The bill implementing the Federal Employee Retirement System (FERS) was signed on June 6, 1986. Twenty-five years later, FERS is still with us as the number of federal employees under the previous Civil Service Retirement System (CSRS) dwindles. Approximately 4 percent of employees eligible to transfer to the new plan actually did so in 1987. That figure was substantially smaller than what had been expected by some observers.
Despite a cold reception from federal employees when the system was implemented, the FERS system has been successful. That is the opinion of Jamie Cowen who was chief counsel to the Senate Subcommittee on Civil Service, Senate Governmental Affairs Committee, and also served as assistant to Senate Majority Whip Ted Stevens (R-AK) from 1978-1986. He was one of the principal legislative architects of the FERS system.
Employee satisfaction surveys from OPM also confirm that the Thrift Savings Plan, which was part of the FERS plan, is very popular among federal employees. Mr. Cowen is also the author of “25 Years After Federal Pension Reform” EBRI Issue Brief, no. 359 July 2011, which looks back at the changes brought about to the federal retirement system by FERS.
Potential Changes to FERS
Potential Social Security changes being considered by those trying to reduce the budget deficit, such as raising the Social Security normal retirement age, will not require changes to FERS like the changes made when converting from the Civil Service Retirement System (CSRS) to the FERS system.
Still, FERS benefits are not immune from some changes as the United States begins to confront its massive debt and a downgrade in the credit rating for a country that has been the richest and most successful the world has had.
One significant proposal now being discussed would curtail federal budget deficits is to increase employee contributions to the defined benefit portion of FERS. The increased employee contributions would reduce the government’s projected normal cost contribution amounts. Currently, FERS employees contribute 0.8 percent of pay to FERS. Some proposals recommend increasing the contribution amount to one half the projected normal cost, or 6.25 percent of pay. (See They Want Me to Pay Seven Times More Toward My Retirement?)
This would be the most significant change to FERS since it became the primary federal retirement system for the federal workforce.
The FERS system was passed, in part, because of the need to strengthen the Social Security System. Adding the federal workforce created a broader base of workers for this system because, under CSRS, the federal workforce was not part of this program. There was also a concerted effort by President Ronald Reagan to reduce federal spending and this legislation was part of that effort.
Implementing FERS and Key Elements of the FERS System
Cowan writes that federal employee unions were strongly opposed to the new retirement system during the legislative process “and yet today FERS garners overwhelming support from Federal workers.” He also says that “This law is perhaps the key reason why federal retirement benefits today—unlike almost any other government program—are not being singled out for major reform.”
When FERS was enacted after a multi-year effort, it had three major elements:
- Mandatory Social Security coverage of civilian federal workers as a base.
- A basic and mandatory defined benefit pension plan, but with a lower level of benefits than the Civil Service Retirement System.
- A voluntary thrift savings plan where worker contributions matched by the employer would be invested in a limited variety of investment funds.
The biggest obstacle to agreement on the new federal retirement system was the cost. The Reagan Administration insisted on limiting the cost to that of the average retirement plan in private industry. The CSRS retirement system was estimated to cost approximately 30 percent more than large employers’ private plans so federal unions and other employee organizations wanted to keep the CSRS system. The plan passed by the Senate was estimated to cost around 15 percent less.
Cowen says that “Because the administration’s relationship with labor unions was poor, the White House refused to invite labor leaders to the signing ceremony, over the objections of many members. As a result, no Democratic members of Congress attended….”
The legislation became effective on January 1, 1987.
Thrift Savings Plan
The Thrift Savings Plan was a major part of the new federal retirement system. There was concern from the beginning that there would be attempts to politicize this investment system.
“As to the issue of Congress tampering with the thrift funds, the inherent nature of a thrift plan precludes that possibility. Unlike a defined benefit plan where an employer essentially promises a certain benefit, a thrift plan is an employee savings plan. In other words, the employee owns the money. The money, in essence, is held in trust for the employee and managed and invested on the employee’s behalf until the employee is eligible to receive it. This arrangement confers upon the employee property and other legal rights to the contributions and their earnings. Whether the money is invested in Government or private securities is immaterial with respect to employee ownership. The employee owns it, and it cannot be tampered with by any entity, including Congress.”
There have been attempts by Congress to add investment options such as “socially responsible” funds, a minority-owned fund, a real estate investment fund and a fund to help refugees in Africa.
Cowen contends that “the susceptibility of the Thrift Fund to these continued proposals is significant” but also not a good move for the plan. After the legislation was enacted, GAO recommended a change in budgetary treatment. (See Letter B-227344, May 29, 1987)
The Thrift Plan Fund is classified as “nonbudgetary”—meaning that its assets are not considered to be part of the federal budget and therefore not counted as revenue (or loss), thereby keeping it out of federal budget battles.” (See The TSP Pot is Growing Fast: Will Congress Resist the Political Opportunities?; Congress Weighs Using Nest Eggs as Agents of Change and Money, Congress and Your TSP: Watch Out for Your Retirement Money)
Cost of CSRS vs. FERS
Two of the major reasons for switching to a new system were to create a bigger base for the Social Security system and to have a system that cost less money.
The first objective has been met. Federal employees who are in FERS are now part of the Social Security system. But, as to whether the new system is less expensive, the answer will surprise some readers. Here is a quote from Twenty-Five Years After Federal Pension Reform:
“Thus, the projected normal cost of CSRS since the enactment of FERS has dropped by approximately 25 percent, whereas the cost of FERS has remained fairly constant, creating the anomaly that today FERS likely is a more expensive program than CSRS. In discussing this with representatives of OPM, changes in underlying economic assumptions led to a significant revision of CSRS normal cost calculations.”
The FERS plan appears to cost more than the CSRS system using current economic assumptions. That is the conclusion of the Board of Actuary Report from OPM as noted in the Cowen article.
From the perspective of many federal employees, the newer system probably prevented more significant changes after FERS was implemented. And, as Cowen notes, the FERS system is more comparable to corporate retirement plans and enables federal employees to transfer more easily between federal and private sector jobs if they choose to do so.
We see a number of comments from readers expressing the opinion that the CSRS system was preferable because it put the onus on the government for funding future retirement rather than relying so heavily on the Thrift Savings Plan. No doubt, readers can argue the merits of each system. The general conclusion appears that those under CSRS think FERS retirees have many advantages while those under FERS often think that CSRS employees get a better deal. While the argument may continue for the next few years, there is no doubt that many private sector workers would prefer the relative security of the federal system in the current economic climate. So, perhaps, one broad area of agreement is that those who are fortunate to be under a federal retirement system are, or should be, grateful for what they have.