How Retirement Systems Work

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A retirement system is an organization that facilitates retirement savings and benefits distribution for government workers. While these systems vary greatly, many of them have defined benefit and defined contribution retirement savings plans and health insurance components.

In defined benefit plans, current employees and their employing agencies contribute money to the retirement system. The system uses that money to pay annuities and health insurance costs for current retirees. The system assumes the risk of investment performance. Defined benefit plans are the backbone of many long-standing retirement systems.

As time has gone on, retirement systems have added defined contribution options for employees to save additional money for retirement. In many systems, defined contribution options started as just that -- options. But they are slowly changing system by system.

Diminishing Attractiveness of Government Retirement

Under public pressure, lawmakers have diminished the overall attractiveness of retirement systems in several ways. First, they have forced employees to contribute more money while holding benefits the same. Much like the concept of governments doing more with less, employees contribute more money for the same retirement payout.

Second, lawmakers have shifted risk from employers to employees by making defined contribution plans a greater part of the system while chipping away at defined contribution plans. It gives employees more uncertainty about their standard of living in retirement. Employees can work toward a target annuity in a defined benefit plan, but they cannot do so with certainty in a defined contribution plan.

Third, lawmakers have added rules affecting how early a person may retire and how much of retirees’ health insurance costs are paid by the system. Health insurance is a major cost for retirement systems, so shedding part of that cost is a big benefit to retirement system administrators but not to the people they serve.

Fourth, lawmakers have limited the practice of double-dipping where retirees work at an organization within the retirement system, thus withdrawing from the retirement system and a member employer. Depending on a retirement system’s rules, this practice can have dire consequences for the system’s sustainability.

When Rules Change

Government workers tend to vote in higher proportion than the overall population, so it stands to reason that lawmakers try to appease government workers by grandfathering current employees under old rules. New workers are placed under less advantageous rules. They don’t know they are getting a worse deal than their co-workers until they are already on the job.

Some retirement systems make employees contribute to Social Security. Others do not. To receive retirement benefits from Social Security, individuals must contribute to it during their working lives. When lawmakers and their staffs write enabling statutes for retirement systems, they take into consideration whether or not retirees will have access to Social Security.

Examples of Systems 

Both federal and state retirement systems provide excellent examples of such plans.

Most federal government workers participate in the Federal Employees Retirement System. This system began in 1987 to phase out the Civil Service Retirement System. FERS has three components: Social Security, Basic Benefit Plan, and Thrift Savings Plan. This plan combines both defined benefit and defined contribution elements. CSRS is a defined benefit plan. When FERS was created, employees could choose to stay with CSRS or go to FERS.

States have several retirement systems working for various collections of governmental entities and their employees. Some states have retirement systems specifically for state agencies, public education, city governments, and county governments. For example, Texas has the Employees Retirement System for state employees, Teacher Retirement System for university and school district employees, Texas Municipal Retirement System for city employees, and Texas County & District Retirement System for employees in county governments and special districts. Some large cities and counties opt not to participate in state-run retirement systems and set up their self-funded retirement plans.