Order Code RL30023
CRS Report for Congress
Received through the CRS Web
Federal Employee Retirement Programs:
Budget and Trust Fund Issues
Updated May 24, 2004
Patrick J. Purcell
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

Federal Employee Retirement Programs: Budget and
Trust Fund Issues
Summary
Retirement annuities for civilian federal employees are provided mainly through
two programs: the Civil Service Retirement System (CSRS) and the Federal
Employees Retirement System
(FERS). These annuities are financed through a
combination of employee contributions and payments made by the federal
government to the civil service retirement trust fund. The federal government makes
supplemental payments into the trust fund on behalf of employees covered by CSRS
because employee and agency contributions do not meet the full cost of the benefits
earned by employees covered by that system.
Civil service retirement annuities are paid from the same trust fund regardless
of whether the benefits were accrued under CSRS or FERS. FERS pension benefits
are fully funded as they are earned, and the full cost of funding retirement benefits
under FERS is recognized in each government agency’s annual budget. CSRS is not
fully funded, and the full costs of pension benefits earned by workers under CSRS
are not accounted for in the budgets of individual federal agencies. Although the two
programs are financed differently, the ultimate source of the money from which
benefits are paid is the same for both programs: revenue collected by the government
through taxes and by borrowing from the public.
In FY2004, the expenditures of the Civil Service Retirement and Disability
Fund (CSRDF) are estimated to reach $52.8 billion, composed mostly of annuity
payments to retirees and survivors. These expenditures will be 38% as large as the
$137.6 billion paid as salary and wages to current employees. Expenditures from the
retirement fund will increase over the next several years until they are about 45% as
large as the payroll for current federal employees. After 2015, they will fall relative
to payroll expenses. By 2050, expenditures from the retirement fund will be less than
one-fourth as large as the government’s wage and salary payments to current
employees. Estimated expenditures from the CSRDF are equal to less than one-half
percent of the nation’s gross domestic product (GDP) in 2004. Federal pension
expenditures are expected to remain steady as a share of GDP for the next 15 years
before declining from about 0.43% of GDP in 2020 to 0.20% by 2060.
By law, benefits under FERS must be pre-funded according to their full actuarial
cost. CSRS benefits, in contrast, are not fully pre-funded. Fully funding the CSRS
would require increased contributions from the federal government or employees. If
agencies fully funded the costs of the CSRS through increased contributions, they
could be required to do so from their current-law appropriations, or they could be
granted additional appropriations by Congress. However, because these funds would
be used by the CSRDF to purchase Treasury bonds (which is an intragovernmental
transfer
of funds), no additional outlays would occur and there would be no effect on
the federal budget. Pre-funding the full costs of the CSRS without giving agencies
additional appropriations would reduce the federal budget deficit (or increase the
budget surplus), because the outlays of each agency would have to be reduced by the
amount of its additional contributions to the CSRDF.

Contents
Fundamentals of Pension Plan Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Pre-funding of Pension Benefits in the Private Sector . . . . . . . . . . . . . . 2
Pre-funding of Pension Benefits in the Public Sector . . . . . . . . . . . . . . 3
Investment of Trust Fund Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Financing Retirement Annuities for Federal Employees . . . . . . . . . . . . . . . . 5
Employee Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Employer Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
How the Civil Service Trust Fund Operates . . . . . . . . . . . . . . . . . . . . . . . . . 7
Financial Status of the Civil Service Trust Fund . . . . . . . . . . . . . . . . . . . . . . 8
The Short-Term Picture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Long-Term Picture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Civil Service Retirement and Disability Fund in the Federal Budget . . 14
Civil Service Retirement: Funding and Accounting Issues . . . . . . . . . . . . 16
Accounting for Pension Costs Under CSRS and FERS . . . . . . . . . . . . 16
Why Are CSRS Revenues Less Than the Present Value of Benefits?
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Accounting Issues Raised by the Way CSRS Benefits Are Financed
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
List of Tables
Table 1. Income and Expenditures of the Civil Service Retirement and
Disability Fund, 2003-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Table 2. Past and Projected Flow of Assets of the Civil Service
Retirement and Disability Fund, 1990 to 2075 . . . . . . . . . . . . . . . . . . . . . . 13

Federal Employee Retirement Programs:
Budget and Trust Fund Issues
Pensions for civilian federal employees are provided through two programs, the
Civil Service Retirement System (CSRS) and the Federal Employees Retirement
System (FERS). CSRS was authorized by the Civil Service Retirement Act of 1920
(P.L. 66-215) and FERS was established by the Federal Employees’ Retirement
System Act of 1986 (P.L. 99-335). Under both CSRS and FERS, employees and
their employing agencies make contributions to the Civil Service Retirement and
Disability Fund (CSRDF), from which pension benefits are paid to retirees and their
surviving dependents. Retirement and disability benefits under FERS are fully
funded by these contributions and the interest earned by the bonds in which the
contributions are invested. The cost of the retirement and disability benefits earned
by employees covered by CSRS, on the other hand, are not fully funded by agency
and employee contributions and interest income. The federal government therefore
makes supplemental payments each year into the civil service trust fund on behalf of
employees covered by CSRS. Even with these additional payments into the trust
fund, however, CSRS pensions are not fully pre-funded.
Prior to 1984, federal employees did not pay social security payroll taxes and
they were not eligible for social security benefits. The Social Security Amendments
of 1983 (P.L. 98-21) mandated Social Security coverage for civilian federal
employees hired on or after January 1, 1984. This change was made in part because
the Social Security system needed additional cash contributions to remain solvent.
Enrolling federal workers in both CSRS and Social Security, however, would have
required employee contributions equal to more than 13% of workers’ salaries.
Consequently, Congress directed the development of the Federal Employees’
Retirement System (FERS), with Social Security as the cornerstone. The FERS is
composed of three elements: (1) Social Security, (2) a defined benefit plan (the
FERS basic retirement annuity), and (3) a defined contribution plan (the Thrift
Savings Plan).1 All permanent federal employees initially hired on or after January
1, 1984, are covered under FERS, as are employees who voluntarily switched from
CSRS to FERS during “open seasons” held in 1987 and 1998.
Fundamentals of Pension Plan Financing
Retirement programs are classified as either defined benefit (DB) plans or
defined contribution (DC) plans. In a defined benefit plan, the retirement benefit
typically is based on salary and years of service and is usually paid as a life-long
1 This report describes the financing of CSRS and the FERS basic annuity. For a
description of the Thrift Savings Plan, see CRS Report RL30387, Federal Employees’
Retirement System: The Role of the Thrift Savings Plan
.

