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

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By • November 14, 2012 Comments

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.

Summary

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.

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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 newsletter and a co-founder of two companies and several newsletters concerning federal human resources.

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