Order Code 98-972 EPW CRS Report for Congress Received through the CRS Web Federal Employees’ Retirement System: Summary of Recent Trends Updated January 23, 2004 Patrick J. Purcell Specialist in Social Legislation Domestic Social Policy Division Congressional Research Service ˜ The Library of Congress Federal Employee Retirement Programs: Summary of Recent Trends Summary This report describes recent trends in the number of civil service annuitants and the financial status of the Civil Service Retirement and Disability Fund. Among the results presented: ! ! ! ! ! ! ! ! ! In fiscal year 2002, 66% of civilian federal employees were enrolled in the Federal Employees Retirement System (FERS), which covers employees hired since 1984. Thirty-four percent were enrolled in the Civil Service Retirement System (CSRS), which covers only employees hired before 1984. 2.4 million people received civil service annuity payments in fiscal year 2002. Ninety-three percent of these annuitants were covered by CSRS. More than one-third of all federal employee annuitants and survivor annuitants reside in five states: California, Florida, Texas, Maryland, and Virginia. The average civilian federal employee who retired in 2002 was 58 years old and had completed 26.7 years of federal service. The average monthly annuity payment to workers who retired under CSRS in 2002 was $2,595. Workers who retired under FERS received an average monthly annuity of $867. (The FERS retirees had shorter average length of service than CSRS retirees. They also earned Social Security benefits and received an employer match on their contributions to the Thrift Savings Plan.) At the end of FY2002, the balance of the Civil Service Retirement and Disability Fund was $570 billion, an amount equal to 11 times the amount of outlays from the fund during 2002. The trust fund balance is expected to reach $633 billion by the end of fiscal year 2004. From 1970 to 1985, the number of people receiving civil service annuities rose by one million, an increase of 105%. Between 1985 and 2002 the number of civil service annuitants rose by 412,000, an increase of 20%. As of September 2002, civilian federal employment, including the Postal Service, totaled 2.62 million workers, a decline of 500,000 (16%) since 1990. Employees of the federal government are older on average than workers in the private sector. Fifty-nine percent of all federal employees were age 45 or older in 2000, and 40% were age 50 or older. In contrast, only 34% of wage and salary workers in the private sector were 45 or older in 2000, and just 23% were 50 or older. Contents Fundamentals of the Civil Service Retirement Programs . . . . . . . . . . . 1 Retirement Coverage of Current Federal Employees . . . . . . . . . . . . . . 3 Coverage of Current Civil Service Annuitants . . . . . . . . . . . . . . . . . . . 4 State of Residence of Civil Service Annuitants . . . . . . . . . . . . . . . . . . . 5 Average Age and Years of Service at Retirement . . . . . . . . . . . . . . . . . 7 Average Age at Retirement of New Federal Retirees, 1989 to 2002 . . 10 Total and Average Annuity Payments to Retirees and Survivors in 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Cost-of Living Adjustments under CSRS and FERS . . . . . . . . . . . . . 12 Income and Expenditures of the Civil Service Retirement and Disability Fund, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Recent Trends in the Balance of the Civil Service Retirement and Disability Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Number of Civil Service Annuitants and Total Annuity Payments, 1970 to 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Civilian Federal Employment, 1940 to 2002 . . . . . . . . . . . . . . . . . . . . 19 Age Distribution of Executive Branch Employees . . . . . . . . . . . . . . . 21 List of Tables Table 1. Retirement Systems Coverage of Federal Employees, by Fiscal Year . . 4 Table 2. Retirement Plan Coverage of Civil Service Annuitants, FY2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Table 3. State of Residence of Civil Service Annuitants, 2002 . . . . . . . . . . . . . . 6 Table 4. Number, Average Age and Years of Service, and Average Annuity of Civil Service Annuitants Who Retired in 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Table 5. Average Age at Retirement for New Federal Retirees,1989 to 2002 . . 10 Table 6. Total and Average Annuity Payments to Retirees and Survivors in 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Table 7. Cost-of-Living Adjustments under CSRS and FERS . . . . . . . . . . . . . . 12 Table 8. Income and Expenditures of the Civil Service Retirement and Disability Fund, 2002-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Table 9. Income and Expenditures of the Civil Service Retirement and Disability Fund, 1989 to 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Table 10. Annuitants and Annuity Payments, 1970 to 2006 . . . . . . . . . . . . . . . . 18 Table 11. Civilian Federal Employment, 1940 to 2002 . . . . . . . . . . . . . . . . . . . 20 Table 12. Age Distribution of Full-time, Permanent Employees . . . . . . . . . . . . 