Federal Employees’ Retirement System: The Role of the Thrift Savings Plan Page: 4 of 22
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Federal Employees' Retirement System:
The Role of the Thrift Savings Plan
Pensions for civilian federal employees are provided through two programs, the
Civil Service Retirement System (CSRS), which was established in 1920, and the
Federal Employees Retirement System (FERS), which began operating in 1987. Prior
to enactment of the Social Security Amendments of 1983 (P.L. 98-21), federal
employees were not covered by Social Security. Because the Social Security system
needed additional cash contributions to remain solvent, the 1983 amendments
mandated coverage for civilian federal employees hired in 1984 or later. Congress
recognized, however, that CSRS provided some of the same benefits as Social
Security. Moreover, enrolling federal workers in both plans would have required
payroll deductions equal to more than 13% of employee pay. Consequently,
Congress directed the development of a new federal employee retirement system with
Social Security as the cornerstone, and which would incorporate many features of the
retirement programs typical among large employers in the private sector.
The result of this effort was the Federal Employees' Retirement System Act of
1986 (P.L. 99-335). FERS consists of three elements: (1) Social Security, (2) the
FERS basic annuity (a defined benefit plan), and (3) the Thrift Savings Plan (a
defined contribution plan). FERS now covers all federal employees whose initial
federal employment began on or after January 1, 1984, as well as employees who
voluntarily switched from CSRS to FERS during "open seasons" held in 1987 and
1998.1 Of 2,595,000 participating federal and Postal Service employees in March
2003, 1,825,000 (70%) were covered by FERS and 770,000 (30%) were covered by
the Civil Service Retirement System.
Defined Benefit and Defined Contribution Retirement Plans
Two Types of Retirement Plans. Retirement programs generally can be
classified as either defined benefit plans or defined contribution plans. A defined
benefit plan typically pays a pension based on years of service and some measure of
average salary during those years. Social Security is a defined benefit pension plan
in which years of service are counted as the 35 years of highest earnings and the
measure of salary is the worker's average indexed monthly earnings during those 35
years. Both CSRS and the FERS basic retirement annuity are defined benefit plans.
With each year of service, the worker accrues pension benefits equal to a percentage
of average pay during his or her three highest consecutive years of earnings. To
determine the amount of the retirement annuity, this percentage is multiplied by the
number of years that the employee was covered by the plan. For example, a worker
1 Relatively few employees who were covered by CSRS chose to switch to FERS. Only
about 5% of eligible employees switched in 1987 and fewer than 2% switched in 1998.
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Purcell, Patrick J. Federal Employees’ Retirement System: The Role of the Thrift Savings Plan, report, June 10, 2004; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc808345/m1/4/: accessed April 24, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.