Federal Employees’ Retirement System: Benefits and Financing
Congressional research reportNov 13, 2019
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Federal Employees’ Retirement System:
Benefits and Financing
Katelin P. Isaacs
Specialist in Income Security
Updated November 13, 2019
Congressional Research Service
7-....
www.crs.gov
98-810
Federal Employees’ Retirement System: Benefits and Financing
Summary
Most civilian federal employees who were hired before 1984 are covered by the Civil Service
Retirement System (CSRS). Federal employees hired in 1984 or later are covered by the Federal
Employees’ Retirement System (FERS). Both CSRS and FERS require participants to contribute
toward the cost of their pensions through a payroll tax to the Civil Service Retirement and
Disability Fund (CSRDF).
The Office of Personnel Management (OPM) estimates CSRS to cost an amount equal to 36.6%
of employee pay. Of this amount, the federal government pays 29.6% and employees pay 7.0%.
CSRS employees do not pay Social Security taxes or earn Social Security benefits.
Effective beginning October 1, 2019, OPM estimates the FERS basic annuity to cost an amount
equal to 16.8% of pay for employees first hired before 2013, 17.3% for employees first hired in
2013, and 17.5% for employees first hired in 2013 or later. (These FERS normal cost percentages
apply to regular FERS employees. For special categories of employees—such as Members of
Congress and law enforcement officers—higher normal costs apply. Beginning October 1, 2019,
lower normal costs apply for employees of the U.S. Postal Service.) Of this amount, for regular
FERS employees first hired
before 2013, the federal government contributes 16.0% and employees pay the
other 0.8%,
in 2013, the federal government contributes 14.2% and employees pay the
remaining 3.1%, and
after 2013 the federal government contributes 14.4% and employees pay 4.4%
(with the additional sums from the higher FERS employee contributions [4.4%3.1%=1.3%]) going to pay down the CSRS unfunded liability).
All FERS employees contribute 6.2% of wages up to the Social Security taxable wage base
($132,900 in 2019) to the Social Security trust fund.
The minimum retirement age (MRA) under CSRS is 55 for workers who have at least 30 years of
service. The FERS MRA is 55 for employees born before 1948, is 56 for employees born between
1953 and 1964, and increases on an incremental basis to 57 for those born in 1970 or later. Both
FERS and CSRS allow retirement with an unreduced pension at the age of 60 for employees with
20 or more years of service and at the age of 62 for employees with at least 5 years of service.
The Thrift Savings Plan (TSP) is a retirement savings plan similar to the 401(k) plans provided by
many private-sector employers. In 2019, employees covered under either CSRS or FERS can
contribute up to $19,000 to the TSP. Employees aged 50 and older can contribute an additional
$6,000 to the TSP. Employees under FERS receive employer matching contributions of up to 5%
of pay from their federal employing agency. Federal workers covered by CSRS also can
contribute to the TSP, but they receive no employer matching contributions.
Employers pay three other costs for employees under FERS: (1) both the employer and employee
pay Social Security taxes equal to 6.2% of pay up to the maximum taxable amount; (2) agencies
automatically contribute an amount equal to 1% of employee pay to the TSP; and (3) agencies
make matching contributions to the TSP equal to up to 4% of pay.
At the end of FY2017, the CSRDF had an unfunded liability of $968.1 billion, consisting of a
$812.5 billion deficit for CSRS and a $155.6 billion deficit for FERS. Although the civil service
trust fund has an unfunded liability, it is not in danger of becoming insolvent. OPM projects that
the balance the CSRDF’s balance will continue to grow through at least 2095, at which point it
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Federal Employees’ Retirement System: Benefits and Financing
will hold assets equal to more than 6.5 times total payroll and about 20 times total annual benefit
payments.
This report provides an overview of current benefits and financing under CSRS and FERS. For
summary information on recent reform proposals related to CSRS and FERS, see CRS In Focus
IF10243, Civilian Federal Retirement: Current Law, Recent Changes, and Reform Proposals, by
Katelin P. Isaacs.
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Federal Employees’ Retirement System: Benefits and Financing
Contents
Background ..................................................................................................................................... 1
Origins of the Federal Civilian Retirement System .................................................................. 1
Two Types of Retirement Plans................................................................................................. 2
Eligibility and Benefit Amounts Under FERS and CSRS ............................................................... 2
Retirement Age and Years of Service ........................................................................................ 3
Retirement Income Adequacy ......................................................................................................... 4
Replacement Rates .................................................................................................................... 4
Determinants of the Replacement Rate............................................................................... 4
Salary Base ......................................................................................................................... 4
Accrual Rates ...................................................................................................................... 5
Replacement Rates for Federal Retirees ............................................................................. 6
Social Security and the “FERS Supplement” ..................................................................... 6
Cost-of-living Adjustments ....................................................................................................... 6
The Thrift Savings Plan ................................................................................................................... 7
TSP Investment Options............................................................................................................ 7
TSP Withdrawal Options ......................................................................................................... 10
Employer and Employee Contributions to CSRS and FERS ........................................................ 10
Pension Funding in the Private Sector Versus the Federal Government .................................. 11
Employee Contributions and Other Sources of Funding......................................................... 12
Employee and Employer Contribution Amounts .................................................................... 12
Financing Pension Benefits for Federal Employees ...................................................................... 14
Federal Trust Funds and Prefunding of Benefits ..................................................................... 15
Investment Practices of Federal Trust Funds .......................................................................... 15
Tables
Table 1. Minimum Retirement Age Under FERS............................................................................ 3
Table 2. Government Matching Rate on TSP Contributions by FERS Participants ........................ 7
Table 3. Annual Rates of Return for Thrift Savings Plan Funds ..................................................... 8
Table 4. FERS Employee Contribution Rates by Date of Hire ...................................................... 11
Contacts
Author Contact Information .......................................................................................................... 17
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Federal Employees’ Retirement System: Benefits and Financing
Background
Most civilian federal employees who were hired before 1984 are covered by the Civil Service
Retirement System (CSRS). Under CSRS, employees do not pay Social Security taxes or earn
Social Security benefits. Federal employees first hired in 1984 or later are covered by the Federal
Employees’ Retirement System (FERS). All federal employees who are enrolled in FERS pay
Social Security taxes and earn Social Security benefits. Federal employees enrolled in either
CSRS or FERS also may contribute to the Thrift Savings Plan (TSP); however, only employees
enrolled in FERS are eligible for employer matching contributions to the TSP.
Origins of the Federal Civilian Retirement System
Congress passed the Civil Service Retirement Act of 1920 (P.L. 66-215) to provide pension
benefits for civilian federal employees. In 1935, Congress created the Social Security system for
workers in the private sector. During the 1950s, Congress allowed state and local governments to
bring their employees into Social Security, and today about three-fourths of state and local
employees are covered by Social Security. Federal employees remained outside of Social Security
until Congress passed the Social Security Amendments of 1983 (P.L. 98-21). This law required all
civilian federal employees hired into permanent employment on or after January 1, 1984, to
participate in Social Security.
