CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

CBO

Options for Changing 

the Retirement 

System for Federal 

Civilian Workers

AUGUST 2017
Notes

Numbers in the text and tables may not add up to totals because of rounding.

Unless otherwise indicated, budgetary numbers are presented for fiscal years, not calendar 

years. Fiscal years run from October 1 to September 30 and are designated by the calendar 

year in which they end. 

www.cbo.gov/publication/53003
Contents

Summary 1

What Retirement Systems Does the Federal Government Operate for Its Civilian Employees? 1

How Much Does the Federal Government Spend on Its Retirement Systems? 1

How Does FERS Affect Current Pay and Retirement Income? 1

How Does FERS Affect Recruitment and Retention? 2

What Are Some Options to Change FERS? 2

The Federal Retirement Systems for Civilian Workers 5

The Defined Benefit Pension 5

BOX 1. HOW THE CIVIL SERVICE RETIREMENT AND DISABILITY TRUST FUND IS FINANCED 7

The Defined Contribution Plan 8

Spending on Federal Retirement Benefits 9

The Net Cost of Federal Retirement Benefits on a Cash Basis 10

The Net Cost of Federal Retirement Benefits on an Accrual Basis 12

The Role of the Federal Retirement System in Employees’ Compensation 13

Current Pay 13

Retirement Income 13

The Role of the Federal Retirement System in the Recruitment and Retention 

of Federal Workers 14

Recruitment 14

Retention 17

Options for Changing the Federal Retirement System 20

Changes to the Pension Plan 22

Replacing the Pension With Larger Government Contributions to TSP for New Employees 29

Appendix 36

Definitions 43

List of Figures and Tables 45

About This Document 46

Options for Changing the Retirement 

System for Federal Civilian Workers

Summary

The federal government employs about 2.7 million civilian workers—1.8 percent of the U.S. workforce. Like 

many employers, the federal government compensates its 

employees with salaries, wages, and other benefits that 

are paid as they are earned, as well as deferred compensation in the form of retirement benefits. Lawmakers have 

expressed interest in examining the current structure 

of retirement benefits to ensure that the government 

provides adequate compensation to attract and retain 

skilled employees while not paying more than needed 

to accomplish that goal. Therefore, this report analyzes 

several potential changes to the federal retirement system 

and their impact on the federal budget over 75 years.

What Retirement Systems Does the Federal 

Government Operate for Its Civilian Employees?

The federal government currently provides its civilian 

employees with pensions under two different systems: 

The Civil Service Retirement System (CSRS), which 

is phasing out and has been closed to new participants 

since 1983, and the Federal Employees Retirement System (FERS), in which almost all current workers participate. In addition, it operates the Thrift Savings Plan 

(TSP), a defined contribution plan for federal civilian 

employees. The TSP is similar to 401(k) accounts, which 

are common in the private sector. (The federal government also provides health care to retirees through the 

Federal Employees Health Benefits, or FEHB, program 

and operates a few other smaller retirement programs, 

though those are not the focus of this report.)

How Much Does the Federal Government Spend on 

Its Retirement Systems?

In 2016, the federal government spent $91 billion on 

retirement benefits for most of its civilian employees: 

$70 billion for CSRS pensions for civilian retirees and 

their survivors; $13 billion for FERS pensions for civilian 

retirees and their survivors; and $8 billion for contributions to TSP. Those expenditures were partially offset by 

$3 billion in revenues from employees’ contributions to 

the CSRS and FERS pension plans.

Under current law, the government’s net cash outflows 

for the federal civilian retirement system (that is, the 

system’s outlays minus its revenues) are projected to grow 

by an average of about 2.8 percent annually between 

2018 and 2027. Over a longer time horizon—75 years—

they would decline sharply as a share of gross domestic 

product (GDP)—from 0.48 percent of GDP in 2016 to 

0.13 percent of GDP in 2091, the Congressional Budget 

Office projects. Also, the composition of that spending 

would change. By the 2060s, CSRS would be almost 

completely phased out. Almost all spending would be on 

the pensions provided through FERS and on contributions to TSP (see Figure 1). 

How Does FERS Affect Current Pay and 

Retirement Income?

The structure of FERS affects federal workers’ current 

pay as well as their retirement income—the amount of 

income they will receive from the pension and from their 

TSP accounts. For the purposes of this report, “current pay” is defined as the worker’s salary or other cash 

compensation minus the amount of the contributions 

he or she is statutorily required to make to the pension 

plan and voluntarily makes to TSP. Workers hired in 

2018 who will eventually receive a pension will contribute 12 percent of their salary, on average, to the pension 

plan and TSP, CBO projects. The federal government 

will contribute an amount equal to 15.5 percent of those 

workers’ salaries for those purposes, CBO projects. 

The amount of income from the pension depends on a 

worker’s age, years of service at retirement, and earnings 

history, whereas income from a TSP account depends on 

the employer’s and the employee’s contributions and the 

employee’s investment decisions. For workers with the 

same number of years of federal service, the replacement 

rate—retirement income as a share of preretirement 

earnings—is generally higher for workers who join the 

government at older ages than for workers who join at 

younger ages. Moreover, for workers who join at older 

ages, a larger share of retirement income will come from 

the pension than from TSP.
2 Options for Changing the Retirement System for Federal Civilian Workers August 2017

How Does FERS Affect Recruitment and Retention?

The effect FERS has on recruitment depends on the 

career plans of the workers whom agencies want to hire. 

Because the value of the pension grows with the number of years of service, the pension attracts workers who 

anticipate a long career in the federal government but 

not workers who do not expect to remain in federal service for a long time. In contrast, TSP probably enhances 

recruitment among a broader group of workers because 

employees are eligible for federal contributions of up 

to 5 percent of their salary regardless of their age and 

tenure.

The pension and TSP also affect the retention of federal 

workers differently. For midcareer employees, the pension benefit provides an incentive to stay in government 

in order to qualify for a larger pension. By contrast, that 

incentive is limited for workers who are early in their 

careers because they will have to work for the government many more years before they retire. For workers 

who are eligible to retire with a full pension, working 

for an additional year would mean forgoing pension 

payments for that year, so for them, the plan may serve 

as a disincentive to stay. TSP probably provides an 

incentive to stay in government at most points in a career 

because the value of the benefit does not depend on how 

long the worker has been employed or how far from 

retirement he or she is. 

What Are Some Options to Change FERS?

To explore how changing FERS would affect spending 

in the long term, CBO assessed two types of options (see 

Table 1). One type would modify the pension plan either 

by changing employees’ contributions to the plan or 

by changing the formula used to calculate benefits. The 

other type would replace the pension for new employees with larger contributions from the government to 

employees’ TSP accounts—a change that would be 

similar to the shift during recent decades from defined 

benefit to defined contribution retirement plans in many 

private-sector companies and some state governments. 

The options CBO analyzes in those categories are illustrative; other options could be designed to be more or 

less costly to the government.

Figure 1.

Net Government Outflows for Major Federal Civilian Retirement Programs

The federal retirement system’s net cash outflows for civilian workers will decline as a share of GDP under current law, CBO projects. Net outflows will 

fall relative to GDP because the number of CSRS retirees will decline (the CSRS pension tends to cost more than the FERS pension) and because the 

number of federal workers will decline as a share of the U.S. workforce.

Percentage of GDP

0

0.1

0.2

0.3

0.4

0.5

0.6

1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090

Historical Projected

TSP

FERS

CSRS

Source: Congressional Budget Office, using historical data from the Office of Personnel Management and the Federal Retirement and Thrift Investment 

Board.

Historical data for CSRS and FERS pensions are through 2015, the most recent year for which such data are available. Historical data for TSP 

contributions are estimates based on data from 2014, the most recent year for which such data are available. To estimate TSP contributions in other 

past years, CBO used the percentage of FERS payroll costs in 2014. Net outflows for CSRS and FERS pensions include outlays for pension benefits 

minus revenues from employees’ contributions to the pension plan. For TSP, net outflows are the government’s contributions to employees’ TSP 

accounts. 

CSRS = Civil Service Retirement System; FERS = Federal Employees Retirement System; GDP = gross domestic product; TSP = Thrift Savings Plan.
August 2017 Options for Changing the Retirement System for Federal Civilian Workers 3

Table 1.

Estimated Effects of Several Options That Would Change the FERS Pension Plan and Contributions to TSP

Nominal Present-Value Percentage 

 Terms, Terms, Change in 

Accrual Costb

-14 -3 n.a. No effect Decreases for workers 

hired before 2014

Current pay declines for 

workers hired before 2014; 

retirement income changes for 

those who leave federal work 

early as a result 

10 13 22 Increase Increases for workers 

hired after 2012

Current pay increases for 

workers hired after 2012

-1 -3 -4 Slight Decreases for Current pay remains

decrease midcareer workers; the same; retirement

increases for income declines 

retirement-eligible

workers

24 10 -6 Increase Increases for early- Current pay increases.

career and retirement- Retirement income increases 

Contribution to a Maximum eligible workers; for workers without a full 

of 15 Percent decreases for midcareer career in federal government; 

workers uncertainty of retirement

 income increases

17 -3 -29 Uncertain Increases for early- Current pay increases.

career and retirement- Average retirement income 

eligible workers; decreases; uncertainty of 

decreases for retirement income 

midcareer workers increases

1. Increase Pension 

Contributions of Some 

Employees

4. Eliminate Pension, 

5. Eliminate Pension,

Increase Government's TSP 

Increase Government's TSP 

Retention

Current Pay and 

Retirement Incomec

Options That Would Replace the Pension Plan With Larger Contributions to TSP for New Employees

Contribution to 10 Percent

Recruitment

Options That Would Change the Pension Plan

Option

Formula to High 5

2. Decrease Pension 

Contributions of Some 

Employees

Percentage Change in the 

Government's Net Outflowsa

3. Change Pension

Source: Congressional Budget Office.

Option 1 would increase the FERS contribution rate to 4.4 percent for current employees (from 0.8 percent for employees hired before 2013 and from 

3.1 percent for employees hired in 2013).

Option 2 would decrease the FERS contribution rate to 0.8 percent for all employees (from 4.4 percent for employees hired after 2013 and from 

3.1 percent for employees hired in 2013).

Option 3 would decrease FERS pensions by basing the retirement benefit on the five years of highest salary (instead of three years of highest salary).

Option 4 would eliminate the FERS pension, increase the government’s automatic TSP contribution to 8 percent of salary, and require the government 

to match employees’ contributions up to an additional 7 percent.

Option 5 would eliminate the FERS pension, increase the government’s automatic TSP contribution to 10 percent of salary, and eliminate the 

government’s matching contribution.

A discount rate equal to the interest rate projected for 20-year Treasury securities was used in the calculation of present discounted values.

FERS = Federal Employees Retirement System; TSP = Thrift Savings Plan; n.a. = not applicable.

a. Net outflows represent an increase in budget deficits. They include outlays for FERS pension benefits, plus the government’s contributions to 

workers’ TSP accounts minus revenues from employees’ contributions to the pension plan. The percentage change in net outflows is measured 

relative to net outflows for the FERS pension and TSP.

b. The estimated accrual cost is calculated for workers with no prior federal service who are projected to join the federal workforce in 2018.

c. Current pay is workers’ salary minus their required contributions to the pension plan and minus their projected voluntary contributions to the defined 

contribution plan. Retirement income is the pension plus the annuitized value of workers’ TSP accounts. It excludes payments from Social Security, 

other employer-sponsored retirement plans, and personal savings. 
4 Options for Changing the Retirement System for Federal Civilian Workers August 2017

CBO estimated the net costs of the options on both 

a cash basis and on an accrual basis. On a cash basis, 

federal outlays (pension payments and the government’s 

contributions to TSP) and revenues (employees’ contributions to the pension plan) are recorded at the time 

when those transactions occur. For pension payments, 

those transactions can be many years after the obligation 

to make those payments was incurred. On a cash basis, 

CBO measured net federal outflows in nominal terms 

over the next 10 years and in present-value terms over 

the 75-year projection period. By contrast, when measuring net costs on an accrual basis, CBO approximated 

the percentage of workers’ salaries that the government 

would need to set aside each year to fully fund those 

workers’ benefits. For illustrative purposes, CBO compared the cash and accrual costs for federal employees 

who would be hired in 2018.

Change the FERS Pension Plan. Three options would 

change the terms of the FERS pension:

 Option 1. Increase the pension contribution to 

4.4 percent of salary for all employees. (Currently 

that rate is 0.8 percent for employees hired before 

2013 and 3.1 percent for employees hired in 2013. It 

is already 4.4 percent for employees hired after 2013.)

 Option 2. Decrease the pension contribution rate to 

0.8 percent for all employees. 

 Option 3. Decrease pensions by basing the retirement 

benefit on the five years of highest salary (instead of 

the three years of highest salary, as in current law).

Option 1 would reduce the federal government’s net 

costs for retirement for employees enrolled in FERS by 

14 percent on a cash basis over the next 10 years, and by 

3 percent on a present-value basis over the 75-year projection period. Because the option would affect only current workers hired in 2013 or earlier, the government’s 

savings would gradually decline as those workers retire or 

leave government. For the same reason, retirement costs 

for new federal employees would remain unchanged 

on an accrual basis. Correspondingly, CBO expects 

that the federal government’s ability to recruit new 

employees would be unaffected. However, the option 

would increase the number of employees who chose to 

leave federal service because their current pay would 

be reduced. The most experienced and highly qualified 

employees would be those most likely to leave.

Option 2 would increase the government’s net retirement 

costs for employees enrolled in FERS by 10 percent on 

a cash basis over the next 10 years, and by 13 percent 

over the 75-year period. On an accrual basis, the option 

would increase retirement costs for new employees by 

22 percent. However, this option would enable the 

government to recruit and retain a more highly qualified 

workforce by increasing both current pay and the value 

of the pension plan (net of the employees’ contributions) 

for workers who were hired recently as well as those who 

will be hired in the future.

Option 3 would reduce the government’s net retirement 

costs for employees enrolled in FERS by 1 percent on a 

cash basis over the next 10 years, and by 3 percent over 

the 75-year period. The option would reduce costs by 

4 percent on an accrual basis for new employees. CBO 

expects a small decrease in the recruitment and retention 

of highly qualified workers because the reduction in the 

pension is relatively small and because changes in retirement benefits would have less effect than would a similar 

change in current pay. 

Replace the FERS Pension With Larger Government 

Contributions to TSP for New Employees. Two 

options would eliminate the FERS pension for new 

employees and replace it with larger TSP contributions. 

On a cash basis, such options would impose costs in the 

near term because they would require larger outlays at 

the time the benefit is earned, but costs would be lower 

in the future, when employees affected by the options 

retired. 

 Option 4. Eliminate the FERS pension, increase 

the government’s automatic TSP contribution to 

8 percent of salary, and require the government to 

match up to 7 percent of additional contributions for 

new employees.

 Option 5. Eliminate the FERS pension, increase 

the government’s automatic TSP contribution to 

10 percent of salary, and eliminate the government’s 

matching contribution to TSP.

Option 4 would increase the government’s net retirement 

costs for employees enrolled in FERS on a cash basis by 

24 percent over the next 10 years and by 10 percent over 

the 75-year period. However, the net cash cost of this 

option would be lower than the cost under current law if 

the analysis was projected over a sufficiently long period 
August 2017 Options for Changing the Retirement System for Federal Civilian Workers 5

to incorporate the full savings from reduced future 

liabilities. On an accrual basis, net retirement costs for 

new federal employees would be about 6 percent lower 

than costs under current law. The option would probably 

increase the recruitment and retention of early-career and 

retirement-eligible employees, though it would reduce 

the retention of midcareer employees.

Option 5 would increase the government’s net retirement 

costs for employees enrolled in FERS on a cash basis by 

17 percent over the next 10 years and reduce them by 

about 3 percent over the 75-year period. On an accrual 

basis, the option would reduce costs by 29 percent for 

new federal employees. The effect of the option on 

recruitment is uncertain. CBO expects that the option 

would increase retention of early-career and retirement-eligible employees, but by less than Option 4.

The Federal Retirement Systems for 

Civilian Workers

Like many employers in the private sector, the federal 

government compensates its workers with both wages 

and nonwage benefits such as defined benefit pensions 

and contributions to retirement savings accounts. Those 

benefits help the government attract and retain employees with the skills that are required to perform its many 

different functions. However, good management of the 

federal government requires that it does not pay more 

than needed to attract and retain such employees. 

Almost all federal civilian workers participate in FERS 

or CSRS.1 Because CSRS has been closed to new participants since 1983, almost all current workers are in 

FERS, whereas the majority of current pension recipients are in CSRS. According to the Office of Personnel 

Management (OPM), in September 2015 there were 

2.7 million active federal civilian employees, 2.5 million 

1. The plans discussed in this report pertain to about 85 percent 

of the federal civilian workforce. CSRS and FERS both 

provide special benefits for certain air traffic controllers, 

bankruptcy judges, Congressional employees, firefighters, law 

enforcement officers, Members of Congress, and others, which 

are not examined here. Workers in those categories accrue 

benefits at higher rates in both CSRS and FERS than do other 

federal employees and could be subject to different employee 

contribution rates or retirement eligibility ages. In some cases, 

smaller retirement plans have been created by statute (such as the 

Foreign Service Retirement and Disability System) or set up by 

agencies that have authority to set compensation (for instance, 

the Federal Reserve).

of whom participated in the FERS pension plan.2 By 

contrast, 1.9 million of the 2.6 million retirees received 

benefits from CSRS in 2015. 

Both CSRS and FERS consist of a pension and a defined 

contribution plan that resemble many plans in the 

private sector.3 (For details about these terms, see the 

Definitions at the end of this report.) The pension is a 

regular payment that typically commences at the time 

the federal worker retires and ends at his or her death or 

the death of his or her survivor, if the retiree has chosen 

the joint-survivor pension. The amount of the payment 

is determined by a worker’s salary history, years of 

service, and the age at which he or she claims benefits. 

The defined contribution plan is similar to 401(k) 

plans in the private sector—the participants own 

the assets in their accounts, direct the investments, 

and decide the amount and frequency of their contributions. The employer provides automatic and matching 

contributions. 

The federal government’s outlays for retirement benefits 

in a given year consist of paying pensions to current 

retirees or their eligible family members and contributing 

to the TSP accounts of current employees. Those outlays 

are partially offset by revenues from required contributions made by current employees to the pension plan. 

In addition, the federal government pays the employer’s 

share of Social Security payroll taxes for its employees 

enrolled in FERS. However, analyzing Social Security 

costs or benefits is outside the scope of this report, as are 

any effects on tax revenues that might occur as a result of 

the options analyzed in the report. 

The Defined Benefit Pension

In both CSRS and FERS, workers are eligible to start 

receiving pensions upon leaving the federal workforce, as 

long as they have reached a certain age and accumulated 

a certain number of years of service with the federal government. In general, workers are not eligible to receive 

2. The number of employees is determined on a full-time-equivalent 

basis and includes employees on leave without pay who retain 

coverage. 

3. The CSRS program was created in 1920 as a stand-alone defined 

benefit plan, which predated and later ran parallel to Social 

Security for many decades. FERS was created by the Congress in 

1986 to provide federal workers with three forms of retirement 

income—a defined benefit plan, a defined contribution plan, and 

coverage under Social Security.
6 Options for Changing the Retirement System for Federal Civilian Workers August 2017

pensions if they have less than five years of service (also 

known as a vesting period) at the time they retire.4 Both 

plans also require employees to contribute a certain percentage of their pay to the Civil Service Retirement and 

Disability Fund (CSRDF) that finances their pension 

benefits.5 (For a more detailed discussion of funding for 

CSRDF, see Box 1.)