21 Federal Employee Retirement Programs: Summary of Recent Trends Fundamentals of the Civil Service Retirement Programs. The Civil Service Retirement System (CSRS) was established by P.L. 66-215 in 1920, 15 years before Congress created the Social Security system for workers in the private sector. Because CSRS was designed to provide adequate retirement and disability benefits on its own, federal employees were excluded from participating in Social Security. State and local governments were permitted to bring their employees into the Social Security program in the early 1950s, and most state and local governments have chosen to do so. In the Social Security Amendments of 1983 (P.L. 98-21), Congress mandated participation in Social Security by all civilian federal employees initially hired on or after January 1, 1984. Because Social Security provides both retirement and disability benefits, and because enrolling federal workers in both CSRS and Social Security would have required each employee to contribute more than 13% of pay, Congress directed the development of a new federal employee retirement system with Social Security as the cornerstone. The result of these efforts was the Federal Employees Retirement System (FERS), created by P.L. 99-335 and enacted on June 6, 1986. The new system, patterned after the retirement programs typical of medium and large employers in the private sector, is comprised of three elements: (1) Social Security, (2) a defined benefit plan (the FERS basic annuity), and (3) a defined contribution plan (the Thrift Savings Plan).1 All permanent federal employees whose initial federal employment began after December 31, 1983, are covered by FERS, as are employees who voluntarily switched from CSRS to FERS during “open seasons” held in 1987 and 1998.2 Former federal employees who have completed at least 5 years of service under CSRS and are rehired after a break in service of less than 1 year can either join FERS or participate in both CSRS and Social Security through the “CSRS offset plan.” Under this plan, 6.2% of the employee payroll contribution and an equal share of the employer contribution are paid into Social Security. In retirement, these employees’ CSRS annuities are reduced (“offset”) by the amount of the Social Security benefit. 1 In a defined benefit plan, the amount of the retirement benefit is based on an employee’s salary and number of years of service. With each year of service, a worker accrues a benefit equal to a fixed dollar amount or a percentage of pay. A defined contribution plan is like a savings account maintained on behalf of each participating employee. The amount of retirement benefits that a worker receives will depend on the balance in the account, which is the sum of contributions, plus interest, dividends, and capital gains (or losses). 2 P.L. 105-61 (October 10, 1997) authorized an open season to be held from July through December 1998, during which employees still enrolled in CSRS could transfer to FERS. CRS-2 Under FERS, workers who have completed at least 30 years of service can retire at age 55. The minimum retirement age will increase beginning with workers born in 1948, eventually reaching age 57 for those born in 1970 or later. Employees with 20 or more years of service can retire at age 60, and those with at least 5 years of service can retire at age 62. Federal employees and former employees who have completed at least 10 (but fewer than 30) years of service can receive a reduced FERS pension benefit at age 55. For those who choose this option, the FERS pension benefit is permanently reduced by 5% multiplied by the number of years between the worker’s age at retirement and age 62. For example, the pension of a federal employee who retires at age 55 with fewer than 30 years of service would be permanently reduced by 5% multiplied by 7, or 35%. Under CSRS, the minimum retirement age is 55 for employees with 30 years of federal service, age 60 for those with 20 years of service, and 62 for employees with at least 5 years of service. CSRS has no provision for early retirement with a reduced benefit, except for special circumstances such as a reduction in force. Agencies undergoing a reduction in force can, with the approval of the Office of Personnel Management, offer retirement to employees age 50 or older with 20 or more years of service or at any age with 25 or more years of service. An employee under CSRS who is offered and accepts an offer of voluntary early retirement has his or her retirement annuity permanently reduced by 2% multiplied by the number of years between the worker’s age at retirement and age 55 Under both CSRS and FERS, the amount of an employee’s retirement annuity is based on the average of the individual’s highest 3 consecutive years of basic pay multiplied by their years of service and the rate at which benefits accrue for each year of service.3 Under FERS, this accrual rate is one percent of base pay per year. Workers with 20 years or more of service under FERS who work until at least age 62 are credited with an accrual rate of 1.1% for each year of service.4 For example, a worker covered by FERS who retires at 61 with 25 years of service will receive a FERS annuity equal to 25% of high-3 average pay. Delaying retirement by one year would increase the annuity to 28.6% of high-3 average pay (26 X 1.1 = 28.6). Accrual rates are higher under CSRS than under FERS because employees covered by CSRS do not pay Social Security payroll taxes or earn Social Security retirement benefits. Under CSRS the benefit accrual rate increases with length of service. Workers accrue benefits equal to 1.5% of high-3 average pay for each of their first 5 years of service; 1.75% of high-3 pay for years 6 through 10; and 2.0% of high-3 pay for each year of service after the tenth year. This yields a pension equal to 56.25% of high-3 average pay after 30 years of federal service under CSRS. 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 Thrift Savings Plan (TSP), even if the employee makes no voluntary contributions to the TSP. In 3 The calculation of “high-3 average pay” is based on nominal or “current dollars” rather than indexed or “constant dollars.” 