CSRS vs. FERS, Again

It seems like the end of the year is a time for trips down memory lane. I remember exploring more than once in this column the age-old debate over which retirement system was better -- the Federal Employees Retirement System or the Civil Service Retirement System. I thought of that when I listened to Mike Causey’s Federal News Radio program on Wednesday. Causey invited two guests -- Tom Trabucco, former director of external affairs for the Thrift Savings Plan and Judy Park, former legislative director for the National Active and Retired Federal Employees Association -- to look back over the past 25 years since the creation of FERS.

I thought about whether some employees who transferred to FERS might be looking back and wondering what their retirement would have looked like if they had remained under CSRS. And some FERS employees might be wondering what their retirement would look like if they had been hired before 1984 and were eligible for CSRS rather than after 1983, when FERS become mandatory for most new hires.

One of the things Trabucco pointed out on Causey’s program was that lower-salaried employees would fare better under FERS because of the Social Security tilt towards low wage earners. This means they may not have needed to save as much in the TSP to come up with the same overall retirement income replacing their salaries as their CSRS counterparts with similar career paths. Someone who spent their career in a higher wage bracket would receive less replacement income from Social Security but they also might have fared well under FERS, depending on their TSP balance, their retirement eligibility and how much of their career was spent in federal service.

Numbers Game

Let’s look at some numbers to see if Trabucco’s theory holds true:

30 years of service under CSRS provides 56.25 percent of the high-three average salary:

• $50,000 x .5625 = 28,125/year or $2,343.75/month
• $75,000 x .5625 = $42,187/year or $3,515.58/month
• $155,000 x .5625 = $87,187/year or $7,265.58/month

30 years of service under FERS provides 30 percent of the high-three average salary (33 percent for those 62 and over):

• $50,000 x .30 = $15,000/year or $1,250/month ($16,500/$1,375 at 62+)
• $75,000 x .30 = $22,500/year or $1,875/month ($24,750/$2,062.50 at 62+)
• $155,000 x .30 = $46,500/year or $3,875/month ($51,150/$4,262.50 at 62+)

45 years of service under CSRS provides a maximum benefit of 80 percent of the high-three average salary:

• $50,000 x .80 = $40,000/year or $3,333/month
• $75,000 x .80 = $60,000/year or $5,000/month
• $155,000 x .80 = 124,000/year or $10,333/month

45 years of service under FERS provides either 45 percent or 49.5 percent (for those 62 and older) of the high-three average salary (FERS does not have a maximum benefit):

• $50,000 x .45 = $22,500/year or $1,875/month ($24,750/$2,062.50 at 62+)
• $75,000 x .45 = $33,750/year or $2,812.50/month ($37,125/$3,093.75 at 62+)
• $155,000 x .45 = $69,750/year or $5,812.50/month ($76,725/$6,393.75 at 62+)

For a worker born in 1951, with a moderate wage history for 40 years since 1973 (assume they earned $46,876 in 2012), the Social Security retirement benefit would be $1,605.98/month at full retirement age (66) or $1,204/month at 62 (in 2013). For a worker born in 1947, who earned the maximum taxable Social Security wage since 1973 ($110,100 in 2012), the Social Security retirement benefit would be $2,533 in 2013, at age 66.

Trabucco’s theory of the low wage earner doing better under FERS holds true for the following example:

• $50,000 high-three average salary with 30 years of federal service.
• FERS plus Social Security would equal $2,409 to $2,980 per month (depending on age at retirement and when the retiree filed for Social Security benefits).
• Under CSRS, he or she would get $2,343.75 per month.

For a higher wage earner, the picture would look like this:

• $155,000 high-three average salary with 30 years of federal service.
• FERS plus Social Security would total $6,408 to $6,795 per month (depending on age at retirement under FERS and assuming the retiree filed for Social Security at age 66 in 2013)
• Under CSRS, he or she would get $7,265 per month.
• Additional income from a TSP account would be available that would increase the overall retirement income in all cases (and FERS employees would have the advantage of receiving additional agency automatic and matching contributions).

Other Considerations

Some other points to remember:

• Unused sick leave would add additional service credit to all of the above CSRS and FERS examples (including the maximum 80 percent benefit under CSRS).
• Employees should be sure that all of their service has been properly documented and should also check to be sure they don’t have an unpaid civilian or military service credit deposit that might affect their retirement eligibility or computation of the benefit under CSRS or FERS.
• FERS retirement benefits receive delayed and reduced cost-of-living adjustments compared to CSRS retirement benefits.
• Social Security also provides spousal benefits and widows’ and widowers’ benefits. Married, widowed and divorced individuals sometimes can receive a higher Social Security benefit based on a spouse’s work record than on their own.
• CSRS retirees are affected by the Government Pension Offset, which reduces and often eliminates any entitlement to Social Security spousal or widow’s benefits.
• Taxes are another issue. Even though all federal retirement benefits are potentially taxable, some states give more favorable tax treatment to Social Security benefits. Some exempt federal retirement benefits from taxation. Social Security benefits are partially or fully federal income tax-free depending on total adjusted gross income.
• Spousal survivor benefits are slightly more expensive and slightly less generous under FERS than under CSRS.

Bottom Line

CSRS and FERS both were designed to provide adequate retirement benefits for federal employees as long as they understand their benefits and plan for retirement early in their career. For employees who spend a portion of their career outside civilian federal service, it’s also important to understand the need for retirement savings to supplement Social Security and any other pension benefits that might be payable.

In the end, your goal should be to accumulate enough retirement income to cover your ongoing expenses and needs, with some leftover for the things you want.

Correction: In one of the above examples, the monthly figure for those 62 and older at a $75,000 salary level with 30 years of service under FERS was incorrectly listed as $1,062.50. The correct figure is $2,062.50. The column has been updated to correct the error.