Enrolling federal workers in both CSRS and Social Security would have resulted in substantial
duplication of benefits and would have required employees to contribute more than 13% of pay to
the two programs. Consequently, Congress directed the development of a new retirement system
for federal workers with Social Security as its cornerstone. The new plan was designed to include
many features then existing in the retirement plans of large private-sector employers. The result
of this effort was the Federal Employees’ Retirement System Act of 1986 (P.L. 99-335), enacted
on June 6, 1986. The FERS has three elements:
Social Security,
the FERS basic retirement annuity and the FERS supplement, and
the Thrift Savings Plan.
The FERS covers employees initially hired into federal employment on or after January 1, 1984,
and employees who voluntarily switched from CSRS during “open seasons” in 1987 and 1998.1
Former federal employees who had completed at least five years of service under CSRS and were
later rehired by the government after a break in service could either join FERS or participate in
the “CSRS offset plan.” Under the CSRS offset plan, 6.2 percentage points of the employee’s
payroll contribution (up to the Social Security taxable wage base) and an equal share of the
employer contribution are diverted from CSRS to the Social Security trust fund. Later, the
retiree’s CSRS annuity is reduced (offset) by the amount of his or her Social Security benefit.
Both CSRS and the CSRS offset program will terminate with the death of the last worker or
survivor still covered under that program, which the Office of Personnel Management (OPM)
estimates will occur around the year 2090.
1 The first open season was held from July through December 1987, as authorized under P.L. 99-335. The second open
season, held from July through December 1998, was authorized by P.L. 105-61, enacted on October 10, 1997.
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Federal Employees’ Retirement System: Benefits and Financing
Two Types of Retirement Plans
Employers establish retirement plans both to help them attract workers with valuable skills and to
enable older workers to retire without facing the prospect of inadequate income. Employers must
balance the goals of providing adequate retirement income with controlling the cost of the
retirement plan. For private-sector employers, another important consideration is the regulatory
environment in which their retirement plans must operate. Private-sector retirement plans must
comply with the relevant provisions of federal law, including the Employee Retirement Income
Security Act (ERISA), the Age Discrimination in Employment Act (ADEA), and the Internal
Revenue Code.
Retirement programs generally can be classified as either defined benefit (DB) plans or defined
contribution (DC) plans. In a defined benefit plan, a worker’s retirement benefit is typically paid
as a life annuity based on years of service and average salary. A defined contribution plan is much
like a savings account maintained by the employer on behalf of each participating employee. The
employer and/or employee contribute a specific dollar amount or percentage of pay into an
account, which is usually invested in stocks and bonds. When the worker retires, he or she
receives the balance in the account, which is the sum of all the contributions that have been made
plus interest, dividends, and capital gains (or losses), net of fees and expenses. The retiree usually
may choose to receive these funds as a series of payments over a period of years or as a lump
sum.
An important difference between the two types of retirement plans is that in a defined benefit plan
the employer bears the financial risk, whereas in a defined contribution plan the employee bears
the financial risk. In a defined benefit plan, the employer promises to provide retirement benefits
in the form of a life annuity or its actuarial equivalent.2 To pay the promised benefit, the employer
must make contributions to a pension fund, which is invested in stocks, bonds, and other assets.
The employer’s contributions plus the expected investment earnings on the contributions must be
sufficient to pay the pension benefits that workers have earned under the plan. The employer is at
risk for the full amount of retirement benefits that have been earned by employees. If the pension
plan is underfunded, the employer must make additional contributions so that the promised
benefits can be paid.
In a defined contribution plan, the employee bears the investment risk. For example, if the
contributions to the plan have been insufficient or if the securities in which the contributions have
been invested lose value or appreciate too slowly, the employee might reach retirement age
without the financial resources needed to maintain his or her desired standard of living in
retirement. If this occurs, the worker might have little choice but to delay retirement.
CSRS is a DB plan that provides a standalone annuity. FERS includes both DB and DC plan
elements (i.e., the FERS annuity and the TSP, respectively).
Eligibility and Benefit Amounts Under FERS
and CSRS
Under both CSRS and FERS, the date of an employee’s eligibility to retire with an annuity
depends on age and years of service. The amount of the retirement annuity is determined by three
2 The actuarial equivalent of a life annuity is a lump-sum payment that could purchase an annuity of equal value,
assuming a certain interest rate and life expectancy.
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factors: (1) the number of years of service, which are prorated based on completed months,3 (2)
the accrual rate at which benefits are earned for each year of service, and (3) the salary base to
which the accrual rate is applied.4
Retirement Age and Years of Service
Under CSRS, a worker with at least 30 years of service can retire at the age of 55; a worker with
at least 20 years of service can retire at the age of 60; and a worker with 5 or more years of
service can retire at the age of 62.
Federal employees are fully vested in the FERS basic retirement annuity after five years of
service. The FERS minimum retirement age (MRA) for an employee with 30 or more years of
service was 55 for workers born before 1948. The MRA under FERS began to increase in 2003
for workers born after 1947. The MRA for employees born between 1953 and 1964 is 56. It will
increase on an incremental basis to 57 for those born in 1970 or later. (See Table 1.) A worker
who has reached the MRA and has completed at least 30 years of service can retire with an
immediate, unreduced annuity. A worker with 20 or more years of service can retire with an
unreduced annuity at age 60, and a worker with at least 5 years of service can retire at age 62.
Table 1. Minimum Retirement Age Under FERS
Year of Birth
Minimum Retirement Age
1947 or earlier
55 years
1948
55 years, 2 months
1949
55 years, 4 months
1950
55 years, 6 months
1951
55 years, 8 months
1952
55 years, 10 months
1953 to 1964
56 years
1965
56 years, 2 months
1966
56 years, 4 months
1967
56 years, 6 months
1968
56 years, 8 months
1969
56 years, 10 months
1970 or later
57 years
Source: U.S. Office of Personnel Management.
Under FERS, an employee can retire with a reduced benefit at the minimum retirement age with
at least 10 years of service. For an employee who does not qualify for an unreduced annuity, the
retirement benefit is permanently reduced by 5% multiplied by the difference between 62 and the
3 U.S. Office of Personnel Management, Civil Service Retirement System (CSRS) and Federal Employees Retirement
System (FERS) Handbook for Personnel and Payroll Offices, April 1998. According to Chapter 50, “Computation of
Annuity Under the General Formula” (available at https://www.opm.gov/retirement-services/publications-forms/
csrsfers-handbook/c050.pdf), “Length of service for annuity computation purposes is based on whole months (30 days).
To determine the total length of service for annuity computation purposes, add all creditable civilian and military
service and the period represented by the unused sick leave; then eliminate any fractional part of a month” (p. 5).
4 This report describes basic retirement benefits for federal employees under the Civil Service Retirement System
(CSRS) and the Federal Employee’s Retirement System (FERS). Both programs also provide for disability retirement,
benefits for surviving dependents, and benefits for former spouses. These benefits are described in three other CRS
reports: CRS Report RS22838, Disability Retirement for Federal Employees; CRS Report RS21029, Survivor Benefits
for Families of Civilian Federal Employees and Retirees; and CRS Report RS22856, Retirement and Survivor
Annuities for Former Spouses of Federal Employees.
