I couldn’t believe what I was reading.
While I’ve read a lot of weird things on Reddit, this caused me to completely rethink all of my assumptions about federal pensions.
I was browsing through a subreddit for federal employees when I found someone asking a question about how to opt out of FERS.
“Why would anyone want to opt out of such a great benefits system,” I asked myself.
And then it hit me. This federal employee contributes much more to his pension than I do. Maybe he thinks FERS is a bad return on investment.
In this post I’m going to explain how much federal employees contribute to their pension. (And if you read to the end, I’ll tell you whether I think FERS is still a good deal for federal employees).
Table of contents
- Do all federal employees contribute the same amount towards their pension?
- Understanding the different categories for pension contributions among federal employees.
- How much do federal employees pay into retirement for their pension?
- Other frequently asked questions about federal employee pension contributions
- So… Is FERS a good deal?
- Are federal employees pension contributions a good deal?
Please do not confuse my personal blog for financial advice, tax advice or an official position of the U.S. Government. This post may contain affiliate links. If you make a purchase after clicking on a link, I get a small percentage of the sale at no additional cost to you.
Do all federal employees contribute the same amount towards their pension?
No. Unfortunately, federal employees contribute different percentages to their pension depending on
- which retirement system they belong to
- when they were hired
- their job function.
If you are already a federal employee and don’t know how much you contribute toward your pension, I would recommend finding a paystub ASAP. Also, if you have no idea how your federal retirement works, you can check out some of my older posts on the topic.
On the other hand, if you’re trying to compare public and private sector pay, you will need to better understand all of the different scenarios. Luckily, I have condensed this confusing topic into just the major points.
Note: I’m completely ignoring CSRS employees (hired before 1987) in this post. If you’ve been working for the federal government since 1986, you’re probably too close to retirement to be splitting hairs about your retirement contributions.
Understanding the different categories for pension contributions among federal employees.
There are two factors that determine how much federal employees contribute to their pension: whether they are a “FERS special employee” and their date of hire.
Special FERS employees
A “special FERS employee” is a type of federal employee who can retire after 20 years. Special FERS employees are primarily comprised of law enforcement officers and firefighters.
Special FERS employees have a code “M” on Box-30 of their SF-50 and contribute a higher percentage of their pay towards their pension.
For reference, standard FERS employees have a code “K” on Box-30. There are also type “L” federal employees (air traffic controllers) and type “N” federal employees (military reserve techs).
Type “L” FERS employees contribute a similar percentage of pay as type “M” and receive similar retirement benefits although there are differences in retirement eligibility.
A military reserve technician is very similar to a normal, Type K federal employee with the exception that their annuity is capped at 1% per year of service even if they work past age 62.
Date of hire
Your date of hire will also determine how much you as a federal employee will contribute to your pension. I’m already assuming that people reading this are FERS employees (hired after 1/1/1987).
Since 2013, Congress passed laws changing the FERS contribution percentages for new employees. This has created 3 different groups of FERS employees. Finally, several jobs, like law enforcement, have special pension contributions.
If you are a current federal employee, you can look at your SF-50 to determine how much you contribute to retirement. The amount you contribute towards retirement depends on the code in Box 30.
- “Normal FERS employees” were hired before 1/1/2013. They contribute the least 0.8% of their pay towards retirement.
- “FERS-Revised Annuity Employees” or “FERS-RAE” employees were hired in 2013 and contribute 3.1% of their pay.
- “FERS-Further Revised Annuity Employees” or “FERS-FRAE” were hired on or after January 1st, 2014 and contribute 4.4%.
These contribution percentages listed describe Type K-FERS employees. Special FERS employees and air traffic controllers contribute an additional 0.5% towards their pension.
In short, the K/M determines whether you are a “special FERS employee”, such as a law enforcement, with a lower minimum retirement age. The second letter (if you have one) determines whether you are subject to the increased pension contributions from the Bipartisan Budget Act of 2013 or the Middle Class Tax Relief and Job Creation Act of 2012.
How much do federal employees pay into retirement for their pension?
How much do federal employee contribute to pension? While I kind of answered the question in the last section, it was buried in the middle of a lot of other stuff. If you’re like me, you probably just skipped that last section entirely and jumped to the answer. Don’t worry, I got your back.
Type K FERS
Standard FERS employees (Type K) contribute 0.8% of their pay towards their pension. Type KR employees were hired in 2013 and contribute 3.1% of their pay towards their pension. And employees hired on or after January 1, 2014 contribute 4.1% of their pay towards their pension (Type KF).
