Federal Employee Retirement Programs: Budget and Trust Fund Issues

Publication Date: May 2004

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Government

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Abstract:

Retirement annuities for civilian federal employees are provided mainly through two programs: the Civil Service Retirement System (CSRS) and the Federal Employees Retirement System (FERS). These annuities are financed through a combination of employee contributions and payments made by the federal government to the civil service retirement trust fund. The federal government makes supplemental payments into the trust fund on behalf of employees covered by CSRS because employee and agency contributions do not meet the full cost of the benefits earned by employees covered by that system.

Civil service retirement annuities are paid from the same trust fund regardless of whether the benefits were accrued under CSRS or FERS. FERS pension benefits are fully funded as they are earned, and the full cost of funding retirement benefits under FERS is recognized in each government agency's annual budget. CSRS is not fully funded, and the full costs of pension benefits earned by workers under CSRS are not accounted for in the budgets of individual federal agencies. Although the two programs are financed differently, the ultimate source of the money from which benefits are paid is the same for both programs: revenue collected by the government through taxes and by borrowing from the public.

In FY2004, the expenditures of the Civil Service Retirement and Disability Fund (CSRDF) are estimated to reach $52.8 billion, composed mostly of annuity payments to retirees and survivors. These expenditures will be 38% as large as the $137.6 billion paid as salary and wages to current employees. Expenditures from the retirement fund will increase over the next several years until they are about 45% as large as the payroll for current federal employees. After 2015, they will fall relative to payroll expenses. By 2050, expenditures from the retirement fund will be less than one-fourth as large as the government's wage and salary payments to current employees. Estimated expenditures from the CSRDF are equal to less than one-half percent of the nation's gross domestic product (GDP) in 2004. Federal pension expenditures are expected to remain steady as a share of GDP for the next 15 years before declining from about 0.43% of GDP in 2020 to 0.20% by 2060.

By law, benefits under FERS must be pre-funded according to their full actuarial cost. CSRS benefits, in contrast, are not fully pre-funded. Fully funding the CSRS would require increased contributions from the federal government or employees. If agencies fully funded the costs of the CSRS through increased contributions, they could be required to do so from their current-law appropriations, or they could be granted additional appropriations by Congress. However, because these funds would be used by the CSRDF to purchase Treasury bonds (which is an intragovernmental transfer of funds), no additional outlays would occur and there would be no effect on the federal budget. Pre-funding the full costs of the CSRS without giving agencies additional appropriations would reduce the federal budget deficit (or increase the budget surplus), because the outlays of each agency would have to be reduced by the amount of its additional contributions to the CSRDF.