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retiree’s age at the time the annuity begins. For example, an employee with at least 10 years of
service, but fewer than 30, who retires at 56 would receive a pension benefit that is reduced by
30% below the amount that would be paid to an individual with the same salary and years of
service who retired at the age of 62.
Retirement Income Adequacy
Replacement Rates
A commonly used measure of retirement income adequacy is the percentage of pre-retirement
income replaced by pension income.5 This measure—the replacement rate—is expressed by the
following ratio:
annual retirementbenefits
annual pre - retirementearnings
Replacement rates usually are based on the sum of the employee’s pension benefit and Social
Security benefit. Because retirees do not have the expenses that are associated with having a job
(including making contributions toward retirement benefits), most people are able to maintain
their previous standard of living with less income than they had while working. Although there is
no fixed rule about what comprises an adequate replacement rate, most pension analysts believe
retirement income should replace at least 70% to 85% of pre-retirement income.6 Workers who
had low-wage jobs generally need a replacement rate near the high end of this range because a
higher proportion of their income is expended on non-discretionary items, such as food, clothing,
shelter, health care, and taxes.
Determinants of the Replacement Rate
The basic retirement annuity under both CSRS and FERS is determined by multiplying three
factors: the salary base, the accrual rate, and the number of years of service. This relationship is
shown in the following formula:
Pension Amount = salary base x accrual rate x years of service
Salary Base
In both CSRS and FERS, the salary base is the average of the highest three consecutive years of
basic pay.7 This is often called “high-three” pay.8
5 The measure of pre-retirement income used in the replacement rates in this report reflects an individual’s “high-three”
pay. However, other variations of this measure may be used. For instance, a replacement rate may reflect pre-retirement
income over a different time period (e.g., average lifetime earnings or income immediately preceding retirement).
6 U.S. Government Accountability Office (GAO), Retirement Security: Better Information on Income Replacement
Rates Needed to Help Workers Plan for Retirement, GAO-16-242, March 2016.
7 The definition of basic pay under 5 U.S.C. §8331(3) (CSRS) and 5 U.S.C. §8401(4) (FERS) includes locality-based
pay adjustments and other salary increases for which retirement deductions are withheld, such as shift rates.
8 This calculation is based on nominal or current dollars rather than indexed or constant dollars.
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Accrual Rates
The accrual rate is the pension benefit earned for each year of service, expressed as a percentage
of the salary base. Under FERS, workers accrue retirement benefits at the rate of 1% per year; or,
for employees in FERS who have at least 20 years of service and who work until age 62, the
accrual rate is 1.1% for each year of service. For example, a worker under FERS who retires at 61
with 29 years of service would receive an annuity equal to 29% of his or her high-three average
pay. Delaying retirement by one year would increase the annuity to 33% of high-three average
pay (30 x 1.1 = 33).
CSRS pension accrual rates increase with length of service. CSRS pensions equal 1.5% of highthree average pay for each of the first 5 years of service, 1.75% for the 6th through 10th years, and
2.0% for each year of service after the 10th year. This formula yields a replacement rate of 56.25%
for a worker who retires with 30 years of service. FERS accrual rates are lower than those under
CSRS because employees under FERS pay Social Security payroll taxes and earn Social Security
retirement benefits.
Some Members of Congress and congressional staff, and all federal law enforcement officers,
firefighters, and air traffic controllers accrue benefits at higher rates under both CSRS and FERS
than do other federal employees. The rationale behind enhanced benefits for these employee
groups is an expectation of limited federal service. For Members of Congress and congressional
staff, this limited federal service is due to the uncertain tenure of congressional office.9 For
federal law enforcement officers, the expectation of limited federal service is because they are
subject to a mandatory retirement age.10 Under CSRS, all Members of Congress and
congressional staff accrue benefits at the rate of 2.5% for each year of service. This results in a
replacement rate of 75% after 30 years of service. All law enforcement officers and firefighters,
and air traffic controllers enrolled in CSRS accrue benefits at the rate of 2.5% for each of their
first 20 years of service and 2.0% for each year thereafter.
Under FERS, Members of Congress and congressional staff first covered by FERS before 2013
accrue pension benefits at the rate of 1.7% per year for their first 20 years of service and 1.0% for
each year of service after the 20th year. All law enforcement officers, firefighters, and air traffic
controllers also accrue pension benefits at the rate of 1.7% per year for their first 20 years of
service and 1.0% for each year of service after the 20th year. These accrual rates yield a pension
equal to 34% of the FERS salary base after 20 years of service and 44% after 30 years of service.
With enactment of P.L. 112-96, Members of Congress and congressional staff first covered by
FERS in 2013 or later, accrue pension benefits at the same rate as regular FERS employees (i.e.,
1% per year; or, for Members and congressional employees in this category with at least 20 years
of service and who work until age 62, the accrual rate is 1.1% for each year of service). The
replacement rate for these Members and congressional staff is, therefore, the same as for regular
FERS employees.11
9 For additional details on pension benefits for Members of Congress, see CRS Report RL30631, Retirement Benefits
for Members of Congress.
10 For additional details on pension benefits for federal law enforcement officers and related personnel, see CRS Report
R42631, Retirement Benefits for Federal Law Enforcement Personnel.
11 For additional details on FERS accrual rate changes made by P.L. 112-96, see U.S. Office of Personnel Management,
Benefits Administration Letter, 12-104, October 3, 2012, available at http://www.opm.gov/retire/pubs/bals/2012/12104.pdf.
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Replacement Rates for Federal Retirees
For a regular federal employee with 30 years of service, CSRS provides a replacement rate equal
to 56.25% of high-three average pay. Estimating replacement rates under FERS is complicated by
the fact that income from two of its components—Social Security and the TSP—will vary
depending on the individual’s work history, contributions to the TSP, and the investment
performance of his or her TSP account.12
Social Security and the “FERS Supplement”
Because Social Security retirement benefits cannot begin before the age of 62, Congress included
in FERS a temporary supplemental benefit for workers who retire before age 62. This “FERS
supplement” is paid to workers who retire at the age of 55 or older with at least 30 years of
service or at the age of 60 with at least 20 years of service. It is also paid to law enforcement
officers, firefighters, and air traffic controllers who retire at the age of 50 or later with 20 or more
years of service. The supplement is equal to the estimated Social Security benefit that the
individual earned while employed by the federal government. It is paid only until the age of 62,
regardless of whether the retiree chooses to apply for Social Security retired worker benefits at 62
years old.
