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March 21, 2018

Why should two lost work days cost McCabe three-fourths of his pension?

March 21, 2018

Like most long-term government employees, former FBI deputy director Andrew McCabe was eyeing a comfortable retirement, with a generous pension and retiree health benefits, plus Social Security and whatever he had saved in retirement and other accounts. Yet he lost $1.1 million in pension benefits when Attorney General Jeff Sessions fired him late last week, two days before McCabe’s 50th birthday, when he would have qualified for his full pension.

McCabe’s situation is extreme, but it highlights the arbitrariness of government pension rules. Government pensions vary widely depending on when employees were hired and how long they worked, which can make attracting and maintaining the best employees difficult.

Like most federal workers, McCabe participated in the Federal Employees Retirement System (FERS), which provides retirees with a monthly pension based on salary and years of service. Retirees also receive Social Security and proceeds from their thrift savings plan, similar to a 401(k) plan to which both employees and their employer can contribute.

What exactly will McCabe lose by being fired?

As a law enforcement officer, McCabe was entitled to an enhanced pension. He could expect to receive annual benefits equal to 34 percent of his average annual salary over his three highest-paying years, plus 1 percent of his final average salary for each completed service year in excess of 20. He earned $161,900 in 2017 and $160,300 in 2016 as deputy director of the FBI and likely earned $153,700 in 2015 as assistant director in charge of the Washington, DC, field office, before being promoted to FBI deputy director midway through the year.

This employment history would generate an annual pension of $57,108, which he could begin collecting as soon as he retired, as long as he worked until age 50 and accumulated at least 20 years of service. As a law enforcement officer, McCabe also qualified for a special retirement supplement until age 62, equal to the Social Security benefits he earned while employed by the federal government. This supplement would raise his annual pension through age 62 by about $19,000. Both the pension and the retirement supplement would increase with inflation.

These benefits would have been worth $1.4 million over McCabe’s lifetime, if our calculations use a 2.7 percent annual real interest rate and a 2.7 percent annual inflation rate and assume that McCabe has a typical life expectancy. This value is less than the simple sum of his expected lifetime payments because future benefits are worth less than benefits received today that can be invested and earn interest.

When McCabe was fired, he lost his enhanced law enforcement pension because his employment did not last until he was 50 (and he hadn’t completed 25 years of service, at which point employees can retire at any age). Instead, he now qualifies for a smaller standard FERS pension. That pension pays him 1 percent of his final average salary for each year of completed service, but he can’t begin collecting until age 56 and 8 months, his minimum retirement age.

And when he collects at that age, his pension will be permanently discounted by five-twelfths of 1 percent for every month he collects before turning 62, a total reduction of 26.7 percent. He also lost the special retirement supplement that he would have received through age 62.

McCabe, then, will receive an annual pension of $25,593—more than most retirees but $31,515 less than he would have received each year after age 62 had he not been fired. Over a lifetime, his reduced pension is worth $301,000, just 22 percent of the pension he would have received had he not been fired.

Government pension benefits should scale at a more even rate

McCabe’s losses are dramatic, but it isn’t unusual for government pensions to vary widely depending on when employees were hired and how long they worked.

The figure below shows how the lifetime value of a standard FERS pension changes with each additional year of work for typical employees hired at age 25. Employees earn additional pension benefits worth 8 percent of their annual salary during their 10th year of employment, 152 percent of their salary during their 32nd year of employment, and 32 percent of their salary during their 33rd year of employment.  

These spikes in future pension benefits don’t make sense, and they don’t help the government attract and retain the best employees.

The threat of lost pension benefits might deter employee misconduct, but those cases are rare, and these arbitrary benefit rules create unfair pension disparities between equally productive employees. McCabe’s pension losses are a personal blow to him, but they may provide an opportunity to create fairer, more effective government pensions.

Andrew McCabe, who was Acting Director of the Federal Bureau of Investigation at the time, testifys before the U.S. Senate Select Committee on Intelligence on Thursday, May 11, 2017, in Washington, DC. Photo by Jahi Chikwendiu/The Washington Post via Getty Images.

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