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New retirement system for Federal employees.

New retirement system for Federal employees

Pension eligibility requirements, financing, and benefits were significantly revised under provisions of the Federal Employees' Retirement System Act of 1986. The new system (FERS), effective January 1, 1987, will cover all Federal civilian employees hired on or after that date and virtually all earlier hires with fewer than 5 years of nonmilitary service on December 31, 1986. Since January 1, 1984, these employees have been subject to interim retirement rules under which they are covered by both the existing Civil Service Retirement System (CSRS) and the Social Security system. However, they make reduced payments to the CSRS (1.3 percent of earnings instead of the usual 7 percent) and contribute the full employee share to Social Security.

Employees currently covered by the interim retirement rules with more than 5 years of service on December 31, 1986, will continue under the dual benefit coverage unless they opt to transfer to the FERS between July 1 and December 31, 1987.

Employees covered only by CSRS will remain under that system unless they opt to shift to the FERS. Eligibility for unreduced benefits under CSRS is age 62 after 5 years of service; age 60 after 20 years of service; or age 55 after 30 years (beginning in 2003, this age requirement will be increased, in stages, to age 57 in 2025). Retirement benefits continue to be based on the employee's average annual earnings during the three highest consecutive years. The formula is 1.5 percent of the average annual earnings figure for each of the first 5 years of service, plus 1.75 percent of the earnings figure for each of the next 5 years of service, plus 2 percent of the earnings figure for each year of service in excess of 10. For 30 years of service, the result is a benefit equal to 56.25 percent of the average annual earnings figure.

The FERS consists of three benefits--Social Security, CSRS, and a thrift savings plan.

Under Social Security, employees will pay a reduced Old Age, Survivors, and Disability Insurance (OASDI) tax of 5.7 percent (6.2 percent in 1990), in addition to the medicare tax which all Federal employees pay. The OASDI and medicare taxes are applied on earnings up to a specified amount (currently $42,000).

The second benefit is the CSRS, to which employees will contribute 1.3 percent of their annual earnings, dropping to 0.94 percent in 1988 and to 0.8 percent in 1990. Age and length of service requirements are as described above for employees staying in the CSRS. The annual benefit will be calculated at 1.0 percent of a retiring employee's average annual earnings for the three highest consecutive years, multiplied by the number of years of service. If the employee is age 62 or older at retirement, the calculation factor will be 1.1 percent. If younger, the employee will receive a supplement equal to the estimated Social Security benefit that would be payable based on current Federal service under Social Security, calculated as if the employee was age 62. The supplement, which is subject to reduction if outside earnings exceed limits, will cease at age 62, when the retiree begins drawing actual Social Security benefits.

The third benefit is a thrift savings plan. It offers three types of tax deferred investments: special Government securities, fixed income securities, and a stock index fund. The Government will contribute an amount equal to 1 percent of each employee's pay to the plan, even if the employee does not participate. In addition, the Government will contribute a dollar for each employee dollar contributed up to 3 percent of pay, and 50 cents for each employee dollar up to the next 2 percent of pay. The maximum employee contribution is 10 percent of pay.

Employees who opt for coverage by CSRS only may invest up to 5 percent of their pay in the special Government securities, but the Government will not contribute matching funds.

The Federal Employees' Retirement System Act limits automatic cost-of-living adjustments payable from the CSRS fund. Annual adjustments will be the actual 12-month rise in the BLS Consumer Price Index if it is less than 2 percent, 2 percent if the rise is 2 to 3 percent, and the rise minus 1 percentage point if the rise is 3 percent or more. The adjustments apply to all retirees, beginning at age 62. Previously, the formula provided for unreduced adjustments for all retirees, regardless of age.

The new retirement system is expected to save the Government $42 million in 1987, rising to $2.67 billion a year in 1991. Major changes also were made in the retirement system for military personnel. (See Monthly Labor Review, September 1986, pp. 39-40.)
COPYRIGHT 1986 U.S. Bureau of Labor Statistics
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1986 Gale, Cengage Learning. All rights reserved.

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Publication:Monthly Labor Review
Date:Oct 1, 1986
Words:793
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