CSRS and FERS offer tax incentives for saving by 

deferring some federal income tax on contributions until 

retirement. Although employees pay federal income taxes 

on the income used to make their required contributions 

to the pension plan at the time those contributions are 

made, federal taxes on the employer’s contributions, and 

on the amounts by which the pension benefits exceed the 

employee’s and employer’s combined contributions, are 

deferred until the pension is received. 

However, CSRS and FERS differ in certain ways. For 

instance, participants in CSRS are not generally covered 

by Social Security. Consequently, the CSRS pension 

formula is designed to replace a larger share of earnings 

than the FERS pension formula. In contrast, employees 

participating in FERS are covered by Social Security and 

generally expect to receive payments from the Social 

Security system in retirement. The two plans also differ 

in retirement eligibility ages and required contributions. 

Other differences between the two programs include 

the benefits provided for workers who become disabled 

on the job, surviving dependents, and former spouses, 

as well as automatic cost-of-living adjustments to the 

pension.6

4. Instead, those workers will be paid back their own contributions 

to the plan with a certain rate of return. In both CSRS and 

FERS, workers may opt to withdraw their contributions upon 

separation and give up the right to a pension. 

5. In contrast, most plans in the private sector do not require 

employees to make contributions.

6. For detailed information on cost-of-living adjustments, see 

Katelin P. Isaacs, Federal Employees’ Retirement System: Benefits and 

Financing, Report for Congress 98-810 (Congressional Research 

Service, July 15, 2015). For a detailed description of federal 

disability and survivor benefits, see Katelin P. Isaacs, Disability 

Retirement for Federal Employees, Report for Congress RS22838 

(Congressional Research Service, March 25, 2014), and Survivor 

Benefits for Families of Civilian Federal Employees and Retirees, 

Report for Congress RS21029 (Congressional Research Service, 

December 18, 2012). For a discussion of how replacement rates 

compare in CSRS, FERS, and the private sector, see Patricia 

P. Martin, “Comparing Replacement Rates Under Private and 

The CSRS Pension. The CSRS pension is based on 

length of service, age at retirement, and the highest 

average salary earned during any three consecutive years 

of service (known as the “high-3” average salary). To be 

eligible for an immediate pension, workers must have 

reached age 55 and have at least 30 years of service, age 

60 with at least 20 years of service, or age 62 with at 

least 5 years of service. For most employees, the CSRS 

pension as a percentage of the high-3 is computed by 

multiplying the first five years of service by 1.5 percent, 

plus 1.75 percent times years of service for the next five 

years, plus 2 percent times remaining years of service.7

Thus, an employee who worked for 30 years and retires 

at age 62 can expect to receive an annual benefit equal to 

56.25 percent of his or her high-3 salary. 

While working for the federal government, employees in 

CSRS are required to contribute 7 percent of their current salary to fund retirement benefits. The employing 

agencies of those workers contribute another 7 percent. 

Employees in CSRS do not pay Social Security payroll 

taxes and do not earn Social Security benefits for their 

federal service. 

The FERS Pension. Employees in FERS become eligible 

to draw a pension upon separation when they reach the 

minimum retirement age and have at least 30 years of 

federal service. That minimum retirement age is 56 for 

employees born between 1953 and 1964, and it gradually increases to 57 for employees born in later years.8

Former employees also receive pension payments if they 

have at least 20 years of service and have reached age 

60 or have at least 5 years of service and have reached 

age 62. 

Retiree benefits in FERS are also based on years of federal service, age at retirement, and average earnings, but 

they are calculated using a different formula from that 

applicable to workers in CSRS. The amount of the FERS 

Federal Retirement Systems,” Social Security Bulletin, vol. 65, 

No. 1 (2003/2004), https://go.usa.gov/xRk38. 

7. The CSRS pension is capped at 80 percent of the high-3 average 

salary.

8. Former employees with at least 10 years of service can choose 

to start receiving reduced payments as early as their minimum 

retirement age. Those payments are permanently reduced by 

5/12 percent for every month that the date of the first payment 

precedes the date at which the former employees would have 

received their first unreduced payment. In this report, eligible for 

retirement refers to employees who are eligible for a full pension.
August 2017 Options for Changing the Retirement System for Federal Civilian Workers 7

Box 1.

How the Civil Service Retirement and Disability Trust Fund Is Financed

The Civil Service Retirement and Disability Trust Fund (CSRDF), 

an accounting mechanism in the federal budget created to 

administer the Civil Service Retirement System (CSRS) and the 

Federal Employees Retirement System (FERS), holds assets 

and tracks income and outlays. Most assets in the CSRDF—

like all assets in the Social Security trust funds—are invested 

in special-issue U.S. Treasury securities. Inflows to the CSRDF 

come from contributions from federal employees and their 

employing agencies as well as transfers from the general fund 

of the Treasury (for interest on the trust fund balances and for 

certain unfunded liabilities).1 Pension payments to beneficiaries account for almost all of the fund’s outflows. 

Employers and employees in both CSRS and FERS are 

required to contribute toward the cost of retirement benefits. 

However, the employing agencies of workers in CSRS do not 

contribute the full cost of promised benefits to the fund. Workers in the CSRS program contribute 7 percent of their salary to 

retirement benefits and the employing agencies contribute an 

additional 7 percent. Together, those contributions are 14 percent of the employee’s salary, well short of the 29.3 percent 

of payroll that the Office of Personnel Management (OPM) 

estimates would be required to fully fund CSRS.2

Unlike CSRS, FERS is required by law to be fully funded.3 That 

is, employers of workers in FERS are required to set aside 

enough money each year from the combined contributions 

by employers and employees to pay the retirement benefits 

accrued by those workers that year.4 Most employees in FERS 

1. Agency contributions to CSRDF are intragovernmental transfers. Those 

transactions are income to the fund, but they are not income to the 

U.S. government. They do not affect the government’s budget deficit or 

surplus because no money is received or spent by the government.

2. The 29.3 percent of payroll is OPM’s estimate of the net accrual cost of 

CSRS benefits for current CSRS workers.

3. The funding provisions for CSRS and FERS are different for Postal 

Service employees. See Office of Personnel Management, Civil Service 

Retirement and Disability Fund Annual Report, Fiscal Year Ended 

September 30, 2016 (February 2017), https://go.usa.gov/xRQ56.

4. Accrual budgeting can provide better information for personnel 

decisions. Because the employing agencies of workers enrolled in FERS 

are required to fully recognize in their budgets the cost of future pension 

benefits for their employees, they are more likely than the employing 

agencies of workers enrolled in CSRS to consider the implications of 

future retirement costs when determining the size and composition of 

their workforce. 

who were hired before January 1, 2013, contribute 0.8 percent 

of their salary toward the pension plan. Their employing 

agencies contribute the remainder of the cost necessary 

to fully fund those workers’ benefits. That combined cost, 

according to OPM, is currently 14.5 percent of workers’ salaries. Recently, the Middle Class Tax Relief and Job Creation 

Act of 2012 increased the contribution rate of FERS employees 

from 0.8 percent to 3.1 percent for most employees hired after 

December 31, 2012, and the Bipartisan Budget Act of 2013 

increased the contribution rate further to 4.4 percent for most 

employees hired after December 31, 2013. According to OPM, 

currently the combined contribution rate for employer and 

employee that is necessary to fully fund benefits is 15.0 percent for workers in FERS hired between January 1, 2013, and 

December 31, 2013, and 15.1 percent for workers hired after 

December 31, 2013.

As of September 2015, the CSRDF had unfunded liabilities of 

$790 billion, 94 percent ($740 billion) of which was in CSRS 

because agencies are not required to set aside adequate 

funds for CSRS every year. Nevertheless, inflows to and outflows from the fund are projected to balance out over the long 

term—because the Treasury makes an annual payment to the 

fund to cover those unfunded liabilities. Also, the Bipartisan 

Budget Act stipulated that employers’ contributions for workers who contribute 4.4 percent should not be correspondingly 

reduced and that contributions in excess of those necessary 

to fully fund the benefits of those workers should be used to 

address the unfunded liability of CSRS.

As a result, unlike the Social Security trust funds, the CSRDF 

is not in danger of being exhausted. But a significant part of 

the fund’s annual income comes from the Treasury’s general 

fund in the form of interest payments and the annual payment 

to cover unfunded liabilities. In fiscal year 2016, the fund 

received $28 billion in interest payments and $36 billion for 

unfunded liabilities, compared with $30 billion in agency contributions and $3 billion in employee contributions. The funds 

required to make the benefit payments that are not covered 

by annual contributions from employees and their employing 

agencies and interest payments have to be generated each 

year through taxes, income from other government sources, 

or borrowing from the public.
8 Options for Changing the Retirement System for Federal Civilian Workers August 2017

pension as a percentage of the high-3 salary is computed 

at 1.0 percent times the number of years of federal service. If the worker retires at age 62 or later, with at least 

20 years of service, a factor of 1.1 percent is used rather 

than 1.0 percent. Hence, an employee who worked for 

30 years and retires at age 62 can expect to receive an 

annual benefit equal to about 33 percent of his or her 

high-3 salary in FERS.9 In addition, that worker would 

be eligible for a Social Security retiree benefit, based 

on his or her long-term earnings history. For example, 

an employee who worked for 30 years and earned a salary equal to the average wage in the economy would be 

eligible for an annual Social Security benefit equal to 

40 percent of his or her high-3 salary if claimed at the 

full retirement age, or 30 percent if claimed at age 62.10

The average Social Security benefit for lower-paid federal 

workers would be a larger share of their preretirement 

earnings than would the Social Security benefit for higher-paid federal workers. The reason is that, in contrast 

to FERS, Social Security uses a progressive formula to 

calculate the benefit.11

Similar to CSRS, employees participating in FERS 

are required to contribute a percentage of their current 

salary toward retirement benefits. In general, workers 

in FERS who were hired before 2013 contribute 

9. Calculations are illustrative and are based on a worker born in 

1955 who retires at age 62 in 2017 and has had an uninterrupted 

30-year career, earning a salary equivalent to the average wage in 

the economy in each of those years.

10. The high-3 salary of that worker is assumed to equal the average 

of his or her salary from ages 59 through 61. The worker’s full 

retirement age for Social Security is 66 years and 2 months. The 

worker would be eligible for a monthly Social Security benefit as 

early as age 62 but that benefit would be about 26 percent lower 

than the monthly benefit he or she would be eligible for at the 

full retirement age. 

11. Unlike the CSRS or FERS pension, the Social Security benefit 

amount is based on workers’ highest 35 years of earnings and is 

calculated using a progressive formula: Low-income workers on 

average receive a higher replacement rate from Social Security 

than do high-income workers. The calculation in the text is 

illustrative. The Social Security replacement rate that a federal 

worker would be eligible to receive could vary considerably 

and would also depend on the age at which the worker claims 

his or her Social Security benefit. Workers can choose to claim 

monthly benefits as early as age 62, but those benefits would be 

permanently reduced. Alternatively, workers can delay claiming 

benefits until they reach full retirement age, in which case 

they would receive the full benefit, or they can delay claiming 

benefits past their full retirement age up to age 70 and receive a 

permanently increased benefit.

0.8 percent of their salary. The Middle Class Tax Relief 

and Job Creation Act of 2012 and the Bipartisan Budget 

Act of 2013 increased the contribution rates of newly 

hired employees enrolled in FERS. Federal employees 

who entered service during calendar year 2013 contribute 3.1 percent of salary toward their retirement pensions 

and are referred to as FERS–Revised Annuity Employees 

(FERS-RAE). Federal employees who were first hired 

after December 31, 2013, contribute 4.4 percent of 

salary toward their pension and are referred to as FERS–

Further Revised Annuity Employees (FERS-FRAE). The 

increase in employees’ contributions was not accompanied by any corresponding increase in the retirement 

benefit formula, which remained unchanged. In addition 

to employees’ contributions, their agencies also contribute a percentage of the employees’ salaries to the pension 

plan (in 2016 agencies contributed 13.2 percent of salary 

for workers in FERS and 11.1 percent of salary for workers in FERS-RAE and FERS-FRAE). Employees and 

their agencies also make contributions to Social Security. 

The Defined Contribution Plan 

TSP, which is similar to 401(k) accounts in the private 

sector, is the defined contribution portion of federal 

retirement benefits. Employees in both CSRS and FERS 

are allowed to contribute to TSP. For employees in 

FERS, the federal employer matches a portion of their 

contributions to their TSP accounts. For workers in 

CSRS, the employer does not match contributions. 

Participants in TSP can choose between two tax treatments of their TSP contributions. One is a traditional 

treatment in which the worker defers paying income 

taxes on contributions and the returns earned on them 

until he or she withdraws the money in retirement. The 

second is a Roth treatment in which the worker pays 

federal income taxes on contributions as he or she makes 

them, but does not pay taxes on contributions or returns 

at withdrawal. Both the traditional and Roth TSPs 

provide the worker with the benefit of tax-free compounding until the account balances are withdrawn. The 

benefit of the two tax treatments depends on the worker’s 

tax rate when the contributions are made relative to the 

rate when he or she withdraws them.

The federal government’s costs for TSP predominantly 

come from the employing agencies’ contributions to the 
August 2017 Options for Changing the Retirement System for Federal Civilian Workers 9

accounts of FERS employees.12 Employers automatically 

contribute an amount equal to 1 percent of basic pay to 

the TSP accounts of all FERS employees, regardless of 

whether employees themselves choose to contribute.13 In 

addition, employers match FERS employees’ contributions up to 5 percent of salary according to the following 

schedule: The first 3 percent of pay that an employee 

contributes is matched dollar for dollar; the next 2 percent is matched at 50 cents on the dollar; and contributions above 5 percent of pay are not matched. Employees 

in CSRS are allowed to participate in TSP but do not 

receive any automatic or matching contributions from 

their employers. 

TSP participants in FERS are immediately vested in 

(that is, entitled to) their own contributions and any 

matching contributions by agencies. However, TSP 

participants must work a minimum number of years in 

order to be vested in the agencies’ automatic contributions and associated earnings in their accounts. For most 

FERS employees, the TSP vesting requirement is three 

years.14

Unlike the pension plan, TSP does not guarantee a 

benefit amount in retirement.15 Instead, participants 

12. One exception is the additional cost to the government associated 

with workers’ investments in TSP’s G fund. The interest rate 

on those investments resets monthly and is based on the 

weighted average yield of all outstanding Treasury notes and 

bonds with four or more years to maturity. The return on that 

fund is somewhat higher than other marketable investments of 

similar risk. For more information, see Andrew Biggs and Jason 

Richwine, Comparing Federal and Private Sector Compensation,

Working Paper 2011-02 (AEI Economic Policy, March 2011), 

http://tinyurl.com/n6trqq6. CBO did not estimate the cost 

associated with the subsidy to the G Fund going forward, because 

CBO estimates that the budgetary cost of that subsidy is small 

and the adoption of the life-cycle funds as the default investment 

funds in TSP since 2015 will diminish the share of assets that 

federal workers invest in the G fund.

13. For more details on the specifics of TSP, see Thrift Savings Plan 

(accessed July 27, 2017), https://www.tsp.gov/index.html. 

14. Employees serving in certain positions, including some 

senior executive level positions, Members of Congress, and 

Congressional employees, need to complete only two years of 

service to meet the TSP vesting requirement.

15. Other benefits provided by the pension plan include a benefit 

in the event of a worker’s disability and a spousal or dependent’s 

benefit in the event of a worker’s death. Unlike the pension 

plan, TSP does not guarantee such benefits. However, upon the 

worker’s or retiree’s death, his or her descendants can keep the 

remaining TSP balance. 

are entitled to the balances in their TSP accounts, from 

which they can withdraw money penalty-free once they 

reach age 591⁄2.16 Workers in TSP bear all the investment 

risk associated with their chosen investment portfolios. The amount employees accumulate in their TSP 

accounts by retirement depends on the amount contributed to the plan and the performance of the account’s 

investments.

Most federal civilian workers choose to participate in 

TSP. As of 2014—the most recent year for which data 

are available—about 65 percent of workers in CSRS 

and 90 percent of workers in FERS contributed to their 

accounts. Among those who contributed, the average 

contribution rate was 8.5 percent of salary for workers 

in CSRS and 8.1 percent of salary for workers in FERS. 

The employing agencies of FERS workers contributed 

4.3 percent of salary to the accounts of their workers, on 

average.

Spending on Federal Retirement Benefits 

CBO examined historical net outflows for the federal 

civilian retirement systems starting in 1990 and projected net outflows over the next 75 years as a percentage 

of GDP (see Figure 1 on page 2). The federal costs 

of retirement benefits are recorded as federal outlays 

on a cash basis when retirees and survivors receive their 

pension payments and when agencies make TSP contributions. Employees’ contributions to the pension plan 

are recorded as revenues at the time they are made.17 By 

contrast, on an accrual basis, the costs of future pension 

obligations are recognized when the commitment to pay 

them is incurred. 

Because there are advantages to each accounting method, 

CBO has included both cash and accrual estimates 

throughout this report. Measuring cost on a cash basis 

provides the information needed to determine how the 

retirement system affects the federal budget in a given 

16. The Internal Revenue Service requires individuals past the age 

of 701⁄2 to take minimum distributions from their defined 

contribution accounts each year. 

17. Federal agencies’ contributions to the CSRDF are 

intragovernmental transfers in which budget authority 

is transferred from federal agencies to the trust fund. 

Intragovernmental transfers have no effect on the size of the 

government’s annual budget deficit or surplus. However, they 

affect discretionary spending, which is subject to caps through 

fiscal year 2021. (Discretionary spending is controlled by annual 

appropriation acts.)
10 Options for Changing the Retirement System for Federal Civilian Workers August 2017

year. Cash-based estimates, however, fall short of being a 

comprehensive measure of the cost of the federal retirement program because they fail to show the liability that 

taxpayers incur for future retirement benefits in a given 

year, as accrual estimates do. Because of the timing of 

outlays, when a pension plan is measured on a cash basis, 

it could appear to be much less expensive than a defined 

contribution plan when examined over a short time horizon, even if the plans would provide the same amount 

of retirement benefits. The reason is that federal outlays 

for TSP occur early, when participants are still working, 

whereas outlays for the pension plan occur much later, 

when they are retired.

For the purposes of this report, federal retirement 

benefits encompass only the defined benefit and defined 

contribution programs—CSRS, FERS, and TSP. Some 

policy options discussed in the report might affect the 

cost of other benefits for retired workers, such as costs 

for retirees’ health care in the Federal Employees Health 

Benefits program. Eligibility and receipt of such benefits 

might be affected by the various options described in this 

report and might further affect workers’ behavior. Such 

effects are outside the scope of this report and are not 

reflected in the cost estimates. 

Also excluded from the estimates in this report are 

administrative costs related to the management of the 

CSRDF or employees’ TSP accounts. Both of those 

costs are relatively small.18 Changes in spending that 

stem from changes in administrative costs because of the 

options are also excluded. 

CBO did not analyze tax revenues related to the provision of federal retirement benefits because it lacked the 

information to accurately identify federal employees’ 

tax brackets. Under the Internal Revenue Code, the 

defined benefit and defined contribution plans offer tax 

18. CSRDF’s Board of Actuaries estimates the fund’s administrative 

costs to be about 0.27 percent of benefits. See Office of Personnel 

Management, Civil Service Retirement and Disability Fund Annual 

Report, Fiscal Year Ended September 30, 2016 (February 2017), 

https://go.usa.gov/xRQ56. According to the Federal Retirement 

Thrift Investment Board, expenses related to administering 

TSP are mostly offset by forfeitures of the agencies’ automatic 

1 percent contributions to workers enrolled in FERS who leave 

federal service before they become vested, other forfeitures, and 

loan fees. TSP participants share in the remainder of the costs. 

