An introduction to the federal employees retirement system

Federal employees retirement system

The United States federal civil workforce administers the various government departments and agencies. These executives deliver professional, technical, and clerical services. They receive salaries according to a graded pay scheme, and the federal employees retirement system (FERS) ensures that they lead a comfortable, worry-free life even after their service.

Eligibility for federal employees retirement system

  1. The US Congress-approved FERS came into effect on January 1, 1987. All the employees hired after December 31, 1983, are automatically covered by this system. Those who are not under the FERS are eligible for transfer plans.
  2. The FERS successfully replaced the Civil Service Retirement System (CSRS). All new employees hired after January 1, 1987, come under this system. Rehired or newly hired employees between 1984-86 are also eligible for FERS.
  3. Employees hired before 1984 and had 5 years of civilian service by the end of 1986 have a choice. They can opt for CSRS or elect FERS within 6 months of rehire. However, the transfer to FERS is final and irrevocable. The creditable service rules are applicable to determine age and service criteria.
  4. The minimum retirement age (MRA) for collecting the benefits depends on the date of birth.
    Those born before 1953 should be between 55 to 56 years of age at the time of retirement. Employees born after 1953 have an MRA between 56 to 57 yrs. For all others born after 1970, the MRA is 57 years of age.
  5. Employees who are 60, 62, or retire at MRA are eligible for immediate benefits. They can collect their pension within 30 days from the date of retirement. However, they should have put in 5 to 30 years of service. Reductions to benefits are also applicable to these retirees as per the specified rules.
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FERS: a planned three-tier system

FERS is a multi-tiered system with three important components. They are the Social Security Benefits, Basic Benefit, and Thrift Savings plan. The federal employees retirement system makes these three plans work together. It ensures a strong and reliable financial robustness to the retiree’s later life.

Social security benefits

These payments cover some hospital expenses, monthly payments, and lump-sum death benefits. However, the benefits depend on tax payments, average earnings, family composition, and consumer price index (CPI).

Basic benefit plan

These plans are also applicable to those who transfer from CSRS. It does not cover unused sick leave but includes creditable civil and military service with deposit contributions. The retirees can choose postponed, early, immediate, or deferred payments.

Thrift savings plan

The TSP is the third component that is very similar to private corporations’ 401(k) plans for workers. It is a tax-deferred savings and investment plan with a loan program and withdrawal options. New hires can participate in TSP after 6 to 12 months of civilian service. They can save on income, reduce taxes, and invest funds with varying returns and risk factors.

Computing federal employees retirement system annuity

A specific salary amount gets deducted to cover social security costs. The employer also pays an equal amount, which is up to 6.20% of earnings. It covers survivors, old age, disability, and Medicare insurance.

For the Basic Benefit Plan, employees contribute 7% of basic pay and 0.80% Social Security tax. The benefits get calculated using the length of service and “high-3” average salary. It is the highest basic pay averaged over any 3 consecutive years of creditable service.
Benefits = (1% of high-3 average pay) X (years of creditable service).
If the employee retires at 62 or after with 20 service years, 1% changes to 1.1%.

Special Provisions: The 1% factor gets replaced by 1.7% for retirees from Air Traffic Control, Fire fighting, Law Enforcement, or Congress. It also applies to Nuclear Material Couriers, Supreme Court, and Capitol Police. These are extra benefits other than the above benefits formula.

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For TSP, the employees can contribute up to 10% of basic pay. But there is an adjustable IRS limit starting at US$10,000 in 1998. The agency automatically contributes 1% when this account is set-up. The agency also makes matching contributions as per the following schedule:

  1. For the first 3% of basic pay, the agency matches US$1 for every dollar you contribute.
  2. For the next 2% of basic pay, the agency contributes US$0.50 for your 1 dollar.
  3. And, for the next 5% of basic pay, the agency does not match with a contribution.

Choosing a retirement plan

The civil workforce plays a significant role in determining a Nation’s future. So, employees work in a lot of stressful situations. They deserve a smooth and hassle-free life after retiring from the service, and the federal employees retirement system facilitates this dream. But the employees have to plan and use these important tips for their advantage:

  1. The employee must utilize the service credit program to make deposits and re-deposits. It includes principal and interest and therefore maximizes the retirement benefits.
  2. Rely on any reliable estimator for automatic calculations. It is best to accurately estimate both benefits as well as the TSP account balances.
  3. The last 5 years before retirement is significant for insurance coverage. Review the service history, and verify your social security, pension offsets, and windfall provision estimates.
  4. Resolve your debts and request direct deposit of annuity checks in the last year. Also, withdraw TSP, and apply for retirement after inquiring about voluntary contributions.

Survivors and federal employees retirement system

The FERS is not just for the civil services employees alone. The benefits also extend to eligible dependents like spouses and children. Widows receive a lump sum, adjusted for cost of living, starting at US$21,783.34 in 1998. The spouse also receives 1/2 of the annual pay rate at death or 1/2 of high-3 average pay, whichever is higher.

Children and ex-spouses also receive benefits as per eligibility rules or court orders. The FERS also covers disabilities with benefits up to 40% or 60% of high-3 average pay, with increases of 2% to 3% accounting for consumer price index (CPI) after the first year.