February 22, 2019
Alan and Gina are a very nice couple who recently reached out to me for some financial help. They are in their mid-60s, live in West Falmouth, have two grown daughters, and are faithful readers of this column each week. According to Gina, Alan has never missed a week in six years.
Alan’s retiring next year from his job as a civil engineer for the Federal government, and Gina is a retired schoolteacher who now volunteers part time in the schools, where she continues her passion to work with kids. Both of them are looking forward to seeing their two young granddaughters now that they’ll have the time. They’ve done well for themselves, wisely using the pensions and benefits programs they were eligible to collect as state and federal employees. They have also made other smart investment decisions along the way.
As we began to build out their retirement system, I remarked that they’d done quite well for themselves partly thanks to the Federal Employee Retirement System (FERS) that all Federal employees are enrolled in.
“Yeah, it’s the same one that Congress gets, but unlike them, I actually have to work for a living,” said Alan, with a cynical laugh. As a “non-essential” government employee poor Alan had been furloughed by the recent government shutdown, though by the time we met he was getting paychecks again. Like Alan, more than 800,000 government workers went without pay for about a month, which trickled down to disruptions in the private sector as well.
By the Congressional Budget Office’s (CBO’s) calculation, the United States suffered $11 billion of lost gross domestic product during that time. Even with back-pay in place for federal workers like Alan and the government now back at full steam, the CBO estimates about $3 billion of that will be lost permanently.
Hmmm . . .
Seems to me like an awful waste of money and productivity just because the two sides of the aisle don’t feel like talking to each other.
You know, this got me thinking.
What exactly is the deal with Congress’ retirement benefits anyway? While I have heard a lot of things over the years, I decided to do a little digging of my own. What I found out was that members of Congress have a pretty good deal.
Members of Congress elected since 1984 are automatically covered by FERS, which provides retirement benefits for all federal employees. FERS is a three-tiered retirement plan that includes a basic benefit for which employees pay through payroll deductions; Social Security benefits; and enrollment in the Thrift Savings Plan (TSP).
Members of Congress pay Social Security taxes, just like everyone else. But it’s interesting to note that that before 1984, they didn’t (neither did other federal service employees). The creation of FERS aligned that.
The TSP is a defined contribution plan which operates similarly to the retirement plans offered by private employers, such as a 401k. The TSP provides enrollees traditional and Roth tax treatments for their contributions. Members of Congress are even entitled to up to 5% in matching contributions from the government, plus an additional 1% (regardless of how much they contribute). Members of Congress who are 50 or older can even make catch-up contributions. And as members of Congress come from the private sector where they already ostensibly have retirement savings plans of their own, the TSP does provide them with the ability to roll over contributions from existing plans as well.
A defined contribution plan isn’t the only perk of being a member of Congress. They’re even eligible for a good old-fashioned defined benefit plan. That’s right, members of Congress are also eligible for a pension plan.
Members are vested after 5 years of service. A full pension is available to members 62 years of age with 5 years of service; 50 years or older with 20 years of service; or 25 years of service at any age. Now, by law, retired members of Congress cannot earn their full salary in retirement, but they can earn up to 80% of their final salary.
You see, the formula for that pension is based on the three highest years of a member’s salary, the number of years, and a multiplier (1.7 percent for the first 20 years of service, 1.0 percent for subsequent years). In 2016, Congressional pay was $174,000 per year. So, it’s possible for a member of Congress to obtain a lifelong pension benefit of $139,200. But under the current formula, you’d have to have 67 years of service to hit that limit. Even John Dingell, the Michigan representative who recently passed away after retiring in 2015, only managed 59 years in office. And he’s the current record-holder.
The average pension received by retired members of Congress under FERS was about $41,076 in 2016. It also turns out that members of Congress are required to buy healthcare for themselves and their families through an Affordable Care Act-approved exchange just like other Federal employees.
It’s worth pointing out that members of Congress are, for the most part, already pretty well-heeled. The Center for Responsive Politics reports that the median net worth of a senator was $3.2 million, while the median net worth of a member of the House of Representatives was $900,000. By comparison, the median net worth of the average U.S. household (not accounting for age) is $97,300.
I can’t dispute that our elected leaders have a lot of advantages that the rest of us don’t. In many cases, they already come to Washington with a big wallet which only gets fatter before they leave, and they hold positions of power and influence that affords them the ability to exercise control over our lives in ways big and small. They also have reasonably robust benefits as Federal employees. Not all of us can count on the same sorts of retirement benefits that members of Congress enjoy, of course.
I know, it can feel maddening that crucial pieces of our retirement, such as our Social Security and Medicare benefits, depend on what happens in Congress. I get it.
But in a world with so much “uncontrol” we need to look to areas where we can control. What we can do is decide for ourselves to take control of our own financial lives. This begins with a commitment to build out a sound retirement and financial system to ensure that our needs and the needs of our families are met. To that end, make sure your strategy employs appropriate risk management mechanisms that help to mitigate financial risks. Such risks include, but are not limited to, longevity (outliving our assets), inflation (the value of a buck may not be a buck in the future), interest (risk of having the wrong strategy in a rising interest rate environment), and market risk (good time to reflect after coming off the worst quarter in the markets in quite some time).
Folks, make sure your retirement system puts you in control.
Always be vigilant and stay alert, because you deserve more.
Have a great week!
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, a wealth management firm with offices in Falmouth, Duxbury, and Mansfield. Jeff can be reached at email@example.com.
Cutter Financial Group LLC (“Cutter Financial”) is a SEC Registered Investment Advisor.
This article is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain a better understanding of the subject or the article. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable.
Market data and other cited or linked-to content on in this article is based on generally-available information and is believed to be reliable. Cutter Financial does not guarantee the performance of any investment or the accuracy of the information contained in this article. Cutter Financial will provide all prospective clients with a copy of Cutter Financials Form ADV2A and applicable Form ADV 2Bs. Please contact us to request a free copy via .pdf or hardcopy.