How do federal retirement programs differ from the private sector?

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Federal pension systems (civilian and military) are different from many employer-provided pension plans in the private sector in several ways – and that’s a good thing.

First, many private sector retirement systems consist of a 401(k) type plan and that’s it. Less than 20% of employers offer a defined benefit plan such as FERS or BRS. BRS stands for the military “mixed retirement system”. Imagine how less secure our retirement years would be without the security of an FERS or BRS pension. I didn’t mention Social Security here because it’s a given; 96% of American workers are covered by Social Security, including FERS, BRS, and private sector workers.

Second, among private sector systems, many do not guarantee lifetime monthly payments. These systems generally offer the retiree an option between a lump sum distribution and lifetime payments, while FERS and BRS only offer a lifetime annuity (pension) and no lump sum payment. A lump sum distribution represents the present value of future pension payments and is usually a large sum of money.

FERS and BRS offer a lifetime income guarantee for the rest of the retiree’s life; neither system gives the pensioner the choice of a lump sum distribution. Choice may be a good thing, but monthly checks, such as FERS and BRS retirees, provide future financial security and protect the retiree from the adverse effects of bad money movements. A recent MetLife survey showed that 1/3 of retirees who chose a lump sum spent the entire amount in five years.

Granted, the financially savvy will lament the lack of choice they have in their defined benefit plan, but being financially savvy, they likely have money in the TSP and IRAs that they can invest. This group certainly wouldn’t have ended up in the third of the lump sum payment recipients who spent all the money in five years.

Another difference between the private sector and the FERS/BRS is that we get cost of living adjustments (COLA). Many retirees from other levels of government (eg, state, local, etc.) also have COLAs, but very few private sector pensions do.

Often we don’t realize how lucky we are to be federal civilian employees or members of the uniformed services. Our retirement benefits give us a reason to be grateful.

© 2022 John Grobe. All rights reserved. This article may not be reproduced without the express written consent of John Grobe.

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