirement covered federal civilian service of more than 365 days that ended on or after Jan. 1, 1984 (and in most cases, they had at least 5 years of potentially creditable service as of Jan. 1, 1987).
Example:
Federal appointment from 6/5/1976 to 8/2/1981 under CSRS
Break in federal service of more than 365 days
Rehired appointment from 3/2/1988 to Present under CSRS Offset
If the employee above had never left federal employment for more than a year (or if he/she would have returned to federal service under CSRS before Jan. 1, 1984 which was when these amendments took effect for most federal employees), he/she would still be CSRS today and would not currently be paying Social Security taxes from his/her current federal pay (unless he/she had chosen to transfer to FERS). But the Social Security amendments required that any federal employee rehired on or after Jan. 1, 1984 with more than a 365-day break since his/her last CSRS covered position, had to pay Social Security taxes upon rehire.
There are some CSRS Offset employees today who began their federal civilian careers prior to Jan. 1, 1984 but did not obtain federal retirement coverage until after this date.
Example:
Temporary appointment (exempt from CSRS coverage) FICA ONLY from 8/4/1978 to 8/3/1979
Term appointment (exempt from CSRS coverage) FICA ONLY from 6/8/1982 to 6/7/1984
Federal appointment from 6/8/1984 to 12/31/1986 under CSRS Interim
Covered appointment continues from 1/1/1987 to Present under CSRS Offset
Note: FICA ONLY means that they only paid Social Security taxes during this appointment… and did not pay into CSRS.
In the example above, this employee did not have any retirement coverage until his/her appointment on 6/8/1984 (which was after the effective date of the Jan. 1, 1984 Social Security amendments). Before FERS and CSRS Offset became effective on Jan. 1, 1987, an employee who initially obtained a federal position eligible for retirement coverage between Jan. 1, 1984 and Dec. 31, 1986 was given temporary retirement coverage called CSRS Interim. But when CSRS Offset and FERS became effective in 1987, they were either automatically converted to FERS (without an election opportunity) or they were converted to CSRS Offset (with the option to elect FERS coverage).
The only folks who should have been placed under FERS automatically were folks who had less than 5 years of potentially creditable federal civilian service as of Dec. 31, 1986. Once an employee is covered under FERS (either automatically or by an employee election), any CSRS Interim or CSRS Offset service they may have previously had would be treated under FERS rules (for retirement eligibility and computation purposes).
Note: There is an exception to this “5-year test” for employees who were covered under CSRS prior to Jan. 1, 1984 and another exception for employees of the D.C. Govt. who were covered under CSRS prior to Oct. 1, 1987 that will not be addressed in this article. For more information regarding these exceptions, either contact me or read through some of my articles regarding retirement coverage.
However, as in the example above, if the employee under CSRS Interim had at least 5 years of potentially creditable service as of Dec. 31, 1986, then they should have been converted to CSRS Offset (with the option to elect FERS). If they chose not to elect FERS coverage and were still employed today, they would be a CSRS Offset employee.
What Does the Offset Really Mean?
Offset means reduction.
CSRS Offset employees currently make a much smaller contribution into the Civil Service Retirement & Disability Fund (CSRDF) than their CSRS counterparts. The CSRDF is the “bucket of money” that the Office of Personnel Management (OPM) uses to pay federal pensions & survivor benefits. Most CSRS Offset employees currently contribute .8% of their Basic Pay into the CSRSDF while most CSRS employees contribute 7%. CSRS Offset employees under the Special Group provisions (i.e. Law Enforcement, Firefighters, Congressional, etc.) contribute 1.3% into the CSRSDF while the Special Group CSRS employees contribute 7.5%.
However, CSRS Offset employees also pay a mandatory Social Security tax that their CSRS counterparts do not currently pay. Since most of today’s CSRS Offset employees have paid more Social Security taxes than their CSRS counterparts, it makes sense that their benefit from Social Security tends to be slightly better. But once the CSRS Offset retiree becomes eligible for Social Security benefits based on his/her own work record, then the CSRS Offset federal pension from OPM will be subject to the offset computation (reduction).
It only takes 10 years of paying Social Security taxes to earn the necessary 40 credits to be vested under your own work record. Most CSRS Offset folks have already earned their 40 credits. If not, most will eventually qualify by the time they decide to stop working.
What if I Retire Before Age 62?
