In 1986, the Congress replaced CSRS with FERS 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. 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. 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.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. 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 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. 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. 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 the table shows, the lower salary ranges have shown the greater increase over time in the percentage of individuals who make contributions. 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. 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. 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. A July 1986 Congressional Research Service report included illustrative comparisons of the replacement rates 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. 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 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.