United States General Accounting Office

GAO Report to Congressional Requesters

October 1995 FEDERAL PENSIONS

Thrift Savings Plan Has

Key Role in Retirement

Benefits

GAO/HEHS-96-1

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-260594 

October 19, 1995

The Honorable Constance A. Morella

House of Representatives

The Honorable Eleanor Holmes Norton

House of Representatives

In the early 1980s, the Congress began to consider a new retirement

system for federal employees in part because it believed the existing Civil

Service Retirement System (CSRS) was too costly. As a result, the Congress

enacted legislation that extended Social Security coverage to federal

employees hired after December 31, 1983, and established the Federal

Employees Retirement System (FERS), which it modeled after private

sector retirement systems. Unlike CSRS retirees, FERS retirees receive

benefits from three sources: Social Security, a federal government annuity,

and Thrift Savings Plan (TSP) distributions.1

 Congressional deliberators

believed that this combination of benefits would enable employees to

maintain roughly their preretirement standard of living in retirement.

Because of your concerns about whether TSP was fulfilling its role in

helping FERS-covered employees to save effectively for retirement, in your

capacities as ranking minority and chair of the former Subcommittee on

Compensation and Employee Benefits, Committee on Post Office and Civil

Service, you asked us to develop information on

• the extent to which FERS-covered employees voluntarily contribute to TSP

and the percentage of their salaries contributed (the deferral rate);

• how well TSP’s educational materials address the importance of employee

participation to meet certain retirement income goals; and

• the desirability of having additional TSP investment options.

To develop this information, we reviewed the legislative history of FERS

and TSP, and discussed it with Congressional Research Service staff. We

also reviewed their studies of the program, updated certain data in their

1986 report comparing CSRS and FERS retirement benefits (see app. I), and

analyzed surveys of private sector plans established under Internal

Revenue Code section 401(k) that are similar to TSP. In addition, we

interviewed TSP staff and officials and obtained and analyzed TSP

demographic data from 1987 to 1993, TSP’s educational materials, and

information on the TSP Board’s consideration of additional investment

1

CSRS employees can also participate in TSP.

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options. Our work was performed from January through August 1995 in

accordance with generally accepted government auditing standards.

Results in Brief As of September 1994, some 942,000 FERS-covered employees (about

76 percent) were voluntarily contributing an average of 5.7 percent of their

salaries to TSP. Most of the remaining 300,000 FERS-covered employees

(24 percent) who were not contributing were in the lower pay ranges.

Lower-paid workers who were contributing were doing so at lower rates

than higher-paid workers—an average of about 4.4 percent of their

salaries.

Although lower-paid workers are deferring at lower rates, we found that it

may be less necessary for them to contribute to TSP than it is for workers

with higher earnings. A general measure of retirement income needs used

by pension professionals is about 60 to 80 percent of preretirement

income. Thus, lower-paid workers may achieve retirement income levels

within this range even with low deferral rates because Social Security

benefits are proportionately greater for them. On the other hand, mid- to

higher-pay-level workers need to defer at least 5 percent of their salaries

throughout their careers, if not more, to achieve retirement income levels

within this range.

Educating FERS workers can play a central role in their making wise

preretirement investment decisions. We found that although TSP’s

educational materials extensively discuss the plan’s financial aspects, they

are not explicit in discussing how TSP can enable FERS-covered employees

to achieve their retirement income goals.

A full range of options can also facilitate sound preretirement investment

decisions. More specifically, the TSP Board concluded that a domestic

small capitalization stock fund and an international stock fund would give

employees more diversity in investment options and the opportunity for

potentially higher earnings, although at greater risk. In May 1995, the TSP

Board decided to seek legislation that would add these two investment

options to the three it currently has. We found that these additions would

make TSP’s investment options more closely resemble those available in

similar private sector plans.

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Background In 1986, the Congress replaced CSRS with FERS2

 for federal employees hired

beginning January 1, 1984, in part to (1) recognize the inclusion of federal

employees under Social Security and (2) reduce federal pension costs.

