Financial Questions & Answers with Stephen Zelcer Part 1 – Threats to Federal Benefits
Let’s get into the questions. There were a lot of questions. Some of them had common themes, so I try to lump the questions or the questions with common themes together. So let us try to tackle some of those themes. Some of the themes have to do with threats to federal benefits, RIFs, reduction in force, insurance questions, health insurance, life insurance, TSP questions, and then there’s some miscellaneous questions as well.
So let us dive in. The first series of questions, there were a number of questions as far as threats to benefits. People are very concerned. This is, obviously a concern that’s on people’s minds, threats to benefits. So I have over here just a few questions that have to do with the threats to benefits, John, Katie, and another question from John.
So the first question is, are the federal employees pension safe? Kathy’s question is, do you think the Trump administration will get rid of the retirees FEHB? John’s question is that, will new federal employees have to pay more into their retirement system? Fine. Fantastic. So let’s start with the first John’s questions.
Are federal employees pensions safe? And the answer to that question is yes and no. Just so you know, I have heard this concern for at least a dozen years. This has nothing to do with the new administration. Of course, the new administration is making people very nervous. But just so you know, all the threats that you’ve heard about federal benefits being changed, for example.
Changing your high three to a high five, removing the fake social security the first supplement or removing the FEHB for retirees. This is not the first time these proposals have been made, and I would almost assure you this is not gonna be the last time these proposals are made. It comes up almost every time there is a change in administration and I’m not concerned. I’m not concerned for a few reasons. Number one, they’ve been talking about this all the time, and they never seem to implement it. That’s number one. Number two, even if they do implement it, it’s usually for the new employees going forward, and the ones that are already in, they just get grandfathered in, which we’ll talk about that that in just a second.
And then number three, even if there is a change, it doesn’t go into effect instantaneously. There’s usually a runway, a lead up time, so at least you have the ability to then reevaluate your course of action. So are federal employee pension safe? My, my general sentiment is, yes, they’re fine. And by the way, when I say my general sentiment, let me remind everybody, for those who don’t know, my wife is a federal employee.
In my financial plans, I include her pension, the regular pension. Okay, so I include her pension. Now I realize that’s an assumption. And whenever you make a, an assumption on your financial plan, who has to live with those assumptions, you do. So obviously, if you feel that one of your assumptions is not to your liking, if you feel that Stephan, maybe we should not assume the full pension.
Make sure we do, we should assume a reduced pension. Maybe we should assume that FE HB is not gonna be entirely subsidized by the government. It’s gonna be whatever the government’s subsidy is going to be is gonna go away in retirement. If you wanna change those assumptions, I’m happy to make changes in your projections.
Just going forward. For my wife, I assume the pension’s gonna be there for the health insurance. I assume that the health insurance is gonna be there as well. So these are assumptions that I assume, so that’s why when you ask me, are federal pension safe, my answer is yes and no. The reason why I say no is because it could be that the pension was mis-structured, just like social security was mis-structured.
As we all know, social security’s running outta money and if they don’t change the social security system in some way, they may have to start scaling back benefits in less than 10 years from now. That’s not because the they need to, there’s new rules and the new administration changed the social security system that has nothing to do with it.
That has to do with the mis-structuring of the benefits to begin with. I’m sure you guys heard about this, I’m sure you heard that in 2013, new hires in the FERS retirement system, they have to pay more into the FERS retirement system. Lemme say it again. In 2013, OPM rolled out a new version of the FERS retirement system where the new employees have to pay more into the system.
So for example, if you were hired before 2013, you’re paying 0.8% into your first retirement system. If you’re hired after 2013 depending upon when you were hired, some of you are paying 4.4% for the same exact benefits. You’re just paying more. Now, why are you paying more for the same benefits?
One of the reasons is because in order to keep the system afloat you need more money. So are your pensions safe? The answer is yes and no. And ultimately, if you want to use it as an assumption or if you don’t wanna include it as an assumption, that’s gonna be up to you whether you include it or not in your financial plans.
Just so you guys know, from my clients, I’m sure you guys I’m sure you’ve heard this from me before. When I project my client’s pensions, I assume zero COLAS, zero COLAS. That’s one of my conservative assumptions that I bake into my financial plans. Fantastic. So Kathy’s question has to do with, will the Trump administration get rid of retirees, FEHB, or make them pay for the entire cost of the insurance?
So Kathy, it’s a great question. Obviously I don’t know the answer to that question, but here’s what I will tell you. We do have a precedent of a previous president removing or changing the rules for FEHB, for retirees. For example, president Biden, I don’t know, does anybody here remember what President Biden did in 2022?
So President Biden had his, it’s called the Postal Service Reform Act, PSRA, the Postal service. You guys could look it up, you could Google it. Okay. So postal service reform 2022, president Biden required that postal employees get Medicare with their FEHB. Okay. So it could very well be that the same way President Biden made postal employees get Medicare with the FEHB.
That wasn’t originally the plan. There are many pe, many federal employees, they retired just relying on their FEHB. They were not planning on getting Medicare, but then came President Biden and he forced them to get Medicare. So is that a possibility in the future? It is a possibility in the future, will it happen?
I don’t know. My, my assumption is that it’s probably not going to happen. But I do have good news for you that if it does happen, the postal employee reform act may be a precedent. Because what happened with the Postal Employee Reform Act is that the postal employees were forced to have Medicare, but they were not penalized for picking it up late.
That’s a big deal. So it could be that you guys could just choose your FEHB without the Medicare, and in the future, if they force you to have Medicare, so then. You could you could get it without penalty. That could very well be the case. Now coming back to Kathy’s question, she’s not necessarily asking about Medicare.
She’s asking about will the government portion be removed and now you have to pay the full portion. And the answer may be it could be, and at that point you may have to take Medicare and the question is meaning not have to, but meaning you may wanna take Medicare because at that point Medicare may be less expensive.
And the question is, in that situation, will there be a penalty for picking up Medicare late or will it be like we saw with the postal employees that they were able to pick up Medicare late and they were not penalized for it? So I don’t know the definitive, I don’t have a crystal ball. Obviously it’s possible for them to change the rules.
My assumption is that they’re not gonna change the rules. But even if they do change the rules, hopefully the precedent is that you could get Medicare at that time without penalties. And Medicare without penalties should be cheaper than having to pay the full FEHB premium. Okay, John’s question. My understanding is that there will be an increase in retirement contributions for new hires.
Will this apply to employees who leave and come back to federal service? Are there any changes that could be enforced to existing federal employees? That’s a great question, John. So the answer is that so long as you have five years in your current employment to federal government. So if you have five years of service and you leave service and then come back later, you usually get put back into the system that you’re in right now.
Okay? So as long as you have the five years, that’s generally the way it works. So to answer your question, if you leave and come at the service, you’ll probably come back to where you are and you’ll have to pay the 0.8% as opposed to the 4.4%. Okay? Now with this being said, I’m gonna give you guys general guidance.
When someone leaves federal service, they have the choice to either keep their FERS contributions in the system or withdraw their FERS contributions outta the system. My general recommendation, keep your FERS contributions in the system. You’re gonna get a pension. A pension in the future based upon those years of service that you’ve done.
