Federal Employees’ Retirement System:
Budget and Trust Fund Issues
Katelin P. Isaacs
Analyst in Income Security
January 10, 2013
Congressional Research Service
7-5700
www.crs.gov
RL30023
CRS Report for Congress
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Federal Employees’ Retirement System: Budget and Trust Fund Issues

Summary
FERS annuities are fully funded by the sum of employee and employer contributions and interest
earned by the Treasury bonds held by the CSRDF. The federal government makes supplemental
payments into the CSRDF on behalf of employees covered by the CSRS because employee and
agency contributions and interest earnings do not meet the full cost of the benefits earned by
employees covered by that system.
The Office of Personnel Management (OPM) estimated that in FY2012, obligations from the
CSRDF would total $74.7 billion, of which $74.3 billion will represent annuity payments to
retirees and survivors. Other outlays consist of refunds, payments to estates, and administrative
expenses. Outlays from the fund are projected to increase by 4.5% to $78.0 billion in 2013, of
which $77.7 billion will represent annuity payments. OPM estimated that receipts to the CSRDF
from all sources would be $95.1 billion in 2012 and $94.2 billion in 2013. The year-end balance
of the CSRDF was projected to increase from $812.5 billion at the end of 2012 to $823.2 billion
at the end of 2013.
The total annual income of the CSRDF will increase from an estimated $102.5 billion in 2011 to
an estimated $155.5 billion in 2025 and to $1.2 trillion in 2085. The total expenses of the fund are
projected to rise more slowly, increasing from $69.3 billion in 2011 to an estimated $116.2 billion
in 2025 and to $669.7 billion in 2085. Consequently, the assets held by the CSRDF also are
projected to increase steadily, rising from $784.6 billion in 2011 to an estimated $1.3 trillion in
2025 and $13.9 trillion in 2085. Expenditures from the CSRDF currently are about 36% as large
as federal expenditures for the salaries and wages paid to federal employees. Pension
expenditures are projected to decline relative to the government’s wage and salary expenses,
beginning around 2020. By 2085, the expenditures of the CSRDF are estimated to be only about
23% as large as the government’s expenditures for wage and salary payments to employees.
Because CSRS retirement benefits have never been fully funded by employer and employee
contributions, the Civil Service Retirement and Disability Fund has an unfunded liability. The
unfunded liability was $622.3 billion in FY2010. According to actuarial estimates, the unfunded
liability of the CSRDF will continue to rise until about 2023, when it will peak at $684.8 billion.
From that point onward, the unfunded liability will steadily decline and is projected to turn into a
surplus of $716.7 billion by 2085. Actuarial estimates indicate that the unfunded liability of the
CSRS does not pose a threat to the solvency of the trust fund. In its annual report, OPM has stated
that “the total assets of the CSRDF, including both CSRS and FERS, continue to grow throughout
the term of the projection, and ultimately reach a level of over 4.7 times payroll, or nearly 20
times the level of annual benefit outlays” by 2085. Unlike the Social Security trust fund, there is
no point over the next 70 years at which the assets of the Civil Service Retirement and Disability
Fund are projected to run out.


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Federal Employees’ Retirement System: Budget and Trust Fund Issues

Contents
Introduction ...................................................................................................................................... 1
Fundamentals of Pension Plan Financing ........................................................................................ 1
Pre-funding of Pension Benefits in the Private Sector .............................................................. 2
Pre-funding of Federal Employee Pension Benefits .................................................................. 3
Investment of Trust Fund Assets ............................................................................................... 3
Financing Retirement Annuities for Federal Employees ................................................................. 4
Employee Contributions ............................................................................................................ 4
Employer Contributions ............................................................................................................ 5
Operation of the Civil Service Retirement Fund ............................................................................. 5
Financial Status of the Civil Service Retirement Fund .................................................................... 6
The Short-Term Picture ............................................................................................................. 6
The Long-Term Picture ............................................................................................................. 7
The Civil Service Retirement and Disability Fund in the Federal Budget ...................................... 9
Civil Service Retirement: Funding and Accounting Issues ........................................................... 10
Accounting for Pension Costs Under CSRS and FERS .......................................................... 10
Why Are CSRS Revenues Less Than the Present Value of Benefits? ..................................... 11
Accounting Issues Raised by the Way CSRS Benefits Are Financed ..................................... 13
Conclusion ..................................................................................................................................... 14

Tables
Table 1. Receipts and Obligations of the Civil Service Retirement Fund, FY2011-2013 ............... 7
Table 2. Projected Income and Expenses of the Civil Service Retirement Fund ............................. 8

Contacts
Author Contact Information........................................................................................................... 15
Acknowledgments ......................................................................................................................... 15

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Federal Employees’ Retirement System: Budget and Trust Fund Issues

Introduction
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
employee and employer contributions and 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 did not earn 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 resulted in duplication of some benefits and would have required employee contributions
equal to more than 13% of workers’ salaries. Consequently, Congress directed the development of
the FERS, with Social Security as the cornerstone. The FERS is composed of three elements: (1)
Social Security, (2) the FERS basic retirement annuity and the FERS supplement, and (3) the
Thrift Savings Plan (TSP).1 Most permanent federal employees initially hired on or after January
1, 1984, are enrolled in the 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 plans 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 an employee’s salary
and years of service. A DB plan must offer participants the option to take their benefit as a life
annuity. A defined contribution plan is much like a savings account maintained by the employer
on behalf of each participating employee. The employer or the employee or both contribute to an
account, which is invested in assets such as stocks and bonds. In some DC 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 as an annuity.

