In 2021, I received a new salary offer that was a few thousand dollars less than Patrick’s federal government salary at the time. But I made more money than Patrick.
What?
When you accept a new compensation package, it is important to look beyond just the salary because your benefits may increase the pay received from your employer, and fees may decrease the pay received from your employer. Working for the federal government is initially not as lucrative as it may appear since each employee pays what is essentially a salary tax to the Federal Employees’ Retirement System (FERS) to fund its pension program. Since there are nearly two million employees of the federal government, it is important to calculate pay accurately.
FERS Tax
Federal government employees receive a pension by completing at least five years of civilian service. After five years of service, government employees are vested in FERS and are eligible to receive a small pension. The value of the pension grows with salary increases and service time.
But the benefit is not free. Employees hired by January 1, 2013, pay a small 0.8% of their salary as a fee to participate in FERS upon retirement. Employees hired between January 1, 2013 and December 31, 2013, pay 3.1% of their salary towards FERS. Employees hired in 2014 and beyond pay 4.4% of their salary towards FERS.
If you were hired on January 1, 2014, you pay 4.4% of your salary to one day receive a FERS benefit. Meanwhile, your colleague hired in 2012 pays only 0.8% of their salary to receive exactly the same benefit.
While these percentages seem small, they follow you over your whole government career. To actually receive a decent FERS benefit in retirement, that means spending a long career with the federal government and handing more than a hundred-thousand dollars over the course of your career without counting interest. Assuming you enter government as a GS-7, spending two years at each grade before spending the remainder of your career as a GS-15 from years 17–30, you would pay more than $500,000 over a 30-year career, assuming an 8% interest rate.*
Half a million dollars in salary tax to pay for your retirement. Work 40 years instead? The money you pay into FERS will exceed $1,250,000, assuming an 8% interest rate.
Salary Comparison
Say you are a GS-13 in the DC area making $112,015 a year.* You just received an offer letter from the private sector for $106,000 with a 7% employer 401(k) match. This private sector job offer is worth more than your government salary.
Here is the math:
Should you take the lower salary that is actually a higher income in the private sector? That depends on your goals and how long you plan to spend in the workforce. While the FERS tax does lower your compensation overall, it does also offer some long-term benefits, if your length of service is long enough for them to make sense for you.
Benefits Received
Federal government employees do receive retirement benefits in exchange for this payment, so it is not a tax without potential rewards. There are two main retirement benefits for government employees:
Pension benefits
Thrift Savings Plan (TSP) match
Federal government employees receive a federal pension equivalent to 1% of the average of the highest three years of salary multiplied by the number of years worked in government service if they retire before age 62 or with fewer than 20 years of service. If an employee retires above age 62 with at least 20 years of service, they receive 1.1% of the average highest three years of salary multiplied by the number of years worked in government service. This amount continues for the remainder of the individual’s life, operating like an annuity. To get an idea of what that translates to each year, this would be the calculation for a 30-year career ending after age 62 with at least three years spent at the top of the GS-15 range**:
$183,500 × 1.1% = $2,018.50
$2,018.50 × 30 = $60,555.00
Annual pension benefit: $60,555.00
An annual pension of $60,555 is a generous benefit. If that employee wanted to save a principal amount of money and live off of 4% withdrawals instead of taking advantage of the pension, they would need $1,513,875.00 in the bank to provide $60,555 annually. That is more than the 4.4% paid into FERS over the course of a 30-year career, even when accounting for interest.
So why do I remain a bit pessimistic about the pension benefit?
Years of service and retirement age are both integral to the equation. If an employee retires after 20 years of service, still a long time in my retiring-before-40 opinion, and before age 62, that benefit is only $36,700 a year even if the employee had three years at the top step of GS-15. To again compare to investing a principal and living off 4%, this would require accumulating less than $1 million to surpass the $36,700 benefit. With compound interest over a 20-year career, that is not difficult. For example, if you only maximize contributions to a 401(k) over a 20-year career, have no employer match, and make no other retirement contributions, you end up with $1,112,016 at the end of that 20 years, assuming an 8% interest rate.
To supplement the pension benefit, the federal government now also offers a TSP match of up to 5% of contributions. TSPs are the federal government version of 401(k)s and have relatively low management fees, making them a good deal relative to many other employer management platforms. By our standards, the match is moderate, but the low management fees make it more beneficial than many other options.
Weighing the Pros and Cons
The TSP’s 5% match almost exactly counteracts the FERs tax of 4.4% plus the low management fees for the TSP. In other words, considering the TSP match and the FERS tax together puts the employee at about net zero.
This means the decision of whether government employment is a good deal for you comes down to whether the pension is a good deal for you. If you know you want to work for the federal government for at least 30 years and retire at age 62 or older, it is a great deal. If you want to retire sooner, or may want to switch employers, the value of the benefit decreases rapidly with fewer years of service. I consider approximately 20 years (or a bit sooner) to be the cutoff since I find it easier to just invest the money and have the freedom of not relying on the years of service, but your own calculations may be different based on other potential career paths in your field of choice.
Particularly if you are unsure about staying in federal service for your whole career, take the time to consider your career path. Assess your personal goals and whether this ends up being a good deal for your plans.
* Calculations are based on the current 2023 GS Scale for DC-MD-VA-WV-PA. These numbers will get higher as salaries rise, but they will be lower in areas with lower regional GS Scales (which vary based on the local cost of living).
** To simplify calculations, I just used the 2023 rates again rather than researching historic salaries and averaging them. This makes the benefit slightly higher, but it will grow as salaries increase in future years.
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