igher-income federal employees who participate in the Federal Employees Retirement System may need to save more in preparation for retirement than their lower-paid colleagues, according to a new General Accounting Office study.
Pension professionals estimate that for federal retirees to maintain their standard of living, their annual income should be between 60 percent and 80 percent of their pretax annual income before retirement. Retirees can maintain their standard of living on a diminished income because they no longer have such work expenses as commuting and clothing, they typically pay less in taxes and they likely have paid off their mortgages and no longer have dependent children.
A GAO report released in November shows that higher-paid federal workers tend to be more dependent on the Thrift Savings Plan, in part because Social Security doesn't replace as large a share of their pre-retirement income as it does for lower-paid workers.
The report recommends that mid- to higher-paid workers defer at least 5 percent of their salaries throughout their careers to TSP. GAO estimates that as of September 1994, 76 percent of FERS employees, or 942,000, contributed an average of 5.7 percent of their salaries throughout their careers. Approximately 24 percent, or 300,000 workers, contribute less than 5 percent or nothing.
Although the Federal Retirement Thrift Investment Board provides educational materials about the thrift plan to employees, the report says materials fail to provide adequate information about financial planning for retirement.
Despite what GAO perceives as a lack of emphasis on investment in TSP, higher-income workers appear to be deferring at an adequate rate. For example, GAO data indicates that in 1993, 93 percent of FERS workers making between $50,000 and $59,000 a year contributed to the plan. Workers in that income range invested on average 6.9 percent of their salaries toward retirement savings.
The Plans
In the early 1980s, Congress responded to concern that the Civil Service Retirement System was too expensive by establishing FERS. The newer system is modeled after private-sector retirement plans, which are supplemented by Social Security benefits. Congress extended Social Security benefits to federal employees hired after Dec. 31, 1983. These employees contribute less to their retirement. CSRS employees contribute more to their retirement and pay nothing into Social Security.
In addition to Social Security benefits, FERS retirees receive distributions from the thrift plan and regular annuities. As in CSRS, the FERS annuity is based on age, length of service and the average of an employee's highest three consecutive years' salaries. But it pays out at a lower rate, since FERS credits each year of service at about 1 percent, while CSRS credits 1.5 percent to 2 percent per year of service. While FERS automatically enrolls its participants in the Thrift Savings Plan, CSRS employees have the option to participate but are not automatically enrolled.
FERS requires employers to contribute an amount equal to 1 percent of an employee's salary to the thrift plan. Workers can contribute up to 10 percent of their salaries to the plan by deferring funds to any or all of the three thrift funds comprising TSP-a federal government securities fund (G fund), a commercial bond fund (F fund) and a commercial large capitalization stock fund (C fund). Agencies match employee contributions up to 5 percent of salary. CSRS employees can invest up to 5 percent of their salaries in the thrift plan, but agencies do not match these employees' contributions.
The Thrift Board
The Thrift Board, in conjunction with the Office of Personnel Management, has released a report on participant demographics. The study looked at levels of participation in TSP in 1994 and compared it with previous years. The study showed 77 percent of FERS workers invested in the plan in 1994. The data indicated an increase in average deferral rates corresponding with increases in the salaries and ages of FERS investors.
The Thrift Board disagrees with GAO's assessment that the board's educational materials do not adequately explain the thrift plan's role in and effect on FERS benefits. The board says education about FERS is OPM's responsibility. GAO says the personnel agency should share the responsibility for informing employees, but contends that the Thrift Board is better prepared to educate employees about investments in the plan.
In May 1995, the Thrift Board sought legislation adding two thrift funds - a domestic small capitalization stock fund and an international stock fund - to the plan's investment options. GAO has recommended that Congress enact the legislation. Rep. Constance Morella, R-Md., is sponsoring the bill in the House. Sen. Ted Stevens, R-Alaska, has sponsored corresponding legislation in the Senate.
The GAO report was requested last year by Morella and Del. Eleanor Holmes Norton, D-D.C., out of concern over whether FERS yields adequate savings. Morella and Norton served in the 103rd Congress as ranking minority member and chair, respectively, of the Post Office and Civil Service Subcommittee on Compensation and Employee Benefits.
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