Issue Briefs

Following is the portion of a new Congressional Research Service report describing how the financing of the federal retirement programs works, a topic of regular interest during discussions of government spending.


Both CSRS and FERS require participants to contribute toward the cost of their future pensions through a payroll tax. Under CSRS, employees contribute 7.0% of base pay to the Civil Service Retirement and Disability Fund (CSRDF). Under FERS, employees contribute 0.8% of pay to the CSRDF and they also pay Social Security taxes of 6.2% on salary up to the maximum taxable wage base ($106,800 in 2010). Participants in CSRS are not covered by Social Security.

Members of Congress contribute 8.0% of salary to the CSRDF if covered by CSRS and 1.3% of salary if under FERS. All members of Congress pay Social Security taxes, regardless of whether they are under CSRS or FERS.

In the private sector, employers are required by the Employee Retirement Income Security Act of 1974 (ERISA, P.L. 93-406) to pre-fund the benefits that workers earn under defined benefit plans.

Pre-funding of future pension obligations is required because there is always the possibility that a firm could go out of business. A firm that closes down will no longer have revenues to pay its pension obligations, and if these obligations were not fully funded, retirees and employees of the firm would lose some or all of their pension benefits. Private-sector employers with defined benefit pensions are required to pay premiums to the Pension Benefit Guaranty Corporation (PBGC), which insures the pensions of workers whose employer terminates a pension plan that has unfunded liabilities. For plans that terminate in 2010, the PBGC guarantees a maximum annual benefit of $54,000 for a worker retiring at the age of 65. The maximum benefit is lower for workers who retire before the age of 65. The PBGC does not insure federal, state, or local government pensions. The ultimate guarantors of government pensions are the taxpayers.

The federal government requires firms in the private sector to pre-fund employees’ pension benefits to ensure that if a firm goes out of business, there will be funds available to pay its pension obligations. Although the federal government is unlikely to "go out of business," there are other reasons that Congress has required federal agencies and their employees to contribute money to the CSRDF. First, by providing a continuous source of budget authority, the CSRDF allows benefits to be paid on time, regardless of any delays that Congress may experience in passing its annual appropriations bills. Secondly, the balance in the trust fund acts as a barometer of the government’s future pension obligations. Given a fixed contribution rate and benefit structure, a rising trust fund balance indicates that the government is incurring obligations to make higher pension payments in the future.16 Finally, prefunding pension obligations forces federal agencies to recognize their full personnel costs when requesting annual appropriations from Congress. Otherwise, these costs would be recognized only in the central administrative accounts of the Office of Personnel Management, and not by the agencies where the costs are incurred.

Employee Contributions


Contributions to CSRS and FERS are not deposited into individual employee accounts. Nor is the amount of a federal worker’s pension based on the amount of his or her contributions. All contributions are paid into—and all benefits are paid out of—the Civil Service Retirement and Disability Fund. Employee contributions pay for a comparatively small part of the retirement annuities paid by CSRS and FERS. There are, however, both budgetary and actuarial reasons that federal employees are required to contribute to CSRS and FERS.

Employee Contributions from a Budgetary Perspective

Employee contributions are revenues of the federal government. These revenues reduce the proportion of pension costs that must be borne by the public. In FY2008, employee contributions to CSRS and FERS totaled $3.7 billion, equal to 4.1% of the total income of the Civil Service Retirement and Disability Fund. The other major sources of revenue to the CSRDF are agency contributions, contributions of the U.S. Postal Service on behalf of its employees, interest on the federal bonds held by the fund, and transfers from the general revenues of the U.S. Treasury.

These transfers are necessary because the costs of the older of the two federal retirement programs, the CSRS, are not fully covered by employee and agency contributions. FERS benefits are required by law to be fully funded by the sum of contributions from employees and their employing agencies and the interest earnings of the CSRDF.

Employee Contributions in Actuarial Terms


Actuaries calculate the cost of defined benefits pension plans in terms of "normal cost." The normal cost of a pension plan is the level percentage of payroll that must to be set aside each year to fund the pension benefits that participants have earned. Normal cost is based on estimates of attrition and mortality among the workforce, future interest rates, salary increases, and inflation.

OPM has estimated the normal cost of CSRS to be 25.8% of payroll in FY2009. The federal government’s share of the normal cost of CSRS is 18.8% of payroll. The Civil Service Retirement Amendments of 1969 (P.L. 91-93) require participating employees and their employing agencies each to contribute an amount equal to 7.0% of basic pay to the CSRDF to finance retirement benefits under CSRS. The combined contribution of 14% of employee pay does not fully finance the retirement benefits provided by the CSRS. The costs of the CSRS that are not financed by the 7.0% employee and 7.0% agency contributions are attributable mainly to increases in future CSRS benefits that result from (1) employees’ annual pay raises, and (2) annual COLAs to CSRS annuities. In actuarial terms, the employee and agency contributions totaling 14% of pay are equal to the static normal cost of CSRS benefits. This is the benefit that would be paid if employees received no future pay raises and annuitants received no future COLAs. The dynamic normal cost of CSRS pensions includes the cost of financing future benefit increases that result from pay raises and COLAs provided to annuitants.

