Economics, Entitlements

How Generous Are Federal Employee Pensions?

USA Today reports that “retirement programs for former federal workers—civilian and military—are growing so fast they now face a multitrillion-dollar shortfall nearly as big as Social Security’s.” USA Today’s figures include both pension and retiree health costs and are inclusive of military programs, so it is a broad figure. Nevertheless, it raises an interesting question: how did retirement costs for a small segment of the population grow to rival Social Security, a program designed to cover nearly all Americans? One big reason is that federal pension benefits are simply very generous relative to typical private sector plans.

How generous? To check, I took a stylized worker and ran his annual salary through both the federal pension programs and a typical plan offered to private sector employees to see the difference in how much they would end up with at retirement. Since federal workers receive higher salaries than the average private sector worker (more on that here) I assumed the employee earned 150 percent of the average wage each year; that would put his earnings this year at a bit over $60,000. I assumed he entered the workforce at age 21 and worked until age 65; in reality, most people take some time out of the workforce and most federal employees have held other jobs, but for these purposes that doesn’t matter too much.

Most current federal employees are covered by two pension plans: a defined benefit (DB) program known as the Federal Employees Retirement System (FERS) and a defined contribution (DC) program called the Thrift Savings Plan (TSP). For a federal employee who retires at age 62 or older and has 20 or more years of service, his basic FERS benefit will equal 1.1 percent of his highest 3 years of average earnings, multiplied by his years of service. For FERS, most federal employees contribute 0.85 percent of pay, with the remaining costs covered by the government. The Thrift Savings Plan functions similarly to a private sector 401(k) plan. Federal employers contribute 1 percent of worker wages to the TSP regardless of whether individuals participate. In addition, the federal government matches employee contributions $1.00 per $1.00 for the first 3 percent of earnings contributed and $.50 per $1.00 for the next 2 percent of earnings. A federal employee contributing 5 percent of earnings to the TSP would receive a total employer contribution of 5 percent of earnings. Most current federal employees also participate in the Social Security program.

In the private sector, a typical pension plan today is a defined contribution 401(k) program, which is generally funded with a combination of worker contributions and employer matches. The most common matching formula is $.50 per $1.00 of contributions, up to the first 6 percent of pay. Around one-third of employers offering matching 401(k) plans use this approach, so we’ll follow it here. DB plans still exist in the private sector, but they’re shrinking fast: only 13 of the Fortune 100 companies now offer a traditional DB plan to newly hired employees. Some offer so-called “hybrid plans”—which are themselves shrinking—while the remainder offer 401(k) plans.

For both 401(k)s and the TSP, we need to make the risk of the benefits they offer comparable to the guaranteed benefits from a defined benefit plan; otherwise, investments in riskier assets like stocks will seem like “free money.” To do that, I follow the Congressional Budget Office’s approach of assuming that DC plans invest in government bonds, which I assume to have a 4 percent yield. That’s higher than the roughly 2.5 percent Treasury securities are currently paying but lower than the historical average, so you can adjust up or down as you see fit. Once people retire, I convert their DC accounts to a joint and survivor annuity using rates published by the TSP. For both workers, I assume they contribute enough to receive the maximum employer match to their DC account; but in comparing benefits I use only those generated by the employer match, not from the worker’s own contributions.

In both federal and private sector employment the worker would receive the same annual Social Security benefit of around $21,656. At retirement, the worker’s highest three years of earnings average at $60,368; with an assumed 44 years of service and a 1.1 percent replacement factor, that generates an annual FERS pension of $29,218. In addition, the annuitized value of the employer match to the TSP generates another $6,960 in annual benefits, for a total retirement income of $57,834. In addition, the federal employee would have whatever income his own TSP contributions generated.

The private sector worker would have a Social Security benefit of around $21,656, plus an annuity payment drawn from his employer’s 401(k) contributions of around $4,175 per year. The total retirement income would be around $25,832, plus whatever he received through his own 401(k) contributions. To make things simple, $25,832/$57,834 = around 45 percent, so the private sector worker clearly is receiving far less.