Among the concerns of congressional deliberators in crafting FERS were

that its retirement benefits be comparable with those under CSRS and

enable employees to maintain their standard of living in retirement. To

accomplish these and other goals, FERS provides a retirement benefit that

comprises three components: a basic FERS annuity, Social Security

payments, and TSP payments. The total income from these sources is

meant to help individuals to receive retirement benefits comparable with

CSRS benefits and commensurate with their retirement income goals.

The basic FERS annuity is similar to CSRS in that it guarantees a specific

monthly retirement benefit based on age, length of creditable service, and

the average of the highest 3 consecutive years’ salaries.3

 However, the FERS

annuity is lower because its benefit formula credits each year of service

generally at 1 percent while CSRS service credits range from 1.5 to

2 percent per year of service. In addition, cost-of-living adjustments

authorized by FERS are lower and generally are not provided before age 62.

Unlike the FERS basic annuity, the benefit provided under Social Security’s

benefit formula declines as a proportion of individuals’ preretirement

earnings as their earnings increase. For example, a person aged 62, with a

certain lifetime earnings pattern and earnings of $20,000 in his or her final

year of employment, would receive Social Security benefits that represent

about 35 percent of those earnings. In contrast, a person aged 62, with a

certain lifetime earnings pattern and earnings of $75,000 in his or her final

year of employment, would receive a benefit that represents just about

17 percent of those earnings.

Pension professionals believe that to maintain roughly the same living

standard in retirement, individuals’ income needs generally range from 60

to 80 percent of their preretirement annual pretax earnings. Among other

things, retirees typically pay less taxes, do not have work-related expenses

such as daily commuting costs and clothing needs, may no longer have

dependent children, and may have their mortgages paid.

2

Employees under CSRS had the option to transfer to FERS.

3

A detailed discussion of FERS and CSRS benefits is included in the Congressional Research Service’s

report, Federal Civil Service Retirement: Comparing the Generosity of Federal and Private Sector

Retirement Systems (95-687 EPW, June 5, 1995).

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TSP is administered by the Federal Retirement Thrift Investment Board,

which is an independent agency. The Board consists of five part-time

members who are appointed by the President. TSP’s daily activities are

carried out by a staff headed by an executive director selected by the

Board. Retirement benefits from TSP are the flexible component of FERS

because they depend on the amount that is in each employee’s account at

retirement. Thus, TSP can help FERS-covered employees to save toward a

total retirement benefit that is commensurate with their retirement income

goals.

Employees under FERS are automatically enrolled in TSP because federal

agencies are required to contribute an amount equal to 1 percent of their

employees’ salaries to the plan. In addition, employees can make voluntary

contributions up to 10 percent of their salaries: agencies match the first

3 percent on a dollar-for-dollar basis and the next 2 percent at 50 cents to a

dollar, for a 5 percent total agency contribution; additional employee

contributions are not matched, but all contributions and earnings thereon

are tax deferred. CSRS employees may also participate in TSP by

contributing up to 5 percent of their salaries; while there is no agency

match, the contributions and earnings are tax deferred. However, all

employee contributions are limited to a statutory inflation-adjusted cap,

which was $8,994 in 1993.

TSP contributions can be invested in a federal government securities fund

(G fund), a commercial bond fund (F fund), and a commercial large

capitalization stock fund (C fund). The C and F funds are passively

managed index funds that track changes in a certain body of securities in

the stock and bond markets. These investment options were specified in

TSP’s statute, which also provided for adding investment options, via

amendments, at the request of TSP’s Board. In addition, TSP’s law restricted

the amounts that could be invested in the C and F funds through 1990.4

With the lifting of the restriction in 1991, employees have increased their

contributions to the C and F funds. For example, in January 1991 about

5 percent and 2 percent of contributions were going into the C and F

funds, respectively, while in August 1994 the comparable rates were

35 percent and 10 percent. In January 1995, TSP contributions and earnings

were invested as shown in table 1.

4

TSP’s statute required all CSRS-covered employees’ contributions to be invested in the G fund

through 1990. Similarly, all FERS-covered employees’ contributions had to be invested in the G fund in

1987; this requirement decreased each year by 20 percent through 1990 and was eliminated in 1991.

