The Value of a CSRS Pension

[GregLee]

Quote:

Originally Posted by Nords bust sanctuary

What does that mean?

[Purron]

Quote:

Originally Posted by martyb Well...I guess I should have read the latest posts from beowulf & I wouldn't have had to comment on a couple of them. Sorry about that! Also...I did forget to mention the part about the ability to add any unused sick leave to the pension equation. When I retire, I'll be 55, with just under 36 yrs.

Dang, nearly 36 years? You deserve a good retirement

[Nodak]

[QUOTE=Purron;991535]Yes, CSRS is an awesome deal. However, it's important to note that those under CSRS don't get social security benefits and matching contributions to the TSP like those under FERS. /QUOTE]

I worked my 40 quarters before I started Civil Service so I do collect both CSRS and SS. Started working in the local theater at the age of 13. However, my SS benefit is reduced by about 35% because of the CSRS pension.

[martyb]

Similar case here...I started paying in to SS when I was 15, and then through high school, my time on active duty, and a little while afterwards. All those years I spent in the AF reserves, I was also paying in, but it wasn't enough to be considered "substantial" years. Still...I'll get a little sumpin'. I did buy back my 4 1/2 years of active duty time for my CSRS, but unfortunately I waited way too long, and so what would have been around $1500 ended up costing me $8263, with all the interest that accrued.

[beowulf]

martyb - whatever it cost, it was well worth it since you would lose those years when you turn 62. I bought back 6 years and I am very happy I did. One of my friends, for whatever reasons he had, refused to do it, and at age 62 he "lost" 3 years, or 6% of his CSRS pension. For him, that came to nearly $5K a year. More in one year than it would have cost him to pay back. He tried the appeal route claiming that personnel never told him about it, but virtually no one is ever successful. He wasn't and several years later he is still very upset about it.

One other area that I see some people messing up with, and this applies to both CSRS and FERS employees, is failing to have carried FEHB (health insurance) for 5 full years prior to retirement. They were generally on a spouse's insurance and either had to work an extra 5 years with FEHB, or forgo it in retirement. Bad way to end your career.

BTW, I am pretty sure that FERS employees MUST payback their military time or they will not get those years of service credited.

[Spanky]

Quote:

Originally Posted by beowulf "CSRS: Depending the number of years of service, one can receive up to 100% of the average of the highest three salaries + cost of living adjustment + medical benefits -- what a deal!!!!!" There is no way any CSRS retiree can earn 100% of their salaries. If they max out at 41.5 years and never, ever, use a day of sick leave, they could add maybe 1.5 years to the 80%, which would come to about 83%. In fact, the vast majority of CSRS retirees retire at about age 60 with just over 30 years of service with an average pension of about 60% of their high 3. Still a great deal, but not available to new hires for the past 26 years.

Thanks for clarifying the CSRS system. As you say, 60% of the average of the highest 3 years of salary is definitely a great deal. For SS, the highest benefit is $27,876 with a salary of $106,800. For CSRS, using the same salary of $106,800, the benefit is $64,080 @60% or $85,440 @80%.

You are right - it's a great deal.

[Spanky]

After some calculations, I wonder why we should pay into the social security system. The maximum yearly SS benefit is only $27,876 for a 2010 FICA salary of $106,800. If we had invested 7% of salary with a 6% return for the last 30 years, the amount would have been $570,752 now (based on initial salary of $46,800 @3% growth to yield $106,800 after 30 years). Instead of using the $570,752, we are at the mercy of the government to provide $27,876 for the first year of retirement + inflation adjustment for the rest. For the next 20 years, the total disbursement would be $749,039 based on an inflation rate of 3%, while our $570,752 would have grown to $1,726,867 @6% return.

Obviously, the assumption of salary growth makes a difference. If we assumed the salary growth is 5%, the amount would be about $400K (instead of $571K) after 30 years. In another 20 years, the amount would rise to about $1.3 mil @6% (as opposed to $1.7mil).

[stoutboy]

Beowulf:

you are correct--I had to buy back my four years of active duty. It didn't cost that much, and for me it was completely worth it-money well spent at twice the price.

Quote:

Originally Posted by beowulf martyb - whatever it cost, it was well worth it since you would lose those years when you turn 62. I bought back 6 years and I am very happy I did. One of my friends, for whatever reasons he had, refused to do it, and at age 62 he "lost" 3 years, or 6% of his CSRS pension. For him, that came to nearly $5K a year. More in one year than it would have cost him to pay back. He tried the appeal route claiming that personnel never told him about it, but virtually no one is ever successful. He wasn't and several years later he is still very upset about it. One other area that I see some people messing up with, and this applies to both CSRS and FERS employees, is failing to have carried FEHB (health insurance) for 5 full years prior to retirement. They were generally on a spouse's insurance and either had to work an extra 5 years with FEHB, or forgo it in retirement. Bad way to end your career. BTW, I am pretty sure that FERS employees MUST payback their military time or they will not get those years of service credited.