4 Note that because FERS coverage began in 1984, no federal workers will have 30 years of service exclusively under FERS until 2014. CRS-3 2004, workers covered by FERS will be permitted to contribute as much as 14% of their pay to the TSP, up to the annual limit defined in the Internal Revenue Code ($13,000 in 2004).5 These contributions are made on a pre-tax basis, and neither the employee’s contribution nor any investment earnings are taxed until the money is withdrawn from the account. In addition, the first 5% of employee pay contributed to the TSP generates agency matching contributions.6 Workers covered by CSRS also may participate in the TSP, but their total contribution is limited to 9% of pay, and they receive no matching contributions from their employing agency. Retirement Coverage of Current Federal Employees. Because enrollment in CSRS has been closed to new entrants since 1984, the proportion of federal workers covered by FERS has been rising and coverage under CSRS has been declining. (See Table 1.) Fiscal year 1995 was the first year in which a majority of civilian federal employees (51%) were covered by FERS. During FY2002, 65.5% of federal employees were covered by FERS. 5 P.L. 106-554, the FY2001 Appropriations Act for the Departments of Labor, Health and Human Services, and Education (H.R. 4577 of the 106th Congress), will increase the maximum allowable employee contribution to the TSP by 1 percentage point each year for 5 years. The percentage-of-pay limits on contributions to the TSP then will be eliminated, and employee contributions will be subject only to the limits applicable under Internal Revenue Code § 402(g). Beginning in July 2001, employees covered by FERS are allowed to contribute up to 11% of pay to the TSP, and employees covered by CSRS are allowed to contribute up to 6% of pay to the TSP. The maximum permissible contribution will rise by 1 percentage point each fiscal year until reaching 15% for FERS and 10% for CSRS in FY2005. In fiscal year 2006, the percentage-of-pay limits will be eliminated, but, the contribution limits under IRC § 402(g) will continue to apply. 6 All employees covered by FERS receive “agency automatic contributions” of 1% of pay. Employee contributions are matched dollar-for-dollar on the first 3% of pay and at $.50 on the dollar on the next 2% of pay. Thus, the maximum agency contribution is 5% of pay. CRS-4 Table 1. Retirement Systems Coverage of Federal Employees, by Fiscal Year Covered active employees * Fiscal Year 2002 Percentage distribution CSRS 906,000 34.5% FERS 1,717,000 65.5% Total 2,623,000 100% Fiscal Year 2001 Percentage distribution 987,000 36.9% 1,689,000 63.1% 2,676,000 100% Fiscal Year 2000 Percentage distribution 961,000 37.6% 1,629,000 62.4% 2,590,000 100% Fiscal Year 1999 Percentage distribution 1,009,000 39.6% 1,536,000 60.4% 2,545,000 100% Fiscal Year 1998 Percentage distribution 1,108,000 41.7% 1,550,000 58.3% 2,658,000 100% Fiscal Year 1997 Percentage distribution 1,194,000 44.5% 1,487,000 55.5% 2,681,000 100% Fiscal Year 1996 Percentage distribution 1,235,000 47.1% 1,385,000 52.9% 2,620,000 100% Fiscal Year 1995 Percentage distribution 1,311,000 48.9% 1,371,000 51.1% 2,682,000 100% Fiscal Year 1994 Percentage distribution 1,402,000 52.0% 1,296,000 48.0% 2,698,000 100% Source: Federal Civilian Workforce Statistics: 2002 Fact Book, Office of Personnel Management and Report of the Civil Service Retirement and Disability Fund for the Fiscal Year ended September 30, 2002. *Number of employees on a full-time equivalent basis. Includes U.S. Postal Service. Does not include employees on leave without pay. Coverage of Current Civil Service Annuitants. Although the majority of current federal employees are covered by FERS, most retired federal workers and their surviving spouses and dependents receive benefits from employment that was covered by CSRS. At the beginning of FY2002, 93% of current annuitants were receiving pension benefits that were accrued under CSRS, while just 7% had retired under FERS. (See Table 2.) Under both CSRS and FERS, employee and agency contributions are paid into – and pension annuities are paid from – the Civil Service CRS-5 Retirement and Disability Fund.7 The number of FERS annuitants is comparatively small because the FERS is still a relatively new program when compared to the average length of a worker’s career. The program was established in 1987 and was made retroactive for all employees initially hired on or after January 1, 1984. Table 2. Retirement Plan Coverage of Civil Service Annuitants, FY2002 Employee annuitants Percentage Survivor annuitants Percentage Total annuitants Percentage CSRS 1,593,123 91.1% FERS 155,797 8.9% Total 1,748,920 100% 620,041 97.8% 14,089 2.2% 634,130 100% 2,213,164 92.9% 169,886 7.1% 2,383,050 100% Source: Statistical Abstracts, Fiscal Year 2002, Federal Employee Benefits Program, U.S. Office of Personnel Management. State of Residence of Civil Service Annuitants. Nearly 2.4 million people received civil service annuities in 2002, either as retired federal employees, surviving spouses, or surviving dependents. California had the largest number of annuitants with 223,806 and Vermont had the fewest with 3,928. Five states — California, Florida, Texas, Maryland, and Virginia — accounted for 35% of all civil service annuitants in 2002. 