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annuity. 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 then is invested
in assets such as stocks and bonds. In some plans, the amount of the employer
contribution depends on how much the employee contributes from his or her pay.
When the worker retires, he or she receives 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). This is usually paid as a lump-sum, but the employee sometimes
has the option to receive benefits as a series of fixed payments over a period of years
or in the form of a life-long annuity.2
An important difference between defined benefit and defined contribution plans
is that the employer bears the financial risk in a defined benefit plan, while the
employee bears the financial risk in a defined contribution plan. In a defined benefit
plan, the employer promises to provide retirement benefits equal to a certain dollar
amount or a specific percentage of the employee’s pay. Under federal law, employers
in the private sector are required to pre-fund these benefits by setting aside money in
a pension trust, which is typically invested in stocks, bonds, and other assets. The
employer is at risk for the full amount of retirement benefits it has promised to its
employees and their survivors. If the value of the pension trust falls below the
present value of the benefits that have been accrued under the plan, the employer is
required by law to make up this deficit — called an unfunded liability — through
additional contributions over a period of years.
In a defined contribution plan, the employer bears no risk beyond its obligation
to make contributions to each employee’s retirement account. In a DC plan, it is the
employee who bears the risk that markets will decline (“market risk”) or that the
specific investments he or she chooses will fall in value (“investment risk”). If the
contributions to the account are inadequate, or if the securities in which the account
is invested lose value or increase in value too slowly, the employee risks having an
income in retirement that is too small to maintain his or her desired standard of
living. If this situation occurs, the worker might find it necessary to delay retirement.
Both kinds of retirement plan are eligible for favorable treatment under the
Internal Revenue Code, provided that they meet the statutory requirements. Plans
that meet these requirements are called tax-qualified plans. Employers are permitted
to deduct contributions to a qualified plan from the firm’s income. Contributions and
investment earnings are not counted as taxable income to the employee until they are
distributed during retirement.
Pre-funding of Pension Benefits in the Private Sector. Private-sector
employers are not required to provide retirement plans for their employees, but those
that do must comply with the Employee Retirement Income Security Act of 1974 (P.L.
2 Retirees can also choose a joint and survivor annuity in which a surviving spouse
continues to receive an annuity after the retired worker’s death. Because it is guaranteed for
the lifetimes of both spouses, it pays a lower monthly benefit than a single-life annuity.

CRS-3
93-406), popularly known as “ERISA.”3 ERISA sets standards that plans must meet
with respect to reporting and disclosure, employee participation, participant vesting,
plan funding, and fiduciary standards.
The administration of ERISA is divided among the U.S. Department of Labor
(DOL), the Department of the Treasury’s Internal Revenue Service (IRS), and the
Pension Benefit Guaranty Corporation (PBGC). Title I of ERISA contains rules for
reporting and disclosure, vesting, participation, funding, fiduciary conduct, and civil
enforcement. Title II of ERISA, amended the Internal Revenue Code to parallel
many of the Title I rules. Title III is concerned with jurisdictional matters and with
coordination of enforcement and regulatory activities by the DOL and the IRS. Title
IV covers the insurance of defined benefit pension plans and is administered by the
Pension Benefit Guaranty Corporation (PBGC). DOL has primary responsibility for
reporting, disclosure and fiduciary requirements; and the IRS has primary
responsibility for participation, vesting and funding issues. However, DOL may
intervene in any matters that materially affect the rights of participants, regardless of
primary responsibility.
Because employers cannot be certain that their revenues in future years will be
sufficient to pay the pension benefits they owe to retired workers, ERISA requires
these benefits to be pre-funded. Pre-funding of benefits protects employees who
have earned the right to receive pension payments in the event that the firm goes out
of business. Employers in the private sector pre-fund their pension liabilities by
establishing pension trusts, which are invested in assets such as corporate stocks and
bonds and U.S. Treasury bonds. ERISA also established the Pension Benefit
Guaranty Corporation, which pays pension benefits (up to certain limits) in the event
that a company goes out of business with an underfunded pension plan. The PBGC,
which is funded by premiums collected from employers, insures only defined benefit
plans.
Pre-funding pension benefits is consistent with the principle of accrual
accounting, in which a firm’s assets and liabilities are recognized in its financial
records as they accrue, as opposed to waiting until cash is received or paid out. By
providing for future pension liabilities as they are incurred, the firm is recognizing
that the pension benefits that it must pay in the future are part of the cost of doing
business today. When an employer fails to set aside enough money each year to pay
the retirement benefits accrued by its workers that year, it accumulates an “unfunded
liability.” An employer that develops an unfunded liability must make additional
deficit reduction payments over a period of years until the pension plan’s assets equal
the present value of its liabilities.
Pre-funding of Pension Benefits in the Public Sector. When the Civil
Service Retirement System was established in 1920, it was not pre-funded. Benefits
paid to retirees and their surviving dependents were paid from current contributions
to the plan. This method of financing retirement benefits, called “pay-as-you-go,”
also has been used in the Social Security system for most of its history. The federal
government is not likely to “go out of business,” and it could have continued to fund
3 Neither federal nor state and local employee pension plans are subject to ERISA.

CRS-4
its pension obligations to federal employees on a pay-as-you-go basis. Nevertheless,
when Congress established the Federal Employees’ Retirement System in 1986, it
required all pension benefits earned under FERS to be fully pre-funded by employer
and employee contributions and the interest earned by the bonds in which these
contributions are invested.
In establishing FERS, Congress decided to require pre-funding of federal
employee retirement benefits for reasons of equity and efficiency. Many employers
would have regarded it as inequitable for Congress to have required pre-funding by
private-sector pension plans while not requiring it for federal employees’ retirement
benefits under FERS. Moreover, pre-funding promotes more efficient allocation of
resources between personnel costs and other expenses because it forces agencies to
recognize the full cost of retirement benefits when preparing their annual budget
requests. Efficient allocation of resources between labor and other inputs can occur
only when the price paid for each resource reflects its full marginal cost (the cost of
one more unit of each resource). Pre-funding employee pensions under FERS
promotes efficient allocation of resources by requiring the full marginal cost of
employee compensation to be recognized in each agency’s budget.
Investment of Trust Fund Assets. The assets in a pension fund represent
a “store of wealth” that guarantees that future obligations can be met as they come
due. The Civil Service Retirement and Disability Trust Fund, however, is not a store
of wealth in the same way as the pension funds of private-sector firms and state and
local governments. The civil service trust fund is required by law to invest
exclusively in U.S. Treasury bonds. The bonds can be converted to cash only by
collecting taxes from the public (or by issuing more Treasury bonds, which merely
delays the time at which taxes must be collected.) In short, “pre-funding” federal
employee retirement benefits with U.S. Treasury bonds will not obviate the need to
raise revenue from the public to pay civil service retirement benefits as those benefits
come due.4 The bonds held by the civil service trust fund assure that the fund has the
legal authority to issue pension checks drawn on the Treasury, but they do not reduce
future claims against the ultimate guarantor of federal employee pensions, which is
the tax-paying public.
If the Civil Service Retirement and Disability Fund held assets that earned a
higher average rate of return than U.S. Treasury bonds, some of the future cost of
civil service retirement annuities could be paid from these higher investment returns.
However, in the short run, allowing the civil service retirement trust fund to invest
in private-sector securities such as corporate stocks and bonds would result in higher
federal expenditures. The trust fund’s two main sources of income are employee
contributions and contributions from federal agencies on behalf of their employees.
Employee contributions are income both to the federal government and to the trust
fund. Agency contributions, however, while they are income to the trust fund, are not
income to the federal government. Agency contributions to the trust fund are
intragovernmental transfers that have no effect on the size of the government’s
4 The bonds held by the Civil Service Retirement and Disability Fund represent budget
authority
, which is the legal basis for the Treasury to disburse funds.

