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Friday, October 5, 2012

Federal Employees’ Retirement System: Budget and Trust Fund Issues

Katelin P. Isaacs
Analyst in Income Security

Retirement annuities for civilian federal employees are provided mainly through two programs: the Civil Service Retirement System (CSRS) and the Federal Employees’ Retirement System (FERS). Under both of these systems, retirement annuities are financed through a combination of employee and employer contributions to the Civil Service Retirement and Disability Fund (CSRDF). All assets of the CSRDF are invested in U.S. Treasury bonds and other securities backed by the full faith and credit of the U.S. government. Retirement annuities for federal employees are paid from the CSRDF regardless of whether the benefits were accrued under CSRS or FERS.

FERS annuities are fully funded by the sum of employee and employer contributions and interest earned by the Treasury bonds held by the CSRDF. The federal government makes supplemental payments into the CSRDF on behalf of employees covered by the CSRS because employee and agency contributions and interest earnings do not meet the full cost of the benefits earned by employees covered by that system.

The Office of Personnel Management (OPM) estimated that in FY2012, obligations from the CSRDF would total $74.7 billion, of which $74.3 billion will represent annuity payments to retirees and survivors. Other outlays consist of refunds, payments to estates, and administrative expenses. Outlays from the fund are projected to increase by 4.5% to $78.0 billion in 2013, of which $77.7 billion will represent annuity payments. OPM estimated that receipts to the CSRDF from all sources would be $95.1 billion in 2012 and $94.2 billion in 2013. The year-end balance of the CSRDF was projected to increase from $812.5 billion at the end of 2012 to $823.2 billion at the end of 2013.

The annual income of the CSRDF will increase from $95.2.0 billion in 2010 to an estimated $155.5 billion in 2025 and to $1.2 trillion in 2085. The total expenses of the fund are projected to rise more slowly, increasing from $69.3 billion in 2011 to an estimated $116.2 billion in 2025 and to $669.7 billion in 2085. Consequently, the assets held by the CSRDF also are projected to increase steadily, rising from $784.6 billion in 2011 to an estimated $1.3 trillion in 2025 and $13.9 trillion in 2085. Expenditures from the CSRDF currently are about 36% as large as federal expenditures for the salaries and wages paid to federal employees. Pension expenditures are projected to decline relative to the government’s wage and salary expenses, beginning around 2020. By 2085, the expenditures of the CSRDF are estimated to be only about 23% as large as the government’s expenditures for wage and salary payments to employees.

Because CSRS retirement benefits have never been fully funded by employer and employee contributions, the Civil Service Retirement and Disability Fund has an unfunded liability. The unfunded liability was $622.3 billion in FY2010. According to actuarial estimates, the unfunded liability of the CSRDF will continue to rise until about 2023, when it will peak at $684.8 billion. From that point onward, the unfunded liability will steadily decline and is projected to turn into a surplus of $716.7 billion by 2085. Actuarial estimates indicate that the unfunded liability of the CSRS does not pose a threat to the solvency of the trust fund. In its annual report, OPM has stated that “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 over 4.7 times payroll, or nearly 20 times the level of annual benefit outlays” by 2085. Unlike the Social Security trust fund, there is no point over the next 70 years at which the assets of the Civil Service Retirement and Disability Fund are projected to run out.

Date of Report: September 27, 2012
Number of Pages: 18
Order Number: RL30023
Price: $29.95

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