Federal Employees’ Retirement System:
Budget and Trust Fund Issues
Katelin P. Isaacs
Analyst in Income Security
March 24, 2014
Congressional Research Service
7-5700
www.crs.gov
RL30023
Federal Employees’ Retirement System: Budget and Trust Fund Issues
Summary
Most of the civilian federal workforce is covered by one of two retirement systems: (1) the Civil
Service Retirement System (CSRS) for individuals hired before 1984 or (2) the Federal
Employees’ Retirement System (FERS) for individuals hired in 1984 or later. FERS annuities are
fully funded by the sum of employee and employer contributions and interest earned by the
Treasury bonds held by the Civil Service Retirement and Disability Fund (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 FY2014, obligations from the
CSRDF would total $80.0 billion, of which $79.4 billion will represent annuity payments to
retirees and survivors. Other outlays consist of refunds, payments to estates, and administrative
expenses. Obligations from the fund are projected to increase by 3.4% to $82.7 billion in
FY2015, of which $82.1 billion will represent annuity payments. OPM estimated that receipts to
the CSRDF from all sources would be $95.3 billion in FY2014 and $98.5 billion in FY2015. The
year-end balance of the CSRDF was projected to increase from $848.5 billion at the end of
FY2014 to $861.8 billion at the end of FY2015.
The total annual income of the CSRDF will increase from $94.8 billion in FY2012 to an
estimated $158.8 billion in FY2025 and to $1.1 trillion in FY2090. The total expenses of the fund
are projected to rise more slowly, increasing from $73.9 billion in FY2012 to an estimated $115.0
billion in FY2025 and to $715.8 billion in FY2090. Consequently, the assets held by the CSRDF
also are projected to increase steadily, rising from $829.1 billion in FY2012 to an estimated $1.3
trillion in FY2025 and $13.7 trillion in FY2090. Expenditures from the CSRDF currently are
about 38% 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 FY2020. By FY2090, the expenditures of the CSRDF are estimated
to be only about 30% 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 CSRDF has an unfunded liability. The unfunded liability was $789.9 billion in
FY2012. According to actuarial estimates, the unfunded liability of the CSRDF will continue to
rise until about FY2025, when it will peak at $855.9 billion. From that point onward, the
unfunded liability will steadily decline and is projected to turn into a surplus of $29.5 billion by
FY2090. Actuarial estimates indicate that the unfunded liability of the CSRS does not pose a
threat to the solvency of the trust fund. Unlike the Social Security trust fund, there is no point
over the next 80 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 and Disability Fund ...................................................... 6
Financial Status of the Civil Service Retirement Fund .................................................................... 7
The Short-Term Picture ............................................................................................................. 7
The Long-Term Picture ............................................................................................................. 8
The Civil Service Retirement and Disability Fund in the Federal Budget .................................... 10
Civil Service Retirement: Funding and Accounting Issues ........................................................... 12
Accounting for Pension Costs Under CSRS and FERS .......................................................... 12
Why Are CSRS Revenues Less Than the Present Value of Benefits? ..................................... 13
Accounting Issues Raised by the Way CSRS Benefits Are Financed ..................................... 14
Conclusion ..................................................................................................................................... 16
Tables
Table 1. Receipts and Obligations of the Civil Service Retirement Fund, FY2013-2015 ............... 8
Table 2. Projected Income and Expenses of the Civil Service Retirement Fund ............................. 9
Contacts
Author Contact Information........................................................................................................... 16
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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 DB plan, the retirement benefit typically is based on an employee’s salary and years of
service. Under federal law, a DB plan must offer participants the option to take their benefit as a
life annuity. A DC plan—for example, a 401(k)—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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An important difference between DB plans and DC plans is that the employer bears the financial
risk in a DB plan, whereas the employee bears the financial risk in a DC 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.3
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.
3 For additional information on the PBGC, see CRS Report 95-118, Pension Benefit Guaranty Corporation (PBGC)
and Defined Benefit Pension Plan Funding Issues, by John J. Topoleski.
