What is a Federal Government Pension Worth?

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federal government pensionI went to a co-worker’s retirement earlier this month.  In the federal government, it is a big deal when you reach retirement.  She served in the government for 27 years, so they threw a huge celebration for her.  More than 100 of her co-workers, friends, and family came to the event.  She clearly made an impact on a lot of people.  Speech after speech effused her praise and accentuated how she was essentially irreplaceable.

 

Working for the Government

Afterwards, I attended a post-ceremony gathering to socialize with all of the people that had come to celebrate.  There were quite a few other government employees that were also near retirement.  They highlighted how wonderful it was to work for the federal government, namely because of the amazing benefits.  They specifically expressed how valuable the pension was, particularly in light of the fact that pensions are disappearing outside of the government.

 

Over the years, I have nodded my head in agreement as I have heard this said many times.  Admittedly, I had never really taken the time to calculate to truly know how great these pension benefits really were.  

 

federal government pensionQuick side note: In this post, I’m not going to talk about health care benefits.  If you have a crystal ball of what the future holds, please clue me in.  My boss strongly believes that the government’s health care benefits will become worthless when we’re ready for retirement since we’ll be in a single-payer model.  His boss thinks he’s crazy.  He, on the other hand, believes the federal government health care benefits are more important than the pension we receive.  Clearly, nobody really knows the future value of these benefits.  

 

Additionally, since most of the major contractors in the DC area all have equivalent or better 401(k) plans, I’m also going to ignore this in my analysis as well, since theoretically, that should essentially be a wash.

 

I am only going to focus in on the pension.

 

The Government Pension

Getting a monthly check the rest of your life sounds really great in theory.  However, I’ve always wondered what the breakeven would be between choosing to work for the government and receiving its pension versus going private sector.

 

So before I get too far, I want to share the different payout systems in regards to a pension.  

 

Civil Service Retirement System (CSRS)

If a federal government employee was hired before 1983, they were eligible for a type of pension under a program known as CSRS (Civil Service Retirement System).  Federal workers were required to pay between 7-8% of their pay each year, and in return, they would receive a pension based on a certain formula.

 

Table 1

Years of Service What You Receive
First 5 years of service 1.5 percent of your high-3 average salary for each year
Second 5 years of service Plus

1.75 percent of your high-3 average salary for each year

For all years of service over 10 Plus

2 percent of your high-3 average salary for each year.

 

This meant that if you put in a 30-year career with the federal government, that you would be eligible for a pension of 56.25% based on the average of your highest three (high-3) salaries.  For most people, that was usually the last three years of their career.  That means that if you started in 1982, the year before CSRS ended, and retired in 2012 at the ripe age of 55, with a high-3 average salary of $100,000, you would make $56,250 every year for the rest of your life.  

 

Did I also mention that the pension increases each year for cost of living adjustments?  It’s a pretty sweet deal if you were under CSRS.

 

Federal Employees Retirement System (FERS)

After 1982, they started a new program called FERS (Federal Employees Retirement System).  FERS started with a multi-tier approach, in which employees would be eligible to retire based on their age.  Retirement could start as early as age 55 and graduating to age 57, if you were born after 1970.  

 

Instead of the lucrative 1.5-2%, like CSRS, the FERS formula pays 1% of your high-3 salaries, if you are under age 62 or less than 20 years of service.  You can also receive 1.1% of your high-3 salaries, if you are older than age 62 or have more than 20 years of service.

 

FERS requires that its employees contribute 0.8% of their pay each year towards the pension.  What they failed to emphasize is that there is an additional 6.2% that will also be taken out to account for Social Security payments.  

 

Thus, there is no real difference in deduction for a CSRS or FERS member.

 

Table 2

Age Formula
Under Age 62 at Separation for Retirement, OR–

Age 62 or Older With Less Than 20 Years of Service

1% of your high-3 average salary for each year of service
Age 62 or Older at Separation With 20 or More Years of Service 1.1% of your high-3 average salary for each year of service

 

This means if you put in a 30-year career with the federal government, that you would be eligible for a pension of 33%, based on the average of your high-3 salaries.  That means that if you started in 1983, the year after CSRS ended, and retired in 2013 at the ripe age of 55 with a high-3 average salary of $100,000, that you would make $33,000 every year for the rest of your life.  