For 2016, the average net expense was $0.38 per $1,000 invested. 

See Federal Retirement Thrift Investment Board, “Expense Ratio” 

(accessed July 24, 2017), https://go.usa.gov/xRTwt.

incentives to both employers and participating employees. In general, employers’ and employees’ contributions 

to defined contribution plans and employers’ contributions to pension plans are excluded from employees’ 

federal income taxes when those contributions are made. 

Instead, income generated from those contributions is 

taxed when received in retirement. 

The Net Cost of Federal Retirement Benefits on a 

Cash Basis

The federal budget largely measures cash flows into and 

out of the U.S. Treasury, and for the most part reports 

those cash flows in the year in which they occur.19 CBO 

routinely projects the budgetary effects of the federal 

retirement programs over the current year and the coming 10 years on a cash basis as part of its baseline budget 

projections under current law. On a cash basis, benefit 

payments to retirees and survivors and employer’s contributions to TSP are recorded as federal outlays when they 

are paid, and employees’ contributions to the pension 

plan are recorded as revenues when they are received. 

Since 1990, most outlays for the federal retirement programs have compensated retirees in CSRS. In the coming decades, CBO expects a greater share of retirement 

spending will go to FERS retirees. Over the same period, 

federal spending for retirement benefits will decline as 

a share of GDP. The two main factors that will contribute to that trend are the decline in the share of retirees 

receiving CSRS benefits, which cost the government 

19. The costs of some programs or activities are reported on an 

accrual basis. In particular, the Federal Credit Reform Act of 

1990 requires federal direct loans and loan guarantees—the cash 

flows of which typically extend well beyond the period covered by 

baseline projections—to be recorded in the budget on an accrual 

rather than cash basis. For those programs, the estimated lifetime 

cost of a new loan or loan guarantee is recorded in the budget in 

the year the loan is disbursed. See, for example, Congressional 

Budget Office, “CBO’s January 2017 Baseline Projections for 

the Student Loan Program” (January 2017), https://go.usa.gov/

xRQeg. For more information on the budgetary treatment of 

federal credit programs, see Mindy R. Levit, Budgetary Treatment 

of Federal Credit (Direct Loans and Loan Guarantees): Concepts, 

History, and Issues for Congress, Report for Congress R42632 

(Congressional Research Service, June 24, 2014). For more 

information on cash versus accrual accounting in the federal 

budget, see Congressional Budget Office, Comparing Budget and 

Accounting Measures of the Federal Government’s Fiscal Condition

(December 2006), www.cbo.gov/publication/18262. 
August 2017 Options for Changing the Retirement System for Federal Civilian Workers 11

more than FERS benefits, and the decline of the federal 

civilian workforce as a share of the total workforce.20

Cash Flows From 1990 to 2016. In 2016, net outflows 

for CSRS and FERS pension benefits and TSP contributions were an estimated $87 billion, or 0.48 percent 

of GDP. The federal government paid pension benefits 

of $82 billion to civilian retirees and their survivors in 

that year. Roughly 85 percent of that amount was paid 

to CSRS retirees, who were 73 percent of the 2.6 million 

retirees in 2016. In addition, the federal government 

paid an estimated $8 billion to the TSP accounts of federal employees. At the same time, federal employees paid 

about $3 billion to the pension plan in 2016, offsetting a 

portion of the government’s outlays. 

Net outflows for federal retirement benefits, measured as 

a percentage of GDP, were similar in 2016 to what they 

had been in 1990: 0.48 percent of GDP in 2016 and 

0.47 percent of GDP in 1990. 

Between 1990 and 2016, the composition of spending 

on federal retirement changed. Net outflows for retirees and survivors in CSRS declined from 0.45 percent 

of GDP in 1990 to 0.38 percent of GDP in 2016. In 

contrast, net outflows for retirees and survivors in FERS 

increased from zero in 1990 to 0.06 percent of GDP in 

2016. The federal government’s contributions to TSP 

also increased as a share of GDP over that period, from 

0.02 percent in 1990 to 0.04 percent in 2016. Those 

trends are explained by the gradual phaseout of the 

20. CBO generally presents long-term estimates as percentages of 

GDP and not in nominal dollars. In the agency’s judgment, 

a presentation in nominal dollars can be misleading. The key 

problem is that a dollar today means something very different 

from a dollar in the distant future, for at least two reasons. First, 

the cumulative effect of changes in prices over a long period can 

be quite large, so a dollar amount in the distant future will have 

much lower value than the same dollar amount today. Second, 

the population, the economy, and people’s incomes will all grow 

substantially over time, so a dollar amount in the distant future 

will be much smaller relative to the size of the economy or a 

person’s income than the same dollar amount today. Alternatively, 

net outflows for the retirement system could be measured as a 

percentage of federal salaries, although that measure does not 

incorporate population growth because CBO does not project 

that the size of the federal civilian workforce will change. 

Measured as a percentage of salaries, therefore, under current law, 

net outflows for the retirement systems would fall by 44 percent 

between 2018 and 2091, whereas they would fall by 72 percent 

over that period when measured as a percentage of GDP, CBO 

estimates.

CSRS system. Because CSRS was closed to new participants in 1983 and replaced by FERS, the share of CSRS 

beneficiaries as a percentage of all beneficiaries and the 

share of outlays for CSRS as a percentage of total outlays 

have been declining. 

Cash Flows From 2017 to 2091. The net cost of federal 

retirement benefits is projected to rise more slowly than 

GDP over the next decade. As a result, if current law 

remained unchanged, net federal outflows for retirement 

benefits would increase in dollar terms but decline as 

a share of GDP, CBO projects (see Figure 1 on page 

2 and Table 2 on page 12). Net outflows for 

CSRS would not change significantly, whereas outflows 

for FERS and TSP would both increase substantially. 

In 2027, combined net outflows for federal retirement 

benefits would be 31 percent higher (in dollar terms) 

than in 2017. However, in 2027, those outflows would 

be a smaller share of GDP than in the previous 25 years, 

CBO projects.

Under current law, net outflows for federal retirement 

would decline from 0.41 percent of GDP in 2028 to 

0.13 percent of GDP at the end of the 75-year projection period—as those outflows are projected to grow 

at an average annual rate of 2.3 percent, whereas GDP 

is projected to grow by an average of 4.1 percent per 

year. Two main factors contribute to the relatively slow 

growth in benefit payments. First, the share of retirees 

receiving benefits from CSRS would decline over that 

period (almost all CSRS beneficiaries will leave the 

federal retirement system by the 2060s, CBO projects), 

and CSRS benefits cost the government more than FERS 

benefits. Second, the total size of the U.S. workforce 

will increase, CBO projects, and under current law, the 

federal workforce would represent a smaller share of the 

total workforce.21 Under current law, CBO projects that 

the number of federal workers would remain unchanged 

after 2015 and over the next 10 years. Consistent with 

historical trends, CBO also projected that the size of 

the federal workforce would remain unchanged over the 

75-year period.

CBO’s projections of the cost to the federal government 

of retirement benefits are based in part on the benefits of 

current retirees and the salaries of current and incoming 

21. Between 2007 and 2015, the number of federal workers 

remained roughly unchanged and federal workers declined as a 

share of the workforce.
12 Options for Changing the Retirement System for Federal Civilian Workers August 2017

employees.22 Those data were supplemented with information on TSP account balances, participation, and contributions from current participants.23 (For more details 

on CBO’s methodology, see the appendix.) 

The Net Cost of Federal Retirement Benefits on an 

Accrual Basis

An alternative way to measure the cost of federal retirement benefits is on an accrual basis. On that basis, the 

cost of retirement benefits that will be paid when workers retire (that is, in the future) is incorporated into the 

current cost of their compensation. That approach allows 

future retirement liabilities to be recognized as they are 

incurred, as opposed to waiting until the cash is received 

22. The data were provided by OPM.

23. The data were provided by the Federal Retirement Thrift 

Investment Board.

or paid out. Because such an approach treats current and 

deferred forms of compensation equally, it avoids budgetary effects resulting from the timing of compensation 

and facilitates the comparison of an employer’s compensation costs for a pension plan with those for a defined 

contribution plan. 

On an accrual basis, CBO projects that under current 

law total lifetime retirement-related net outflows for 

the cohort of employees starting federal service in 2018 

would be 14.2 percent of the salaries of those workers. 

CBO chose that group of workers to illustrate the cost 

of federal retirement on an accrual basis under current 

law and under the five options presented in this report 

because it is the first cohort of employees that could be 

affected by those options. 

Table 2.

Projected Outlays, Revenues, and Net Outflows for Major Federal Civilian Retirement Programs

Billions of Dollars

Total,

Actual,

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2027

70 70 70 71 71 72 72 72 72 71 71 70 711

1 1 * * * * * * * * * * 2 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ____

69 69 70 70 71 71 72 72 71 71 71 70 709

13 14 16 18 20 23 26 29 32 35 38 42 279

2 3 3 4 4 4 5 5 6 6 7 8 52 __ __ __ __ __ __ __ __ __ __ __ __ ____

10 11 13 15 16 18 21 23 26 29 32 35 227

8 9 9 9 10 10 10 11 11 11 12 12 105 ___ ___ ___ ___ ___ ____ ___ ___ ___ ___ ___ ___ ____

88 89 91 94 97 100 103 106 108 111 114 117 1,041

0.48 0.47 0.46 0.46 0.45 0.45 0.45 0.44 0.44 0.43 0.42 0.42 0.44

Outlaysa

Revenuesb

Net Outflowsc

Outlaysa

Revenuesb

Net Outflowsc

Civil Service Retirement System

Federal Employees Retirement System

Thrift Savings Plan

Outlaysd

Total Net Outflows

Total Net Outflows as a Percentage

of Gross Domestic Product

Source: Congressional Budget Office.

TSP = Thrift Savings Plan; * = between zero and $0.5 billion.

a. Outlays consist of pension benefits and refunds of employees’ contributions to the pension plan.

b. Revenues consist of employees’ contributions to the pension plan.

c. Net outflows are outlays for benefits minus the revenues that the government collects from employees’ contributions to the pension plan.

d. Outlays for TSP are the government’s contributions to employees’ TSP accounts. Outlays for 2016 are estimated.
August 2017 Options for Changing the Retirement System for Federal Civilian Workers 13

The Role of the Federal Retirement System in 

Employees’ Compensation

The federal retirement system influences the amount of 

compensation that employees receive when they earn it 

and the amount they receive during retirement. Changes 

to the federal retirement system can affect the amount 

of workers’ compensation and can change the balance 

between current pay (that is, salary minus retirement 

contributions) and retirement income.24

Current Pay

Federal retirement plans play a role in workers’ compensation by determining the current pay that individuals receive while working for the federal government. 

Employees’ current pay (as defined in this report) equals 

their salary or other cash compensation minus the 

amount of contributions they are required to make to 

the pension plan and the voluntary contributions they 

make to their TSP plan. 

CBO projects that workers hired in 2018 who go on to 

receive a pension would contribute 4.4 percent of their 

salary to the pension plan and an average of 7.6 percent 

of salary to TSP, resulting in current pay that would be 

12 percent lower than salary, on average. 

Retirement Income

To assess the effects of potential changes to FERS on 

workers’ income in retirement, CBO estimated that 

income as a share of the worker’s preretirement earnings, 

known as a replacement rate. The replacement rate measures the extent to which workers’ income in retirement 

is commensurate with their income prior to retirement. 

The replacement rate CBO estimated is the ratio of 

employees’ annual retirement income from the pension 

and TSP to their average earnings in their last three 

years before retirement. The calculation required CBO 

to estimate annual retirement income from TSP savings. 

In contrast to pensions, TSP benefits are in the form of 

an account balance that workers have accumulated at 

the time of retirement. Therefore, CBO estimated an 

expected annuity stream that could be purchased with 

the accumulated TSP balance and added that annual 

24. For a more detailed description of the compensation the federal 

government provides its employees, see Congressional Budget 

Office, Comparing the Compensation of Federal and Private-Sector 

Employees, 2011–2015 (April 2017), Appendix B, www.cbo.gov/

publication/52637.

income from TSP to the annual pension.25CBO did not 

include retirement income from Social Security, from 

private savings, or from retirement plans from other 

employers in the calculation of the replacement rate 

because those data were not available. 

The pension plan and TSP differ in the way benefits 

build up over time. For the same number of years of 

service, a worker who joined the federal workforce later 

in life would receive a higher replacement rate from his 

or her pension than a worker who joined earlier in his or 

her career. For example, among workers who leave federal service after 15 years, those who joined in their 40s 

could expect an average replacement rate of 14 percent 

from their pension, whereas those who joined in their 

20s could expect an average replacement rate of 7 percent. The opposite is true for TSP. The average projected 

replacement rate from TSP is 10 percent for workers 

who joined in their 40s and 12 percent for workers who 

joined in their 20s (see Figure 2). Two factors contribute 

to that result. One, because the government’s pension 

payment is based on the average of a worker’s three years 

of highest salary (which usually occur at the end of his or 

her federal service), the pension plan favors workers who 

spend a given number of years in federal service later in 

their careers, when their earnings are higher and they are 

closer to their retirement age. Two, because the benefit 

of compound interest favors workers who start saving at 

an early age, employees who join the federal workforce 

earlier in their careers gain greater expected benefits from 

TSP than do those who join later. However, because 

annual contributions to TSP are proportionate to a 

worker’s salary, the government’s TSP payment is equally 

valuable to all workers, regardless of when they join TSP.

The federal government funds a considerable share of 

its employees’ retirement income. For workers hired in 

2018 who are projected to receive a pension in retirement, the employing agencies will incur pension costs 

equal, on average, to 11.2 percent of workers’ salaries 

and TSP costs equal, on average, to 4.3 percent of workers’ salaries. That brings the government’s total costs for 

25. However, CBO did not attempt to incorporate the fees that 

would stem from purchasing annuities. For a detailed description 

of the assumptions underlying CBO’s projection of retirees’ 

replacement rates, see the appendix.
14 Options for Changing the Retirement System for Federal Civilian Workers August 2017

the pension and TSP to 15.5 percent of workers’ salaries, 

on average.26

The Role of the Federal Retirement System 

in the Recruitment and Retention of 

Federal Workers 

The federal retirement system affects people’s incentives 

to begin working for the government or remain in ways 

that depend on people’s career plans and vary over the 

course of their careers. As a result, changes in FERS 

that affect workers’ current pay or retirement income 

26. On an accrual basis, the net cost to the government for the full 

cohort of workers starting in 2018 would be lower, 14.2 percent 

of salary. The reason is that over time, some employees will 

separate before becoming vested in the pension or will choose to 

have the government return their pension contributions and give 

up their rights to a pension. 

can affect the government’s ability to recruit and retain 

qualified workers. 

Recruitment

The amount of compensation, as well as the way it is 

distributed between current pay, pension payments, 

and TSP, can affect the government’s ability to recruit 

high-quality employees. Even though the size of the federal workforce has changed little over the past 10 years, 

the government has hired about a quarter of a million 

employees per year over that period, CBO estimates. 

Most of those people joined the government when 

they were between the ages of 20 and 40, and the most 

common starting age was 26. The majority of the new 

employees have replaced departing workers, although 

the Department of Veterans Affairs has substantially 

increased its number of employees to expand the services 

it provides, whereas the Postal Service has gotten smaller. 

Figure 2.

Average Share of Preretirement Earnings Replaced at Age 62 or at Retirement for Workers Hired in 2018 

Who Leave Federal Service After 15 Years, Under Current Law

TSP Pension

Share of Preretirement Earnings

10

11

12

14

8

7

0 15 30

Age 40 to 49 at Date of Hire

Age 30 to 39 at Date of Hire

Age 20 to 29 at Date of Hire

Source: Congressional Budget Office.

Estimates shown are for workers with no prior federal service who will join the federal workforce in 2018 and leave federal service after 15 years. 

Those workers would generally receive a pension in retirement.

Under current law, employees hired in 2018 will contribute 4.4 percent of their salary to the FERS pension plan. The government will make an 

automatic TSP contribution of 1 percent of salary and match employees’ contributions up to an additional 4 percent.

Replacement rates were calculated at age 62 or at the age of retirement from federal service, whichever is later. Preretirement earnings were 

measured as the workers’ average earnings in the last three years before retirement, adjusted for average growth in economywide earnings if they left 

federal service before becoming eligible for an immediate pension. Retirement income is the pension plus the annuitized value of workers’ TSP account 

balances at the time of retirement. The projected TSP account balances include the accumulated employers’ and employees’ contributions and the 

investment returns on those contributions. Retirement income excludes payments from Social Security, other employer-sponsored retirement plans, 

and personal savings.

The length of the bars reflects unrounded numbers.

FERS = Federal Employees Retirement System; TSP = Thrift Savings Plan.

The replacement rate from the pension is 

larger for workers hired at an older age in part 

because they are closer to the age at which 

they are eligible to draw a pension.
August 2017 Options for Changing the Retirement System for Federal Civilian Workers 15

The pension payments provided through FERS and the 

government’s contributions to employees’ TSP accounts 

are both attractive to potential employees. In recent 

years, lawmakers increased employees’ required contributions to the pension plan, which had the effect of reducing the amount of current pay that agencies can offer to 

potential employees.

To analyze the effect of those changes on recruitment, 

CBO estimated the value employees place on retirement 

income relative to current income. That estimate is 

subject to considerable uncertainty, and other estimates 

could reasonably be made that could lead to different 

conclusions about the effect that the amounts of current 

pay and the pension plan have on recruitment. (For 

additional details, see the appendix.) 

Effect of Current Pay on Recruitment. The average 

quality of newly-hired employees tends to rise or fall 

depending on the amount of current pay, in CBO’s judgment. The amount of current pay that federal workers 

receive is reduced by the contributions they must make 

to the FERS pension plan and the contributions they 

elect to make to their TSP accounts. 

One way to assess the effects of changes in current pay 

is to examine what occurred after the required pension 

contribution was raised from 0.8 percent of salary in 

2012 to 3.1 percent in 2013. (Data on the effects of 

the more recent increase to 4.4 percent were not readily 

available at the time of the analysis.) CBO found that 

two measures of new employees’ performance declined 

following the 2013 reduction in current pay (see 

Table 3). First, workers hired in 2013 were less likely 

than those hired in 2012 to have their performance 

rated as “fully successful” or better by their supervisors. 

Second, they were more likely to be dismissed, or 

“involuntarily separated,” early in their careers. Those 

results suggest that decreases in current pay may affect 

recruitment, but the analysis encompasses a short period 

and cannot account for every factor that might have 

contributed to the differences in employees’ performance. Other research found that a 1 percent decrease in 

the average federal salary relative to the average privatesector salary was associated with a 2 percent decrease in 

Table 3.

Salary, Performance, and Retention of Newly Hired Employees

Employees Employees

Hired in 2012 Hired in 2013 Percentage Difference

Percentage of Salary That Employees Contribute to the Pension Plan 0.8 3.1 n.a.

Average Starting Salary (2016 Dollars)

Salary 57,100 56,300 -1.4

Salary Minus Contributions to the Pension Plan 56,600 54,400 -3.8

Performance Measures (Percentage of newly hired employees)

First Performance Rating Above “Fully Successful” 53.6 52.5 -2.2

Involuntarily Separated During First 13 Months 2.2 2.5 11.6

Retention Measure (Percentage of newly hired employees)

Voluntarily Separated During First 13 Months 8.2 9.1 11.7

Source: Congressional Budget Office, using data from the Office of Personnel Management.

CBO compared employees hired in 2012, the last year employees’ contribution rate to the pension plan was 0.8 percent, to employees hired in 2013, 

during which employees’ contribution rate to the pension plan was 3.1 percent. To compare similar jobs in similar locations, CBO limited its analysis to 

workers on the General Schedule, and the salaries, performance measures, and retention measure were adjusted to account for differences between 

the two groups of employees in occupations, grades, and locations.

