The Thrift Savings Plan: Helping Federal Employees Achieve Retirement Security

7/27/2011

U.S. House Committee on Oversight and Government Reform Subcommittee on Federal Workforce, U.S. Postal Service, and Labor Policy

Chairman Ross, Ranking Member Lynch, and Subcommittee Members, thank you for allowing me to share NTEU’s views on the Thrift Savings Plan. We believe that the TSP has been an important part of the retirement program for employees in the FERS system. We have been pleased with the productive working relationship that the Employee Thrift Advisory Council (ETAC) has had with the Thrift Board staff and Board of Directors. NTEU is a member of ETAC.

As you know, the Social Security Amendments of 1983 required federal employees to participate in Social Security. Since the retirement system in place at the time would not coordinate with Social Security, a new retirement plan needed to be designed. For over two years a bipartisan group of Members of Congress and their staff, actuaries, researchers, and employee groups worked to put together a carefully crafted system that would provide a decent and fair retirement for career federal employees. This system was created 24 years ago to replace a defined benefit system (CSRS) that had a serious and growing, unfunded liability problem similar to those faced by many state plans today. FERS has recently been referred to as a model by pension experts as diverse as David John, senior research fellow at the Heritage Foundation, Norman Stein, pension consultant and professor at Drexel University and Leigh Snell of the National Council on Teacher Retirement. In addition to being a model plan, the creation of FERS helped to shore up the ailing Social Security System by having federal employees be covered by and contribute to that system for the first time. The FERS annuity is fully pre-funded, with zero money having to be transferred from general revenues.

Retirement age, COLAS, and the basic benefit formula for determining pension payments are less generous under FERS than under CSRS. According to a 2010 Congressional Research Service report, the average monthly annuity payment to workers who retired under CSRS was $2,587. Workers who retired under FERS received an average monthly annuity of $944, or less than $12,000 per year. Federal employees pay 6.2% of salary to social security, just as private sector employees do. They also pay .8% of salary toward the FERS defined benefit. Private sector employers pay roughly 98% of the cost of their defined benefit plans, very similar to the FERS employer/employee split. And federal employees generally pay up to 5% of their salary into the Thrift Savings Plan, a defined contribution 401(k) type plan, for a total of 12% of salary.

So, there are three parts to the system: a defined benefit part, which provides about 32% of a worker’s final salary; Social Security, which provides retirement income on a sliding, progressive scale; and a defined contribution part, the TSP, a key element. It is important to note that if any part of this program is reduced, the chance of providing a secure retirement is lessened. Current proposals to change the pension contributions or the structure of FERS will result in a demoralized workforce and an inability to attract new workers to the civil service.

Pension experts agree that workers need approximately 70 % of their final salary to have a retirement free from worry. Consider a GS-4 employee. This person would receive about 32% of salary from FERS and about 25% from Social Security. At 57% of salary, this employee falls short of the desired amount of retirement pay. For a GS-12, the story is even worse – 32% from FERS and 19% from Social Security, for a retirement income of 51% of final salary. Thus, the TSP is a very important part of the FERS retirement program. The average TSP balance as of October 2010 was $61, 439. According to the TSP Calculator, that would result in a monthly annuity of $349. We need for employees to contribute more to the TSP, not less.

It is unfortunate that, in the many budget discussions taking place in Washington, not a word has been spoken about how pay freezes and pension contribution increases will negatively impact the federal employee’s ability to contribute to the TSP, and in turn negatively affect the employee’s retirement income. Some of the proposals, requiring employees to pay 6.2% of pay into Social Security and 6.3% of pay into FERS, will result in TSP participation rates dropping precipitously. Such a cut in pay could mean a decrease in take home pay of $1874/year for a federal employee just starting out and $3435/year for a mid-level employee. An increase in employee pension contributions on top of a two-year pay freeze means a loss of money every year, which will never be made up, compounded by the loss in the retirement annuity, which is based on salary. A change in the computation from high 3 to high 5 can result in reducing a Civil Service Retirement System (CSRS) annuity by an average of $7,148 over five years. A Federal Employees Retirement System (FERS) annuity would be cut by an average of $2,322 over five years. The possible change in the Consumer Price Index used for computing the cost-of-living adjustment for retirees would be another loss, of about three percent. Should these proposals become law, I do not believe we will be able to hire or retain the kind of workforce we need to do the very important work of the federal government.

In the last Congress, the Thrift Savings Plan Enhancement Act was passed and became P.L. 111-31. It contains many changes to the TSP, most importantly:

• Newly hired federal employees are automatically

enrolled in the TSP at a contribution rate of 3%

of pay (although they can change this at any

time);

• Requires the Thrift Board to establish a Roth

contribution program;

• Allows authority to establish a mutual fund; and

• Allows a surviving spouse of a deceased TSP

participant to take over that account.

As the Thrift Board finds ways to do more with less, like every other government entity, ETAC will assist as much as possible. One provision we would like to see added pertains to permitting federal employees to contribute unused annual leave to their TSP accounts. The IRS issued a ruling allowing such contributions for private sector 401(k) plans last year. A bill was introduced by Rep. Stephen Lynch (D-MA) and Jason Chaffetz (R-UT) in the 111th Congress. We hope to have it introduced in this Congress and we hope the subcommittee will approve it.

NTEU’s goal is to make sure that the federal government keeps its promises to its employees; that workers that have paid into a system for 20 or 30 years will be afforded a fair retirement, and that the system we worked so hard to put into place in 1986 is not shredded in an attempt to balance the budget on the backs of government workers. Federal employees have suffered so many indignities this year – an 11th hour reprieve from a government shutdown, with little or no information about how it would be handled – the constant worry that they are the number one target in deficit reduction while millionaires are not touched – now the debt ceiling crisis (will federal employees get paid?). I urge you and your colleagues, Mr. Chairman, to oppose efforts that threaten a fair and secure retirement system for federal workers.