CSRS Is Better Than FERS. Are You Sure?

By on September 20, 2011 in Current Events, Retirement with 279 Comments

Everybody knows the old CSRS system is better than FERS. Right? This is conventional wisdom, and conventional wisdom is never wrong. Is it? Even though we all know the answer, let’s take a closer look.

To have a really good handle on this, we will need to consider more than the Thrift Savings Plan, and more than the annuity. Also, examining a benefit without weighing the employee cost provides an incomplete picture, so let’s include employee cost.

The hypothetical employees are both 58, both have 27 years service in their respective retirement systems, and they have the same $54,000 high-three and lifetime earnings: $1,458,000.

1. Annuity

System Employee Cost Monthly Benefit Annual
FERS $11,664 (0.8%) $1,215 $14,580
CSRS $102,060 (7%) $2,261 $27,135

 

2. Thrift Savings Plan (TSP) – contribute 5% of salary

System Employee Cost Match Accumulation (assume 7% annual gain)
FERS $72,900 $72,900 $208,250
CSRS $72,900 -0- $104,125

 

3. Social Security – age 62

System Employee Cost Match Monthly Benefit Annual
FERS $90,396 (6.2%) $90,396 $1,200 estimated $14,400
CSRS -0- -0- -0- -0-

 

4. Annuity Supplement – prior to age 62

System Employee Cost Match Monthly Benefit Annual
FERS -0- unknown $1,080 $12,960
CSRS -0- -0- -0- -0-

 

The monthly annuity from CSRS is almost double that of FERS! Clearly, this makes CSRS better. But wait.  In order to get this big, fat pension, the CSRS employee has to pay $102,060  vs. the FERS payment of only $11,664.  Put another way, the FERS person recovers all his contributions in just ten months, while it takes three years 9 months for the other fellow to recover his “investment.”

In comparing the payouts from the pension fund, you also need to count the FERS annuity supplement – in this case, $1,080 each month until he reaches age 62, when the supplement is replaced with Social Security.  CSRS employees get no supplement, and no Social Security.

Add the monthly FERS supplement to the monthly FERS annuity and the result is $2,295.  This is more than the CSRS person!  And don’t forget: the FERS guy paid only $11,664 for his annuity, while the CSRS employee had to pay $102,060.

Thrift Savings
At retirement, the FERS retiree will have a nest egg of $208,250, while CSRS is half: $104,225.  That is a substantial difference, advantage FERS.

To summarize, the FERS person gets a monthly check from the Office of Personnel Management combining the annuity and supplement into one payment that is MORE than the CSRS retiree gets, and it costs him $90,000 less in contributions.  If that’s not enough, there is the TSP lump sum for him that is double what the CSRS guy gets!

I believe the above objective factors are telling us that, all things considered, the overall value of FERS compares favorably with CSRS.  In fact, if either of the two retirement systems is “better,” the evidence definitely supports FERS as the winner.

A negative on the FERS side is the COLA calculation.  Prior to age 62, FERS retirees receive no COLA – CSRS does – and the FERS COLA is (usually) one percentage point lower than the CPI.   Of course, this aspect is probably going to be overcome by the proposed COLA change, which will take money away from both sides.

The proposal to change the deduction for FERS to 6% instead of 0.8% is a game changer.  If/when this happens, the net value of FERS will drop dramatically.

NEWS FLASH
Just as this article is being finished, the White House has announced they are proposing to incrementally raise retirement contributions 0.4% per year, starting in 2013, for three years, for a new contribution rate of 2.0%.  The really bad news, however, is the recommended cancellation of the FERS annuity supplement.

Readers might want to check my website and calculators:  fedbens.us

 

© 2016 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.

About the Author

Robert Benson served 35 years in various Federal agencies, as both a management analyst and IT specialist. He is a graduate of Northwestern University.

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