Terry Gerton: We’ve got a couple of reports to talk about. So let’s first start with Social Security. The Social Security trustees released a new report on the health of the Social Security Trust Fund. What in there caught your eye?

Tammy Flanagan: Yeah, every year about this time, the Social Security actuaries come out with a report. And I think it’s mostly to tell Congress, hey, we got to do something, because every year so far in the past several years, we’ve seen that the trust fund is not gonna be able to pay full benefits starting about 10 years from now. In fact, that’s now in the year 2033. So that’s really less than 10 years from now. And if nothing happens to change Social Security benefits, they’ll only be able to pay about 77% of the benefits payable even to current retirees. So I have a feeling Congress won’t let that happen. It’s just a matter of when will they make the needed changes to avoid that serious reduction in benefits.

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Terry Gerton: We’ve talked about this before, but what are some of the policy changes that Congress could make that would sustain the trust fund?

Tammy Flanagan: Well, almost any of the changes that they’ll make will probably make some people unhappy. So I think that’s why they’ve been pushing this can down the road a little bit further. Because I think it’s either a matter of raising tax revenues or reducing benefits. I think in the area of reducing benefits, Social Security has always been a system that’s been kind of tilted towards the lower wage earner. So people who have worked at pretty relatively low or moderate wages throughout their career will get a higher return on their investment in Social Security. Whereas higher wage earners, in theory, weren’t as dependent or won’t be as dependent on social insurance. So those benefits will be less of a replacement of income. So I think we may see more of a tilt in the future where the higher wage earners will get even maybe a little less replacement income, but it will be protected for those low wage earners to avoid them becoming impoverished. Now, on the side of increasing revenues, that 6.2% FICA tax that we’ve been used to paying for a few decades now, that could go up. Who knows by how much? Another thing that I think is likely to change is the amount of income subject to the FICA tax. That income is under $200,000 a year. I would think they’ll either lift the cap entirely or raise it to a much higher limit. So those things are yet to be seen. Congress has a lot of options to make changes. I’ve seen a laundry list of roughly about 100 different things, little things here and there that can be tweaked. So it’ll be real interesting to see how those changes play out.

Terry Gerton: Well, make no hard decision before it’s time, though. Speaking of hard decisions, faced with this kind of news, for people who are thinking about when to draw Social Security, might they have the reaction, well, I’m going to draw as soon as I can and get it while I can while there’s still money in the bank?

Tammy Flanagan: I hear that a lot: get it while the getting’s good. So I’m gonna take it as soon as I turn 62. But be careful, because those who draw Social Security at 62 and then decide retirement’s not quite what I thought it was gonna be, and they go back to work, remember that there’s an earnings limit that’s relatively low. So if you start to earn above that limit, you’re gonna lose some of that Social Security benefit. And if you don’t tell Social Security that you returned to work, you might find yourself with a large overpayment that has to be repaid. So that earnings limit doesn’t go away until you reach your full retirement age, which is 67 if you were born in 1960 or later, and a little bit under 67 if you’re older like I am. So for me, I think it’s 66 and eight months. But you’ve got to be careful about those earned wages if you are drawing Social Security before that age.

Terry Gerton: That’s an important caution. I’m speaking with Tammy Flanagan. She’s a principal with Retire Federal. All right, Tammy, let’s switch to the second report that you brought to our attention, which is a recent update from the TSP — their Office of Participant Experience.

Tammy Flanagan: That’s right. The TSP often — actually almost every month or every time the board of the TSP meets — they put out the statistics of a lot of different things regarding TSP participation. And the one I was looking at in particular, because we have so many federal employees leaving government service, is what are people doing with the money in their thrift? What are the most popular withdrawal options? And the one thing that may or may not surprise most people is that the annuity option offered through the TSP through a contract with MetLife is not a real popular option, although it has gained a little bit in popularity. On an average year, less than 1,000 people or 1,000 participants take the annuity option from the TSP. In 2024, that number was just under 1,000 people. So that’s really low when you compare that to how many people are taking monthly payments on an ongoing basis, which averages around almost 3 million participants. So I always wondered, why is that?

Terry Gerton: Really treating it more as income replacement than as opposed to that once-a-year kind of annuity payment.

