Expert's View

Last time I wrote about the unfunded liability of the Civil Service Retirement and Disability Fund (CSRDF). That liability was caused in large measure by agencies not making any contributions to the fund on behalf of their employees for decades after the retirement system was created in 1920. As a result, the retirement system operated on a pay-as-you-go basis, with no pre-funding of future benefits. That changed in 1956 when agencies were finally required by law to match the contributions made by their employees. However, the law never required that employee and agency contributions equal the present value of benefits that CSRS employees accrue.


An even larger change occurred when the Federal Employees Retirement System was created, effective January 1, 1987. The FERS act required that the benefits accrued each year by employees be fully funded. The cost of the defined benefit part of the system – the annuity – was identified and the amounts that employees and agencies would need to contribute to make the system whole were established. Further, a method for adjusting agency contributions based on actuarial projections was created.

Currently, most FERS employees contribute 0.8 percent of their basic pay, while agencies contribute 14.5 percent. Contrast that with what most employees and agencies contribute to CSRS: 7.0 and 7.0 percent. But just look at the difference in how much they receive in their annuities. CSRS retirees receive nearly twice as much as do FERS retirees. To illustrate, a CSRS retiree with a high-3 of $50,000 would receive 56.5 percent of that amount ($28,250), while a FERS employees would receive only 30 percent ($15,000).

To better understand how the retirement fund operates, I"ll quote from a report issued by the Congressional Research Service: "The CSRDF is similar to the Social Security Trust Fund in that 100% of the monies deposited must be used to purchase special-issue U.S. Treasury bonds. This exchange between the trust fund and the Treasury does not result in revenues or outlays for the federal government. It is an intra-governmental transfer, which has no effect on the size of the government"s budget surplus or deficit.

"Federal trust funds are not a "store of wealth" like private pension funds. The assets of the civil service retirement trust fund are U.S. Treasury bonds that function solely as a record of available budget authority. The bonds cannot be sold by the trust fund to the general public in exchange for cash. They can only be returned to the Treasury, which recognizes each bond as representing an equivalent dollar-value of budget authority to be used for the payment of benefits to federal retirees and their survivors."

To sum up the fiscal difference between CSRS and FERS, FERS has a minuscule unfunded liability when compared to CSRS: $0.9 billion versus $673.3 billion. However, as I pointed out last week, unlike the Social Security trust fund, there"s no point over the next 70 years when the CSRDF will run out of money. In fact, after the unfunded liability peaks at $853.1 billion in 2030, it will decline to $4.5 billion in 2085. By then, few if any CSRS retirees will be around to collect the annuity benefits that neither they nor their agencies fully paid for.