7 Under CSRS, both the employee and the employing agency contribute an amount equal to 7.0% of base pay to the retirement and disability fund. This does not provide sufficient resources to pay the retirement benefits that are accrued annually by federal employees covered under CSRS. The shortfall (equal to about 10% of pay) is made up through transfers from the general fund of the U.S. Treasury. Retirement benefits accrued under FERS are fully funded through contributions from employees (0.8% of base pay) and their employing agencies (10.7% of payroll in 2004). CRS-6 Table 3. State of Residence of Civil Service Annuitants, 2002 State Alabama Number of annuitants Percent of national total 55,899 2.4% Alaska 6,636 0.3% Arizona 47,605 2.0% Arkansas 23,700 1.0% California 223,806 9.5% Colorado 43,384 1.8% Connecticut 14,503 0.6% 6,752 0.3% 43,700 1.9% Florida 163,019 6.9% Georgia 73,425 3.1% Hawaii 23,889 1.0% Idaho 11,619 0.5% Illinois 64,015 2.7% Indiana 33,888 1.4% Iowa 19,518 0.8% Kansas 23,184 1.0% Kentucky 30,836 1.3% Louisiana 25,321 1.1% Maine 13,074 0.6% 141,092 6.0% Massachusetts 46,049 2.0% Michigan 38,495 1.6% Minnesota 25,393 1.1% Mississippi 23,758 1.0% Delaware District of Columbia Maryland CRS-7 State Number of annuitants Percent of national total Missouri 50,408 2.1% Montana 10,812 0.5% Nebraska 13,046 0.6% Nevada 19,269 0.8% New Hampshire 11,431 0.5% New Jersey 56,057 2.4% New Mexico 24,879 1.1% New York 99,029 4.2% North Carolina 58,271 2.5% North Dakota 5,788 0.2% Ohio 73,045 3.1% Oklahoma 47,802 2.0% Oregon 29,678 1.3% Pennsylvania 105,743 4.5% Rhode Island 9,410 0.4% South Carolina 38,637 1.6% South Dakota 8,748 0.4% 39,272 1.7% Texas 150,374 6.4% Utah 32,395 1.4% Vermont 3,928 0.2% Virginia 133,800 5.7% Washington 59,939 2.6% West Virginia 14,798 0.6% Wisconsin 23,873 1.0% Wyoming 5,257 0.2% 2,348,249 100% Tennessee Total Source: Statistical Abstracts, Fiscal Year 2002, Federal Employee Benefits Program, U.S. Office of Personnel Management. Average Age and Years of Service at Retirement. More than 74,000 civilian federal employees (including U.S. Postal Service employees) retired during fiscal year 2002. (See Table 4.) Of this number, 50,149 (68%) were normal retirements8 and another 6,250 (8%) were voluntary early retirements. Under both 8 Normal retirements include all retirements except disability retirements, voluntary early (continued...) CRS-8 CSRS and FERS, normal retirement can occur as early as age 55 with 30 years of service, age 60 with 20 years of service, or age 62 with 5 years of service. The minimum retirement age under FERS is scheduled to increase beginning with workers born in 1948, eventually reaching age 57 for employees born in 1970 or later. The average age of workers taking voluntary, normal retirement in 2002 was 60 for employees covered by CSRS and 62.6 for those covered by FERS. Workers taking normal retirement under CSRS in 2002 had completed an average of 32.5 years of service, while those retiring under FERS had an average of 16.4 years of service. More than 6,000 federal employees took voluntary early retirement in 1999. These workers were younger on average (53.4 years old) than those who took normal retirement, and their average length of service (27.5 years) was slightly less than that of those who took normal retirement. Approximately 14% of all retirements among federal employees in 2002 were taken for reasons of disability. Disability retirees were, on average, 49.8 years old with 16.6 years of service. Involuntary retirements (such as those resulting from agency down-sizing) and retirements taken under other special circumstances accounted for 10% of all retirements by federal employees in 2002. Average Annuity Amounts under CSRS and FERS. The average monthly annuity paid to civilian federal employees who retired under CSRS in 2002 was $2,595, while new FERS annuitants received an average annuity of $867 per month. Employees retiring under CSRS received larger annuities than those covered by FERS both because of their longer average length of service and because CSRS was designed to provide an adequate retirement income from a single source. FERS was designed to provide a smaller annuity than CSRS for any given length of service and level of compensation because federal employees covered by FERS participate in Social Security and they also can elect to save for retirement on a pre-tax basis with agency matching contributions through the Thrift Savings Plan.9 Employees in FERS who retire at 55 or older with 30 years of federal service are eligible to receive a supplement to their FERS annuity between their retirement and age 62. The supplement is approximately equal to the Social Security payments they will receive for their years of federal employment. (Employees with 20 years of service receive this supplement if they are at least age 60 at retirement.) 8 (...continued) retirements, involuntary retirements, and special provision retirements. 9 In 2002, federal employees covered by CSRS may contribute up to 7% of pay (pre-tax) to the TSP, but they receive no agency matching contributions. For more information on the TSP, see CRS Report RL30387, Federal Employees’ Retirement System: Role of the Thrift Savings Plan, by Patrick Purcell. CRS-9 Table 4. Number, Average Age and Years of Service, and Average Annuity of Civil Service Annuitants Who Retired in 2002 2002 civilian federal retirements CSRS FERS* Average or Total Normal Retirements Number Average age at retirement Average years of service Average monthly annuity 38,999 60.0 32.5 $2,733 11,150 62.6 16.4 $651 50,149 60.6 28.9 $2,271 Disability Retirements Number Average age at retirement Average years of service Average monthly annuity 4,031 51.5 23.8 $1,608 6,509 48.7 12.2 $1,017 10,540 49.8 16.6 $1,243 Involuntary retirements Number Average age at retirement Average years of service Average monthly annuity 2,009 55.0 28.0 $2,372 218 55.6 23.4 $1,292 2,227 55.0 27.5 $2,266 Voluntary early retirements Number Average age at retirement Average years of service Average monthly annuity 5,721 53.3 27.9 $2,156 531 53.7 23.9 $1,170 6,252 53.3 27.6 $2,072 Special provision retirements Number Average age at retirement Average years of service Average monthly annuity 2,480 54.4 29.7 $4,292 348 53.1 29.3 $4,792 2,828 54.2 29.7 $4,354 Total retirements in 2002 ** Number Average age at retirement Average years of service Average monthly annuity 54,627 58.3 30.7 $2,595 19,526 57.3 15.4 $867 74,153 58.0 26.7 $2,141 Source: CRS analysis of data from the Office of Personnel Management. * Employees covered by FERS also participate in Social Security. In January 2002, the average monthly Social Security benefit for workers retiring at age 62 was $936. ** Includes other, unclassified retirements. CRS-10 Average Age at Retirement of New Federal Retirees, 1989 to 2002. In 2002, the average age of federal employees taking normal retirement was 60.6. (See Table 5.) Over the period from 1989 to 2002, the average age of normal retirements was 61.4 The average age for all retirements in 2002 was 58.1, which was the same as the average for the period from 1989 to 2002. Under the terms of the Homeland Security Act federal agencies undergoing a major reorganization can request permission from the Office of Personnel Management to offer their employees voluntary early retirement or voluntary separation incentive pay (“buyouts”). Under voluntary early retirement, an employee can retire as early as age 50 with 20 years of service. Voluntary separation incentives are cash payments of up to $25,000 (before taxes) offered to employees who retire or otherwise separate from federal employment voluntarily. Because these incentives are generally offered to retirees who have not yet reached the combined age and years of service that are required for normal retirement, they tend to reduce the average age of those who retire in any given year. Table 5. Average Age at Retirement for New Federal Retirees, 1989 to 2002 Fiscal year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2001 2002 Average age at retirement All Normal retirements retirements 59.4 61.3 59.4 61.3 55.4 61.2 59.1 61.5 57.9 61.5 58.1 61.8 58.0 62.0 57.6 62.0 57.5 61.8 57.6 61.5 58.1 61.3 58.0 61.0 58.1 60.6 Normal retirements as a percentage of all retirements 77.4% 79.0 78.1 70.6 52.4 56.8 53.2 52.8 55.4 57.1 63.2 64.5 67.6 Source: Office of Personnel Management. Note: Normal retirements include all retirements except disability retirements, voluntary early retirements, involuntary retirements, and special provision retirements. CRS-11 Total and Average Annuity Payments to Retirees and Survivors in 2002. The Civil Service Retirement and Disability Fund paid annuities to 1.75 million retired federal employees and 634,000 survivor annuitants in fiscal year 2002. Of these beneficiaries, 2.2 million (93%) received benefits earned under CSRS and 170,000 (7%) received benefits under FERS. Employee annuitants under CSRS received an average monthly annuity of $2,048. Survivors of CSRS annuitants received an average monthly CSRS annuity of $1,040. Employee annuitants under FERS received payments, averaging $735 per month for retirees and $317 for survivors. As was noted earlier FERS benefits are smaller than those under CSRS both because employees covered by FERS have fewer years of service than workers who retired under CSRS, and because FERS benefits are intended to be supplemented by Social Security and the Thrift Savings Plan.10 Table 6. Total and Average Annuity Payments to Retirees and Survivors in 2002 (in thousands of dollars) Employee annuitants Percent of Total Mean monthly benefit Median monthly benefit Survivor annuitants Percent of Total Mean monthly benefit Median monthly benefit Total annuitants Percent of Total CSRS 1,593,123 91.1% FERS 155,797 8.9% All retirees and survivors 1,748,920 100% $2,048 $1,812 $735 $481 $1,931 $1,716 620,041 97.8% 14,089 2.2% 634,130 100% $1,040 $916 $317 $235 $1,024 $895 2,213,164 92.9% 169,886 7.1% 2,383,050 100% Source: Statistical Abstracts, Fiscal Year 2002, Federal Employee Benefits Program, Office of Personnel Management. 10 In December 2002, the average monthly Social Security benefit among all retired workers was $895. The average monthly benefit for a surviving spouse was $861. CRS-12 Cost-of Living Adjustments under CSRS and FERS. Cost-of-living adjustments (COLAs) for both CSRS and FERS are based on the rate of inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). COLAs are determined by the percentage change in the average monthly CPI-W during the third quarter (July to September) of the current calendar year compared to the third quarter of the previous year. The “effective date” for COLAs is December, but they first appear in benefit checks issued in January. All CSRS retirees and survivors receive yearly COLAs equal to the annual percentage change in the CPI-W. Under FERS, COLAs are paid only to retired workers who are age 62 and older and to disabled and survivor beneficiaries of any age. COLAs paid under FERS are less than the rate of inflation whenever the increase in the CPI-W is greater than 2.0%. If the rate of inflation during the measurement period is between 2.0% and 3.0%, the FERS COLA is 2.0%. If inflation is greater than 3.0%, then the COLA for FERS benefits is equal to the CPIW minus one percentage point.11 In January 2004, CSRS beneficiaries received a COLA of 2.1%, and FERS beneficiaries received a COLA of 2.0%. (See Table 7.) Table 7. Cost-of-Living Adjustments under CSRS and FERS Date paid January 1989 January 1990 January 1991 January 1992 January 1993 April 1994 April 1995 April 1996 January 1997 January 1998 January 1999 January 2000 January 2001 January 2002 January 2003 January 2004 CSRS COLA 4.0% 4.7% 5.4% 3.7% 3.0% 2.6% 2.8% 2.6% 2.9% 2.1% 1.3% 2.4% 3.5% 2.6% 1.4% 2.1% FERS COLA 3.0% 3.7% 4.4% 2.7% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 1.3% 2.0% 2.5% 2.0% 1.4% 2.0% Change in CPI from 3rd Qtr to 3rd Qtr 4.0% 4.7% 