Order Code 98-810 EPW
CRS Report for Congress
Received through the CRS Web
Federal Employees’ Retirement System:
Benefits and Financing
Updated June 6, 2003
Patrick Purcell
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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Federal Employees’ Retirement System:
Benefits and Financing
Summary
Most civilian federal employees who began their careers before 1984 are
covered by the Civil Service Retirement System (CSRS). Federal employees first
hired in 1984 or later are covered by the Federal Employees’ Retirement System
(FERS). Both CSRS and FERS require participants to contribute toward the cost of
the plans through a payroll tax. Employees who are covered by CSRS contribute
7.0% of pay to the Civil Service Retirement and Disability Fund (CSRDF). They do
not pay Social Security taxes and are not eligible for Social Security benefits.
Employees who are covered under FERS contribute 0.8% of pay to the civil service
trust fund and 6.2% of pay to Social Security on salary up to the maximum taxable
wage base ($87,000 in 2003).
The normal retirement age under both CSRS and FERS is 55 for workers who
have at least 30 years of service; however, the FERS normal retirement age will
increase beginning with workers born in 1948 and eventually will reach age 57 for
employees born in 1970 or later. FERS and CSRS both allow retirement with an
unreduced pension at age 60 for employees with 20 or more years of service, and at
age 62 for workers with at least 5 years of service.
The Thrift Savings Plan (TSP) is a defined contribution retirement plan similar
to the “401(k)” plans provided by many employers in the private sector. In 2003,
employees covered by FERS can make voluntary contributions equal to the lesser of
13% of pay or $12,000. Employee contributions of up to 5% of pay are matched by
the federal government. Federal workers covered by CSRS also can participate in the
TSP, but their total contribution in 2003 is limited to 8% of pay, and they receive no
matching contributions from their employing agency.
The Office of Personnel Management (OPM) estimates the cost of CSRS to be
24.4% of payroll. The federal government pays 17.4% of payroll and the other 7.0%
is paid by employees. OPM estimates the cost of the FERS basic annuity at 11.5%
of payroll. The federal government contributes 10.7% of payroll with the other 0.8%
paid by employees. There are three other employer costs for employees covered by
FERS. Social Security taxes are 6.2% of payroll on both the employee and the
employer; agencies automatically contribute an amount equal to 1% of employee pay
to the TSP; and agencies also make matching contributions to the TSP.
At the start of FY2001, taking into account benefits yet to be earned in addition
to benefits that have already been accrued, the Civil Service Retirement and
Disability Fund had an unfunded liability of $509 billion, all of which is attributable
to CSRS and none to FERS. Although the civil service trust fund has an unfunded
liability, it is not in danger of becoming insolvent. At no point over the next 75 years
will the fund be exhausted. All of the monies of the Civil Service Retirement and
Disability Trust Fund are invested in special-issue U.S. Treasury bonds. Congress
could permit the trust fund to invest in other assets – such as corporate stocks and
bonds – but the effects of such a change on the federal budget and on government
ownership of private-sector assets would deserve careful consideration.

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Contents
Background on Retirement Plan Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Origins of the Federal Civilian Retirement System . . . . . . . . . . . . . . . . 2
Eligibility and Benefit Amounts under FERS and CSRS . . . . . . . . . . . . . . . 3
Retirement age and years of service . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Retirement Income Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Replacement rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Cost-of-living Adjustments (COLAs) . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Thrift Savings Plan: An Integral Component of FERS . . . . . . . . . . . . . 7
Increase in allowable contributions to the Thrift Savings Plan . . . . . . . 7
Investment options in the TSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
TSP withdrawal options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Employer and Employee Contributions to CSRS and FERS . . . . . . . . . . . . 11
The Role of Employee Contributions . . . . . . . . . . . . . . . . . . . . . . . . . 12
Financing Pension Benefits for Federal Employees . . . . . . . . . . . . . . . . . . 15
Federal Trust Funds and Pre-Funding of Benefits . . . . . . . . . . . . . . . . 15
Investment Practices of Federal Trust Funds . . . . . . . . . . . . . . . . . . . . 16
List of Tables
Table 1. Earliest Retirement Age under FERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 2. Government Matching Rate on TSP Contributions
by FERS Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Table 3. Annual Rates of Return for Thrift Savings Plan Funds . . . . . . . . . . . . 10

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Federal Employees’ Retirement System:
Benefits and Financing
Background on Retirement Plan Design
Employers establish retirement programs both to help them attract workers with
valuable skills and to enable older workers to retire without facing the prospect of
inadequate income. Employers must balance the goals of providing adequate
retirement income with controlling the cost of the retirement program. For
employers in the private sector, another important consideration is the regulatory
environment in which their retirement plans must operate. Private-sector retirement
plans must comply with the relevant provisions of federal law, including the
Employee Retirement Income Security Act (ERISA), the Age Discrimination in
Employment Act (ADEA), and the Internal Revenue Code.
Two Types of Retirement Plans. Retirement programs generally can be
classified as either defined benefit plans or defined contribution plans. In a defined
benefit plan, a worker’s retirement benefit is typically paid as a lifelong annuity based
on years of service and average salary in the last few years before retirement.1 A
defined contribution plan is much like a savings account maintained by the employer
on behalf of each participating employee. The employer contributes a specific dollar
amount or percentage of pay into the account, which is usually invested in stocks or
bonds. In some cases, the amount that the employer contributes depends on the
amount the employee contributes from his or her pay. When the worker retires, the
retirement benefit that he or she receives will depend on the balance in the account,
which is the sum of all the contributions that have been made plus interest, dividends,
and capital gains (or losses). The retiring worker usually has the choice of receiving
these funds in the form of a lifelong annuity, as a series of fixed payments over a
period of years, or as a lump sum.
One important difference between these two types of retirement plans is that in
a defined benefit plan it is the employer who bears the financial risk, while in a
defined contribution plan it is the employee who bears the financial risk. In a defined
benefit plan, the employer promises to provide retirement benefits in the form of a
lifelong annuity or its actuarial equivalent.2 To pay the promised benefits, the
employer must make contributions to a pension fund that is invested in stocks, bonds,
real estate, or other assets. The employer’s contributions to this fund plus the
1 A joint and survivor annuity pays a smaller initial benefit in exchange for a guarantee that
the worker’s spouse will continue to receive an annuity after the retired worker’s death.
2 The actuarial equivalent of a lifelong annuity is a lump-sum payment that could purchase
an annuity of equal value, assuming a certain interest rate and life expectancy.