Figures were converted from nominal amounts with the price index for personal consumption expenditures, which is calculated by the 

Bureau of Economic Analysis.

Performance ratings were for employees in the most common ratings system and were adjusted for differences in the timing of the evaluations.

Tracking separations for 13 months captures most of the separations that occur within a month of the first performance evaluation.

n.a. = not applicable. 
16 Options for Changing the Retirement System for Federal Civilian Workers August 2017

the number of federal job applicants meeting the minimum qualifications for federal positions.27 However, it is 

not clear that a reduction in federal salaries would have 

led to a shortage of highly qualified recruits because data 

on the number of applicants who met more stringent 

qualifications were not examined. 

Although changes in current pay that result from changes 

in the required contributions to the FERS pension plan 

may affect recruitment, changes in current pay that result 

from changes in a worker’s voluntary contributions to 

the TSP probably do not. That is both because those 

contributions are voluntary and because money in a TSP 

account can be accessed in ways that money contributed 

to the pension plan cannot. To maximize the amount 

of money that the government contributes, employees 

would have to contribute 5 percent of salary to their TSP 

accounts. However, many employees choose to contribute less and thus forgo less of their income but still 

receive most of the government’s contribution. Moreover, 

funds contributed to TSP are more accessible than the 

sums contributed to the pension plan. Employees can 

borrow from their past TSP contributions but cannot 

borrow from past contributions to the pension plan.

Effect of the Pension Plan on Recruitment. The 

incentive that the pension plan provides to prospective 

employees depends on whether a worker anticipates 

spending much of his or her career in federal service. 

The pension plan can be a substantial draw for prospective employees who plan to work in the government for 

many years. For example, 26-year-old job candidates 

who anticipate working for the federal government 

until they are 57 would receive annual pension payments equaling 31 percent of their average salary over 

the last three years of their federal career. On the basis 

of the average life expectancy of federal workers, such 

candidates could expect to receive pension payments for 

31 years and cost-of-living adjustments for 26 of those 

years. After adjusting for inflation and the tendency for 

people to value future income less than current income, 

the present discounted value of that pension is about 

$160,000, CBO estimates. After accounting for the 

$70,000 worth of contributions (4.4 percent of pay over 

30 years) that workers would make toward the pension 

27. The decline in the number of applicants was relative to the 

number of workers hired by the government. See Alan B. 

Krueger, “The Determinants of Queues for Federal Jobs,” 

Industrial and Labor Relations Review (July 1988), pp. 567–581,

http://ilr.sagepub.com/content/41/4/567.abstract.

plan during their years of service, the net value of the 

pension is about $90,000 (see Figure 3). The net value of 

the pension was much larger when employees contributed 0.8 percent of their salary toward it, and thus was a 

larger draw for prospective employees.

The pension plan is likely to be less appealing to prospective employees who do not anticipate long federal careers 

for at least two reasons. First, they must contribute 

4.4 percent of their salary to it even if they do not expect 

to work for the government long enough to be eligible 

for a pension. (However, those employees can receive a 

refund, with interest, on their contributions when they 

leave the government.)28 Second, those who leave federal 

service before age 62 will have the value of their pension 

eroded by inflation until they become eligible for a costof-living adjustment at age 62. 

The combination of reduced pay and the effects of inflation can make federal service less appealing to potential 

employees. For example, 26-year-old job candidates 

are likely to value the pension payments they would 

receive less than the contributions they would have to 

make unless they expect to serve 20 years or more (see 

Figure 3). In contrast, the pension plan can be attractive 

for older job candidates who plan to retire within 

10 years because they start federal service closer to the 

age at which they would be eligible to receive a pension. 

Effect of TSP on Recruitment. The contributions 

agencies make to employees’ TSP accounts are probably 

more appealing than the pension plan to people who do 

not anticipate long federal careers. Though the benefits 

of the pension plan are heavily skewed toward older 

employees with long tenures, new employees are eligible 

to receive agency TSP contributions of up to 5 percent of 

their salary, regardless of their age or career horizons. It is 

less clear how the appeal of those contributions compares 

with that of the pension plan for prospective employees 

anticipating long federal careers. On the one hand, the 

pension provides a guaranteed amount of income for life 

to employees who remain in federal service long enough, 

whereas the amount of income available from their TSP 

accounts depends on the uncertain returns of the assets 

employees invest in. On the other hand, when employees 

unexpectedly leave federal service early, they often receive 

none of the income they anticipated from the pension 

28. The government pays interest on those contributions at a rate 

similar to that on a 10-year Treasury bond.
August 2017 Options for Changing the Retirement System for Federal Civilian Workers 17

plan, whereas they keep most or all of the contributions 

their agency has made to their TSP account.29

Retention

The amount of compensation and its composition also 

affect retention. By enticing its employees to continue 

their service, the federal government retains the expertise that those workers have accumulated. That expertise 

can be particularly difficult to replace because the tasks 

29. The majority of federal employees who leave before completing 

three years of service forfeit the automatic contributions their 

agency made to TSP but keep any matching contributions. 

performed by federal employees often differ substantially 

from the tasks performed for other employers.30 Thus, 

the quality of the federal workforce would decline and 

the costs of training new employees would rise if agencies 

were not able to retain a high percentage of their employees from one year to the next. But very high retention 

rates can be inefficient for at least two reasons. First, high 

retention can leave agencies with too little flexibility to 

30. For example, the tasks that accountants for the Internal Revenue 

Service perform to audit tax returns can differ substantially from 

the tasks of the private-sector accountants who prepare those 

returns.

Figure 3.

The Net Value of a FERS Pension to a Worker Considering Federal Employment at Age 26, by Anticipated 

Years of Service and Age of Separation

The net value of the pension differs for prospective federal employees depending on how much they pay for the pension from their own salary and how 

long they anticipate working for the federal government. After 20 years of service, an employee is eligible for a pension without benefit reductions at age 

60. After 30 years of service, an employee is eligible for a pension without benefit reductions at age 57. The pension for a worker who contributes 4.4 percent of his or her salary and who would leave with fewer than 20 years of service would be less valuable than the contributions he or she made to it.

Thousands of Dollars

Required Percentage of 

Anticipated Age of Separation From Federal Service

Salary Contributed

0.8 percent

20 Years

of Service

30 Years

of Service

3.1 percent

4.4 percent

-20

20

60

100

140

180

26 30 34 38 42 46 50 54 58 62 66 70 74

Source: Congressional Budget Office.

Estimates shown are for people age 26 who are considering a federal job with a salary of $50,000 and who would wait to begin receiving pension 

payments until they are eligible for the full amount instead of taking reduced payments that begin at an earlier age.

Most employees in FERS hired before 2013 contribute 0.8 percent of their salary to the pension; most hired in 2013 contribute 3.1 percent; and most 

hired in 2014 or later contribute 4.4 percent.

The net value at date of hire is the value of the pension payments workers would receive in retirement minus the value of the contributions they would 

make to the pension plan. Payments and contributions are discounted back to the date of hire at a rate equal to the interest rate projected for 20-year 

Treasury securities plus about 2 percentage points to illustrate the value of the pension when workers are considering federal service at age 26. If 

the value of those payments is less than the value of their contributions, then they would elect to have their contributions refunded and forgo the 

pension. In those instances, the workers place a negative net value on the pension because the return they receive on their contributions is less than 

the discount rate. For instance, workers with 19 years of service who contribute 4.4 percent of their salary to the pension plan are likelier to elect to 

have their contributions refunded than those with 20 years of service. Those with 20 years of service would be eligible for a pension without benefit 

reductions at age 60, whereas those with 19 years of service would not be eligible for such a pension until age 62.

FERS = Federal Employees Retirement System.
18 Options for Changing the Retirement System for Federal Civilian Workers August 2017

hire workers with new or different skills that might be 

needed if demands on those agencies change over time. 

Second, high retention rates among older employees may 

reduce workforce quality because workers’ productivity 

eventually declines.31

Federal retention rates differ substantially from those 

for private-sector firms, where pensions have become 

rare (see Table 4). The separation rate among midcareer 

employees in the private sector is about eight times 

higher than the rate for federal employees. Many factors 

probably contribute to higher rates of retention for federal employees. For instance, federal workers can relocate 

and yet continue to work for the government, as the federal government is a large employer with offices in many 

parts of the country. However, the pension plan probably 

plays a substantial role. It most likely contributes both to 

the higher rates of retention among midcareer employees 

and to lower retention rates after 30 years of service.

Effect of Current Pay on Retention. Changing current pay would change retention rates, CBO expects. 

For instance, retention rates declined when the increase 

in employees’ contributions to FERS decreased their 

current pay. Employees hired in 2013 were roughly 

31. For a discussion of whether employers use pensions to encourage 

older workers to retire see David Neumark, “Productivity, 

Compensation, and Retirement,” in Gordon L. Clark, Alicia 

H. Munnell, and J. Michael Orszag, eds., Oxford Handbook of 

Pensions and Retirement Income (Oxford University Press, 2006), 

pp. 721–739, http://tinyurl.com/ybjea58s.

10 percent more likely to quit federal service within 

13 months than employees hired in 2012 (see Table 3 on 

page 15). Other factors that could have contributed to 

the decline in retention were the intermittent furloughs 

that several agencies imposed in 2013 and the partial 

shutdown of most agencies during the first two weeks 

of October 2013. However, retention declined between 

2012 and 2013 even when the furloughing agencies were 

excluded from the analysis, and when the months of 

September, October, and November were excluded.

An increase in current pay would boost retention more 

than would an equivalent increase in retirement pensions, in CBO’s judgment. To reach this conclusion, 

CBO compared the changes in retention following the 

across-the-board salary increases received by employees 

in major metropolitan areas in 1991 and the reductions 

in pension benefits imposed by the switch from CSRS to 

FERS. Retention rose substantially following the salary 

increases but only changed slightly after the switch to 

FERS even though pension benefits under that system 

are usually much smaller than they are under CSRS. 

Based on those findings, CBO concluded that a salary 

increase would raise retention more than an increase 

in pension benefits that cost the government the same 

amount.

Effect of the Pension Plan on Retention. The pension 

plan boosts retention among workers who are nearing 

the point in their service at which they become eligible 

for a pension immediately upon separation and reduces 

retention among workers who have passed that point. 

The pension plan’s effects on the retention of workers 

who are many years away from receiving one are unclear. 

The pension plan appeals to workers as they get closer 

to becoming eligible for a pension immediately upon 

separation, in CBO’s judgment. CBO examined workers 

who were hired at age 26 in 1984 and therefore would 

have become eligible for a pension if they completed 

30 years of service.32 Almost all of the workers in that 

32. CBO used data from OPM that cover the vast majority of 

federal civilian personnel (with the exception of Postal Service 

employees). CBO focused its analysis on the first group of 

employees enrolled in FERS (in 1984) to maximize the number 

of years over which to examine retention. The analysis is limited 

to workers who choose to leave; it excludes workers who were 

involuntarily removed from service for poor performance, 

misconduct, or other reasons. (For additional details, see the 

appendix.)

Table 4.

Separation Rates for Workers Hired in 1984

Federal Government Private Sector

1 to 10 11 21

11 to 29 1 8

30 to 32 25 18

Average Annual Separation Rate as a Percentage 

of the Workforce in the Previous Year Years 

of Service

Source: Congressional Budget Office, using data for February 1996 

through January 2016 from the job tenure supplement to the Current 

Population Survey. 

Because data are not available prior to 1996, estimates of the 

separation rates for workers with 1 to 12 years of service are based 

on the separation rates of workers hired in 1996. Separation rates 

incorporate both voluntary and involuntary separations because it is 

difficult to distinguish between them in the data.
August 2017 Options for Changing the Retirement System for Federal Civilian Workers 19

group who completed 20 years of service continued their 

federal employment until they were eligible to draw a 

pension (see Figure 4). The FERS pension plan probably played a central role in that absence of separations. 

By staying the additional 10 years, employees earned 

additional pension payments worth a total of about twice 

their annual salary. In particular, by serving the 30th year 

those workers became eligible to receive pensions at their 

current age of 56 instead of age 60, thus accruing four 

more years of pension payments. Each of those years of 

payments amounts to about 30 percent of their annual 

salary. The employees examined here were required to 

contribute 0.8 percent of their salary to the pension plan, 

whereas employees hired more recently have to contribute 4.4 percent of their salary. But even when contributing 4.4 percent of salary, workers who complete 20 years 

of service after being hired at age 26 will receive additional pension payments worth a total of almost twice 

their annual salary by staying an additional 

10 years.

Figure 4.

Voluntary Separations and Change in Accrued Value of a FERS Pension as a Share of Salary

Percentage of Workers

0

5

10

15

20

26 31 36 41 46 51 56

Immediately Eligible for a Full Pension

Percentage of Salary

-20

0

20

40

60

80

100

120

26 31 36 41 46 51 56

Year Prior to Immediate Eligibility for a Full Pension

Age

Source: Congressional Budget Office, using data for 1984 through 2014 from the Office of Personnel Management.

Estimates shown are for employees who were hired at age 26 in 1984, the year FERS went into effect.

Employees become eligible to draw a pension if they have reached a certain age and years of service: age 62 with at least 5 years of service; age 60 

with at least 20 years of service; and a minimum retirement age with at least 30 years of service. The minimum retirement age is 56 for employees born 

between 1953 and 1964, and it gradually increases to 57 for employees born after 1964.

Data on voluntary separations were readily available for the first 31 years of service under FERS. About 30 percent of the employees remained in the 

federal workforce longer than that.

The accrued value of a pension from an additional year of service is the discounted value of larger annuity payments from an additional year of federal 

service minus employees’ contributions to the pension plan.

FERS = Federal Employees Retirement System.

The accrued value of a pension from 

an additional year of service for those 

workers would be more than 100 percent 

of a year’s salary for those in the year prior 

to immediate eligibility for a full pension. If 

they completed that year, they could draw 

a full pension at age 56, whereas if they left 

during that year, they could not draw a full 

pension until age 60.

Voluntary separations from federal 

service for workers hired at age 26 in 

1984 declined as they advanced toward 

immediate eligibility for a full pension at 

age 56.
20 Options for Changing the Retirement System for Federal Civilian Workers August 2017

The pension plan reduces retention among workers once 

they become eligible for a pension immediately upon 

retirement. That is because employees who are eligible 

to receive pension payments forgo those payments if 

they continue serving, and the value of those forgone 

payments can exceed any increase in future pension 

payments from the additional service. For instance, 

among federal employees who were hired at age 26 in 

1984 and still employed by the government at age 56, 

when they became eligible to retire, about 15 percent 

retired before turning 57. That is the last year of data on 

separations available to CBO for that group, but people 

who were hired at older ages can be followed to higher 

ages. Among workers who were hired at age 40 in 1984 

and served until age 60, when they could start receiving 

a pension, about half left before turning 65. The increase 

in employees’ contributions in 2013 is likely to further 

reduce retention among retirement-eligible employees 

because they would have to contribute 4.4 percent of 

their salary in addition to forgoing pension payments.

It is unclear how the pension plan affects retention 

among employees who were hired recently. Retention 

rates are lower early in workers’ careers in part because 

that is when they are most likely to conclude that a job 

is a poor fit for them. The pension plan might have a 

modest effect on those retention rates, but the direction 

of that effect is unclear. On the one hand, the design of 

the pension plan provides only a limited retention incentive for early-career employees because it will typically be 

many years before they will receive pension payments. 

On the other hand, the large pension payments available 

to workers who remain in federal service for many years 

probably attract employees who are likely to stay through 

the early years to eventually receive those payments.

Effect of TSP on Retention. The effects of TSP on 

retention are roughly consistent over most of workers’ 

careers. In 2014, about 85 percent of employees received 

agency contributions equaling 4 percent to 5 percent 

of their salary. Employees of all ages and tenures receive 

substantial agency contributions. The lowest average 

contribution CBO measured, 3.5 percent, was for 

39-year-olds with 22 years of service. That additional 

compensation generally increases retention but can 

reduce retention for older workers by making retirement 

affordable at a younger age, in CBO’s judgment. 

Options for Changing the Federal 

Retirement System

Lawmakers could make changes to the federal retirement system that would change future spending. In this 

report, CBO examined two broad sets of options that 

would either revise the FERS pension plan or replace the 

pension plan for newly hired workers with an expanded 

defined contribution plan. CBO examined how each 

of the options would change federal spending on a cash 

basis and on an accrual basis, under the assumption that 

appropriations would be changed by a commensurate 

amount.33 CBO also analyzed how each of the options 

would affect workers’ current pay (that is, salary minus 

retirement contributions) and retirement income and 

how each option would affect the federal government’s 

ability to recruit and retain a qualified workforce.

In the first category of options—revising the pension—

CBO looked at three specific options. Similar to options 

that CBO has assessed previously, they would either 

change employees’ contributions to the FERS pension 

plan or they would alter the formula used to calculate 

pension benefits.34 By showing the budgetary effects 

over 75 years, this analysis shows how the effects of some 

options would grow beyond the traditional 10-year budget window, whereas the effects of other options would 

decline over that longer period.

In the second category—eliminating the pension plan 

and increasing the employer’s TSP contributions—the 

agency examined two specific options. Those options 

show the effects of changing the structure of the federal 

government’s retirement plan to be more similar to those 

offered by many private-sector companies and some 

state governments during recent decades. The options 

are intended to be illustrative of the choices lawmakers 

would face in making such a switch. For example, lawmakers would need to choose the amount of the government’s automatic and matching contributions to TSP. 

Those choices could be more or less costly to the 

government than the options considered here.

33. Specifically, CBO assumed that appropriations would be 

increased to cover the cost of additional agency contributions 

to employees’ TSP accounts. In contrast, CBO assumed that 

changes to the FERS defined benefit plan would not affect 

appropriations because those changes would not directly affect 

discretionary spending.

34. See, for instance, Option 12 in Congressional Budget Office, 

Options for Reducing the Deficit: 2017 to 2026 (December 2016), 

www.cbo.gov/publication/52142.
August 2017 Options for Changing the Retirement System for Federal Civilian Workers 21

All options would take effect in 2018, and their net 

costs are projected on a cash basis over 75 years from the 

current year, 2017, through 2091.35 (See Table 5 for a 

summary of the effects of the options on a cash basis.) 

The net costs of all options are projected on an accrual 

35. The personnel costs of some agencies are reimbursed and the 

amounts of those reimbursements could change in response to 

changes in personnel costs. This report does not account for the 

effects of those potential changes.

basis for federal workers hired in 2018. (See Figure 5 for 

a summary of the effects of the options on an accrual 

basis.)36The options would also change the portion of 

36. Figure 5 shows net costs for only the 2018 cohort—the group of 

workers who start working for the federal government that year. 

Unlike examining costs on a cash basis, doing so on an accrual 

basis allows the full cost (over workers’ lifetimes) of retirement 

benefits for a given group of workers under current law to be 

compared with the full cost under each of the options. CBO 

Table 5.

Change in the Government’s Net Outflows for FERS Under Several Options That Would 

Change the FERS Pension Plan and Contributions to TSP

Percentage of Gross Percentage of Net Outflows

Billions of Dollars, Domestic Product, Under Current Law,

a b c

1. Increase Pension Contributions of Some Employees -47 -0.005 -3

2. Decrease Pension Contributions of Some Employees 32 0.021 13

3. Change Pension Formula to High 5 -3 -0.004 -3

TSP for New Employees 

4. Eliminate Pension, Increase Government's TSP 79 0.015 10

Contribution to a Maximum of 15 Percent

5. Eliminate Pension, Increase Government's TSP 58 -0.006 -3

Contribution to 10 Percent

Change the Pension Plan

Replace the Pension Plan With Larger Contributions to

Source: Congressional Budget Office.