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Pre-funding of Federal Employee Pension Benefits
When CSRS 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 FERS 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 CSRDF to invest in private-sector
securities such as corporate stocks and bonds would result in higher federal expenditures, which
would be required to purchase such private-sector securities. 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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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.4
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 2014, wages up to $117,000 are subject to the OASDI tax.5
Employees under FERS first hired (or rehired with less than five years of FERS service) in
calendar year 2013 contribute 3.1% of pay to the CSRDF and 6.2% of taxable wages to the Social
Security trust fund.6 FERS employees first hired (or rehired with less than five years of FERS
4 Under FERS, an employee who retires at the minimum retirement age (age 55 for workers born before 1948;
increasing for workers born after 1947; age 57 for workers born in 1970 or later) with 30 or more years of service or at
age 60 with 20 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.
5 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.
6 These higher FERS employee contributions for individuals first hired (or rehired with less than five years of service)
in calendar year 2013 were enacted under the Middle Class Tax Relief and Job Creation Act of 2012 (P.L. 112-96).
Certain categories of CSRS and FERS employees—including Members of Congress and congressional employees first
covered before 2013 as well as law enforcement personnel—make employee contributions to the CSRDF at different
(continued...)
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service) after December 31, 2013, contribute 4.4% of pay to the CSRDF and 6.2% of taxable
wages to the Social Security trust fund.7
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 FY2014, the Treasury will pay an estimated $35.5 billion to the CSRDF.
However, the CSRS continues to have an unfunded liability, which was $750.9 billion in
FY2012.8
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.
Because of 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) in calendar year 2013.9 The increased FERS employee contributions
under P.L. 113-67, however, did not proportionately reduce agency contributions to FERS.
Instead, employer contributions for employees first hired (or rehired with less than five years of
FERS service) after December 31, 2013, remain unchanged; additional funds will be used to pay
down the current unfunded liability of CSRS. When the CSRS unfunded liability has eliminated,
FERS employer contributions for new employees first hired in 2014 will be recalculated and
adjusted to be based on the dynamic normal cost of FERS.
(...continued)
rates of pay than regular FERS employees. For details on 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.
7 These additional FERS employee contributions for individuals first hired (or rehired with less than five years of
service) after December 31, 2013, were enacted under the Bipartisan Budget Act of 2013 (P.L. 113-67).
8 Data for FY2012 are the most recent actual CSRDF program data available. 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.
9 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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Therefore, FERS benefits are fully funded by employer and employee contributions and interest
earnings with the exception of FERS benefits for employees first hired (or rehired with less than
five years of FERS service) after December 31, 2013. For this latter category of FERS employee,
the employee and agency contributions amount to more than the full cost of the FERS benefit
until the point at which OPM determines that there is no longer a CSRS unfunded liability.
Operation of the Civil Service Retirement and
Disability 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.
Intragovernmental transfers have no effect on the size of the government’s annual budget deficit
or surplus.10
The CSRDF 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 taxpayers. According to the U.S. Office of Management and Budget
(OMB), balances in the trust fund are
available for future benefit payments and other trust fund expenditures, but only in a
bookkeeping sense. The holdings of the trust funds are not assets of the Government as a
whole that can be drawn down in the future to fund benefits. Instead, they are claims on the
Treasury. From a cash perspective, when trust fund holdings are redeemed to authorize the
payment of benefits, the Department of the Treasury finances the expenditure in the same
way as any other Federal expenditure—by using current receipts or by borrowing from the
public. The existence of large trust fund balances, therefore, does not, by itself, increase the
Government’s ability to pay benefits. Put differently, these trust fund balances are assets of
the program agencies and corresponding liabilities of the Treasury, netting to zero for the
Government as a whole.11
10 Only revenues collected from the public and outlays to the public affect the budget deficit.
11 U.S. Office of Management and Budget, Budget of the United States Government, Fiscal Year 2010: Analytical
Perspectives (Washington: GPO, 2009), p. 345.