 

If you’re like me, you may be looking at that number thinking, $23,000 is a pretty substantial difference.  

 

Even if you incorporate the average Social Security benefit of $16,000 per year under FERS, a CSRS employee still receives $7,000 more.  

 

Additionally, FERS participants will have to wait 11 years, if they want to receive full Social Security, in order to receive their complete benefits.  That’s over $250,000 that a FERS employee would lose compared to their CSRS brethren.

 

make a million dollars federal government pensionThat’s certainly a ton of money.  

 

Can you see why the federal government wanted to move employees off of CSRS and onto FERS?

 

I doubt anyone was thrilled when FERS replaced CSRS.  However, most people still joined the government regardless for the benefits and pension.  According to the latest stats, just 14% of companies currently offer a pension.  That percentage is dropping by the day though.  Government personnel are one of the last vestiges to hold onto this benefit.

 

How Great Is This Pension Really?

Let’s use me as an example.  

 

I started working for the government when I was 25.  When I reach the age of 57, I will be eligible to retire.  Therefore, I would have worked for the government for 32 years.  According to Social Security, I can expect to live until I’m 82 years old, although I am hoping to live longer than that if possible.  That means that I should receive a check every month for the next 25 years of my life if/when I retire from the government, until I pass away.

 

Now the only two variables left to calculate my pension are (1) how much I’m going to receive and (2) what my risk-free rate should be.  I’m going to use a round number and say that I will receive $40,000 a year.  My risk-free rate will be the 30-year treasury note, which stands at 2.89%.

 

Table 3

2.89% Rate of Return
25 years Periods
$40,000 Pension
$1,437,490.20 Future Value

 

As you can see, these factors contribute to a future valuation of $1.43 million.  Who wouldn’t want the benefit of knowing that they were set for retirement?  Especially if you only had to wait 5 years, age 62, to start taking out reduced Social Security, or age 66 to take out full retirement benefits from Social Security.  

 

Why Be Anything But A Government Employee Then?

federal government pension best online savings accountIf you said, “More money,” ding ding ding, you are correct.

 

Of course, if you are a contractor for the government, you would expect to be paid better than a government employee.  Otherwise, you would just work for the government instead, right?

 

So let’s say I received two offers when I was a freshly-minted graduate from college.  One offer from the government and one offer from the private sector supporting the government.  Which one is the better option?

 

Well according to the math, the private sector would probably pay me a whole lot less money than I initially thought.  I would have to make a net of $18,000 or if I was in the 25% tax bracket, the private sector would need to pay me at least $24,000 more than the government offered in order to be comparable to a government offer, including the pension.

 

Table 4

Net Salary Above Government Gross Salary Above Government
$18,050.00 $24,066.67
Age Salary based on 30 Treasury Bond
25 $18,571.65
30 $119,797.70
35 $236,521.17
40 $371,114.64
45 $526,313.97
50 $705,273.85
57 $1,002,765.69

 

Future Value (at age 82) $1,437,761.87

 

As you can see, that figure of $1.43 million matched up very closely with Table 3.

 

So how did I come up with the math?

I first took the future value of the pension at age 82.  Then, I applied it to 57 periods to get back down to the age of 25.  (82-57=25).

 

Table 5

2.89% Rate of Return
57 years Periods
$1,437,490.20 Future Value
$18,050 Salary Needed

 

If you are more aggressive than me and use the stock market with an 8% yield or 5.5% from a 60/40 (stock/bond) split, you might be able to get away with a lower salary.  However, I used the 30-year Treasury Bond since it’s a guaranteed rate of return, as is my federal government pension in theory.  

 

So readers, what do you think?  Do you have access to a pension?  Did you think a pension is worth more or less than I shared above?  Share your thoughts below.

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47 Comments

  1. I’ve considered it as well. I was briefly a government employee, but I cashed out my (small) pension to pay student loans so I would be debt-free, figuring that I would never work for the government that long (still true) and that the benefits would be subject to more uncertainty.

    There’s one huge risk with government: the commitment. What if your boss changes? New boss elected? New job focus? For what I did, those were huge uncertainties, so it didn’t make sense to plan on staying that long, but if you’re called to government work and find a great, stable position, it can have great benefits.