When a CSRS Offset employee separates for retirement before the age of 62, his/her federal pension is initially calculated the same as if he/she were always CSRS. The pension is initially computed using the basic CSRS formula. OPM does not apply the offset (reduction) to the pension until the retiree reaches the age of 62, which is the minimum retirement age for regular Social Security retirement benefits.
For example, if a CSRS Offset employee retired at the age of 55 with 30 years of creditable service (or age 60 with 20, or under the Early Retirement or Special Group provisions), they would receive a full CSRS pension between the date of retirement and age 62.
But when the CSRS Offset retiree becomes eligible for Social Security benefits, OPM will compute and apply the offset (reduction), regardless of whether the retiree actually applies for Social Security at that time or not.
If the CSRS Offset retiree is eligible for his/her own Social Security benefit later in life, it wouldn’t be fair to continue giving him/her a full CSRS pension for the rest of his/her life when they did not contribute the same amount of money into the CSRDF. Remember, most CSRS employees contribute more than 7 times as much into the CSRDF than CSRS Offset employees contribute. That’s why there is an offset (reduction) to the CSRS Offset pension once the CSRS Offset retiree becomes eligible for his/her own Social Security benefit (which tends to be better than the Social Security benefit that a CSRS retiree may have earned for him/herself). Keep in mind, there are some CSRS retirees who will never qualify for their own Social Security benefit.
But here you have Uncle Sam holding two buckets of federal dollars. One bucket represents the CSRDF and the other represents Social Security. Once you become eligible, it’s up to you to decide when you want to apply for money from these two buckets. Even though you have not contributed as much into the CSRDF as your CSRS counterparts, OPM is willing to give you a full CSRS pension from the date of your retirement until you become eligible for Social Security, but OPM will reduce your CSRS pension based upon the Social Security benefit attributable to the Social Security taxes that you paid as a CSRS Interim/Offset employee. We will discuss this in more detail later in this article.
There are many reasons why some folks do not apply for Social Security as early as age 62. But if the person in the example above had his/her 40 credits under Social Security by the time he/she reaches age 62, the offset (reduction) would be applied to the federal pension accordingly, even if he/she decides to apply for Social Security at a later age.
No one will force you to apply for Social Security when you are eligible for the benefit. OPM doesn’t ask Social Security if you have applied for the benefit or not. They just ask Social Security if you are eligible based on your own work record. If so, OPM computes the offset to your federal pension at that time.
In the example above, the CSRS Offset retiree does not have to apply for Social Security at age 62 if they do not want to. But they just need to be aware and prepared for the reduction to their federal pension at that time.
What if I Retire On or After Age 62?
Most CSRS Offset employees who choose to continue their federal careers beyond the age of 62 will have already earned their 40 credits by the time they retire from the federal govt. OPM applies the offset to the computation of the CSRS Offset pension at the age of 62 or date of retirement, whichever is later. In this case, the date of retirement would be later than 62. So, for example, if a CSRS Offset employee retired at the age of 64, the reduction would be applied immediately if the retiree had already obtained his/her 40 credits under Social Security.
It’s rare, but if the CSRS Offset retiree never obtains his/her 40 credits under Social Security, then his/her pension would never be subject to the offset (reduction), even if they qualify for a Social Security benefit based on his/her spouse’s or former spouse’s record. Remember, the offset is only applied IF the CSRS Offset retiree earns a Social Security benefit based on his/her own work record. But if they ever get their 40 credits later, OPM is supposed to apply the offset at that time.
For example, in some situations, the CSRS Offset retiree separates for retirement prior to the age of 62 but does not obtain 40 credits under Social Security until after the age of 62 (perhaps with a private sector job they obtain after retirement). In this situation, the CSRS Offset retiree would receive a full CSRS pension from the date of his/her retirement up until he/she obtained enough credits to qualify for Social Security (even though they didn’t obtain enough credits until after the age of 62).
Remember, whether the retiree applies for Social Security or not, OPM applies the reduction to the CSRS Offset pension as soon as the retiree is eligible for Social Security based on his/her own work record. “Eligibility” is the key word here… it doesn’t matter if you are actually “receiving” money from Social Security.
How Does OPM Compute the Offset?
Keep in mind, a CSRS Offset pension is initially computed using the same rules that a CSRS pension is computed. But when the CSRS Offset retiree becomes eligible for Social Security benefits, OPM will contact Social Security and ask them a few questions. OPM will not contact you… they contact Social Security directly.
The first question OPM will ask: “Does this individual have 40 credits under the Social Security system?”