Also, beginning in 1991, employees could reallocate their past contributions among the three funds.

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Table 1: TSP Investments as of

January 1995 Dollars in Billions

Investment Amount Percent

G fund $18.9 70

C fund 6.4 24

F fund 1.6 6

Total $26.9a 100

aSeparate data for CSRS- and FERS-covered employees are not available.

TSP’s three funds have had different average annual rates of return since

1987. The C fund has averaged 12.5 percent, a higher return than the F and

G funds’ average earnings of about 8.0 percent each over the 7 years of

plan experience. The C and F funds also have been more volatile than the

G fund as shown in figure 1.

Figure 1: Growth of a $1,000

Investment in Each TSP Fund,

1987-1994

Dollars

0

500

1000

1500

2000

2500

1/1/87 1987 1988 1989 1990 1991 1992 1993 1994

Year

C Fund

F Fund

G Fund

Page 5 GAO/HEHS-96-1 Thrift Savings Plan
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Figure 1 shows that a $1,000 investment in the C fund on January 1, 1987,

would grow to $2,452 over the following 7 years based on actual annual

rates of return. Similarly, $1,000 investments in the F and G funds would

grow to $1,836 and $1,868, respectively, over the same period. The higher

returns available from the C fund also connote the somewhat higher risks

inherent in a stock portfolio. Thus, the retirement income TSP ultimately

provides a participant will depend on how much the individual has

contributed and on the rates of return earned on those contributions.

Since returns and risks are related, the ability to diversify investments

among stocks and bonds is an important factor for participants in a

program such as TSP because it allows them to tailor their investment

portfolios to reflect the level of risk they are willing to assume.

Extent to Which

FERS-Covered

Employees Contribute

to TSP

The proportion of FERS-covered employees contributing to TSP has steadily

increased. For example, in September 1987 some 219,000 FERS-covered

employees (about 38 percent) were making voluntary contributions to TSP;

whereas, in September 1994 about 942,000 (76 percent) were doing so.

However, the degree of voluntary participation in TSP has varied

considerably among salary ranges as shown in table 2.

Table 2: Percent of FERS-Covered Employees Making Voluntary Contributions to TSP by Salary Ranges, 1987-1993

Salary ranges and percent contributing

Dollars in Thousands

Year $10-19 $20-29 $30-39 $40-49 $50-59 $60-69 $70+

All salary

levels

1987 27% 42% 53% 72% 78% 78% 80% 44%

1988 28 45 63 77 84 85 85 49

1989 30 48 67 78 86 85 86 52

1990 35 54 71 80 85 87 86 57

1991 37 58 75 84 89 89 88 63

1992 41 63 78 87 90 92 90 68

1993 45 69 81 89 93 93 96 73

Source: Latest TSP demographic data available.

Most of the 300,000 (24 percent) FERS-covered employees who did not

make any voluntary contributions were lower-paid workers. Historically,

such employees have been less likely to make voluntary contributions

than have employees in the middle and higher salary ranges. However, as

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the table shows, the lower salary ranges have shown the greater increase

over time in the percentage of individuals who make contributions.

Salary Deferral Rates Have

Increased, but Lower-Wage

Employees’ Rates Remain

Lower Than Others

Overall, in 1993 FERS-covered employees making voluntary contributions

were deferring an average of 5.7 percent of their salaries compared with

3.7 percent in 1987. The deferral rates varied from 4.4 percent of their

salaries for low-wage employees to 7.2 percent for the highest-wage

employees as table 3 shows.

Table 3: FERS-Covered Employees’ Overall Deferral Rates by Salary Ranges, 1987-1993

Salary ranges and deferral rates

Dollars in Thousands

Year $10-19 $20-29 $30-39 $40-49 $50-59 $60-69 $70+

All salary

levels

1987 3.3% 3.6% 3.8% 4.1% 4.4% 4.7% 5.1% 3.7%

1988 3.9 4.6 5.2 5.7 6.4 6.8 7.3 4.9

1989 4.0 4.7 5.3 5.8 6.5 6.9 7.4 5.0

1990 4.1 4.8 5.4 5.8 6.4 6.8 7.4 5.1

1991 4.1 4.9 5.6 6.1 6.5 6.9 7.3 5.3

1992 4.2 5.1 5.8 6.4 6.7 7.0 7.4 5.6

1993 4.4 5.2 6.0 6.5 6.9 7.2 7.2 5.7

Source: Latest TSP demographic data available.

