EBRI Issue Brief

Twenty-Five Years After Federal Pension Reform

Jul 1, 2011 24  pages


THE FEDERAL EMPLOYEE RETIREMENT SYSTEM: Congress created the Federal Employee Retirement System (FERS) in 1986, in the most sweeping overhaul of retirement benefits for civilian workers in modern times. The law is now 25 years old, has changed little (other than modest expansion of investment choices), and remains the basis for retirement benefits provided to some 3 million civilian federal workers.

FERS AS BACKGROUND: With state governors and legislators currently grappling with many of the same issues Congress faced in 1986, FERS may provide useful background for their deliberations. This report provides a legislative history of the arduous five-year effort to overhaul the federal retirement system by enacting FERS and how various forces affected the passage of the law.

SOCIAL SECURITY FUNDING, BUDGET DEFICITS DROVE FERS: This landmark legislation resulted in large part from the need to shore up the Social Security system by broadening its base (by mandating coverage of the federal civilian work force), along with pressure from then-President Ronald Reagan to reduce federal spending. Through a remarkable combination of bipartisanship and trust among the key players in both the House and Senate (at the time, controlled by different parties), and shrewd legislative strategizing, lawmakers enacted a sweeping and cost-cutting law that fundamentally restructured the retirement benefits. The success of the law can be seen in the fact that, in the current debate over cutting federal spending, no sweeping proposals have been made to cut federal retirement benefits (although there is a proposal to raise workers’ contributions to their retirement plan).

A THREE-TIERED SYSTEM: Congress created FERS with three basic elements:

• Mandatory Social Security coverage of civilian federal workers as a base.

• A basic and mandatory defined benefit pension plan, but with a lower level of benefits than the rich plan that existed at the time.

• And a new voluntary thrift savings 401(k)-type plan (patterned after the private sector) where worker contributions matched by the employer would be invested in a limited variety of investment funds. The changes applied to most federal civilian workers hired after 1983, including the foreign service and intelligence agencies.

KEY FACTORS TO SUCCESS: Despite initial opposition from labor groups and veto threats from the Reagan administration, Congress ultimately enacted a plan that reduced federal spending and eventually won strong support from federal workers, particularly because of the Thrift Savings Plan (TSP). Lawmakers deliberately and carefully insulated the TSP from political manipulation and minimized the impact of the federal workers’ investments in the financial markets.