Retirement Planning

CSRS vs. FERS: The Reaction

By Tammy Flanagan National Institute of Transition Planning April 7, 2006

Last week's column comparing CSRS to FERS certainly attracted a lot of feedback. I expected some skepticism, but not the level of hostility in some of the responses. I was trying to make FERS employees feel better about their future; it seems that some of them think I need to "get real."

In general, the responses fell into four categories: Mistrust of FERS, basic retirement benefits, Thrift Savings Plan issues and Social Security concerns. Let's look at each of these areas of concern.

Mistrust of FERS

Here are a few of the comments, with my responses:

  • I'll keep my CSRS and thank you very much! I was given the opportunity to switch over to FERS many years ago. The problem was I had around 10 years of service back then, and I knew this switch was good for the government but not good for me. FERS was created to save the government money, plain and simple.
  • The CSRS versus FERS [comparison] appears to be slanted toward the "party line."
  • If you can get out of FERS, do it now. CSRS is superior to FERS.
I do not really know if FERS was designed to save the government money, but I do know that creating a system that is more portable was a wise move, considering all of the federal employees who are being downsized and outsourced.

Agencies have a larger initial outlay for the FERS employees because of matching TSP contributions, Social Security taxes and contributing the "normal cost percentage" for the FERS basic benefit. Under CSRS, the agency matches the 7 percent CSRS contribution, but there are no matching TSP contributions, and CSRS employees are exempt from Social Security.

Basic Benefits

The withholdings required by the FERS employee during the time of employment far exceed the withholdings of the CSRS employee to get what is presented in the article as "comparable" retirements.

The required contributions of CSRS and FERS employees are very close:

 
CSRS
FERS
Basic Retirement Benefit Contribution 7% 8/10 of 1%
Social Security Tax (FICA) 0% 6.2% (of basic pay up to $94,200)
TSP (employee contributions are optional, but important) 0% 0% (however, if the employee contributes 5%, the agency will provide 5% in automatic and matching contributions)
Total required contributions 7% 7%

If CSRS employees took advantage of the Voluntary Contributions Program for the entire time of their employment, they would have far more in retirement benefits than illustrated while still putting in less than FERS employees must contribute to their retirement.

My example in last week's column assumed that the CSRS as well as the FERS employee would put 5 percent of their pay into a TSP account. The only difference for the CSRS employee in the Voluntary Contributions Program is that the money they put in already has been taxed. This means it takes more money to equal a 5 percent FERS contribution. Additionally, there is only one investment option for the voluntary contributions, not 10 as in the TSP. Also, remember that the FERS employee receives automatic matching contributions from the government where the CSRS employee does not.

CSRS retirees receive a full [cost-of-living allowance] on a much larger base amount while FERS retirees receive a "diet COLA" on a smaller base. The divergence of benefits over 20-30 years becomes substantial.

As under CSRS, the amount of a COLA for a FERS retiree is determined by the change in the Consumer Price Index. Generally, FERS COLAs are 1 percent less than the increase in the CPI. However, if the CPI increase is between 2 and 3 percent, the FERS COLA is 2 percent. If the actual increase is 2 percent or less, the FERS COLA matches the CPI increase. FERS basic retirement benefits are adjusted annually for inflation beginning at age 62. Some groups will receive COLAs prior to age 62 under FERS. Also, remember that the Social Security benefits that FERS retirees receive are fully adjusted for inflation in a similar manner to CSRS benefits. And TSP withdrawal options can be structured to allow for more sizable withdrawals later in life and smaller payouts early in retirement.

The sick leave add-on to CSRS retirement increases the base benefit, which becomes a substantial benefit in future years.

CSRS employees receive 1 day of service credit in the computation of their retirement for every 5.8 hours of unused sick leave. Employees who have more than 2,087 hours of unused sick leave will have another year of service included in the computation of their CSRS retirement benefit. This is a definite advantage for CSRS retirees.

