With the exception of senior executives and other wealthy tycoons, most Americans don't enjoy the retirement benefits accorded to members of Congress.
The details of their pension plans are worth checking out, but be forewarned: Their pension system is complicated by virtue of the fact that several changes have taken place over the years, and because, well, Congress was involved in making the rules. Of course they're complicated!
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For instance, members of Congress who were elected prior to 1984 had access to a plan called the Civil Service Retirement System, or CSRS. They did not pay payroll taxes, nor did they receive Social Security benefits. But they did contribute to the CSRS.
A law passed in 1983 required all members of Congress to participate in Social Security as of Jan. 1, 1984, regardless of when they were elected. Soon after, new retirement benefits for Congress were introduced that complemented Social Security benefits. The centerpiece of the plan is called the Federal Employees' Retirement System, or FERS.
As a result of all the changes, members of Congress get coverage from one of four different arrangements:
- CSRS and Social Security: This involves paying the payroll tax of 6.2 percent up to $113,700 of salary in 2013 (same as all other Americans who participate in Social Security). Senators and representatives also contribute 8 percent of their pay to CSRS, which is matched with an equivalent contribution from Congress.That 8 percent contribution is not subject to a wage cap, meaning wages above $113,700 are subject to it.
- The CSRS offset plan: CSRS contributions and benefits are reduced by Social Security contributions and benefits. This plan requires a 6.2 percent contribution to Social Security, same as everyone else's, and a 1.8 percent contribution to CSRS, up to $113,700 of salary. Above that salary level, an additional 8 percent is levied for CSRS.
- FERS and Social Security: Again, this is complicated due to rule changes. Members elected before 2013 pay 1.3 percent of their total salary to FERS and 6.2 percent to payroll taxes up to $113,700. Congress pays 18.3 percent toward FERS for members enrolled in FERS prior to Dec. 31, 2012. Members elected after Dec. 31, 2012, pay 3.1 percent to FERS. Congress contributes 9.6 percent of salary toward FERS for these employees, who also pay Social Security taxes up to the wage cap.
- Social Security alone: Members of Congress elected before September 2003 can elect to decline FERS coverage if they feel inclined to do so; those elected since then get mandatory coverage. Those who decline would get only Social Security, so they must pay 6.2 percent payroll taxes up to the wage cap.
Typical Retirement Pensions
Members of Congress are vested (meaning entitled) to receive pension benefits from either CSRS or FERS after five years of service. They are generally able to collect benefits at an earlier age than other federal employees -- with fewer years of service. And their benefits are greater -- though, in all fairness, they contribute more for the benefits than regular federal employees. Like other pension plans, the benefit amount is based on tenure, the three highest years of pay and an accrual rate. A report from the Congressional Research Service provided these examples of retirement benefits for Congress:
- A member of Congress retiring with 20 years of service under FERS and a high three-year average salary of $174,000 would get an initial annual FERS pension of $59,160.
- A member of Congress retiring with five years' service under CSRS and 25 years under FERS at the same salary level would get an initial annual pension of $89,610.
- A member of Congress retiring with 30 years of service under the CSRS offset plan would get an initial annual benefit of $130,500. However, at age 62 or older, this amount would be reduced by the amount received from Social Security attributable to federal service.
All these benefit amounts are enhanced by cost-of-living adjustments -- something that most pensions in the private sector do not get.
The Thrift Savings Plan
Regardless of which retirement plan they're covered by, members of Congress also have access to the Thrift Savings Plan, or TSP, which is like a 401(k) plan, except on steroids.
All federal employees in the TSP get a 1 percent contribution from the agency employing them even if they don't contribute to the plan. This contribution is vested (meaning they can't be forfeited) after two years of service. Those who contribute to the TSP get a 5 percent match from their employing agency. Members of Congress covered under FERS get this 5 percent match. Those under CSRS do not get the match, but they can contribute up to the limit, which in 2013 is $17,500 ($23,000 for those 50 and older).
The TSP is run efficiently. Expenses are offset by forfeitures of the 1 percent agency contributions if federal employees leave before they are vested as well as other forfeitures, and loan fees are applied to defray plan expenses. As a result, the TSP costs employees just 0.027 percent, or 27 cents per $1,000 invested.
Meanwhile, for those Americans with access to a workplace retirement plan, expenses for a 401(k) plan range between 0.2 percent and 5 percent, according to BrightScope, depending on the size of the plan.
Small plans get crushed by expenses.
How does this fee advantage benefit those in the TSP plan? Assuming a 7 percent annualized return and, just to keep things simple, a $5,000 annual contribution over 30 years, TSP plan participant paying 0.027 percent a year versus would amass more than $470,000 while a 401(k) plan participant paying 1 percent a year would have a balance of $395,000. Calculations do not include matching contributions.
The TSP plan participant ends up with a nest egg worth nearly 20 percent more than the 401(k) plan participant, thanks to the low fees. Imagine the disparity in savings if we considered more expensive 401(k) plans.
What happens to members of Congress who only serve one four-year term? They can keep whatever they have vested in the Thrift Savings Plan, but they are not entitled to a pension under CSRS or FERS. That's because they need at least five years of service to be vested in a pension plan.
That's all the more reason for new congressional members to focus on winning the next election!
This piece originally appeared at Bankrate.com