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CRS-2
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 promised to employees and their
survivors. 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 employer bears no risk beyond its obligation
to contribute a specified dollar amount or percentage of pay to each employee’s
retirement account. In these plans, the employee bears the risk that his or her
retirement account will be sufficient to provide adequate retirement income. If the
contributions to the account are insufficient, or if the securities in which the account
is 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. If this occurs, the worker might have little choice but to delay retirement.
CSRS and FERS. Most civilian federal employees who began their careers
before 1984 are covered by the Civil Service Retirement System (CSRS). Employees
covered by CSRS do not pay Social Security taxes and are not eligible for Social
Security benefits. Federal employees first hired in 1984 or later are covered by the
Federal Employees’ Retirement System (FERS). All federal employees who are
covered under FERS pay Social Security taxes and are eligible for Social Security
benefits. Federal employees enrolled in either CSRS or FERS also may participate
in the Thrift Savings Plan (TSP), which is a defined contribution plan. Only
employees covered under FERS, however, are eligible for employer matching
contributions to the TSP.
Origins of the Federal Civilian Retirement System. Congress passed
the Civil Service Retirement Act of 1920 (P.L. 66-215) to provide pension benefits
for civilian federal employees. In 1935 Congress created the Social Security system
for workers in the private sector. In the 1950s, Congress allowed state and local
governments to bring their employees into Social Security, and today about three-
fourths of state and local employees are covered by Social Security. Federal
employees remained outside of Social Security until Congress passed the Social
Security Amendments of 1983 (P.L. 98-21). This law required all civilian federal
employees hired into permanent employment after January 1, 1984 to be covered by
Social Security.
Enrolling federal workers in both CSRS and Social Security would have
resulted in substantial duplication of benefits and would have required employees to
contribute more than 13% of pay to the two programs. Consequently, Congress
directed the development of a new retirement system for federal workers with Social
Security as its cornerstone. The new plan was intended to incorporate many features
of the retirement programs of large employers in the private sector. The result of this
effort was the Federal Employee Retirement System Act of 1986 (P.L. 99-335),
enacted on June 6, 1986. FERS has three elements:
! Social Security,
! the FERS basic annuity (a defined benefit plan), and
! the Thrift Savings Plan (a defined contribution plan).

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CRS-3
FERS now covers all federal employees initially hired into federal employment
on or after January 1, 1984 and employees who voluntarily switched from CSRS to
FERS during “open seasons” in 1987 and 1998.3 Former federal employees who
were vested in CSRS and are later rehired by the government after a break in service
can either join FERS or participate in the “CSRS offset plan.” Under this plan, 6.2
percentage points of the employee’s payroll contribution and an equal share of the
employer contribution are diverted from CSRS to the Social Security trust fund.
Later, the retiree’s CSRS annuity is reduced (offset) by the amount of his or her
Social Security benefit. Both CSRS and the CSRS offset program will terminate
with the death of the last worker or survivor still covered under that program, which
the Office of Personnel Management estimates will occur around the year 2070.
Eligibility and Benefit Amounts under FERS and CSRS
Under both CSRS and FERS, two factors determine an employee’s eligibility
for a retirement annuity: age and years of service. The amount of the worker’s
retirement annuity is determined by three factors: the number of years of service,
the accrual rate at which benefits are earned by for each year of service, and the
salary base to which the accrual rate is applied.
Private-sector plans usually provide two retirement options related to age and
years of service. Most plans define a “normal retirement age” at which workers can
retire with an immediate, unreduced pension. According to the U.S. Department of
Labor, among workers in private establishments that offered defined-benefit pension
plans in 2000, 21% were in plans with a normal retirement age of 62 and 49% were
in plans with a normal retirement age of 65.4 Among workers whose employer had
set the normal retirement age at age 62, most also had a minimum service
requirement of 10 years, but among workers whose pension plan had a normal
retirement age at 65, only 39% also had to meet a length-of-service requirement.
Many firms in the private-sector also have an option for “early retirement” at a
reduced pension. In 2000, 77% of employees in private establishments who were
covered by a defined benefit pension plan had the option to take early retirement with
a reduced benefit. Two-thirds of these workers could take early retirement at age 55,
usually with a further requirement that they complete at least 5 years of service. A
typical reduction in the benefit amount for these workers is 5% for each year below
the normal age of retirement. For example, a worker retiring at age 55 in a defined
benefit plan with a normal retirement age of 62 would have his or her pension
permanently reduced by 35% below the amount that would have been paid to an
employee retiring at age 62 with the same salary and years of service.
Retirement age and years of service. Under CSRS, a worker with at least
30 years of service can retire at age 55. A worker with at least 20 years of service can
retire at age 60, and one with 5 or more years of service can retire at age 62.
3 The open season held from July through December 1998 was authorized by P.L. 105-61,
enacted on October 10, 1997.
4Employee Benefits in Private Industry in the United States, 2000. U.S. Department of
Labor, Bureau of Labor Statistics, Bulletin 2555, January 2003.