If Social Security says NO, then OPM will allow the CSRS Offset retiree to continue with the full CSRS pension until the individual obtains his/her 40 credits… if ever. This would result in an ongoing communication between OPM and Social Security.
If Social Security says YES, as will be the case in most situations, then OPM will ask a couple more questions.
If YES, OPM will then ask Social Security for the total amount of the monthly Social Security benefit payable and they will also ask for the amount attributable to the years where the individual paid Social Security taxes as a CSRS Interim/Offset employee. The latter of these monthly figures that OPM receives from Social Security (that is based on the amount attributable to your CSRS Offset service) is the most that they can reduce your monthly federal pension by. Social Security will compute this figure for OPM when requested.
Let’s discuss this first figure for a moment. Think of your future monthly benefit from Social Security as a basket of apples and oranges.
The apples is the amount of money that you earned from Social Security based on any Social Security taxes that you paid prior to 1984 (including any temporary appointments you may have had with the federal govt.), including any taxes that you may have paid by working outside of your federal civilian career (which would also include any military service you may have had since 1957 from which you also paid Social Security taxes). Remember, you probably paid Social Security taxes for other jobs you may have had outside of your federal career.
And the oranges is the amount of money that you earned from Social Security based only on the taxes that you paid as a CSRS Interim/Offset employee. Keep in mind, if you never paid Social Security taxes anywhere else (other than your federal service as a CSRS Offset employee), then your Social Security benefit would be 100% oranges. But as mentioned above, it is common for most CSRS Offset folks to have held jobs outside of their federal careers where they paid Social Security taxes elsewhere.
For example, let’s say that I have been a CSRS Offset employee for the last 20 years and I’m getting ready to retire from the federal govt. here at the age of 62. So in this case, I know that OPM will be applying the offset (reduction) to my federal pension as part of the initial adjudication of my retirement (because I already have my 40 credits under Social Security AND I am eligible to apply for the benefit at the time of my federal retirement, if I wanted to).
Let’s say my work history looks like this:
10 years military service FICA ONLY – apples
1 year temporary appointment with federal govt. prior to 1984 (exempt from CSRS coverage) FICA ONLY – apples
5 years CSRS – did not pay Social Security taxes
6 years private sector/contracting/consulting FICA ONLY – apples
20 years (returned to a covered position with the federal govt.) under CSRS Offset – oranges
Using the example above, you can see that I paid Social Security taxes for 37 years of my working life. 17 of those years represent the apples and 20 years represent the oranges in my monthly Social Security benefit payable to me at the age of 62.
Let’s say that Social Security tells OPM that the total monthly Social Security benefit payable to me at the age of 62 is $1,200/month. But Social Security will break that $1,200/month benefit down into apples and oranges, and they will provide OPM with the value of oranges. Let’s say the oranges represent $700/month (which means the apples represent the remaining $500/month).
In this example, the most that OPM could reduce my federal pension by would be $700/month.
The Calculation
Now for the good news… the calculation of the offset (reduction) that OPM will apply to your federal pension will be the LESSER of the following:
-the amount of your Social Security benefit attributable to your CSRS Interim/Offset service (oranges)
or
-the amount obtained by multiplying the following fraction by the total Social Security benefit payable at that time:
(Total Years of Offset Service divided by 40) X Total Social Security benefit payable
To estimate the Offset to your future pension, you should always take your total years of Offset service and divide it by 40 to come up with a percentage, and then multiply that by the total Social Security benefit payable to you at the age of 62 (or date of separation for federal retirement, whichever is later). In many cases, your estimate should be very accurate because the LESSER of the two items listed above is usually the latter. Where do you get the total Social Security benefit payable to you? You can start by clicking HERE.
In my example, I would take 20 years of CSRS Offset service and divide it by 40… which would result in 50%. In my example, my total Social Security benefit payable at age 62 was $1,200/month… so 50% of $1,200 is $600/month.
Every Cloud has a Silver Lining
Since OPM uses the LESSER of the two to compute my Offset, they would only reduce my pension by $600/month in my example. The good news is that my CSRS Offset service has earned me more retirement income from Social Security (oranges = $700/month) than the reduction that will be applied by OPM. Plus, by working elsewhere I earned an additional $500/month (apples) from Social Security as well.
It’s not always a bad thing to be under CSRS Offset. In most situations, once a CSRS Offset retiree is collecting both a federal pension AND Social Security, they are usually taking home more retirement income (from these 2 federal sources) than what they would have been taking home if they were just CSRS.
