The three parts of the Federal Employee Retirement System
The Federal Employee Retirement System has three main components. Rather than benefits coming from a single source, like a pension for some workers, retirement benefits come from three sources under the FERS.
Social Security benefits
Along with the specific benefits designed for government employees, people covered under FERS are also contributing to Social Security, so they qualify for Social Security benefits when they become disabled or retire. Social Security is based on individual contributions, calculated as a percentage of income.
This is an important side note because many people who are covered by pensions are not contributing to Social Security, so they lack the added protections that it can offer for family members during life and after death.
Basic Benefit Plan
The Basic Benefit Plan is a pension that pays government employees a set amount of money, regardless of what they've paid into its fund. The amount they receive is based on length of service and the average of the three highest paid consecutive years of service. (It only looks at base salary, not bonuses or overtime.)
Annual pension benefits are 1% of the average of an employee's "high-3" for each year they were employed. So, if a worker earned $50,000, $53,000, and $57,000 across their highest consecutive earning years, the Basic Benefit would be based on $53,333, the average pay across those three years.
Thrift Savings Plan
The Thrift Savings Plan (TSP) behaves like a 401(k), and has the same tax benefits and savings as one. During each pay period, the government will deposit the equivalent of 1% of basic pay into the TSP.
Employees can then contribute as much as 5% of pay, and the government will match it, just like a traditional 401(k). Federal workers get to choose from a list of investment options that the plan administrator has designed, although, like a 401(k), there's a limit on annual contributions.
