Terry Garton:

There are several reports to discuss today. Let’s kick things off with an update on Social Security. The Social Security Councillors have shared a new report regarding the health of the Social Security Trust Fund. What stood out to you?

Tammy Flanagan:

Every year around this time, Social Security actuaries publish their reports. It seems like they’re mainly trying to inform Congress that action needs to be taken. For the last few years, we’ve noticed that the trust funds are projected to only fully pay benefits for about ten more years. As it stands, that date is currently 2033—so we’re talking less than a decade here. If there’s no adjustment to Social Security benefits, retirees will only receive about 77% of their benefits. I think Congress is aware that they can’t let that happen. The real question is when they will take action to prevent such a significant reduction.

Terry Garton:

We’ve discussed this previously, but what kind of policy changes could Congress implement to maintain the integrity of the trust fund?

Tammy Flanagan:

Most of the changes that might happen could end up displeasing some individuals. I believe that’s one of the reasons for the delay in making changes. They are probably considering either raising tax revenue or cutting benefits. Social Security tends to favor lower-wage workers, meaning that those who have earned modest incomes throughout their careers typically get a better return on their contributions. In contrast, higher-wage earners might not depend as much on Social Security, hence their benefits may not be as critical to their income. So, in the future, there could be a scenario where higher earners see reduced replacement income while lower-wage workers are more safeguarded against poverty. In terms of revenue, there’s a possibility that the long-standing 6.2% FICA tax might rise—though the amount is uncertain. Additionally, discussions are ongoing about increasing the income cap for FICA taxation, which is currently set just under $200,000. They might completely lift that cap or raise it significantly. Congress has a variety of options available; I’ve seen lists of nearly 100 potential changes. It will be fascinating to see how these might unfold.

Terry Garton:

It’s wise not to postpone tough decisions until it’s too late. For those worried about their Social Security future, this news isn’t exactly reassuring, especially when they have to make tough choices.

Tammy Flanagan:

Yeah, I’ve heard a lot of people say, “I’ll take it as soon as I turn 62.” But those who decide to withdraw Social Security at that age often don’t consider the implications. If they end up going back to work, they must keep an eye on the income limits, or they risk losing some benefits. If they forget to inform Social Security about returning to work, they might face substantial overpayments they’ll need to repay. For folks born after 1960, the income limit will remain in effect until they reach 67. For me, that’s around 66 years and 8 months. But if they take Social Security earlier, they definitely need to watch their earnings closely.

Terry Garton:

That’s a crucial point. I’m speaking with Tammy Flanagan, who is a retired federal principal. Now, let’s shift gears to the second report that you’ve highlighted—the recent update from TSP.

Tammy Flanagan:

Absolutely. The TSP regularly shares statistics whenever they meet, almost every month. I was particularly looking into how many federal employees are leaving their jobs and what they are opting to do with their retirement funds. Perhaps what might be less surprising to some is that while TSP offers pension options through a contract with MetLife, those options are not being widely taken advantage of. Less than 1,000 participants chose the pension route in 2024. When you compare that to those making ongoing withdrawals, the number seems pretty low. I often wonder why that is.

Terry Garton:

It seems to be viewed more like an alternative income rather than a straightforward pension payment.

Tammy Flanagan:

Right, pensions provide a monthly income. The drawback is that once you commit your funds to MetLife for a TSP pension, you can’t change it easily; it’s stuck in that lump sum. I don’t think many people appreciate that lack of flexibility.

Terry Garton:

We’ve discussed how older individuals might balance their TSP with other funds as they contemplate their retirement income options. This seems to resonate with that consideration.

Tammy Flanagan:

Exactly. As long as you keep your money in the TSP—or at least a part of it—you can still transfer among different core funds. This includes moving money in and out of G, F, C, S&I funds, or lifecycle funds. I believe we value that flexibility and the control we have over our savings from our careers.

Terry Garton:

With your insights on the TSP savings behaviors, what effects might we see if some of the settlement bill’s provisions get implemented, especially in regard to retirement contributions?

Tammy Flanagan:

If the proposed changes go through, new hires might face a tough choice—whether to opt for a low contribution rate to their retirement plans or switch to a higher-fee status as an AT-Will employee. For many, this could make it harder to save into their TSP accounts, especially if they find themselves having to pay higher contributions. I hope most people still aim for a 5% contribution, but I fear that non-participation rates could increase if individuals struggle to cover their living expenses.

Terry Garton:

Right. A 10% contribution to maintain your employment status is quite a burden, especially for younger federal employees.

Tammy Flanagan:

Exactly—this adds on top of the FICA tax, making it challenging to save through TSP as new hires become increasingly concerned about their immediate finances rather than just retirement plans.

Terry Garton:

We are all keeping a close eye on these developments to see how they unfold. Moving on, we should also discuss the online retirement process. You mentioned how OPM aims to streamline it.

Tammy Flanagan:

Yes, this shift will bring several advantages. Transmitting everything in an envelope to the OPM will definitely be an improvement over past methods. The application process is expected to speed up a bit. Currently, employees often fill out paper forms or even write them by hand, then have to hand them to an HR specialist—who might not even be in the same state. It would certainly help if they could submit these applications online. This could reduce mistakes made during the application process. I believe it will also assist agencies in submitting complete retirement paperwork to OPM, minimizing errors that can lead to delays. However, once the application reaches OPM, it still needs to be thoroughly reviewed, whether it was submitted electronically or through mail. And certain situations, like a divorce, can complicate the review process significantly.

Tammy Flanagan:

This could create delays ranging from a month to several months, primarily due to how benefits are assessed in court-ordered situations. Some people are resigning under the CSRS offset, which requires coordination with Social Security. Timing delays can occur as OPM waits for necessary information from Social Security. Generally, employees with a steady 30-year tenure might not face issues if there aren’t any marital complications. Such claims can be processed fairly quickly, even without electronic submissions. However, for those needing special documentation or coordination with other offices, delays are likely. While we might still see complaints about delays, I remain hopeful that most employees departing will find the process to be quicker.