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CRS-4
Federal employees are fully vested in the FERS basic retirement annuity after
5 years of service. The earliest age at which a worker can retire under FERS is 55 for
workers born before 1948. The retirement age under FERS will increase beginning
with workers born in 1948 and eventually will reach age 57 for those born in 1970
or later. (See Table 1.) A worker who has reached the earliest retirement age 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 one with at least 5 years of service can retire at age 62.
Table 1. Earliest Retirement Age under FERS
Year of birth
Earliest retirement age
1947 or earlier
55 years
1948
55 years, 2 months
1949
55 years, 4 months
1950
55 years, 6 months
1951
55 years, 8 months
1952
55 years, 10 months
1953 to 1964
56 years
1965
56 years, 2 months
1966
56 years, 4 months
1967
56 years, 6 months
1968
56 years, 8 months
1969
56 years, 10 months
1970 or later
57 years
An employee covered by FERS can retire with a reduced benefit at the earliest
retirement age if he or she has completed at least 10 years of service. The retirement
benefit is permanently reduced by 5% multiplied by the difference between the
normal retirement age and the retiree’s age at the time the annuity begins. For
example, an employee with 10 years of service who retires at 55 would receive a
pension benefit that is reduced by 35% below the amount that would be paid to an
individual with the same salary and years of service who retired at age 62.
Retirement Income Adequacy
Replacement rates. A commonly used measure of retirement income
adequacy is the percentage of pre-retirement income replaced by pension income.
This measure – the replacement rate – is expressed by the following ratio:
annual retirement benefits
annual pre-retirement wages
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, most people are able to maintain their previous

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CRS-5
standard of living with less income than they had while working. Although there is
no fixed rule about what comprises an adequate replacement rate, most pension
analysts believe retirement income should replace 60% to 80% of pre-retirement
income.5 Workers who had low-wage jobs generally need a replacement rate near the
high end of this range because a higher proportion of their income is expended on
non-discretionary items, such as food, clothing, shelter, health care, and taxes.
Determinants of the Replacement Rate. 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:
Pension Amount = salary base x accrual rate x years of service

Salary Base. In both CSRS and FERS, the salary base is the average of the
highest three consecutive years of base pay.6 This is often called “high-3” pay.
Accrual Rates. The accrual rate is the pension benefit earned for each year
of service, expressed as a percentage of the salary base. Under FERS, workers
accrue retirement benefits at the rate of 1% per year. A worker with 30 years of
service will have accrued a pension benefit equal to 30% of high-3 pay. For
employees in FERS who have at least 20 years of service and who work until at least
age 62, the accrual rate is 1.1% for each year of service.7 For example, a worker
covered by FERS who retires at 61 with 29 years of service will receive a FERS
annuity equal to 29% of his or her high-3 average pay. Delaying retirement by one
year would increase the FERS annuity to 33% of high-3 average pay (30 x 1.1 = 33).
Federal employees covered under CSRS accrue pension benefits at rates that
increase with length of service. Workers covered by CSRS accrue benefits equal to
1.5% of high-3 pay for each of their first 5 years of service; 1.75% of high-3 pay for
each year in years 6 through 10; and 2.0% of high-3 pay for each year of service after
the tenth year. These accrual rates yield a replacement rate of 56.25% for a worker
who retires with 30 years of federal service. CSRS accrual rates are higher than the
accrual rates under FERS because employees covered by CSRS do not pay Social
Security payroll taxes or receive Social Security retirement benefits.
Members of Congress, congressional staff, federal law enforcement officers and
federal firefighters accrue benefits at higher rates under both CSRS and FERS than
do other federal employees. Under CSRS, Members of Congress and congressional
staff accrue benefits at the rate of 2.5% for each year of service. This results in a
5President’s Commission on Pension Policy, Coming of Age: Toward a National Retirement
Income Policy (Washington DC, USGPO, 1981), and U.S. General Accounting Office,
Federal Pensions: Thrift Savings Plan Has Key Role in Retirement Benefits, HEHS-96-1,
October 1995.
6This calculation is based on nominal or “current dollars” rather than indexed or “constant
dollars.”
7Because FERS coverage began in 1984, no federal workers will have 20 years of service
under FERS until 2004.

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CRS-6
replacement rate of 75% after 30 years of service. Law enforcement officers and
firefighters accrue benefits at the rate of 2.5% for each of their first 20 years of
service and 2.0% for each year thereafter. Under FERS, Members of Congress,
congressional staff, law enforcement officers and firefighters accrue pension benefits
at the rate of 1.7% per year for their first 20 years of service and 1.0% per year for
years of service after the 20th year. These accrual rates yield a pension equal to 34%
of the FERS salary base after 20 years of service and 44% after 30 years of service.
Replacement Rates for Federal Retirees. For a worker with 30 years of
federal employment, CSRS will provide a replacement rate equal to 56.25% of high-
3 average pay, and a slightly lower percentage of final annual pay. Estimating
replacement rates under FERS is complicated by the fact that income from two of its
components — Social Security and the TSP — will vary greatly depending on the
individual’s work history, contributions to the TSP, and the investment performance
of his or her TSP account. For detailed estimates of the replacement rates under
FERS, see CRS Report RL30387, Federal Employees’ Retirement System: The Role
of the Thrift Savings Plan.
Early Retirement, Social Security and the “FERS Supplement”.
Because Social Security retirement benefits cannot begin before age 62, Congress
included in FERS a temporary supplemental benefit for workers who retire before
age 62. This benefit, the “FERS supplement” is paid to workers who retire at age
55 or older with at least 30 years of service or at age 60 with at least 20 years of
service. It is paid only until age 62, regardless of whether or not the retiree chooses
to apply for Social Security at 62. The supplement is equal to the estimated Social
Security benefit for which the worker will become eligible at age 62, but is based
only on the portion of Social Security payments that are attributable to the worker’s
years of federal employment.
Cost-of-living Adjustments (COLAs). Cost-of-living adjustments protect
the purchasing power of retirement benefits from being eroded by inflation in the
prices of goods and services. COLAs increase the nominal amount of retirement
income, but they do not raise the real value of this income, provided that they are
based on an accurate measure of inflation. In 1972, Congress passed legislation
providing for automatic cost-of-living adjustments (COLAs) for Social Security.
Congress passed this legislation in order to save money, because previous ad hoc
increases in Social Security benefits had been criticized for being too strongly subject
to political influences and, consequently, overly generous relative to the rate of
inflation. Social Security COLAs are based on the change in the Consumer Price
Index for Urban Wage and Clerical Workers (CPI-W). Private-sector pension plans
typically do not provide automatic COLAs. According to the Bureau of Labor
Statistics, only 7% of employees in private establishments who participated in a
defined benefit pension plan in 2000 were covered by a plan that provided automatic
post-retirement cost-of-living adjustments.