1 This report describes the financing of CSRS and the FERS basic annuity. The Thrift Savings Plan is described in CRS
Report RL30387, Federal Employees’ Retirement System: The Role of the Thrift Savings Plan, by Katelin P. Isaacs.
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Federal Employees’ Retirement System: Budget and Trust Fund Issues

An important difference between defined benefit plans and defined contribution plans is that the
employer bears the financial risk in a defined benefit plan, whereas the employee bears the
financial risk in a defined contribution plan. In a DB 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 trust fund, which is typically invested in stocks, bonds, and other assets.
The employer is at risk for the full amount of retirement benefits its employees have earned. If the
assets held in the pension fund are worth less than 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 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.
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 (ERISA;
P.L. 93-406).2 ERISA sets standards that plans must meet with respect to reporting and disclosure,
employee participation and vesting, plan funding, and fiduciary standards.
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 companies to pre-fund DB
pension obligations. Pre-funding of DB pensions protects employees who have earned the right to
receive a pension, even if the firm goes out of business. Employers in the private sector pre-fund
their DB pension liabilities by establishing pension trusts, which are invested in assets such as
stocks and bonds. ERISA also established the Pension Benefit Guaranty Corporation (PBGC),
which pays pension benefits (up to limits set in law) in the event that a company goes out of
business with an underfunded pension plan. The PBGC is funded by premiums paid by employers
that sponsor defined benefit pensions. It does not insure defined contribution plans.
Pre-funding DB pension benefits is consistent with the principles 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.” ERISA requires any employer that develops an unfunded liability in its defined benefit
pension plan to make additional contributions over a period of years until the plan’s assets equal
the present value of its liabilities.

2 Neither federal nor state and local employee pension plans are subject to ERISA. Federal employee pension plans are
governed by Title 5 of the U.S. Code. Pensions for state and local government employees are governed by state laws.
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Federal Employees’ Retirement System: Budget and Trust Fund Issues

Pre-funding of Federal Employee Pension Benefits
When the Civil Service Retirement System was established in 1920, it was not pre-funded.
Benefits paid to federal retirees were paid from current contributions to the plan. Because the
federal government is not likely to go out of business, it could have continued to pay the pensions
earned by 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 the sum of employer and employee contributions and the interest
earned by the U.S. Treasury bonds held by the Civil Service Retirement and Disability Fund.
Congress required pre-funding of FERS retirement benefits so that federal agencies would have
to recognize these costs in their budgets. Pre-funding promotes more efficient allocation of
resources between personnel costs and other expenses because it forces federal agencies to
recognize the full cost of employee compensation when they prepare their annual budget requests.
Investment of Trust Fund Assets
The assets in private-sector pension funds represent a “store of wealth” that firms can use to meet
pension obligations as they come due. The CSRDF, however, is not a store of wealth for the
federal government. The fund is required by law to invest exclusively in U.S. Treasury bonds.
These bonds represent budget authority, which is the legal basis for the Treasury to disburse
funds. When the CSRDF redeems the Treasury bonds that it holds, the Treasury must raise an
equivalent amount of cash by collecting taxes or borrowing from the public.
If the CSRDF 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, are
income to the trust fund, but they are not income to the federal government. Agency contributions
to the CSRDF are intragovernmental transfers that have no effect on the government’s annual
budget deficit or surplus.
Currently, most outlays from the trust fund are benefit payments to annuitants. If the CSRDF
were to purchase private-sector assets rather than U.S. Treasury bonds, an outlay from the trust
fund would be required to purchase these assets. If employee contributions were used to purchase
private-sector assets, they would no longer be income to the Treasury, and they 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 and would be a new outlay of funds from the Treasury.
Over the long run, however, purchasing private-sector assets would not increase the budget
deficit, and 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 to purchase assets. If the
net rate of return on private-sector securities exceeded the rate of return on 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. Such a change in policy, however, would raise important questions about the federal
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Federal Employees’ Retirement System: Budget and Trust Fund Issues