[beowulf]

"After some calculations, I wonder why we should pay into the social security system. "

You can blame/congratulate FDR for that system. CSRS, FERS, state and local pension systems, some company plans, etc., are pension plans. Some are defined benefit, most now are defined contribution. SS is a safety net social welfare redistribution system. It was never meant to be a full pension system - just a system that would provide some retirement income for the lowest wage earners so they would not be a burden to society. Rather than reading the official site, try this Social Security (United States) - Wikipedia, the free encyclopedia) for a more understandable explanation.

SS and pension plans simply cannot be compared. Think of it more like the taxes you pay for services you may never use. If you don't have kids, you will still pay for schools. If you never have a home fire, you still pay to support the fire department, etc.

SS has morphed over the years into something very different from what its creators intended. It was meant to be supplemental, not the primary retirement income for an ever growing number of people who can't or won't save for retirement.

No poilitical comments intended, just a very brief explanation of where we are today with SS.

[stoutboy]

we pay into social security for several reasons. The main one, though, is to ensure a means of retirement income to the working poor who do not earn enough to fund a retirement, and to protect all of us from the vagaries of the stock market. Millions of people would not have the discipline to save the way you indicate in your example, and the returns you use are by no means a given. Nothing is stopping you from setting aside 7% of your take-home salary to do what you outline below.

[sorry about the fonts, don't know what happened]

Quote:

Originally Posted by Spanky After some calculations, I wonder why we should pay into the social security system. The maximum yearly SS benefit is only $27,876 for a 2010 FICA salary of $106,800. If we had invested 7% of salary with a 6% return for the last 30 years, the amount would have been $570,752 now (based on initial salary of $46,800 @3% growth to yield $106,800 after 30 years). Instead of using the $570,752, we are at the mercy of the government to provide $27,876 for the first year of retirement + inflation adjustment for the rest. For the next 20 years, the total disbursement would be $749,039 based on an inflation rate of 3%, while our $570,752 would have grown to $1,726,867 @6% return. Obviously, the assumption of salary growth makes a difference. If we assumed the salary growth is 5%, the amount would be about $400K (instead of $571K) after 30 years. In another 20 years, the amount would rise to about $1.3 mil @6% (as opposed to $1.7mil).

[jdw_fire]

Quote:

Originally Posted by Spanky After some calculations, I wonder why we should pay into the social security system. The maximum yearly SS benefit is only $27,876 for a 2010 FICA salary of $106,800. If we had invested 7% of salary with a 6% return for the last 30 years, the amount would have been $570,752 now (based on initial salary of $46,800 @3% growth to yield $106,800 after 30 years). Instead of using the $570,752, we are at the mercy of the government to provide $27,876 for the first year of retirement + inflation adjustment for the rest. For the next 20 years, the total disbursement would be $749,039 based on an inflation rate of 3%, while our $570,752 would have grown to $1,726,867 @6% return. Obviously, the assumption of salary growth makes a difference. If we assumed the salary growth is 5%, the amount would be about $400K (instead of $571K) after 30 years. In another 20 years, the amount would rise to about $1.3 mil @6% (as opposed to $1.7mil).

i dont know if your numbers are right but a COLAed $27,876/yr represents a SWR of 4.88% (that is COLAed) based on a portfolio value of $570,752, not too shabby

[MasterBlaster]

Quote:

Originally Posted by Spanky After some calculations, I wonder why we should pay into the social security system. The maximum yearly SS benefit is only $27,876 for a 2010 FICA salary of $106,800. If we had invested 7% of salary with a 6% return for the last 30 years, the amount would have been $570,752 now (based on initial salary of $46,800 @3% growth to yield $106,800 after 30 years). Instead of using the $570,752, we are at the mercy of the government to provide $27,876 for the first year of retirement + inflation adjustment for the rest. For the next 20 years, the total disbursement would be $749,039 based on an inflation rate of 3%, while our $570,752 would have grown to $1,726,867 @6% return. Obviously, the assumption of salary growth makes a difference. If we assumed the salary growth is 5%, the amount would be about $400K (instead of $571K) after 30 years. In another 20 years, the amount would rise to about $1.3 mil @6% (as opposed to $1.7mil).

Your SS payment numbers are off by a factor of two. You pay 6.2% into SS and your employer pays 6.2 % for you into SS. Were you self employed you would get to pay the entire 12.4 % all by yourself.