Now, we can haggle about some of these assumptions. Maybe private sector workers who are comparable to federal workers in terms of education or other skills receive more generous pensions. But even if we assume that the employer matches 6 percent of pay rather than the more typical 3 percent, that brings the private pension benefit up to only 51 percent of the federal level. And bear in mind that these percentage differences are reduced by the inclusion of Social Security; if I looked only at employer-provided pension benefits, the private benefit would be only around one-tenth the federal level.

Put it this way: federal employees have a more generous defined contribution pension than most private sector workers, and on top of this they have a defined benefit plan for which they pay less than 1 percent of salaries. State and local workers who participate in Social Security usually have more generous DB plans (a replacement factor of around 1.9 percent of final earnings versus 1 or 1.1 percent for federal employees, according to the Public Plans Database), but they pay far more for their benefits: almost 5 percent of pay versus less than 1 percent for federal employees.

In addition, federal employees are also eligible for retiree health coverage, which is very valuable for early retirees but which in the private sector is shrinking even faster than DB pensions. Based on CBO figures, Jason Richwine and I estimated that eligibility for retiree health coverage is worth around an extra 6 percent of pay for federal workers.

In simple terms, the federal employment package is a great deal for federal employees, and as a former federal employee I was happy to get it. But if you wonder why costs are so high, now you know.

173 thoughts on “How Generous Are Federal Employee Pensions?

  1. Did you know if you father a child while drawing social security, the child is entitled 1/2 of what you draw until the age of 18? I know a government worker who was 60, met another gov employee on the job, aged 29. Married her, fathered two children, and retired. Draws government retirement, soc sec, and an army injury check. The kids each draw 1/2 his soc sec, which he banks every month. he braggs the children will have over 3/4 of a million at age 18, on our dime. Oh, and BTW, his wife makes 100k a year. Another example of fun. Unrelated- his sister retired fed gov@ 55. Had affairs on the job with bosses and bragged how she slept on the job regularly. Total right-wing Republican/Christian, too. You sholuld see her kitchen! Her husband retired last week fed gov too. He did work hard.

    • I know people who worked in the private sector who do the same. These are social security payments and authorized by congress for good reasons. We vote for people to take hard fought benefits and rights from us all. We seem not to complain about what we don’t have, but what others have and we don’t have. We vote for people who reduce our employment numbers and vote against increasing minimum wage while lying about the real rate of inflation, by not counting the things that really increase our bills like health care costs, insurance costs, taxes, and real food.

    • Also government employees pay the same taxes private sector employees pay and more than you if they are making so much more. They cannot strike. They don’t get to choose not to do certain tasks outside their specialty. Those the department of the navy have to travel abroad whether they want to or not and work directly with the military in the harshest conditions. They are exposed to more toxins, viruses, and diseases than in this country. A lot of them are veterans of foreign wars. And more recently private sector folks and recent graduates would not work for the government even if it was a last resort mainly because of how badly the government has been treating them for the past 5 years. I served my country when there was a draft. The main reason they don’t want to mistreat the military, is because a lot of them would not sign back up, and in that situation they would have to start a draft for national defense.

      • The average federal pension pays $32,824 annually. The average state and local government pension pays $24,373, Census data show. The average military pension is $22,492. ExxonMobil, which has one of the best remaining private pensions, pays an average of $18,250 per retiree, Labor Department filings show.
        The federal government has two retirement systems: one for those hired before 1984 and another for those hired after. Under the older system, employees did not participate in Social Security. The older system covers 78% of current retirees and accounts for 96% of six-figure pensions. All federal retirees receive health benefits.