Also, as with the percentage of employees making contributions, deferral

rates vary among salary groups. The deferral rate among employees in the

lower salary range has also increased the least compared with the rates of

the other employees since 1987—about 27 percent compared with over

50 percent for all but the highest salary range. The 41-percent increase in

the highest salary range may be partly due to the statutory

inflation-adjusted cap on annual contributions, which was $8,994 for 1993.

TSP Contributions Needed

to Reach Target

Retirement Replacement

Rates

Our analysis showed a disparity in the extent to which higher- and

lower-paid employees under FERS may need to contribute to TSP to achieve

total FERS retirement benefits that would be commensurate with their

preretirement standard of living. In general, lower-paid workers may

achieve retirement income goals, or total benefits that are in the range of

60 to 80 percent of final annual earnings, with minimal TSP deferral rates,

while higher-paid workers need to defer at correspondingly higher rates.

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A July 1986 Congressional Research Service report5 included illustrative

comparisons of the replacement rates6

 under FERS and CSRS for various

retirement assumptions and TSP benefits from (1) just the mandatory

agency 1-percent contribution and (2) employee voluntary contributions of

5 percent. In our analysis, we updated the Congressional Research

Service’s illustration for employees retiring after 30 years of service at age

62. Our analysis showed that such employees with earnings in the lower

salary ranges might achieve a level of FERS benefits that would be within 60

to 80 percent of final annual earnings with just their agencies’ mandatory

1-percent contribution but that employees in the higher salary ranges

would not. However, using conservative assumptions of TSP returns of

6.1 percent, contributions of 5 percent throughout their careers would also

provide higher-paid employees with an overall FERS replacement rate

within this range as shown in table 4.

Table 4: Illustrative Final Annual Pay Replacement Rates for FERS-Covered Employees for Retirement at Age 62 With 30

Years of Service

Final year earnings and replacement rate

1995 Dollars

FERS income source $20,000 $30,000 $45,000 $75,000 $100,000

FERS annuitya 32 31 32 31 31

Social Security 35 26 24 17 14

TSP at agency 1%a 3 2 3 2 2

TSP at 5% match 29 24 25 20 19

Total replacement rate with TSP at 1% 70 59 59 50 47

Total replacement rate with TSP at 5% match 96 81 81 68 64

Note: We developed this table to illustrate the Social Security formula’s effects as well as TSP’s

pivotal role in FERS. It should not be viewed as definitive of specific outcomes. For example, the

replacement rates are greater for service over 30 years.

aThe annuity varies generally because of differences in salary growth rates and rounding. See

appendix I for the details of our methodology and the assumptions used for this illustration.

Source: GAO analysis.

Again, the disparity in the total replacement rates largely results from the

varying level of benefits that Social Security provides to individuals in

different earnings brackets. As table 4 shows, the Social Security

5

A Retirement Plan for Federal Workers Covered by Social Security: An Analysis of the Federal

Employees Retirement System (P.L. 99-335) (86-137 EPW, July 21, 1986).

6

The replacement rate measures the proportion of preretirement earnings that is provided by

retirement benefits.

Page 8 GAO/HEHS-96-1 Thrift Savings Plan
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replacement rate is just 14 percent for an employee aged 62 with final

pretax wages of $100,000 but over twice as high (35 percent) for someone

with final wages of $20,000.

Furthermore, table 4 shows that a 5-percent deferral provides a total FERS

replacement rate for higher-paid workers that is in the lower end of the

range that pension professionals believe is needed (that is, the 64 and

68 percent shown in table 4). These lower replacement rates may not

reflect such individuals’ retirement income goals and, consequently, these

employees would need to contribute more than 5 percent to TSP to achieve

a higher level of total FERS benefits.

