In last week’s column, Where Retirement Benefits Came From, we looked at the origins of the retirement system, both nationally and in the federal government. This week, let’s examine how we got to where we are today.
Recent history in regard to private sector as well as federal retirement plans starts with the invention of the employer-sponsored savings plan in 1978. At about the same time, changes in the tax code put company pension plans in jeopardy by requiring them to account for their pension liabilities. According to a 2014 article in Bloomberg Pursuits, Richard Stranger, a policy analyst on the staff of the congressional Joint Committee on Taxation, was the primary author of the 869-word section 401(k) of the 1978 tax law that created employer-sponsored plans.
The 401(k) provision encouraged employees to direct part of their salary into retirement accounts without paying taxes on it up front and established basic rules to prevent too much of the benefit from going to executives. Theodore Benna became known as the “father of the 401(k)” because he created and gained IRS approval of the first such savings plan while serving as vice president of the Johnson Companies. Today Americans participate in about 50 million plans holding roughly $3 trillion in assets.
At the same time, pension plans have become more and more rare. In 1983 there were 175,000 such plans nationally, but by 2008 there were only about 47,000.
The “three-legged stool” concept—including a defined benefit or traditional pension plan, Social Security benefits and an employer-sponsored savings plan—was the basis for the creation of the Federal Employees Retirement System in 1986. According to a 1986 article in Social Security Bulletin by Wilmer L. Kerns of Social Security’s Office of Policy, over the years, numerous studies were conducted on the feasibility of covering federal employees under the Social Security program before 1983.
After the passage of the 1983 Social Security amendments that brought all newly hired federal employees under Social Security, Congress began considering a retirement system for newly hired federal employees that would provide a benefit structure coordinated with Social Security and involving overall contributions comparable to those for employees under the existing Civil Service Retirement System.
The creation of the Thrift Savings Plan was part of the design of the new retirement plan. The TSP included an automatic agency contribution of one percent of annual salary into a savings account for each FERS member. People employed as of Jan. 1, 1987, who were hired on or after Jan. 1, 1984, received credit toward the TSP of 1 percent of salary earned during 1984-86. Beginning in 1987, FERS members could contribute up to 10 percent of their salary to the plan. The employee’s agency matches these contributions dollar for dollar up to the first 3 percent of salary and 50 cents per dollar for the next 2 percent.
The automatic and matching agency contributions are the same today as they were in the original law. But other things have changed a lot in the federal retirement benefits world:
- As of January 2018, the TSP plan balance has grown to more than $500 billion.
- There are now more than 5 million participants in the TSP, including civilian federal employees, members of the uniformed services and beneficiary participants.
- The average account balance for a FERS employee is $142,395. (This may not sound high, but this includes new hires as well as employees hired as far back as 1984).
- As of Sept. 30, 2014, only 188,000 federal employees remained under CSRS, out of a total of 2.6 million employees.
- According to a 2018 Congressional Research Service report, in fiscal 2016, 94 percent of civilian federal employees were enrolled in FERS.
- Also as of fiscal 2016, more than 2.6 million people received civil service annuity payments, including 2,077,804 employee annuitants and 533,884 survivor annuitants. The average monthly annuity payment to workers who retired under CSRS was $4,755. The average FERS retiree received an annuity of $1,714.
- At the end of fiscal 2016, the balance of the Civil Service Retirement and Disability Fund was $879.8 billion—more than 10 times the amount of outlays from the fund that year. The trust fund balance is expected to reach $909 billion by the end of fiscal 2018.
According to a 2015 CRS report, the CSRDF will be able to pay benefits through 2090. While the CSRDF has an unfunded liability, actuarial estimates project that it will peak in 2025 and gradually be eliminated by 2090. There is no point over the next 80 years at which the assets of the retirement and disability fund are projected to run out.
Which begs the question: If there’s no problem with the solvency of the federal retirement system, why are there so many proposals to reduce or eliminate benefits? Next week, we’ll explore that question as we look at the future of retirement.
Photo: Flickr user Ken Teegardin