5.4% 3.7% 3.0% 2.6% 2.8% 2.6% 2.9% 2.1% 1.3% 2.4% 3.5% 2.6% 1.4% 2.1% Source: Office of Personnel Management. * COLAs are first included in benefits paid during the month after the effective date. 11 Workers who switched from CSRS to FERS receive a COLA that is weighted by the proportion of their federal service that was spent under each retirement system. CRS-13 Income and Expenditures of the Civil Service Retirement and Disability Fund, 2002. The Civil Service Retirement and Disability Fund (CSRDF) ended FY2002 with a balance of $569.5 billion. By law, these assets are invested in special-issue U.S. Treasury bonds. The balance of the trust fund represents the amount of budget authority available to pay benefits under both CSRS and FERS. The fund’s balance at the end of 2002 was more than 11 times the value of the CSRS and FERS annuities paid from the fund that year. The Civil Service Retirement and Disability Fund receives income from several sources. Some of the fund’s income results from cash transactions. Other income comes from intra-governmental transfers. The largest cash transaction ($4.0 billion in 2002) consists of employee contributions to CSRS and FERS. These contributions are equal to 7.0% of base pay under CSRS and 0.8% of pay under FERS.12 Smaller cash payments are received from the District of Columbia to finance retirement benefits for its employees, and from additional cash contributions made by federal workers. These usually are former federal employees who are returning to government service and who had previously withdrawn their retirement contributions. The fund’s largest sources of income are (1) interest payments on the U.S. Treasury bonds it holds, (2) a payment from the general fund of the Treasury to make up for the insufficient funding of benefits accrued under CSRS, and (3) payments from federal agencies and the Postal Service on behalf of their employees.13 Agency contributions under CSRS are equal to 7.0% of payroll, and are supplemented by transfers from the general fund of the Treasury equal to approximately 10% of payroll. Agency contributions to FERS are required by law to be equal to the full actuarial cost of the program minus employee contributions. Agency contributions to FERS equal 10.7% of pay in 2004. These three sources of income are not cash transactions, but intra-governmental transfers which result in an increase in the fund’s budget authority as recorded in the accounts of the U.S. Treasury. The fund receives Treasury bonds as a record of this budget authority, which it redeems periodically as annuity payments come due.14 12 Under the Balanced Budget Act of 1997 (P.L. 105-33), employee contribution rates under CSRS and FERS rose by 0.25% in January 1999 and by a further 0.15% in January 2000. They were to increase by another 0.1% in January 2001 before reverting to their previous levels — 7.0% under CSRS and 0.8% under FERS — after December 31, 2002, but the increased contributions were repealed by P.L. 106-346. 13 At the time CSRS was created in 1920, it was common for private employers to pay some retirement benefits directly from their sales revenues rather than from reserves held in a pension fund. Because CSRS was not designed to be funded entirely from employee and agency contributions, some of the benefits accrued by workers covered by CSRS are financed through transfers from the general revenues of the U.S. Treasury. P.L. 108-18 (April 23, 2003) will reduce future Postal Service Payments to the Civil Service Retirement and Disability Fund. For more information, see CRS Report Rl31684, Funding Postal Service Obligations to the Civil Service Retirement System. 14 Also see CRS Report RL30023, Civil Service Retirement Programs: Budget and Trust (continued...) CRS-14 Expenditures from the retirement and disability fund consist almost entirely of payments to retired federal employees and their surviving spouses and dependents. Annuity payments totaled $48.5 billion in 2002, while payments to the estates of decedents and payments to separating employees accounted for another $285 million. Administrative expenses for the fund were $131 million, just 0.27% of expenditures. Table 8. Income and Expenditures of the Civil Service Retirement and Disability Fund, 2002-2004 (amounts in millions) Beginning balance Income to the fund Cash transactions: Employee contributions District of Columbia Other employee deposits Intragovernmental transfers: Agency contributions Postal Service (total) Interest on securities General fund receipts Re-employment offset Total income to the fund FY2002 FY2003(est.) FY2004(est.) $542,639 $573,738 $602,596 $3,998 $61 $477 $3,930 $52 $494 $3,858 $46 $520 $10,731 $6,763 $35,902 $22,108 $29 $80,069 $9,975 $7,026 $37,266 $22,484 $29 $81,256 $10,739 $7,221 $38,768 $22,787 $30 $83,969 Expenditures from the fund Employee annuities Survivor annuities Payments to estates Separated employees Administration Total expenditures from the fund -$40,764 -$7,790 -$150 -$135 -$131 -$48,970 -$42,479 -$8,086 -$163 -$127 -$136 -$50,991 -$43,671 -$8,497 -$169 -$114 -$148 -$52,599 Legislation (Postal Service Payments) –- -$1,407 -$626 $602,596 $633,340 Ending balance $573,738 Source: U.S. Office of Management and Budget, Budget of the United States Government, FY2004. 