CRS-5
annual budget deficit or surplus. Outlays from the trust fund occur mainly as benefit
payments to annuitants and payment of administrative expenses of the fund.
If the trust fund were to purchase private assets such as corporate stocks and
bonds rather than U.S. Treasury bonds, an outlay from the trust fund would be
required to purchase the assets. This outlay would consist partly of the employee
contributions that are income to both the trust fund and the Treasury and partly of the
agency contributions that are income to the trust fund, but are not income to the
Treasury. If employee contributions were used to purchase private-sector assets,
they would no longer be income to the Treasury, and would increase the federal
budget deficit by the amount diverted to purchase private-sector assets. Agency
contributions — currently an intragovernmental transfer — would instead be used to
purchase private-sector assets, representing an outlay of funds from the Treasury.
Over the long run, however, purchasing private-sector assets would not increase
the budget deficit, and it could reduce it. Outlays would be moved from the future
— where they would have occurred as benefit payments — to the present, where they
would occur as asset purchases. If the net rate of return on private-market securities
exceeded the return from Treasury bonds, the extra investment income earned by the
trust fund would reduce the amount of tax revenue that would have to be raised from
the public in the future to pay pension benefits under CSRS and FERS. This would
also be true for any other federal trust fund that purchased higher-yielding private-
sector securities, such as the Social Security trust fund.
Financing Retirement Annuities for Federal Employees
The source of the money from which pension annuities are paid is the same for
both CSRS and FERS: revenue collected by the government through taxes,
employee contributions, and borrowing from the public.5 Federal agencies “pre-
fund” their pension liabilities by deferring some of their budget authority (which
represents legal permission to spend money from the Treasury) until it is needed to
pay pensions to retired workers. Federal agencies defer this budget authority by
transferring it to the Civil Service Retirement and Disability Trust Fund. The
Treasury credits the fund with the appropriate amount of budget authority in the form
of special-issue bonds that earn interest equal to the average rate on the Treasury’s
outstanding long-term debt. In the future, when annual outlays for retirement and
disability benefits exceed the amount of income from employee and agency
contributions, the Civil Service Retirement and Disability Trust Fund will redeem
bonds in the amount of the additional budget authority it requires to make benefit
payments in that year.
Employee Contributions. Federal employees have mandatory contributions
to the Civil Service Retirement and Disability Trust Fund deducted from their
paychecks. Employees of the executive branch who are covered by CSRS contribute
5 The contributions to the trust fund from the U.S. Postal Service are derived mainly from
the revenue derived by that agency from selling postal services to the public.

CRS-6
7.0% of basic pay, while workers covered by FERS contribute 0.8% of pay.6
(Members of Congress contribute 8.0% of salary if covered by CSRS and 1.3% if
covered by FERS). In addition, workers covered by FERS pay Social Security taxes
of 6.2% to the Old-Age, Survivors, and Disability Insurance program (OASDI) on
salary up to the annual maximum taxable payroll amount ($87,900 in 2004).7
Congress made the sum of FERS contributions and OASDI payroll taxes equal to the
CSRS contribution rate of 7.0% so that workers with the same salary would have the
same take-home pay, regardless of whether they were covered by CSRS or FERS.8
Employee contributions to CSRS and FERS do not go into individual accounts,
and the pension annuity that a retired employee receives from CSRS or FERS is not
directly related to the amount that the employee contributed to the system. Under
both CSRS and FERS, the amount of the retirement annuity is based on the
employee’s years of service and the average of the employee’s highest three
consecutive years of salary. Workers covered by CSRS accrue benefits equal to 1.5%
of pay for their first five years of service, 1.75% for the next five years, and 2.0% of
pay for each year beyond the tenth. Employees covered by FERS accrue benefits
equal to 1.0% of pay for each year of service. If they have worked for the federal
government for 20 or more years and retire at age 62 or older, the accrual rate under
FERS is 1.1% for each year of service.
Employer Contributions. Whether a federal employee is covered by CSRS
or FERS, his or her employing agency also contributes to the CSRDF. The amount
of the contribution differs between CSRS and FERS for employees with the same
basic pay. Federal law requires that agency contributions to FERS must be equal to
the full cost of FERS, minus employee contributions. The percentage of basic pay
contributed by federal employees is set in law at the difference between the CSRS
contribution rate (7.0%) and the Social Security payroll tax rate (6.2%). The cost of
retirement and disability benefits accrued each year under FERS is currently
estimated by the Office of Personnel Management (OPM) to be equal to 11.5% of
payroll. Thus, federal agencies contribute an amount equal to 10.7% of their total
payroll to the CSRDF for employees covered by FERS.9 Together, the employee and
6 Under the Balanced Budget Act of 1997 (P.L. 105-33) employee contribution rates under
both CSRS and FERS rose by 0.25% in Jan. 1999, and by a further 0.15% in January 2000.
Another 0.1% increase was scheduled for Jan. 2001. Employee contribution rates were to
revert to previous levels on Jan. 1, 2003. The increases mandated by the BBA were repealed
by P.L. 106-46 (H.R. 4475 of the 106th Congress), effective Jan. 1, 2001.
7 Retired 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.
8 Take-home pay is equal for two workers with the same salary whether they are covered
by CSRS or FERS only up to the Social Security wage base ($87,900 in 2004). Employees
covered by CSRS contribute 7.0% of all wage income to CSRS. Employees covered by
FERS contribute only 0.8% of pay to FERS on salary above the Social Security wage base.
9 Because the cost of retirement and disability benefits can vary from year to year based on
the age and experience profile of the federal work force, the percentage of pay contributed
to FERS by federal agencies on behalf of their employees also can change from year to year.
(continued...)

