Could I Do Better Investing My Annuity Contributions?

Could a federal employee under FERS wind up with more money investing his annuity contributions? The author provides an analysis.

Beginning in the early 1980’s, and continuing through 2012, employees in the FERS retirement system contributed 0.8% of their salary for their annuity, and their earned annuity was 1.0% of the high three salary for each full year of service.

In 2013 the law for new hires was changed. The contribution rate for new employees was increased to 3.1%. The next year it was increased again, to 4.4% for those hired during during/after 2014. The laws for these two revisions were called “Revised Annuity Employees,” or FERS-RAE, and “Further Revised Annuity Employees,” or FERS-FRAE.

(Despite the names, neither of the above laws revised the annuity. The contribution rate was revised, while the annuity was unchanged. We all saw this, didn’t we? Nobody was fooled. Right?)

Four point four percent is more than five times 0.8%. There were some who believed the 4.4% was so great a cost increase with NO concomitant benefit increase, a prudent employee would be better off investing his contributions on his own, if this were allowed. But it was hard to tell.  

To have a better appreciation of the situation, a computer program was used.


  • Start in 2014 with a $32,000 salary over a 30-year career
  • Use a 4.4% contribution rate in all cases
  • Assume annual salary and investments (compounded) as shown
  • Compare investment outcome with annuity
Average Annual Increase Increase In:  
Salary Investment Principal Final Salary Earned Annuity Final Principal
3 4 $75,410 $21,970 $119,332
3 6 $75,410 $21,970 $164,522
3 8 $75,410 $21,970 $231,164
3 11 $75,410 $21,970 $396,610
5 4 $131,716 $37,662 $157,757
5 6 $131,716 $37,662 $211,705
5 8 $131,716 $37,662 $289,935
5 11 $131,716 $37,662 $480,526

Above projections are hypothetical and arbitrary, for illustration, only. Your mileage may vary.

Sick leave and military time are not included in the above annuity calculations. Also:

  • The 1.0% per year of service becomes 1.1% if you retire at/after you are 62 with 20 or more years.
  • For those who retire under age 62, there is an annuity supplement.  For retirements in 2019, the supplement can be more than $2,000 monthly, depending on length of service, age, and career earnings. This can make a big difference!
  • Still, remember the supplement ends at 62, has no survivor benefit – which the annuity does – and offers no COLAs. Also, it is reduced if your outside income is too high!
  • Annuity payments will continue as long as you live. How long are you going to live? If you do not know, meaningful comparisons between investment and annuity become problematic.

Regarding the supplement, for some time policymakers have been proposing to end this benefit. It is not known whether these efforts will be successful. But if they are successful, then most likely – if past practices are a guide – those with 5 or more years service when the law becomes effective will be “grandfathered,” or exempted. This means the vast majority of current feds will not be affected by the change. 

Changing the employee contribution rate to 3.1% for a single year, and then increasing it again the next year to 4.4% was truly an immediate savings for taxpayers – their funding of pensions dropped right away while affected employees paid more, to make up the “deficit.” But the savings from abolishing the annuity supplement are different. 

Irony. It appears significant “savings” from abolishing the supplement will not begin until today’s current cohort of younger employees starts retiring  in their late fifties with well over 20 years service. This will be many years in the future. Something to think about.  

About the Author

Robert Benson served 35 years in various Federal agencies, as both a management analyst and IT specialist. He is a graduate of Northwestern University.