14 (...continued) Fund Issues. CRS-15 Recent Trends in the Balance of the Civil Service Retirement and Disability Fund. Between 1989 and 2002, the balance of the Civil Service Retirement and Disability Fund rose from $215 billion to $574 billion, an increase of 167%. (See Table 9.) The balance of the fund has been rising partly because the civil service retirement programs are in a long-term transition from pay-as-you-go financing under CSRS to advance-funding under FERS. For most of its history, CSRS benefits were funded on a pay-as-you-go basis with a small reserve equal to about one year of benefit payments to meet unexpected contingencies. Employee contributions and agency contributions were less than the actuarial value of the benefits that were accrued each year by federal employees. In 1969, P.L. 91-93 mandated annual payments to the fund from the general revenues of the U.S. Treasury to make up most of this shortfall.15 When Congress passed the legislation that created FERS in 1986, it required that the full actuarial value of benefits accrued each year by federal employees covered by the program (including the value of future COLAs) must be funded by the sum of employee and agency contributions. The Office of Personnel Management estimates that at some time in the 21st century, the trust fund will reach a steady state in which it holds sufficient budget authority to finance about 20 years of retirement and disability benefits. Table 9. Income and Expenditures of the Civil Service Retirement and Disability Fund, 1989 to 2004 (in billions of dollars) Fiscal year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003(est.) 2004(est.) CSRDF income $48.8 $52.2 $56.2 $59.5 $62.2 $63.5 $65.7 $66.6 $70.2 $72.2 $74.5 $76.0 $77.9 $80.1 $79.8 $83.3 CSRDF expenditures -$29.2 -$31.1 -$33.3 -$33.7 -$34.9 -$36.4 -$38.4 -$39.8 -$41.7 -$43.1 -$43.9 -$45.2 -$47.4 -$49.0 -$51.0 -$52.6 Ending balance $214.6 $235.6 $258.5 $284.4 $311.8 $338.9 $366.2 $393.0 $421.5 $450.7 $481.3 $512.1 $542.6 $573.7 $602.5 $633.2 Source: Office of Management and Budget, Budget of the United States Government, various years. 15 The Office of Management and Budget has estimated that employee and agency contributions and the transfers from the general fund are sufficient to meet all of the actuarial costs of CSRS except for the increase in benefits represented by COLAs. CRS-16 Number of Civil Service Annuitants and Total Annuity Payments, 1970 to 2006. The number of people receiving civil service annuity payments has more than doubled since 1970, but the rate of increase has slowed since 1985. (See Table 10.) The rapid rise in the number of civil service annuitants from less than one million in 1970 to approximately two million in 1985 resulted from the increase in federal employment that occurred between 1940 and 1955. (See Table 11.) Throughout the 1930s, civilian federal employment (including postal employees) was less than one million. 1940 was the first year in which there were more than one million people in the federal workforce. By 1955, civilian federal employment had reached 2.4 million. There were brief upward spikes in federal employment during World War II and the Korean War, but relatively few of these war-time workers remained in service long enough to become vested in pension benefits. After 1955, civilian federal employment increased much more slowly. It reached 2.9 million in 1970, due in part to the war in Vietnam and the creation of such large-scale social programs as Medicare and Medicaid in the 1960s. The slower but still steady increase in the number of federal employees in the years between 1955 and 1970 has had as one of its consequences the slower but steady increase in the number of civil service annuitants in the years since 1985. Between 1985 and 2000, the number of civil service annuitants rose from around 2 million to about 2.4 million. The Office of Management and Budget estimates that by 2006 there will be approximately 2.5 million people receiving federal civil service annuities. Expenditures for civil service annuities have grown by a greater percentage than the number of annuitants because they are affected not only by the number of people employed by the federal government, but also by increases in average life-span, growth in real wages, and inflation. Cost-of-living adjustments — which have been applied to civil service annuities since 1962 — do not represent an increase in the real value of these annuities. They merely keep purchasing power from eroding due to the effects of inflation.16 Under current law, the real value of a civil service annuity either remains constant (CSRS) or declines (FERS) during retirement.17 Therefore, the increase in the real value of annuities has been the result of increases in the average value of the “high-3" average pay on which these annuities are based. Rates of increase in the high-3 average pay of retiring federal employees are in turn affected by adjustments to pay for each grade-and-step level;18 special pay increases such as locality pay 16 On the revenue side of the equation, federal tax revenues increase each year partly as a result of inflation, and income tax brackets are indexed in recognition of increases in personal income that result solely from inflation. 17 Some CSRS COLAs in the 1970s exceeded the rate of inflation because P.L. 91-93, enacted in 1969, called for COLAs of “CPI plus one percentage point.” The additional one percentage point was repealed by P.L. 94-440, enacted in 1976. FERS annuities are only partially indexed for annual increases in the general price level that exceed 2.0%, as measured by the Consumer Price Index (CPI-W.) 18 Adjustments in the pay for each grade and step affect the real value of pay only to the extent that they exceed the rate of inflation, which has only rarely occurred. In the long run, (continued...) CRS-17 adjustments; the distribution of federal employees among various grade-and-step levels over time; and average length of service (since each additional year of service tends to increase the high-3 average pay). The average real value of civil service annuities per annuitant can be expected to decline in the future