CRS-7
employer contributions to the CSRDF for employees enrolled in FERS, plus the
interest that accrues on those contributions, fully fund the pension benefits earned
each year by employees covered by FERS.
Unlike FERS, which by law must be fully pre-funded, the retirement benefits
accrued by employees covered by CSRS contributions are not fully pre-funded by
employee and agency contributions and interest earnings. As a result, retirement and
disability benefits under CSRS are paid for in part from the general revenues of the
U.S. Treasury. Each year, the Treasury credits the Civil Service Retirement Trust
Fund with additional budget authority for this purpose. In FY2004, this transfer
amounts to $21.9 billion. (See Table 1.)
How the Civil Service Trust Fund Operates
The Civil Service Retirement and Disability Trust Fund is a record of the budget
authority available to pay retirement and disability benefits. Each year, the trust fund
is credited by the Treasury with contributions from current employees and their
employing agencies, interest on the securities held by the fund, interest on previous
service for which benefits have been accrued but for which budget authority has not
yet been provided, and a transfer from the general revenues of the Treasury. Only a
small part of this income to the fund — mainly contributions from employees — is
in cash, and represents income to both the trust fund and the government as a whole.
The remainder of these transactions are intragovernmental transfers in which budget
authority is transferred from agencies to the trust fund. These intragovernmental
transfers have no effect on the size of the government’s budget deficit.10
The largest sources of income to the trust fund are agency and employee
contributions, contributions from the U.S. Postal Service, interest earned by the
securities held by the fund, and a transfer of general revenues of the Treasury. The
transfers from the Treasury pay part of the actuarial costs of CSRS that are not met
by contributions from employees and their employing agencies.11 The full actuarial
cost of the CSRS has been estimated by the Office of Personnel Management to be
24.4% of payroll. Workers covered by CSRS and their employing agencies each
contribute an amount equal to 7.0% of payroll to the civil service trust fund.
9 (...continued)
The full cost of the FERS to the federal government also includes the employer share of
Social Security taxes and the employer match on employee contributions to the Thrift
Saving Plan. These costs are in addition to the 10.7% of payroll contributed for to the civil
service trust fund to finance the FERS basic retirement annuity.
10 The transaction between the trust fund and the Treasury does not affect the deficit
because it occurs within the government. Only revenues collected from the public and
outlays of federal funds to the public affect the budget deficit.
11 Part of the actuarial cost of CSRS benefits — the cost of future cost-of-living adjustments
(COLAs) paid to retirees — is not covered by contributions from employees, their
employing agencies or the Treasury. As a result, the CSRS continues to accrue an unfunded
liability.

CRS-8
The civil service trust fund is similar to the Social Security trust fund in that, by
law, 100% of its assets are invested in special-issue U.S. Treasury bonds or other
bonds backed by the full faith and credit of the United States government. When the
trust fund needs cash to pay retirement benefits, it redeems the bonds and the
Treasury disburses an equivalent dollar value of payments to civil service annuitants.
Because the bonds held by the trust fund are a claim on the U.S. Treasury, they
ultimately are paid for by the American taxpayer. According to the U.S. Office of
Management and Budget (OMB), balances in the trust fund:
. . . are available to finance future benefit payments and other trust fund
expenditures — but only in a bookkeeping sense. These funds are not set up to
be pension funds, like the funds of private pension plans. The holdings of the
trust funds are not assets of the government as whole 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. From an economic
standpoint, the Government is able to prefund benefits only by increasing saving
and investment in the economy as a whole.12
Financial Status of the Civil Service Trust Fund
The Short-Term Picture. The Civil Service Retirement and Disability Fund
held a balance of $601.7 billion at the close of FY2003, which represents budget
authority that may be used to make payments to annuitants under both CSRS and
FERS. Expenditures from the fund totaled $50.4 billion in 2003, and consisted
mostly of payments to retired federal employees and their surviving dependents.
Annuity payments totaled $50 billion in 2003, and payments to the estates of
decedents and to separating employees accounted for another $276 million.
Administrative expenses for the fund were $119 million, or 0.2% of total
expenditures. (See Table 1.) The trust fund currently holds budget authority equal
to the estimated outlays from the fund over the next nine years.
Each year, the CSRDF receives payments of two types: cash transactions and
intragovernmental transfers. The largest cash transactions ($4.0 billion in 2003)
consist of employee contributions to CSRS and FERS. For executive-branch
employees, these contributions are equal to 7.0% of base pay under CSRS and 0.8%
of pay under FERS. 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, such as former federal employees who return
to government service and repay retirement contributions they had previously
withdrawn.
The largest payments to the CSRDF are those it receives from federal agencies
and the Postal Service on behalf of their employees, interest payments from the U.S.
12 U.S. Office of Management and Budget, Budget of the United States Government, Fiscal
Year 2005: Analytical Perspectives
(Washington: GPO, 2004), p. 343.

CRS-9
Treasury on the bonds held by the fund, and a payment from the general fund of the
Treasury to make up for the insufficient funding of benefits accrued under CSRS.13
These payments are not cash transactions. They are intragovernmental transfers that
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.
In recent years, aggregate employee contributions have declined, while agency
contributions have increased. The main reason for this trend is the continuing
transition in which more of the federal work force is covered by FERS each year.
Employee contributions to the trust fund are a smaller percentage of pay under FERS
(0.8% of pay) than under CSRS (7.0% of pay).14 Agency contributions under FERS
must be equal to the full actuarial cost of the program that is not paid for by
employee contributions. Agency contributions for employees in FERS are equal to
10.7% of payroll in 2004, compared with 7.0% of payroll for employees in CSRS.
13 Federal law requires that employee and agency contributions to the civil service trust
fund, plus the interest paid on securities held by the fund, together must provide sufficient
budget authority to pay all of the benefits that federal employees accrue each year under
FERS, according to actuarial estimates. Employee and agency contributions to CSRS are
not sufficient to fully fund CSRS benefits; consequently, additional budget authority must
be transferred each year from the general revenues of the U.S. Treasury to meet benefit
obligations under CSRS.
14 Employees covered by FERS also pay Social Security taxes of 6.2% of pay up to $87,900.

CRS-10
Table 1. Income and Expenditures of the Civil Service
Retirement and Disability Fund, 2003-2005
(amounts in millions)
FY2003
FY2004(est.)
FY2005(est.)
Beginning balance
$573,738
$601,736
$631,551
Income to the fund
Cash transactions:
Employee contributions
$4,004
$4,087
$3,990
District of Columbia
$53
$46
$42
Other employee deposits
$518
$543
$569
Intragovernmental transfers:
Agency contributions
$11,288
$11,566
$12,769
Postal Service (total)
$3,331
$4,364
$4,450
Interest on securities
$37,261
$36,035
$37,926
General fund receipts
$21,878
$25,970
$26,372
Re-employment offset
$33
$34
$36
Total income to the fund
$78,366
$82,645
$86,154
Expenditures from the fund
Employee annuities
-$42,022
-$44,106
-$45,857
Survivor annuities
-$7,951
-$8,296
-$8,759
Payments to estates
-$153
-$163
-$171
Refunds to separated employees
-$123
-$113
-$104
Administration
-$119
-$152
-$143
Total expenditures from the fund
-$50,368
-$52,830
-$55,033
Ending balance
$601,736
$631,551
$662,672
Source: Office of Management and Budget, Budget of the United States Government, FY2005.
The Long-Term Picture. Table 2 portrays the annual income and
expenditures of the CSRDF through the year 2075, as estimated by OPM. The fund
receives income from employee contributions, government contributions, and interest
income on the securities it holds. The fund’s expenses consist mostly of benefit
payments. The table also shows the year-end balance of the fund and the estimated
amount of the unfunded actuarial liability at the end of the year. The unfunded
actuarial liability represents the difference between the present value of the fund’s
future benefit obligations and the present value of future credits to the fund plus the
value of the securities it holds. The final two columns of the table show,
respectively, the expenditures of the CSRDF relative to the government’s total
payroll expenses for employees and CSRDF expenditures relative to the nation’s
annual gross domestic product (GDP).

