CBO Analysis Highlights Impact of Federal Buyouts on Early Retirement and Social Security Benefits
The Congressional Budget Office (CBO) estimates that increasing federal buyout incentives could encourage more than 1,300 additional workers per year to leave their jobs voluntarily. About half would retire approximately a year and a half earlier than they otherwise might. A proposed House bill aims to raise the maximum voluntary separation incentive from $25,000 or less to as much as six months of an employee's pay. However, these buyouts can have significant implications for Social Security benefits if not structured carefully. If treated as current earnings by the Social Security Administration (SSA), a large severance payment could trigger the retirement earnings test in 2026. This would result in $1 withheld from monthly benefits for every $2 earned above $24,480 before full retirement age is reached. To avoid this outcome, workers must ensure their buyout agreements clearly state that obligations were completed prior to leaving employment and use Form SSA-131 to document the payment. Severance qualifies as a tax-exempt 'special payment' only if it meets these criteria.
Topics: federal buyouts severance payments Social Security earnings test