FERS vs. FECA: Best retirement option sometimes hard to call
- By Nathan Abse
- Aug 26, 2020
For some feds, federal disability can pay more each month than regular retirement benefits. For others, though, taking regular retirement pay is a better choice. A new report finds it’s often hard to predict the best choice in advance.
The report, just issued by the Government Accountability Office, delves into what at first glance seems like a straightforward arithmetic problem -- but of course, in the end, it isn’t.
Federal employees at retirement normally begin to take monthly payments under the Federal Employees Retirement System (FERS). Just how much a FERS check amounts to is calculated in a formula based on an employee’s “high-3” -- the highest three years of salary a federal worker earned.
However, GAO finds, those who were injured or disabled in their career, and remain so at retirement age, may be better off not drawing from FERS but instead electing to continue to draw disability pay, under the Federal Employees’ Compensation Act (FECA) program. GAO notes that not all injured retirees are aware of this option.
“FECA recipients can receive … compensation for as long as their disability continues,” the report states. “At retirement age, they can remain on FECA or, instead, choose to receive their benefits from the Federal Employees Retirement System (FERS).”
With prospective FERS payments increasing over the course of most federal careers, the converse is also true: In a short federal career, an employee’s FERS payout is likely to be small. That means those who are disabled early in the arc of their work life may well be better off continuing to take FECA at retirement.
As the GAO report summarizes: “FERS benefits increase substantially the longer a federal employee works. As a result, median … FECA packages were greater than the FERS median for retirees with shorter careers absent injury. However, median FECA packages were similar to or less than FERS for retirees with longer careers.”
The difference can be striking. For example, the report says when a fed who has less than 10 years on the job is disabled, the median FERS package on offer at retirement would be $14,560 per year, while FECA would pay out a median of $37,869. FECA would be the obvious choice for retirement under this scenario.
On the other hand, if an employee has more than 30 years at the time of injury, the median FERS package comes to just over $50,000, while the “reduced” FECA package pegs at far less, a mere $36,299. Again, the decision is simple: For long-haul feds starting to draw FECA near the end of their careers, the best option at retirement would usually be to take FERS.
In cases like these, the choice is clear, but in between the picture is murkier. The Department of Labor and the Social Security Administration, the report notes, together “use a manual and highly complex process” when they calculate a key component of a FECA recipient’s retirement compensation. GAO says these manual calculations are “time-consuming and increase risks associated with human error, which hinders their ability to produce estimates upon request and could lead to inaccuracies,” hampering FECA recipients’ ability to adequately compare benefits options.
Perhaps the most important point in the GAO report is that, to date, “the Department of Labor does not routinely remind recipients to compare benefits.” Arriving at the best decision can involve a complex mathematical calculation. Feds who are drawing disability and not sure whether to opt for FERS or FECA in retirement should consult their financial advisor or benefits specialist.