Which retirement system is really better?

In this example, FERS comes out slightly ahead of CSRS. But consider the following factors that could change the situation: At the same time, there are also some reasons why someone might be happier to retire under FERS:

Which federal retirement system is better? If you ask most employees, they seem to think the Civil Service Retirement System provides more generous benefits than its newer counterpart, the Federal Employees Retirement System. Even though most employees don't have any control over which system they're in, there are several reasons why this remains a subject of discussion:

  • Some employees who switched from CSRS to FERS at one point are beginning to question whether they made the right choice.
  • Some workers who were at one time mistakenly placed in the wrong retirement system, and thus who are affected by the 2000 Federal Erroneous Retirement Coverage Corrections Act, still are making decisions about whether to convert to FERS or the CSRS Offset system.
  • Returning federal employees with more than five years of prior CSRS service who have had a break in service of more than a year also get to choose between FERS and CSRS Offset.
  • If nothing else, I would like to address the inferiority complex that many FERS employees have from hearing how lucky their CSRS co-workers are to have been hired before 1984, when FERS became mandatory for new federal employees.
Two Different Approaches

A good place to start a comparison is with a basic knowledge of the how the two systems were designed.

The modern civil service dates back to 1883. CSRS was created in 1920. By that time, some civil servants had been on the job for 37 years. Why hadn't they retired? Partly because there was no retirement system available. Employees who did not have families to support them generally would work until they died or became too unhealthy to continue. Congress must have looked at the employees occupying federal jobs and decided it was time to rejuvenate the workforce.

CSRS was designed as a stand-alone program to provide a means for employees to survive after they retired from government. (Remember, Social Security wasn't created until 1935.) CSRS was supposed to serve career civil servants who entered federal service at a young age and remained onboard for a full career.

FERS has its roots in 1983 changes to Social Security mandating that all federal employees hired after that year would be subject to Social Security tax withholding, and would later receive benefits from the program. FERS was designed to be compatible with private sector retirement plans.

The creators of FERS figured such compatibility would help agencies attract mid-career employees from private companies, and would enable federal employees to explore careers outside of government. When FERS employees leave federal service before retirement, they can take their Social Security benefits with them and roll over the funds in their Thrift Savings Plan accounts into private firms' 401(k) plans. They also can collect a small pension benefit as long as they complete a minimum of five years of federal service.

CSRS employees were not able to set up TSP accounts until 1987 and generally were not encouraged to save for retirement prior to the creation of the TSP. CSRS employees receive no matching contributions on their TSP investments, and they do not earn Social Security benefits during their federal careers. Let's look at a comparison of a CSRS employee and one covered by FERS. In the example, we'll assume the employee retires at age 56 while making a $68,000 salary:

Basic benefit (30 years service with high-three average salary of $65,000) $36,562 $19,500
Social Security supplement $0 $10,800
Thrift Savings Plan account balance (assuming 5 percent contributions and an average return of 8 percent) $155,000 $311,000
TSP income (assuming employee withdraws 4.5 percent per year and continues to earn 8 percent return) $6,975 $13,955
Total annual retirement income $43,537 $44,255
The employee leaves federal service before retirement eligibility.
  • FERS:The employee could pick up where he left off in his next job. His Social Security earnings would continue to build and he could add to his savings with his next employer's 401(k) plan. He could collect a FERS benefit when he reaches the minimum retirement age or at age 62, depending on how much service he had when he left the government.
  • CSRS: This employee has a lot more to lose. In her next job, she could be paying Social Security on her wages for the first time in her career. Social Security computes benefits on the highest 35 years of wages; if she has only 15 or 20 years of paying Social Security tax, she will get a much smaller benefit. Deferred CSRS benefits are not payable until age 62 and are computed on the high-three average salary when the employee left federal service.
The employee continues working until age 62.
  • FERS: His TSP would benefit from continued contributions and additional years of growth. FERS cost of living allowances are payable on the basic FERS benefit after age 62, so the retiree would receive adjustments to the FERS annuity in his first year of retirement. Also, Social Security is payable at age 62, so he would be able to collect from a full career's worth of employment covered by Social Security, which could include nongovernment work.
  • CSRS: The employee could have retired five years earlier, so she gave up receiving her retirement benefit for five years. Her basic annuity grows by 2 percent of the high-three salary figure for each additional year of service. Retiring at age 62 may not leave much time to work outside of federal service to earn a Social Security benefit.
The employee reached the high end of the federal salary range.
  • FERS: Social Security benefits provide a higher replacement of income for low-salaried workers and a lesser replacement for high-salaried employees. To maximize benefits, a higher-salaried FERS employee must be diligent in participating in the TSP and managing his funds.
  • CSRS: The CSRS employee with a higher salary would benefit from the higher computation of the CSRS annuity. Over time, this benefit would maintain its value with retiree COLAs.
The employee worked at a lower salary or for fewer years.
  • FERS: The biggest disadvantage for a lower-paid employee is the fact that it could be more difficult to invest in the TSP. But if she could manage consistent investing habits, she could see good results.
  • CSRS:If the employee worked at a lower salary, it would be less likely that he would have invested in the TSP.