    Financially, I think it’s worth less: there’s a huge opportunity cost you pay by committing yourself financially to working the same place. What if huge opportunities arise for you in the private sector? You have a large pension loss you’ll have to take to pursue them. I’m amazed how well self-employment has worked out so far, and it allows me to earn in ways I never could while working a government job. That, more than the numbers, is what matters, I think: the cost of the commitment.
    Finances with Purpose recently posted…Why We Gave Away $2,500 Today, And Challenge Fellow BloggersMy Profile

    • Isn’t the risk the same with every employer? You have a certain numbers of years to work before you are vested int he 401k, you have to work a set number of years before you get more vacation hours, etc. What if your boss changes? New job focus? I just can’t follow the fear of commitment! With the Government, after working for them for 5 years you have locked in a pension! People commit to the military for 3 years, college for 4 years, but 5 years working for the Government locks in a pension when one reaches the appropriate age.

      The great thing about the government is that that almost every job you can think of they also have. You can switch jobs, departments, agencies so if you don’t like your boss its just a temporary thing! You can move cities, states, even more internationally and it doesn’t have to involve a new employer.

      I think there is the same cost of commitment to work for any employer as the government. I acknowledge there is an opportunity cost between being employed and self employed, but Government is not all or nothing. The risk you mention is that you give it a shot for 5 years, if its not for you then you leave with a vested 401k and a very small pension.

      The same risk is for every other job one would take as an employee.

      • We agree that government may have many jobs and you may be able to move around some, but it’s still riskier, especially if you’re pretty specialized or switch between agencies where your pension won’t carry with you. And no, some employers immediately vest you (such as my last one), or they allow you to participate in a 401(k) but only “vest” the matching part after a few years, typically.

        I disagree: with the government, you’re locked into working for the government. You’re also subject to risks of layoff, and so on, which may affect your pension planning. By contrast, my retirement account goes with me, even if I switch to self-employment, for instance, or move between employers. I agree, though, that it’s less risky if you’re in DC working for the federal government and can switch around jobs fairly easily. But it’s still riskier than working in the private sector.

        I suspect the risk actually goes *up* as you age in the government system: now you’re largely vested in a pension, whereas if you step away, you lose the ability to continue growing your main retirement savings. Mathematically, it would be hard to walk away from a planned pension after a while (which is why employers use them – they increase loyalty and retention) and start with an empty 401(k), even if you could walk away with a small pension.
        Finances with Purpose recently posted…Why We Gave Away $2,500 Today, And Challenge Fellow BloggersMy Profile

    • That’s a great point that you bring up!!! Having no loyalty to a company can allow you to jump to a bigger offer along the way and further increase your salary.

  2. Nice write up as I have always wondered what these pension plans look like. You just always hear people talk about the great benefits. That is a sweet gig getting guaranteed money like that though. That has to play into your FIRE dreams knowing what you will be giving up if you exit early.

    What about opportunity for advancement? I hear that people kind of get stuck on a career path just getting their 1.8% raise per year. I know my biggest raises personally come from every time I change jobs and get a 20% raise in one jump.
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  3. Hey MSM! Great post on a topic most people know little about. I have quite a few government friends and they all cite the pension as a huge benefit. By the time they reach higher levels, they often resist leaving for the pension alone — call it pensioner’s handcuffs.

    There’s also a keen awareness in government that employees at executive levels will not earn the equivalent of private sector counterparts. The GS scale caps out at $160k, and government executive pay tops out, by law, in the low $200s — still a great salary but nowhere near the $500k to $1MM salary + bonuses that someone in a large private sector corporation with similar levels of responsibility would earn.
    Rich @ pennyandrich.com recently posted…Penny On Fame And Shame — A Response To Critics Of Her Notorious Guest PostMy Profile

  4. In Canada, we automatically pay into the Canadian Pension Plan if we work. I also have a work pension on top of my government pension. However, with the government and companies changing the pension rule whenever they want and it also depends on the financial condition of the government and companies when I retire, I am not a huge fan of pensions as I have no control or say on how those money are invested. Hence, I am only putting in the mandatory contributions and not a penny more. I am treating these money as icing on the cake when I retire and does not include them in my net worth calculation.

    In my opinion, it’s very risky if my retirement money is not in my account. This is why I am taking charge if my own investments.
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    • It sounds like your government pension is somewhat similar to social security for us, although I agree it would be nice to have a say in how that money is invested 🙂

  5. Great analysis, Rob. I always have people telling me about the good old days of CSRS as compares to FERS. That’s why it’s important to fund your TSP account!