CRS-11
The estimates presented in Table 2 show the income to the CSRDF rising over
the projection period from $78 billion in 2004 to $150 billion in 2025 and to $938
billion in 2075.15 The total expenses of the fund are projected to rise more slowly,
increasing from $53 billion in 2004 to $122 billion in 2025 and to an estimated $494
billion in 2075. Consequently, the assets held by the CSRDF also are projected to
increase steadily over the next 70 years, rising from $627 billion in 2004 to more
than $1.1 trillion in 2025 and to $10.3 trillion in 2075. According to the estimates
prepared by OPM, the unfunded actuarial liability of the CSRS will continue to rise
until about the year 2030, when it will peak at $809 billion. From that point onward,
as the number of annuitants covered by CSRS steadily declines, the unfunded
liability will fall, reaching a projected level of $52 billion in the year 2075.
In FY2004, $53 billion will be expended from the CSRDF, composed mainly
of annuity payments to retirees and survivors. The federal government’s payroll
expense for covered employees in 2004 is approximately $138 billion. Therefore,
pension expenditures to former employees and their surviving dependents are equal
to about 38.5% of the amount paid as salary and wages to current employees.
Pension expenditures are projected to increase relative to payroll expenditures over
the next several years, peaking in 2015 at an amount equal to 44.5% of the
government’s salary and wage expenses for its employees. From that point onward,
the expenditures of the CSRDF are projected to fall in comparison with payroll
expenses. By 2075, the amount paid to retired workers and their survivors is
estimated to be 21% as large as the government’s wage and salary payments to its
employees.
Annuity payments to retired workers and their survivors are not a component
of the government’s current payroll expenses. They are a separate, additional
category of the government’s personnel costs. However, CSRDF expenditures
expressed as percentage of payroll are a useful measure of the relative size of pension
expenses because of the assumptions underlying OPM’s estimates of total payroll
expenditures. OPM estimates the government’s annual payroll expense under the
assumption of a constant number of federal workers from year to year. The ratio of
pension outlays to payroll expense provides a measure of the cost of annuities paid
to retirees and survivors relative to payroll expenditures for a workforce of constant
size. Virtually all of the increase in this ratio through the year 2020 can be attributed
to an increase in the number of annuitants relative to the number of currently
employed workers. The decline in the ratio of pension outlays to current pay that
occurs after 2020, however, does not indicate a declining ratio of annuitants to
employees, but rather will occur mainly because more retirees will be receiving
smaller pension benefits under FERS than they would have received under CSRS.
Economists often compare the federal budget to the size of the economy (the
GDP) to evaluate whether federal spending is absorbing more or less of the nation’s
resources over time. Individual components of the budget, too, can be compared to
GDP to evaluate the proportion of the nation’s total economic resources that they
consume each year. The final column of Table 2 shows federal outlays for civil
service pensions as a percentage of GDP. Relative to the total economic resources
15 All amounts in Table 1 and Table 2 are expressed in nominal dollars.

CRS-12
of the economy, the expenditures of the CSRDF fell throughout the 1990s and are
expected to remain steady for the next 15 years before declining dramatically from
2020 to 2075. Federal expenditures for civil service retirement annuities are
estimated to equal to 0.46% of GDP in 2004, down slightly from a high of 0.55% in
1991. Between 2004 and 2020, the annual expenditures of the CSRDF are projected
to remain at about 0.43% to 0.45% of GDP each year. From that point on, outlays
from the CSRDF will fall steadily to about 0.20% of GDP by 2060.
CSRDF expenditures will fall relative to GDP mainly as a result of the decline
in the proportion of civil service annuitants who are covered by CSRS and the
increase in the number who are covered by FERS. The FERS basic annuity was
designed to be much smaller relative to high-3 average pay than a CSRS annuity
because FERS annuitants also receive benefits from Social Security and the Thrift
Savings Plan. Because the transition from CSRS to FERS is mandated by law, the
constant-dollar value of CSRDF outlays per annuitant will decline due to the
different benefit formulas between CSRS and FERS. Consequently, outlays for civil
service annuities are almost certain to decline relative to GDP, even if GDP grows
more slowly than is assumed in the projections displayed in Table 2.16
The estimates in Table 2 do not reflect the effects of the Postal Civil Service
Retirement System Funding Reform Act of 2003 (P.L. 108-18, April 23, 2003), which
lowers the Postal Service’s annual payment for CSRS pensions by over $2.5 billion
beginning in FY2003. The legislation was enacted after a study was conducted by
the Office of Personnel Management of the Postal Service’s estimated remaining
financial obligation to the trust fund for service performed by Postal Service
employees covered under CSRS. The OPM study concluded that because past Postal
Service contributions had earned interest at rates higher than the 5% rate assumed in
statute, the Postal Service’s remaining obligation to the civil service trust fund for
past service performed by employees covered under CSRS was approximately $5
billion, rather than the $30 that had been estimated previously. P.L. 108-18 reduces
the future payments from the USPS to the civil service trust fund in recognition of
the reduction in the Postal Service’s remaining CSRS liabilities.
16 GDP estimates in Table 2 are taken from the 2004 Annual Report of the Board of
Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust
Funds.

CRS-13
Table 2. Past and Projected Flow of Assets of the Civil Service
Retirement and Disability Fund, 1990 to 2075
(amounts in billions)
Assets at
Unfunded Expenses as a Expenses as
Fiscal
Total
Total
End of
Actuarial
Percent of
a Percent of
Year
Income
Expenses
Year
Liability Total Payroll
GDP
Actual
1990
52.7
-31.4
238.0
568.7
35.8%
0.54%
1991
56.8
-33.2
261.6
593.8
36.0
0.55
1992
60.0
-33.2
288.4
599.7
33.9
0.53
1993
62.9
-35.1
317.4
540.1
35.1
0.53
1994
63.8
-36.5
344.3
540.6
35.5
0.52
1995
66.1
-38.6
371.3
545.8
36.8
0.52
1996
67.7
-39.9
398.9
512.4
37.0
0.51
1997
70.4
-41.8
427.5
505.6
38.3
0.50
1998
72.8
-43.2
457.1
496.1
39.4
0.49
1999
73.7
-44.0
486.8
506.6
38.0
0.48
2000
76.0
-45.2
521.5
509.5
37.4
0.46
2001
77.9
-47.1
548.2
510.9
37.6
0.47
Estimated a
2004
78.1
-53.0
626.6
555.3
38.5
0.46
2005
79.7
-55.4
650.8
571.5
39.2
0.46
2010
94.4
-70.1
768.3
650.1
42.5
0.45
2015
111.0
-88.4
883.7
717.1
44.5
0.45
2020
131.1
-105.6
1,004.7
762.2
43.7
0.43
2025
150.0
-121.8
1,140.2
789.7
41.6
0.40
2030
172.3
-136.2
1,299.7
808.6
38.1
0.36
2035
201.7
-148.9
1,527.5
803.6
33.9
0.32
2040
238.6
-161.3
1,862.0
772.4
29.9
0.28
2045
286.1
-175.4
2,345.0
714.2
26.5
0.25
2050
347.9
-195.2
3,021.3
625.9
23.9
0.22
2055
427.9
-225.2
3,931.6
502.1
22.4
0.21
2060
522.1
-268.6
5,102.9
346.6
21.7
0.20
2065
631.0
-327
6,518.7
212.9
21.5
0.20
2070
767.0
-401.4
8,218.2
114.1
21.4
0.19
2075
937.7
-494.2
10,272.0
51.5
21.4
0.19
Source: U.S. Office of Personnel Management, Civil Service Retirement and Disability Fund
Actuarial Valuation, Fiscal Year 2002
; Council of Economic Advisors, Economic Report of the
President, 2004
; and the 2004 Report of the Social Security Board of Trustees.
a. These estimates do not reflect the effects of the Postal Civil Service Retirement System Funding
Reform Act of 2003
(P.L. 108-18, April 23 2003), which lowers the Postal Service’s annual payment
for its CSRS obligation by over $2.5 billion beginning in FY2003.

