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FERS pioneers examine past, present and future of retirement fund
Wednesday - 12/12/2012, 8:02pm EST
At the time the new federal pension system was created, the vast majority of federal employees were slated to one day draw benefits from the Civil Service Retirement System. Now, federal experts project at most just 300,000 CSRS employees are left in federal service — out of a workforce of 2.6 million.
When Congress began mulling legislative changes to federal retirement, federal-employee groups and unions lobbied hard against many of the more dramatic changes. Now, federal unions staunchly defend the FERS system against a new wave of proposals.
The Thrift Savings Plan, one of the most popular provisions of the FERS program, has also undergone its own series of changes: from three funds in 1987 to 10 today, and the addition of a new after-tax investment option.
Tom Trabucco, the former longtime director of external affairs at the Federal Retirement Thrift Investment Board, and Judy Park, the former legislative director of the National Active and Retired Federal Employees (NARFE) Association, joined Your Turn with Mike Causey for a look back at the creation of FERS and how it has evolved over the years. Both Trabucco and Park worked for federal employee groups at the time FERS was enacted and had a hand in shaping the eventual program.
President Ronald Reagan signed the law creating FERS in June 1986, and the new system officially went into effect in January 1987. But the legislative groundwork was actually laid years earlier, Trabucco said.
In 1983, Congress voted to require federal employees, for the first time, to contribute to the Social Security system.
Tom Trabucco and Judy Park at the Federal News Radio studios.
"The system had been under fire for a while, but the big moving force was the enactment in 1983 of the Social Security amendments that brought ... future hires into the Social Security system," Trabucco said. "At that point, something had to be done to integrate the federal employees' retirement system with Social Security."
The legislative wrangling went on for more than two years.
With the passage of the Social Security amendments, federal groups knew they lost the "long battle" to keep feds out of the Social Security system, Park said. But rather than opposing, wholesale, the creation of a new system, federal unions began working to ensure it would be a good deal for federal employees.
Park said unions considered three factors essential to a new plan.
- Comparability. The plan would have to provide the same level of benefits as CSRS. That included both comparability in terms of future benefits and in the amount employees contributed to the system.
- Portability. This would ensure federal employees could take their accrued benefits with them if they left federal service.
- Sustainability. The new system would have to ensure that both the legacy CSRS system and funding for the new system would be fiscally sustainable.
In contrast to many of today's legislative battles, the process was largely bipartisan, Park said. Former Sen. Ted Stevens (R-Alaska) led the effort in the upper chamber and Rep. William D. Ford (D-Mich.) led the activity in the House.
Differences between the two plans
FERS and CSRS, the system it replaced, are very different.
CSRS is based on a simple formula, Park said. The federal annuity earned by retirees is directly based on years of federal service.
"So, it's an easy one to calculate ... It's just a simple staff retirement plan," Park said.
At the maximum length of service, federal retirees under CSRS could earn about 80 percent of their pre-retirement income, fully indexed to inflation.
FERS, on the other hand, is a three-part program.
- The base is Social Security, which covers most private sector workers as well.
- FERS also provides a defined benefit similar to CSRS but only half as generous. At an employee's minimum retirement age, this portion of FERS would provide 30 percent of an employee's pre-retirement salary.
- Finally, feds under FERS can make contributions to the Thrift Savings Plan, which are eligible for matching agency contributions.
When the new system was created, newly hired federal employees were automatically funneled into FERS, and existing feds had the option of joining or staying put in CSRS.
Only about 2 percent of CSRS employees decided to take the leap into the unknown.
Trabucco said mostly higher-paid, newer employees switched over, lured by the promise of the TSP. "It just seemed like a better deal for them because they weren't invested that heavily in the CSRS system," he said.
Later, in the 1990s, feds were again given the option to move out of CSRS and into FERS. Again, about 2 percent of eligible employees did so.
The age-old question — Which is better, CSRS or FERS? — is answered only by a vague, "it depends."
CSRS is clearly more beneficial for "lifers," people who stay in federal service their entire careers.
But FERS is likely a better system for employees who don't expect to be in federal service their entire careers or if they plan to also work in the private sector at some point.
One of the downsides of CSRS, according to analysts, was that it created "golden handcuffs," forcing people to stay in the government because its benefits were not portable. If employees left federal service, they would also leave behind their earned retirement benefits unless they agreed to defer them until they retired — albeit not indexed to inflation.
"The portability factor was a major one in the development of the FERS program, because there had been concern before about leaving government after so many years or leaving and coming back," Park said.
A portable retirement system doesn't only benefit employees, she said.
"I think the government, itself, benefits from people leaving for a while, getting experience in other areas — perhaps which they already had some expertise in — and then coming back and bringing that experience with them," she added.
TSP has also evolved
The TSP — just one portion of the FERS program — has also evolved over the years.
Trabucco, who served as the TSP board's spokesman for two decades, pointed to three major areas where the TSP has changed over time.
"It was a very limited program when it first came out," he said. "You could contribute small amounts of money; your investments were quite limited."
For example, some FERS employees were only able to contribute to the G Fund, the government-securities fund, and many others could invest only small portions of their income in the private funds, such as the C and F funds.
Employees were also restricted to contributing 10 percent of their basic pay to the TSP, and the Internal Revenue Service capped contribution rates at $7,000. Finally, the plan offered only a single tax treatment — pre-tax contributions.
Over time, those limits and restrictions were removed, Trabucco said.
Today, participants can contribute as much as $17,500 (the IRS limit) with additional contributions allowed for those over 55.
And while, initially, there were limits on how much money participants could invest in the private funds, "Now, you can put all of your money wherever you want to do it," Trabucco said. "You are in complete control of that."
In the last year, the TSP board also launched a Roth option, which allows participants to contribute after-tax contributions, which means withdrawals from the TSP, including earnings, are not taxed.
Over the past few years, the Federal Retirement Thrift Investment Board has been besieged by proposals from participants and lawmakers to include even more options, such as a "gold fund" or a "socially-responsible fund."
Trabucco said the clamor for more options was difficult for the agency. But ultimately, Congress decided to defer to the board's judgement about what options were feasible.
That made sense, he said, because the board is the only true fiduciary of the system, meaning it looks out only for the interests of the participants.
"We don't really care, in setting up funds in the TSP, whether it works for the insurance industry or the real estate industry," he explained. "We only care if it works for the participants."
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