The Civil Service Retirement Act, which became effective on August 1, 1920, established a retirement system for certain Federal employees. It was replaced by the Federal Employees Retirement System (FERS) for Federal employees who first entered covered service on and after January 1, 1987.
The Civil Service Retirement System (CSRS) is a defined benefit, contributory retirement system. Employees share in the expense of the annuities to which they become entitled. CSRS covered employees contribute 7, 7 1/2 or 8 percent of pay to CSRS and, while they generally pay no Social Security retirement, survivor and disability (OASDI) tax, they must pay the Medicare tax (currently 1.45 percent of pay). The employing agency matches the employee’s CSRS contributions.
CSRS employees may increase their earned annuity by contributing up to 10 percent of the basic pay for their creditable service to a voluntary contribution account. Employees may also contribute a portion of pay to the Thrift Savings Plan (TSP). There is no Government contribution, but the employee contributions are tax-deferred.
Congress created the Federal Employees Retirement System (FERS) in 1986, and it became effective on January 1, 1987. Since that time, new Federal civilian employees who have retirement coverage are covered by FERS.
FERS is a retirement plan that provides benefits from three different sources: a Basic Benefit Plan, Social Security and the Thrift Savings Plan (TSP). Two of the three parts of FERS (Social Security and the TSP) can go with you to your next job if you leave the Federal Government before retirement. The Basic Benefit and Social Security parts of FERS require you to pay your share each pay period. Your agency withholds the cost of the Basic Benefit and Social Security from your pay as payroll deductions. Your agency pays its part too. Then, after you retire, you receive annuity payments each month for the rest of your life.
The TSP part of FERS is an account that your agency automatically sets up for you. Each pay period your agency deposits into your account amount equal to 1% of the basic pay you earn for the pay period. You can also make your own contributions to your TSP account and your agency will also make a matching contribution. These contributions are tax-deferred. The Thrift Savings Plan is administered by the Federal Retirement Thrift Investment Board.
Because FERS has three components, these components each offer retirees less money. The annuity payment for CSRS retirees is designed to be their only income, whereas FERS retirees have the annuity, the thrift savings plan, and Social Security benefits
CSRS is being phased out but some employees are still in the system
The U.S. government maintains two retirement systems for its employees—the Federal Employees Retirement System and the Civil Service Retirement System. Retirement systems are common at all levels of government. Employees, and often employers as well, contribute money to the employees’ retirement funds and retirees draw monthly income from the system.
There are several significant differences between these two systems.
All federal workers had the option to convert from CSRS to FERS when FERS was first created in 1987. Now all federal employees are automatically enrolled in FERS—they don’t have the choice of electing CSRS instead.
It is not to say that no federal employees have CSRS, however. CSRS is still available to federal workers who were in the CSRS system before 1987 and who chose to remain with CSRS instead of switching to FERS at that time. Their benefits were not terminated with the introduction of FERS. FERS is intended to fully succeed CSRS when the CSRS beneficiaries eventually die off.
CSRS was established on January 1, 1920, and it’s a classic pension plan similar to those established during the same time period among labor unions and large companies. Employees contribute a certain percentage of their pay. When they retire, they receive an annuity sufficient to maintain a standard of living similar to what they experienced during their working years.
Assuming the worker has at least 30 years in federal service, the CSRS benefit is generally sufficient to provide a comfortable lifestyle even without Social Security or any retirement savings. It’s indexed for inflation.
A FERS employee has a smaller pension, one not intended to fully fund his retirement on its own. He also gets a thrift savings plan and Social Security to fund his retirement in addition to the pension program.
The thrift savings plan is similar to a 401(k), so it’s possible that a FERS employee can come up short in retirement if she doesn’t handle the plan efficiently. But having the TSP gives FERS employees more control over and flexibility with their retirement plans. FERS workers typically retire with double the savings that CSRS workers accumulate, although CSRS employees do have superior pension benefits.
Older employees who have had CSRS received cost of living adjustments from the start. The FERS adjustment is stingier and not available until the employee reaches age 62. The COLA is equivalent to that given to military retirees and Social Security recipients.
It’s generally accepted that the FERS plan has the edge here, at least for employees who have passed 18 months of service. Benefits are slightly greater, and, of course, CSRS employees are not generally entitled to Social Security disability because they don’t have sufficient Social Security credits.
Survivors of CSRS employees are entitled to survivor benefits of 55% of the initial unreduced CSRS benefit. It drops to 50% for FERS survivors—after a 10% reduction. FERS survivors would typically receive Social Security survivor benefits as well, however, and would presumably inherit the balance remaining in the thrift savings plans as well.
The U.S. government contributes an amount equal to 1% of each FERS employee’s contribution to his thrift savings account. FERS employees can contribute more, and the U.S. government will match those contributions up to a certain percentage.
CSRS employees can participate in the thrift savings plan, but they receive no additional money from the federal government if they elect to do so. That 1% helps the government to ensure that FERS employees achieve a retirement that’s comparable to that of CSRS employees. It’s vested after three years of service, and it does not automatically close upon retirement, forcing a transfer of funds.
CSRS employees contribute between 7% and 9% of their salaries to the system. It should be noted, however, that FERS employees contribute a comparable amount when Social Security is factored into the total contribution. Federal employees hired before or during 2012 contribute 8%, and employees hired after 2012 contribute 3.1%.
The Social Security tax rate also called Old Age, Survivors and Disability Insurance, or OASDI is 5.3%. FERS employees can contribute more to the plan if they choose by using the thrift savings plan.
CSRS employees can retire as young as 55 years of age, but FERS employees who began their careers during or after 1970 must wait until age 57. Older FERS employees can retire a little earlier, depending on when they began their careers.
It’s no longer really necessary to weigh all these pros and cons now that you can no longer elect CSRS benefits. It can help you to plan your retirement a bit more effectively, however, if you’re passing 30 years of service but not ready to retire quite yet.