Contributions from employees and their employing agencies meet about 54% of the normal cost of CSRS. (14.0/25.8 = .543) The remaining 46% of the cost of CSRS is paid from the interest earned by bonds held by the retirement and disability trust fund, special contributions by the U.S.

Postal Service for retired postal workers, and transfers from the general revenues of the U.S.

Treasury. If each federal agency were to pay the full cost of CSRS benefits on an accrual basis, as is done under FERS, they would contribute an amount equal to 18.8% of payroll. This represents the dynamic normal cost of CSRS minus the required employee contribution of 7.0% of pay.

OPM has estimated the normal cost of the FERS basic annuity to be 12.3% of payroll in 2009.

Federal law requires agencies to contribute an amount equal to the normal cost of FERS minus employee contributions to the program. Employees contribute 0.8% of pay toward their FERS annuities. Consequently, the normal cost of the FERS basic annuity to the federal government is equal to 11.5% of payroll (12.3-0.8=11.5). The federal government has three other mandatory costs for employees enrolled in FERS: Social Security, the 1% agency automatic contribution to the TSP, and agency matching contributions to the TSP. Social Security taxes are 6.2% of payroll on both the employer and the employee up to the maximum taxable amount of earnings ($106,800 in 2010). All agencies must contribute an amount equal to 1% of employee pay to the TSP. The normal cost of FERS to the federal government is therefore at least 18.7% of pay.

Federal matching contributions to the TSP can add up to 4 percentage points to amount. For an employee enrolled in FERS who contributes 5.0% or more of pay to the TSP, his or her employing agency must finance retirement costs equal to 22.7% of employee pay.

CSRS and FERS differ in the way that each federal agency must budget its contributions toward employee pension benefits. Under FERS, each agency must include the full normal cost of the FERS basic benefit (11.5% of pay in 2009) in its annual budget request. In addition, each agency must include in its budget request the cost of the employer share of Social Security payroll taxes, the 1.0% automatic contribution to the TSP, and employer matching contributions to the TSP.

Under CSRS, each agency must budget only a 7.0% contribution to the CSRDF, even though this is less than the full cost of the program. The costs associated with CSRS that are not paid by the employee contribution of 7.0% and the agency contribution of 7.0% are treated as a general obligation of the U.S. Treasury.


In both CSRS and FERS, government contributions to the Civil Service Retirement and Disability Fund result in the Treasury issuing securities that are credited to the fund. The contributions for both programs are commingled, and benefits for retirees and survivors in both programs are paid from the CSRDF. In contrast, government contributions to the TSP are deposited into individual accounts for each TSP participant. The accounts are managed by the Federal Retirement Thrift Investment Board. The TSP is not a trust fund of the U.S. government.

TSP accounts are individually owned by the participants in the TSP in the same way that 401(k) accounts are owned by workers in the private sector.

Financing Pension Benefits for Federal Employees

As of September 30, 2008, the CSRDF had net assets of $734 billion available for benefit payments under both CSRS and FERS. At the same time, the accrued actuarial liability under the CSRS and FERS plans was $1,408 billion. In other words, on October 1, 2009, the civil service trust fund had an unfunded actuarial liability of $674 billion. All but $1 billion this unfunded liability is attributable to CSRS. Federal law has never required that employee and agency contributions must equal the present value of benefits that employees accrue under the CSRS. In contrast, the FERS Act requires that the benefits accrued each year by employees must be fully funded by contributions from employees and their employing agencies.


Although the CSRDF has an unfunded liability, it is not in danger of becoming insolvent.

According to the projections of the actuaries at OPM, the assets of the CSRDF will continue to grow over the next 70 years. The fund’s assets will reach $1.1 trillion in 2020, $2.4 trillion in 2040, $6.5 trillion in 2060, and $15.3 trillion in 2080. Actuarial projections indicate that the CSRDF will be able to meet its financial obligations in perpetuity. According to OPM, "the total assets of the CSRDF, including both CSRS and FERS, continue to grow throughout the term of the projection, and ultimately reach a level of about 4.1 times payroll, or about 19 times the level of annual benefit outlays." One reason that the CSRDF will not exhaust its resources is that all federal employees hired since 1984 are enrolled in FERS. By law, the benefits that employees earn under FERS must be fully funded by the sum of employer and employee contributions and interest earnings.