In general, the lower TSP’s investment earnings are the more an individual

would need to contribute in order to reach a certain total FERS replacement

rate goal; conversely, higher TSP returns would provide individuals with a

higher retirement income than they projected as their goal at a given

deferral rate. For example, using TSP’s actual average rate of return of

8.95 percent for the period 1988 to 1994 produces TSP replacement rates

that are about 50 percent higher than those shown in table 4.

Effect of

Preretirement

Contributions Not

Explained in TSP

Educational Materials

The TSP Board produces and provides to federal agencies a variety of

educational materials for their employees. Among other things, these

leaflets, pamphlets, and brochures emphasize the monetary benefits of TSP,

such as the advantages of tax deferral, the effects of compounding, and the

higher returns possible from beginning to make contributions early in

one’s career. In addition, these materials inform employees about the pros

and cons, including potential risks, of investing in each of TSP’s three funds

and the earnings history of each fund.

However, TSP’s educational materials are not explicit in discussing the

importance of employee TSP contributions in achieving total FERS

retirement benefits that would be commensurate with preretirement living

standards, that is, benefits in the range of 60 to 80 percent of earnings. For

example, the materials do not include illustrative examples of FERS

replacement rates at varying TSP deferral rates and their effect on total

FERS benefits. Private sector plans have such examples in their educational

materials. Were TSP’s Board to revise its materials to include that type of

example, it would need to do so in collaboration with the federal Office of

Personnel Management (OPM), which has some responsibility for overall

FERS education, including establishing training programs for agency

retirement counselors.

Page 9 GAO/HEHS-96-1 Thrift Savings Plan
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TSP Board to Seek

Two Additional

Investment Options

In May 1995, TSP’s Board decided to seek legislation that would add two

investment options: an indexed domestic small capitalization equity fund

and an indexed international equity fund. The Board selected these funds

because they add diversity and provide the opportunity for greater returns

than the current options though at somewhat increased risk. Adding the

two funds would make TSP’s number of investment options and mix more

like those provided under private sector section 401(k) plans.

TSP’s Board began looking into the possibility of increasing the number of

investment options in 1992 after the statutory restrictions on C and F fund

investments expired. Among other things, the Board reviewed the

investment options generally available under section 401(k) plans and the

returns and risks associated with them. On average, most private sector

section 401(k) plans offer four or more investment options that include a

number of bond and stock funds of varying risk.

The Board’s actions to broaden TSP’s investment options are consistent

with pension professionals’ beliefs that employees should have a variety of

investment options encompassing a range of risks and returns to provide

the opportunity for higher earnings that would increase their retirement

nest eggs. The new options would allow TSP participants to diversify their

investments. The new funds would complement the C fund, which has

historically outperformed the G and F funds by an average of about

4.5 percentage points since 1987. Proposed legislation to add the options

was introduced in the Senate on July 27, 1995, and in the House of

Representatives on September 12, 1995.

Conclusions TSP was designed to provide one source of retirement income for

FERS-covered employees. However, unlike the two other FERS components

whose benefits are determined by formula and are constant for individuals

with the same work histories, TSP’s benefits will vary according to the

amounts that employees have contributed and the investment returns on

those contributions. Because of the effects of Social Security’s benefit

formula, higher-paid workers will be more dependent on TSP income than

lower-paid workers in maintaining their standard of living in retirement.

TSP’s educational materials, however, are not explicit in making this

distinction. These materials should explain and provide examples of

contribution rates and their relationship to preretirement earnings and

potential retirement income.

Page 10 GAO/HEHS-96-1 Thrift Savings Plan
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TSP was also designed to be a retirement savings vehicle for federal

employees that is similar to section 401(k) plans for workers in the private

sector. The addition of the indexed domestic small capitalization equity

and indexed international equity funds will provide federal employees the

same opportunity that those in the private sector have for tailoring their

investment portfolios to reflect the returns they seek and the risks they are

willing to undertake.

