In a defined benefit plan, the employer promises to provide retirement benefits in the form of a life annuity or its actuarial equivalent. The employer's contributions plus the expected investment earnings on the contributions must be sufficient to pay the pension benefits that workers have earned under the plan. The employer is at risk for the full amount of retirement benefits that have been earned by employees. If the pension plan is underfunded, the employer must make additional contributions so that the promised benefits can be paid.
In a defined contribution plan, the employee bears the investment risk. For example, if the contributions to the plan have been insufficient or if the securities in which the contributions have been invested lose value or appreciate too slowly, the employee might reach retirement age without the financial resources needed to maintain his or her desired standard of living in retirement.
If this occurs, the worker might have little choice but to delay retirement. The amount of the retirement annuity is determined by three factors: 1 the number of years of service, which are prorated based on completed months, 3 2 the accrual rate at which benefits are earned for each year of service, and 3 the salary base to which the accrual rate is applied.
Under CSRS, a worker with at least 30 years of service can retire at the age of 55; a worker with at least 20 years of service can retire at the age of 60; and a worker with 5 or more years of service can retire at the age of Federal employees are fully vested in the FERS basic retirement annuity after five years of service.
The MRA for employees born between and is It will increase on an incremental basis to 57 for those born in or later. See Table 1. A worker who has reached the MRA and has completed at least 30 years of service can retire with an immediate, unreduced annuity. A worker with 20 or more years of service can retire with an unreduced annuity at age 60, and a worker with at least 5 years of service can retire at age Table 1.
Under FERS, an employee can retire with a reduced benefit at the minimum retirement age with at least 10 years of service. A commonly used measure of retirement income adequacy is the percentage of pre-retirement income replaced by pension income.
Replacement rates usually are based on the sum of the employee's pension benefit and Social Security benefit. Because retirees do not have the expenses that are associated with having a job including making contributions toward retirement benefits , most people are able to maintain their previous standard of living with less income than they had while working. The basic retirement annuity under both CSRS and FERS is determined by multiplying three factors: the salary base , the accrual rate , and the number of years of service.
This relationship is shown in the following formula:. The accrual rate is the pension benefit earned for each year of service, expressed as a percentage of the salary base. CSRS pension accrual rates increase with length of service. CSRS pensions equal 1. This formula yields a replacement rate of Some Members of Congress and congressional staff, and all federal law enforcement officers, firefighters, and air traffic controllers accrue benefits at higher rates under both CSRS and FERS than do other federal employees.
The rationale behind enhanced benefits for these employee groups is an expectation of limited federal service. For Members of Congress and congressional staff, this limited federal service is due to the uncertain tenure of congressional office.
All law enforcement officers and firefighters, and air traffic controllers enrolled in CSRS accrue benefits at the rate of 2. All law enforcement officers, firefighters, and air traffic controllers also accrue pension benefits at the rate of 1.
With enactment of P. The replacement rate for these Members and congressional staff is, therefore, the same as for regular FERS employees. For a regular federal employee with 30 years of service, CSRS provides a replacement rate equal to Estimating replacement rates under FERS is complicated by the fact that income from two of its components—Social Security and the TSP—will vary depending on the individual's work history, contributions to the TSP, and the investment performance of his or her TSP account.
Because Social Security retirement benefits cannot begin before the age of 62, Congress included in FERS a temporary supplemental benefit for workers who retire before age This "FERS supplement" is paid to workers who retire at the age of 55 or older with at least 30 years of service or at the age of 60 with at least 20 years of service.
It is also paid to law enforcement officers, firefighters, and air traffic controllers who retire at the age of 50 or later with 20 or more years of service. The supplement is equal to the estimated Social Security benefit that the individual earned while employed by the federal government.
It is paid only until the age of 62, regardless of whether the retiree chooses to apply for Social Security retired worker benefits at 62 years old. Cost-of-living adjustments COLAs protect the purchasing power of retirement benefits from being eroded by inflation in the prices of goods and services.
