How the Federal Employee Pension System Works

Jul 13, 2010
Mark Butler

Federal Pension Rules are Published by OPM - US Government

Federal employment comes with a federal pension. So how is the pension calculated? That depends on the employee's time in federal service and the grade.

While there will always be those who decry the public servant, the reality is that the federal government needs dedicated employees to serve the public and accomplish what the lawmakers direct and fund. The advantages of federal employment include a pension, vacation time and a generous sick leave policy. Not all jobs are in Washington, DC and getting a federal job isn’t easy, even for a veteran with preference. Before seeking out a federal job, it is best to understand things like pensions and leave accrual. This article discusses how the federal pension plan works.

The Federal Employee Retirement System (FERS)

Unlike many jobs in the private sector, government workers, including federal employees enjoy a pension system that provides for some level of lifetime earnings in exchange for public service. For federal employees this is theFederal Employee Retirement System (FERS) and with the Thrift Savings Plan (TSP) and Social Security, a federal employee can have a reasonable retirement. Enrollment in FERS is automatic for new federal employees, and it comes at a cost of 0.8 percent of salary as the employee’s contribution (although the President has proposed an increase)to the pension plan. The federal government picks up the rest of the cost, estimated at 6.2 percent of the employee's total pay.

The pension a federal employee earns is 1 percent of salary for each year of federal service and it is based on the average of the highest 36 months of federal pay. In order to retire with this amount, the federal employee must meet one of four different ways as published by OPM. Some of these involve a term called Minimum Retire Age (MRA) which is between 55 and 57 depending on the year of birth.

The following scenarios describe the ways that a federal employee can meet retirement requirements:

Complete 30 years of service and have reached the Minimum Retire Age (MRA) which is between 55 and 57 depending on the year of birth.
Complete 20 years of service and have reached age 60.
Complete 5 years of service and have reached age 62.
Complete 10 years of service and have reached the MRA.

For those who retire at MRA with at least 10 years of service but less than 30, the retirement benefit is reduced by 5 percent a year for each year the retiree is under age 62, unless the retiree has 20 years of service and benefits start after reaching age 60 or later.

Those who are able to serve the federal government for at least 20 years and who are over the age of 62, the retirement calculation is increased to 1.1 percent of pay vice 1 percent.

Some Examples of How FERS Works

John L., age 62, entered federal service after getting laid off from Lehman Brothers back in 1998 at the age of 50. John found a federal position in New York City and because of his MBA and extensive experience in the finance industry he was able to rise up to the grade of GS-14 and is now at Step 5 with a salary of $123557. With 12 years of service, John will see a gross retirement amount of $1,235 monthly and from this taxes and some insurance will be deducted. John can also draw a much reduced Social Security check if he so elects since he isn’t at full retirement age. Hopefully he was able to save his 401K and roll it over into an IRA or the Thrift Savings Plan which is very similar to a private sector 401K.

Mary K., age 60, retired from the US Navy at age 38 with 20 years of military service back in 1988 and then landed a job in logistics via the Presidential Management Fellows program which was similar to her military job in Norfolk, VA. Mary rose to the grade of GS-12 and is now at Step 8 with a salary of $84863. With her 22 years of civil service Mary will see a gross monthly amount of $1,555 before deductions. Mary’s could have retired at 58 with 20 years of federal service and the MRA but her pension would have been reduced. Retirement at 58 would have resulted in a monthly pension of $1414 which would have been further reduced by 10 percent down to $1,272 monthly.

Barry O., age 67, has worked a wide variety of jobs and managed to land a federal job at age 59 in Washington, DC. With his 8 years of federal service Barry is finally ready to retire and has waited to this point to have a higher Social Security benefit in addition to his federal retirement. Barry is retiring as a GS-9, Step 4 with a salary of $56,791. With 8 years of service, Barry’s federal pension will be $378 monthly before deductions.

George B., age 57, entered federal service right out of college at age 22 and now has 35 years of service. When the FERS system was started in 1988, George opted for FERS because he doubted he would stay for a full career and wanted to build up his TSP with the matching government contributions. George is working in Boston, MA and is a GS-15, Step 7 with a salary of $149,203. His pension is $4,351 per month before deductions.

While only a small percentage (about 1 percent) of federal employees reach the GS-15 level, it is this level of pay and pension that provides the fuel for the “great pension” myth that federal employees enjoy. The vast majority do not have such a great pension and will have to either work at some sort of part-time job while enjoying their federal retirement or will have to cut back on their lifestyle.

Note: The pay listed in these examples were for 2010 and calculations did not include a 36 month average. Actually, amounts will typically be slightly less. If the last three years included a promotion from a lower grade, the difference could be significant.

For infomation on the How the Federal Thrift Savings Plan works, please see Eligibility and Benefits of the Federal Thrift Savings Plan