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The Military and Civil Service Pensions

Reprinted from PN September 2012

The Civilian Federal Employee Retirement System offers an excellent opportunity for veterans to earn pension income from their time served on active duty.

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The Civil Service Retirement System (CSRS) was established by Congress in 1920 to provide pensions to retired civilian federal employees. 

CSRS is a prefunded employee pension system that requires employees and the federal agencies that employ them to contribute toward the cost of the pension. The contributions are then invested in special-issue U.S. Treasury bonds that are held by the Civil Service Retirement and Disability Fund (CSRDF) until the retired federal employees begin drawing their pensions.

Employees contribute to the CSRDF through payroll deductions. These deductions started with initial contributions of 2.5%, and through congressional acts they have increased to the current level of 7%. 

When CSRS was established, Congress allowed military service to be credited toward a civil service pension. Military service can only be credited toward CSRS if the person is not receiving a military pension for that service.

In addition, an employee may be required to make a deposit to the CSRDF for their military service to be credited toward a civil service retirement annuity.

Adjustments

Since 1920, Congress has amended CSRS and Social Security to provide benefits for retirees and their dependents.

These amendments have attempted to coordinate military service, civilian federal employee service, and the benefits granted by Social Security.

There have been numerous adjustments to Social Security and CSRS, and both have attempted to ensure military service received credit for the benefit of veterans and their dependents. Many of the adjustments have also addressed the employee’s ability to receive civil service pension, Social Security, or both. 

Federal Employee System

In 1986, Congress established the Federal Employees’ Retirement System (FERS) for federal employees who were hired after 1983 or those who elected to transfer from the CSRS to FERS.

Employees under FERS also earn Social Security retirement benefits, so the FERS basic retirement annuity is smaller than the CSRS retirement annuity.

Contributions to CSRS and FERS must be paid by employees to their civil service pensions, but employees under FERS are also required to pay Social Security payroll tax.

While the CSRS employees contribute the full 7% to the CSRDF, those employees under FERS pay .8% to CSRDR and 6.2% of their pay to the Social Security trust fund.

Omnibus Reconciliation

The Omnibus Budget Reconciliation Act of 1982 (OBRA) created a process by which military veterans who become federal employees and are eventually
eligible for Social Security can avoid having their civil service pensions reduced.

Under OBRA of 1982, veterans hired into civilian federal employment before Oct. 1, 1982, are allowed to make a CSRDF deposit in an amount equal to the total deductions they would have made had they been in civil service instead of the military. 

The deposit would be what would have been withheld from their basic military pay. Veterans hired before Oct. 1, 1982 are not required to make this deposit; however, their military service will count toward their civil service retirement annuity only until they become eligible for Social Security. 

Veterans hired before Oct. 1, 1982, must make their deposit to the CSRDF prior to separating from federal service or their federal retirement annuities will be reduced when they are eligible for Social Security. 

Those in CSRS must deposit 7% of their total basic pay received while on active duty; for those enrolled in FERS, their deposit is 3%. These deposits can be made in one lump sum or through payroll deduction.

Interest payments must also be paid by employees hired before Sept. 30, 1982, if they didn’t make a deposit within three years after the enactment of the OBRA of 1982.

Interest is also charged on deposits made after Oct. 1, 1985. Interest is not charged if employees make their deposit within the two-year period following their hire as civilian federal employees. Prior to separation from federal employment, all deposits for any military service must be paid to the CSRDF.

The Normal Cost

The pensions for civilian federal employees are prefunded, and the cost of this prefunding is called the pension’s “normal cost.”

The normal cost is the percentage of the employees’ earnings that must be set aside yearly for the pension prefunding. Several factors go into determining the normal cost of employee pensions such as salary, amount of pension benefit relative to the salary, tenure, and expected inflations, interest rates, and future mortality.

Once the normal cost is determined, the percentages of the employees’ contributions are set; currently they are at 7% for CSRS and .8% for FERS. These amounts are only part of the cost of the annuities for the civilian federal employees, and the remaining percentage of the normal cost is paid by the federal agencies that employ them.

An Excellent Opportunity

As our government works through the Veterans Opportunity to Work (VOW) Act and Paralyzed Veterans of America’s Operation PAVE counselors work to put our veterans back to work, it is important to remember that years of military service may be counted toward a pension if the veterans work as a civilian federal employees and they make a deposit to the CSRDF for the time they served in the military.

Many of the current federal employees hired after Sept. 30, 1982, and all newly hired personnel would be enrolled in FERS. If they are veterans who do not receive a military pension, they would be eligible to have their military service credited toward their FERS annuity as long as they make the required 3% deposit of their total basic pay received while on active duty and the deposit is made prior to their separation from federal employment.

The Civilian Federal Employee Retirement System offers an excellent and likely unique opportunity for veterans to earn pension income from their time served on active duty.

For more information, visit opm.gov/retire/pre/csrs/index.asp or pva.org.

 

Contact: PVA Veterans Benefits Department, 800-424-8200. 

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