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CRS-7
COLAs have been in effect since 1962 for CSRS. CSRS annuities are fully
indexed for inflation, as measured by the CPI-W.8 As a cost-control measure,
Congress provided for limited indexing of the basic annuity under FERS. Under
FERS, the basic annuity is fully indexed if inflation is under 2% per year and
partially indexed if inflation exceeds 2%. If the CPI-W increases by up to 2%, then
the FERS monthly benefit amount increases by the same percentage. If the CPI-W
increases by 2% to 3%, the FERS annuity increases by 2%. If the CPI-W increases
by more than 3%, the FERS annuity increases by the rise in the CPI-W minus one
percentage point. As a further restraint on the costs associated with COLAs, FERS
provides COLAs only to retirees who are age 62 or older, annuitants of any age who
are retired by reason of disability, and to survivor annuitants of any age.
The Thrift Savings Plan: An Integral Component of FERS
The Thrift Savings Plan (TSP) is a defined contribution retirement plan similar
to the “401(k)” plans provided by many employers in the private sector.9 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, the FERS basic annuity,
and the federal government’s automatic contribution of 1% of pay to the TSP.
For all federal workers covered by FERS, the agency where they are employed
contributes an amount equal to 1% of the employee’s base pay to the TSP, whether
or not the employee chooses to contribute anything to the plan. In 2003, workers
covered by FERS can make voluntary contributions up to the lesser of 13% of pay
or the annual limit under of section 402(g) of the Internal Revenue Code. The
maximum permissible contribution to the TSP in 2003 is the lesser of $12,000 or
13% of pay. Contributions to the TSP are made on a pre-tax basis, and both the
employee’s contribution and any investment earnings are free from taxes until the
money is withdrawn from the account. In addition, employee contributions of up to
5% of pay are matched by the federal government, according to the schedule shown
in Table 2. Federal workers covered by CSRS also may participate in the TSP, but
their total contribution in 2003 is limited to 8% of pay, and they receive no matching
contributions from their employing agency.
Increase in allowable contributions to the Thrift Savings Plan.
Under the terms of the Consolidated Appropriations Act of 2000 (P.L. 106-554), the
8 Under both CSRS and FERS, COLAs are effective in January each year, based on the
percentage increase in the CPI-W for the most recent third quarter (July-September)
compared to the previous third quarter. In 1994, 1995, and 1996 COLAs for civil service
annuitants were delayed from January until April as a means of achieving budgetary savings.
See CRS Report 94-834, Cost-of-Living Adjustments for Federal Civil Service Annuities
for a complete history of COLAs under CSRS and FERS.
9“401(k)” refers to the section of the Internal Revenue Code that authorizes deferral of
income taxes on contributions to retirement savings plans and the interest and dividends on
those contributions until funds are withdrawn. According to the Bureau of Labor Statistics,
46% of employees in private-sector establishments with 100 or more meployees participated
in a defined contribution plan in 2000.

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CRS-8
maximum allowable employee contribution to the TSP will increase by 1 percentage
point each year from 2001 to 2005. The maximum permissible contribution will rise
by 1 percentage point each year until it reaches 15% for FERS and 10%for CSRS in
2005. The percentage-of-pay limitations on contributions to the TSP will then be
eliminated. Employee contributions to the TSP will remain subject to the limit under
IRC § 402(g), which will be $15,000 in 2006.
Table 2. Government Matching Rate on TSP
Contributions by FERS Participants
(as a percentage of salary)
Employee
Government
Total
0.0%
1.0%
1.0%
1.0%
2.0%
3.0%
2.0%
3.0%
5.0%
3.0%
4.0%
7.0%
4.0%
4.5%
8.5%
5.0% or more
5.0%
10.0%

The TSP and portability of benefits. The TSP adds an important element
of portability to retirement benefits that was absent under CSRS. All TSP
participants are immediately vested in their contributions to the plan, all federal
matching on those contributions, and any growth in the value of their investment
from interest, dividends, and capital gains. Participants are fully vested in the 1%
agency automatic contributions to the TSP after 3 years (2 years for congressional
employees and executive-branch political appointees). Workers can therefore move
more easily between federal employment and jobs in other sectors of the economy,
while carrying a significant portion of their accrued retirement benefits with them.
Investment options in the TSP. The contribution that the TSP makes to
a federal employee’s retirement income will depend on the value of the account at
retirement. The value of the account in turn will depend on the worker’s salary
during his or her career, the percentage of salary that was contributed to the TSP, the
number of years over which investment earnings accrued, and the performance of the
funds into which the employee directed the contributions. Participants in the TSP
may choose among five funds in which they can invest their TSP contributions:
! The “C” fund is a common stock index fund consisting of the corporations
that are represented in Standard and Poor’s Index of 500 common stocks.
These comprise most of the largest and best-known corporations in the United
States. Because stock prices can both rise and fall, the value of investments
in the “C” fund may both increase and decrease over time. Over the period
from 1988 through 2002, the “C” fund earned an average annual rate of return
of 11.1%.