Option 1 would increase the FERS contribution rate to 4.4 percent for current employees (from 0.8 percent for employees hired before 2013 and from 

3.1 percent for employees hired in 2013).

Option 2 would decrease the FERS contribution rate to 0.8 percent for all employees (from 4.4 percent for employees hired after 2013 and from 

3.1 percent for employees hired in 2013).

Option 3 would decrease FERS pensions by basing the retirement benefit on the five years of highest salary (instead of three years of highest salary).

Option 4 would eliminate the FERS pension, increase the government’s automatic TSP contribution to 8 percent of salary, and require the government 

to match employees’ contributions up to an additional 7 percent.

Option 5 would eliminate the FERS pension, increase the government’s automatic TSP contribution to 10 percent of salary, and eliminate the 

government’s matching contribution.

A discount rate equal to the interest rate projected for 20-year Treasury securities was used in the calculation of present discounted values.

FERS = Federal Employees Retirement System; GDP = gross domestic product; TSP = Thrift Savings Plan.

a. Net outflows represent an increase in budget deficits. They include outlays for FERS pension benefits plus the government’s contributions to 

workers’ TSP accounts minus revenues from employees’ contributions to the pension plan. 

b. Net present value of change in net outflows measured as a share of GDP. 

c. Net present value of change in net outflows measured as a share of net outflows for the pension plan and TSP under current law. Net outflows 

include outlays for FERS pension benefits plus the government’s contributions to employees’ TSP accounts minus revenues from employees’ 

contributions to the pension plan.
22 Options for Changing the Retirement System for Federal Civilian Workers August 2017

workers’ compensation that goes toward current pay 

versus the portion that gets contributed toward their 

retirement. (See Figure 6 for a summary of how the 

options are projected to change workers’ current pay and 

employees’ and employers’ contributions to the pension 

plan and TSP for the 2018 cohort.)

examines the 2018 cohort because that is the first cohort that 

would be affected by the options that eliminate the pension. 

Figure 5.

Net Accrual Cost to the Government of Retirement Benefits as a Share of Lifetime Salary for Workers Hired 

in 2018, Under Current Law and Under Several Options

Percent

10.0

13.3

13.7

17.3

14.2

0 10 20

Option 5. Eliminate Pension, Increase Government's

TSP Contribution to 10 Percent

Option 4. Eliminate Pension, Increase Government’s

TSP Contribution to a Maximum of 15 Percent

Option 3. Change Pension Formula to High 5

Option 2. Decrease Pension Contributions 

of Some Employees

Option 1. Increase Pension Contributions 

of Some Employees

Current Law

Same as current law for workers hired in 2018

Source: Congressional Budget Office.

Estimates shown are for workers with no prior federal service who are projected to join the federal workforce in 2018, irrespective of whether they 

receive a pension in retirement.

Under current law, employees hired in 2018 will contribute 4.4 percent of their salary to the FERS pension. The government will make an automatic TSP 

contribution of 1 percent of salary and match employees’ contributions up to an additional 4 percent. 

Option 1 would increase the FERS contribution rate to 4.4 percent for current employees (from 0.8 percent for employees hired before 2013 and from 

3.1 percent for employees hired in 2013). Option 1 is the same as current law for workers hired in 2018.

Option 2 would decrease the FERS contribution rate to 0.8 percent for all employees (from 4.4 percent for employees hired after 2013 and from 

3.1 percent for employees hired in 2013).

Option 3 would decrease FERS pensions by basing the retirement benefit on the five years of highest salary (instead of three years of highest salary).

Option 4 would eliminate the FERS pension, increase the government’s automatic TSP contribution to 8 percent of salary, and require the government to 

match employees’ contributions up to an additional 7 percent.

Option 5 would eliminate the FERS pension, increase the government’s automatic TSP contribution to 10 percent of salary, and eliminate the 

government’s matching contribution.

These numbers approximate the share of workers’ salaries that would need to be set aside each year to fully fund those workers’ benefits. Retirement 

benefits and lifetime salary are discounted at a rate equal to the interest rate projected for 20-year Treasury securities.

FERS = Federal Employees Retirement System; TSP = Thrift Savings Plan.

Changes to the Pension Plan

The three options examined here would change the pension plan in FERS by increasing some employees’ contributions, decreasing some employees’ contributions, or 

changing the formula that determines the basic pension. 

Option 1. Increase Pension Contributions of Some 

Employees. Under this option, all employees enrolled 

in FERS would contribute 4.4 percent of their salary 

toward their pensions. The contribution rate would 

increase by 3.6 percentage points for employees who 
August 2017 Options for Changing the Retirement System for Federal Civilian Workers 23

Figure 6.

Current Pay and Share of Salary Contributed to the Pension Plan and TSP for Workers Hired in 2018, 

Under Current Law and Under Several Options

The current pay of federal employees varies depending on how much they are required to pay for their pension and how much they choose to save 

in TSP.

Percent

92.5

91.6

88.0

91.6

88.0

4.4

0.8

4.4

7.5

8.4

7.6

7.6

7.6

10.6

14.8

11.2

10.0

13.3

4.3

4.3

4.3

5. Eliminate Pension, Increase Government’s

TSP Contribution to 10 Percent

4. Eliminate Pension, Increase Government’s

TSP Contribution to a Maximum of 15 Percent

3. Change Pension Formula to High 5

2. Decrease Pension Contributions 

of Some Employees

1. Increase Pension Contributions 

of Some Employees

Current Law

Employees’ 

Contributions

Pension

TSP

Current Pay

Same as current law for workers hired in 2018

Salary

Government’s

Contributions

Source: Congressional Budget Office.

Estimates shown are for workers with no prior federal service who are projected to join the federal workforce in 2018 and receive a pension in 

retirement. 

Pay and contributions represent average values during workers’ federal service. Employees’ contributions to the pension plan are mandatory; 

contributions to TSP are optional. Current pay is salary minus employees’ required contributions to the pension plan and voluntary contributions to TSP. 

Under current law, employees hired in 2018 will contribute 4.4 percent of their salary to the FERS pension. The government will make an automatic TSP 

contribution of 1 percent of salary and match employees’ contributions up to an additional 4 percent. 

Option 1 would increase the FERS contribution rate to 4.4 percent for current employees (from 0.8 percent for employees hired before 2013 and from 

3.1 percent for employees hired in 2013). Option 1 is the same as current law for workers hired in 2018.

Option 2 would decrease the FERS contribution rate to 0.8 percent for all employees (from 4.4 percent for employees hired after 2013 and from 

3.1 percent for employees hired in 2013).

Option 3 would decrease FERS pensions by basing the retirement benefit on the five years of highest salary (instead of three years of highest salary).

Option 4 would eliminate the FERS pension, increase the government’s automatic TSP contribution to 8 percent of salary, and require the government 

to match up to an additional 7 percent.

Option 5 would eliminate the FERS pension, increase the government’s automatic TSP contribution to 10 percent of salary, and eliminate the 

government’s matching contribution.

A discount rate equal to the interest rate projected for 20-year Treasury securities was used in the calculation of present discounted values. 

FERS = Federal Employees Retirement System; TSP = Thrift Savings Plan.
24 Options for Changing the Retirement System for Federal Civilian Workers August 2017

enrolled in FERS before 2013 and by 1.3 percentage 

points for employees who enrolled in FERS in 2013. 

The increased contribution rates would be phased in 

between 2018 and 2021. Future pensions would not 

change under the option, and the option would not 

affect employees hired in 2014 or later. Those employees 

already contribute 4.4 percent of their salary toward the 

pension plan. Agencies’ contributions would remain the 

same.37

Effect on Federal Spending on a Cash Basis. The first 

option would reduce the government’s net outflows 

associated with the retirement system by $47 billion 

from 2018 through 2027. As a result, CBO estimates, 

the government’s net costs for FERS pensions and 

37. An increase in the employees’ contribution rate could cause 

more employees who separate early to take a refund of their 

contributions, which in turn could slightly raise gross outlays 

for retirement benefits and might raise the share of salaries that 

agencies have to contribute to the CSRDF to fully fund the 

benefits of the remaining workers. CBO did not take such effects 

into account because no information was available on workers’ 

refund rates under different contribution rate regimes.

TSP contributions would be about 3 percent less over 

75 years under this option than under current law in 

present-value terms—that is, considered as a single lump 

sum in today’s dollars. The option would mostly affect 

revenues, which would increase as the amount that the 

federal government collects from employees’ contributions to FERS increases. Outlays would also increase 

somewhat under the option because of an increase in 

refunds to employees who leave federal service and 

withdraw the contributions that they have made to the 

pension. The effect of the option, in present-value terms 

over the 75-year period, would be a reduction in net outflows of 0.005 percent of the present value of GDP over 

the same period (see Table 5 on page 21).

Because the option would only affect the contributions 

of employees hired before 2014, most of the revenue 

increases would occur in the years immediately following 

implementation, with a peak in 2021 (the last year of the 

phase-in period). Revenue increases would build up and 

then gradually dissipate as employees hired before 2014 

leave federal service (see Figure 7).

Figure 7.

Change in the Government’s Net Outflows for FERS if Pension Contributions of Some Employees Were 

Increased (Option 1)

Over the 75-year period, net outflows for the pension plan and TSP under the option would be 3 percent lower than net outflows under current law.

Percentage of Gross Domestic Product

-0.030

-0.025

-0.020

-0.015

-0.010

-0.005

0.000

2017 2025 2033 2041 2049 2057 2065 2073 2081 2089

Source: Congressional Budget Office.

Option 1 would increase the FERS contribution rate to 4.4 percent for current employees (from 0.8 percent for employees hired before 2013 and from 

3.1 percent for employees hired in 2013).

Net outflows for FERS pensions include outlays for pension benefits minus revenues from employees’ contributions to the pension plan. The amount 

shown for each year is the change in net outflows that would occur in that particular year under the option. 

FERS = Federal Employees Retirement System.
August 2017 Options for Changing the Retirement System for Federal Civilian Workers 25

Effect on Federal Spending on an Accrual Basis. Because 

the first option would affect only current workers, on an 

accrual basis retirement costs for the cohort of federal 

civilian workers hired in 2018 would remain unchanged 

from current law (see Figure 5 on page 22).

Effect on Workers’ Current Pay. Current pay would decline 

for federal civilian workers hired before 2013 by 3.6 percentage points of their salary and would decline for 

those hired in 2013 by 1.3 percentage points.38 Because 

workers hired in 2018 will already contribute 4.4 percent 

under current law, the option would not affect their 

current pay, their contributions toward their pensions, or 

the costs to the government of their retirement benefits 

(see Figure 6 on page 23). 

Effect on Workers’ Retirement Income. Option 1 would 

slightly reduce the retirement income that some federal 

workers receive. Because the option would not alter the 

formula that determines the pension, changes in federal 

retirement income would result only from changes in 

years of federal service or employees’ contributions to 

TSP. A decrease in average years of service would lead to 

a reduction in the average replacement rate that workers 

receive from their pension. It would also lead to lower 

TSP balances as a result of the shorter period over which 

workers would receive employers’ automatic and matching contributions. Because the option would decrease 

employees’ current pay, it could also affect workers’ 

replacement rates by affecting their contributions to TSP. 

CBO did not estimate those effects because of considerable uncertainty surrounding them. 

Effect on Recruitment. Option 1 would not affect the federal government’s ability to recruit new employees. That 

is because employees hired in 2014 or later (as all new 

employees would be) would be unaffected by the option. 

Effect on Retention. The option would lead to a modest increase in the number of employees who chose to 

leave federal service over the next 10 years. The most 

experienced and highly qualified employees would be 

the most likely to resign because of a rise in the employees’ contribution rate. That is in part because the most 

experienced employees have served long enough to be 

38. Those increases in contributions correspond to slightly bigger 

percentage declines in after-tax compensation because employee 

contributions are subject to income and payroll taxes. However, 

the income tax implications are outside the scope of this report.

eligible for a FERS pension immediately upon leaving 

the federal workforce and are forgoing pension payments 

by remaining in federal service. Some of those employees 

would choose to retire instead of making larger contributions to the pension plan in addition to forgoing 

payments. Also, some of the most highly qualified federal 

employees have more lucrative job opportunities in the 

private sector than in the federal government, in part 

because private-sector salaries have grown faster than federal salaries since 2010. More of those employees would 

leave for the private sector under Option 1. Beyond the 

next 10 years, the effect of the option on retention rates 

would dissipate as the portion of the workforce subject 

to the increased pension payment shrank.

Option 2. Decrease Pension Contributions of Some 

Employees. Under this option, all employees would 

contribute 0.8 percent of their salary toward the pension. 

The contribution rate would not change for employees 

who enrolled in FERS before 2013. It would decline 

from 3.1 percent for those hired in 2013 and from 4.4 

percent for those hired in 2014 or later. The formula for 

calculating defined benefit pensions would not change 

under the option. Agencies’ contributions for employees 

hired in 2013 or later would increase to ensure that the 

retirement pensions for those employees remained fully 

funded.

Effect on Federal Spending on a Cash Basis. The option 

would increase the government’s net outflows associated with the retirement system by $32 billion from 

2018 through 2027. In present-value terms, the government’s net costs for FERS pensions and TSP would 

be 13 percent larger over the 75-year projection period 

than they would be under current law, CBO estimates. 

Revenues would decline as the amount that the federal 

government collected from employees’ contributions to 

FERS decreased. Outlays would decline somewhat under 

the option because of a decrease in the refunds paid 

to employees who leave federal service and withdraw 

the contributions that they have made to the pension. 

The effect of the option in present-value terms over the 

75-year period would be an increase in net outflows of 

0.02 percent of the present value of GDP over the same 

period (see Table 5 on page 21). 

Because the reduction in employees’ contributions 

would be paralleled by an equivalent increase in the 

government’s contribution rate for the pension, agencies 

would require larger appropriations (all else being equal). 
26 Options for Changing the Retirement System for Federal Civilian Workers August 2017

However, those contributions are intragovernmental 

transactions and the change in the amount would have 

no net effect on the budget.

Because the option would affect the contributions of 

employees hired in 2013 or later—including all future 

employees—the decrease in revenues would grow larger 

over time. Revenues would drop in 2018, the year of 

implementation, and continue to decline gradually. As a 

result, net outflows would increase in 2018 and gradually increase over time. However, they would eventually decline as a share of GDP, as the size of the federal 

workforce declines as a share of the total U.S. workforce, 

CBO projects (see Figure 8).

Effect on Federal Spending on an Accrual Basis. CBO 

estimates that Option 2 would increase the government’s 

net retirement costs for new employees hired in 2018 

by 22 percent on an accrual basis. Net lifetime costs 

for retirement benefits would rise from 14.2 percent 

of salaries under current law to 17.3 percent of salaries 

under the option. The increase in the government’s 

accrual cost is somewhat smaller than the corresponding 

3.6 percentage-point reduction in employees’ contribution rate because the cost of funding the future benefits 

of the 2018 cohort is lowered by those employees who 

withdraw their contributions upon separating and give 

up their rights to a pension. 

Effect on Workers’ Current Pay. Option 2 would increase 

the current pay of federal civilian workers hired after 

2013 by 3.6 percentage points of their salary and the 

current pay of federal civilian workers hired in 2013 by 

2.3 percentage points (see Figure 6 on page 23). The 

average worker hired in 2018 who went on to receive 

a pension would contribute 0.8 percent to the pension 

plan and 7.6 percent to TSP for a combined employee 

savings rate of 8.4 percent during his or her service, compared with 12.0 percent under current law. 

Effect on Workers’ Retirement Income. Because Option 2 

would change only employees’ contributions, not the 

pension formula, CBO projects that it would only 

modestly change workers’ retirement income, and 

that change would occur through a possible increase 

in expected years of federal service. An increase in the 

Figure 8.

Change in the Government’s Net Outflows for FERS if Pension Contributions of Some Employees Were 

Decreased (Option 2)

Over the 75-year period, net outflows for the pension plan and TSP under the option would be 13 percent higher than net outflows under current law.

Percentage of Gross Domestic Product

0.000

0.005

0.010

0.015

0.020

0.025

0.030

2017 2025 2033 2041 2049 2057 2065 2073 2081 2089

Source: Congressional Budget Office.

Option 2 would decrease the FERS contribution rate to 0.8 percent for all employees (from 4.4 percent for employees hired after 2013 and from 

3.1 percent for employees hired in 2013).

Net outflows for FERS pensions include outlays for pension benefits minus revenues from employees’ contributions to the pension plan. The amount 

shown for each year is the change in net outflows that would occur in that particular year under the option. 

FERS = Federal Employees Retirement System.
August 2017 Options for Changing the Retirement System for Federal Civilian Workers 27

average years of service before retirement could lead to 

an increase in the average replacement rate that workers 

receive from their pension and could also lead to higher 

TSP balances as a result of the longer period over which 

the workers receive automatic and matching contributions from the government. Because the option would 

increase employees’ current pay, it could also affect their 

retirement income by causing them to increase contributions to TSP. CBO did not estimate those effects because 

of considerable uncertainty surrounding the effect of the 

option on workers’ behavior.

Under this option, the federal government would fund 

a larger share of its employees’ retirement income than 

it would under current law. The employing agencies of 

workers hired in 2018 who go on to receive a pension 

would incur total costs for the pension and TSP equal to 

19.1 percent of workers’ salaries, up from 15.5 percent 

under current law (see Figure 6 on page 23).

Effect on Recruitment. Option 2 would enable the 

government to recruit a more highly qualified workforce 

by substantially decreasing the amount new workers 

pay for the pension. In particular, reducing employees’ 

contribution rates would make the pension plan more 

appealing to workers who are uncertain how long 

they would be in federal service. Using 26-year-old 

job candidates who expect to serve for 10 years as 

an example, CBO estimates that the net value of the 

pension for the candidates would be $9,000 under this 

option, compared with −$4,000 under current law 

(see Figure 3 on page 17). (The latter amount stems 

from the difference between the amount of interest 

workers would receive on their past contributions if they 

withdrew from FERS upon leaving federal employment, 

and the value they would have placed on being able to 

spend those contributions when they were earned.) More 

generally, the option would boost the net value of the 

pension regardless of how long the job candidate planned 

to stay in federal service. 

Effect on Retention. Option 2 would also help the government retain a highly qualified workforce by reducing the 

number of recently hired employees who choose to leave 

federal service over the next 10 years. The gains in retention would probably grow in later years as the portion of 

the workforce subject to the option expanded.

Option 3. Change the Pension Formula to High 5.

This option would change how earnings are measured 

when calculating the FERS pension payment. Under 

the option, average earnings would be calculated using 

the five consecutive years of employees’ highest earnings, 

rather than three years. 

Effect on Federal Spending on a Cash Basis. Compared 

to current law, Option 3 would decrease the amount 

that the federal government pays for retirement benefits 

by $3 billion over the next 10 years. It would decrease 

spending on FERS pensions and TSP by 3 percent over 

75 years in present-value terms, CBO estimates. Revenues would not be affected because contributions would 

be unchanged. The effect of the option would be to 

reduce outlays by 0.004 percent of the present value of 

GDP over the same period (see Table 5 on page 21). 

Because Option 3 would affect only future pension 

recipients, the savings would increase gradually over time 

as more federal employees retired under the new rules, 

and then decline slightly as a share of GDP, as the federal 

civilian workforce declines as a share of the total U.S. 

workforce, CBO projects. As a result, the outlay savings 

would decline gradually over the next 30 years as a percentage of GDP (see Figure 9).