Under FERS, COLAs are applied only to annuities of retirees aged 62 or older, individuals who retired by reason of disability, and to survivor annuitants. The TSP is a defined contribution DC retirement plan similar to the k plans provided by many private-sector employers. The TSP is a key component of FERS, especially for workers in the middle and upper ranges of the federal pay scale, who are unlikely to achieve adequate retirement income—as measured by the replacement rate—from Social Security and the FERS basic annuity.
These employee contributions may be made on a pre-tax basis, in which case neither the contributions nor investment earnings that accrue to the plan are taxed until the money is withdrawn. Alternatively, P. Under a Roth contribution option, employee salary deferrals into a retirement plan are made with after-tax income. Federal workers covered by CSRS also may contribute to the TSP, but they receive no matching contributions from their employing agencies. TSP participants are immediately vested in their contributions to the plan, all federal matching contributions, and any interest, dividends, or capital gains attributable to those contributions.
Table 2. The value of an individual's TSP account at retirement will depend on how much he or she contributed to the TSP each year, the number of years over which contributions were made, and the investment earnings of the TSP funds. Lifecycle Funds are invested in various combinations of the five existing TSP funds.
According to the Federal Retirement Thrift Investment Board, participants who invest in these funds "benefit from having professionally designed asset allocation models available to optimize their investment performance by providing portfolios that are appropriate for their particular time horizon. When a particular Lifecycle Fund reaches its target date, it is automatically rolled into the "L Income Fund," to produce income for TSP participants who anticipate withdrawing from their TSP accounts in the near term or who are already receiving TSP monthly payments.
Historical rates of return for the TSP are shown in Table 3. For the years before , the rates of return for the S and I funds are the rates of return for the indices on which those funds are based. Table 3. Note s : Rates of return for the TSP funds are shown net of expenses. Rates of return for the S and I funds prior to are the rates of return for the indices on which those funds are based. Because these funds were not TSP investment options prior to , TSP-produced measures of average returns for the S and I funds may not match these calculations because they would be based on a different time period i.
TSP Lifecycle Funds were first established in Prior years are labeled as Not Applicable NA. Annual rates of return for the L Income Fund, which produces income for TSP participants who anticipate withdrawing from their TSP accounts in the near term or who are already receiving TSP monthly payments, are provided.
An employee can withdraw funds from the TSP after leaving federal service in three ways. Funds can be withdrawn. A retiree can choose to have payments begin immediately or at a later date. However, the penalty does not apply if the individual has retired and is aged 55 or older, or if the withdrawals are taken as a series of substantially equal periodic payments based on the person's remaining life expectancy.
Under CSRS, employees contribute 7. Under FERS, employees first hired before contribute 0. FERS employees first hired in contribute 3. FERS employees first hired after contribute 4.
Table 4. Current Law Prior to P. Increases Enacted Under P. Certain special categories of FERS employees—including certain Members of Congress, certain congressional staff, federal law enforcement officers, federal firefighters, air traffic controllers, and nuclear waste couriers—contribute an additional 0.
Under P. Nor is the amount of a federal worker's pension based on the amount of his or her contributions. All contributions are paid into—and all benefits are paid out of—the Civil Service Retirement and Disability Fund. Pre-funding of future pension obligations is required because there is always the possibility that a firm could go out of business. Your agency withholds your contributions for the Basic Benefit and Social Security from your pay as payroll deductions.
Your agency pays its part too. Then, after you retire, you receive annuity payments each month for the rest of your life. Eligibility is determined by your age and number of years of creditable service. If you are disabled, age requirements may be affected. If you have been separated from federal service for more than 30 days, submit your application to the U.
Or you may write to: U. For additional information on this benefit or to contact the program, please see below. Federal government websites always use a. Toggle navigation. Browse by Agency. Browse by Category. Other Resources. Share sensitive information only on official, secure websites. The FERS retirement system became effective in , and almost all new Federal civilian employees hired after are automatically covered by this new system.
The retirement system is a three-tiered retirement plan. The three components are:. The amount of this contribution has changed several times recently, due to changes in Federal law.
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