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CRS-9
! The “F” fund, or “Fixed Income Index Investment Fund,” is a bond index fund
that tracks the performance of the Shearson Lehman Brothers Aggregate
(SLBA) bond index. These securities consist of government bonds, corporate
bonds, and mortgage-backed securities. Like the “C” fund, the securities
purchased by the “F” fund may fluctuate in value and investments in this fund
are thus subject to some risk. From 1988 through 2002, the “F” fund earned
an average annual rate of return of 8.2%.
! The “G” fund consists of U.S. government securities and pays interest equal
to the average rate of return on long-term U.S. government bonds. The “G”
fund is the safest of the TSP funds because the principal is guaranteed not to
decline in value. Over the period from 1988 through 2002, the “G” fund
earned an average annual rate of return of 6.9%.
! The Small Capitalization Stock Index Fund (the “S” fund) is invested in a
portfolio of common stocks that matches the distribution of stocks in the
Wilshire 4500 index. The Wilshire 4500 represents smaller companies than
those in the S&P 500. Over the period from 1988 through 2002, the stocks
represented in the “S” fund earned an average annual rate of return of 10.6%
! The International Stock Index Investment Fund (the “I” fund) invests in the
common stocks of foreign corporations represented in the Morgan-Stanley
EAFE (Europe, Australia-Asia, Far East) index. Over the period from 1988
through 2002, the stocks represented in the “I” fund earned an average annual
rate of return of 3.4%10
Historical rates of return for the five TSP funds are shown in Table 3. For the
years before 2001, the rates of return for the S and I funds represent the rates of
return for the indices on which those funds are based.
10 Both the “S” fund and the “I” fund were added to the TSP in May 2001 in accordance
with the Thrift Savings Plan Act of 1996 (P.L. 104-208).

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CRS-10
Table 3. Annual Rates of Return for Thrift Savings Plan Funds
Year
G Fund
C Fund
F Fund
S Fund
I Fund
1988
8.8%
11.8%
3.6%
20.5%
26.1%
1989
8.8
31.0
13.9
23.9
10.0
1990
8.9
-3.2
8.0
-13.6
-23.6
1991
8.1
30.8
15.7
43.5
12.2
1992
7.2
7.7
7.2
11.9
-12.2
1993
6.1
10.1
9.5
14.6
32.7
1994
7.2
1.3
-3.0
-2.7
7.8
1995
7.0
37.4
18.3
33.5
11.3
1996
6.8
22.8
3.7
17.2
6.1
1997
6.8
33.2
9.6
25.7
1.6
1998
5.7
28.4
8.7
8.6
20.1
1999
6.0
21.0
-0.8
35.5
26.7
2000
6.4
-9.1
11.7
-15.8
-15.2
2001
5.4
-11.9
8.6
-2.2
-15.4
2002
5.0
-22.1
10.3
-18.1
-16.0
1988-2002
6.9% 11.1% 8.2% 10.6% 3.4%
Sources: www.tsp.gov, www.wilshire.com, www.msci.com.
Note: Rates of return for the C, G, and F funds are shown net of TSP expenses.
TSP withdrawal options. At retirement, there are three ways an employee
can withdraw funds from the TSP. Funds can be withdrawn
! as a life annuity,11
! in a single “lump-sum” payment12, or
! in a series of monthly payments, either for a fixed number of months or in a
fixed dollar amount, until the account is depleted.
The retiree can choose to have payments begin immediately or at a later date.
There is a 10% tax penalty for those who retire before the year in which they turn 55
if they withdraw funds before age 59½, either as a lump sum or as a series of fixed
payments (unless the payments are based on life expectancy, as in an annuity).
11 An annuity is a contract between the individual and a financial institution, usually an
insurance company, in which the individual exchanges a lump sum for a guaranteed stream
of monthly payments for the rest of his or her life, and often for the lifetime of a surviving
spouse. The insurance company invests the lump sum and uses the earnings of the
investment as well as the principal to make payments to the annuitant. Payments are based
both on the estimated rate of return from the investment and actuarial estimates of the
annuitant’s remaining life expectancy at retirement.
12 A new TSP record-keeping system will go online in 2003. In addition to providing daily
valuation of funds, it will allow retirees to withdraw funds from the TSP in the form of a
partial lump-sum withdrawal with the remainder paid as an annuity.

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CRS-11
Employer and Employee Contributions to CSRS and FERS
Both CSRS and the FERS basic annuity are defined-benefit retirement plans.
In most defined benefit plans in the private sector, the employer alone contributes
money to the pension fund from which pension benefits are paid. The Bureau of
Labor Statistics reports that in 2000, only 5% of employees in private establishments
who participated in a defined benefit retirement plan were required to contribute to
the plan. Most employees of state and local governments, however, are required to
contribute to their defined benefit plan. In 1998, according to the Bureau of Labor
Statistics, 78% of state and local government employees who were covered by a
defined benefit plan were required to contribute to the plan.
Both CSRS and FERS require participants to contribute toward the cost of the
plans through a payroll tax. Employees who are covered by CSRS contribute 7.0%
of base pay to the Civil Service Retirement and Disability Fund (CSRDF). Workers
covered by FERS contribute 0.8% of pay to the Fund.13 Federal employees covered
by FERS also pay 6.2% of pay in Social Security taxes on salary up to the maximum
taxable wage base ($87,000 in 2003). Participants in CSRS are not covered by Social
Security.14 Congress made the sum of FERS contributions and Social Security
payroll taxes equal to the CSRS contribution rate so that workers with the same
salary would have the same take-home pay, regardless of whether they were covered
by CSRS or FERS. Members of Congress contribute 8.0% of salary to the CSRDF
if covered by CSRS and 1.3% of salary if covered by FERS. All members of
Congress pay Social Security taxes, regardless of whether they are covered by CSRS
or FERS.15
In the private sector, employers are required by the Employee Retirement Income
Security Act of 1974 (ERISA) to pre-fund the benefits that workers earn under
defined benefit plans. Any unfunded liability of the pension plan must be amortized
over a period of not more than 30 years. Pre-funding of future pension obligations
is beneficial for workers because there is always the possibility that a firm could go
out of business. A firm that closes down will no longer have revenues to pay its
pension obligations, and if these obligations were not pre-funded, retirees and
employees of the firm would lose some or all of their present and future pension
benefits. A federal agency, the Pension Benefit Guarantee Corporation (PBGC)
13 As mandated by the Balanced Budget Act of 1997 (P.L. 105-33), employee contribution
rates under both CSRS and FERS rose by 0.25% in January 1999 and by a further 0.15% in
January 2000. Another increase of 0.1% was scheduled for January 2001. Employee
contribution rates were then to revert to their base levels — 7.0% under CSRS and 0.8%
under FERS — on January 1, 2003. The increases in employee contribution rates under
both CSRS and FERS were repealed (effective December 31, 2000) by the FY2001
Department of Transportation Appropriations Act (P.L. 106-346). The repeal applies to all
federal employees except for members of Congress, who continued to pay the higher
contribution rate mandated by BBA-97 until January 1, 2003.
14Former federal employees are eligible for Medicare at age 65, regardless of whether they
were covered by CSRS or FERS, and federal workers in both programs pay the Hospital
Insurance (HI) payroll tax of 1.45% on all salary and wages.
15 See also CRS Report RL30631, Retirement Benefits for Members of Congress.

