Furloughs, paychecks & pensions

Monday - 2/4/2013, 2:00am EST

In a perfect world, we would all have a minimum of six months of cash in the bank, credit union or in a water-tight jar in the back yard. It would be enough money to cover the rent/mortgage, food and bills because you lost your job or your income was reduced drastically.

Unfortunately, most people don't live in a perfect world. Many people, for a variety of reasons, live paycheck to paycheck.

For tens of thousands of federal workers and government contractors, the prospect of a 20 percent salary reduction — from April through September — gets closer every day Congress and the White House continue to fight over taxes and spending cuts. In 2011, the politicians set a deadline for "sequestration," a Dr. Strangelove sort of political-fiscal weapon so awful that nobody would dare set it off. Sequestration was supposed to begin last month but the politicians moved its start date a couple of months.

When and if it happens — and a growing number of people believe it will — Defense and some other federal agencies plan to save money by furloughing workers one day a week for a total of 22 days. Some agencies believe they can get by without furloughs, or by only having a few furlough days, by freezing hiring, firing temps and reducing spending for travel and training.

The last time there was a governmentwide shutdown (1995-96), Congress voted to pay employees for the time they had been furloughed. But, last year, after a small furlough at the Federal Aviation Administration, Congress said no-work-no-pay. Transportation Department officials found enough money to reimburse the furloughed feds.

Pat Niehaus, president of the Federal Managers Association, says she lived through the last furlough/shutdown and this one will be different. "I don't believe Congress will reimburse furloughed employees for pay lost because of a furlough," she said. And many agree. Niehaus was a guest last week on our Your Turn radio program, along with Federal Times reporters Sean Reilly and Stephen Losey. To hear the entire show, click here.

Bad as the possibility of a furlough/pay cut is, many workers are concerned about what that lost pay would mean to their high-three salary computation for retirement purposes. Losing 20 percent of your pay for six months would be rough. Getting a smaller lifetime retirement benefit because of that would be even rougher.

Annuities of most workers are based on their length of service and their highest three-year average salary. Because of the two-year pay freeze, there has been no change in the high-three for employees since 2011. So what impact would a prolonged pay cut have on their future benefits? Typical is this query from a reader/listener:

  • "Hi Mike, I am a couple years from retirement. Reading about a possible furlough this year, I have not seen anything about a furlough of this magnitude's impact on high-three computation. Or hopefully non-impact.

    "Can you give us some guidance? If there is an impact, many of us would probably start reviewing our retirement plans." — Just Wondering.

  • OK, can you stand a little good news? If so:

    Short answer: No!

    Benefits strategist John Elliott says that unless someone is furloughed for six months or more in a calendar year, it would have no impact on the employees' high-three. He cites OPM on the subject.

    "An aggregate nonpay status of 6 months in any calendar year is creditable service. Coverage continues at no cost to the employee while in a nonpay status. When employees are in a nonpay status for only a portion of a pay period, their retirement deductions are adjusted in proportion to their basic pay (5 U.S.C. 8332 and 8411)."
    Sorry to shock you with work-related good news! Don't worry. It won't happen often.


    NEARLY USELESS FACTOID

    Compiled by Jack Moore

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