Special FERS employees
Firefighters and law enforcement officers hired before January 1st, 2013 (Type M FERS) contribute 1.3% of their pay towards their pension. Type MR FERS (hired in 2013) contribute 3.6% of their pay towards their pension and Type MF FERS hired after 1/1/2014 have to contribute a whopping 4.6% of their pay towards their pension. (At that rate, I’m not sure if MF standard for M-Further Revised Annuity Employees or the curse word they shout when they see their pay-stub).
Other frequently asked questions about federal employee pension contributions
Is FERS underfunded?
Obviously, if you’re depending on FERS for income in retirement, you will want to know if it will still be there when you retire. FERS benefits are paid out of the Civil Service Retirement and Disability Fund (CSRDF). Your retirement contributions (0.8%-??%) of your pay go into the CSRDF along with agency matching contributions.
Employee and agency contributions have never been enough to completely pay for the FERS benefits. However, the federal government makes supplemental payments into the CSRDF to cover this shortfall.
Therefore, while the CSRDF may be underfunded, FERS pensions are backed by the US Government and are therefore very unlikely to run out of money. As I stated in a previous post about how I think about my pension in my net worth, I think my pension is safe unless the United States loses a global war, in which case I will have bigger issues than not having a pension.
Do federal employees get social security?
Many people also depend upon social security for income in retirement. FERS employees contribute to social security and receive social security benefits. CSRS employees do not earn social security benefits for their time in federal service but may qualify for benefits based upon previous employment. Still confused? I wrote a post explaining federal retirement and social security benefits.
So… Is FERS a good deal?
With all of these complaints I’ve seen on Reddit, I thought I should see if FERS was really a rip-off for new employees.
For this analysis, I’m only considering the FERS pension (retirement annuity). As I’ve written before, FERS is a lot more than just a pension! Also, I am going to need to make some assumptions about what people’s careers look like. I’m going to consider a very conservative career path.
FERS is a good deal for those staying until MRA
Alice- starts government service as a GS-7 program support assistant and eventually moves into a GS-9 position after 15 years of government service and retires at 30 years of service. For these calculations I also assume Alice belongs to the “Further Revised Annuity Employee” category and contributes 4.1% of her pay towards her pension. Furthermore, I used the Rest of US locality pay. Finally, I assumed that the COLA adjustments equaled inflation so that we could use today’s dollars when talking about salary.
After 30 years, Alice contributed $72,496 towards her pension with a high three of $69,462. Therefore, she earned a FERS pension equivalent to $20,838.60 per year.
On the other hand, if Alice invested 4.1% of her salary (8% return) she would have $256,999.42. In other words, we can say that Alice’s pension contributions had an opportunity cost of ~$260k.
Now we need to compare the pension ($21k per year) to the invested balance ($260k total). We could choose a lot of ways to do this. However, I believe it’s easiest to use the 4% rule. If you have never heard of it, “4% rule” states that you can withdraw ~4% of your portfolio for 30 (or more) years without running out of money.
If Alice wanted to have a portfolio big enough to match her pension at a 4% withdrawal rate, she would need $520,965.00! That’s almost twice as big as what she earned from her investments. On top of that, the government guarantees her FERS pension. (There is a small but non-zero chance that 4% withdraws would leave you penniless).
What if you leave before MRA?
After I ran my previous calculation, I felt good. My numbers showed that my assumption that FERS is a good deal was correct. I thought my calculation was conservative. Could you imagine Alice’s ROI if she started as a GS-7 and ended at a GS-15?
But, I thought I should try another example. What if Alice only stuck around for a few years?
In this scenario, I assumed Alice worked for 7 years and contributed $12,367 over the course of her federal career. Her FERS deferred pension would be worth $3,544 a year (at age 62). In contrast, if she would have invested that money and had it compound for an additional 23 years, she would have $100,394. Her investments could provide $4,015 per year (or about 14% more than her FERS pension).
Even in this horrible scenario where your FERS pension is stagnant while your investments grow, FERS does not lose out by too much.
Are federal employees pension contributions a good deal?
I hope by now you understand how much federal employees contribute to their pension and how it compares to investment returns. In my opinion, if you started before 2014, you get an excellent return on your retirement contributions.
However, FERS Further Revised Annuity Employees may or may not be getting a good deal.
For these employees, they receive an excellent ROI on their contributions if they stay until they can receive an immediate annuity. However, if they leave the government before retirement, the returns might not match the stock market.
No matter what, FERS provides a reliable, stable stream of income in retirement. And that peace of mind can be worth *so much* when the market is crashing all around you.
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