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CRS-12
collects premiums from employers to finance insurance against the failure of firms
that have unfunded pension liabilities.16 PBGC insurance does not guarantee that a
retiree will receive 100% of the pension benefits that were promised by an employer.
The PBGC guarantees a maximum annual benefit of $43,977 in 2003.
The federal government requires firms in the private sector to pre-fund
employees’ pension benefits to ensure that if a firm goes out of business, there will
be funds available to pay its pension obligations. Although the federal government
is unlikely to “go out of business,” there are other reasons that Congress requires
federal agencies and their employees to contribute money to the Civil Service
Retirement and Disability Fund.17 First, by providing a continuous source of budget
authority, the trust fund allows benefits to be paid on time, regardless of any delays
that Congress may experience in passing its annual appropriations bills. Secondly,
the balance in the trust funds acts as a barometer of the government’s future pension
obligations. Given a fixed pension plan contribution rate and benefit structure, a
rising trust fund balance indicates that the government is incurring obligations to
make higher pension payments in the future.18 Finally, prefunding pension
obligations forces federal agencies to recognize the full cost of their personnel when
requesting annual appropriations from Congress. Otherwise, these costs would be
recognized only in the central administrative accounts of the Office of Personnel
Management, and not by the agencies where the costs are incurred.
The Role of Employee Contributions. Federal employees must contribute
either to CSRS or FERS, but employee contributions pay for a comparatively small
part of the retirement annuities paid by these programs. Contributions to CSRS and
FERS are not deposited into individual employee accounts. 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. There are, however, both budgetary and actuarial
reasons that federal employees are required to contribute to CSRS and FERS.
Employee Contributions from a Budgetary Perspective. Employee
contributions generate revenue that reduces the proportion of pension costs that must
be borne by the public through income taxes and other taxes. In the context of the
federal budget process, employee contributions may make federal workers more
conscious of their role as “stakeholders” in these programs, thus generating some
protection for federal retirement benefits during the annual budget debates. In
FY2002, employee contributions to CSRS and FERS totaled $4.0 billion, equal to
5.0% of the total income of the Civil Service Retirement and Disability Fund. The
other major sources of revenue to the CSRDF are agency contributions, contributions
of the U.S. Postal Service on behalf of its employees, interest on the federal bonds
16 The premium, set by Congress, is currently $19 per participant per year. Underfunded
plans must pay an additional variable rate premium because of their higher risk of default.
17In general, state and local governments do not face this risk either; however; they are more
like private businesses in that they have in some cases defaulted on their public debts.
18As is explained later in this report, a large trust fund balance does not by itself make it
easier to pay these benefits when they come due. This is a fundamental distinction between
the federal government and other employers in their ability to prefund benefits.

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CRS-13
held by the fund, and a transfer from the general revenues of the U.S. Treasury. This
transfer is necessary because the costs of the older of the two federal retirement
programs, CSRS, are not fully covered by employee and agency contributions. FERS
benefits are required by law to be fully funded by the sum of contributions from
employees and their employing agencies.
Employee Contributions in Actuarial Terms. Actuaries calculate the
cost of pension programs in terms of “normal cost.” The normal cost of a pension
plan is the level percentage of payroll that must to be set aside each year to fund the
expected pension benefits that will be paid to all members of an employee group and
their surviving dependents. Normal cost is based on estimates of attrition and
mortality among the workforce and estimates of future interest rates, salary increases,
and inflation.
The Office of Personnel Management (OPM) estimates the normal cost of
CSRS to be 24.4% of payroll in FY2003. The federal government’s share of the
normal cost of CSRS is 17.4% of payroll. The Civil Service Retirement Amendments
of 1969 (P.L. 91-93) require participating employees and their employing agencies
each to contribute an amount equal to 7.0% of basic pay to the Civil Service
Retirement and Disability Fund to finance retirement benefits under CSRS. The
combined contribution of 14% of employee pay does not fully finance the retirement
benefits provided under the Civil Service Retirement System. The costs of the CSRS
that are not financed by the 7.0% employee and 7.0% agency contributions are
attributable mainly to increases in future CSRS benefits that result from (1)
employees’ annual pay raises, and (2) CSRS annuitants’ annual cost-of-living
adjustments. In actuarial terms, the employee and agency contributions totaling 14%
of pay are equal to the static normal cost of CSRS benefits.19 This is the benefit that
would be paid if employees received no future pay raises and annuitants received no
future cost-of-living adjustments. The dynamic normal cost of CSRS pensions
includes the cost of financing future benefit increases that result from pay raises and
cost-of-living adjustments.20
Contributions from employees and the federal agencies that employ them meet
about 57% of the normal cost of CSRS. (14.0/24.4 = .57) The remaining 43% of the
cost of CSRS is paid from the interest earned by bonds held by the retirement and
disability trust fund, special contributions by the U.S. Postal Service for retired postal
workers, and through transfers from the general revenues of the U.S. Treasury. In the
108th Congress, H.R. 180 (Ryan) would charge each federal agency the full cost of
CSRS benefits on an accrual basis, as is done under the Federal Employees
Retirement System (FERS). Each agency would contribute to the CSRDF an amount
equal to 17.4% of payroll, which represents the dynamic normal cost of CSRS minus
the required employee contribution of 7.0% of pay. This proposal was included in
the President’s budget for FY2003 and the budget for FY2004. The Office of
19A pension plan’s normal cost is the level percentage of pay that, invested today at a
particular real rate of interest will be sufficient to fully finance the retirement benefits under
the plan.
20 Two other elements of a pension plan’s dynamic normal cost are increases in benefits that
result from (1) new or expanded benefits and (2) newly covered groups of workers.