Keep in mind, even though both CSRS and CSRS Offset retirees are subject to the Windfall Elimination Provision, this WEP usually has a smaller impact to your Social Security benefit if you are a CSRS Offset retiree because of the many years that you paid your Social Security taxes… and in some cases, you might even be exempt from the WEP.
Even if the lesser of the two computations was my oranges ($700… which can happen if you don’t have many years of CSRS Offset service under your belt)… when OPM takes that benefit away from my federal pension, I could apply to collect my monthly oranges ($700) AND apples ($500) from Social Security. In this case, I still might be better off as a CSRS Offset retiree because the WEP won’t affect my Social Security as much.
I don’t care where I get my federal oranges, as long as Uncle Sam gives me my federal oranges. A CSRS retiree will never have any oranges from Social Security, and he/she is lucky to have any apples!
Is There a Downside to Being CSRS Offset?
Now, sometimes there is a small temporary downside to being a CSRS Offset retiree… especially for those who are not ready to collect Social Security until later. Unfortunately, you know by now that whether you decide to apply for Social Security benefits now or later, OPM is going to apply the offset (reduction) to your pension as soon as you become eligible for Social Security.
For example, you might have a post-retirement job lined up that wants to pay you good money and you plan to continue this post-retirement job beyond the age of 62. And you may have heard of the “earnings test” that Social Security uses to reduce any benefit you try to claim before you reach your Social Security full retirement age. When the “earnings test” is applied, it doesn’t take very much work income to reduce a Social Security benefit to $0. In this example, you may not be ready to give up that nice post-retirement job just so you can collect a $1,200/month benefit from Social Security.
Another reason why some CSRS Offset retirees want to wait until later to collect Social Security is because they know there is a permanent increasing effect to the benefit for every month that they wait to draw the benefit (all the way up to age 70).
Regardless of the reason for waiting to collect a benefit from Social Security, it is true that you would temporarily “fall behind” your CSRS counterparts a little in federal retirement income, but the good news is that OPM only computes the Offset (reduction) once… this happens when you first become eligible for Social Security… and that is when your oranges from Social Security will be small. For those folks who wait, the oranges AND the apples from Social Security continue to grow bigger. Once you start collecting that bigger benefit, your total federal retirement income will most likely surpass your CSRS counterparts if you live long enough.
In most cases, for the CSRS Offset retirees who plan to collect Social Security a few years after they first become eligible, they will usually break even sometime in their mid-80s… in some cases sooner. And then, for the rest of their life, they tend to end up drawing more federal retirement income (federal pension & Social Security combined) on a monthly basis than their CSRS counterparts. And none of this takes into account the benefits and savings you may have accrued by working a post-retirement job elsewhere. Again, this is one of the main reasons why some folks don’t collect Social Security as soon as they are eligible.
But if you are really done working as a CSRS Offset retiree by the time you reach the age of 62, and you don’t plan on working anywhere else… you will certainly want to weigh your options on whether or not it’s worth postponing your application for Social Security benefits.
How Does the Offset to My Pension Affect the CSRS Survivor Benefit for My Spouse?
A survivor benefit payable to the spouse of a deceased CSRS Offset retiree is computed in the same manner as a survivor benefit payable to the spouse of a deceased retiree with full CSRS coverage.
If you are married and you choose to provide a survivor benefit to your spouse when you retire from the federal govt., you can provide as much as 55% of your full CSRS pension as a survivor benefit. The examples below do not take into account any cost of living adjustments (COLAs), but just keep in mind that survivor benefits are increased by the same COLAs that CSRS Offset retirees receive in their federal pensions.
However, the amount of the survivor benefit payable to the spouse of a deceased CSRS Offset retiree may be reduced if the spouse is eligible for Social Security survivor benefits based on the deceased’s federal service as a CSRS Offset employee. This is sometimes called Social Security widow/widower benefits.
For example, let’s say that my full CSRS pension (before the offset) is $5,000/month. In this example, the maximum survivor benefit I can provide to my spouse would be $2,750/month. And when I reach the age of 62, OPM will reduce my federal pension by $600/month.
In this example, the most that my spouse’s survivor benefit could be reduced by would be the same as my offset ($600/month). In other words, my surviving spouse would be eligible for at least $2,150/month… that’s IF she is eligible for a survivor benefit from Social Security based on my work record. If my spouse is NOT eligible for a survivor benefit from Social Security based on my work record, then she could be eligible for the full $2,750/month from my federal pension.
