What Is the Three-Legged Stool of Government Retirement?
The metaphor of a three-legged stool has been used with retirement planning for decades. A family’s retirement planning is a seat held up by three legs: Social Security, retirement plans, and personal savings. All three legs are vital to living a stable retirement. Without one of the legs, the stool falls down.
Most, but not all, government employees contribute to Social Security. This is critical because those who do not contribute to Social Security do not withdraw funds upon retirement or becoming disabled. Those government employees who do not contribute must ensure that the other two legs of the stool are strong.
Social Security is a political football at the federal level. Politicians know uncomfortable choices must be made to continue the system’s solvency, but no one wants to take the political hit of decreasing benefits or increasing contributions. This leg of the stool is particularly susceptible to wobbling because of the politics surrounding it.
Social Security by itself will not sustain the lifestyle a beneficiary is accustomed to living. This leg should bear as little weight as possible.
Retirement plans simply are not what they used to be. Politicians have used public employees and their retirement benefits as scapegoats for out-of-control public budgets. Nevermind pork barrel spending and costly public assistance programs. Personnel is a large portion of any organization’s budget, and scapegoating employees for this fact is a morale killer.
Political maneuvering has taken its toll on retirement systems. Benefits have diminished while costs borne by employees have risen. While the private sector does not have to deal with politicians maiming their retirement benefits, private sector employees have also seen their retirement benefits shrink. In both sectors, the retirement plans’ stability is no longer the guarantee it used to be.
Most federal employees contribute to the Federal Employees Retirement System. This system has its own three-legged stool of Social Security, an annuity payment and a personal savings plan called the Thrift Savings Plan. Federal employees who do not contribute to FERS contribute to the Civil Service Retirement System which is just an annuity. For both systems, the annuities are defined benefit plans.
State and local governments that have their own retirement systems usually have defined benefit plans which require employee participation. Many have personal savings options like 401(k)s and IRAs, but those components are rarely mandatory.
As mentioned earlier, some retirement systems have options or requirements for personal savings. The federal government’s Thrift Savings Plan is mandatory to some extent. Agencies contribute an amount equal to a portion of an employee’s salary. The employee may contribute more. Contribution is incentivized by matching contributions up to a certain point meaning agencies will match or partially match what employees contribute of their own volition.
When personal savings vehicles do not have matching features, public employees have no incentive to use the retirement system plan instead of those offered by private investment companies. Like many other government-sponsored personal savings plans, the Thrift Savings Plan offers limited investment options, compared to private investment companies.
No matter how public employees choose to save for retirement, the important thing is that they actually save. The days of relying on Social Security and a pension are long gone.
As the stool metaphor suggests, each leg of the stool is important. Government employees should pay attention to each leg and ensure it remains stable. Social Security and retirement plans are largely outside an employee’s control, so the place employees can make the most difference in long-term stability is personal savings.
Public employees seeking to maximize their retirement security should consult financial advisors through their retirement systems or through private investment companies. Some retirement systems have arrangements with private financial consultants who work for reduced rates and have experience working with public employees.