As many economists have noted. Since the cost of employing you must go up to cover your employer-paid SS payments, that amount comes out of what you would otherwise be paid. So the true cost to you is indeed the full 12.4 % even though half of it is hidden from you.

[Spanky]

Quote:

Originally Posted by stoutboy we pay into social security for several reasons. The main one, though, is to ensure a means of retirement income to the working poor who do not earn enough to fund a retirement, and to protect all of us from the vagaries of the stock market. Millions of people would not have the discipline to save the way you indicate in your example, and the returns you use are by no means a given. Nothing is stopping you from setting aside 7% of your take-home salary to do what you outline below. [sorry about the fonts, don't know what happened]

Thanks for the explanation of the purpose of SS. While it's true that return of stock market is uncertain, a 6% return is very reasonable and realistic if history is of any guide.

[Spanky]

Quote:

Originally Posted by MasterBlaster Your SS payment numbers are off by a factor of two. You pay 6.2% into SS and your employer pays 6.2 % for you into SS. Were you self employed you would get to pay the entire 12.4 % all by yourself. As many economists have noted. Since the cost of employing you must go up to cover your employer-paid SS payments, that amount comes out of what you would otherwise be paid. So the true cost to you is indeed the full 12.4 % even though half of it is hidden from you.

You are right that my employers picked up another part of the payment. Therefore, it is a good deal for the government.

[jazz4cash]

I see lots of dollar on dollar analysis of the social security annuity, but the value(?) of the other (insurance, disability, etc) components is usually not included. I am sure there are cheaper, better options for those benefits as well, but very few typical workers would have the know-how to assemble all these benefits esp. without risk of being consumed by financial sharks.

[freebird5825]

Quote:

Originally Posted by jazz4cash What employee contributions were/are required for CSRS/FERS?

I was hired in 1988 so I was always FERS. No complaints.
I believe the answer is 0.8% of gross salary for the FERS pension. Someone correct me if I am wrong.

TSP has an automatic agency 1% contribution, then an uneven matching scale up to 5% maximum agency contribution.
The employee was originally held to a 10% maximum contribution, then it was increased from 11-15% per year, then the IRS made it an annual dollar maximum employee contribution.

[GregLee]

Quote:

Originally Posted by beowulf SS has morphed over the years into something very different from what its creators intended. ... just a very brief explanation of where we are today with SS.

What's the difference whether SS is what its creators intended?

[beowulf]

Quote:

Originally Posted by GregLee What's the difference whether SS is what its creators intended?

To me, the difference is that SS was meant to assist those in most need of help live out their older years without being on welfare or having to eat catfood. For everyone else, it was meant to be a supplemental program to pensions and savings. There is also the age issue - in 1934, the age expectancy in the US, according to the CDC, was 61.1 years. In 2007 it was 77.9 years. This is a total average for all sexes, races, etc.

The actuarial basis for the viability of SS was that about half of those covered would die before they collected anything. That's why the age was raised to 67 from 65. I would expect further increases as our life expectency increases.

There is also the basic fairness question of how easily can someone work past 62 or 67 if they engage in hard physical labor their entire working career. Not everyone works in an office. And whether there should be an asset limit on how much resources someone has before social security is phased out (i.e. - $5M, 10M, whatever).

I don't have any solutions (or at least none I can mention here), but it's pretty clear to most people that benefits will have to be cut, taxes raised, ages raised, some combination or something else or sooner, rather than later, the system will run out of money.

[GregLee]

Quote:

Originally Posted by beowulf There is also the age issue - in 1934, the age expectancy in the US, according to the CDC, was 61.1 years. In 2007 it was 77.9 years.

I am completely in sympathy with arguments that full retirement age should be increased in accordance with the increase in life expectancy, with the side benefit that the pay-as-you-go system for funding SS could then be extended far into the future -- perhaps forever. It would be fair, and it would make the system work. But I'm just saying that the original intent of the authorizing legislation strikes me as being irrelevant to such issues, having a merely historical interest.

[stoutboy]

Quote:

Originally Posted by beowulf I don't have any solutions (or at least none I can mention here),

what exactly might those be?

Quote:

Originally Posted by beowulf but it's pretty clear to most people that benefits will have to be cut, taxes raised, ages raised, some combination or something else or sooner, rather than later, the system will run out of money.

No need to cut benefits--if one thinks the viability of ss is in danger (I do not btw), the solution is simple:

• eliminate the payroll tax cap--it doesn't have to be 7 1/2%--3-5% would suffice.
• raise the age to receive benefits to 70 for all born after a certain date--I think the year 2000 is reasonable.

Problem solved.