Federal Retirement Benefits

While the private sector has recently cut back on their retirement programs, the government continues to offer comprehensive coverage.

There are two basic types of retirement programs: defined benefit and defined contribution. In a defined benefit program, an employee is guaranteed a certain level of income after retirement, based on factors such as length of service and salary. In a defined contribution program, a certain amount of money goes into an account, such as a 401(k); however, the amount available at the end depends on how well the investments performed.

In private industry, defined benefit programs are falling by the wayside, largely because of the high cost to the company. Typically, they are being replaced, if at all, with defined contribution programs.

The federal government, though, offers both. Federal and postal employees typically fall under one of two retirement programs: the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS). .

The CSRS system is essentially for those who have been working for the government continuously since 1983. A variant, called CSRS-Offset, generally applies to those who had at least five years of CSRS service, left the government, and then returned. While CSRS employees aren't covered by Social Security, CSRS-Offset employees are. The “offset” is a reduction in the civil service annuity when Social Security benefits begin.

Employees pay seven percent of their salary to participate in CSRS. In return, they get a defined benefit under a several-step formula based on their "high-three" -- their highest three years of consecutive earnings. The benefit adds up to 16 percent of high-three at 10 years of service, 36 percent at 20 years and 56 percent at 30 years.

Generally, the FERS system applies to those hired since 1984. It consists of three legs. The first part is Social Security, in which coverage is provided under the same terms as private sector employees. That is, both federal and private sector employment count toward Social Security credit and the benefits accumulate at the same rate.

The second leg is civil service annuity, which is based on the worker's high-three salary figure. This benefit is 10 percent of a high-three at ten years of service, 20 percent at 20 years and so on. FERS employees also pay seven percent of salary for these benefits. Like private sector employees, 6.2 percent of it goes to the Social Security trust fund, while the remainder goes into the civil service retirement trust fund.

The third leg of the FERS system is the Thrift Savings Plan, which allows FERS-covered employees to save up to 14 percent of their biweekly salaries, pre-tax. The government contributes up to an additional five percent of salary for FERS investors. Although the benefits are not as good for them, CSRS employees also can participate in the TSP.

Under both systems, employees pay an additional 1.45 percent of salary toward Medicare.

In both systems, retirement benefits generally are available to those aged 55 with 30 years of service, age 60 with 20 years or age 62 with five. In some cases such as reorganization, the government offers early retirement, which lets employees retire at age 50 with 20 years of service or at any age with 25 years.

Retirees can designate survivor benefits, although at a cost. For example, providing 50 percent of a retiree's annuity to a survivor results in a 10 percent reduction.

Benefits are inflation-protected. CSRS retirees get a full cost-of-living adjustment (COLA) each January, based on the change in a consumer price index measure every third quarter. Those retired under FERS get the full COLA on the Social Security portion of their benefits. The COLA on the civil service portion, on the other hand, may be reduced by a percentage, depending on the level of inflation.

Unlike many private sector retirees, federal retirees are eligible to continue many of the benefits they had while actively employed, including health insurance coverage.

Retirees pay the same Federal Employees Health Benefits program premiums as do active employees: a huge benefit because older people typically consume more health care. Also, an eligible spouse can continue FEHB coverage after the retiree's death. However, unlike active employees, retirees aren't eligible to pay premiums from pre-tax money or to fund medical expenses from flexible spending accounts. Retirees also become eligible for Medicare benefits at age 65.

Retirees also can continue their coverage under the Federal Employees Group Life Insurance program. They can choose either to keep the same coverage as when they were actively employed or to reduce it. Those who keep non-reduced coverage have to pay higher premiums.

Retirees also can keep coverage under the Federal Long Term Care Insurance program at the same rates they paid while actively employed.

Editor's note: This updated article by Eric Yoder, was first acquired by washingtonpost.com on July 30, 2003.