    • Thanks for sharing Dave!!! I definitely agree that you should do everything you can to max out your TSP as our pensions are definitely not as lucrative as the past.

  6. I was a fed for 5 years, became a contractor, and am now back to being a fed. I’ll hit my 20 year fed mark in a few months! One important distinction is that private sector jobs around DC are not like the rest of the US. When I was a contractor I made double my fed salary, but due to contract win/loss, I always was starting over with a new company every 3-5 years. So, while I never worried about a job, I never got vested in the 401k (bye bye matching funds) and was always starting over with vacation. After 10 years and working for 6 different companies (none voluntary switches), I came back as a federal employee.

    I’m kind of surprised by some of the comments above. Yes, bosses change and they might have a new focus….but its like that in the private sector as well. Pension handcuffs? I get that, but when I look at other government contractors, there are a few that I worked for that give pretty nice employee bonuses at the 10, 15, and 20 year mark. It’s loosely the same. One other factor that may don’t realize you are not stuck in the same job, at the same department, at the same agency for your entire career. I’ve moved to three different agencies so far focusing on different criteria, so while my employer is the same, the experience part of the job has been new, exciting, and refreshing.

    On the financial side, my wife and I worked two jobs early in our career to ensure we could put the max in our 401k. Thankfully our salaries rose to the point we could still do that without the part-time work, but we have consistently maxed out our 401k for over 30 years.

    While we both will have the government FERS pension, we are saving like we won’t have it or social security. Congress has shown their hand in that they are willing and ready to change their contract with the federal workforce, and I don’t see how social security will remain viable without some significant tweaking. For me, I’m funding my own retirement and if I get my pension and SS, then that’s the icing on the cake.

    • Congrats Paul on your 20 year anniversary!!! That’s awesome news. I definitely am with you maxing out my TSP and trying not to depend on FERS or SSA in the future. Although if I do get those funds it would definitely help a ton 🙂

  7. Ayup! There are a lot of downsides to working for the government, but the pension is pretty good. My dad’s been in government work for a few decades and he’ll be able to retire early on his pension here in a few years. But yes, your earning power outside the government is usually higher. And, y’know, you don’t have to put up with as much BS (there’s a lot of it in government work).
    Mrs. Picky Pincher recently posted…What A Frugal Weekend! July 30My Profile

  8. It is definitely a balance. High pay now (private sector) versus a good pension later (government job). Who knows what the right answer is but if you enjoy your job it is worth it. I also have a pension and a high salary (though not as high as if I went into a truly private medical practice). I think the work life balance I have now is worth it with likely guaranteed income when I retire.
    Dads Dollars Debts recently posted…Non-traded REITSMy Profile

    • That is definitely one of the biggest advantages of the government. I love the work/life balance that I currently have and am not sure I could get that elsewhere based on some feedback with some friends.

  9. My in-laws both have pensions – my MIL was a teacher and my FIL worked for the state government. They are always confused as to why my husband didn’t chase a pension job and why we question the long term viability of my SIL’s state teacher pension in 20 years.

    Definitely a great deal though the security is only there if the provider is actually able to pay it. Federal government seems like a safe bet, but taking less money for the promise of a corporate pension can be a dangerous game.

    Thanks for laying all the numbers out! Was really interesting to see how it breaks down!
    Chelsea @ Mama Fish Saves recently posted…Make Money While You Sleep: The Basics of Passive IncomeMy Profile

    • Thanks for stopping by Chelsea!!! I am really hoping the federal government can make good on the pension. That would really stink for a lot of potential retirees but clearly we see how pensions have been broken before.

  10. When I was in the government, there were a lot of younger folks in our group so we all had the FERS and were envious of the people who had CSRS because of the pension benefit. I have this option with the state, but I would have to work there for 11 years for it to trigger.
    SMM recently posted…How to Deal With Financial RegretsMy Profile

    • Thanks for sharing SMM!!! I think most of the CSRS people I knew were running towards the exits when I joined. So there weren’t too many people that I really knew personally.

  11. Pensions are certainly going extinct, so it’s nice to see some folks can still tap them (I remember when a 70 y.o. colleague retired a few years ago, she had TWO pensions from different companies, plus of course social security and an enormous 401K – nice).
    Paul recently posted…Talent and Luck Aren’t FriendsMy Profile

    • Wow that it’s incredible. I can’t imagine having that amount of inflows of cash between multiple pensions, social security and withdraws from a 401k. Sounds like she is/was set up nicely.

