Expert's View

Here we have a battle of the Titans, one that has federal employees wondering if they are in the “best” retirement system. I put quotes around the word best because, as with most things in life, it all depends. To understand which is the best, we need to examine the main features of each system. We’ll start with the annuities they produce.

The Civil Service Retirement System has often referred to as the one that provides golden handcuffs to its employees. That’s because once in the system, it’s in your best interest to stay there. The formula that is used to determine your annuity assures you that if you reach age 55 and have 30 years of service, you’ll receive an annuity worth 56.25 percent of your highest three consecutive years of average pay (the high-3). And the more years of service you have, the higher that annuity will be. In fact, if you have 41 years and 11 months of service, you’ll reach the maximum earned annuity benefit of 80 percent. And any unused sick leave you have would make it go higher than that.

On the other hand, if you leave before you are eligible to retire, you have only two choices. You can either take a refund of your retirement contributions or, if you have at least five years of service, wait until you are age 62 and apply for a deferred annuity.

The Federal Employees Retirement System sought to break those golden handcuffs by allowing employees to have greater opportunity to move in and out of the system. Take retirement. Rather than be confined to the same age and service rules as CSRS, a new option was provided. You can now retire on an immediate annuity at your minimum retirement age with as few as 10 years of service. But beware, there is a 5 percent-per-year penalty if you retire under the MRA+10 provision and are under age 62, unless you have 20 years of service and retire at age 60 or later. Fortunately, if you postpone the receipt of your annuity until a later date, you can reduce or eliminate that penalty.

The formula used to compute a FERS annuity is far less generous than that under CSRS: 0.01 x high-3 x years of service (0.11 if you retired at age 62 or later with at least 20 years of service). For example, if you retire at your MRA with 30 years of service, your annuity would only amount to 30 percent of your high-3. Therefore, to increase the value of FERS, two additional features were included: coverage under Social Security and sweetened benefits in the Thrift Savings Plan.

To bridge the gap between retirement and age 62, when Social Security benefits kick in, most of those who are eligible for an immediate annuity will receive a special retirement supplement (SRS) that approximates the Social Security benefit they earned while covered by FERS. The exception is those who retire under the MRA+10 provision and are not at least age 60 with 20 years of service.

Nice as this feature is, the crown jewel of FERS is the employer contributions in the TSP. Under it FERS employees may be matched by the government up to 5 percent of their basic pay. While CSRS employees may also contribute to the TSP, there is no government match.

Of course, there are other wrinkles to consider. Take cost-of-living adjustments for one. COLAs are given to all CSRS employees who are eligible for an immediate retirement benefit. Most FERS employees—law enforcement officers being the major exception–only begin receiving them at age 62. And the ones they receive are 1 percentage point less if the adjustment is 3 percent or more.

On the other hand, FERS employees who leave under the early retirement provision not only are spared the age-penalty reduction but may begin receiving the SRS as soon as they reach their MRA. CSRS employees who retire early will face a 2 percent annuity reduction for every year they are under age 55.

For most CSRS employees, it’s the predictability of their annuity that makes that system attractive. Add to that the ability to contribute to the TSP and you have the makings of a comfortable retirement.

For most FERS employees, it’s the ability to build up a really sizable government-supported portfolio in the TSP and the portability of their Social Security benefits to the private sector that makes the FERS system most attractive to them.

Now, which sounds best to you?