The assumption was that FERS retirees would get roughly the same income as CSRS - as long as they invested 5 percent of income into the TSP. Image: Shutter B Photo/Shutterstock.com
By: Reg JonesThere’s a world of difference between the Civil Service Retirement System and the Federal Employees Retirement System. So, it’s worth taking the time to explore those differences and find out why they exist.
CSRS was created in 1920 by an act of Congress. It was a defined benefit plan to which employees and the government contributed and included a formula that used an employee’s base pay and years of service to determine their retirement benefit. Funded by contributions from employees and the government, CSRS was a forward-looking approach to employee welfare at a time when nearly all other employees who retired received a pat on the shoulder, a farewell wave and, if they were highly enough placed in the organization, a gold pocket watch. Social Security, on which most of us rely today, didn’t exist at the time and was not integrated into CSRS when it was created in 1935.
FERS began operating in 1987 under Social Security reforms enacted in 1983 that in part were designed to get more people paying into that system. Developed on Capitol Hill with hardly any input from the executive branch, it sought to mirror what had become by then the standard practice in much of the private sector, a retirement system that stood on three legs: a small defined benefit plan, Social Security, and a tax-favored personal retirement savings account (the Thrift Savings Plan for federal employees). All of them relied on contributions from employees and the government. CSRS employees were also allowed to invest in the TSP but without a matching government contribution.
Unlike CSRS, where retiree cost-of-living adjustments are made annually regardless of the age at which an employee retires, FERS retirees generally don’t receive a COLA on their annuities until they reach age 62 and become eligible for a regular Social Security benefit. An exception is made for special category employees such as law enforcement officers and firefighters, who have shorter careers and are subject to mandatory retirement.
When the FERS law was passed, the assumption was that FERS retirees would receive essentially the same amount of retirement income based on their years of service as CSRS retirees if—and this is a big if—the FERS employees invested 5 percent of their income into the TSP (with matching contributions from the government). Contributing up the annual dollar maximum, even without matching government contributions on part of it, might put FERS employees ahead of their CSRS counterparts.
So, how has it turned out?
Not surprisingly, CSRS employees – whose annuities can be calculated to the penny – generally come out ahead. Even more so if they contributed to the TSP. On the other hand, FERS employees only know with certainty what their annuity and special retirement supplement (SRS) will be. (The SRS is the amount of Social Security benefit to which they would be entitled to at age 62.)
However, as noted above, they receive no COLAs on that benefit until age 62, when their earned Social Security benefit begins. Further, any income they could derive from their TSP account would depend not only on how much they had invested over the years but how those investments had performed.
Those FERS employees who can invest at the needed level and manage their investments well can prove that the designers of FERS were essentially right in believing they can come out even with a CSRS employee. However, those FERS employees who can’t afford to invest at the needed level and/or don’t manage their investments well, will curse the day that the oh-so-dependable defined benefit plan enjoyed by CSRS employees was superseded by one that requires that they put more of their own money toward their retirement and hope that those investments perform well.
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