Under a bill President Obama signed Wednesday evening, those who are newly hired into the federal government in 2013 and after and who don’t have at least five years of prior federal service will have to pay an additional 2.3 percent of salary toward their civil service retirement benefit. That means the total required contribution toward that benefit will be 3.1 percent of salary for most of them. Current employees would not be affected.
Here are some questions and answers on the issue.
What do federal employees contribute toward their retirement benefits now?
That varies. Employees under the Civil Service Retirement System, which generally covers employees first hired before 1984, pay 7 percent of their salary into the federal retirement fund. They don’t pay Social Security payroll taxes, nor do they earn a Social Security benefit through their federal service. Their entire retirement benefit comes from the civil service fund, unless they earn a Social Security benefit from employment elsewhere. If they do, that benefit is reduced in most cases.
Employees first hired in 1984 and after generally are in the Federal Employees Retirement System. They earn the same Social Security benefit and pay the same Social Security contribution as other workers. Typically, that is 6.2 percent of salary, although in 2011 and 2012 (now that a full-year extension has been signed) it is 4.2 percent. In addition, they pay 0.8 percent toward a civil service benefit that is worth roughly half the value of a CSRS annuity for an employee with a similar work record.
Some employees, primarily in law enforcement, firefighting and air traffic control, pay an additional 0.5 percent of salary toward their civil service benefit and receive an enhanced annuity.
Why the difference between the two retirement systems?
FERS was created in the 1980s as part of an effort to get more people paying into Social Security. The standard FERS contributions were structured so that the total retirement contribution of 6.2 percent to Social Security and 0.8 percent toward the federal retirement fund would come to the same standard 7 percent for CSRS employees.
The FERS civil service annuity plus the Social Security benefit plus employer contributions for FERS employees into the 401(k)-style Thrift Savings Plan were designed to make the total value of benefits about equal to a CSRS annuity.
What is the difference between what the government pays and what employees pay to fund the retirement program?
According to a Congressional Research Service report issued this month, the cost of funding the CSRS system equals 26 percent of salary. CSRS employees pay their 7 percent, and employing agencies also pay 7 percent of salary into the civil service fund on an ongoing basis. The remaining 12 percent comes from direct transfers from the Treasury, interest from the Treasury bonds in which the fund is invested and contributions from the Postal Service for its retirees.
Under FERS, the cost of the civil service benefit is 12.7 percent of payroll, according to CRS. Employees pay 0.8 percent, and employing agencies pay the rest on an ongoing basis. In addition, agencies pay an amount equal to 1 percent of a FERS employee’s salary to the TSP, whether the individual invests or not, plus up to another 4 percent in matching contributions, along with 6.2 percent into Social Security. The employer contribution to Social Security has remained at that rate even as the employee contribution has been lower last year and this year.
Why the recent focus on employee contributions?
The Simpson-Bowles commission in late 2010 pointed out the disparity between what employees pay and what the government pays. The theme then was picked up in numerous proposals in Congress, mainly by House Republicans. The Obama administration has twice proposed increasing the contribution for all employees, as well.
However, financing of federal retirement is a long-running issue. The required contributions were raised slightly for several years during the Clinton administration, largely because of a concern that the retirement system is underfunded. But that increase was repealed during better budgetary times.
Why do some employees say they are forced to pay 12 percent of their salary to retirement?
It’s a question of what you count. Under FERS, which now covers four-fifths of the workforce, the conventional wisdom is that to build a benefit comparable to what a similar CSRS employee would receive, you must capture the full government match in the TSP. That is achieved by investing 5 percent of salary personally. So, they add that 5 percent to the 6.2 percent normal Social Security contribution and the 0.8 percent civil service contribution.
Employees are not forced to invest in the TSP; it is a strictly voluntary program. Many FERS employees argue that they effectively are required to invest at least 5 percent, though.
Employees under CSRS may also invest in the TSP, although they get no government contributions.
Does the recent action imposing an increase only on future employees settle the issue?
Employee organizations are warning that the new law doesn’t necessarily lift the threat to current employees. Various proposals remain pending in Congress that would affect current employees.