Federal vs. Private

Comparing retirement benefits in the public and private sectors.

In a recent piece in the Wall Street Journal, Dallas Salisbury of the Employee Benefit Research Institute detailed how private sector benefits have changed since World War II. That got me thinking about the changes that have occurred in the federal government in the years since the Civil Service Retirement System was established in 1920.

The biggest change was the creation of the Federal Employees Retirement System in the mid-1980s. With that move, the government system began the process of shifting from a single benefit retirement plan (CSRS) to one that is similar to the 401(k)-based plans that dominate in the private sector today (FERS).

In 1979, 62 percent of workers in a retirement plan had a company pension, which was based on salary and length of service. In 1984, Bank of America introduced the first hybrid-defined benefit plan, offering a combination of a pension and an employer-sponsored savings plan. By 2005, 63 percent of private sector employees had access only to a 401(k) plan (like the federal Thrift Savings Plan). This year, IBM moved its employees to enhanced 401(k) plans for all future service. IBM's new plan has no defined benefit and provides up to an 8 percent employer match on employee retirement savings in the 401(k).

The private sector hybrid plans combined Social Security, a defined benefit and an employer-sponsored savings option. With FERS, the federal government offered its employees a plan similar plan. But FERS does have some differences. Consider the following comparison:

Government Private Sector
Average weekly salary (in 2006) $1,198 $816
How much are workers saving for retirement? Of employees covered by FERS, 86 percent participate in the Thrift Savings Plan. Their average account balance is $73,329. Participants ages 40-44 with 20 years of federal service have an average balance of $138,616. The Employee Benefits Research Institute says 72 percent of workers report that they and/or their spouse have saved money for retirement. But 36 percent of workers have saved less than $10,000. Only 12 percent have saved $250,000 or more.
Who insures retirement benefits? Full CSRS benefits and the FERS basic benefit are backed by the full faith and credit of the U.S. government. It takes an act of Congress to change a federal employee's retirement benefit. Investments in the TSP are subject to risk of loss due to market fluctuations, credit risk and inflation. The Pension Benefit Guarantee Corporation currently guarantees payment of basic pension benefits for more than 44 million workers and retirees. PBGC's liabilities are not explicitly backed by the full faith and credit of the federal government; doing so would require a change in law.
Cost of living adjusted pensions CSRS and FERS retirees both get annual cost of living adjustments. The COLA for FERS isn't quite as generous. Most FERS retirees see the COLA after age 62. Many private sector pension plans make a level payment for life. Social Security benefits are adjusted by an annual cost of living adjustment.

The good news for FERS employees is that unlike many in the private sector, they have both a basic pension benefit as well as an employer-sponsored savings plan (the TSP). A federal employee who leaves government before retirement and moves to a job that does not offer a pension will have to save more to make up for this valuable lifetime benefit.

FERS employees are vested in the FERS basic benefit after five years of civilian service, so even without a full career in government, they'll have something to show for their years of work besides Social Security and their savings. But if they stay in government until retirement, they get another benefit -- lifetime health insurance coverage. As benefits of working for government go, the FERS basic benefit and the potential of lifetime coverage under the Federal Employees Health Benefits Program are more important than ever.

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.