Effect on Federal Spending on an Accrual Basis. The 

option would reduce the government’s net retirement 

costs by 3.5 percent on an accrual basis for the cohort of 

federal civilian workers hired in 2018 (see Figure 5 on 

page 22).

Effect on Workers’ Current Pay. Option 3 would only affect 

future pension payments. It would not affect workers’ 

current pay or their contributions to retirement, which 

would remain the same as under current law. 

Effect on Workers’ Retirement Income. Because 

Option 3 would change the formula that determines 

the FERS pension, CBO projects that it would lead 

to a modest reduction in retirement income. Workers might choose to offset some of the decline in their 

retirement income by saving more in their TSP accounts. 

The degree to which federal employees might do that, 

however, would depend on how close to retirement they 

are and what other private savings they have. CBO could 

not examine the effects of this option on TSP contributions because of a lack of information on federal workers’ 

private savings.
28 Options for Changing the Retirement System for Federal Civilian Workers August 2017

Because of the reduction in the pension benefit, 

employing agencies would fund a smaller portion of 

their employees’ retirement income than they would 

under current law. The employing agencies of workers 

hired in 2018 who are projected to receive a pension in 

retirement would incur costs for the pension equal to 

10.6 percent of workers’ salaries and costs for the TSP 

equal to 4.3 percent of workers’ salaries, for a combined 

total cost of 14.9 percent of salary under the option, 

compared with 15.5 percent under current law.

Effect on Recruitment. The option would have a small 

effect on the government’s ability to attract highly qualified workers because it would only modestly reduce the 

retirement benefit they would receive. The effect would 

also be small in that many potential hires are probably 

insensitive to modest changes in the size of the pension 

because they are uncertain whether they will remain in 

federal service long enough to receive it.

Effect on Retention. Option 3 would cause a small 

reduction in retention rates for midcareer employees 

but increase retention rates slightly for employees who 

are already at an age at which they can retire. Midcareer 

employees would have less incentive to remain until they 

are eligible for a pension because that pension would be 

smaller. Some employees who are eligible to retire would 

postpone departure to compensate for the retirement 

income lost under the option. 

Generally, reducing pensions might be less harmful to 

the federal government’s ability to compete with the 

private sector in attracting and retaining highly qualified 

personnel than a reduction in current pay might be. 

The reason is twofold. First, research indicates that past 

changes in retirement benefits have had less effect on 

recruitment and retention than past changes in salaries.39

Second, lower pension payments would make the mix 

between current pay and retirement income offered 

39. Specifically, CBO found that locality-based salary increases 

had a larger effect on retention than the change in retirement 

benefits between CSRS and FERS. Other research indicates that 

the number of workers applying for federal jobs increased when 

federal salaries compared more favorably with private-sector 

salaries, whereas the relative generosity of federal benefits was not 

associated with an increase in the number of job applicants. See 

Alan B. Krueger, “The Determinants of Queues for Federal Jobs,” 

Industrial and Labor Relations Review (July 1988), pp. 567–581, 

http://ilr.sagepub.com/content/41/4/567.abstract.

Figure 9.

Change in the Government’s Net Outflows for FERS if the Pension Formula Was Changed to High 5 

(Option 3)

Over the 75-year period, net outflows for the pension plan and TSP under the option would be 3 percent lower than net outflows under current law.

Percentage of Gross Domestic Product

-0.030

-0.025

-0.020

-0.015

-0.010

-0.005

0.000

2017 2025 2033 2041 2049 2057 2065 2073 2081 2089

Source: Congressional Budget Office.

Option 3 would decrease FERS pensions by basing the retirement benefit on the five years of highest salary (instead of three years of highest salary).

Net outflows for FERS pensions include outlays for pension benefits minus revenues from employees’ contributions to the pension plan. The amount 

shown for each year is the change in net outflows in that particular year that would occur under the option. 

FERS = Federal Employees Retirement System.
August 2017 Options for Changing the Retirement System for Federal Civilian Workers 29

by the federal government more like that offered by 

private-sector employers. Reductions in salaries, in 

contrast, would make the difference in that mix even 

bigger. 

Replacing the Pension With Larger Government 

Contributions to TSP for New Employees

During recent decades, many private-sector companies 

have restructured the retirement benefits that they offer 

to employees. In most cases, those private-sector employers switched from defined benefit to defined contribution 

retirement programs. 

Some state and local governments have also restructured 

their pension plans, although they have typically opted 

to preserve their traditional defined benefit plans while 

shifting away from complete reliance on those plans. 

Instead, they offer defined contribution plans as alternatives or offer hybrid plans that reduce the defined benefit 

and add or increase defined contribution options.

The shift toward defined contribution plans has generally reduced employers’ uncertainty about costs in the 

future.40 From the employees’ perspective, the shift has 

made it easier to change jobs because they can more 

easily carry retirement benefits from one employer to 

another. At the same time, however, it has reduced financial security for employees, who take on more responsibility for saving enough for retirement over the course of 

their careers and for investing those savings wisely.

Under both options in this section, the pension plan 

would be eliminated for federal workers hired in 2018 

and later. Agencies’ contributions to TSP would increase 

for those workers to partially or fully offset the decline 

in retirement benefits associated with the elimination of 

the pension. For workers hired before 2018, the defined 

benefit and the TSP benefit would remain the same as 

under current law. 

40. In a pension plan, employers bear risk related to investment 

returns on the resources set aside to pay out the benefits when 

they are due and the length of time over which pensions 

would have to be paid. Funding shortfalls and stock market 

volatility have resulted in some private-sector and state and local 

government plans being underfunded. In contrast, in a defined 

contribution plan, the employer makes regular contributions 

to savings accounts that are owned by the workers and thus 

does not face risks related to investment returns or workers’ life 

expectancy. 

Because the two options differ only in the structure and 

amount of the employer’s TSP contribution, they would 

have similar types of effects on compensation, recruitment, and retention, but the effects of each option would 

differ in magnitude.

The options in this section are illustrative. The amounts 

of the agencies’ contributions to TSP could be set at 

various other levels.

Specifically, the two options are the following: 

 Option 4. Eliminate the pension plan; increase 

the government’s automatic TSP contribution to 

8 percent of salary, and require the government to 

match up to 7 percent of additional contributions for 

new employees, for a total contribution of as much as 

15 percent.

 Option 5. Eliminate the pension plan, increase the 

employer’s automatic TSP contribution to 10 percent 

of salary, and eliminate the employer’s matching 

contribution for new employees.

Option 4. Eliminate the Pension and Increase the 

Government’s TSP Contribution to 8 Percent, Plus up 

to a 7 Percent Match. Under Option 4, agencies’ automatic contributions to TSP would increase to 8 percent 

of salary (from 1 percent under current law) and employers would match employees’ contributions according to 

the following schedule: The first 5 percent of salary that 

an employee contributes would be matched dollar for 

dollar; the next 4 percent would be matched at 50 cents 

on the dollar; and any contributions above 9 percent 

of pay would not be matched. Employees who want 

to maximize their employer’s matching contributions 

would contribute 9 percent of their salary to TSP and 

receive an employer’s contribution of 15 percent of salary 

(the 8 percent automatic contribution and 7 percent 

matching contribution), for a total of 24 percent of pay 

contributed to the workers’ TSP accounts. 

Under the option, all new employees would automatically be enrolled in TSP at a default contribution rate 

of 5 percent of salary (an increase from 3 percent under 

current law). A worker who does not change his or her 

contribution rate would receive a 13 percent contribution from his or her agency (an 8 percent automatic contribution and a 5 percent matching contribution). TSP 

participants would be immediately vested in (entitled to) 
30 Options for Changing the Retirement System for Federal Civilian Workers August 2017

their own contributions and the employers’ automatic 

and matching contributions. A participant in TSP would 

be allowed to change his or her contribution rate, subject 

to limits set by the Internal Revenue Service.41

Also under the option, the ability of retirees to continue 

their health insurance coverage through the Federal 

Employees Health Benefits program into retirement 

would remain the same. That is, though the FERS 

pension would be eliminated, CBO assumed that the 

rules regarding eligibility for health insurance coverage 

for retirees would be adjusted so that eligibility for such 

coverage would not change.42

Option 5. Eliminate the Pension and Increase the 

TSP Contribution to 10 Percent. Under Option 5, 

agencies’ automatic contributions to TSP would increase 

to 10 percent of salary (from 1 percent under current 

law) and the employer match would be discontinued. All 

new employees under the option would be automatically 

enrolled in TSP at a default contribution rate of 5 percent of salary (from 3 percent under current law). TSP 

participants would be immediately vested in (entitled to) 

their own contributions and their employer’s automatic 

contributions. Workers who do not change their default 

contribution rates would have a total of 15 percent of 

salary contributed to their TSP accounts each period. 

As under Option 4, the ability of retirees to continue 

their health insurance coverage through the FEHB 

program into retirement would remain the same. That 

41. Employees’ and employers’ contributions to TSP are subject 

to IRS limits. In 2017, employees’ contributions are limited 

to $18,000 (combined traditional and Roth) and combined 

employee and employer contributions are limited to $54,000. 

Individuals over age 50 are allowed an additional $6,000 of 

catch-up contributions. Under current law, changes to those 

thresholds are related to changes in the consumer price index. In 

the projections, CBO modeled those limits to increase over time 

at the rate of growth of wages in order to keep constant the share 

of employees for whom the limits impose a constraint on savings. 

Under such a projection, CBO does not expect those limits to 

impose significant restrictions on employees’ TSP contributions. 

For example, in 2017, a 9 percent employee contribution rate, 

needed for receiving the full employer match under Option 4, 

would be barred by the IRS limits only for federal employees 

earning more than $200,000 per year. In 2014, less than 5 

percent of federal employees contributed to TSP at the maximum 

allowed IRS limit. 

42. Under current law, workers who have had FEHB coverage during 

the five years preceding retirement and who are eligible for a 

pension can continue their FEHB enrollment into retirement. 

is, though the FERS pension would be eliminated, CBO 

assumed that the rules regarding eligibility for health 

insurance coverage for retirees would be adjusted so that 

eligibility for such coverage would not change.

Effects of Options 4 and 5. The two options would 

affect federal spending for employer-provided retirement benefits, as well as workers’ current pay, retirement 

income, recruitment, and retention. 

Effect on Federal Spending on a Cash Basis. Both options 

would increase net costs to the government over the next 

10 years. During that period, Option 4 would increase 

outlays by $52 billion, reduce revenues by $27 billion, 

and result in a $79 billion increase in net outflows. Over 

the same period, Option 5 would increase outlays by 

$31 billion and reduce revenues by $27 billion. Thus, 

Option 5 would result in a $58 billion increase in net 

outflows. The added outlays would result from the 

government’s larger contributions to the TSP accounts of 

newly hired workers; the revenue losses would stem from 

smaller contributions by employees to the pension plan 

because new hires would not be enrolled in that plan and 

would not contribute to it (see Table 5 on page 21).

Overall, on a cash basis Option 4 would result in net 

costs to the government that are 10 percent higher over 

the 75-year projection period than costs under current 

law, whereas Option 5 would result in net costs that are 

3 percent lower than under current law (see Table 5 on 

page 21).

Under both options, the federal government would start 

realizing savings on a cash basis as the workers affected 

by the options began to retire (see Figure 10). Under the 

options, the federal government would carry no further 

obligations and make no subsequent retirement payments to workers who are no longer in federal service. 

Starting in the 2050s, annual net outflows under the 

options would be smaller than under current law, CBO 

expects. 

Because the years in which these two options would have 

net costs to the government occur within the 75-year 

time horizon, but not all of the years of cash savings 

do, the accrual estimates provide a more comprehensive 

measure of their effects and are more informative when 

comparing costs under the options with costs under 

current law. 
August 2017 Options for Changing the Retirement System for Federal Civilian Workers 31

Effect on Federal Spending on an Accrual Basis. CBO 

projects that for the 2018 cohort, the net cost to the 

government of either option on an accrual basis would 

be lower than under current law. The government’s net 

retirement costs under current law would be about 14.2 

percent of salaries for the 2018 cohort. For that group, 

the government’s net costs are projected to be 13.3 

percent of salaries under Option 4 and 10.0 percent of 

salaries under Option 5 (see Figure 5 on page 22). The 

reason that both options cost less than current law on an 

accrual basis, but not on a cash basis, is because the net 

budgetary savings of the options on a cash basis would 

take longer than 75 years to be fully realized. 

CBO estimates that savings under the options would 

increase more for cohorts hired after 2018. The reason that those savings would increase over time is that 

projected costs under current law increase faster than 

projected costs under the options. CBO anticipates that 

lifetime retirement costs for future cohorts hired under 

current law would increase as a percentage of their lifetime salaries because of improvements in life expectancy 

and, consequently, longer projected receipt of pensions 

for future cohorts. Because CBO did not project corresponding increases in the length of workers’ careers, 

lifetime retirement costs for future cohorts hired under 

the options would remain roughly unchanged over time 

as a percent of those workers’ lifetime salaries. 

Effect on Workers’ Current Pay. The options would change 

the current pay of the affected workers. Because workers 

under both options would no longer be required to contribute 4.4 percent of pay to the pension plan, their current pay would automatically increase. However, because 

workers contribute to TSP on a voluntary basis, it is 

more difficult to predict how their contributions would 

change under the options. CBO judged that the higher 

matching contributions and the higher default contribution rate under the options would result in employees’ making a larger contribution to TSP, on average, 

Figure 10.

Change in the Government’s Net Outflows for FERS if the Pension Was Eliminated and the Government’s 

TSP Contribution Was Increased (Options 4 and 5)

Over the 75-year period, net outflows for the pension plan and TSP under Option 4 would be 10 percent higher than outflows under current law, and 

net outflows under Option 5 would be 3 percent lower than net outflows under current law.

Percentage of Gross Domestic Product

4. Eliminate Pension, Increase Government’s 

TSP Contribution to a Maximum of 15 Percent

5. Eliminate Pension, Increase Government’s 

TSP Contribution to 10 Percent

-0.10

-0.06

-0.02

0.02

0.06

0.10

2017 2025 2033 2041 2049 2057 2065 2073 2081 2089

Source: Congressional Budget Office.

Option 4 would eliminate the FERS pension, increase the government’s automatic TSP contribution to 8 percent of salary, and require the government 

to match employees’ contributions up to an additional 7 percent for new employees.

Option 5 would eliminate the FERS pension, increase the government’s automatic TSP contribution to 10 percent of salary, and eliminate the 

government’s matching contributions for new employees.

Net outflows for FERS pensions include outlays for pension benefits minus revenues from employees’ contributions to the pension plan. For TSP, 

net outflows are the government’s contributions to employees’ TSP accounts. The amount shown for each year is the change in net outflows in that 

particular year that would occur under the option. 

FERS = Federal Employees Retirement System; TSP = Thrift Savings Plan.
32 Options for Changing the Retirement System for Federal Civilian Workers August 2017

under Option 4 than under current law (see Figure 6 

on page 23). That higher contribution rate would 

offset some of the increase in current pay. Overall, CBO 

projects that the average current pay of workers affected 

by this option would be higher than their average current 

pay under current law. 

In contrast, CBO expects that the employees’ contribution rate to TSP would be similar under Option 5 to 

their contribution rate under current law, because the 

absence of matching contributions would reduce their 

contributions by about the same amount that increasing 

the default contribution rate to 5 percent would increase 

it. 

Under both options, agencies’ contributions toward the 

retirement benefits of their workers would be lower. 

Effect on Workers’ Retirement Income. CBO also projected 

the effects that the two options would have on workers’ 

retirement income as measured by their expected average 

replacement rate (federal retirement income as a percentage of preretirement earnings) at age 62. CBO projected 

that the average salary replacement rate for a worker 

hired in 2018 who leaves the federal government after 

15 years (the average length of federal service) would 

be about 21 percent under Option 4, about 17 percent 

under Option 5, and about 24 percent under current 

law. The lack of an employer match under Option 5, 

however, might discourage some workers from contributing to the plan and could further reduce their TSP 

accumulations and replacement rate beyond what CBO 

has projected.43

Unlike pension benefits, retirement benefits under the 

defined contribution plan accumulate more evenly over 

a worker’s tenure. As a result, for workers who join the 

federal workforce relatively young (in their 20s) and 

remain for 15 years, average replacement rates would 

43. Although the presence of an employer match has been shown to 

increase the share of workers who participate and contribute to 

a defined contribution plan, more recent studies have indicated 

that the effect of automatic enrollment might be stronger than 

that of the employer match. For example, one study finds that 

automatic enrollment raises participation even in the absence 

of more traditional plan features known to be effective, such as 

the employer match. See John Beshears and others, “The Impact 

of Employer Matching on Savings Plan Participation Under 

Automatic Enrollment,” in David A. Wise, ed., Research Findings 

in the Economics of Aging (University of Chicago Press, 2010), pp. 

11–327, www.nber.org/chapters/c8208.

be higher than those under current law under Option 

4 and roughly on par with current law under Option 5 

(see Figure 11). For workers who join the federal workforce in their 40s, average replacement rates under both 

options would be lower than average replacement rates 

under current law. 

CBO projected workers’ TSP accumulations and converted them into annuities using the rate of return on 

20-year Treasury securities, thereby equalizing the risks 

to employees in the defined benefit and defined contribution plans. (For additional details, see the appendix.) 

In doing so, CBO was able to compare replacement rates 

under current law and under the options examined here 

while holding workers’ investment risk constant. However, under both Option 4 and Option 5, most employees could expect higher long-run returns, on average, 

than that calculation would indicate, but they would also 

expose themselves to more investment and market risk 

under the options than under current law; depending on 

their investment returns, some workers would be worse 

off. 

In addition, unless workers purchased an annuity with 

their TSP balances, they would also expose themselves to 

the risk of outliving their resources—a risk that they are 

partially insured against by the pension.44

Effect on Recruitment. Changes in workers’ current pay 

and retirement income under the options would affect 

recruitment and retention. Increasing the maximum 

agency TSP contribution to 15 percent under Option 4 

would probably improve recruitment more than eliminating the pension would hamper it. In particular, many 

prospective employees who are uncertain how long they 

will stay in federal service might prefer the agency’s additional contributions over the pension because they could 

keep most of the agency’s contributions no matter when 

they left the federal workforce. Moreover, portability 

across employers and the more even accrual of benefits in 

TSP would make workers’ projected retirement income 

under the options less dependent on their high-3 salary 

and their expected tenure with the federal government—

both of which are highly uncertain. However, under the 

option, workers would bear more investment risk than 

44. CBO’s analysis captures the approximate value of TSP 

contributions but does not attempt to incorporate the fees that 

would stem from purchasing annuities in the private market, as 

very few people choose to annuitize their TSP balances.
August 2017 Options for Changing the Retirement System for Federal Civilian Workers 33

Figure 11.

Average Share of Preretirement Earnings Replaced at Age 62 or at Retirement for Workers Hired in 2018 

Who Leave Federal Service After 15 Years Under Current Law, Option 4, and Option 5

For federal workers hired in their 20s in 2018 who remain for the average length of service, 15 years, average replacement rates under the two 

options to eliminate the pension and increase TSP contributions would be about the same as under current law, or higher. For federal workers hired in 

their 40s in 2018, those rates would be lower than under current law.

5. Eliminate Pension, Increase Government’s

TSP Contribution to 10 Percent

4. Eliminate Pension, Increase Government’s

TSP Contribution to a Maximum of 15 Percent

Current Law

Ages 40 to 49 at Date Hired

Share of Preretirement Earnings

15

19

10 14

0 15 30

5. Eliminate Pension, Increase Government’s

TSP Contribution to 10 Percent

4. Eliminate Pension, Increase Government’s

TSP Contribution to a Maximum of 15 Percent

Current Law

Ages 30 to 39 at Date Hired

17

21

11 8

0 15 30

5. Eliminate Pension, Increase Government’s

TSP Contribution to 10 Percent

4. Eliminate Pension, Increase Government’s

TSP Contribution to a Maximum of 15 Percent

Current Law

Ages 20 to 29 at Date Hired

TSP Pension

19

24

12 7

0 15 30

Source: Congressional Budget Office.