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CRS-14
Management and Budget (OMB) states that it “would require agencies to fund the
full Government share of the accruing cost of pensions . . . as they are earned by all
Federal civilian and military employees.”21
OPM estimates the normal cost of the FERS basic annuity at 11.5% of payroll
in 2003. Federal law requires agencies to contribute an amount equal to the normal
cost of FERS minus employee contributions to the program, which are equal to 0.8%
of payroll. Consequently, the normal cost of the FERS basic annuity to the federal
government is equal to 10.7% of payroll (11.5-0.8=10.7). The federal government
has three other mandatory costs for employees covered by FERS. Social Security
taxes are 6.2% of payroll on both the employee and the employer. All agencies
automatically contribute an amount equal to 1% of employee pay to the TSP.
Agencies also make matching contributions to the TSP.22 The normal cost of FERS
to the federal government is therefore at least 17.9% of pay, slightly higher than the
normal cost of CSRS. Federal matching payments to the TSP can add up to 4
percentage points to this total, depending on an employee’s voluntary contributions.
CSRS and FERS differ in the way that each federal agency must budget for its
contributions toward employee pension benefits. Under FERS, each agency must
include the full normal cost of the FERS basic benefit (10.7% of pay in 2003) in its
annual budget request. Under CSRS, each agency must budget only a 7.0%
contribution, even though this is less than the cost of the program. The difference
between the full normal cost of CSRS and the agency contribution of 7.0% is treated
as a general obligation of the U.S. Treasury.
In both CSRS and FERS, government contributions to the Civil Service
Retirement and Disability Trust Fund result in the Treasury issuing securities that are
credited to the Fund. The contributions for both programs are commingled and
benefits for retirees and survivors in both programs are paid from the same fund.
Government contributions to the Thrift Savings Plan are general obligations of the
Treasury. Individual federal agencies therefore are not required to include matching
contributions to the TSP in their annual budgets. These payments go into individual
accounts for each TSP participant and the accounts are managed by the Federal Thrift
Advisory Board. The Civil Service Retirement and Disability Fund is a trust fund
of the U.S. Government. The TSP is not a trust fund of the U.S. Government. Thrift
Savings Plan accounts are individually owned by the participants in the TSP in the
same way that 401(k) accounts are owned by workers in the private sector.
Financing Pension Benefits for Federal Employees
At the start of FY2001, the Civil Service Retirement and Disability Fund had
a balance of $522 billion available for benefit payments under both CSRS and FERS.
At the same time, the actuarial present value of future benefits under the CSRS and
21 OMB News Release 2001-47, October 15, 2001.
22Employees covered by FERS also contribute 6.2% of pay to the Social Security (OASDI)
trust fund and they may contribute up to 10% of pay to the TSP.

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CRS-15
FERS plans was $1,031 billion.23 In other words, on October 1, 2000, the civil
service trust fund had an unfunded actuarial liability of $509 billion. All of this
unfunded liability is attributable to CSRS because federal law has never required that
employee and agency contributions to the fund must equal the present value of
benefits that employees accrue under that plan. In contrast, The FERS Act requires
that the benefits accrued each year by employees covered by FERS must be fully
funded by contributions from employees and their employing agencies.
Although the civil service trust fund has an unfunded liability attributable to
CSRS, the Civil Service Retirement and Disability Trust Fund is not in danger of
becoming insolvent. According to the projections of the fund’s actuaries, there is no
point over the next 75 years at which the fund will be exhausted. Actuarial
projections of the credits that will be entered to the fund and the benefits that will be
paid from it indicate that the Civil Service Retirement and Disability Fund will be
able to meet its financial obligations in perpetuity. According to OPM, “the total
assets of the CSRDF continue to grow throughout the term of the projection, and
ultimately reach a level of about 4.3 times payroll, or 20 times the level of annual
benefit outlays.”24 One reason that the civil service trust fund will not exhaust its
resources for the foreseeable future is that all federal employees hired since 1984 are
covered by FERS. By law, the benefits that employees earn under FERS must be
fully funded by the sum of annual contributions made by employees and their
employing agencies.
Federal Trust Funds and Pre-Funding of Benefits. The Civil Service
Retirement and Disability Trust Fund is similar to the Social Security Trust Fund in
that 100% of the monies deposited are used to purchase special-issue U.S. Treasury
bonds. This exchange between the trust fund and the Treasury does not result in
revenues or outlays for the federal government. It is an intra-governmental transfer,
which has no effect on the size of the government’s budget surplus or deficit.25
Federal trust funds are not a “store of wealth” like private pension funds. The
assets of the civil service retirement trust fund are special-issue bonds of the U.S.
Treasury that function solely as a record of unexpended budget authority. These
bonds cannot be sold by the trust fund to the general public in exchange for cash.
They can only be returned by the fund to the Treasury, which recognizes each bond
as representing an equivalent dollar-value of budget authority to be used for the
23The actuarial present value of benefits is based on the dynamic normal costs of the plans,
which include all future costs, including COLAs.
24 Civil Service Retirement and Disability Fund, Report for the Fiscal Year Ended
September 30, 2001, page 10.
25A trust fund merely represents budget authority. Only revenues and outlays affect the size
of the annual budget surplus or deficit. The excess revenues that result in a trust fund
surplus therefore reduce the government’s deficit (or increase its surplus) and the outlays
for retiree and survivor benefits either reduce the government’s budget surplus or increase
the budget deficit. However, the exchange of cash for bonds (or vice versa) between the
trust fund and the Treasury does not affect the deficit because it is an exchange that occurs
within the government.