Cost-of-living Adjustments
Cost-of-living adjustments (COLAs) protect the purchasing power of retirement benefits from
being eroded by inflation in the prices of goods and services. In 1972, Congress passed legislation
providing for automatic COLAs for Social Security. COLAs have been in effect since 1962 for
CSRS. Social Security COLAs and CSRS COLAs are equal to the annual change in the
Consumer Price Index for Urban Wage and Clerical Workers (CPI-W).13
As a cost-control measure, Congress limited the annual COLA applied to the FERS retirement
annuity. Under FERS, the basic retirement annuity is fully indexed to the CPI-W if inflation is
under 2% per year and partially indexed if inflation exceeds 2%. If the CPI-W increases by up to
2%, then the FERS annuity increases by the same percentage. If the CPI-W increases by 2% to
3%, the FERS annuity increases by 2%. If the CPI-W increases by more than 3%, the FERS
annuity increases by the rise in the CPI-W minus one percentage point. Under FERS, COLAs are
applied only to annuities of retirees aged 62 or older, individuals who retired by reason of
disability, and to survivor annuitants. Non-disabled, non-survivor FERS beneficiaries under the
age of 62 receive no COLAs.
12 For estimates of the replacement rates under FERS, see CRS Report RL30387, Federal Employees’ Retirement
System: The Role of the Thrift Savings Plan.
13 Under both CSRS and FERS, automatic COLAs are paid out beginning in January each year, based on the
percentage increase in the Consumer Price Index for Urban Wage and Clerical Workers (CPI-W) for the most recent
third quarter (July-September) compared to the third quarter in the last year a COLA was determined. In 1994, 1995,
and 1996 COLAs for civil service annuitants were delayed from January until April as a means of achieving budgetary
savings. In 2010 and 2011, there were no automatic COLAs for civil service annuitants. In 2019, the automatic COLA
for CSRS is 2.8% and for FERS is 2.0%. For 2020, the automatic COLA for both CSRS and FERS is 1.6%. See CRS
Report 94-834, Cost-of-Living Adjustments for Federal Civil Service Annuities, for a complete history of COLAs under
CSRS and FERS.
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The Thrift Savings Plan
The TSP is a defined contribution (DC) retirement plan similar to the 401(k) plans provided by
many private-sector employers. The TSP is a key component of FERS, especially for workers in
the middle and upper ranges of the federal pay scale, who are unlikely to achieve adequate
retirement income—as measured by the replacement rate—from Social Security and the FERS
basic annuity.
In 2019, federal employees can contribute up to $19,000 to the TSP.14 Employees aged 50 and
older can contribute an additional $6,000. These employee contributions may be made on a pretax basis, in which case neither the contributions nor investment earnings that accrue to the plan
are taxed until the money is withdrawn. Alternatively, P.L. 111-31 authorized a qualified Roth
contribution option to the TSP. Under a Roth contribution option, employee salary deferrals into a
retirement plan are made with after-tax income. Qualified distributions from the Roth TSP plan
option—generally, distributions taken five or more years after the participant’s first Roth
contribution and after the age of 59½—are tax-free.
For all federal workers under FERS, the employing agencies contribute to the TSP an amount
equal to 1% of each employee’s base pay, whether or not the employee contributes anything to
the plan. In addition, employees enrolled in FERS can receive employer matching contributions
equal to 4% of pay, according to the schedule shown in Table 2. Federal workers covered by
CSRS also may contribute to the TSP, but they receive no matching contributions from their
employing agencies.
TSP participants are immediately vested in their contributions to the plan, all federal matching
contributions, and any interest, dividends, or capital gains attributable to those contributions.
Participants are fully vested in the 1% agency automatic contribution to the TSP after three years
(two years for congressional employees and executive branch political appointees).
Table 2. Government Matching Rate on TSP Contributions by FERS Participants
Employee
Government
Total
0.0%
1.0%
2.0%
3.0%
4.0%
5.0% or more
1.0%
2.0%
3.0%
4.0%
4.5%
5.0%
1.0%
3.0%
5.0%
7.0%
8.5%
10.0%
Source: Federal Retirement Thrift Investment Board.
TSP Investment Options
The value of an individual’s TSP account at retirement will depend on how much he or she
contributed to the TSP each year, the number of years over which contributions were made, and
the investment earnings of the TSP funds. Participants in the TSP may choose among five funds
in which they can invest their TSP contributions:
14 See 26 U.S.C. §402(g). Prior to 2006, employee contributions were limited to the lesser of a specific percentage of
pay or the amount permissible under I.R.C. §402(g). The Consolidated Appropriations Act of 2000 (P.L. 106-554)
eliminated the percentage-of-pay limitations on contributions to the TSP, effective in 2006.
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The “C” fund invests in a stock market index fund that replicates the Standard
and Poor’s 500 Index of 500 large to medium-sized U.S. companies.
The “F” fund invests in bonds in the same proportion as they are represented by
the Barclays Capital U.S. Aggregate Bond Index.
The “G” fund invests in U.S. government securities and pays interest equal to the
average rate of return on government securities with maturities of four years or
more.
The “S” fund invests in a stock index fund that tracks the Dow Jones U.S.
Completion Total Stock Market Index of small to medium-sized U.S. companies
not included in the “C” Fund.
The “I” fund invests in a stock index fund that replicates the Morgan Stanley
Capital International EAFE (Europe, Australasia, Far East) Index.15
In 2005, the TSP added a “Lifecycle Funds” option. Lifecycle Funds are invested in various
combinations of the five existing TSP funds. According to the Federal Retirement Thrift
Investment Board, participants who invest in these funds “benefit from having professionally
designed asset allocation models available to optimize their investment performance by providing
portfolios that are appropriate for their particular time horizon.”16 The participant’s time horizon
is based on the future date he or she expects to begin withdrawing money from the TSP. There are
currently four TSP Lifecycle Funds:
1.
2.
3.
4.
Lifecycle 2050 (with a target date for leaving federal service of 2045 or later);
Lifecycle 2040 (with a target date of 2035 through 2044);
Lifecycle 2030 (with a target date of 2025 through 2034); and
Lifecycle 2020 (with a target date of now through 2024).
When a particular Lifecycle Fund reaches its target date, it is automatically rolled into the “L
Income Fund,” to produce income for TSP participants who anticipate withdrawing from their
TSP accounts in the near term or who are already receiving TSP monthly payments.
Historical rates of return for the TSP are shown in Table 3. For the years before 2001, the rates of
return for the S and I funds are the rates of return for the indices on which those funds are based.
Table 3. Annual Rates of Return for Thrift Savings Plan Funds
Year
G Fund
C Fund
F Fund
S Fund
I Fund
L Income
Fund
1988
8.8%
11.8%
3.6%
20.5%
26.1%
NA
1989
8.8%
31.0%
13.9%
23.9%
10.0%
NA
1990
8.9%
-3.2%
8.0%
-13.6%
-23.6%
NA
1991
8.1%
30.8%
15.7%
43.5%
12.2%
NA
1992
7.2%
7.7%
7.2%
11.9%
-12.2%
NA
1993
6.1%
10.1%
9.5%
14.6%
32.7%
NA
1994
7.2%
1.3%
-3.0%
-2.7%
7.8%
NA
15 The “S” and “I” funds were added in 2001 in accordance with the Thrift Savings Plan Act of 1996 (P.L. 104-208).
16 Statement of Gary A. Amelio, former executive director of the Federal Retirement Thrift Investment Board before
the Senate Subcommittee on Securities and Investment, June 14, 2005.