Estimates shown are for workers with no prior federal service who will join the federal workforce in 2018 and leave federal service after 15 years. 

Those workers would generally receive a pension in retirement. 

Under current law, employees hired in 2018 will contribute 4.4 percent of their salary to the FERS pension plan. The government will make an 

automatic TSP contribution of 1 percent of salary and match employees’ contributions up to an additional 4 percent. 

Option 4 would eliminate the FERS pension, increase the government’s automatic TSP contribution to 8 percent of salary, and require the government 

to match employee’s contributions up to an additional 7 percent.

Option 5 would eliminate the FERS pension, increase the government’s automatic TSP contribution to 10 percent of salary, and eliminate the 

government’s matching contribution.

Replacement rates were calculated at age 62 or at the age of retirement from federal service, whichever is later. Preretirement earnings were 

measured as workers’ average earnings in the last three years before retirement, adjusted for average growth in economywide earnings if they left 

federal service before becoming eligible for an immediate pension. Retirement income is the pension plus the annuitized value of workers’ TSP account 

balances at the time of retirement. The projected TSP account balances include the accumulated employers’ and employees’ contributions and the 

investment returns on those contributions. Retirement income excludes payments from Social Security, other employer-sponsored retirement plans, 

and personal savings. 

The length of the bars reflects unrounded numbers.

FERS = Federal Employees Retirement System; TSP = Thrift Savings Plan.
34 Options for Changing the Retirement System for Federal Civilian Workers August 2017

they do under current law because more of their retirement income would come from TSP.

Option 5 would also reduce the uncertainty about 

retirement income that stems from prospective employees’ being unsure if they would remain in federal service 

long enough to receive a substantial pension. However, 

the option would reduce the average amount of retirement income and workers would bear more investment 

risk than they do under current law, which could lessen 

the attractiveness of the overall compensation package 

provided by the federal government. CBO could not 

determine whether, on average, the decrease in qualified applicants that would result from the reduction 

in compensation and the increase in investment risk 

would be smaller or larger than the increase in qualified 

applicants resulting from the elimination of uncertainty 

over whether they would serve long enough to receive 

a pension. However, positions that require professional 

and advanced degrees might become particularly difficult 

to fill, because federal workers with those qualifications 

already receive less compensation than their private-sector counterparts do, on average.45

45. See Congressional Budget Office, Comparing the Compensation of 

Federal and Private-Sector Employees, 2011 to 2015 (April 2017), 

www.cbo.gov/publication/52637.

Effect on Retention. Option 4 and Option 5 would 

increase retention among early-career employees as 

well as those who would have been eligible for retirement under current law but reduce it among midcareer 

employees. For about the first15 years of their careers, 

most employees would accrue more benefits under those 

options than they would under current law. Put another 

way, the increase in agencies’ contributions to their 

employees’ TSP accounts would more than offset the loss 

of the pension after taking into account the cost employees incur in contributing to the pension (see Figure 12). 

From about year 20 until they are eligible to retire, most 

employees would accrue much less benefit under Option 

4 and Option 5 than under current law, giving employees at that stage of their careers less incentive to stay. 

Employees who would have stayed long enough to collect a pension would be more likely to remain employed 

with the federal government past that age under both 

options, because doing so would no longer entail forgoing pension payments. Because agencies would provide 

more TSP contributions under Option 4 than Option 5, 

Option 4 would give a larger boost to early-career retention and reduce midcareer retention by less.
August 2017 Options for Changing the Retirement System for Federal Civilian Workers 35

Figure 12.

How the Value of the Pension and TSP to an Employee Hired at Age 26 Changes With an Additional Year of 

Service Under Current Law, Option 4, and Option 5

Percentage of Salary

-30

0

30

60

90

120

26 30 34 38 42 46 50 54 58 62 66

Source: Congressional Budget Office.

Estimates shown are for workers who are hired at age 26 and who would wait to begin receiving pension payments until they are eligible for the full 

amount instead of taking reduced payments that begin at an earlier age. Current law estimates shown here differ from those shown for 4.4 percent of 

salary contributed in Figure 3 in four ways. One, estimates shown here are for the combined value of the pension and TSP instead of just the pension. 

Two, payments and contributions are discounted back to each age here as opposed to age 26. Three, this figure shows changes in the accrued value 

from one year to the next as opposed to the cumulative accrued value. Four, estimates here are as a percentage of salary rather than in thousands of 

dollars.

Under current law, employees hired after 2013 contribute 4.4 percent of their salary to the FERS pension. The government makes an automatic TSP 

contribution of 1 percent of salary, and matches employees’ contributions up to an additional 4 percent. 

Option 4 would eliminate the FERS pension, increase the government’s automatic TSP contribution to 8 percent of salary, and require the government 

to match employees’ contributions up to an additional 7 percent.

Option 5 would eliminate the FERS pension, increase the government’s automatic TSP contribution to 10 percent of salary, and eliminate the 

government’s matching contribution.

The value of the pension and the TSP is the discounted value of larger pension payments and the government’s additional contributions to TSP from 

an additional year of federal service minus the employee’s contributions to the pension. Payments and contributions are discounted back to the 

employee’s age at a rate equal to the interest rate projected for 20-year Treasury securities plus about 2 percentage points to illustrate the value of the 

pension and TSP at each age.

Employees enrolled in FERS participate in Social Security under current law and would continue to do so under both options. Those benefits are not 

included in this analysis.

FERS = Federal Employees Retirement System; TSP = Thrift Savings Plan.

4. Eliminate Pension, Increase Government’s

TSP Contribution to a Maximum of 15 Percent

5. Eliminate Pension, Increase Government’s 

TSP Contribution to 10 Percent

Current Law

Years of Service Are 

Multiplied by a Larger 

Factor to Determine 

the Pension Benefit Will Become Eligible for 

Pension Benefits at Age 60

Will Become Eligible for 

Pension Benefits at Age 57

Age
APPENDIX

Appendix: CBO’s Analytic Approach

This appendix summarizes the approaches this 

report takes in projecting the outlays and 

revenues of the federal retirement systems on 

a cash basis; in estimating federal retirement 

costs on an accrual basis; and in projecting the changes 

in the compensation, recruitment, and retention of 

federal civilian workers if the federal retirement systems 

were changed. 

How CBO Projected Outlays and 

Revenues of the Federal Retirement 

Systems in the Long Term

The Congressional Budget Office relied on data from 

several sources to project the number of people receiving retirement benefits from the federal government, 

the number of federal employees making contributions 

to the Civil Service Retirement and Disability Fund 

(CSRDF), and the outlays and revenues for each group. 

CBO then estimated total outlays and revenues for the 

federal retirement systems based on those projections. 

Those estimates of total outlays and revenues are presented as annual amounts over the next 10 years and as 

a share of gross domestic product (GDP) over the next 

75 years.

Data Sources

CBO used data from multiple sources. Information used 

to project the number of people receiving benefits from 

the federal retirement systems (retirees or their surviving 

spouses or children, if eligible) as well as the number of 

federal employees contributing to CSRDF was provided 

by the Office of Personnel Management (OPM). The 

most recent data available when this report was prepared 

were for 2015. Information used to project both average 

outlays and average revenues per person was provided 

by OPM and the Federal Retirement Thrift Investment 

Board (FRTIB). OPM provided information as of 

2015 on benefit amounts for current retirees and their 

surviving dependents, and on employees’ salaries. That 

information was used to project average annual outlays 

for retirees’ benefits and average annual revenues from 

employees’ contributions to the pension plan (which are 

a share of employees’ salaries). 

FRTIB provided information on the participation of 

current employees and the contributions of current 

participants to the Thrift Savings Plan (TSP). The most 

recent data available from FRTIB were for 2014. That 

information was used to project average annual federal 

payments to employees’ TSP accounts. 

Projecting the Number of Retirees and Employees

Future outlays and revenues in the federal retirement 

system will depend in part on the number of workers 

making contributions and the number of people receiving benefits. 

Under current law, CBO projects that the number of 

federal workers would remain unchanged after 2015 and 

over the next 10 years. Consistent with historical trends, 

CBO also projected that the size of the federal workforce would remain unchanged over the 75-year period. 

That is, CBO projected that the number of new federal 

civilian workers hired each year would equal the number of workers retiring or leaving the federal workforce 

that year. In those projections, the characteristics of new 

workers, such as sex, age, previous years of service, and 

average salary, are consistent with recent information on 

newly hired employees provided by OPM. OPM made 

similar projections in its CSRDF Annual Report.1

The number of people receiving benefits will depend not 

only on the number of workers but also on retirement 

and mortality rates. CBO used retirement and mortality 

rates employed by the CSRDF Board of Actuaries to 

project the number of benefit recipients in each year. The 

retirement rates differ by sex, age, years of service, and 

type of pension. The mortality rates differ by sex, year 

of birth, and type of pension; those rates incorporate 

declines in mortality at a given age over time. 

1. See Office of Personnel Management, Civil Service Retirement and 

Disability Fund Annual Report, Fiscal Year Ended September 30, 

2016 (February 2017), https://go.usa.gov/xRQ56. 
APPENDIX Options for Changing the Retirement System for Federal Civilian Workers 37

Projecting Outlays and Revenues

In addition to the number of retirees and workers, outlays and revenues also depend on the amount of spending and revenues per person. 

Spending consists of pension payments and agencies’ 

contributions to the TSP accounts of their employees. In 

turn, the size of pension payments and employer’s contributions depends on workers’ salaries. CBO projected 

workers’ salaries using earnings growth rates based on 

CBO’s long-term macroeconomic forecast of the economy and on rates for merit increases used by the CSRDF 

Board of Actuaries. CBO projected recipients’ pension 

amounts using the program rules and applying cost-ofliving increases that were consistent with CBO’s projections of inflation. Agencies’ contributions to TSP also 

depend on how much workers choose to contribute to 

their accounts. CBO projected employees’ participation 

and contributions to TSP using data from the FRTIB.

Revenues consist of employees’ contributions to the pension plan. CBO’s projections of those amounts are based 

on projections of workers’ salaries and the FERS rules.2

Estimating the Present Values of Future Outlays and 

Revenues

To present the results of the long-term projections succinctly, CBO summarized annual outlays and revenues as 

a single number that covers a given period by estimating 

the present value of those outlays and revenues. CBO 

estimated the present value of outlays and revenues for 

the 75-year horizon from 2017 through 2091. Such a 

measure facilitates comparison of the cash costs of the 

civilian federal retirement systems between current law 

and the options, especially when current law and the 

options differ in the timing of outlays or revenues.3

The present value of a given stream of future outlays or 

revenues depends on the rate of interest—known as the 

discount rate—that is used to translate those streams into 

current dollars. In estimating those present values, CBO 

used a discount rate equal to CBO’s long-term projection of the nominal rate of return on 20-year Treasury 

2. CBO did not analyze effects of the options on the federal 

government’s tax revenues or spending, other than those related 

to the federal retirement system.

3. CBO has used similar measures in other reports. See, for 

example, Congressional Budget Office, CBO’s 2016 Long-Term 

Projections for Social Security: Additional Information (December 

2016), www.cbo.gov/publication/52298.

securities.4 Twenty years is approximately the average 

maturity of the defined benefit obligations.

How CBO Projected Costs in the Federal 

Retirement Systems on an Accrual Basis

Using an accrual measure, CBO estimated net lifetime 

outflows for a given group of workers under current law 

and under the options, and expressed those outflows as 

a percentage of the lifetime salaries of that same group 

of workers. The measure approximates the percentage of 

workers’ salaries that needs to be set aside each year to 

fully fund those workers’ benefits.5

Net lifetime outflows are calculated as the sum of the 

discounted present values of the projected annual outlays 

for defined benefit pension payments (to the retired 

workers and their spouses and children, if eligible), 

minus employees’ contributions to the pension plan, plus 

the government’s contributions to TSP. Lifetime salaries 

are calculated as the sum of the discounted present values 

of the projected annual salaries of the examined group of 

workers. CBO used the same discount rate to estimate 

costs on an accrual basis as it did to estimate the present value of outlays and revenues on a cash basis for the 

75-year horizon.6

The discount rate does not account for the market risk 

borne by the government. For instance, future earnings by federal employees are uncertain. Because those 

earnings are used to determine pension payments to 

future retirees, the cost of those benefits to the federal 

government is also uncertain. In the future, CBO expects 

to analyze the accrual cost of federal retirement benefits 

under current law and under the options on a fair-value 

basis. The fair-value approach reflects the market value 

of the federal government’s obligations. In those calculations, CBO expects to use a discount rate that is higher 

4. The rate of return on 20-year Treasury securities is projected 

to be 2.7 percent in 2017 and to increase to 5.0 percent by 

2046—corresponding to rates of 1.0 percent and 3.0 percent, 

respectively, after removing the effects of inflation. It is 30 basis 

points higher than CBO’s long-term projection of the rate of 

return on 10-year Treasury securities.

5. The CSRDF’s actuaries use a similar concept to determine the 

percentage of pay that needs to be contributed to the fund in 

order to fully fund the pension benefits of a given group of 

employees.

6. CBO’s projections of wage growth, inflation, and interest rates 

(and discount rates) differ from those of the actuaries of the 

CSRDF.
38 Options for Changing the Retirement System for Federal Civilian Workers August 2017

than the rate on 20-year Treasury securities that would 

include a risk premium to reflect the cost of market risk 

borne by the government. 

How CBO Modeled the Effects of Changing 

the Pension and TSP on Retirement Income, 

Recruitment, and Retention

Changes to the Federal Employees Retirement System 

(FERS) can affect not only the federal budget but also 

the retirement income of federal employees, and, consequently, the government’s ability to attract and retain 

a qualified workforce. This section describes how CBO 

analyzed the effect of federal workers’ retirement plans 

on retirement income, recruitment, and retention under 

current law and under the options.

Modeling Retirement Income

To assess the effects of changes to the federal retirement 

system on workers’ retirement income, CBO projected such income for the first cohort of workers who 

would be affected by the options that would change 

the pension—those workers who would join the federal 

workforce in 2018. The agency examined how those 

workers’ retirement income would compare with their 

earnings before retirement—that is, the replacement 

rate—both under current law and under the options. 

CBO expects that the effects of the options on the 

replacement rates of workers who join the federal workforce later would be of similar magnitude but did not 

include those calculations in the analysis because that 

would have required projections beyond the 75-year 

horizon. 

Projecting Retirement Income. CBO projected the 

income that workers would receive in retirement from 

the defined benefit and defined contribution plans that 

they participated in during their federal service. CBO 

did not include retirement income from Social Security, 

from private savings, or from retirement plans from 

other employers in the calculation of retirement income 

because those data were not available.

CBO projected the monthly pension amount for workers 

who join the federal workforce in 2018 using information from OPM on the salaries of recently hired employees. It projected workers’ salaries using wage growth rates 

based on CBO’s long-term macroeconomic forecast of 

the economy and rates of merit increases used by the 

CSRDF Board of Actuaries. CBO projected recipients’ 

defined benefit amounts using the program rules and 

applying cost-of-living increases that were consistent 

with CBO’s projections of inflation. That information 

is needed because defined benefit pensions depend on 

workers’ earnings histories, age, and years of service at 

retirement. 

To project retirement income from the defined contribution plan, CBO projected the TSP balances that workers would accumulate and then estimated the annuity 

streams that workers could purchase with those balances. 

To project TSP balance accumulations for workers who 

join the federal workforce in 2018, CBO used data on 

TSP participants’ behavior from 2008 through 2014. 

CBO estimated participation rates, employees’ contribution rates, and the government’s contribution rates 

by workers’ age, years of service, and plan type. CBO 

then used those estimates of annual TSP contributions, 

together with a projected rate of return that equals 

the projected return on 20-year Treasury securities, to 

calculate workers’ account balances at retirement.7 Using 

that rate of return makes the risk associated with returns 

on TSP contributions equal to the risk associated with 

FERS pension benefits, making projected income from 

the defined benefit and defined contribution plans easily 

comparable. In projecting retirement income, CBO 

did not account for the potential effect that TSP loans, 

hardship withdrawals, or cash-outs upon leaving federal service could have on workers’ balances because of 

limited data.8

Beginning in August 2010, new federal employees 

were automatically enrolled in TSP; CBO took that 

7. Employees’ and employers’ contributions to TSP are subject to 

limits set by the Internal Revenue Service. Under current law, 

those limits are indexed to changes in the consumer price index. 

According to CBO’s macroeconomic forecast, wages will grow 

faster than inflation over the examined 75-year period. As a 

result, the contribution limits under current law would impose 

significant restrictions on employees’ TSP contributions in the 

future under Option 4 and Option 5. In order to keep the share 

of employees whose savings are constrained by the limits constant 

over time, CBO’s analysis incorporated the assumption that those 

limits would increase at the rate of growth of wages. 

8. In the context of 401(k) plans, hardship withdrawals, loans, 

and cash-outs upon leaving the employer but before reaching 

age 591⁄2 are often referred to as leakages. Using data on defined 

contribution plans in the private sector, some researchers have 

found that current leakage rates from 401(k) plans reduce 

aggregate age-60 retirement assets by more than 20 percent. See 

Alicia Munnell and Anthony Webb, The Impact of Leakages from 

401(k)s and IRAs, Working Paper 2015-2 (Center for Retirement 

Research at Boston College, February 2015), http://tinyurl.com/

y9w873aa.
APPENDIX Options for Changing the Retirement System for Federal Civilian Workers 39

into account in its projections.9 Using TSP data, CBO 

estimated that automatic enrollment considerably 

affected federal workers’ participation and savings 

behavior in TSP.10 The share of workers who contribute 

to their accounts increased after the adoption of automatic enrollment, whereas the average contribution rate 

declined. 

Finally, CBO projected the annuity streams that workers 

could purchase with their TSP balances by calculating 

an inflation-adjusted annuity that a person could receive 

at retirement. In the calculation of that annuity stream, 

CBO used sex and life expectancy and the same rate 

of return as the projected return on 20-year Treasury 

securities. The inflation adjustment equals the projected 

cost-of-living adjustment in FERS at the time of retirement. CBO’s analysis captures the approximate value of 

the retirement income that can be generated from the 

TSP contributions but does not attempt to incorporate 

the fees that would stem from purchasing such an annuity because few individuals currently purchase annuities 

using their defined contribution plans.11

Projecting Replacement Rates. To assess the effects of 

potential changes to the federal retirement system on 

workers’ income in retirement, CBO estimated a worker’s retirement income as a share of preretirement earnings under current law and under the options examined 

in this report. That share is known as a replacement rate. 

The replacement rate provides a different perspective on 

retired workers’ benefits from the view offered by looking 

simply at amounts. 

Retirees’ replacement rates were calculated at age 62 or 

at the age of retirement from federal service, whichever 

would be later. Preretirement earnings were measured 

9. As of August 2010, new federal employees have 3 percent of their 

pay automatically deducted and placed in their TSP accounts. A 

share of workers’ salary was not automatically contributed to TSP 

for workers hired before August 2010. Instead, those workers had 

to make an active decision to contribute. 

10. For more information on participants’ outcomes in TSP, see 

Thrift Savings Plan, “Participant Behavior and Demographics: 

Analysis of 2010–2014” (2015), https://go.usa.gov/xRkcQ. 

