Reg Jones Expert's View

Lately, there has been a lot of talk in Congress – at least on one side of the aisle – about raising the amount employees contribute to the retirement fund. In other words, they want them to pay more for their future benefits. With that in mind, I thought it would be a good idea to clear the air with some facts about where the money comes from to pay CSRS and FERS annuities, and whether it’s enough to pay the bills – both now and in the future.

As you already know, both retirement systems are financed through a combination of employee and employer contributions. However, what you probably don’t know is that all the money goes into one place, the Civil Service Retirement and Disability Fund (CSRDF). And while FERS annuities are fully funded, CSRS annuities aren’t. That’s because the contributions made and the interest earned on them doesn’t meet the full cost of the benefits.

The reason for this is found in the way the system was set up in 1920. It was on a pay-as-you-go basis. The money that was collected in employee contributions was paid out to retirees. Nothing was done to pre-fund the benefits of current employees. It wasn’t until 1956 that agencies were required to make contributions on behalf of their eligible employees. However, that did little to achieve the pre-funding of future retirement benefits.

Because the full costs of CSRS aren’t met by employee contributions, agency contributions, interest earnings, and supplemental payments from the Treasury, some future CSRS benefits will have to be paid from contributions made on behalf of FERS employees. This will create an unfunded FERS liability, which will have to be paid off through a series of 30-year amortization payments from the general fund of the Treasury.

In 2008, the CSRDF had an unfunded liability of $674.2 billion. It’s expected to rise to $853.1 billion in 2030, after which it will begin to decline until it drops to $4.5 billion in 2085. The good news here is that, unlike the Social Security trust fund, there’s no point over the next 70 years when the CSRDF will run out of money.

Now that you have an overview of the facts, do you think there’s a reason to raise employee contributions to the retirement fund?

According to the Congressional Research Service, “Proposals to pre-fund CSRS in the same manner as required under FERS have foundered either on the question of whether additional budget authority should be granted to federal agencies, or whether they should make higher contributions from their current budget authority. Many policymakers believe that greater pre-funding of CSRS retirement annuities would lead to improved accounting of personnel costs among federal agencies. However, CSRS has been closed to new enrollment since 1984, and the percentage of federal employees enrolled in CSRS is declining rapidly as these workers retire. In 2009, fewer than one-fifth of federal employees were enrolled in CSRS. With the proportion of federal employees enrolled in CSRS declining each year, the budgetary treatment of government contributions toward their retirement annuities is becoming a less pressing issue.”