CRS-14
The Civil Service Retirement and Disability Fund in the
Federal Budget

In FY2003, the total receipts of the CSRDF were approximately $78 billion, and
disbursements from the fund were about $50 billion. The data displayed in Table 1
show that only a small part of the revenues to the fund ($4.0 billion) were cash
receipts
. The remainder consisted of budget authority transferred from other federal
agencies.17 The cash receipts of the fund come primarily from the contributions of
federal and Postal Service employees toward their future retirement benefits. Other
cash income to the fund comes from payments made by the District of Columbia on
behalf of its employees covered by CSRS or FERS, and a small amount of
supplemental contributions made by federal employees. All of the cash payments
into the CSRDF are income to both the U.S. government and to the trust fund. These
cash receipts reduce the government’s budget deficit (or increase its surplus). Benefit
payments to retirees and survivors are cash outlays of the federal government.
Most of the payments into the CSRDF — $74 billion in 2004 — are
intragovernmental transfers. These transactions are income to the fund, but they are
not income to the U.S. government. Agencies of the federal government do business
not only with the public, but also with each other. These intragovernmental
transactions rarely involve cash and they never affect the government’s budget deficit
or surplus because no funds either come into or go out of the government. Cash is
rarely involved in intragovernmental transfers because individual government
agencies, in general, have no cash to spend.18 What the Congress appropriates to
federal agencies each year is not cash, but budget authority. Budget authority is legal
permission for an agency to spend money from the accounts of the U.S. Treasury
.
The Treasury takes in money from the public by collecting taxes and by borrowing
(issuing bonds), and in most cases it is only the Treasury that disburses cash.
Only transactions in which the government either collects money from the
public or pays money to the public affect the federal budget surplus or deficit. (The
“public” includes federal employees, who are paid salaries and who make mandatory
contributions to the civil service trust fund.) Intragovernmental transfers merely
move budget authority from one agency’s account with the Treasury to the account
of another agency. Income to the trust fund that comes from the public also is
income to the government. Income to the trust fund that is transferred from another
government agency is income only to the trust fund, and not to the government.
Agencies pre-fund their employees’ pension benefits by transferring budget authority
to the civil service trust fund. When the income of the trust fund exceeds the amount
it needs to pay benefits, it “saves” this budget authority for the future by purchasing
17 “Cash” in this context refers to money deposited in a bank, not just notes and coins.
18 Some federal agencies collect “user fees” or other payments from the public, but the cash
receipts of federal agencies are trivial in comparison to the size of the federal budget. The
majority of the government’s cash transactions with the public — collecting taxes,
purchasing goods and services, paying federal employee salaries, and disbursing Social
Security benefits, government pensions, and cash welfare — are conducted by the U.S.
Treasury.

CRS-15
bonds from the U.S. Treasury. The CSRDF can pay retirement benefits up to the
amount of budget authority it holds in its account at the Treasury.
It has been suggested from time to time that the Civil Service Retirement and
Disability Fund should be taken “off budget,” as has already been done with the
Social Security Trust Fund. Some observers have noted that Congress has on
occasion sought budgetary savings from CSRS and FERS that were not sought from
Social Security.19 Of course, it cannot be known with certainty whether any special
consideration that might have been given to Social Security in the Congress’s annual
budget deliberations was due to its being “off budget” or to the much larger number
of beneficiaries who would be affected. Whether taking the civil service retirement
programs off-budget would protect them from future budget cuts is uncertain.
Taking an account “off budget” means that its income, outgo, and year-end
balance are not included in calculations of the government’s annual budget surplus
or deficit. Off-budget accounts are portrayed separately in the budget documents
prepared by the Office of Management and Budget and the Congressional Budget
Office (CBO). However, both OMB and CBO also publish unified budget accounts
that include Social Security and other programs that are “off budget.” This is done
because taking an account off budget does not end the activity or remove its effects
from the U.S. economy. Whether Social Security — or civil service retirement —
is on-budget or off-budget, it still collects revenues from the public, pays benefits to
the public, and affects the nation’s financial markets by influencing the amount of
private capital that is absorbed by government borrowing.
Taking the civil service trust fund off-budget would not affect the government’s
revenues or outlays in the unified budget accounts, but it would affect the size of the
budget deficit or surplus as portrayed in any budget documents that excluded the
CSRDF. For example, employee contributions to CSRS and FERS that are now
counted as revenue to the Treasury would not be treated as revenue if they were paid
to an “off-budget” CSRDF. The money that federal agencies now send to the trust
fund in the form of intragovernmental transfers would instead be recorded as outlays,
and would therefore increase the government’s budget deficit or reduce the budget
surplus in the year that the transfer occurs rather than in the future when benefits are
paid. The outlays made by the fund to pay civil service annuitants would not appear
at all in the federal budget. The net effect of these changes if the CSRDF had been
off-budget in 2003 would have been an increase of $28 billion in the government’s
reported budget deficit, even though the amount of money collected from the public
and the amount of money paid to civil service annuitants would have been no
different than under current law.
One of the purposes of the federal budget is to show whether the government’s
revenues and outlays are in balance or out of balance. Therefore, taking any account
off-budget distorts the picture of the government’s fiscal condition. It is for this
reason that financial analysts and economists focus almost exclusively on the unified
budget
totals when evaluating the effect of the federal budget on the nation’s
19 For example, in 1994, 1995, and 1996, cost-of-living adjustments (COLAs) for CSRS and
FERS were delayed from Jan. to Apr., but Social Security COLAs were not delayed.

