Friday, March 15, 2013
Katelin P. Isaacs
Analyst in Income Security
Federal employees participate in one of two retirement systems. The Civil Service Retirement System (CSRS) was established in 1920 and covers only employees hired before 1984. Participants in the CSRS do not pay Social Security payroll taxes and they do not earn Social Security benefits. For a worker retiring after 30 years of federal service, a CSRS annuity will be equal to 56.25% of the average of his or her highest three consecutive years of basic pay.
The Social Security Amendments of 1983 (P.L. 98-21) required federal employees hired after 1983 to participate in Social Security. Because the CSRS was not designed to coordinate with Social Security, Congress directed the development of a new retirement plan for federal workers hired after 1983. The result was the Federal Employees’ Retirement System (FERS) Act of 1986 (P.L. 99-335). The FERS has three elements: (1) Social Security, (2) the FERS basic retirement annuity and FERS supplement, and (3) the Thrift Savings Plan (TSP).
The amount of the FERS basic retirement annuity is determined by three factors: (1) the salary base, (2) the accrual rate, and (3) years of service. The salary base is the average of the worker’s highest three consecutive years of pay. Under FERS, the benefit accrual rate is 1.0% per year of service, or 1.1% for workers retiring at the age of 62 or later with 20 or more years of service. A worker with 30 years of service retiring at the age of 62 will receive a FERS pension equal to 33% of the average of his or her highest three consecutive years of pay, or about 32% of final annual salary.
The TSP is a defined contribution retirement plan similar to the 401(k) plans provided by many employers in the private sector. The income that a retired worker receives from the TSP will depend on the balance in his or her account. In 2013, employees covered by FERS or CSRS can contribute up to $17,500 to the TSP. Employees aged 50 or older can contribute an additional $5,500. Contributions of up to 5% of pay made by workers under FERS are matched by the federal government. Workers covered by CSRS can contribute to the TSP, but they receive no matching contributions.
The TSP is a key element of the FERS, especially for workers at the upper ranges of the federal pay scale. The Social Security benefit formula is designed to replace a greater share of income for low-wage workers than for high-wage workers. The FERS basic annuity will replace about 32% of final salary for an employee retiring at the age of 62 with 30 years of service. Higher-wage federal workers need to contribute a greater percentage of pay to the TSP to reach the same level of income replacement as lower-paid workers can achieve from just the FERS retirement annuity and Social Security. At an annual rate of return of 6.0%, income from the TSP can replace about 33% of final pay for a federal employee who contributes 10% of pay over 30 years.
Date of Report: March 8, 2013
Number of Pages: 25
Order Number: RL30387
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Posted by Penny Hill Press, Inc. at 8:38 AM