as a growing number of new retirees are covered by FERS rather than CSRS. FERS annuities are supplemented by Social Security benefits and the Thrift Savings Plan. 18 (...continued) wages increase faster than prices in the economy at large because of increases in worker productivity (measured as output per worker per hour work.) Increases in productivity are the chief source of growth in economic output and worker incomes. CRS-18 Table 10. Annuitants and Annuity Payments, 1970 to 2006 Year Total annuitants (000s) Payments in nominal dollars (millions) Payments in constant 2002 dollars (millions) 1970 962 $2,746 $12,732 1971 1,026 3,228 14,339 1972 1,166 3,772 16,234 1973 1,277 4,515 18,294 1974 1,335 5,661 20,657 1975 1,391 7,048 23,568 1976 1,452 8,267 26,138 1977 1,522 9,531 28,294 1978 1,589 10,867 29,984 1979 1,656 12,369 30,650 1980 1,675 14,662 32,011 1981 1,779 17,597 34,826 1982 1,829 19,405 36,176 1983 1,869 20,717 37,420 1984 1,910 21,813 37,769 1985 1,971 23,012 38,475 1986 2,008 23,942 39,299 1987 2,055 25,713 40,720 1988 2,095 28,047 42,651 1989 2,122 29,134 42,268 1990 2,143 31,036 42,719 1991 2,184 33,188 43,836 1992 2,185 33,545 43,013 1993 2,242 34,792 43,315 1994 2,263 36,254 44,009 1995 2,311 38,319 45,234 1996 2,333 39,670 45,485 1997 2,343 41,604 46,633 1998 2,361 42,943 47,395 1999 2,369 43,828 47,327 2000 2,372 45,072 47,087 2001 2,380 47,244 47,991 2002 2,383 48,838 48,838 *2003 2,400 50,854 49,711 *2004 2,446 52,450 50,167 *2005 2,486 54,844 51,227 *2006 2,526 57,197 52,122 *2007 2,559 59,582 52,971 *2008 2,595 61,982 53,761 Source: Office of Personnel Management and Office of Management and Budget. Note: Depending on the day that the fiscal year begins, a year can have 11, 12, or 13 payments. * Estimated number of annuitants and nominal outlays from the Budget of the United States. CRS-19 Civilian Federal Employment, 1940 to 2002. Since 1990, the number of civilian federal employees (including the U.S. Postal Service, which participates in both CSRS and FERS) has fallen by 505,000. (See Table 11.) Civilian federal employment outside the Postal Service has fallen by 498,000, a decline of 21.5% since 1990. These reductions yield immediate savings in payroll costs, and ultimately they will result in lower expenditures for retirement annuities for federal employees. In the near-term, however, reductions in the federal work force may result in a greater number of annuitants to the extent that the reductions are achieved by inducing employees to retire early. Note that in 2002, employment in the Judicial Branch exceeded employment in the Legislative Branch. Between 1983 and 2000, employment in the Legislative Branch declined from 40,000 employees to 31,000 employees. Over the same period, employment in the Judicial Branch rose from 15,000 to 33,000. CRS-20 Table 11. Civilian Federal Employment, 1940 to 2002 (In thousands, as of September 30 each year) Year 1940 1945 1950 1955 1960 1965 1970 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Legislative Branch 20 25 23 22 23 26 31 39 39 39 39 40 40 39 39 39 39 39 38 38 38 38 38 39 39 38 35 33 32 31 30 30 31 33 31 Judicial Branch 2 3 4 4 5 6 7 10 11 13 13 13 15 16 16 17 17 18 19 20 22 22 24 26 28 28 28 29 30 30 32 32 32 32 33 Executive Branch 758 3,181 1,449 1,860 1,808 1,900 2,158 2,149 2,157 2,131 2,164 2,161 2,161 2,143 2,110 2,157 2,171 2,214 2,193 2,235 2,222 2,238 2,250 2,244 2,227 2,157 2,085 2,012 1,934 1,867 1,856 1,821 1,784 1,738 1,750 Source: Office of Personnel Management. Note: Table shows total persons employed, including part-time. Postal Service 312 379 485 512 563 596 726 699 676 658 656 662 660 663 660 663 683 750 774 798 832 826 817 804 792 790 823 845 852 854 871 866 861 831 810 Total 1,091 3,588 1,961 2,397 2,398 2,528 2,922 2,897 2,883 2,841 2,872 2,876 2,876 2,861 2,825 2,876 2,910 3,021 3,024 3,091 3,114 3,124 3,129 3,113 3,086 3,013 2,971 2,919 2,848 2,782 2,789 2,749 2,708 2,634 2,624 CRS-21 Age Distribution of Executive Branch Employees. Employees of the federal government are older on average than workers in the private sector. Fortyone percent of employees in the Executive branch were under age 45 in 2001. Nineteen percent were between the ages of 45 and 49, and 40% were age 50 or older. (See Table 12.) In contrast, according to data collected by the U.S. Bureau of the Census, an estimated 66% of all wage and salary workers in the private sector were under age 45 in 2000. Eleven percent of private sector employees were ages 45 to 49, and 23% were age 50 or older.19 Under both CSRS and FERS, an employee can retire with an immediate, unreduced annuity at age 55 with 30 years of service or at age 60 with 20 years of service. Nearly 40% of federal employees will reach age 55 within 10 years, but not all of them will have 30 years of service at that age. Of those who do, not all will retire immediately. The average age among all federal employees who retired in 2002 was 58. The average among those who took normal retirement – as opposed to early retirement or disability retirement, for example – was 61.20 Table 12. Age Distribution of Full-time, Permanent Employees (Employees in thousands, as of September 30, 2001) Under Age 45 45 - 49 50 - 54 55 - 59 60 - 64 Number 646 304 333 186 74 27 1,569 Percent 41.1% 19.4% 21.2% 11.8% 4.7% 1.7% 100% Age 65 or older Total Source: U.S. Office of Personnel Management 19 CRS analysis of data from the March 2002 Current Population Survey. Based on wage and salary workers employed in the private sector. 20 Retirements other than normal retirements include disability retirements, voluntary early retirements, involuntary retirements, special retirements for law enforcement officers and firefighters, and other unclassified retirements.