FERS was patterned after corporate pensions, which typically do not factor in unused sick leave. There are many who believe allowing credit for sick leave toward the FERS retirement computation would reduce the amount of sick leave "abuse" among employees, but Congress hasn't moved to take such action.

Social Security

Don't you know that Social Security will be broke by the time we are old enough to collect it?

With an aging population of Americans with longer life expectancies than any previous generation, the current system of funding and paying Social Security won't work forever. No one is seriously suggesting that we eliminate Social Security. But future changes could continue the shift to providing proportionately higher benefits to those who have received lower wages during their working years. This, in turn, will mean that those who have earned higher wages (including many federal employees) will have to take more responsibility for saving for their retirement years.

Thrift Savings Plan

  • How can you assume that the TSP will grow by 8 percent per year? Don't you know that it was on a slippery slope in 2000, 2001 and 2002?
  • The FERS employee has to pay more to achieve any reasonable retirement income after 25 or 30 years by putting money in the TSP. You better be aggressive by investing in the S, I and C funds or your pot of gold at the end of the tunnel will be minimal.
  • You mentioned in passing that low-paid employees, or those with larger families (and higher expenses), must "manage consistent investing habits." But they are the very ones who cannot find the resources to invest after month-to-month expenses.

    • To answer this one, I contacted a respected certified financial planner at Wachovia Securities. Here is his response on the issue of the TSP funds' performance:

    Well, what about the period from 1991-1999, where the market was up nine years in a row, averaging a 21.4 percent gain and turning a $10,000 investment into $55,000? Indeed, 2000-2002 was the worst stock market period since the Great Depression of 1929-1932. However, some historical perspective is necessary. In the last 80 years, there have only been four times when the S&P 500 (which the C fund mirrors) was down in consecutive years....

    Plus, we are only talking about one of the funds here -- the C fund. By diversifying your money across the other funds as well, I think it is more than reasonable that a TSP participant should expect excellent growth over time.

    On an employee's "ability to save," the financial planner provides the following comment:

    Both in the government and in corporate America, the trend in the last 25 years has been to build vehicles to help employees and citizens save on their own, rather than relying on pensions, Social Security, etc. An unfortunate social side effect of this is that the gap is widening between the "haves" and the "have nots" as some people take advantage of these plans and others don't. However, I don't buy the objection that it is the lower paid employees that are left behind. No matter how much money you make, to make your retirement work you have to have a similar process, which starts with spending less than you bring home. This is true whether you make $15,000 a year or $250,000 a year.

    One last note: Some people asked that I address the CSRS Offset option in more detail. I'll do that in a future column.

    Resources

    To Do

    • Human Resources: Learn about your federal retirement benefit by requesting estimated retirement computations. Find brochures and other published information on federal retirement plans. Ask questions to gain a solid understanding of your retirement benefit.
    • Internet: Use the above resources to learn about investing for retirement. FERS employees must develop an understanding of investment basics, such as dollar cost averaging and diversification of investments.
    • Library: Check out books on financial planning to gain knowledge for retirement investing.

    Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

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    COMMENTS

    • When can I withdraw from my 401K or TSP without a penalty. I am under the CSRS, I started contributing in 1998 timeframe and the agency is not matching what ($200/mo) I am putting in. Sarah T. Cook Posted January 28, 2008 1:59 PM
    • I've been working in the federal government for approximately 5 years. I would like to stop working before Iam eligible. How can I file for retirement when I become eligible without going back to work? Darrell Slaughter Posted July 31, 2007 2:36 PM
    • In your chart comparing CSRS and FERS, you had the government contribution to the TSP as zero for both and a total required contribution of 7 percent. Actually, it is 1 percent for FERS TSP and therefore the total required contribution would be eight percent for the FERS. If a FERS employee makes no contribution to his TSP account, then an automatic 1 percent contribution is made by his agency. GovExec.com reader Posted April 21, 2006 1:48 PM
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    CORRECTION: Due to an editing error, the original version of this column erroneously referred to Thrift Savings Plan Voluntary Contributions. The article has been updated to correct the error.