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Federal Employees’ Retirement System: Benefits and Financing
Year
G Fund
C Fund
F Fund
S Fund
I Fund
L Income
Fund
1995
7.0%
37.4%
18.3%
33.5%
11.3%
NA
1996
6.8%
22.8%
3.7%
17.2%
6.1%
NA
1997
6.8%
33.2%
9.6%
25.7%
1.5%
NA
1998
5.7%
28.4%
8.7%
8.6%
20.1%
NA
1999
6.0%
21.0%
-0.8%
35.5%
26.7%
NA
2000
6.4%
-9.1%
11.7%
-15.8%
-14.2%
NA
2001
5.4%
-11.9%
8.6%
-2.2%
-15.4%
NA
2002
5.0%
-22.1%
10.3%
-18.1%
-16.0%
NA
2003
4.1%
28.5%
4.1%
42.9%
37.9%
NA
2004
4.3%
10.8%
4.3%
18.0%
20.0%
NA
2005
4.5%
5.0%
2.4%
10.5%
13.6%
2.2%
2006
4.9%
15.8%
4.4%
15.3%
26.3%
7.6%
2007
4.9%
5.5%
7.1%
5.5%
11.4%
5.6%
2008
3.8%
-37.0%
5.5%
-38.3%
-42.4%
-5.1%
2009
3.0%
26.7%
6.0%
34.9%
30.0%
8.6%
2010
2.8%
15.1%
6.7%
29.1%
7.9%
5.7%
2011
2.5%
2.1%
7.9%
-3.4%
-11.8%
2.2%
2012
1.5%
16.1%
4.3%
18.6%
18.6%
4.8%
2013
1.9%
32.5%
-1.7%
38.4%
22.1%
7.0%
2014
2.3%
13.8%
6.7%
7.8%
-5.3%
3.8%
2015
2.0%
1.5%
0.9%
-2.9%
-0.5%
1.9%
2016
1.8%
12.0%
2.9%
16.4%
2.1%
3.6%
2017
2.3%
21.8%
3.8%
18.2%
25.4%
6.2%
2018
2.9%
-4.4%
0.2%
-9.3%
-13.4%
0.7%
Average
Return,
1988-2018
5.0%
11.5%
6.2%
12.4%
6.9%
3.9%
Sources: https://www.tsp.gov/InvestmentFunds/FundPerformance/annualReturns.html, http://www.wilshire.com,
and http://www.msci.com.
Notes: Rates of return for the TSP funds are shown net of expenses. “Average Return” is the average of the
annual return across each year, 1998 through 2018.
Rates of return for the S and I funds prior to 2001 are the rates of return for the indices on which those funds
are based. Because these funds were not TSP investment options prior to 2001, TSP-produced measures of
average returns for the S and I funds may not match these calculations because they would be based on a
different time period (i.e., post-2000).
TSP Lifecycle Funds were first established in 2005. Prior years are labeled as Not Applicable (NA). Annual rates
of return for the L Income Fund, which produces income for TSP participants who anticipate withdrawing from
their TSP accounts in the near term or who are already receiving TSP monthly payments, are provided. For
annual rates of return for other Lifecycle Funds, see https://www.tsp.gov/InvestmentFunds/FundPerformance/
annualReturns.html.
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Federal Employees’ Retirement System: Benefits and Financing
TSP Withdrawal Options
An employee can withdraw funds from the TSP after leaving federal service in three ways. Funds
can be withdrawn
as a life annuity,17
in a single lump-sum payment, or
in a series of monthly payments, either for a fixed number of months or in a fixed
dollar amount until the account is depleted.
A retiree can choose to have payments begin immediately or at a later date. In general, there is a
10% tax penalty for those who withdraw funds before the age of 59½. However, the penalty does
not apply if the individual has retired and is aged 55 or older, or if the withdrawals are taken as a
series of substantially equal periodic payments based on the person’s remaining life expectancy.
Effective September 15, 2019, additional options for in-service and postservice TSP withdrawals
are available, as authorized under the TSP Modernization Act of 2017 (P.L. 115-84). These
expanded withdrawal options include multiple postseparation partial withdrawals; additional inservice withdrawals for participants aged 59½ or older and still employed in federal service; and a
new choice about withdrawals from a traditional TSP balance, a Roth balance, or a proportional
mix of both; among other new TSP withdrawal flexibilities.18
Employer and Employee Contributions to CSRS
and FERS
Both CSRS and FERS require participants to contribute toward the cost of their future pensions
through a payroll tax. Under CSRS, employees contribute 7.0% of base pay to the Civil Service
Retirement and Disability Fund (CSRDF). Under FERS, employees first hired before 2013
contribute 0.8% of pay to the CSRDF and they also pay Social Security taxes (6.2% on salary up
to the maximum taxable wage base of $132,900 in 2019). FERS employees first hired in 2013
contribute 3.1% of pay to the CSRDF as well as Social Security taxes. FERS employees first
hired after 2013 contribute 4.4% of pay to the CSRDF as well as Social Security taxes.
Participants in CSRS are not covered by Social Security.19 See Table 4 for a summary of FERS
employee contribution rates by date of hire.20
17 An annuity is a contract between the individual and an insurance company that pays a monthly income in exchange
for an initial premium. The monthly income that a given premium will purchase depends on both on the estimated rate
of return from the investment and actuarial estimates of the annuitant’s remaining life expectancy.
18 For more details, see Thrift Savings Plan Fact Sheet, “Questions and Answers About Changes to TSP Withdrawal
Options,” September 2019, available at https://www.tsp.gov/PDF/formspubs/tspfs10.pdf.
19 Former federal employees are eligible for Medicare at the age of 65, regardless of whether they were covered by
CSRS or FERS. Workers in both programs pay the Hospital Insurance (HI) payroll tax of 1.45% on all salary and
wages.
20 Certain special categories of FERS employees—including certain Members of Congress, certain congressional staff,
federal law enforcement officers, federal firefighters, air traffic controllers, and nuclear waste couriers—contribute
higher employee contributions. For information on the retirement contributions of federal law enforcement and related
personnel, see CRS Report R42631, Retirement Benefits for Federal Law Enforcement Personnel. For information on
the retirement contributions of Members of Congress and congressional staff, see CRS Report RL30631, Retirement
Benefits for Members of Congress.
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Table 4. FERS Employee Contribution Rates by Date of Hire
(contribution rates expressed as percentage of pay)
Current Law Prior to
P.L. 112-96: Hired prior to
2013
Increases Enacted Under P.L.
112-96: Hired (or rehired with
less than 5 years of FERS
service) in 2013
Increases Enacted Under P.L.
113-67: Hired (or rehired with
less than 5 years of FERS
service) after 2013
0.8%
3.1%
4.4%
Source: Compiled by the Congressional Research Service.