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Financial Status of the Civil Service
Retirement Fund
The Short-Term Picture
The CSRDF held a balance of $835.7 billion at the end of FY2013. (See Table 1.)12 Obligations
from the fund totaled $77.5 billion in FY2013, consisting mostly of annuity payments. Annuity
payments totaled $76.9 billion in FY2013. Payments to the estates of decedents and refunds to
separating employees accounted for another $445 million. The administrative expenses of the
fund were $128 million, or about 0.17% of total obligations. In FY2013, an additional $2 million
was transferred from the CSRDF to the Merit Systems Protection Board, which hears federal
employee appeals (including federal retirement decisions).
Each year, the CSRDF receives cash contributions and intragovernmental transfers. Cash
contributions from required employee contributions, other employee deposits, and the District of
Columbia amounted to $3.5 billion in FY2013. The largest payments into the CSRDF were
contributions from federal agencies ($21.9 billion in FY2013) and the Postal Service ($2.9 billion
in FY2013) on behalf of their employees, interest payments ($32.1 billion), and a payment from
the general fund of the Treasury to make up for the insufficient funding of benefits accrued under
CSRS ($33.0 billion in FY2013). In FY2013, there was also a $50 million payment into the
CSRDF due to offsets from the re-employment of annuitants. These payments are
intragovernmental transfers. The CSRDF receives Treasury bonds as a record of available budget
authority. It redeems bonds periodically as annuity payments come due.
Finally, the short-term term picture of the CSRDF, as estimated in the FY2015 President’s
Budget, includes a proposal to refund overpayments made by the U.S. Postal Service on behalf of
its FERS employees. This proposal would involve additional obligations from the CSRDF
estimated to be $2.5 billion in FY2014 and $2.5 billion in FY2015.13
12 All amounts in Table 1 and Table 2 are expressed in nominal dollars.
13 For more details on this proposal, see page 1232 of the “Budget Appendix” of the FY2015 President’s Budget,
available at http://www.whitehouse.gov/sites/default/files/omb/budget/fy2015/assets/opm.pdf.
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Table 1. Receipts and Obligations of the Civil Service Retirement Fund, FY2013-2015
(amounts in millions)
FY2013
FY2014 (est.) FY2015 (est.)
Beginning balance
$819,753
$835,685
$848,480
Receipts to the fund
Cash receipts:
Employee contributions
$2,817
$2,991
$3,054
District of Columbia
$26
$25
$23
Other employee deposits
$677
$706
$739
Intragovernmental transfers:
Agency contributions
$21,919
$21,860
$25,647
Postal Service contributions
$2,882
$3,047
$3,282
Interest on securities
$32,083
$31,136
$29,470
General fund receipts
$32,995
$35,470
$36,264
Re-employment offset
$50
$49
$48
Total receipts to the fund
$93,449
$95,284
$98,527
Obligations from the fund
Employee and survivor annuities
-$76,938
-$79,433
-$82,123
Refunds and payments to estates
-$445
-$458
-$484
Administration -$128
-$96
-$95
Transfer to Merit Systems Protection Board
$2
$2
$2
Total obligations from the fund
-$77,513
-$79,989
-$82,704
Proposal: Refund USPS FERS overpayment
-$0
-$2,500
-$2,500
Ending balance
$835,685a
$848,480 $861,803
Source: Office of Management and Budget, Budget of the United States Government, FY2015.
a. Includes rounding adjustment of -$4 million.
The Long-Term Picture
Table 2 presents the annual income and expenditures of the CSRDF through FY2090, as
estimated by OPM. Table 2 also shows the year-end balance of the trust fund and its estimated
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
expense for employee wages and salaries and CSRDF expenditures relative to the nation’s annual
gross domestic product (GDP).
