How Much Do You Know About Funding of the Federal Retirement System?

By on November 14, 2012 in Human Resources, News, Retirement

Most current federal employees will eventually receive retirement payments from the federal retirement system. And, of course, current federal retirees are already receiving payments from this system.

How much do you know about the funding of your federal retirement? Most of us never paid much attention to where the money comes from but have confidence the money will be there to support a comfortable lifestyle during the decades following departure from federal service. A Congressional  Research Service report sheds light on the financing for federal retirement. Here is a brief explanation of a complex system of funding.

Retirement annuities for civilian federal employees are primarily provided  through two programs: the Civil Service Retirement System (CSRS) and the Federal Employees’ Retirement System (FERS). Retirement annuities are financed through employee and employer contributions to the Civil Service Retirement and Disability Fund (CSRDF).  The assets of the CSRDF are invested in Treasury bonds or other securities backed by the federal government. Retirement annuities for federal employees are paid from the CSRDF regardless of whether an employee’s benefits were under CSRS or FERS.

Expenditures from the CSRDF currently are about 36% as large as federal expenditures for the salaries paid to federal employees. These pension expenditures are projected to decline relative to the government’s wage and salary expenses, beginning around 2020.

CSRS and FERS Funding: Why the Difference?

There is a difference in the funding for FERS and CSRS annuities.

In the 1980’s, the CSRS retirement system ended and new federal employees were placed into the FERS system. One reason for the change was because FERS annuity payments are fully funded by employee and employer contributions and interest earned by the Treasury bonds held by the CSRDF. Congress required pre-funding of FERS retirement benefits so federal agencies would have to recognize these costs in their budgets. (See FERS After 25 Years)

The FERS basic annuity was designed to be smaller compared to the high-three average pay of a CSRS annuity because FERS annuitants also receive benefits from Social Security and the Thrift Savings Plan.

The federal government pays more money into the CSRDF for employees covered by CSRS. This is because employee and agency contributions and interest earnings do not cover the cost of the benefits earned by CSRS employees.  When the Civil Service Retirement System was established in 1920, it was not pre-funded. Benefits paid to federal retirees were paid from current contributions to the plan. It was anticipated that retirement benefits could continue on a pay-as-you-go basis. In 1969, Congress passed a law that set the employee contribution to CSRS at 7.0% of pay and required an equal amount to be contributed from funds appropriated to federal agencies. But, while more money was coming into the system, it did not cover higher future costs because of pay raises or an average higher pay grade and overall higher pension costs for future retirees over time. Because the cost of annual cost of living increases (COLAs) is not accounted for in the payments to the trust fund mandated by the 1969 law, the CSRS continues to accumulate an unfunded liability.

The result is that CSRS benefits will, in part,  be paid from contributions that were made to the CSRDF on behalf of employees enrolled in FERS. This lack of CSRS funding, in turn, creates an unfunded liability for FERS payments.

When Congress established the Federal Employees’ Retirement System in 1986, it required all pension benefits earned under FERS to be fully pre-funded by employer and employee contributions and the interest earned by Treasury bonds held by the Civil Service Retirement and Disability Fund. For those inclined to lament the differences between the two retirement systems, this has been covered in other articles. The purpose of this article is outline the funding of the federal retirement programs, not delve into the differences or advantages of the two systems. (See CSRS Is Better Than FERS. Are You Sure? and Thirteen Years of Increases for Employees vs. FERS and CSRS)

That Unfunded CSRS Liability

Because CSRS retirement benefits are not fully funded, the Civil Service Retirement and Disability Fund does not have enough money  to pay these benefits. This unfunded liability was $622.3 billion in  fiscal year 2010. The unfunded liability of the CSRDF is expected to rise until about 2023. At that point,  the unfunded liability will hit a peak of about $684.8 billion. From that point, the unfunded liability will steadily decline and is projected to turn into a  surplus of $716.7 billion by 2085. So, for a current federal retiree under CSRS who is retiring at 65 years of age in 2012, the fund will have a surplus by the time that person is 138 years old.

The CSRS is funded by employee and agency contributions and money from the general fund of the U.S. Treasury. The Treasury’s general fund makes up some of the difference between the contributions and the actual cost of the program.

The CSRS has been funded on a “pay-as-you-go” basis. The trust fund was used to pay benefits to former federal employees who had already retired rather than to pre-fund the pension benefits of those who were currently working. Initially, only employees made payroll contributions to the fund. Regularly scheduled agency contributions were not mandated until the 1950s. In fact, for many years, there were so few federal retirees that the fund was able to meet its financial obligations to beneficiaries from employee contributions alone.