There are many CSRS Offset employees/retirees who are married to folks who expect a larger benefit from Social Security based on their own work records, which means that they would not be collecting a survivor benefit from Social Security for the majority of their life. For example, if my spouse was eligible for $1,600/month from Social Security based on her own work record and my Social Security benefit was only $1,200/month, then she would only draw Social Security based on her own work record and could also receive the full $2,750/month from my federal pension. In this scenario, OPM would not apply the offset to her survivor benefit if she was already 62 years old.
But let’s change the scenario a little… what if I pass away before she is 62 years old? Unless my spouse is disabled or caring for a minor child, my surviving spouse won’t be eligible for survivor benefits from Social Security until she reaches the age of 60. In this example, she would be entitled to the full $2,750/month until she reaches the age of 60.
Even though her own benefit from Social Security is higher than the one that I earned for her based on my work record, she would not be eligible to apply for her own benefit until she reaches the age of 62, so in this situation, OPM would apply the offset to her survivor benefit for a couple of years.
Even if my widow did not apply for the survivor benefit from Social Security at age 60 (perhaps because she is still working and the “earnings test” that we previously mentioned could easily reduce her survivor benefit to $0), OPM would still apply the offset to her federal survivor benefit until she reaches the age of 62.
However… here’s “a little something” that most folks might not be aware of… if my widow remarried sometime between the age of 55 and 60, OPM would NOT apply the offset to her survivor benefit (because her remarriage before the age of 60 would disqualify her from being eligible for the survivor benefit from my Social Security record). In this case, OPM would leave her alone.
The reason why I say “remarriage between the age of 55 and 60” is because unless our marriage lasted for 30 years, my widow would be forfeiting her survivor benefit from OPM if she remarries before the age of 55… even though she could eventually have the survivor benefit from OPM reinstated if her new marriage ended in a death or divorce. But if our marriage had lasted for at least 30 years before I passed away, then my widow could get married the very next month and OPM would leave her alone… although I would hope she would at least give it a few months before she remarried.
Don’t let these crazy rules confuse you too much! These are some of the reasons why folks will hire me to walk them through these sorts of scenarios.
But in this example, if my widow was still single (or if her new marriage ended before she reached the age of 60), then OPM would apply the offset to her survivor benefit until she reached the age of 62. But whether she decided to collect her $1,600/month from Social Security (based on her own work record) at age 62 or wait until later for a bigger benefit, she could have OPM reinstate the full $2,750 survivor benefit once she reaches age 62. According to regulations, the offset to the survivor benefit from OPM would no longer apply once the widow/widower becomes eligible for a Social Security benefit based on his/her own earnings under Social Security IF their benefit exceeds the Social Security survivor benefit.
Wow!!! This stuff can be complicated, right?!
One More Bonus for being CSRS Offset
One last positive note… you can visit another article I wrote by clicking on Government Pension Offset to learn more about the GPO, but don’t worry about it if you plan to have at least 5 years of CSRS Offset service (or more) by the time you retire from the federal govt.
The GPO has nothing to do with the “offset” that we have been discussing so far in this article. The GPO is an offset (reduction) to Social Security benefits that CSRS retirees have to deal with when they try to collect Social Security based on their spouse’s work records. Again, CSRS retirees are lucky if they can get any apples from Social Security… and when they do… it’s usually because they earned it themselves. But by the time most CSRS Offset retirees separate from federal service, they are usually exempt from the GPO. This is just one more benefit of being CSRS Offset.
For example, let’s say that I’m a CSRS Offset retiree and my spouse passes away before I do. As her widower, I’m eligible for as much as the $1,600/month benefit she earned under her own Social Security work record. That’s a lot better than the $1,200/month that I earned for myself based on my work record (which is potentially subject to the WEP mentioned earlier in this article). The WEP has no impact whatsoever on the Social Security survivor benefit that I am eligible to receive, and I’m exempt from the GPO because I had more than 5 years of CSRS Offset service.
I really don’t mean to make light of such a sensitive topic as losing our spouses, but I just want federal employees and retirees to understand their benefits and I want them to understand the options that are available to them. Sometimes, when I use these extreme examples, it helps us to understand these quirky rules and regulations. I said it before and I’ll say it again, Congress has always done it’s best to confuse people when they wrote the laws & regulations that govern federal retirement benefits. And it’s doubtful that they will write any new laws that will be any clearer.
Take care of yourselves and your families… good luck as you continue your federal careers and as you continue to plan for your future retirement!
Sincerely,
James