Federal Trust Funds and Pre-Funding of Benefits

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. The Office of Management and Budget has stated that These [trust fund] balances are available for future benefit payments and other trust fund expenditures, but only in a bookkeeping sense. The holdings of the trust funds are not assets of the Government as a whole that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury. From a cash perspective, when trust fund holdings are redeemed to authorize the payment of benefits, the Department of the Treasury finances the expenditure in the same way as any other Federal expenditure—by using current receipts or by borrowing from the public. The existence of large trust fund balances, therefore, does not, by itself, increase the Government’s ability to pay benefits. Put differently, these trust fund balances are assets of the program agencies and corresponding liabilities of the Treasury, netting to zero for the Government as a whole.

Government trust funds, however, can ease the burden of future benefit payments if an increase in the trust fund balance represents a net increase in national saving. Again, quoting OMB: From an economic standpoint, the Government is able to prefund benefits only by increasing saving and investment in the economy as a whole. This can be fully accomplished only by simultaneously running trust fund surpluses equal to the actuarial present value of the accumulating benefits while maintaining an unchanged Federal fund deficit, so that the trust fund surplus reduces the unified budget deficit or increases the unified budget surplus. This would reduce Federal borrowing by the amount of the trust funds surplus and increase the amount of national saving available to finance investment. As long as the increase in Government saving is not offset by a reduction in private saving, greater investment would increase future national income, which would yield greater tax revenue to support the benefits.


Investment Practices of Federal Trust Funds

Federal trust funds do not represent a store of wealth for the government because they consist entirely of U.S. government bonds. A bond represents wealth only when it is held by someone other than the individual, company, or government that issued it. A bond is an I.O.U.—that is, a promise to pay. An I.O.U. received from someone else might be considered an asset, provided that the issuer is willing and able to pay the debt when it is due, but writing an I.O.U. to oneself does not create an asset. This analogy applies to the U.S. Treasury bonds held by the federal government’s trust funds: they are I.O.U.s issued by one agency of the U.S. government and held by another agency of the same government. Both the issuer and holder are part of the same entity: the U.S. government. When federal trust funds redeem their bonds, the Treasury has only one source from which to obtain the required cash: the public. It can do this either by collecting taxes or by borrowing.

Many state and local government pension funds invest in stocks, bonds, mortgages, real estate, and other private assets. If Congress were to permit the CSRDF to acquire assets other than U.S.

Treasury bonds—such as the stocks and bonds issued by private corporations—these assets could be sold to the public for cash as pension liabilities come due. This would represent a major change in public policy that would have important effects on the federal budget and on private businesses that would, in effect, be partly owned by an agency of the federal government.

Among the possible drawbacks of allowing the CSRDF to invest in private assets are that the stocks and bonds purchased by the trust fund would displace purchases of these assets by private citizens, so that while civil service retirement benefits would be prefunded, it would be at the cost of reducing the amount of private-sector assets held by private citizens. In a scenario of "full displacement," there would be no net increase in the amount of saving and investment in the economy, just a reallocation of assets in which the government would own more private sector stocks and bonds and private investors would hold more Treasury bonds.

A second issue that would have to be considered if the trust fund were to purchase private investment securities would be the fund’s management and investment practices. Who would make the investment decisions, and what would be the acceptable level of investment risk for the funds? The most fundamental risk is that poor investment choices would result in the trust fund losing value over time. Another question would be how the fund would decide what assets to purchase. Deciding what would constitute an appropriate investment for a fund that consists mainly of monies provided by taxpayers could be controversial. Not all companies, industries, or countries would be seen by the public as appropriate places to invest these funds. In short, the question of investing trust fund assets in securities other than U.S. Treasury bonds is one that would deserve close and careful consideration of all the possible ramifications.

Allowing the civil service retirement trust fund to invest in private-sector securities also would have implications for the federal budget. Currently, the trust fund is credited by the Treasury with agency contributions on behalf of covered employees, and it receives revenue in the form of employee contributions. Agency contributions are intra-governmental transfers, and have no effect on the size of the government’s annual budget deficit or surplus. Employee contributions, however, are revenues of the U.S. government. As it now operates, the only outlays of the trust fund are payments to annuitants and relatively minor outlays for administrative expenses. If the trust fund were to purchase private assets such as corporate stocks and bonds rather than U.S.

Treasury bonds, there would be an immediate outlay of funds. This outlay by the trust fund would be paid for in part by employee contributions that would be diverted from the general fund of the Treasury. The remainder of the purchase, financed by agency contributions, would replace an intra-governmental transfer with a direct outlay of federal funds.

Because the Treasury would no longer receive employee contributions toward CSRS and FERS as revenue, it would have to borrow an equal amount from the public. Consequently, without an offsetting reduction in outlays elsewhere in the budget or an increase in revenues other sources, the net effect of these transactions would be an increase in the government’s budget deficit (or a decrease in the budget surplus). If the budget accounting period extended over a long enough time, these transactions would cancel one another out because the long-term effect would merely move some outlays from the future, where they would have occurred as payments to annuitants, to the present, where they would occur partly as outlays to purchase assets and partly as a reduction in revenues that currently go to the general fund of the Treasury.