In practice, this means that when the CSRDF redeems the Treasury bonds or securities that it holds, the Treasury must raise an equivalent amount of cash by collecting taxes, borrowing from the public or other sources such as foreign countries. The Treasury bonds also pay interest which means, in effect, that the federal government pays itself interest on the money used to buy the bonds.

Agency contributions are income to the trust fund, but they are not income to the federal government. Agency contributions to the CSRDF are intragovernmental transfers that have no effect on the government’s annual budget deficit or surplus. In effect, an agency does not transfer actual dollars. It transfers a portion of its authority to spend money to the Treasury which disburses cash to the public (or to federal retirees in this case).

On a more positive note, despite the financial shortfall outlined above, OPM says that, unlike the Social Security trust fund, there is no point over the next 70 years at which the assets of the Civil Service Retirement and Disability Fund are projected to run out. OPM says that the CSRS system does not threaten to the solvency of the trust fund because “the total assets of the CSRDF, including both CSRS and FERS, continue to grow throughout the term of the projection, and ultimately reach a level of over 4.7 times payroll, or nearly 20 times the level of annual benefit outlays” by 2085.


The percentage of federal employees enrolled in CSRS is declining as these federal employees retire. In 2011, less than one-sixth of federal employees were enrolled in CSRS. With the proportion of federal employees enrolled in CSRS declining each year, the funding of contributions toward their retirement annuities is a less pressing issue.

In short, your future pension benefits should be secure, according to the Office of Personnel Management, despite the financial shortfall, as the number of people covered by CSRS continues to decline. This projection assumes that the government will continue funding the retirement program as outlined in the Congressional Research Service report.

© 2016 Ralph R. Smith. All rights reserved. This article may not be reproduced without express written consent from Ralph R. Smith.


About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources.

19 Replies

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  1. Czkid1 says:

    Am I wrong, but, hasn’t the Fed “borrowed” from the CSRS when the Govt needed funds, and promised to “pay it back”,  and the Govt has never actually paid back to CSRS what it owes????

  2. Japygid says:

    Pension plans are set up by actuaries.  Actuaries must go through an intense mathematics regimen in college, to include three calculus courses. Graduation from college is not enough – they must still pass a series of 10 rigorous examinations, over a period of years, before they acquire the coveted title of “actuary.”

    In view of the above, here is my question: why have actuaries been silent on this vital topic?  Not hearing from actuaries on pension plans is like not hearing from doctors about sickness. 

  3. msgrowan says:

    The key element in the article is: “In practice, this means that when the CSRDF redeems the Treasury bonds or securities that it holds, the Treasury must raise an equivalent amount of cash by collecting taxes, borrowing from the public or other sources such as foreign countries.”  This means that the same conundrum being faced with the Social Security trust fund’s now having lower incoming FICA tax flows, necessitates redemption by the Treasury of trust fund bonds (in effect IOUs) through borrowing or drawing on the general revenue.  Yet again, similar to the Social Security model, the monetary contributions of employees and agencies to the CSRDF has long been spent on general government operations.  The pols of both parties have pulled this same scam time and again for years, and now the bill is coming due big time.

    • grannybunny says:

      Well, no, actually, the contributions have been invested in the Treasury bonds/securities mentioned in the article, which generate interest.  To do otherwise — i.e., to spend the funds or simply hold them in a non-interest-bearing form – would be wholly irresponsible.

      • msgrowan says:

        But the rate of return on these bonds is held to low levels and in any event does not change the fact that in the bond redemption process the funds needed to pay annuities must be generated by borrowing or diversion of funds from general Treasury tax revenue inflows (usually, these days, the former.  Indeed, the earned interest on these bonds is merely credited to the CSRDF as an additional obligation (i.e., an IOU), and involves no set-aside of any actual money in this process.  The pols of both parties have pulled this same scam repeatedly and have been allowed to get away with it.  This has gotten the most attention in the Social Security arena, but that’s by no means the extent of such chicanery.

        • grannybunny says:

          The rate of return is generally low, but — since private sector interest rates have sunk so low — actually looks pretty good.  Furthermore, the relatively-low rate of return is a comcommitent function of the fact that government bonds are so incredibly risk-free.  At any rate, the contributions have not “long been spent on general government operations.”  Bonds are debt; the fact that they are redeemed with treasury funds or other debt does not represent any type of scam/chicanery or increase any type of “bill coming due.”