The estimates presented in Table 2 show the income to the CSRDF rising over the projection
period from $94.8 billion in FY2012 to $158.8 billion in FY2025 and to about $1.1 trillion in
FY2090.14 The total expenses of the fund are projected to rise more slowly, increasing from $73.9
billion in FY2012 to $115.0 billion in FY2025 and to $715.8 billion in FY2090. Consequently,
the assets held by the CSRDF also are projected to increase steadily from $829.1 billion in
FY2012 to about $1.3 trillion in FY2025 and to $13.7 trillion in FY2090. According to actuarial
14 All amounts in Table 1 and Table 2 are expressed in nominal dollars.
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projections, the unfunded liability of the CSRDF will continue to rise until about FY2025, when
it will peak at $855.9 billion. From that point onward, the unfunded liability will steadily decline
and is projected to turn into a surplus of $46.1 billion by FY2090. The CSRDF is currently
estimated to have a surplus beginning around FY2080.
In FY2012, expenditures from the CSRDF totaled $73.9 billion. The federal government’s payroll
expense for employees in FY2012 was approximately $196.4 billion (not presented in Table 2).
Therefore, expenditures from the CSRDF were equal to about 38% of the amount paid as salaries
and wages to federal employees. CSRDF expenditures are projected to decline relative to the
government’s wage and salary expenses, beginning around FY2025. By FY2090, the
expenditures of the CSRDF are estimated to be equal to about 30% of the government’s wage and
salary payments to its employees. The decline in the ratio of CSRDF outlays to salary expense
after FY2020 will occur mainly because future retirees will receive smaller pension benefits
under FERS than they would have received under CSRS.
The final column of Table 2 shows federal outlays for civil service pensions as a percentage of
GDP. Relative to the total economic resources of the economy, the expenditures of the CSRDF
are expected to remain roughly steady for the next 10 years before declining substantially from
FY2020 to FY2090. Federal expenditures for civil service retirement annuities were estimated to
equal 0.48% of GDP in FY2012, down from a high of 0.55% in FY1991 (not presented in Table
2). Between FY2012 and FY2020, the annual expenditures of the CSRDF are projected to remain
in the range of 0.48% to 0.42% of GDP. From that point on, outlays from the CSRDF will fall
steadily to about 0.13% of GDP by FY2090.
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 smaller relative to high-three
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.
Table 2. Projected Income and Expenses of the Civil Service Retirement Fund
(amounts in billions)
Assets at
Unfunded
Expenses as a
Expenses as a
Fiscal
Total
Total
End of
Actuarial
Percentage of
Percentage of
Year
Income
Expenses
Year
Liability
Total Payroll
GDP
Actual
2012 94.8 -73.9 829.1
789.8
37.6
0.48
Estimated
2015 115.2 -82.7 923.4
820.5
39.1
0.45
2020 137.0 -98.8 1,104.7
847.2
39.2
0.42
2025 158.8 -115.0 1,310.0
855.9
38.5
0.39
2030 184.7 -130.3 1,559.8
840.9
36.9
0.35
2035 213.9 -144.8 1,873.7
801.9
34.7
0.31
2040 249.0 -159.3 2,278.5
735.9
32.5
0.27
2045 287.1 -174.4 2,794.6
650.1
30.3
0.24
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Assets at
Unfunded
Expenses as a
Expenses as a
Fiscal
Total
Total
End of
Actuarial
Percentage of
Percentage of
Year
Income
Expenses
Year
Liability
Total Payroll
GDP
2050 337.5 -193.0 3,451.7
542.1
28.6
0.21
2055 394.0 -219.7 4,268.4
407.2
27.7
0.19
2060 454.9 -256.2 5,213.5
279.5
27.6
0.18
2065 525.3 -303.1 6,277.5
170.7
27.8
0.17
2070 607.1 -360.1 7,462.2
86.9
28.1
0.16
2075 702.7 -427.7 8,779.6
29.0
28.5
0.15
2080 814.6 -507.8 10,248.6
-7.5
28.8
0.15
2085 944.8 -602.9 11,886.9
-29.9
29.1
0.14
2090 1,094.8 -715.8 13,707.1
-46.1
29.5
0.13
Sources: U.S. Office of Personnel Management, Annual Report of the Board of Actuaries, Civil Service Retirement and
Disability Fund, Fiscal Year Ended September 30, 2013; Council of Economic Advisers, Economic Report of the
President, 2014; and the 2013 Report of the Social Security Board of Trustees.
