January 30, 2018
While this site is devoted to the Thrift Savings Plan, the issue of government pensions and other compensation have received a lot of discussion of late. Pensions and TSP benefits go hand-in-hand, but debates have focused primarily on possible reforms of pension programs. It is interesting, therefore, to briefly explore the history of government pensions to gain some perspective on where the programs stand now.
Below is a short history of the federal government pensions, drawing first from a 1995 overview written by the Government Accountability Office at the request of Congress (see GAO’s “Overview of Federal Retirement Programs,” May 22, 1995), and other government documents thereafter. The overview discusses the Civil Service Retirement System (CSRS) and Federal Employees Retirement System (FERS) programs only, and does not deal with Foreign Service, military, or other pension systems.
The CSRS was the first retirement system for federal government employees when it was created in 1920. As the GAO notes, it was created “out of a pressing management need to remove from employment permanently tenured personnel who could not perform effectively because of age or infirmities.” When it was first created, CSRS paid a retirement annuity only after employees reached the “mandatory retirement age,” which was 70, and employees only received an annuity if they had worked 15 years or more with the civil service. CSRS also provided a “disability retirement,” but again an annuity was paid only if the disabled civil servant had 15 or more years of service. Annuities initially ranged from $180 to a maximum of $720 a year, but in 1926 annuities were calculated based on a formula using an employee’s final 10 years of service and total number of years of service, up to 30. The maximum annual annuity by then was $1,000.
In 1930, the retirement age was lowered but was based on lengthened service requirements. Those with 30 years or more of service could retire at 68 (2 years earlier than the mandatory separation age of 70) with no reduction in their yearly annuity. The annuity formula was also modified that year, to a 5-year average instead of the 10-year average. The maximum annuity a retiree could earn was increased to $1,200 a year.
In 1942, the retirement ages were lowered to 60 with 30 years of service, or 62 with 15 years of service, in order to reduce the number of employees retiring on disability before they reached the ages of 68 or 70. Those with 30 years of service could retire with an immediate annuity between the ages of 55 and 60, but with a reduced yearly annuity. (Note that in 1940, just over half of the U.S. population was expected to reach the age of 65, and those that did would live on average another 13 years, according to Social Security Administration data; thus, most civil servants who reached the age of 60 had already outlived many of their compatriots.)
In 1956, the minimum number of years required to retire at age 62 was reduced from 15 to 5. In 1967, the annuity reduction for those leaving service between the ages of 55 and 60 was eliminated, and the service requirement was reduced from 30 to 20 years for retirement at age 60.
Finally, in 1986 Congress created FERS. (See “[Happy 25th Birthday, TSP!]” for further details.)
Beyond the history of the retirement programs, there is additionally the issue of how much individual workers pay into the government pension fund compared to what the employing agencies (and, ultimately, taxpayers) pay into the government pension fund. Currently, traditional FERS employees pay 0.8% of their salary into the pension fund, and the employing agency pays the equivalent of 11.9% of an employee’s salary. Thus, if an employee makes $50,000 in taxable income (after TSP and other pre-tax deductions), he or she will pay $400, and the employing agency will pay $5,950. According to USA Today, despite the large pay-in rates, the federal pensions have an unfunded liability of $1.6 trillion (yes, with a “t”).
This pay-in rate is the central issue for many proposals to reform government pension plans. The President’s National Commission on Fiscal Responsibility and Reform (“Simpson-Bowles”), for example, proposed increasing federal employees’ contributions to their defined benefit pension by 5 percent of salary over five years.
Employee contributions have been increased slightly in the past. The employee contribution amount was raised as part of the Balanced Budget Act of 1997. The Act directed that deductions for the Civil Service Retirement System and the Federal Employees Retirement System would be increased by 0.25% in 1999, by an additional 0.15% in 2000, and by 0.1% more in 2001, for a total increase of 0.5% by the start of 2002. And as of mid-2012, new employees are required to pay a higher rate of 3.1% of their salaries into the system.
Moreover, pension fund payments are in addition to contributions for Social Security and Medicare. Employees pay 6.2% of their salary into Social Security on taxable salaries up to approximately $118,100, while employing agencies contribute an additional 6.2% for a total of 12.4%. (The employee contribution was temporarily reduced to 4.2% in 2011 but returned to 6.2% possibly in 2013.)
There is also Medicare’s Hospital Insurance (HI) program. The tax rate for the HI is 1.45 percent for both employee contributions and for employer contributions, for a total of 2.9% of salary. As of 1993, there is no maximum limit on HI-taxable earnings.
There are many other benefits for special categories of retirees that this post does not deal with, such as the FERS Special annuity supplement, or retiree healthcare, which according to USA Today has a total unfunded liability of $355 trillion (again, with a “t”). And this post is not meant to take a position one way or another, but merely to discuss benefits as they stand now, together with the total costs and consequences of those benefits in an era of $1 trillions-plus yearly budget deficits. Of all the discussions on federal government benefits, the TSP is one benefit that is not slated for reduction. It is also the one benefit over which we have the most control, and it is portable.Related topics: annuities