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Federal Eye
Posted at 06:00 AM ET, 08/22/2011

Taking Stock: Feds offer two main roads to retirement

Federal pay and benefits have come under increased scrutiny. But just what are the basics of working for Uncle Sam? This is the last installment of our Taking Stock series on the federal workforce.

In recent years many private sector employers have dropped “defined benefit” programs, which are traditional retirement programs that pay a certain amount based on a formula involving the employee’s years of service and salary level. If they have retirement programs at all, they’re more likely to offer “defined contribution” plans such as 401(k)s where the employer and employee typically make contributions but the money available at retirement depends on the earnings of those contributions.

The government, though, offers both types of benefits.

Eye Opener

Almost all federal employees first hired in 1984 or after are in a program called the Federal Employees Retirement System. People who worked for the government before 1984 usually are in an older program called the Civil Service Retirement System. FERS covers about four-fifths of the workforce, while CSRS mostly covers older employees.

Annuities are based on the highest three consecutive years of salary, called the high-3, and years of service. Under certain conditions, military service and unused sick leave are credited as time served. Under both programs, most employees can draw benefits starting at age 62 with five years of service, age 60 with 20 years, or age 55 with 30 years. Special age and service combinations apply in certain situations.

Both systems allow for providing survivor benefits at the cost of a reduction to the retiree’s own benefit; the choices are more extensive in CSRS than in FERS. Both also provide inflation protection to benefits, with the CSRS system more generous.

CSRS-covered employees pay 7 percent of their salary into the civil service retirement fund and in return become entitled to a benefit that works out to 16.25 percent of the individual’s high-3 salary after 10 years of service, plus 2 percent for each year of service above 10. For example, at 30 years of service, the benefit is 56.25 percent of high-3.

CSRS employees don’t pay into Social Security and therefore don’t qualify for a benefit from that system from their federal service. However, many qualify because of employment before or after their federal service, though benefit reductions commonly apply. A small percentage are in a hybrid system called CSRS Offset that does include Social Security coverage, but with an offsetting reduction in their federal annuity.

The FERS program consists of Social Security and a civil service pension less generous than that provided to CSRS employees. FERS-covered employees pay into Social Security and accumulate those benefits just like other workers. They also pay 0.8 percent of salary into the civil service retirement trust fund, and become eligible for a benefit of 1 percent of high-3 for each year of service. That increases to 1.1 percent for those retiring at age 62 or later with at least 20 years of service.

Under both systems, special rules apply to certain categories of employees such as law enforcement officers, who pay in more but get enhanced benefits while being subject to mandatory retirement, usually at age 57.

Employees under both systems also can save for retirement through the Thrift Savings Plan, a 401(k)-style program. All employees covered by FERS automatically get an account and the government pays an amount equal to 1 percent of their salary into it even if they choose not to invest their own money. Employees may make annual investments up to the same limits set by the IRS applying to all retirement investors—in 2011, $16,500. The investments come from pre-tax payroll dollars and grow tax-free until withdrawn. Starting in April 2012 the TSP will offer a “Roth” option in which the tax treatment is the reverse.

For FERS employees who invest their own money, the government will match the first three percent of salary dollar-for-dollar, and the next two percent at 50 cents on the dollar. Thus, the maximum government contribution is equal to 5 percent of the investor’s salary.

CSRS employees can invest up to the same dollar limit but get no government contributions.

Participants can allocate their money among a government bond fund, a mixed government/corporate bond fund, a large company stock fund, a small and mid-sized company stock fund or an international stock fund. The TSP also offers five “lifecycle” funds that automatically split investments among those funds according to ratios considered appropriate for the investor’s age.

When they leave government, either for another job or to retire, employees can leave their TSP accounts in place, roll the money over into an individual retirement account or other retirement savings plan, or withdraw the money as a lump-sum, as monthly payments, as an annuity or as a combination.

By  |  06:00 AM ET, 08/22/2011

 
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