- Federal Employee Retirement System (FERS)
- Civil Service Retirement System (CSRS)
- Inflation adjusted guaranteed income
- Are federal employees exempt from social security? (FERS)
- Do federal employees pay social security? (FERS)
- Do federal employees receive social security benefits? (FERS)
- Why don’t federal employees pay into social security? (CSRS)
- Can federal employees collect social security? (CSRS)
- CSRS and the Windfall Elimination Provision
- How I am dealing with the solvency issue
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.
Understanding FERS and CSRS
Federal government employees are covered under one of two retirement systems- “FERS” and “CSRS“. For those of you outside of the government, federal employees pronounced these as “firs” (like the tree) and “sirs”. Almost all current federal employees receive benefits under the FERS retirement system. The CSRS retirement system predated FERS. The government automatically enrolled new employees into FERS more than 30 years ago (January 1, 1987). If that isn’t confusing enough, the government also created a special category of employees called “CSRS Offset” employees.
All of my previous posts about early retirement for federal employees are written specifically for FERS employees. However, FERS and CSRS employees have large differences in how they treat social security. Therefore, I felt like we needed to break these down a little bit to better understand the rest of the post.
Federal Employee Retirement System (FERS)
Government workers in the Federal Employee Retirement System have three sources of retirement income. FERS employees will receive payments from a defined benefit plan (i.e. pension), called the FERS annuity. In addition, they participate in a defined contribution plan called the thrift savings plan (TSP for short). The government matches the first 5% of contributions into the TSP and FERS employees can withdraw money from the TSP numerous ways. Finally, FERS employees pay social security taxes and will receive social security benefits. Another huge benefit of FERS is that these federal employees can keep their health insurance in retirement.
Civil Service Retirement System (CSRS)
Federal government employees were covered under the CSRS retirement system from 1920 until it was phased out for new employees in 1987. CSRS was essentially a defined benefit plan. CSRS federal employees did not need to pay social security taxes (6.2%). As a result, CSRS cannot claim social security from their federal service. These employees did pay Medicare taxes. CSRS employees could participate in the TSP, but received no government match on the money. (Note- CSRS employees may have paid into social security in a second job and can draw social security for that.)
While both CSRS and FERS employees have a pension, the size of the pension is dramatically different between the two systems. CSRS employees earn 1.5-2% of their “high-three” salary per year worked as an annuity (topping out at 80% of their pre-retirement salary at 41.5 years). FERS employees earn only 1% of their “high three” salary for each year worked.
Understanding Social Security
President Franklin Roosevelt signed the Social Security Act in 1935. This legislation established lifetime payments to senior citizens among other protections for American citizens. While most people equate social security with retirement income, it is much more. It also provides disability and death benefits. The CBPP estimates that the social security death benefit is equivalent to a $750,000 life insurance policy for a young married worker with two children. Furthermore, about 20% of people receiving social security payments are under retirement age. These people receive benefits because of a disability or death of a parent. (Honestly, I had no idea how big these benefits were until I started researching this article).
Social security taxes go directly into the “Social Security Trust Fund”. The government keeps this fund separate from other tax revenue. And the trust fund is used to pay social security benefits. Currently, the government collects more money than it pays out. The trust fund invests this extra revenue in Treasury bills, which earn interest and increase the amount of money in the trust fund.
Inflation adjusted guaranteed income
One of the most important parts of social security is that it is both inflation adjusted and guaranteed. Currently, most employee’s must save for their own retirement in tax deferred accounts (i.e. 401(k)s). With these accounts, it is possible that the employees may run out of money if they withdraw too much money or their investments do not keep place with inflation. While social security does not replace 100% of pre- retirement income, it is both inflation adjusted and guaranteed.
FERS employees and social security
Are federal employees exempt from social security? (FERS)
No. FERS employees are not exempt from Old Age, Survivors and Disability Insurance (OASDI) tax, commonly called social security. Federal employees under FERS are full participants in social security and both pay into and receive benefits.
Do federal employees pay social security? (FERS)
Yes. FERS employees pay social security. In addition, the government pays the employer portion of the this tax. If you are a federal employee, you can find the amount contributed each pay period on your pay stub under “OASDI”.
Do federal employees receive social security benefits? (FERS)
Yes. FERS employees receive social security benefits. The amount of your social security benefits is calculated just the same as if you were a private sector employee. You can get an estimate of your social security benefits from the social security administration.
