The Federal Employees Retirement System is the primary mechanism for U.S. government employees to save for retirement. It consists of three components—Social Security, an annuity plan that acts like a pension, and a 401(k)-like savings plan.
The History of FERS
FERS was created by the U.S. Congress in 1986 and became effective at the beginning of 1987. It was meant to replace the Civil Service Retirement System that federal employees participated in before 1987. When FERS began, CSRS workers could switch to FERS. Not all did, so the U.S. Office of Personnel Management maintains two retirement systems.
The most basic difference between the two lies in the robustness of each plan. CSRS is strictly a pension program, whereas FERS provides federal workers with three mechanisms for retirement savings.
The Three Components of FERS
These mechanisms are Social Security, the Basic Benefit Plan, and the Thrift Savings Plan. These three components diversify a federal worker’s retirement income sources. Together, these three pieces of the retirement puzzle are designed to give a retiree a life at a similar standard of living the retiree had during his or her working life. A stable retirement is one of the biggest perks government service offers.
Together, the three components have elements of both defined contribution and defined benefit plans. In defined benefit plans, retirees know precisely what they will receive each month of retirement regardless of what the stock market does. In defined contribution plans, employees contribute a specified amount to be invested in any number of investment vehicles. Market forces dictate how much the investment grows.
#1 Social Security
The first component of FERS is Social Security. Federal workers contribute to Social Security like almost all other citizens who work. Federal workers under CSRS do not participate in Social Security. Some state and local government retirement systems allow their workers to opt out of Social Security, so they neither contribute to that system nor receive any benefits from it.
Social Security provides a safety net for workers most commonly in the form of regular monthly income to workers who become disabled or retire after contributing to the system through federal payroll taxes over the course of their careers.
#2 Basic Benefit Plan
The second component is an annuity called the Basic Benefit Plan (BBP). Federal workers contribute a small percentage of their paycheck, and that money goes toward paying current retirees. When current workers become retirees, they draw their benefits from the contributions of workers at that time. It sounds like a Ponzi scheme, but as long as the government has employees, there will always be contributors to the system.
From the creation of FERS through 2012, all federal workers contributed 0.8% of their paycheck to the BBP and those workers hired prior to 2013 still contribute that amount. Workers hired in 2013 contribute 3.1%. Workers hired in 2014 or later contribute 4.4%.
The amount of money a retiree receives depends on that retiree’s years of service and how much money that individual earned in his or her three highest-earning years. Plan rules define the exact calculations for regular retirement benefits, disability benefits, and survivor benefits and how cost-of-living adjustments are applied.
#3 Thrift Savings Plan
The third component is the Thrift Savings Plan (TSP), which is similar to a 401(k) that any American can have through an employer. As with a 401(k), gains on contributions to the TSP grow tax-free.
The U.S. government automatically kicks in an amount equivalent to 1% of the employee’s pay to their TSP account. The government also matches dollar-for-dollar an employee's contributions amounting up to 3% of their pay in each period. If an employee contributes another 2% of their pay, the government will match half of the amount.
Not participating to the fullest extent in any plan under which your employer matches your contribution is like declining free money.
Becoming Eligible to Retire
To retire, federal workers must have completed a minimum number of years of service and meet a minimum age requirement. For federal employees born in 1970 or later, the minimum retirement age is 57. For employees born before 1948, it is 55. The minimum age rises in two-month increments for workers born from 1948 (55 years and 2 months) to 1969 (56 years and 10 months).