How Much Does the Government Pay to Fund Your Annuity?
by Robert F. Benson |
A FedSmith.com user recently claimed that 95% of annuity costs are paid by the Government. This sounded high to me. However, unlike the complex “which retirement system is better” issue, this one is a matter of simple fact, and can thus be put to rest with a bit of research.
The retirement trust fund is administered by the Office of Personnel Management (OPM). As stewards for this huge pool of money, they know better than anybody how much is in the fund, how fast it is being paid out, how much is deposited by who, etc. In the OPM series of Benefit Administration Letters (BALs), there is one each year on cost factors for the retirement fund. (There is just one fund for both annuity systems, by the way.)
Note BAL 12-307, Cost Factors. Each percentage figure below represents the nominal total paid into the fund, as a percentage of the employee’s salary. Employee contributions ares in parentheses:
|CSRS Regular||CSRS Law Enforcement||FERS Regular||FERS Law Enforcement|
|29.8 (7.0)||50.9 (7.5)||13.7 (0.8)||29.7 (1.7)|
FERS is the predominant retirement system, and it will continue growing for years, while the ranks of CSRS folks are dwindling to the point where they will become extinct. So, to clarify the meaning of the above FERS numbers, let’s look at them in terms of dollars. Both below employees have a salary of $54,000.
|Type of Retirement||Employee||Agency*||Total||Percentage from Agency|
The above cost factors are for accounting purposes and are sometimes called “service costs.” Just to ensure confusion, “imputed costs” are the result of subtracting the actual contributions by both employee and agency from the service costs. This is explained in BAL 03-309.
Who pays the imputed costs? The taxpayers. There is an annual appropriation by Congress for augmentation of the retirement fund.
FERS Revised Annuity Employees (FERS-RAE)
Most employees hired on/after January 1, 2013 are placed into FERS-RAE. The RAE is for “Revised Annuity Employee.” Ironically, despite the terminology, these new employees will NOT be receiving a revised annuity; instead, they will be paying a revised contribution to the retirement fund – 3.1% instead of 0.8%. It appears total service costs will be unchanged from the “old” FERS, with the only difference being more paid by the employee and correspondingly less paid by the agency.
In other words, FERS-RAE is identical to FERS except employees must pay more. This is the basis of the “savings” policy makers credit to FERS-RAE
In conclusion, for employees in the “old” FERS, the assertion that Government pays 95% of retirement costs is essentially correct. For those in FERS-RAE it is a different picture. The 3.1% they pay into the fund represents 22.6% of costs, with 77.4% paid by Uncle Sam..
(In one sense, the 95% paid-by-government claim is false. That is, over the years, the money deposited into the retirement fund grows a great deal, due to the miracle of compound interest. So, it could be said that the interest is a major contributor. But this is kind of picky, or even misleading.)
This is just my opinion, but it looks like non-CSRS employees who want to ensure a decent income at the end of their Government careers need to invest heavily in the Thrift Savings Plan.
My website for calculation of federal benefits is here.
*as augmented by the annual congressional appropriation
© 2014 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.