Federal Employees Retirement System

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The Federal Employees Retirement System is the primary mechanism for US government employees to save for retirement. It consists of three components -- a pension, a savings plan and Social Security.

The History of FERS

FERS was created by the US 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 US 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, Basic Benefit Plan and 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 contribution plans, retirees know precisely what they will receive each month of retirement regardless of what the stock market does.

In defined benefit 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 and 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 call the Basic Benefit Plan. 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 time goes on, there will always be contributors to the system.

Between the creation of FERS and 2012, all federal workers contributed 0.8% of their paycheck to the Basic Benefit Plan. Starting in 2013, new federal workers contribute 3.1%. Workers who were hired before 2013 still contribute the original 0.8%. The law increasing the contribution rate was passed in February 2012 predominantly to pay for a payroll tax cut extension for all US workers, not just for federal employees.

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, survivor benefits and how cost-of-living adjustments are applied.

#3 Thrift Savings Plan

The third component is the Thrift Savings Plan, which is similar to a 401(k) that any American can have on their own or through an employer. The US government kicks in an amount equivalent to 1.0% of the employee’s pay. Federal employees can contribute more, and the government will match it up to a certain percentage. Earnings on contributions grow tax-free.Not participating to the fullest in any plan where your employer matches your contribution is simply giving away free money.

Becoming Eligible to Retire

To retire, federal workers must have a minimum number of years of service and meet a minimum age requirement. For federal workers born in 1970 or later, the minimum retirement age is 57. Older workers have a younger minimum retirement age. The minimum age rose incrementally between 1948 and 1970.

Note: The content of this article is for informational purposes only. This article is not intended to give tax advice. Consult a qualified tax professional for tax advice.