  12. Personally, I think pensions are overrated. Don’t get me wrong, it’s nice. It’s nice getting a certain percentage of your salary until you die. But I think one gets pigeon-holed far more than they realize just to get that “guarantee” of a pension. Whether that’s from a financial standpoint, or a work fulfillment standpoint. I’d probably say both. It also depends I guess on one’s aspirations and temperament as well. I’m definitely biased though. I just think working in the private sector opens up a lot more opportunities, and the end-result of a financial guarantee depends far more on your personal performance and the value you bring to society. Rather than anything structurally set, with very little leeway to do things differently or outside-the-box. Which is kinda more my style of doing things. But then again, maybe I’m romanticizing it a bit too much since I have nothing to base my opinion off of (not having been on the other side of the coin). And I’d imagine not every government job is the same.

    • I’ve been fortunate enough that I get to move every couple of years which has aided my growth along the way. It’s forced me to pick some jobs that I normally wouldn’t have gone after and stretched me which is a good thing since I’m an introvert 🙂

  13. My dad worked for the Federal Government for 37 years. He retired as a GS 12. He is on the CSRS pension. He gets a little more than $5k per month. If that was a defined contribution plan, he would need $1.5M with s 4% withdrawal rate. He is happy with the CSRS pension.
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  14. I worked in the federal government for 3 years (enough to get vested in the pension) though I’m sure it’s minimal. I moved over to state government which also has a pension. The pension here is more lucrative but I definitely miss the thrift savings plan and matching (no matching here with the state). I think pensions are great for those who aren’t financially literate or good at saving themselves but can be a bit of a golden handcuff otherwise.

    • I definitely agree for those that don’t/can’t be responsible with money that a pension is terrific. Just like I’m sure social security is a life saver for those that can’t save for retirement. I have to admit I really enjoy what I do and the work/life balance otherwise I’d probably look elsewhere.

    • Hahaha…that is a great question. It’s definitely something that I ponder from time to time. Hopefully things become clearer for me in the future and while I would love to move into financial coaching in the future for now I feel like I am suppose to be in the government.

  15. I’m a government employee and have to weigh in on this. The first 25 years of my career was outside of government, so my experience doesn’t match with your comparisons. Just prior to the government, I was at a top salary, with my mortgage paid, and transferred all of my 401(k) money into IRAs.
    I recently added up my freebies. These are government contributions to a variety of benefits that are not taxed in my compensation. I live in the NY metropolitan area and get a monthly transit benefit. I have a Health Savings Account and the government chips in a monthly amount and I get a 5% match on my Thrift Savings Plan.
    I am in the FERS retirement plan. I never paid much attention to the equation because it didn’t seem to add up to much. However, having this conversation with a corporate worker, their reaction was, “That’s more than I will get”. I originally thought this would amount to about $1,000 a month, which, by the time I retire, will cover groceries. After taking a closer look, the monthly amount as of Jan 1, 2017 is $1,500 if I retire at age 62. It’s almost $1,900 if I retire at age 65. That’s the calculated amount based on today’s salary. If I continue getting raises, the amount will increase.
    These freebies add up to an additional $27,000 of pre-tax contributions. If that’s grossed up to salary, it comes to about $45,000 in compensation.
    Granted, I don’t make the money that I used to on the outside, but the quality of life is priceless. Considering that I can go on vacation when I want, I have job security, the teleworking, and the work/life balance (8 – 4:30PM with credit hours for overtime), it’s a pretty good deal.
    If I add my salary plus the $45,000 of benefits, it comes out close to what I would be making on the outside but with less hours worked.
    I’ve been thinking about retiring at 59 ½, but seeing the increase in the pension numbers almost makes me want to work more. I will have the monthly pension, two Social Security accounts to draw from when we choose to take it, a Thrift Savings Plan in the hundreds of thousands, and personal IRAs plus savings.
    Not bad, right?

    • Wow Dora it sounds like you all have it made. I especially agree with the quality of life and that should definitely factor in as well. Being able to work 8 hour days and then go home is priceless. Definitely don’t miss having to work longer hours on the outside and it’s definitely not something I want to do ever again 🙂

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