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CRS-16
payment of benefits to federal retirees and their survivors, and for no other purpose.
As has been reported by the United States Office of Management and Budget:
These [trust fund] balances are available to finance future benefit payments and
other trust fund expenditures, but only in a bookkeeping sense. They do not hold
real economic assets that can be drawn down in the future to fund benefits.
Instead, they are claims on the Treasury. When trust fund holdings are redeemed
to pay benefits, Treasury will have to finance the expenditure in the same way
as any other federal expenditure: out of current receipts, by borrowing from the
public, or by reducing benefits or other expenditures. The existence of large trust
fund balances, therefore, does not, by itself, increase the Government’s ability
to pay benefits.26
Government trust funds, however, can ease the burden of future benefit
payments if an increase in the trust fund balance represents a net increase in national
saving. Again, quoting OMB:
From an economic standpoint, the government is able to prefund benefits only
by increasing saving and investment in the economy as a whole. This can be
fully accomplished only by simultaneously running trust fund surpluses . . . and
not allowing the Federal fund deficit to increase, so that the trust fund surplus
reduces the unified budget deficit or increases a unified budget surplus. This
would reduce Federal borrowing by the amount of the trust funds surplus and
increase the amount of national saving available to finance investment. Greater
investment would increase future incomes and wealth, which would provide
more real economic resources to support the benefits.27
Investment Practices of Federal Trust Funds. Federal trust funds do not
represent a store of wealth because they consist entirely of U.S. government bonds.
A bond represents wealth only when it is held by someone other than the individual,
company, or government that issued it. A bond is an I.O.U. — a promise to pay.
One might consider an I.O.U. from someone else to be an asset, provided that the
issuer is willing and able to pay the debt when it is due, but writing an I.O.U. to
oneself does not create an asset. This analogy applies to the U.S. Treasury bonds
held by the federal government’s trust funds: they are I.O.U.s issued by one agency
of the U.S. government and held by another agency of the same government. Both
the issuer and holder are part of the same entity: the U.S. government. When federal
trust funds redeem their bonds, the Treasury has only one source from which to
obtain the required cash: the public. It can do this either by collecting taxes or by
borrowing from the public.
Many state and local government pension funds invest in stocks, bonds,
mortgages, real estate, and other private assets. If Congress were to permit the Civil
Service Retirement and Disability Fund to acquire assets other than U.S. Treasury
bonds – such as the stocks and bonds issued by private corporations – such assets
could be sold to the public for cash as pension liabilities come due. This would
26U.S. Office of Management and Budget, Budget of the United States Government, Fiscal
Year 2004: Analytical Perspectives, p. 373. USGPO, Washington, DC, 2003.
27OMB, Analytical Perspectives, page 373.

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CRS-17
represent a major change in public policy that would have important effects on the
federal budget process and possibly on the private businesses that would effectively
be partly owned by an arm of the federal government.28
Among the possible drawbacks of allowing the CSRDF to invest in private
assets are that the stocks and bonds purchased by the trust fund would displace
purchases of these assets by private citizens, so that while civil service retirement
benefits would be prefunded, it would be at the cost of reducing the amount of
private-sector assets held by private citizens. In a scenario of “full displacement,”
there would be no net increase in the amount of saving and investment in the
economy, just a reallocation of assets, in which the government would own more
private sector stocks and bonds and private investors would hold more Treasury
bonds. (Because the Treasury would be selling fewer bonds to the trust funds, it
would have to sell an equivalent dollar value of bonds to the general public.)
A second issue that would have to be considered if the trust fund were to
purchase private investment securities would be the fund’s management and
investment practices. Who would make the investment decisions, and what would
be the acceptable level of investment risk for the funds? The most fundamental risk,
of course, is that poor investment choices would result in the trust fund losing value
over time. Also, what other criteria would govern the choice of the fund’s
investments? Deciding what constitutes an appropriate investment for a fund that
consists mainly of monies provided by the U.S. taxpayers would undoubtedly result
in some controversies. Not all companies, industries, or countries would be seen by
all concerned stakeholders as appropriate places to invest these funds. In short, the
question of investing trust fund assets in securities other than U.S. Treasury bonds
is one that would deserve close and careful consideration of all the possible
ramifications.
Allowing the civil service retirement trust fund to invest in private-sector
securities also would have implications for the federal budget. Currently, the trust
fund is credited by the Treasury with agency contributions on behalf of covered
employees, and receives revenue in the form of employee contributions. Agency
contributions are intra-governmental transfers, and have no effect on the size of the
government’s annual budget deficit or surplus. Employee contributions, however,
are counted as revenues of the U.S. Government. As it now operates, the only
outlays of the trust fund are payments to annuitants (in addition to outlays for
administrative expenses and some other minor categories of expenditure). If the trust
fund were to purchase private assets such as corporate stocks and bonds rather than
U.S. Treasury bonds, there would be an immediate outlay of funds. This outlay by
the trust fund would be paid for in part by employee contributions that would be
diverted from the general fund of the Treasury. The remainder of the purchase,
28 The Railroad Retirement and Survivors' Improvement Act of 2001 (P.L. 107-90)
authorizes the Railroad Retirement Trust Fund to acquire corporate stocks, bonds, and other
assets to fund railroad retirement benefits. According to the Congressional Budget Office,
“such an action has no clear precedent and raises questions about how the federal
government might behave as an investor in private enterprises.” (Congressional Budget
Office, The Budget and Economic Outlook: Fiscal Years 2003-2012, January 2002, p. 88.)

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CRS-18
financed by agency contributions, would replace an intra-governmental transfer with
a direct outlay of federal funds.
Because the Treasury would no longer receive employee contributions toward
CSRS and FERS as revenue, it would have to borrow an equal amount from the
public. Consequently, without an offsetting reduction in outlays elsewhere in the
budget or an increase in revenues from another source, the net effect of these
transactions would be an increase in the government’s budget deficit (or a decrease
in the budget surplus). If the budget accounting period extended over a long enough
period of time, these transactions would cancel one another out because the long-term
effect is merely to move some outlays from the future, where they would have
occurred as payments to annuitants, to the present, where they occur partly as outlays
to purchase assets and partly as a reduction in revenues that currently go to the
general fund of the Treasury.

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