CSRS Employees and Social Security
Why don’t federal employees pay into social security? (CSRS)
CSRS employees do not pay into social security. When social security was established, federal government employees were already covered within a pension program and therefore were excluded from the program. CSRS employees contribute 7-8% of their salary to their pensions. This is just slightly higher than the amount that FERS employees pay in OASDI tax. Compared to most employees who pay OASDI, CSRS get a great return on their money withheld for retirement.
Can federal employees collect social security? (CSRS)
CSRS employees may be able collect social security. These federal employees would be eligible for social security if they worked a second, non-government job during their lifetime. CSRS employees may have earned credits through a federal employee’s second job. Or perhaps they earned credits for a job they had before or after their federal career. As a CSRS employee, you would need to have earned 40 work credits in your lifetime to be eligible for social security. However, SSA will reduce your benefit through the Windfall Elimination Provision.
Do federal employees get social security and a pension?
Yes. FERS employees receive both a pension annuity and social security. CSRS employees receive a pension and can receive social security if they paid social security in a non-government job. In general, the employees must have qualified for social security through earning enough work credits over their lifetime.
CSRS and the Windfall Elimination Provision
If you are a CSRS employee who is eligible for social security, you may be impacted by the “Windfall Elimination Provision” (or WEP). The WEP applies to people who receive retirement income from a “non-covered source”. The CSRS pension is a non-covered source because employees did not pay OASDI tax while in that job. The WEP reduces the social security benefit CSRS employees would have otherwise been qualified for based on their outside employment.
If this applies to you, definitely check out the social security association’s explainer on the WEP. You may also wish to talk to a qualified benefits professional to understand how much money you may receive from social security.
Solvency of Social Security
Since I write a retirement blog, I wanted to address social security and retirement planning. Despite the Saturday Night Live sketch from the 2000 election, our social security taxes do not go into a lockbox. Instead, most of the OASDI taxes the government collects pay current retirees’ benefits.
Prior to the COVID-19 pandemic, researchers estimated that social security could continue paying full benefits until 2035. After 2035, the government would no longer have enough money coming in to meet their expenses. This doesn’t mean that all benefits would stop; the government would still have enough money to pay 75% of the benefits. However, it does mean that we will have hard decisions to make. Almost half of single people rely on social security for 90% of their income.
In doing this research, I learned that social security won’t “go bankrupt”. Social security will still have plenty of money coming in. They just can’t give everyone 100% of what they are today. It’s possible that Congress will increase social security taxes, change the collection age, or change the benefit collection formula. We can’t say for certain how the government of the future will address this issue. However, no matter what, social security will be able to pay you something when you retire.
How I am dealing with the solvency issue
I am a federal employee who is eligible for social security and also under 40. I do not include social security in my retirement calculations at all. Instead, I hope to entirely fund my retirement through my FERS retirement benefits and my TSP. Any extra money I get from social security is “gravy”.
Of course, my decision to exclude social security entirely is overly conservative. Since they government can afford to pay 75% of benefits in the future, they may decide to reduce everyone’s benefits or extend the age at which you can withdraw money.
If you’re a FERS employee who is close to retirement, then I think it’s prudent to include social security in your calculations. However, for younger feds, like me, I would exercise caution in the amount of social security income you plan to have in retirement.
Summary
In summary federal employees under the FERS retirement system pay social security taxes and are eligible for social security taxes. Importantly, nearly all current federal employees belong to the FERS retirement system. Furthermore, if you’re considering applying for a federal job, you will join the FERS system and will participate in social security.
Some older federal employees and many federal retirees belong to the CSRS retirement system. They did not pay into social security from their federal job and cannot receive benefits from their federal career. If they worked a second job, they may be eligible for social security benefits. However, the government would reduce their social security payment through the WEP.
In writing this post, I learned that social security is way more than just a check given to senior citizens. In fact, social security helps many disabled adults and children who have lost a parent. By participating in social security, FERS employees may also receive these social security benefits. While social security cannot continue to pay the same rate of benefits after 2035, it will still bring in enough money to pay 75% of the benefits, without any changes. Therefore, younger federal employees should be cautious in calculating the role of social security in their retirement.
Sam
Sam i.e. "Gov Worker" started working for the government at age 18 and loved it so much that he never left. He started GovernmentWorkerFI in 2019 to help fellow federal employees understand their benefits, take control of their finances, and live their best lives.
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