Notes: Employee contribution rates are provided for regular FERS employees. Certain special categories of
FERS employees—including certain Members of Congress, certain congressional staff, federal law enforcement
officers, federal firefighters, air traffic controllers, and nuclear waste couriers—contribute an additional 0.5
percentage points (i.e., 1.3% for those individuals hired prior to 2013 and 3.6% for those individuals hired in
2013). Under P.L. 113-67, the Bipartisan Budget Act of 2013, the special category FERS employee contribution is
4.9% for those individuals hired (or rehired with less than 5 years of FERS service) after 2013.
Contributions to CSRS and FERS are not deposited into individual employee accounts. Nor is the
amount of a federal worker’s pension based on the amount of his or her contributions. All
contributions are paid into—and all benefits are paid out of—the Civil Service Retirement and
Disability Fund. Employee contributions pay for a comparatively small part of the retirement
annuities paid by CSRS and FERS. There are, however, both budgetary and actuarial reasons that
federal employees are required to contribute to CSRS and FERS.
Pension Funding in the Private Sector Versus the Federal
Government
In the private sector, employers are required by the Employee Retirement Income Security Act of
1974 (ERISA; P.L. 93-406) to pre-fund the benefits that workers earn under defined benefit plans.
Pre-funding of future pension obligations is required because there is always the possibility that a
firm could go out of business. A firm that closes down will no longer have revenues to pay its
pension obligations, and if these obligations were not fully funded, retirees and employees of the
firm would lose some or all of their pension benefits. Private-sector employers with defined
benefit pensions are required to pay premiums to the Pension Benefit Guaranty Corporation
(PBGC), which insures the pensions of workers whose employer terminates a pension plan that
has unfunded liabilities. For plans that terminate in 2019, the PBGC guarantees a maximum
annual benefit of approximately $67,295 for a worker retiring at the age of 65. The maximum
benefit is lower for workers who retire before the age of 65. The PBGC does not insure federal,
state, or local government pensions. The ultimate guarantors of government pensions are the
taxpayers.21
The federal government requires private-sector firms to pre-fund employees’ pension benefits to
ensure that if a firm goes out of business, there will be funds available to pay its pension
obligations. Although the federal government is unlikely to “go out of business,” there are other
reasons that Congress has required federal agencies and their employees to contribute money to
the CSRDF.22 First, by providing a continuous source of budget authority, the CSRDF allows
21 For additional details on private sector funding of defined benefit pensions and the PBGC, see CRS Report 95-118,
Pension Benefit Guaranty Corporation (PBGC): A Primer.
22 In general, state and local governments do not face this risk either; however, they are more like private businesses in
that they have in some cases defaulted on their public debts.
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Federal Employees’ Retirement System: Benefits and Financing
benefits to be paid on time, regardless of any delays that Congress may experience in passing its
annual appropriations bills. Secondly, the balance in the trust fund acts as a barometer of the
government’s future pension obligations. Given a fixed contribution rate and benefit structure, a
rising trust fund balance indicates that the government is incurring obligations to make higher
pension payments in the future.23 Finally, prefunding pension obligations forces federal agencies
to recognize their full personnel costs when requesting annual appropriations from Congress.
Otherwise, these costs would be recognized only in the central administrative accounts of the
Office of Personnel Management, and not by the agencies where the costs are incurred. In
FY2017, agency contributions for CSRS and FERS totaled $30.2 billion.24
Employee Contributions and Other Sources of Funding25
Employee contributions are revenues of the federal government. These revenues reduce the
proportion of pension costs that must be borne by the public. In FY2017, employee contributions
to CSRS and FERS totaled an estimated $3.9 billion, equal to 3.8% of the total income of the
CSRDF.26 The other major sources of revenue to the CSRDF are agency contributions,
contributions of the U.S. Postal Service on behalf of its employees, interest on the federal bonds
held by the fund, and transfers from the general revenues of the U.S. Treasury. These transfers are
necessary because the costs of the older of the two federal retirement programs, the CSRS, are not
fully covered by employee and agency contributions. FERS benefits are required by law to be
fully funded by the sum of contributions from employees and their employing agencies and the
interest earnings of the CSRDF.
Employee and Employer Contribution Amounts
Actuaries calculate the cost of defined benefits pension plans in terms of “normal cost.” The
normal cost of a pension plan is the level percentage of payroll that must to be set aside each year
to fund the pension benefits that participants have earned. Normal cost is based on estimates of
attrition and mortality among the workforce, future interest rates, salary increases, and inflation.
OPM has estimated the current normal cost of CSRS to be 36.6% of payroll. The federal
government’s share of the estimated normal cost of CSRS is 29.6% of payroll.27 The Civil
Service Retirement Amendments of 1969 (P.L. 91-93) require participating employees and their
employing agencies each to contribute an amount equal to 7.0% of basic pay to the CSRDF to
finance retirement benefits under CSRS. The combined contribution of 14% of employee pay
does not fully finance the retirement benefits provided by the CSRS. The costs of the CSRS that
are not financed by the 7.0% employee and 7.0% agency contributions are attributable mainly to
increases in future CSRS benefits that result from (1) employees’ annual pay raises and (2) annual
23 As is explained later in this report, a large balance in the civil service retirement trust fund does not by itself make it
easier to pay these benefits when they come due because the trust fund invests exclusively in U.S. Treasury securities.
24 U.S. Office of Personnel Management, Annual Report of the Board of Actuaries, Civil Service Retirement and
Disability Fund, Fiscal Year Ended September 30, 2018, February 2019, see Table 2, available at
https://www.opm.gov/about-us/budget-performance/other-reports/fy-2018-csrdf-annual-report.pdf (hereinafter
“FY2018 CSRDF Report”). The FY2018 CSRDF Report is the most recently available financing accounting for the
CSRDF. In the FY2018 CSRDF Report, FY2017 is the most recently available year for actual (vs. estimated) data.
25 For additional information on the role of different sources of funding for CSRS and FERS benefits, see CRS Report
RL30023, Federal Employees’ Retirement System: Budget and Trust Fund Issues.
26 FY2018 CSRDF Report. Total income to the CSRDF for FY2017 was $103.5 billion.
27 FY2018 CSRDF Report, see Table 1.
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COLAs to CSRS annuities. In actuarial terms, the employee and agency contributions totaling
14% of pay are equal to the static normal cost of CSRS benefits.28 This is the benefit that would
be paid if employees received no future pay raises and annuitants received no future COLAs. The
dynamic normal cost of CSRS pensions includes the cost of financing future benefit increases that
result from pay raises and COLAs provided to annuitants.29
Contributions from employees and their employing agencies meet about 38% of the normal cost
of CSRS (14.0/36.6 = .383). The remaining 62% of the cost of CSRS is paid from the interest
earned by bonds held by the retirement and disability trust fund, special contributions by the U.S.
Postal Service for retired postal workers, and transfers from the general revenues of the U.S.
Treasury. If each federal agency were to pay the full cost of CSRS benefits on an accrual basis, as
is done under FERS, they would contribute an amount equal to 29.6% of payroll. This represents
the dynamic normal cost of CSRS minus the required employee contribution of 7.0% of pay.
