April 7, 2006Last 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:
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:
|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%|
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.
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
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….On an employee's "ability to save," the financial planner provides the following comment:
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.
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.
April 7, 2006