Prior to January 1, 1984, there was only one major federal retirement system for federal (and postal) employees — the Civil Service Retirement System (CSRS) which didn’t — and still does not — include Social Security coverage and taxes.
The Social Security laws were changed in 1983 to require Social Security coverage for most new federal employees hired after December 31, 1983, or employees who were rehired after December 31, 1983, after a break in CSRS coverage of more than one year.
These employees were placed in an interim retirement plan that provided for full Social Security deductions from pay and reduced CSRS deductions. This was the precursor of the CSRS Offset plan.
Typically, CSRS Offset retirement applies to employees who had a break in service that exceeded one year and ended after 1983, and had five years of creditable civilian service on January 1, 1987. CSRS Offset retirement coverage also applies to employees hired before January 1, 1984, who acquired CSRS coverage for the first time after that date, and had at least five years of creditable service by January 1, 1987.
On January 1, 1987, the Federal Employees Retirement System (FERS) became effective. Almost all new employees hired after December 31, 1983 are automatically covered by FERS.
All federal employees pay 1.45 percent of all salary toward Medicare. In addition:
- CSRS employees pay 7 percent of all salary toward the civil service portion of their benefits into the civil service retirement fund.
- FERS employees pay 0.8 percent of all salary toward the civil service portion of their benefits into the civil service retirement fund if hired before 2013. They pay 3.1 percent if hired in 2013 and 4.4 percent if hired in 2014 and after; however, those rehired after 2012 following a break in service pay 0.8 percent if they had at least five years of prior creditable service. The lower rate also applies to those who elect FERS coverage (such as someone who worked under CSRS or CSRS Offset, had a break in service, and elected FERS on returning). Guidance is in Benefits Administration Letters 12-104 and 14-102 at www.opm.gov/retirement-services/publications-forms/benefits-administration-letters. All FERS employees also pay standard Social Security taxes of 6.2 percent on salary up to the program’s annual maximum.
- CSRS Offset employees pay 0.8 percent toward their civil service benefit. They also pay the Social Security deduction up to the Social Security maximum. Above that level they pay 7 percent into the civil service retirement fund.
- Certain categories of employees, such as air traffic controllers, law enforcement officers and firefighters, pay an additional half percent of salary toward the civil service portion of their benefits but receive enhanced benefits, as explained below.
Note: Higher contributions and enhanced benefits also apply to members of Congress first taking office, and most congressional staff members first hired, before 2013. Those taking office/hired in that year and after fall under standard rules.
In all systems, the civil service portion of benefits is based on years of service multiplied by the average of the employee’s highest three consecutive years of base salary, called the high-3, which is usually the last three years of service before leaving government.
“Base salary” is the dollar amount you earn from which retirement deductions are taken, as described above. That is the base rate of pay is the one fixed by applicable law or regulations for your position. For general schedule employees, it also includes such things as:
- locality pay;
- within grade increases;
- special pay rates established for recruiting and retention purposes; and
- certain kinds of premium pay, largely affecting firefighters and law enforcement officers.
For wage system employees, base pay includes environmental differential pay.
Excluded from base pay, and, thus, from being used in determining high-3 are:
- bonuses, allowances, holiday, military pay, and overtime;
- foreign post differentials;
- non-foreign area allowances and differentials; and
- payment for credit hours earned under a compressed work schedule.
The high-3 is based on basic pay before any deductions, such as those for a flexible spending account or Thrift Savings Plan investments, are taken out.
The formula for calculating benefits based on the high-3 varies by retirement system, as explained below (note: in each of those formulas, full months beyond a full year of service are credited proportionately).
Civil Service Retirement System (CSRS)
CSRS is a defined benefit system which is based on a formula that allows employees to estimate the annuity they will receive when they retire. The closer they are to retirement, the more accurate their estimate will be.
CSRS rewards those who stay with the government for a full career. For example, employees who retire at age 55 or later with 30 years of covered service will receive an annuity that equals 56.25 percent of their high-3.
CSRS employees may contribute to the Thrift Savings Plan. However, they receive no contributions from the government.
Note: CSRS is a closed system. No new employees may be covered by it. However, if you are a CSRS retiree who returns to work within one year of retirement, you are eligible to resume CSRS coverage. If you come back after a year, you will be offered a choice of being covered by CSRS Offset or FERS.
CSRS Offset employees are covered by both CSRS and Social Security. They earn retirement credits under both systems. Since Social Security is a fully portable benefits system, credits earned while employed under CSRS Offset are added to any earned before joining the government or after leaving it.
The annuities of CSRS Offset employees are computed under the same rules that apply to CSRS retirees. However, if they become eligible for any Social Security benefits at age 62 (or later if they retire from the federal government after age 62), their CSRS annuity will be reduced, or “offset” by the value of the Social Security benefits earned during their CSRS Offset service. In that case, instead of getting one payment from the Office of Personnel Management which reflects all federal service, some of their payment will come from the Social Security Administration.
Similarly, if they are eligible for Social Security benefits and become disabled or die, they will have their disability or death benefits offset.
On the other hand, if they are not eligible for Social Security benefits, their annuity or survivor benefits will not be offset.
CSRS Offset employees may contribute to the TSP under the same rules applying to CSRS employees.
Note: If you are a CSRS Offset retiree with at least five years of CSRS service who returns to work for the government within one year of retiring, you will be offered a choice of being covered by CSRS Offset or FERS. If you come back after a year, you will automatically be covered by FERS.
Federal Employees Retirement System (FERS)
The basic benefit under FERS is calculated using a less generous formula than that under CSRS: 1 percent of high-3 per year of service; 1.1 percent if retiring after age 62 with at least 20 years of service. (Note: Benefit calculations are the same for those hired after 2012 who must pay higher amounts into the retirement system.)
On the other hand, FERS employees will be eligible for a Social Security benefit at age 62. If they retire before age 62, many qualify for a Special Retirement Supplement which mirrors the Social Security benefit they have earned while employed under FERS.
Each pay period, the employing agency deposits an amount equal to 1 percent of basic pay into a FERS employee’s TSP account. Each percent of basic pay the employee contributes to the TSP is matched dollar-for-dollar by the agency up to 3 percent; for the next two percent, the agency adds 0.5 percent of pay. Thus, if the employee contributes 5 percent, the agency’s total contribution will be 5 percent. There are no matching contributions on contributions above 5 percent.
If you are a FERS retiree who returns to work for the government, you will automatically be covered by FERS.