  2. You all like to present skewed data as fact and then use it to prop up shaky arguments. Federal employees don’t make 150% of private sector employees – that’s just stupid to suggest it. The private sector includes tons of low-wage jobs that Federal Government contracts out. Federal jobs typically focus more on skilled labor, many of the lower-paying jobs even require a college diploma, and therefore you can’t lump them all together and compare. To do so is sloppy and lazy and intentionally spreading misinformation. Now if you want to take 100 federal positions and find private sector jobs that have comparable qualification requirements and that perform comparable duties, you will actually find Federal employees are underpaid compared to their private counterparts. If I did my job in the private sector, I could command up to ten times the amount I make in the public sector. But sure, if you want to compare my wages to a private sector mailroom clerk or janitor, then yes I will appear over-compensated.

    • I think you misunderstood the comparison. It wasn’t assuming that federal workers receive 150% of the salaries as similar private sector workers (CBO says they’re around the same; most academic studies say federal salaries are a little higher). Rather, BECAUSE federal employees are more educated/experienced than the average private sector worker, I assumed that federal employees earn around 50% more. That’s actually pretty close to the true numbers — I think the average federal salary is around $65,000 while the average private sector is around $43,000.

      • Good article. To me, this shows how bad private employee pension plans are. 6% savings a year doesn’t result in very much at retirement and considering how many people do not put that much in every year a lot of private sector folks are going to be hurting at retirement time (in addition to those that are only going to receive social security.

        • That’s a good point, though if someone saved reliably at those rates and had Social Security they’d probably come out ok. My own take (to be outlined in a National Affairs article later this month) is that the ‘retirement crisis’ is overstated in a number of ways.

    • Public sector workers are over paid over benefitted no worries of losing a job and are the number one threat to the country.They are over paid welfare recipients .I know I am surrounded by them Its really sad how they can retire between 50-55 while all the rest 67-70 on shit money.You guys are pathetic mobster while the rest of support you welfare low life in retirement.

      • Mike, it is clear from your reading comprehension skills, communication style and drama queen personality how you could possibly be jealous of a $60k govt worker.

  3. 2 TRILLION unfunded ponzi scheme.

    IE…worse than the auto makers fraudulent pensions.

    I can fix the deficit right now. Get rid of all of them and replace them with people who WANT to work and will do it for a fair wage. That could be done in a couple of weeks.

    A 60k pension is like a 2 million dollar stock portfolio paying out a guaranteed 3% forever. Total, indisputable, bat-sh#t insanity.

    You are welcome.

  4. Government pension plans, including local, state, and federal, need to be examined, and in many cases, greatly reduced. As someone who works daily with federal employees, I see how well they have it. Job security, vacation time, pay, reasonable workweeks, and retirement programs are all benefits that far exceed those of their non-government-worker peers. It is unfair to continue to ask those of us who have lost much (either through massive 401k looses due to the market, and/or reductions/losses in pensions, or financial pain due to inflation) to continue to fund their unreasonable retirement plans. Some politician promised these great benefits in order to get themselves elected. They were not given because accountants evaluated them and decided they were fair, reasonable, and sustainable. They are not, and many of them need to be greatly reduced. It is unfair to continue to have the taxpayer support them. Write and tell your representative how you feel.

    BTW, the federal retiree gets a 5% 401k contribution, fantastic medical plan, and most importantly, a very generous life long annuity (with increases proportional to inflation) that leaves the retiree immune to all worries of an under performing market. The last item alone trumps most all plans anyone in the private sector will ever see.

    • Here’s a great idea go get yourself a government job and try working for your country instead of yourself. Sound like you have a terrible case of salary envy. It’s not the fault of the public sector worker that you lost your money in the market. You should have been more responsible.

      • The entire population cannot be employed by the federal government. This is not salary envy, it’s taxpayer theft. My brother retired from the DoD at 55 after 25 years on the job. Should he live as long as our elderly relatives, we’ll be paying him for more years than he put in. Risk free, I might add, and I imagine you have the same kind of perk which is why you’re so callous about the market losses private sector workers faced. That’s OUR money, dude, and why you feel entitled to it simply baffles me. I also have a news flash for you…those of us who work in the private sector ARE working for our country. Without our money, the government and your job would cease to exist.

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