In these cases, FERS doesn't look too shabby stacked up side by side with CSRS. But there are a few other reasons why someone might be happier retiring under CSRS:

  • He or she could get a fairly generous retirement benefit without having accumulated separate savings.
  • Cost of living adjustments on CSRS retirements are fully tied to the Consumer Price Index. Under FERS, only Social Security benefits are fully indexed for inflation. FERS basic retirement benefits are delayed and receive smaller COLAs.
  • The surviving spouse benefit under CSRS is a little more generous and a little less expensive.
  • Sick leave is creditable towards the computation of the CSRS benefit. One year of sick leave credit would add $1,300 per year to the CSRS example in the chart above.
  • CSRS retirees can immediately go back to work outside of the federal government and continue to receive their retirement. FERS supplements and Social Security benefits come with earnings limits attached. If you are still working, it may not make sense to begin TSP withdrawals.
  • CSRS is simpler than FERS. There is not as much planning involved and not as much risk, since retirement benefits are based on a set formula rather than on the performance of your investments.
  • Social Security benefits are not affected or reduced by a FERS retirement.
  • Social Security provides benefits for dependent spouses and children of retirees while they are living. The employee and his or her family could receive total benefits equal to 175 percent of the individual worker's benefit. CSRS only pays benefits to family members after the retired employee dies.
  • If the retiree dies without leaving a survivor annuity, there may still be money left in the TSP for the survivors.
  • If someone doesn't work in government for 30 years, his or her Social Security and TSP can continue to grow in a private sector career.
  • FERS is more flexible for employees who come into government late in their careers or leave federal service early. FERS does not have an age penalty on voluntary early retirement or discontinued service retirement (which occurs at age 50 with 20 years or any age with 25 years). FERS has a retirement option available for employees who have reached the FERS minimum retirement age with at least 10 years of service.
  • FERS employees have more control over their retirement. Their TSP funds can remain invested after retirement. Social Security benefits are available at age 62 or later. If you choose to postpone receiving those benefits, they are paid at a higher rate for the rest of your life.
  • Human Resources: Be sure that your official personnel records clearly document your entire federal career. Request estimates of your federal benefits and ask questions if there are areas you don't understand.
  • Pre-Retirement Seminar: Such sessions can help you understand how TSP investments work and how to take advantage of various investment choices.
  • News Sources: Stay informed about Social Security and monitor changes to the program.
  • At Home: Consider a second career instead of one long career. If you are eligible to begin collecting retirement, take advantage of the opportunity if you can also go back to work earning a similar salary or if you have an opportunity to do other work that is rewarding to you. This will provide a larger source of retirement income when you stop working and enter a second phase of retirement: the volunteer/leisure/family years.
  • At Work: Promote healthy retirement for the next generation. Help younger employees and your children understand that retirement planning is a lifelong process.
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.