CRS-16
financial markets. If “outlays” were to include amounts not actually paid from the
Treasury in the current year (as would be the case if the CSRDF were off-budget),
then no revenue from the public would be needed in that year to pay for them. In
years of budget deficits, some of the “deficit” would require borrowing from the
public, and some of it would not. In years of modest budget surplus, there might
appear to be a deficit because transfers to an off-budget account would be recorded
as outlays, even though they do not involve payments from the Treasury to the public.
For these reasons, taking the CSRDF off-budget might lead to greater confusion
about the size of the “real” budget deficit or surplus, as has been the case with the
off-budget status of Social Security.20
Civil Service Retirement: Funding and Accounting Issues
Accounting for Pension Costs Under CSRS and FERS. Actuaries use
a concept called “normal cost” to estimate the amount of money that must be set
aside each year from employer and employee contributions to pre-fund pension
benefits. Normal cost is usually expressed as a percentage of payroll. There are two
measures of normal cost: static and dynamic.
! Static normal cost is the estimated percentage of payroll that must
be set aside each year to fund pension benefits based on current
employee pay with no future pay increases, no future COLAs for
retiree annuities, and a fixed rate of interest.
! Dynamic normal cost is the estimated percentage of payroll that
must be set aside each year to fully fund pension benefits for
workers who will continue to accrue new benefits, including the
effects of employee pay raises, post-retirement COLAs, and changes
in the rate of interest.21
By law, the basic FERS annuity must be pre-funded according to its dynamic
normal cost. Every year, OPM estimates the dynamic normal cost of FERS pension
annuities for employees entering the federal work force that year. Of course, some
employees will never collect a FERS annuity, so for each group of new employees,
OPM must estimate average job tenure, turnover, career-long salaries, age at
retirement, rates of disability, death rates, and the number of annuitants who will
leave surviving dependents. OPM’s periodic re-estimates of the dynamic normal cost
of FERS reflect anticipated changes in interest rates, inflation, and employee and
retiree demographic characteristics.
20 For further discussion, see CRS Report 98-422, Social Security and the Federal Budget:
What Does Social Security’s Being “Off Budget” Mean?
.
21 Interest rates must be projected because the normal cost is computed as a “present value.”
Expressed in absolute terms, rather than as a percentage of payroll, the normal cost of a
pension plan is the amount of money that would have to be invested at a given rate of return
to pay future pension obligations, including increases in pension costs that will result from
employee pay raises and retiree cost-of-living adjustments (COLAs).

CRS-17
OPM has estimated the normal cost of the FERS basic retirement annuity at
11.5% of payroll. Employee contributions were set in law at 0.8% of pay, so the
contributions of federal agencies are equal to 10.7% of basic pay. If the assumptions
underlying these cost estimates prove to be accurate, FERS will be “fully funded.”22
OPM has estimated the dynamic normal cost of CSRS, using the same economic
assumptions used in FERS, at 24.4% of payroll. The financing of CSRS has at times
been a topic of controversy, however, because it is not funded according to its
dynamic normal cost. CSRS is funded through a combination of employee and
agency contributions that together are equal to the static cost of CSRS, along with
contributions from the general fund of the U.S. Treasury that make up some of the
difference between the static normal cost of CSRS and its dynamic normal cost.
Why Are CSRS Revenues Less Than the Present Value of Benefits?
At the time that Congress established the CSRS in 1920, it set up a trust fund from
which benefits would be paid. From the beginning, however, CSRS was funded on
a pay-as-you-go basis. The trust fund was used to pay benefits to already-retired
workers, rather than to pre-fund the pension benefits of current workers. Initially,
only employees made regular payroll contributions to the fund. Regularly scheduled
agency contributions were not mandated until the 1950s. For many years, there were
so few retirees that the fund was able to meet its financial obligations to beneficiaries
from employee contributions alone.
In 1956, Congress passed P.L. 84-854 which required federal agencies to make
contributions to the Civil Service Retirement Trust Fund on behalf of their eligible
employees. The contributions made by federal agencies were equal in amount to the
money paid into the fund by their employees, and were made from appropriations
that agencies received specifically for this purpose. Even with regular contributions
from the employing agencies, however, the CSRS was still being funded on a pay-as-
you-go basis. Contributions to the fund were sufficient to meet current benefit
obligations but not to pre-fund the future retirement benefits of federal employees.
As the federal civil service pension system matured (that is, as the ratio of
annuitants to workers began to rise), it became necessary to establish a formal system
of accounting for the pension obligations that had been incurred by the federal
government but for which funds had not yet been set aside. In response to this need,
Congress enacted P.L. 91-93 in 1969. This law set the employee contribution to
CSRS at 7.0% of pay and required an equal amount to be contributed from funds
appropriated to federal agencies. This amount (equal to 14.0% of payroll)
represented the total contribution required in 1969 to pay the costs of pension
liabilities accrued by federal employees, using “static” assumptions: no future pay
increases, no COLAs, and a 5.0% annual rate of return on the securities in the Civil
Service Retirement and Disability Fund. Agency and employee contributions under
CSRS have remained at the same percentage of payroll since this law was passed.
22 If the amount set aside each year proves to be insufficient (due to inaccurate assumptions
about pay raises, interest rates, the rate of inflation, or other variables ) the shortfall would
be made up from the general revenues of the U.S. Treasury. See 5 U.S.C. §8423(a)(4).

CRS-18
P.L. 91-93 also requires three types of payments to be made annually from the
general revenues of the U.S. Treasury into the CSRDF. These payments, which are
made by the Treasury each year, are
! The amount necessary to amortize (pay off with interest) over a 30-
year period any increase in pension liability that results from pay
increases (but not retiree COLAs) or from bringing newly covered
groups of workers into the CSRS;
! the amount of the employer’s share of the cost of benefits
attributable to military service; and
! interest, fixed at a rate of 5%, on the estimated amount of the
previously accrued liabilities of the CSRS for which contributions
have not yet been made to the fund.23
Thus, while the static costs of the CSRS were shared equally between federal
employees and their employing agencies, the government assumed the full
responsibility for pension liabilities that are not captured by measuring only static
normal costs. By including the 30-year amortized cost of pay raises in the annual
transfer from the general fund, the federal government explicitly assumed the
additional pension expenses that result from pay raises.24 All costs of the CSRS that
are not paid by employee and agency contributions or through the transfers to the
CSRDF mandated by P.L. 91-93 ultimately will be paid from the general revenues
of the Treasury. The costs of retiree COLAs, which also are not part of the static
normal cost of the CSRS, are not included in the annual transfer from the Treasury
to the CSRDF, and ultimately will be paid from the general fund of the Treasury.
Employee and government contributions under both CSRS and FERS are paid
into the CSRDF, and pension benefits are paid to annuitants under both programs
from this fund. Because the full costs of CSRS are not met by the combined total of
employee contributions, agency contributions, and the supplemental payments from
the Treasury, some future CSRS benefits will of necessity be paid from contributions
that were made to the fund on behalf of employees who are covered by FERS. This
will create an unfunded liability for FERS. This liability will be paid off through a
new series of 30-year amortization payments from the general fund of the Treasury
to the CSRDF. As stated by OPM:
CSRS benefit payments [will] begin to exceed total CSRS income in the year
2007, and the assets attributable to CSRS [will be] depleted by the year 2026.
23 Although this law mandated interest payments on the accrued CSRS liability to be made
from the Treasury to the CSRDF at the fixed rate of 5%, it did not provide for amortizing
(“paying off”) the accumulated liability.
24 Pay raises affect pension costs because the CSRS annuity is based on a worker’s high-3
average pay. The effect of pay raises on future CSRS pension costs is met by amortizing
them over a 30-year period with payments to the from the U.S. Treasury. Because the cost
of COLAs is not accounted for in the payments to the trust fund mandated by the 1969 law,
the CSRS continues to accumulate an unfunded liability attributable to retiree COLAs.