11. People may choose not to annuitize their defined contribution 

balances because of market failures in the private annuity markets 

or the desire to hold assets to cover future expenses (for instance, 

health care costs) or to leave bequests. In addition, some people’s 

resources in retirement are already heavily annuitized because of 

Social Security and defined benefit plans. 

as the workers’ average earnings in the last three years 

before retirement, adjusted for average growth in 

economywide earnings if the worker left federal service 

before becoming eligible for an immediate pension.12

CBO made no adjustments for income taxes paid before 

or in retirement.13

The replacement rates estimated in this report do not 

necessarily reflect all income that federal civilian retirees 

will have in retirement. CBO did not include income 

from other sources, such as Social Security, pensions 

from other employers, and personal savings because 

those data were not available.

Uncertainty in Projecting Replacement Rates. CBO 

projected workers’ TSP accumulations using a rate of 

return that equalizes the risks in the defined benefit and 

defined contribution plans. In doing so, CBO was able 

to compare replacement rates under current law and 

under the options examined here while holding workers’ 

investment risk constant.

However, the actual investment choices available to participants in TSP will not generate the rate of return that 

CBO used to equalize the risks in the defined benefit 

and defined contribution plans.14 In practice, retirement 

income from the defined contribution plan is more 

uncertain than retirement income from the pension. 

That is because workers’ TSP accumulations face additional uncertainty from their investment choices and 

from the variability in the rates of returns associated with 

those choices.

12. For a worker who is eligible for an immediate pension upon 

leaving federal service, the last three years before retirement are 

the last three years before he or she left the federal workforce. 

A worker who is not eligible for an immediate pension was 

projected to work continuously after leaving the federal 

workforce, and his or her earnings were projected to increase 

with average wage growth until age 62. The last three years before 

retirement for that worker are defined as the last three years 

before the worker reaches age 62. 

13. Because of lack of information about individuals’ tax rates before 

and after retirement, CBO also did not make projections about 

workers’ choices between the two tax treatments of TSP—

traditional versus Roth. 

14. The G-Fund rate is the risk-free investment option available to 

participants in TSP. The average G-Fund rate between 1988 and 

2016 was about 5.1 percent, which was about 40 basis points 

lower than the rate of return on 20-year Treasury securities over 

the same period.
40 Options for Changing the Retirement System for Federal Civilian Workers August 2017

Currently TSP participants can choose from five core 

funds and several target-date funds. The five core funds 

are the Government Securities Investment (G) Fund, the 

Fixed Income Index Investment (F) Fund, the Common 

Stock Index Investment (C) Fund, the Small Cap Stock 

Index Investment (S) Fund, and the International Stock 

Index Investment (I) Fund. The target-date funds, also 

known as “life-cycle” funds or L Funds, use a professionally determined mix of the five core funds that is tailored 

to meet an optimal balance between expected return and 

risk based on various time horizons. 

On average, federal employees who invest in the full 

range of options available in TSP, including in the various stock index funds, can expect to earn returns above 

the rate of return on 20-year Treasury securities and thus 

increase their replacement rates over those estimated 

here. However, they can do so only by bearing market 

risk. 

Market risk is the component of risk that remains even 

after a portfolio has been diversified as much as possible. 

It arises because most investments tend to perform relatively poorly when the economy is weak and relatively 

well when it is strong. People value income from investments more when the economy is weak and incomes 

are relatively low, and so would assign a higher cost to a 

given loss that occurs during economic downturns than 

to the same size loss in good economic conditions. The 

cost of market risk captures those collective assessments 

of the value of losses in bad times relative to good times. 

Investors in assets that have market risk expect to earn a 

greater rate of return on their investments than Treasury 

securities offer, as compensation for the risk that they 

bear. 

CBO used recent data on TSP balances to analyze participants’ portfolio allocations. On average, about half 

of the assets of employees enrolled in FERS are invested 

in the G fund, about 15 percent are in life-cycle funds, 

another 15 percent are in the C fund, and the rest are 

roughly equally distributed among the remaining funds. 

Portfolio allocations vary by age and years of service—

recently hired workers and those who are approaching 

retirement hold a higher proportion of their assets in the 

risk-free G fund than workers in midcareer.

To illustrate the trade-off between investment returns 

and risk, CBO simulated replacement rates, using historical rates of return on investments, for workers hired 

in 2018 who leave the federal workforce with 15 years 

of service under two scenarios. CBO used historical 

information on the annual rate of return of the TSP 

funds between 1988 and 2016 for each simulation.15

In one scenario, workers invest solely in a risk-free asset 

(such as the G fund.) In the second scenario, workers 

hold a balanced portfolio that is invested in the life-cycle 

fund whose target date is closest to the worker’s expected 

retirement date. Because of recent design changes in TSP, 

the second scenario might be more illustrative of future 

cohorts of workers. Those changes include the adoption 

of automatic enrollment for workers hired after August 

2010 and, in September 2015, the change of the default 

investment from the G fund to an age-appropriate 

life-cycle fund.

Under both current law and Option 4 (which would 

eliminate the pension, increase the government’s automatic TSP contributions to 8 percent of salary, and 

require the government to match up to 7 percent of 

additional contributions for new employees), the average 

replacement rate using the risk-free investment strategy 

is lower than the average replacement rate using the 

balanced portfolio, according to CBO’s simulations, but 

it is also less variable (see Figure A-1). That is because 

riskier portfolios would result in a higher but less certain 

replacement rate on average. The replacement rate under 

Option 4 also varies more than the one under current 

law regardless of investment strategy because under that 

option workers would receive all of their retirement 

income from their TSP investments, and income from 

TSP is less certain than income from the pension. 

Modeling Recruitment and Retention

To analyze the effects of FERS on recruitment and retention and forecast how those effects would change under 

the options, CBO estimated the value that federal workers place on current pay (that is, salary minus retirement 

contributions) and retirement income, and examined 

how past changes in those forms of compensation have 

affected recruitment and retention. The value that workers place on retirement income—in particular, defined 

benefit pensions—depends greatly on the value they 

15. Using data from FRTIB on annual returns of the investment 

funds in the TSP, CBO estimated that between 1988 and 2016 

the average rates of return on the TSP funds were 2.9 percent, 

9.3 percent, 4.2 percent, 10.6 percent, and 4.8 percent for the 

G, C, F, S, and I Funds respectively, after removing the effects of 

inflation. Of those, the most variable were the S, I, and C Funds, 

in that order.
APPENDIX Options for Changing the Retirement System for Federal Civilian Workers 41

Figure A-1.

Share of Simulations in Which Workers Receive Various Shares of Preretirement Earnings at Age 62 or at 

Retirement if They Leave Federal Service After 15 Years, Using Historical Returns on Investments

Under current law and under Option 4, the replacement rate is more uncertain when the allocation is a balanced portfolio than when it is a risk-free 

portfolio. 

Average

TSP Allocation Is a Balanced Portfolio

Current Law 4. Eliminate Pension, Increase Government’s 

TSP Contribution to a Maximum of 15 Percent

TSP Allocation Is a Risk-Free Portfolio

Current Law 4. Eliminate Pension, Increase Government’s 

TSP Contribution to a Maximum of 15 Percent

Percent

Share of Preretirement Earnings Share of Preretirement Earnings

0

10

20

30

40

10 15 20 25 30 35 40

0

10

20

30

40

10 15 20 25 30 35 40

0

10

20

30

40

10 15 20 25 30 35 40

0

10

20

30

40

10 15 20 25 30 35 40

Source: Congressional Budget Office.

Estimates shown are for workers with no prior federal service who are projected to join the federal workforce in 2018 and remain the average length of 

service, 15 years.

Under current law, employees hired in 2018 will contribute 4.4 percent of their salary to the FERS pension. The government will make an automatic TSP 

contribution of 1 percent of salary, and match employees’ contributions up to an additional 4 percent.

Option 4 would eliminate the FERS pension, increase the government’s automatic TSP contribution to 8 percent of salary, and require the government 

to match employees’ contributions up to an additional 7 percent.

Replacement rates were calculated at age 62 or at the age of retirement from federal service, whichever is later. Preretirement earnings were measured as 

the workers’ average earnings in the last three years before retirement, adjusted for average growth in economywide earnings if they left federal service 

before becoming eligible for an immediate pension. Retirement income is the pension plus the annuitized value of workers’ TSP account balances at the 

time of retirement. The projected TSP account balances include the accumulated employers’ and employees’ contributions and the investment returns on 

those contributions. Retirement income excludes payments from Social Security, other employer-sponsored retirement plans, and personal savings.

The historical average of the risk-free rate of return used in this simulation is higher than the interest rate projected for 20-year Treasury securities.

Bars indicate the share of simulations in which retirement income replaced a particular share of salary. Dotted vertical lines indicate the average 

outcome. The risk-free portfolio allocation is the G fund. The balanced portfolio allocation is the life-cycle fund whose target date is closest to the 

worker’s expected retirement date. 

FERS = Federal Employees Retirement System; TSP = Thrift Savings Plan.
42 Options for Changing the Retirement System for Federal Civilian Workers August 2017

place on future income relative to current income. In this 

analysis, the value of future income is determined by the 

discount rate workers would use to translate future pension payments into current dollars. That discount rate is 

estimated to be 7 percent, which is about 2 percentage 

points higher than the discount rate CBO uses to determine the cost of those pension payments to the federal 

government. Using a higher discount rate for employee 

valuations is consistent with OPM data showing that 

many departing federal employees opt to have their contributions refunded and forgo pension payments.16 It is 

also supported by a recent study that found teachers are 

willing to pay only a small portion of the cost of funding an increase in their pension benefits.17 At a discount 

rate of 7 percent, 26-year-old job candidates are likely to 

value the pension payments they would receive less than 

the contributions they would have to make, unless they 

anticipate serving 20 years or more (as shown in Figure 3 

on page 17). The threshold falls to about 15 years 

when using a discount rate that is 1 percentage point 

lower and rises to about 25 years when using a discount 

rate that is 1 percentage point higher. 

After estimating the values that workers place on current 

pay and retirement income, CBO examined how changes 

in those two forms of income affected employee retention in the past. To determine how retention is affected 

16. See Office of Personnel Management, Civil Service Retirement 

and Disability Fund Annual Report, Fiscal Year Ended September 

30, 2016 (February 2017), https://go.usa.gov/xRQ56.

17. See “How Much Are Public School Teachers Willing to Pay for 

Their Retirement Benefits?” American Economic Journal: Economic 

Policy, vol. 7, no. 4 (November 2015), pp. 165–188, http://

dx.doi.org/10.1257/pol.20140087.

by changes in current pay—such as changes in employees’ contributions to the pension plan—CBO examined 

the changes in retention that accompanied the substantial salary increases given to all workers on the General 

Schedule pay classifications for federal employees in the 

San Francisco, Los Angeles, and New York City areas in 

1991. The retention rates rose far more for those employees than it did for federal employees in other locations.

To determine how retention is affected by changes in 

the amount of the FERS pension, CBO examined the 

changes in retention that accompanied the switch from 

the Civil Service Retirement System to the smaller pensions available through FERS. In making its calculations, 

CBO also weighed the substantial changes in the pension’s value to workers over the course of their careers: 

retention rates are generally higher when additional 

service will cause relatively large increases in the value of 

the pension (as shown in Figure 4 on page 19).18 CBO 

conducted those analyses using data from OPM that 

cover the vast majority of federal civilian personnel, with 

the exception of Postal Service employees.19 The agency 

concluded that reducing pension benefits would decrease 

retention among midcareer employees and increase 

retention among employees who are already eligible to 

retire. 

18. Other researchers have also found that changes in pension values 

affect when federal employees retire by studying employees in 

CSRS. See Beth Asch, Steven J. Haider, and Julie Zissimopoulos, 

“Financial Incentives and Retirement: Evidence From Federal 

Civil Service Workers,” Journal of Public Economics, vol. 89, no. 2 

(February 2005), pp. 427–440, http://tinyurl.com/yd2qh3yy.

19. OPM provided data from the Enterprise Human Resources 

Integration Data Warehouse Statistical Data Mart.
Definitions

Accrual basis: A system of recording outlays and revenues when commitments are made, even though the 

actual cash transactions are made at a different time. See 

cash basis.

Annuity: An annuity is a fixed sum of money paid to 

someone on a regular basis (often every month or year), 

typically for the rest of his or her life.

Cash basis: A system of recording outlays and revenues 

when the cash transactions occur, even though commitments may have been made at a different time. See 

accrual basis.

Civil Service Retirement System (CSRS): A retirement 

plan provided by the federal government for its civilian 

employees. Most employees hired in 1983 or earlier are 

enrolled in CSRS; it is not available to employees first 

hired after 1983. It consists of a pension, jointly funded 

by the employees and the federal agencies that hire them, 

and a defined contribution plan. Employees enrolled 

in CSRS do not receive contributions to their defined 

contribution accounts from the agencies that employ 

them. Employees enrolled in CSRS are also generally 

not covered by Social Security while employed by the 

federal government. See Federal Employees Retirement 

System.

Current pay: In this report, workers’ salary minus their 

required contributions to the pension plan and minus 

their projected voluntary contributions to the defined 

contribution plan. Current pay is a before-tax measure 

of salary; income used to pay individual income taxes, 

payroll (or social insurance) taxes, and other federal taxes 

is included.

Defined benefit plan (pension plan): An employersponsored retirement plan that typically provides its 

beneficiary with a stream of regular payments that 

commence upon the recipient’s retirement and end at 

the time of his or her death. Payments under such a plan 

are set on the basis of a formula that typically accounts 

for an employee’s earnings, years of service, and age at 

retirement. They are referred to as an annuity or pension. 

Federal employees must contribute a portion of their 

salary to fund the pension plans in CSRS and FERS. See 

defined contribution plan.

Defined contribution plan: An employer-sponsored 

retirement plan that typically provides its beneficiary 

with a tax-preferred savings account. The 401(k) plans 

provided by private employers are one type of defined 

contribution plan. Typically workers and their employers 

contribute a certain amount or percentage of salary to 

the account. The account is owned by the worker and its 

balance changes over time with the amounts contributed 

and with the investment earnings or losses on those contributions. See defined benefit plan and Thrift Savings 

Plan (TSP).

Discount rate: In this report, the interest rate used to 

determine the present value of a future stream of revenues, outlays, or income. See present value.

Federal Employees Retirement System (FERS): A 

retirement plan provided by the federal government for 

its civilian employees. Most employees hired in 1984 

or later are enrolled in FERS. It consists of a pension, 

jointly funded by the employees and the federal agencies that hire them, and a defined contribution plan. 

Employees enrolled in FERS receive automatic and 

matching contributions to their defined contribution 

accounts from the agencies that employ them. Employees in FERS are covered by Social Security. See Civil 

Service Retirement System (CSRS).

Present value: A single number that expresses a flow 

of revenues, outlays, or income over time in terms of 

an equivalent lump sum received or paid at a specific 

time. The calculation enables a comparison of the costs 

of programs or projects that differ in the timing of their 

cash flows. The present value depends on the discount 

rate that is used to translate past and future cash flows 

into current dollars. For example, if $100 is invested on 
44 Options for Changing the Retirement System for Federal Civilian Workers August 2017

January 1 at an annual interest rate of 5 percent, it will 

grow to $105 by January 1 of the next year. Hence, at an 

annual 5 percent interest rate, the present value of $105 

payable a year from today is $100. See discount rate.

Replacement rate: Annual retirement income as a 

share of annual earnings prior to retirement. Retirement 

income is measured at age 62 or the projected age of 

retirement from the federal service, whichever is later. 

Earnings are measured as the average of annual earnings 

in the last three years before retirement. See retirement 

income.

Retirement income: Estimated income from the defined 

benefit pension and an annuity stream that could be 

purchased with a worker’s accumulated TSP balance. 

CBO did not include income from Social Security, from 

private savings, or from retirement plans from other 

employers in retirement income, because those data were 

not available. See replacement rate.

Thrift Savings Plan (TSP): A defined contribution plan 

sponsored by the federal government. TSP is similar to 

the 401(k) plans provided by many employers in the 

private sector. See defined contribution plan.
List of Figures and Tables

Figures

1. Net Government Outflows for Major Federal Civilian Retirement Programs 2

2. Average Share of Preretirement Earnings Replaced at Age 62 or at 

Retirement for Workers Hired in 2018 Who Leave Federal Service 

After 15 Years, Under Current Law 14

3. The Net Value of a FERS Pension to a Worker Considering Federal 

Employment at Age 26, by Anticipated Years of Service and Age of Separation 17

4. Voluntary Separations and Change in Accrued Value of a FERS 

Pension as a Share of Salary 19

5. Net Accrual Cost to the Government of Retirement Benefits as a Share 

of Lifetime Salary for Workers Hired in 2018, Under Current Law 

and Under Several Options 22

6. Current Pay and Share of Salary Contributed to the Pension Plan and 

TSP for Workers Hired in 2018, Under Current Law and Under Several Options 23

7. Change in the Government’s Net Outflows for FERS if Pension 

Contributions of Some Employees Were Increased (Option 1) 24

8. Change in the Government’s Net Outflows for FERS if Pension 

Contributions of Some Employees Were Decreased (Option 2) 26

9. Change in the Government’s Net Outflows for FERS if the Pension 

Formula Was Changed to High 5 (Option 3) 28

10. Change in the Government’s Net Outflows for FERS if the Pension 

Was Eliminated and the Government’s TSP Contribution Was 

Increased (Options 4 and 5) 31

11. Average Share of Preretirement Earnings Replaced at Age 62 or at 

Retirement for Workers Hired in 2018 Who Leave Federal Service 

After 15 Years Under Current Law, Option 4, and Option 5 33

12. How the Value of the Pension and TSP to an Employee Hired at Age 

26 Changes With an Additional Year of Service Under Current Law, 

Option 4, and Option 5 35

A-1. Share of Simulations in Which Workers Receive Various Shares of 

Preretirement Earnings at Age 62 or at Retirement if They Leave 

Federal Service After 15 Years, Using Historical Returns on Investments 41

Tables

1. Estimated Effects of Several Options That Would Change the FERS 

Pension Plan and Contributions to TSP 3

2. Projected Outlays, Revenues, and Net Outflows for Major Federal 

Civilian Retirement Programs 12

3. Salary, Performance, and Retention of Newly Hired Employees 15

4. Separation Rates for Workers Hired in 1984 18

5. Change in the Government’s Net Outflows for FERS Under Several 

Options That Would Change the FERS Pension Plan and Contributions to TSP 21
About This Document

This report was prepared at the request of the Chairman of the House Committee on Oversight 

and Government Reform. In keeping with the Congressional Budget Office’s mandate to provide 

objective, impartial analysis, the report makes no recommendations. 

Justin Falk and Nadia Karamcheva wrote the report with guidance from Molly Dahl and Joseph 

Kile. Elizabeth Bass, Jordan Berne, Holly Boras, William Carrington, Michael Falkenheim, 

Sebastien Gay, Heidi Golding, Jeffrey Holland (formerly of CBO), Wendy Kiska, Jason Levine 

(formerly of CBO), Amber Marcellino, John McClelland, David Mosher, Daniel Ready, 

Stephanie Ruiz, Chad Shirley, Carla Tighe Murray, Julie Topoleski, and David Torregrosa provided useful comments on various drafts of the report. In addition, Andrew Biggs of the American Enterprise Institute, Alicia Munnell of Boston College, and James Poterba of the Massachusetts Institute of Technology provided helpful comments. (The assistance of external reviewers 

implies no responsibility for the final product, which lies solely with CBO.)

Mark Hadley, Jeffrey Kling, and Robert Sunshine reviewed the report; Elizabeth Schwinn edited 

it; and Casey Labrack designed the cover and prepared the report. This report is available on 

CBO’s website (www.cbo.gov/publication/53003).

Keith Hall

Director

August 2017