Most civilian federal employees who were hired before 1984 are covered by the Civil Service Retirement System (CSRS). Under CSRS, employees do not pay Social Security taxes or earn Social Security benefits. Federal employees first hired in 1984 or later are covered by the Federal Employees' Retirement System (FERS). All federal employees who are enrolled in FERS pay Social Security taxes and earn Social Security benefits. Federal employees enrolled in either CSRS or FERS also may contribute to the Thrift Savings Plan (TSP); however, only employees enrolled in FERS are eligible for employer matching contributions to the TSP. Congress passed the Civil Service Retirement Act of 1920 (P.L. 66-215) to provide pension benefits for civilian federal employees. In 1935, Congress created the Social Security system for workers in the private sector. During the 1950s, Congress allowed state and local governments to bring their employees into Social Security, and today about three-fourths of state and local employees are covered by Social Security. Federal employees remained outside of Social Security until Congress passed the Social Security Amendments of 1983 ( P.L. 98-21 ). This law required all civilian federal employees hired into permanent employment on or after January 1, 1984, to participate in Social Security. Enrolling federal workers in both CSRS and Social Security would have resulted in substantial duplication of benefits and would have required employees to contribute more than 13% of pay to the two programs. Consequently, Congress directed the development of a new retirement system for federal workers with Social Security as its cornerstone. The new plan was designed to include many features of the retirement plans of large private-sector employers. The result of this effort was the Federal Employees' Retirement System Act of 1986 ( P.L. 99-335 ), enacted on June 6, 1986. The FERS has three elements: Social Security, the FERS basic retirement annuity and the FERS supplement, and the Thrift Savings Plan. The FERS covers employees initially hired into federal employment on or after January 1, 1984, and employees who voluntarily switched from CSRS during "open seasons" in 1987 and 1998. Former federal employees who had completed at least five years of service under CSRS and were later rehired by the government after a break in service could either join FERS or participate in the "CSRS offset plan." Under the CSRS offset plan, 6.2 percentage points of the employee's payroll contribution and an equal share of the employer contribution are diverted from CSRS to the Social Security trust fund. Later, the retiree's CSRS annuity is reduced (offset) by the amount of his or her Social Security benefit. Both CSRS and the CSRS offset program will terminate with the death of the last worker or survivor still covered under that program, which the Office of Personnel Management (OPM) estimates will occur around the year 2090. Employers establish retirement plans both to help them attract workers with valuable skills and to enable older workers to retire without facing the prospect of inadequate income. Employers must balance the goals of providing adequate retirement income with controlling the cost of the retirement plan. For private-sector employers, another important consideration is the regulatory environment in which their retirement plans must operate. Private-sector retirement plans must comply with the relevant provisions of federal law, including the Employee Retirement Income Security Act (ERISA), the Age Discrimination in Employment Act (ADEA), and the Internal Revenue Code. Retirement programs generally can be classified as either defined benefit (DB) plans or defined contribution (DC) plans. In a defined benefit plan, a worker's retirement benefit is typically paid as a life annuity based on years of service and average salary. A defined contribution plan is much like a savings account maintained by the employer on behalf of each participating employee. The employer and/or employee contribute a specific dollar amount or percentage of pay into an account, which is usually invested in stocks and bonds. When the worker retires, he or she receives the balance in the account, which is the sum of all the contributions that have been made plus interest, dividends, and capital gains (or losses), net of fees and expenses. The retiree usually may choose to receive these funds as a series of payments over a period of years or as a lump sum. An important difference between the two types of retirement plans is that in a defined benefit plan the employer bears the financial risk, whereas in a defined contribution plan the employee bears the financial risk. In a defined benefit plan, the employer promises to provide retirement benefits in the form of a life annuity or its actuarial equivalent. To pay the promised benefit, the employer must make contributions to a pension fund, which is invested in stocks, bonds, and other assets. The employer's contributions plus the expected investment earnings on the contributions must be sufficient to pay the pension benefits that workers have earned under the plan. The employer is at risk for the full amount of retirement benefits that have been earned by employees. If the pension plan is underfunded, the employer must make additional contributions so that the promised benefits can be paid. In a defined contribution plan, the employee bears the investment risk. For example, if the contributions to the plan have been insufficient or if the securities in which the contributions have been invested lose value or appreciate too slowly, the employee might reach retirement age without the financial resources needed to maintain his or her desired standard of living in retirement. If this occurs, the worker might have little choice but to delay retirement. CSRS is a DB plan that provides a standalone annuity. FERS includes both DB and DC plan elements (i.e., the FERS annuity and the TSP, respectively). Under both CSRS and FERS, the date of an employee's eligibility to retire with an annuity depends on age and years of service. The amount of the retirement annuity is determined by three factors: (1) the number of years of service, (2) the accrual rate at which benefits are earned for each year of service, and (3) the salary base to which the accrual rate is applied. Under CSRS, a worker with at least 30 years of service can retire at the age of 55; a worker with at least 20 years of service can retire at the age of 60; and a worker with 5 or more years of service can retire at the age of 62. Federal employees are fully vested in the FERS basic retirement annuity after five years of service. The FERS minimum retirement age (MRA) for an employee with 30 or more years of service was 55 for workers born before 1948. The MRA under FERS began to increase in 2003 for workers born after 1947. The MRA for employees born between 1953 and 1964 is 56. It will increase to 57 for those born in 1970 or later. (See Table 1 .) A worker who has reached the MRA and has completed at least 30 years of service can retire with an immediate, unreduced annuity. A worker with 20 or more years of service can retire with an unreduced annuity at age 60, and a worker with at least 5 years of service can retire at age 62. Under FERS, an employee can retire with a reduced benefit at the minimum retirement age with at least 10 years of service. The retirement benefit is permanently reduced by 5% multiplied by the difference between 62 and the retiree's age at the time the annuity begins. For example, an employee with at least 10 years of service who retires at 56 would receive a pension benefit that is reduced by 30% below the amount that would be paid to an individual with the same salary and years of service who retired at the age of 62. A commonly used measure of retirement income adequacy is the percentage of pre-retirement income replaced by pension income. This measure—the replacement rate —is expressed by the following ratio: Replacement rates usually are based on the sum of the employee's pension benefit and Social Security benefit. Because retirees do not have the expenses that are associated with having a job, most people are able to maintain their previous standard of living with less income than they had while working. Although there is no fixed rule about what comprises an adequate replacement rate, most pension analysts believe retirement income should replace at least 70% to 80% of pre-retirement income. Workers who had low-wage jobs generally need a replacement rate near the high end of this range because a higher proportion of their income is expended on non-discretionary items, such as food, clothing, shelter, health care, and taxes. The basic retirement annuity under both CSRS and FERS is determined by multiplying three factors: the salary base , the accrual rate , and the number of years of service . This relationship is shown in the following formula: Pension Amount = salary base x accrual rate x years of service In both CSRS and FERS, the salary base is the average of the highest three consecutive years of basic pay. This is often called "high-three" pay. The accrual rate is the pension benefit earned for each year of service, expressed as a percentage of the salary base. Under FERS, workers accrue retirement benefits at the rate of 1% per year; or, for employees in FERS who have at least 20 years of service and who work until age 62, the accrual rate is 1.1% for each year of service. For example, a worker under FERS who retires at 61 with 29 years of service would receive an annuity equal to 29% of his or her high-three average pay. Delaying retirement by one year would increase the annuity to 33% of high-three average pay (30 x 1.1 = 33). CSRS pension accrual rates increase with length of service.