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Tammy Flanagan: Well, the annuity is actually monthly. But I think the problem with the annuity payment is once you turn that money in your TSP over to MetLife, they keep it, and they’re only going to give it back to you once a month. So you can’t make changes to that, you can’t take out a lump sum. So I think a lot of people don’t like that restrictive nature of the annuity option.

Terry Gerton: Well, we’ve been talking a lot in the last several weeks to folks about making changes in their TSP balance as they get older and as they’re thinking about income replacement, balancing between equity and bonds and the lifetime funds. So this would align with that kind of behavior.

Tammy Flanagan: Right, because as long as you leave your money in the TSP — or at least some of it there — you can still make those transfers between the different core funds: the G, F, C, S & I fund, or move money in or out of the lifecycle fund. So I think we like that flexibility and that control of the money that we’ve been saving throughout our career.

Terry Gerton: So Tammy, as you’re looking at this report that’s documenting saver behavior in the TSP, what might you expect to happen if some of the provisions in the reconciliation bill go through, especially the ones that affect retirement contributions?

Tammy Flanagan: Yeah, so if and when those take effect — where it’s going to require new hires to make a really difficult decision between becoming an at-will employee under the Schedule F, as it’s sometimes known, or I think they call it policy career in the bill — that’s either pay the lower rates of contributing to the retirement plan or not become an at-will employee and pay much higher rates into FERS, into the Federal Employees Retirement System. And I think as a result of having to pay those higher contributions to FERS, it’s gonna be much more difficult to get employees to save voluntarily in their TSP account. I hope that people still contribute 5% so they at least get the matching agency funds. But I have a feeling those nonparticipation rates may rise as a result of new hires coming right out of school in some cases who can’t afford to pay rent, let alone save for their retirement that could be decades into the future.

Terry Gerton: Right. And that 10% payment to maintain your protected status is a pretty hefty bill, especially as you say, for young federal employees.

Tammy Flanagan: Right, because you pay that in addition to FICA taxes, and then try to save in the TSP. All of those go towards future benefits that new hires might be more worried about — paying off a student loan or paying rent — rather than retirement planning.

Terry Gerton: Well, I know we’re all watching those provisions with bated breath to see how they manage through. Let’s tackle one more topic today. I think we have some time — the online retirement process. We talked about that the last time you were here — that OPM is moving to an online retirement application process that they say is going to speed processing.

Tammy Flanagan: Well, it is going to do some things. I think it will be an improvement, certainly over the way things are done now when everything goes into a FedEx envelope and gets mailed to the mailroom at OPM. So I think what’s going to be a little faster and less onerous is the process for an employee to submit their application. Right now, that involves a paper application — either typing it in or even handwriting it in — and giving it to your HR specialist who can be in another state. So being able to submit that on your computer with little delay, I think that will help. And maybe even avoid some of the errors that employees make when they’re filling out that application — maybe they forget to sign something. So I think this will prompt them to make sure they make those applications more accurate. I think it will also help the agency when they are submitting that whole retirement package to OPM — and again, in an effort to make fewer errors because that can be a problem that does cause delays. But once that application gets to OPM, whether it’s electronically or by mail, it has to be adjudicated or finalized. And for some employees, there are some things that will cause delays — such as what if you’ve gone through a divorce and now you have to go through the Court Ordered Benefits Branch to have those folks look at that application, look at your divorce decree and figure out how much of that retirement or survivor benefit is gonna go to that former spouse?

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Tammy Flanagan: That can be an area that’s gonna cause a month, maybe two or three months of delay, depending on how backlogged those folks are in the Court Ordered Benefits Branch. Some folks are retiring under CSRS Offset — that requires a coordination with the Social Security Administration. That’s kind of out of OPM’s hands, of how long it’s gonna take Social Security to respond to those requests. So the average retirement, where an employee has stayed at the same agency for 30 years, never gone through a divorce, never moved between agencies — those claims can get processed really quickly, even without electronic applications. But those ones that have missing documents for service history or divorce decrees or certain things that require coordination with other offices — those are still gonna take some time. So I think we’ll see some employees still complaining about delays. But hopefully the majority of employees who retire will get things processed fairly quickly.

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