By: Steven Puckett
The three-legged income stool of the Federal Employees Retirement System (FERS) refers to the three main components that make up the retirement benefits for eligible federal employees. These components are:
Pension Benefit: The first leg of the stool is the Pension Benefit, which is a defined benefit pension plan. It provides a monthly annuity to eligible federal employees based on their length of service and highest three years of average pay. The benefit amount is calculated using a formula that takes into account the employee’s years of service and the average salary earned during the highest-earning consecutive three years of their federal career.
Under FERS, the pension formula is generally 1% of the average of the employee’s highest three years of salary, multiplied by their years of service. For employees who retire at the minimum retirement age (which varies depending on the employee’s birth year), a reduction factor is applied to the pension benefit.
Social Security: The second leg of the stool is Social Security, which is a federal program providing retirement, disability, and survivor benefits. Federal employees covered by FERS pay into Social Security through payroll taxes, similar to employees in the private sector. The amount of Social Security benefits an employee is eligible to receive is based on their earnings and the number of credits they have accumulated through employment.
Social Security benefits are calculated based on an average of the employee’s highest 35 years of earnings, adjusted for inflation. The age at which an employee chooses to start receiving Social Security benefits also affects the benefit amount. The Social Security Administration provides personalized estimates of future benefits based on an individual’s earnings history.
Thrift Savings Plan (TSP): The third leg of the stool is the Thrift Savings Plan (TSP), which is a defined contribution retirement savings plan for federal employees. It operates similar to a 401(k) plan in the private sector. The TSP allows employees covered by FERS to contribute a portion of their salary on a pre-tax or after-tax basis, up to annual limits set by the IRS.
The government may also contribute matching funds up to a 5% of the employee’s salary. The TSP offers a variety of investment funds, including stock and bond index funds, allowing employees to choose how to allocate their contributions. The accumulated balance in the TSP can be withdrawn upon retirement or rolled over into another eligible retirement account.
The three components – Basic Benefit, Social Security, and the TSP – work together to form the three-legged income stool of the FERS system. This multi-tiered approach provides federal employees with a combination of a pension-like benefit, Social Security benefits based on their earnings history, and a personal retirement savings account through the TSP. This diversified structure aims to provide a stable and reliable source of income during retirement for federal employees.
More Information: https://www.tsp.gov/publications/tspbk25.pdf
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