Effective beginning October 1, 2019, OPM estimates the cost of the FERS basic annuity at an
amount equal to 16.8% of pay for employees first hired before 2013, 17.3% for employees first
hired in 2013, and 17.5% for employees first hired in 2013 or later.30 Federal law requires
agencies to contribute an amount equal to the normal cost of FERS minus employee contributions
to the program. Employees first hired before 2013 contribute 0.8% of pay toward their FERS
annuities. Consequently, the normal cost of the FERS basic annuity to the federal government for
these employees equals 16.0% of payroll (16.8 - 0.8 = 16.0). Under P.L. 112-96, FERS employees
first hired in 2013 contribute 3.1% of pay toward their FERS annuity. The cost for this category
of FERS employees equals 14.2% of payroll (17.3 - 3.1 = 14.2). Under P.L. 113-67, the normal
cost of the basic annuity for FERS employees first hired after 2013 is 17.5%. These employees
contribute 4.4%, while their employing agencies contribute 13.1% (17.5 - 4.4 = 13.1). (The
additional amounts provided by the increased employee contributions for employees first hired
after 2013 [i.e., 4.4% vs. 3.1%] are applied toward reducing the CSRS unfunded liability until it
is eliminated.)
The federal government has three other mandatory costs for employees enrolled in FERS: (1)
Social Security, (2) the 1% agency automatic contribution to the TSP, and (3) agency matching
contributions to the TSP. Social Security taxes are 6.2% of payroll on both the employer and the
employee up to the maximum taxable amount of earnings ($132,900 in 2019). All agencies must
contribute an amount equal to 1% of employee pay to the TSP. The normal cost of FERS to the
federal government is therefore is at least 23.2% (16.0 + 6.2 + 1 = 23.2) of pay for employees
first hired before 2013; at least 21.4% (14.2 + 6.2 + 1 = 21.4) of pay for employees first hired in
2013; and 20.3% (13.1 + 6.2 + 1 = 20.3) for employees hired after 2013. Federal matching
contributions to the TSP can add up to 4 percentage points to that amount. For an employee
enrolled in FERS and first hired before 2013 who contributes 5.0% or more of pay to the TSP, the
employing agency must finance retirement costs equal to 27.2% (16.0 + 6.2 + 1 + 4 = 27.2) of
employee pay. For an employee enrolled in FERS and first hired in 2013 who contributes 5.0% or
more of pay to the TSP, the employing agency must finance retirement costs equal to 25.4% (14.2
28 A pension plan’s normal cost is the level percentage of pay that, invested today at a particular real rate of interest,
will be sufficient to fully finance the retirement benefits under the plan.
29 Two other elements of a pension plan’s dynamic normal cost are increases in benefits that result from (1) new or
expanded benefits and (2) newly covered groups of workers.
30 These FERS normal cost percentages, and costs to the federal government as discussed in this report, apply to regular
FERS employees. For special categories of employees—such as Members of Congress and law enforcement officers—
higher normal costs apply. Beginning October 1, 2019, lower normal costs apply for employees of the U.S. Postal
Service. See OPM, “Federal Employees’ Retirement System: Normal Cost Percentages,” 84 Federal Register 2291522916, May 20, 2019.
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Federal Employees’ Retirement System: Benefits and Financing
+ 6.2 + 1 + 4 = 25.4) of pay. Finally, for an employee enrolled in FERS and first hired after 2013
who contributes 5.0% or more of pay to the TSP, the employing agency must finance retirement
costs equal to 24.3% (13.1 + 6.2 + 1 + 4 = 24.3) of pay.
CSRS and FERS differ in the way that each federal agency must budget its contributions toward
employee pension benefits. Under FERS, each agency must include the full normal cost of the
FERS basic benefit (16.0% of pay for FERS employees hired before 2013, 14.2% for federal
employees hired in 2013, and 13.1% of pay for FERS employees hired after 2013) in its annual
budget request. In addition, each agency must include in its budget request the cost of the
employer share of Social Security payroll taxes, the 1.0% automatic contribution to the TSP, and
employer matching contributions to the TSP. Under CSRS, each agency must budget only a 7.0%
contribution to the CSRDF, even though this is less than the full cost of the program. The costs
associated with CSRS that are not paid by the employee contribution of 7.0% and the agency
contribution of 7.0% are treated as a general obligation of the U.S. Treasury.
In both CSRS and FERS, government contributions to the CSRDF result in the Treasury issuing
securities that are credited to the fund. The contributions for both programs are commingled, and
benefits for retirees and survivors in both programs are paid from the CSRDF. In contrast,
government contributions to the TSP are deposited into individual accounts for each TSP
participant. The accounts are managed by the Federal Retirement Thrift Investment Board. The
TSP is not a trust fund of the U.S. government. TSP accounts are individually owned by
participants in the TSP in the same way that 401(k) accounts are owned by workers in the private
sector.
Financing Pension Benefits for Federal Employees
As of September 30, 2017, the CSRDF had net assets of $908.7 billion available for benefit
payments under both CSRS and FERS. At the same time, the civil service trust fund had an
unfunded actuarial liability of $968.1 billion, with $812.5 billion in unfunded liability
attributable to CSRS and $155.6 billion in unfunded liability attributable to FERS.31 Federal law
has never required that employee and agency contributions must equal the present value of
benefits that employees accrue under the CSRS. In contrast, the FERS Act requires that the
benefits accrued each year by employees must be fully funded by contributions from employees
and their employing agencies.
Although the CSRDF has an unfunded liability, it is not in danger of becoming insolvent.
According to the projections of OPM’s actuaries, the assets of the CSRDF will continue to grow
over the next 75 years. The fund’s assets are projected to reach $1.1 trillion in 2020, $2.2 trillion
in 2040, $5.0 trillion in 2060, and $9.6 trillion in 2080. Actuarial projections indicate that the
CSRDF will be able to meet its financial obligations in perpetuity. According to OPM, “the total
assets of the CSRDF ... including both CSRS and FERS, are expected to continue to grow
throughout the term of the projection under existing statutory funding provisions.”32 One reason
that the CSRDF will not exhaust its resources is that all federal employees hired since 1984 are
enrolled in FERS. By law, the benefits that employees earn under FERS must be fully funded by
the sum of employer and employee contributions and interest earnings.
31 FY2018 CSRDF Report, see Table 2. As of the date of this CRS Report, FY2017 are the most recent, actual program
data available from OPM.
32 FY2018 CSRDF Report, p. 23.
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Federal Employees’ Retirement System: Benefits and Financing
Federal Trust Funds and Prefunding of Benefits
The CSRDF is similar to the Social Security Trust Fund in that 100% of the monies deposited
must be used to purchase special-issue U.S. Treasury bonds. This exchange between the trust
fund and the Treasury does not result in revenues or outlays for the federal government. It is an
intra-governmental transfer, which has no effect on the size of the government’s budget surplus or
deficit.33
Federal trust funds are not a “store of wealth” like private pension funds. The assets of the civil
service retirement trust fund are U.S. Treasury bonds that function solely as a record of available
budget authority. The bonds cannot be sold by the trust fund to the general public in exchange for
cash. They can only be returned to the Treasury, which recognizes each bond as representing an
equivalent dollar-value of budget authority to be used for the payment of benefits to federal
retirees and their survivors. The Office of Management and Budget (OMB) has stated that
These [trust fund] balances are available for future benefit payments and other trust fund
expenditures, but only in a bookkeeping sense. The holdings of the trust funds are not assets
of the Government as a whole that can be drawn down in the future to fund benefits.
