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Institute for Workplace Studies----------------- Professor Samuel B. Bacharach

School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor---------------------- Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

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Congressional Research Service (CRS)

 

Federal Employees' Retirement System: The Role of the Thrift Savings Plan

Katelin P. Isaacs, Analyst in Income Security

March 8, 2013

http://www.fas.org/sgp/crs/misc/RL30387.pdf

[full-text, 25 pages]

 

Summary

Federal employees participate in one of two retirement systems. The Civil Service Retirement

System (CSRS) was established in 1920 and covers only employees hired before 1984.

Participants in the CSRS do not pay Social Security payroll taxes and they do not earn Social

Security benefits. For a worker retiring after 30 years of federal service, a CSRS annuity will be

equal to 56.25% of the average of his or her highest three consecutive years of basic pay.

 

The Social Security Amendments of 1983 (P.L. 98-21) required federal employees hired after

1983 to participate in Social Security. Because the CSRS was not designed to coordinate with

Social Security, Congress directed the development of a new retirement plan for federal workers

hired after 1983. The result was the Federal Employees' Retirement System (FERS) Act of 1986

(P.L. 99-335). The FERS has three elements: (1) Social Security, (2) the FERS basic retirement

annuity and FERS supplement, and (3) the Thrift Savings Plan (TSP).

 

The amount of the FERS basic retirement annuity is determined by three factors: (1) the salary

base, (2) the accrual rate, and (3) years of service. The salary base is the average of the worker's

highest three consecutive years of pay. Under FERS, the benefit accrual rate is 1.0% per year of

service, or 1.1% for workers retiring at the age of 62 or later with 20 or more years of service. A

worker with 30 years of service retiring at the age of 62 will receive a FERS pension equal to

33% of the average of his or her highest three consecutive years of pay, or about 32% of final

annual salary.

 

The TSP is a defined contribution retirement plan similar to the 401(k) plans provided by many

employers in the private sector. The income that a retired worker receives from the TSP will

depend on the balance in his or her account. In 2013, employees covered by FERS or CSRS can

contribute up to $17,500 to the TSP. Employees aged 50 or older can contribute an additional

$5,500. Contributions of up to 5% of pay made by workers under FERS are matched by the

federal government. Workers covered by CSRS can contribute to the TSP, but they receive no

matching contributions.

 

The TSP is a key element of the FERS, especially for workers at the upper ranges of the federal

pay scale. The Social Security benefit formula is designed to replace a greater share of income for

low-wage workers than for high-wage workers. The FERS basic annuity will replace about 32%

of final salary for an employee retiring at the age of 62 with 30 years of service. Higher-wage

federal workers need to contribute a greater percentage of pay to the TSP to reach the same level

of income replacement as lower-paid workers can achieve from just the FERS retirement annuity

and Social Security. At an annual rate of return of 6.0%, income from the TSP can replace about

33% of final pay for a federal employee who contributes 10% of pay over 30 years.

 

Contents

Introduction ...................................................................................................................................... 1

The FERS Basic Retirement Annuity .............................................................................................. 1

Retirement Age and Service Requirements ............................................................................... 1

Calculating the FERS Basic Retirement Annuity ...................................................................... 3

Salary Base .......................................................................................................................... 3

Accrual Rate ........................................................................................................................ 3

Social Security, and the "FERS Supplement" ..................................................................... 3

Cost-of-Living Adjustments ...................................................................................................... 4

The Thrift Savings Plan ................................................................................................................... 4

Employee and Agency Contributions ........................................................................................ 5

Maximum Allowable Thrift Savings Plan Contribution ............................................................ 6

Penalty on Early Withdrawals ................................................................................................... 6

Participant Loans ................................................................................................................. 7

Age-based Withdrawals and Hardship Withdrawals ........................................................... 7

TSP Investment Options ............................................................................................................ 8

TSP Withdrawal Options ........................................................................................................... 9

TSP Participation Rates ........................................................................................................... 10

Illustrations of the TSP's Role in Providing Retirement Income ................................................... 10

TSP Estimated Replacement Rates for a 30-Year Employee .................................................. 11

TSP Estimated Replacement Rates for a 20-Year Employee .................................................. 13

Additional Income Replacement from Social Security and the FERS Annuity ...................... 15

Workers Who Leave Federal Employment Before Reaching Retirement Age ........................ 16

The Thrift Savings Plan Enhancement Act of 2009 ....................................................................... 17

Conclusion ..................................................................................................................................... 17

 

Tables

Table 1. Minimum Retirement Age under FERS ............................................................................. 2

Table 2. Government Matching Rate on TSP Contributions by FERS Participants ........................ 5

Table 3. Annual Rates of Return for Thrift Savings Plan Funds ...................................................... 8

Table 4. Illustration of TSP Annuity Replacement Rates under FERS for an Employee Retiring in 2042 at Age 62 After 30 Years of Service ........................ 12

Table 5. Illustration of TSP Annuity Replacement Rates under FERS for an Employee Retiring in 2042 at Age 62 After 30 Years of Service ........................ 13

Table 6. Illustration of TSP Annuity Replacement Rates for FERS-Covered Employee Retiring in 2032 at Age 62 After 20 Years of Service ........................ 14

Table 7. Illustration of TSP Annuity Replacement Rates for FERS-Covered Employee Retiring in 2032 at Age 62 After 20 Years of Service ........................ 14

 

Appendixes

Appendix. Administration of the Thrift Savings Plan.................................................................... 19

Contacts

Author Contact Information........................................................................................................... 21

Acknowledgments ......................................................................................................................... 21

 

 

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