Recommendation to

the Congress

We recommend that to help ensure that TSP participants have investment

opportunities similar to those available under comparable private sector

plans, the Congress enact legislation adding the two investment options

sought by TSP’s Board.

Recommendation to

the Board

We recommend that the Board, in collaboration with OPM, include in TSP’s

educational materials (1) an explanation of TSP’s pivotal role in enabling

employees under FERS to achieve their retirement income goals and

(2) explicit illustrations of the effects of TSP deferral rates on total FERS

benefits.

Agency Comments

and Our Evaluation

The Federal Retirement Thrift Investment Board provided written

comments on a draft of this report (see app. II). The Board disagreed with

our recommendation that TSP’s educational materials include an

explanation of TSP’s role in FERS and explicit examples of the effect of TSP

deferral rates on total FERS benefits. The Board stated that such actions by

TSP would constitute employee education about FERS, which is an OPM

responsibility under the FERS statute. The Board noted that its educational

materials are replete with illustrations that show the dramatic effect of

contributions and investment earnings on the size of an employee’s TSP

account. However, the Board added that the materials do not analyze or

explain the impact that employee TSP accounts will have on total FERS

retirement income because FERS legislation gave that responsibility to OPM.

Also, the Board provided some technical comments that we incorporated

in the report as appropriate.

While OPM has some responsibility for FERS education, such as establishing

training programs for agency retirement counselors, we do not agree that

authority to educate employees on the effects of TSP investments on their

total FERS benefits is vested exclusively in OPM. We continue to believe that

the Board is in a better position to develop educational materials that

Page 11 GAO/HEHS-96-1 Thrift Savings Plan
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include explicit examples of TSP’s potential effects on FERS retirement

income. Such examples would demonstrate TSP’s pivotal role in the

context of FERS, particularly given the effect of Social Security’s benefit

formula. For example, an OPM booklet on FERS includes examples of

replacement rates for four individuals retiring at various ages, with

differing work histories of federal and nonfederal service, and with TSP

deferral rates of 3 and 5 percent. However, while the examples are helpful

in showing the increased benefits derived from contributions at 5 percent

compared with 3 percent, they are not explicit in demonstrating TSP’s

significance in overall FERS benefits at retirement.

Without its FERS context, we believe the value of TSP’s educational

materials to the individual employee is greatly diminished. Furthermore,

TSP is the appropriate source for such information because it periodically

contacts all employees who participate in the plan—including those not

making any voluntary contributions. Accordingly, we believe that TSP

should prepare such educational materials. OPM officials stated that the

Board could do so in collaboration with OPM.

As arranged with your office, unless you publicly announce the contents of

this report earlier, we plan no further distribution until 5 days after its

issue date. At that time, we will send copies of this report to other

congressional committees and members with an interest in this matter and

to others upon request.

Our review was performed under the direction of Donald C. Snyder,

Assistant Director. Other contributors were Endel P. Kaseoru,

Evaluator-in-Charge, and evaluators Carolina M. Morgan and Gregory

Curtis. If you or your staff have any questions about this report, please call

me on (202) 512-7215 or Mr. Snyder on (202) 512-7204.

Jane L. Ross

Director, Income Security Issues

Page 12 GAO/HEHS-96-1 Thrift Savings Plan
Page 13 GAO/HEHS-96-1 Thrift Savings Plan
Contents

Letter 1

Appendix I 

Methodology Used to

Calculate FERS

Replacement Rates

16

Appendix II 

Comments From the

Federal Retirement

Thrift Investment

Board

18

Tables Table 1: TSP Investments as of January 1995 5

Table 2: Percent of FERS-Covered Employees Making Voluntary

Contributions to TSP by Salary Ranges, 1987-1993

6

Table 3: FERS-Covered Employees’ Overall Deferral Rates by

Salary Ranges, 1987-1993

7

Table 4: Illustrative Final Annual Pay Replacement Rates for

FERS-Covered Employees for Retirement at Age 62 With 30 Years

of Service

8

Figure Figure 1: Growth of a $1,000 Investment in Each TSP Fund,

1987-1994

5

Abbreviations

CSRS Civil Service Retirement System

FERS Federal Employees Retirement System

OPM Office of Personnel Management

TSP Thrift Savings Plan

Page 14 GAO/HEHS-96-1 Thrift Savings Plan
Page 15 GAO/HEHS-96-1 Thrift Savings Plan
Appendix I 

