Federal Retirement

Introduction

Federal employees who have participated in the Thrift Savings Plan (TSP) have experienced the same type of dramatic losses as other Americans with 401(k) types of retirement savings. Fortunately, the two major federal retirement plans provide defined benefit pensions, so federal employees’ economic security in retirement has not been entirely undermined by the recent volatility in equity markets. Federal retirement benefits are the only component of federal compensation that is roughly comparable in value to prevailing standards for large private and state employers. However, AFGE is seeking three important changes in the terms of federal employee retirement benefits that will, if enacted, bring them into line with private sector practice: equalizing the treatment of unused sick leave between the two main retirement systems, providing for automatic enrollment in the TSP, and introducing a Roth-type option within the TSP as either an alternative or supplement to the current 401 (k) type of savings option that the program provides. In the last Congress, the House of Representatives passed H.R. 1108, the Family Smoking Prevention and Tobacco Control Act. This bill addressed all three of AFGE’s objectives regarding the modernization of federal retirement benefits, and we urge the new Congress to enact similar legislation promptly.

Credit for Unused Sick Leave Under FERS

One of the most significant differences between the Civil Service Retirement System (CSRS) and the Federal Employees Retirement System (FERS) is the way they treat unused sick leave. CSRS was closed to new enrollment as of 1983. FERS was established as part of the expansion of Social Security coverage to federal employees in 1984. CSRS allows unused sick leave to be credited to the length of service that is used for calculating a worker’s annuity. Both regular and survivor annuities under CSRS are computed by adding any unused sick leave to the number of years and months of services credited to a worker. The conversion rate used by OPM is 5.79 hours of unused sick leave equals one day, a month is 30 days. Fractions of a month do not count. There is no maximum number of unused sick leave days that CSRS employees can credit to their length of service at retirement. Under FERS, unused sick leave is not counted at all in the calculation of an annuity. One exception is that employees who switched from CSRS to FERS can convert unused sick leave accrued up until the date of their conversion toward their length of service upon retirement. Another exception is Title 38 medical professionals, who are able to credit unused sick leave accumulated since mid-2002 to their length of service.

The inequity between the two retirement systems has emerged as a significant management issue, as FERS employees nearing retirement have an incentive to “use it or lose it.” Managers fear that during the year prior to retirement, employees with exemplary attendance records may suddenly find reasons to catch up missed doctor’s appointments. Others voice a concern that there is no incentive to conserve sick leave, and the policy encourages its use. Finally, federal employees feel as though there should be the same financial recognition of a career with exemplary attendance that federal employees under CSRS have long enjoyed.

The bill passed in the last Congress phased in the equalization over three years. After that, FERS employees would join their CSRS coworkers in having all of their unused sick leave credited to the length of service that is used for calculating their retirement annuity. This change would have applied to both regular and survivor annuities under FERS. During the first three years, FERS employees would have receive credit for 75% of their sick leave.

The inequity between the two retirement systems has concerned both workers and managers, in that it gave FERS employees no incentive to conserve sick leave, and no financial recognition for good attendance. We urge the new Congress and the Obama Administration to support equalization of the treatment of unused sick leave between CSRS and FERS.

Automatic Enrollment

Under current law, new federal employees have to choose to participate in the TSP. If they do so, they receive significant government agency matches to their own contributions. However, many new federal employees find the explanations about the TSP during their orientations to be confusing, and decide not to enroll, inadvertently losing out on the agency matches to their contributions. Under the legislation passed in the last Congress, the automatic enrollment provisions of the 2006 Pension Protection Act would have been extended to TSP participants under FERS. Federal employees would obtain both the automatic 1% plus dollar for dollar employer matches for employee contributions up to 3%. Employees would still have the option to decline enrollment. The change from an opt-in approach to the TSP to an opt-out approach is strongly supported by AFGE, as it presents an excellent opportunity for employees to enhance their economic well-being in retirement.

Roth Plan in TSP

AFGE also strongly supports the introduction of a Roth-style option into the TSP. The bill passed in the last Congress required the creation of a Roth option in the TSP. Roth accounts differ from the traditional TSP accounts in that Roth accounts are funded with taxable income and a traditional TSP accounts are funded with "pre tax" income. When the funds from a Roth account are withdrawn during retirement, the withdrawals are tax-free. When the funds from a traditional TSP account are taken out in retirement, they are taxable. The difference is when taxes are paid: for Roth accounts, it is prior to deposit, for traditional TSP accounts, it is when the funds are withdrawn.

Roth accounts are a good option for those whose incomes are so low that that they owe little or no income tax when they are funding the accounts. The main beneficiaries of this option will be active duty military TSP participants. Some lower-graded civilian federal employees may also be advantaged by the Roth option, especially those whose incomes, and income tax liability, are likely to rise considerably over their careers. Under the legislation, employees would have had the option to receive their employer matching funds in either a traditional or Roth-type of account.

Conclusion

AFGE urges Congress to pass legislation that would equalize the treatment of sick leave between CSRS and FERS, provide for automatic enrollment in the TSP so that all federal employees are able to benefit from guaranteed government contributions, and allow the introduction of a Roth-type option into the TSP. These three modest changes constitute important modernizations of federal retirement benefits, and would contribute substantially to government efforts to recruit and retain the next generation of federal employees.