The Best Annuity: FERS or CSRS?
by Robert F. Benson |
Evaluating retirement systems to determine which is “better” is difficult. FERS has the annuity supplement and agency match for TSP contributions, both missing from CSRS. But CSRS has much larger annuity payments. FERS employees pay considerably less for their annuities; however, FERS retirees receive no COLA increases before age 62, while CSRS retirees do. The survivor option for CSRS is a bit less costly and more generous than FERS. And on and on. Not only are there different dimensions in the two systems, the numbers are going to change starting next year.
So, let’s take a look at just the most important element: the annuity. Last May, the Office of Personnel Management (OPM) issued a publication with helpful statistics for the two retirement systems. Exhibit R4 is the source of the numbers in this article, allowing objective comparisons to be made.
In fiscal year 2011, there were 38,839 FERS retirements and 44,998, or 54.3%, CSRS.
The average annuity for FERS was $1,383 monthly, compared to $4,270 for CSRS. No doubt about it. CSRS is much more generous, therefore much better, right? Well, consider how much employees had to pay to get these annuities. FERS employees contributed an average of $9,753 over their careers, while CSRS employees paid an average of $91,272. Note: CSRS employees pay 7.0% of salary for retirement, for FERS it is only 0.8%.
Illustration. Two employees each work 30 years and retire with lifetime civil service earnings of $1 million. During his career, the FERS employee had $8,000 withheld from his paycheck for retirement, and for the CSRS employee the corresponding figure was $70,000.
Evaluating both cost and benefit, the picture is different. Dividing contributions by monthly payments for CSRS shows that the “payback” period is 21.4 months. FERS employees recover their investment in just 7.0 months. Looked at another way, FERS employees get an annuity that is nearly one third the size of the CSRS annuity, and yet they pay only one ninth as much as their CSRS counterparts.
Then there is the annuity supplement, paid with the annuity to retirees under age 62 to compensate them for Social Security, which they cannot start receiving until they become 62. This benefit, depending on both years of FERS service and salary earned, ranges in most cases from $600 – $1,100. There is a widespread, justified belief that policymakers plan to abolish the annuity supplement for FERS employees. This, if it happens, will be painful indeed.
Not Included. The annuity supplement is separate from the annuity itself, and should not be used in a direct comparison. Also, there is no discussion above about the advantages of the Thrift Savings Plan. Nor is there anything on Social Security, which is completely separate from the civilian annuity.
The Annuity. Getting back to the original question, when you consider return on investment, the FERS annuity is clearly superior to the CSRS annuity, even without the supplement. I know FERS employees will argue this point heatedly, but this is what the numbers seem to be telling us.
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© 2013 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.
by Robert F. Benson |