The US Government offered two retirement systems to its employees. There are some similarities between the two plans, but they are not at all identical.

The Civil Service Retirement System

The Civil Service Retirement Act was first passed by congress back on August 1, 1920, as a combined benefit contributory system for certain federal employees. Under this system, the employees taking part in the plan share the expenses of the annuities paid to existing retirees and will themselves collect a benefit of up to 80% of their salary upon retirement. The Civil Service Retirement System is designed to provide benefits for the covered employee until death and can even continue to the CSRS retirees eligible spouse.

Back in 1920, when the plan was initially set up, retirement was not considered an entitlement that everyone should expect at the end of a long arduous career.  In fact, the popular entitlement programs that are around today – such as Social Security – did not even exist at the time the CSRS system was created.

Most employees under this plan pay Medicare taxes and can participate in that program when they are otherwise qualified (age 65+). Still, they do not pay into Social Security or SSDI and, as such, are not eligible for benefits under this plan unless they satisfied their 40 quarters with non CSRS employment. CSRS recipients receive periodic cost of living adjustments that are generally deemed to be in line with the Consumer Price Index.

Another significant benefit for retirees under the Civil Service Retirement System is the option of returning to work in the private sector after federal retirement without a negative impact on their federal retirement pension. CSRS employees still have the ability to invest in the TSP but there is no matching contribution for CSRS employees.

The Federal Employees Retirement System

By comparison, the Federal Employees Retirement System was initially set up in 1983. For the first few years, employees were offered a choice as to which program they participated in. This came to an end in 1987 when all new employees were no longer given the option of the older plan. 

Unlike the CSRS annuity model, the Federal Employees Retirement System was set to work alongside earned retirement benefits from Social Security and TSP savings containing both employer and employee contributions.  Under the newer plan, the retiree could continue to add to the program using benefits earned under the new employer. 

Under the FERS plan, employee retirement is funded by three sources, FERS retirement pension, Social Security, and the Thrift Savings Plan, which operates like a 401(k). The Thrift Savings Plan and Social Security can travel with an employee who moves to a new job inside the private sector but because the TSP is funded via payroll deduction, new contributions are not allowed after separation from service. 

Social Security in Retirement

Social Security was part of President Roosevelt’s New Deal with America and was signed into law on August 14, 1935, during some of the worst days of the Great Depression. Workers paid the first taxes to fund this new legislation in January of 1937. They were taxed at a rate of 1% for the first $3000 earned. Legislation providing benefits for survivors of deceased workers was established in 1939. 

Retirement planning became a bit easier in the late 1950s when benefits allowing retirement at age 62 were set up with full retirement set at 65. This age requirement remained at this level until 1983 when President Ronald Reagan signed legislation calling for the gradual increase in the full retirement age to 67. 

The Thrift Savings Plan (TSP)

The Thrift Savings Plan is only open to federal employees and uniformed service personnel, and it is one of the largest defined contribution plans in the world. The CSRS program defined the entire benefit retired recipients would receive whereas the TSP is a defined-contribution plan.  This is an employer-sponsored plan where the amount contributed is defined but the size and sustainability of retirement distributions depends on the investment prowess and spending habits of the account holder. The program was set up in 1986 and operates as a 401{k} for federal employees with similar tax and savings benefits.  The government offers a 5% match on FERS employee contributions to the plan – this is the defined-contribution. Roth TSP accounts are very popular for tax planning in the federal workforce as well.

The rules regarding withdrawal from the Thrift Savings Plan account were restrictive until 2019 and the passing of the TSP Modernization Act. This legislation provided more freedom for workers wanting to make account withdrawals. 

Walker Capital is a trusted name in helping federal employees from all around the country plan for retirement. Our talented team can help you navigate your retirement journey from the very start. Call 704-879-3137 or email info@WalkerCPG.com to discuss your retirement needs.