USA Today reports that “retirement programs for former federal workers—civilian and military—are growing so fast they now face a multitrillion-dollar shortfall nearly as big as Social Security’s.” USA Today’s figures include both pension and retiree health costs and are inclusive of military programs, so it is a broad figure. Nevertheless, it raises an interesting question: how did retirement costs for a small segment of the population grow to rival Social Security, a program designed to cover nearly all Americans? One big reason is that federal pension benefits are simply very generous relative to typical private sector plans.
How generous? To check, I took a stylized worker and ran his annual salary through both the federal pension programs and a typical plan offered to private sector employees to see the difference in how much they would end up with at retirement. Since federal workers receive higher salaries than the average private sector worker (more on thathere) I assumed the employee earned 150 percent of the average wage each year; that would put his earnings this year at a bit over $60,000. I assumed he entered the workforce at age 21 and worked until age 65; in reality, most people take some time out of the workforce and most federal employees have held other jobs, but for these purposes that doesn’t matter too much.
Most current federal employees are covered by two pension plans: a defined benefit (DB) program known as the Federal Employees Retirement System (FERS) and a defined contribution (DC) program called the Thrift Savings Plan (TSP). For a federal employee who retires at age 62 or older and has 20 or more years of service, his basic FERS benefit will equal 1.1 percent of his highest 3 years of average earnings, multiplied by his years of service. For FERS, most federal employees contribute 0.85 percent of pay, with the remaining costs covered by the government. The Thrift Savings Plan functions similarly to a private sector 401(k) plan. Federal employers contribute 1 percent of worker wages to the TSP regardless of whether individuals participate. In addition, the federal government matches employee contributions $1.00 per $1.00 for the first 3 percent of earnings contributed and $.50 per $1.00 for the next 2 percent of earnings. A federal employee contributing 5 percent of earnings to the TSP would receive a total employer contribution of 5 percent of earnings. Most current federal employees also participate in the Social Security program.
Andrew Biggs