The Civil Service Retirement and Disability Fund in
the Federal Budget
In FY2014, the total receipts of the CSRDF are estimated to be approximately $95.3 billion, and
obligations from the fund were about $80.0 billion. Only a small part of the revenues to the fund
($3.7 billion) in this year were cash receipts. The remainder will consist of budget authority
transferred from other federal agencies. The cash receipts of the fund come primarily from the
contributions of federal 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. 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.
Benefit payments to retirees and survivors are cash outlays of the federal government.
Most of the payments into the CSRDF—an estimated $91.6 billion in FY2014—are
intragovernmental transfers. These transactions are income to the fund, but they are not income to
the U.S. government. Intragovernmental transactions rarely involve cash. They do not affect the
government’s budget deficit or surplus because no money is received or spent by the government.
Cash is rarely involved in intragovernmental transfers because individual government agencies, in
general, have no cash to spend.15 What Congress appropriates to federal agencies each year is
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, and in most cases it is only the Treasury that disburses cash to the public.
It has been suggested from time to time that the CSRDF should be taken “off budget,” as has
already been done with the financing of Social Security benefits (but not Social Security
administrative costs). Taking an account off budget means that its income and expenditures are
15 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 Treasury.
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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 CSRDF 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 reported 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 FY2013 would have been an
increase of about $16 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.16
One purpose 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 financial markets and the economy. 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.
16 Cash receipts in FY2013 ($3.5 billion) would no longer counted as revenue. Intragovernmental transfers in FY2013
($89.9 billion) would be considered outlays. Outlays for annuities as well as refunds and payments to estates in FY2013
($77.4 billion) would not be included in the budget. Therefore, -$3.5 billion + -$89.9 billion + $77.4 billion= -$16
billion.
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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 amount, expressed as a percentage of payroll, that must
be set aside each year to fund pension benefits based on current employee pay
with no future pay raises, no future COLAs for retirees, and a fixed rate of
interest.
• Dynamic normal cost is the amount, expressed as a 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.17
By law, the FERS basic retirement annuity and FERS supplement must be pre-funded according
to its dynamic normal cost. Every year, OPM estimates the dynamic normal cost of FERS
retirement annuities for employees entering the federal work force that year. For each group of
new employees, OPM must estimate average job tenure, turnover, future salaries, age at
retirement, rates of disability, death rates, the number of employees who will become annuitants,
and how many will leave surviving dependents. OPM periodically re-estimates the dynamic
normal cost of FERS to reflect anticipated changes in interest rates, inflation, and employee and
retiree demographic characteristics.
OPM has estimated the normal cost of the FERS basic retirement annuity at 12.7% of payroll.
Employee contributions for FERS employees first hired before 2013 are set in law at 0.8% of pay,
so the contributions of federal agencies are equal to 11.9% of basic pay for these employees. For
employees first hired (or rehired with less than five years of FERS service) in calendar year 2013,
employee contributions are set in law at 3.1% of pay, so the agencies’ contributions for these
employees are equal to 9.6% of basic pay.18 If the assumptions underlying these cost estimates
prove to be accurate, FERS will be “fully funded.”19 OPM has estimated the dynamic normal cost
17 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).
18 For employees first hired (or rehired with less than five years of FERS service) after December 31, 2013, employee
contributions are set in law at 4.4% of pay, but the agency contributions for these employees continue to 9.6% of basic
pay. The combination of these employee and agency contributions—4.4% + 9.6%=14.0%—is greater than the current
normal cost of FERS. Thus, the FERS employee contribution changes enacted under P.L. 113-67 delinked agency
contributions from the FERS dynamic normal cost until the additional funds produced from the increased employee
contributions have eliminated the CSRS unfunded liability.