government owning private-sector assets, and also could result in greater volatility in the value of
the assets held by the trust funds.
Financing Retirement Annuities for
Federal Employees
Under both CSRS and FERS, retirement annuities are based on (1) the employee’s years of
service, (2) the average of the employee’s highest three consecutive years of salary, and (3) the
benefit accrual rate. 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 of service
beyond the 10th year. Under CSRS, an employee with 30 years of service will have earned an
annuity equal to 56.25% of the average of his or her highest three consecutive years of pay.
Employees enrolled in 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. With 30 years of service, an employee
enrolled in FERS will have earned a pension equal to 30% of the average of his or her highest
three consecutive years of pay, or 33% if the individual is 62 or older at retirement.3
Federal agencies pre-fund employee pensions by deferring some of their budget authority until it
is needed to pay pensions to retired workers. Federal agencies defer this budget authority by
transferring it to the CSRDF. 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. The CSRDF can redeem these bonds to pay pensions to
retirees and survivors.
Employee Contributions
Federal employees have mandatory contributions to the CSRDF deducted from their paychecks.
Employees who are under the CSRS contribute 7.0% of basic pay to the CSRDF. Employees
under FERS first hired before 2013 contribute 0.8% of pay to the CSRDF and 6.2% of wages to
the Social Security trust fund for Old-Age, Survivors, and Disability Insurance (OASDI) up to the
Social Security taxable wage base. In 2013, wages up to $113,700 are subject to the OASDI tax.4
Employees under FERS first hired (or rehired with less than five years of FERS service) after
December 31, 2012, contribute 3.1% of pay to the CSRDF and 6.2% of taxable wages to the
Social Security trust fund.5

3 Under FERS, an employee who retires aged 56 or older with 30 or more years of service also receives the “FERS
supplement.” The supplement is equal to the Social Security benefit that the individual earned while a federal
employee. The FERS supplement terminates at the age of 62, regardless of whether the person applies for Social
Security.
4 Retired federal employees are eligible for Medicare at the age of 65, regardless of whether they were covered by
CSRS or FERS. Employees in both programs pay the Hospital Insurance (HI) payroll tax of 1.45% on all salary and
wages.
5 The higher FERS employee contributions for individuals first hired (or rehired with less than five years of service)
after December 31, 2012, were enacted under the Middle Class Tax Relief and Job Creation Act of 2012 (P.L. 112-
96).Certain category of CSRS and FERS employees—including Members of Congress, congressional employees, and
law enforcement personnel—make employee contributions to the CSRDF at higher rates of pay. For details on
(continued...)
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Federal Employees’ Retirement System: Budget and Trust Fund Issues

Employer Contributions
Whether a federal employee is enrolled in CSRS or FERS, his or her employing agency
contributes money to the CSRDF. Agency contributions differ between CSRS and FERS. The
Office of Personnel Management (OPM) estimates the cost of CSRS annuities to be equal to
26.0% of employee pay. This is the amount that would have to be contributed to the CSRDF each
year to fully fund the benefits that employees earn under the CSRS. Under CSRS, employees and
their employing agencies each contribute an amount equal to 7.0% of pay the CSRDF. Agency
and employee contributions total 14.0% of pay. The Treasury makes an annual contribution to the
CSRDF that covers most of the costs of the CSRS that are not covered by employee and agency
contributions. In FY2012, the Treasury will pay an estimated $32.0 billion to the CSRDF.
However, the CSRS continues to have an unfunded liability, which is estimated to be $650.3
billion in FY2012.6
OPM estimates the cost of the FERS basic annuity and the FERS supplement to be equal to
12.7% of employee pay. The employee contribution of 0.8% of pay under FERS for employees
first hired before 2013 is equal to the difference between the CSRS contribution rate (7.0%) and
the Social Security payroll tax rate (6.2%). Federal agencies are required to contribute to the
CSRDF the full cost of the FERS benefits that employees earn each year, minus the employee
contribution. Thus, federal agencies contribute an amount equal to 11.9% of payroll to the
CSRDF for FERS employees hired before 2013. Due to the increased employee contributions
enacted under P.L. 112-96, federal agencies contribute 9.6% of payroll to the CSRDF for FERS
employees hired (or rehired with less than five years of FERS service) after December 31, 2012.7
FERS benefits are fully funded by employer and employee contributions and interest earnings.
Operation of the Civil Service Retirement Fund
The CSRDF is a record of the budget authority available to pay retirement and disability benefits
to federal employees. 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 the income to the fund—mainly contributions from employees—is income to both the
trust fund and to the government. The remainder of these transactions are intragovernmental
transfers in which budget authority is transferred from federal agencies to the trust fund.

(...continued)
employee contributions for Members of Congress, see CRS Report RL30631, Retirement Benefits for Members of
Congress, by Katelin P. Isaacs. For details on employee contributions for law enforcement personnel, see CRS Report
R42631, Retirement Benefits for Federal Law Enforcement Personnel, by Katelin P. Isaacs.
6 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.
7 For additional details on changes to FERS employee and agency contributions under P.L. 112-96, see U.S. Office of
Personnel Management, Benefits Administration Letter, 12-104, “Federal Employees Retirement System-Revised
Annuity Employees (RAE),” October 3, 2012, available online at http://www.opm.gov/retire/pubs/bals/2012/12-
104.pdf.
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