How Government Retirement Systems Work

One of the best-known benefits of public service is the strong likelihood government workers will have a comfortable retirement. Government workers and their employing organizations participate in retirement systems that manage the logistics of collecting contributions and distributing annuity payments. Here is an explanation of how those systems work along with hyperlinks to other articles that provide more extensive information.

What Is a Government Retirement System?

Steven Puetzer/Getty Images

A retirement system is an organization that facilitates retirement savings and benefits distribution for government workers. While systems often have defined contribution components where employees can amass personal retirement savings, the hallmark of government retirement is a defined benefit plan that provides government workers a steady income stream in retirement. 

Government organizations may have their own retirement systems, but it is far more common for similar government organizations to contribute to a common retirement system. For instance, US federal government civilian employees contribute to the Federal Employees Retirement System. Some tenured workers are grandfathered into the Civil Service Retirement System, but all new employees are automatically enrolled in FERS instead of CSRS. More

How Employees Contribute to Government Retirement Systems

Jamie Grill/Getty Images

Each month, government employees contribute a portion of their salaries to a retirement system. This percentage typically ranges from 5% to 9%.

The money is taken out of an employee's gross wages in the same way taxes health insurance premiums and voluntary deductions are taken. Employees never have the chance to hold this money, so they don't really miss it. But when they retire, they are happy it was taken out.

Participation in government retirement systems is compulsory. Employees do not have the option to remove themselves from retirement systems.

How Government Retirement Systems Determine Eligibility

Andrew Bret Wallis/Getty Images

Government retirement systems base retirement eligibility on a combination of an employee's age and years of service. In most systems, these two numbers add up to some magic number. Many systems operate under the rule of 80 meaning a retirement-eligible employee's age and years of service total at least 80 years. For example, a 60-year-old employee must have 20 years of service to be eligible for retirement.

The higher a retirement system sets this magic number the older employees are when they reach retirement eligibility. On average, they also have more years of service. The system sets the number higher in order to have more employees contributing to the system and fewer retirees receiving annuities from the system.

One critical thing to note about service credit is that not all public service is honored by every retirement system. In fact, retirement systems tend to have very strict rules about transferring service credit from one retirement system to another.

When retirement systems change the rules about eligibility, they often grandfather in existing employees under the rules they have been under. When new rules are adopted, new employees are stuck with less favorable eligibility rules. More

How Government Retirement Systems Fund Annuities

Jonathan Kitchen/Getty Images

In order to make annuity payments to retirees, retirement systems need money. This money comes from three sources: employee contributions, employer contributions, and investment income earned on those contributions.

As mentioned above, employee contributions are taken as payroll deductions from employees' gross salary. Employers send their own contributions to retirement systems when they send their employees' contributions.

Retirement systems invest this money. By investing wisely, retirement systems ensure they have enough money to pay retirees and to maintain a healthy amount of money saved in reserves.

How Government Retirement Annuities Are Calculated

artpartner-images/Getty Images

Under defined benefit plans, employees are entitled to a fixed annuity. In government retirement systems, the amount of an employee’s annuity is based on the employee’s salary during his or her highest earning years and the employee’s years of service.

Retirement systems need one salary number to plug into their annuity calculation formulas. They do this by averaging an employee’s salary during the highest few earning years. Most systems use between three and five years.

Another variable in the formula is years of service. This number is multiplied by some constant to determine what percentage of the employee’s highest average salary the employee will receive in retirement.

While annuities are fixed, retirement systems have rules about granting cost-of-living adjustments. After all, an annuity of any amount today won’t have the same buying power in 30 years. More