          • msgrowan says:

            You appear to misunderstand the nature of these bonds; the money for which they were exchanged has indeed been diverted to fund general government operations over the years, and the bonds themselves which were exchanged for the contributors’ money now have no intrinsic monetary value (representing, as you said, just debt), which is what the quoted excerpt from the article pointed out when stating how the bond redemption process operates.  The CSRDF bonds therefore merely represent obligations on the U.S. Treasury, which can only be met in the redemption process to obtain the funds needed to pay annuity benefits through borrowing or current diversion of funds from general Treasury tax inflows, thus exacerbating our escalating fiscal debt crisis.  That fits my defintion of chicanery, and both parties have long engaged in it big time. 

          • grannybunny says:

            These are not special obligations bonds — comparable to those in the Social Security Trust Fund — although I have no problem with such bonds, as they are secured by the Full Faith and Credit of the United States of America, which makes them the safest investment in the World.  These are U. S. Treasury bonds that are negotiable instruments and do — indeed — have intrinsic monetary value.  That the money the Treasury receives from the sale of its bonds is used to fund general government operations is a given; that’s the sole purpose in issuing such bonds.  I’m sorry, I understand that alot of people these days are looking for conspiracies behind every bush, but — objectively speaking — there is no chicanery involved in the government using bond revenues for their intended purpose.

          • msgrowan says:

            The point is not about the “safety” of these bonds; indeed they are backed, as you say by FF&C of the USA, but the fact is that their redemption process inevitably will require a further escalation of our disastrous appetite for nonsustainable spending programs.  This does involve bipartisan chicanery – for that’s what it is – over the years in diverting incoming contributor and agency funds to the CSRDF to the funding of general government operations.  These bonds do not indeed have intrinsic value; if they did there would be no need for the government to have to redeem them by securing the necessary funds through borrowing or diversion of moneys from general incoming tax flow revenue into the Treasury.  Indeed, this is why the Congressional Research Service recently projected a $600 billion plus unfunded liability for the CSRS component of the CSRDF.  Let’s be clear; there is no conspiracy involved here.  What was done both here and in the similar treatment accorded to the Social Security trust fund has been well known for years, but public and media apathy over a problem deemed to be remote and conjectural permitted this to go unrebuked, except by isolated political Cassandras who were in essence treated as bothersome worry warts.  Well, Cassandra turned out to be right – to the belated sorrow of the Trojan people, and we’re seeing a similar scenario unfolding in our modern day equivalent of ignoring such warnings.

          • grannybunny says:

            What can I say?  You are simply incorrect that these bonds are similar to the special obligation bonds in the Social Security Trust Fund, which invalidates all of your further points resting on that assumption.  These are publicly-negotiable, arms length, government bonds, of the type used all over the World to generate revenue.

        • Kark says:

          So if the government did not use bonds, where would they put the money?  Invest in the stock market?  Hold more gold in Fort Knox?  Actually the Fort Knox idea sounds pretty good right now. 

          • msgrowan says:

            Good question, which has long been the subject of intense debate.  During the Clinton era, there was vague but never well defined talk about setting up a “locked box,” into which Social Security’s FICA tax receipts could be kept so that the pols couldn’t get their paws on them, but no consensus could ever be arrived at as to how this was to be done.  Many of the said pols also opposed any such arrangement, because having a political paw-proof  “locked box” would have meant a much bleaker budget process, as the government wouldn’t be able to mask the true extent of our annual deficits if they couldn’t count FICA tax receipts as normal revenue offsetting spending.  Some countries e.g., Chile, Poland, etc.) have successfully privatized their citizens’ retirement accounts, allowing them to decide where and when to invest their retirement deductions rather than having the increasingly dysfunctional, government-run, pay-as-you-go approach used by us.  Indeed, it would have been wise to consider at least setting up a pilot system allowing participants to make their own investment decisons for their retirement contributions and compare their outcomes with the current approach.  The main problem, however, is that we’ve waited so long to seriously consider fixing the out-of-whack Social Security FICA tax system that we don’t have the time to wait and see how such a pilot – of necessity running on a multi-year basis – would work out.   The Social Security system is in crisis right now, and our political “leaders” are playing more attention to partisan advantage than focusing on identifying a workabkle fix for the problem.  It’s disconcerting that the president has ceded leadership on this issue to the Republicans in the current “fiscal cliff” negotiations, as the latter are the only ones putting forward concrete suggestions for reforming Social Security as part of the overall proposed reforms.  Both sides need to be involved in crafting a solution, painful though it may be but necessary.