CRS-19
Since the CSRS benefits continue to be paid from the assets of the CSRDF, the
assets attributable to FERS will be reduced each year by the amount that the
CSRS benefits exceed the CSRS contributions. This will cause an increase in the
supplemental liability under FERS each year, which must then be amortized by
a new series of 30-year payments under FERS.25
Current law specifies that funds that were paid into the CSRDF on behalf of
employees covered by FERS will be used to pay the unfunded liability of CSRS.
FERS will then be reimbursed by a series of payments with interest from the general
fund of the Treasury to the CSRDF.
Accounting Issues Raised by the Way CSRS Benefits Are Financed.
Actuarial estimates indicate that the unfunded liability of the CSRS does not pose a
threat to the solvency of the Civil Service Retirement and Disability Trust Fund. In
its annual report, OPM has stated that “the total assets of the CSRDF continue to
grow throughout the [75-year] term of the projection, and ultimately reach a level of
about 4.4 times payroll, or 21 times the level of annual benefit outlays.”
Nevertheless, the current method of funding the CSRS has in recent years been a
source of debate for at least two reasons:
(1) Because employee and government contributions do not account for the full
actuarial cost of CSRS pension obligations as they accrue each year, the CSRS
continues to accumulate additional unfunded liabilities. Consequently, some of
the pension costs that are incurred each year will not be reflected in the
government’s budget until those benefits are paid at some time in the future.
Some budget experts argue that these costs should be accounted for in each
agency’s budget as they accrue, just as is done in the FERS program.
(2) The supplemental payments to the trust fund that are required by the 1969
law come from the general revenues of the Treasury rather from the budgets of
the various federal agencies where these costs are incurred. As a result, the
amount of employee compensation for which agencies must account in their
budgets each year understates the full costs of employment.26 Critics say that
this contributes to an inefficient allocation of resources in the federal
government by making labor costs appear lower than they really are.
If federal law were amended so that agencies were required to fully fund the
current and future costs of the CSRS through increased contributions, agencies could
do so from their current-law appropriations or they could be granted additional
budget authority for this purpose. The two approaches would have different effects
on the federal budget. For agencies to be held harmless for the increased
contributions, they would have to receive additional appropriations to their salary and
25 U.S. Office of Personnel Management, Civil Service Retirement and Disability Fund,
Report for the Fiscal Year Ended September 30, 2002
(Washington: GPO, 2003).
26 This transfer of funds to the CSRDF from the Treasury is included in the federal budget
in the account for OPM.

CRS-20
expense accounts.27 Because agencies would transfer the appropriated funds to the
CSRDF, which would in turn use them to purchase Treasury bonds, no additional
outlays would occur as a result of these appropriations, and they would not effect the
federal budget deficit or surplus. The outlays would occur in the future when retired
employees collect their CSRS annuities, just as under current law.
An alternative means of fully financing the normal cost of the CSRS would be
to require agencies to increase their contributions to the CSRDF without receiving
any additional appropriations to their salary and expense accounts.28 Pre-funding the
full costs of the CSRS in this way would reduce the federal budget deficit (or
increase the surplus), because the outlays of each agency would have to be cut by the
amount of its additional transfers to the CSRDF. Outlays to CSRS annuitants would,
of course, still occur in the future just as under current law. However, these future
outlays would be offset by a reduction in current outlays so that the future payments
to CSRS annuitants could be fully pre-funded. The reduction in resources available
for current spending, however, could force some agencies to cut back on the services
they provide to the public, or possibly to reduce the number of people they employ.
Paying the full normal cost of CSRS through employee and agency contributions
would prevent the system from accruing additional unfunded liabilities, but it would
not reduce the previously accumulated liability of the CSRS. Under current law, this
liability will be paid off eventually through a series of 30-year amortization payments
from the general fund of the Treasury to the CSRDF. Some observers favor starting
these amortization payments sooner. They note that private-sector employers are
required by ERISA to begin paying down accumulated liabilities soon after they
occur. Others advocate paying down the liability now as a way to forestall proposals
calling for reduced pension benefits or increased employee contributions in the
future.
The Budget of the United States for FY1997 included a proposal to reduce
previously accumulated CSRS liabilities through a series of amortization payments
from the Treasury to the CSRDF.29 In this proposal, which was not enacted by
Congress, the three payments to the CSRDF required by P.L. 91-93 would be
replaced with a single, slightly larger annual payment over a period of 40 years. The
payment would have been classified by OMB as mandatory spending and therefore
would not have required an increase in any limits placed on discretionary spending.
The payments to the CSRDF would have been an “intra-governmental transfer”
which would not have resulted in additional outlays and, therefore, would not have
increased the government’s budget deficit (or reduced the surplus). For the same
reason, however, reducing the accumulated liability of the CSRDF would not reduce
the government’s future outlays for CSRS annuities.
27 This was proposed in the Budget of the United States, FY1996, but was not enacted.
28 This was proposed in the FY1997 Budget of the United States, but was not enacted by
Congress.
29 The accumulated CSRS liability also could be funded by payments from individual
agency budgets. The allocation of fixed costs, however, is always somewhat arbitrary.

CRS-21
Conclusion. Congressional interest in the civil service retirement programs
in recent years has tended to focus on the “under-funding” of retirement annuities in
CSRS. Proposals to pre-fund CSRS in the same manner as required under FERS have
foundered either on the question of whether additional budget authority should be
granted to federal agencies, or whether they should make higher contributions from
their current budget authority. Finding the means to accelerate paying off the
accumulated liability under CSRS under current budget rules also has contributed to
the difficulty in resolving the under-funded status of CSRS. Recently, however,
another issue has been introduced into the debate: some observers have suggested
that investing the civil service trust fund entirely in U.S. Treasury bonds does not
represent true “pre-funding” because these bonds are merely a claim held by the
government against its own future revenues. These critics suggest that at least part
of the trust fund’s assets should be invested in private-sector stocks and bonds where
they could earn a higher rate of return than is available from U.S. Treasury securities
(albeit at greater risk). In addition to issues of risk and investment policies, however,
this proposal faces another significant obstacle in the budgetary “scoring” rules that
would count the purchase of private sector assets as an outlay of federal funds, which
would raise the budget deficit (or lower the budget surplus).
Many policymakers believe that greater pre-funding of CSRS retirement
annuities would lead to improved accounting of personnel costs among federal
agencies. There also appears to be some interest in the possibility of investing some
of the assets of the Civil Service Retirement and Disability Fund in private-sector
stocks and bonds. Obstacles to these proposed changes include differing political
philosophies about the role of government in private financial markets, the effect of
such changes on the budgetary resources of federal agencies and on the federal
budget deficit or surplus, and the continued preference of some policymakers for
financing federal employee retirement benefits on a pay-as-you-go basis. At present,
there is no looming financial crisis facing either CSRS or FERS. According to the
actuaries of the Office of Personnel Management, both programs will have sufficient
budget authority to meet their obligations for the indefinite future. This will provide
the Congress with adequate time to consider fully the benefits and drawbacks that
could arise under various reform proposals.