19 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.
(continued...)
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of CSRS, using the same economic assumptions used in FERS, at 26.0% 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 normal 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 federal 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 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 1969.
P.L. 91-93 also requires three payments to be made annually from the general revenues of the
U.S. Treasury into the CSRDF. These payments 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
(...continued)
Treasury. See 5 U.S.C. §8423(a)(4).
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• 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.20
Thus, while the static costs of the CSRS were shared equally between federal employees and their
employing agencies, the Treasury was given responsibility for pension liabilities that are not part
of the pension system’s static normal costs. By including the 30-year amortized cost of pay raises
in the annual transfer from the general fund, the Treasury assumed the additional pension
expenses that result from pay raises.21 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.
Because the full costs of CSRS are not met by the combined total of employee contributions,
agency contributions, interest earnings, and the supplemental payments from the Treasury, some
future CSRS benefits will of necessity be paid from contributions that were made to the CSRDF
on behalf of employees who are enrolled in FERS. This will create an unfunded liability for
FERS, which 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:
When the non-Postal CSRS account is depleted, projected to occur in 2022, the resulting
transfers from the FERS account to the CSRS account create supplemental liabilities for the
non-Postal FERS account. These supplement liabilities for non-Postal FERS must then be
amortized by means of 30-year payments made by the Treasury.22
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 Fund. In its current annual report, OPM
has stated that “total assets of the CSRDF ... including both CSRS and FERS are expected to
continue to grow throughout the term of the projection under the existing statutory funding
provisions.”23 Nevertheless, the current method of funding the CSRS has in recent years been a
source of debate for at least two reasons:
20 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 the accumulated liability.
21 Pay raises affect pension costs because the CSRS annuity is based on a worker’s high-three average pay. The effect
of pay raises on future CSRS pension costs is met by amortizing them over a 30-year period with payments 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.
22 U.S. Office of Personnel Management, Annual Report of the Board of Actuaries, Civil Service Retirement and
Disability Fund, Report for the Fiscal Year Ended September 30, 2013, p. 18.
23 Ibid., p. 18.
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(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.
(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.24
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 agencies were required to fully fund the current and future costs of the CSRS through increased
contributions, they 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 expense accounts.25 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 affect 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.26 Pre-funding the full costs of the CSRS in this way would
reduce the federal budget deficit, 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 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, would force federal agencies to
cut spending elsewhere in their budgets.
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
when 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.
24 This transfer of funds to the CSRDF from the Treasury is included in the federal budget in the account for OPM.
25 This was proposed in the Budget of the United States, FY1996, but was not enacted.
26 This was proposed in the FY1997 Budget of the United States, but was not enacted by Congress.
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Conclusion
Proposals to pre-fund CSRS in the same manner as required under FERS have grappled with the
question of whether additional budget authority should be granted to federal agencies, or whether
agencies should make higher contributions from their current budget authority. Many policy
makers believe that greater pre-funding of CSRS retirement annuities would lead to improved
accounting of personnel costs among federal agencies. However, CSRS has been closed to new
enrollment since 1984, and the percentage of federal employees enrolled in CSRS is declining
rapidly as these workers retire. At the beginning of FY2013, only about 10% of federal
employees, including Postal employees, were enrolled in CSRS. With the proportion of federal
employees enrolled in CSRS declining each year, the budgetary treatment of government
contributions toward their retirement annuities is becoming a less pressing issue.
Some observers have suggested that investing the CSRDF entirely in U.S. Treasury bonds does
not represent true “pre-funding” of CSRS and FERS annuities because these bonds are merely a
claim held by the government against its own future revenues. They 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 investment risk, however, this proposal would raise questions about how
purchases of private-sector assets would be scored under current budget rules, and also whether it
would be appropriate for federal trust funds to own the stocks and bonds of private-sector
companies.
Author Contact Information
Katelin P. Isaacs
Analyst in Income Security
kisaacs@crs.loc.gov, 7-7355
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