  4. grannybunny says:

    It’s not exactly true that retirement contributions don’t effect the U. S. Treasury.  Due to errors in the statutory formulas setting the payment amounts — since Postal employees don’t increase in salary as rapidly as employees of other agencies — the Postal Service has been forced to overfund its CSRS account by $50-$75 billion (depending upon which audit one accepts) and its FERS account by $13+ billion.  These overpayments are artificially bolstering the CSRDS and lessening the amounts that have to be paid out of the Treasury for retirees from the other government agencies.

    • Japygid says:

      That is interesting.  I am assuming that when the actuaries set up CSRS and FERS there was an assmuption that employees will, generally, progress throughout their career, making significantly more – even adjusting for inflation – in the later parts of their careers.  Example: Joe starts as a GS-5, gets promoted now and then, and is, say, a GS-12 or even 13 for the last five years or so.  Letter carriers, on the other hand, have comparatively fewer opportunities for advancement, and they have a harder time advancing so far.

      So, the assumption that was right for the Executive Department was wrong for the Postal Service, and this lead directly to a “surplus” in the retirement fund for the postal workers.  What I am wondering is this: why on earth didn’t somebody see this, and take corrective action, a long, long time ago?

      • grannybunny says:

        OPM has long taken the position that it can’t do anything about the overfunding; that only Congress can.  Congress, well…(insert your own punchline here).  Thus far, the Postal Service is the only entity excited about the problem, but the American people need to be concerned, too, because — although it is operationally profitable — all of these unnecessary funds being bled off into the Treasury have brought USPS to the very brink of bankruptcy.  If the Postal Service goes under, alot of people will lose access to any type of mail service — much less at an affordable price — since USPS delivers to more than 150 million addresses and FedEx and UPS, combined, only service 30 million locations, consigning a substantial portion of those to the Postal Service for “the first and last mile.”

  5. Michael Rapsik says:

    Wow…to think that cuts to retirement benefits are all targeted at FERS employees. No one wants to target CSRS, even though that is the program that is “underfunded”. What a disgrace.

    • AnotherGuessed says:

       Way to go.. start a “war” between CSRS and FERS. That will make the job of those wanting to stick it to both, that much easier.

      • Tim says:

         This divide, fracture and then sow seeds of resentment, envy, jealousy and animosity between various segments of our population isn’t limited to just encouraging the Rapsik’s in our world to stir up a war between FERS and CSRS retirees.     Our corrupt and incompetent ruling elites use this same model across vast areas of our society.

        Lately, I have noticed that the elites are trying very hard to blur or erase the lines of distinction between ‘earned’ entitlements and ‘unearned’ entitlements.    Granted, nobody admires or has much respect for lazy parasites who jump onto the welfare rolls and then 4 generations later, are still there and who will threaten to riot and burn the city down if anyone tries to wean them off the public trough.    But, anyone who works for a living and who, either as a condition of their employment contract are promised benefits or who are forced to contribute to  those benefits and they are not allowed to opt out – these folks are NOT in the same category as 4th generation welfare bums.   We EARNED our benefits and we are entitled to collect on those benefits because we helped pay for them.

        Our ruling elites, however, are looking for a way to renege on what they owe us.  

    • SamIamTwo says:

       It was at McChord AFB in 1983. We were locked in the base theater and were being forced to change from CSRS to FERS. It was one 15Min presentation and after that the forms were handed out. The doors were chained!

      Look my friend, if you came into the they system pre 83 what would you chose to do…go with FERS? It was pretty much a given that it would break the system…

      And then you have many administrations robbing the retirement system to offset the deficit. They handed over an IOU with the appropriate interest identified. 

      The disgrace comes in when the ranch handlers attempt to manage a system not well thought out. 

      Targeted? Yeah tell me about the comparability pay act? Tell me about all of the contracting out that raised the average annual salary? Many administrations messed up…the contracting out was a major screw up…we exceeded Regan’s Goal of 50% because no one asked till about 1997.

      And if you know anything about WEP and GPO then you would know that most of us who put in 40 credits get our SS cut back severely if we did not earn a certain amount. Perhaps you know that my wife, who has more than the required SS credits, will get ZERO social security under GPO. eh? They began all of this in 1977…disgrace is putting my wife in abject poverty when I pass.