Instead, they are claims on the Treasury. From a cash perspective, when trust fund holdings
are redeemed to authorize the payment of benefits, the Department of the Treasury finances
the expenditure in the same way as any other Federal expenditure—by using current
receipts or by borrowing from the public. The existence of large trust fund balances,
therefore, does not, by itself, increase the Government’s ability to pay benefits. Put
differently, these trust fund balances are assets of the program agencies and corresponding
liabilities of the Treasury, netting to zero for the Government as a whole.34
Government trust funds, however, can ease the burden of future benefit payments if an increase in
the trust fund balance represents a net increase in national saving. Again, quoting OMB:
From an economic standpoint, the Government is able to prefund benefits only by
increasing saving and investment in the economy as a whole. This can be fully
accomplished only by simultaneously running trust fund surpluses equal to the actuarial
present value of the accumulating benefits while maintaining an unchanged Federal fund
deficit, so that the trust fund surplus reduces the unified budget deficit or increases the
unified budget surplus. This would reduce Federal borrowing by the amount of the trust
funds surplus and increase the amount of national saving available to finance investment.
As long as the increase in Government saving is not offset by a reduction in private saving,
greater investment would increase future national income, which would yield greater tax
revenue to support the benefits.35
Investment Practices of Federal Trust Funds
Many state and local government pension funds invest in stocks, bonds, mortgages, real estate,
and other private assets. If Congress were to permit the CSRDF to acquire assets other than U.S.
Treasury bonds—such as the stocks and bonds issued by private corporations—these assets could
33 Federal trust funds represent budget authority. Only revenues and outlays affect the size of the annual budget surplus
or deficit. The excess revenues that result in a trust fund surplus therefore reduce the government’s deficit (or increase
its surplus) and the outlays for retiree and survivor benefits either reduce the government’s budget surplus or increase
the budget deficit. However, the exchange of cash for bonds (or vice versa) between the trust fund and the Treasury
does not affect the deficit because it is an exchange that occurs entirely within the government.
34 U.S. Office of Management and Budget (OMB), Budget of the United States Government, Fiscal Year 2010:
Analytical Perspectives, 2009, p. 345.
35 Ibid.
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Federal Employees’ Retirement System: Benefits and Financing
be sold to the public for cash as pension liabilities come due. This would represent a major
change in public policy that would have important effects on the federal budget and on private
businesses that would, in effect, be partly owned by an agency of the federal government.36
Among the possible drawbacks of allowing the CSRDF to invest in private assets are that the
stocks and bonds purchased by the trust fund would displace purchases of these assets by private
citizens, so that while civil service retirement benefits would be prefunded, it would be at the cost
of reducing the amount of private-sector assets held by private citizens. In a scenario of “full
displacement,” there would be no net increase in the amount of saving and investment in the
economy, just a reallocation of assets in which the government would own more private-sector
stocks and bonds and private investors would hold more Treasury bonds.
A second issue that would have to be considered if the trust fund were to purchase private
investment securities would be the fund’s management and investment practices. It is unclear
who would make the investment decisions, and what the acceptable level of investment risk for
the funds would be. The most fundamental risk is that poor investment choices would result in the
trust fund losing value over time. Another question would be how the fund would decide what
assets to purchase.37 Deciding what would constitute an appropriate investment for a fund that
consists mainly of monies provided by taxpayers could be controversial. Not all companies,
industries, or countries would be seen by the public as appropriate places to invest these funds. In
short, the question of investing trust fund assets in securities other than U.S. Treasury bonds is
one that would deserve close and careful consideration of all the possible ramifications.
Allowing the civil service retirement trust fund to invest in private-sector securities also would
have implications for the federal budget.38 Currently, the trust fund is credited by the Treasury
with agency contributions on behalf of covered employees, and it receives revenue in the form of
employee contributions. Agency contributions are intra-governmental transfers, and have no
effect on the size of the government’s annual budget deficit or surplus. Employee contributions,
however, are revenues of the U.S. government. As it now operates, the only outlays of the trust
fund are payments to annuitants and relatively minor outlays for administrative expenses. If the
trust fund were to purchase private assets such as corporate stocks and bonds rather than U.S.
Treasury bonds, there would be an immediate outlay of funds. This outlay by the trust fund would
be paid for in part by employee contributions that would be diverted from the general fund of the
Treasury. The remainder of the purchase, financed by agency contributions, would replace an
intra-governmental transfer with a direct outlay of federal funds.
36 The Railroad Retirement and Survivors’ Improvement Act of 2001 (P.L. 107-90) authorizes the Railroad Retirement
Trust Fund to acquire corporate stocks, bonds, and other assets to fund railroad retirement benefits. According to the
Congressional Budget Office (CBO), “such an action has no clear precedent and raises questions about how the federal
government might behave as an investor in private enterprises.” (CBO, The Budget and Economic Outlook: Fiscal
Years 2003-2012, January 2002, p. 88.) For more details on the Railroad Retirement Trust Fund, see CRS Report
RS22782, Railroad Retirement Board: Trust Fund Investment Practices.
37 In the case of the Railroad Retirement Trust Fund, there is a Trust independent of the federal government that makes
all investment decisions. See CRS Report RS22782, Railroad Retirement Board: Trust Fund Investment Practices.
38 In the case of the Railroad Retirement Trust Fund, for budgetary purposes, purchases by the Trust are not considered
outlays, but as an exchange of assets of equal value; redemptions are not considered offsetting receipts. This differs
from long-standing budgetary rules, which usually treat an investment in nonfederal securities as the purchase of an
asset, recording both an obligation and an outlay equal to the purchase price during the year of the purchase. See CRS
Report RS22782, Railroad Retirement Board: Trust Fund Investment Practices.
Congressional Research Service
16
Federal Employees’ Retirement System: Benefits and Financing
Because the Treasury would no longer receive employee contributions toward CSRS and FERS
as revenue, it would have to borrow an equal amount from the public. Consequently, without an
offsetting reduction in outlays elsewhere in the budget or an increase in revenues of other sources,
the net effect of these transactions would be an increase in the government’s budget deficit (or a
decrease in the budget surplus). If the budget accounting period extended over a long enough
time, these transactions would cancel one another out because the long-term effect would move
some outlays from the future, where they would have occurred as payments to annuitants, to the
present, where they would occur partly as outlays to purchase assets and partly as a reduction in
revenues that currently go to the general fund of the Treasury.
Author Contact Information
Katelin P. Isaacs
Specialist in Income Security
[redacted]@crs.loc.gov
, 7-....
Acknowledgments
Isaac Nicchitta, research assistant at CRS, contributed to the updating of this report.
Congressional Research Service
98-810 · VERSION 36 · UPDATED
17
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