Methodology Used to Calculate FERS

Replacement Rates

We calculated illustrative FERS replacement rates for each of the program’s

three components—the basic FERS annuity, Social Security benefits, and

TSP—for employees retiring with 30 years of service at age 62, the average

federal retirement age in 1994 for regular retirements. To make our

calculations, we simulated the salary histories of five hypothetical federal

employees and estimated the annuities they would receive under certain

assumptions. The time frame for our analysis was 1986 through 2015.

To produce the salary histories for our model, we used wage growth rates

that are consistent with federal General Schedule salaries. The workers in

our model began their federal careers in 1986 at entry-level salaries for

GS-2, –3, –5, –7, and –9 and retired in January 2016 at age 62 with final

annual salaries, as measured in 1995 dollars, of $20,000, $30,000, $45,000,

$75,000, and $100,000. We first created an inflation-adjusted earnings

history for these workers and then converted it to current year earnings

using the actual inflation rates from 1986 to 1995 and 3.4 percent

thereafter.

To determine employees’ FERS annuities, we used the basic FERS annuity

formula in the law. However, while the formula computes the benefit at

33 percent of the average of the highest 3 consecutive years’ salaries, the

replacement rate is less than 33 percent because the estimated wages

grow in each of the 3 years prior to retirement; thus, the 3-year average

used to calculate the annuity is lower than the final year’s wages. To

calculate Social Security benefits, we used the “ANYPIA” software

program provided by the Social Security Administration’s Office of the

Actuary. In applying this program, we used the alternative I assumptions

of future economic activity from the 1994 report of the Board of Trustees

of the Federal Old Age and Survivors Insurance and Disability Insurance

Trust Funds. The alternative I assumptions are conservative, and thus they

produced replacement rates that were lower by 1 to 5 percentage points

than the rates produced by alternatives II and III.

To calculate the TSP replacement rates, we estimated the balance in the

individuals’ accounts at retirement based on employee and agency

contributions of 5 percent each and the agency-only 1-percent

contribution. For our baseline analysis, we assumed that the accounts

earned a conservative return of 6.1 percent, the same rate the

Congressional Research Service used in its analysis. We also calculated

replacement rates using a weighted average of actual TSP returns from

1988 to 1994 of 8.95 percent. This higher annual rate of return produced

TSP replacement rates that were about 50 percent higher for each salary

Page 16 GAO/HEHS-96-1 Thrift Savings Plan
Appendix I 

Methodology Used to Calculate FERS

Replacement Rates

level. We then calculated an annuity for each account balance using a

worksheet in TSP’s annuities booklet.7

 We assumed an increasing single life

annuity at 6-percent interest, the rate used in TSP’s worksheet. The

replacement rates we computed, shown in table 4, vary by final year wage

because each had a different growth rate over the 30 years we modeled.

We also tested different rates of wage growth, returns on TSP, and the FERS

annuity and found the results were consistent across the five final salaries

we modeled.

7

Thrift Savings Plan Annuities, Federal Retirement Thrift Investment Board (Washington, D.C.:

Jan. 1994).

Page 17 GAO/HEHS-96-1 Thrift Savings Plan
Appendix II 

Comments From the Federal Retirement

Thrift Investment Board

Page 18 GAO/HEHS-96-1 Thrift Savings Plan
Appendix II 

Comments From the Federal Retirement

Thrift Investment Board

Page 19 GAO/HEHS-96-1 Thrift Savings Plan
Appendix II 

Comments From the Federal Retirement

Thrift Investment Board

Page 20 GAO/HEHS-96-1 Thrift Savings Plan
Appendix II 

Comments From the Federal Retirement

Thrift Investment Board

(105680) Page 21 GAO/HEHS-96-1 Thrift Savings Plan
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