High-3 vs. High-5

The idea of basing federal retirement annuities on the highest five consecutive years of average basic pay, rather than three (as is currently the case), has been floated in years past but never made it very far in the legislative process. However, with all three branches in Republican hands, a less-generous high-five basis is closer to becoming reality than ever before – among other proposals again on the table as Congress tries to hammer out a budget that likely will require cuts.

With that prospect in mind, I thought it would be a good idea to see what difference it would make in your annuity if the change became law. To illustrate that difference, I’ve created a pair of examples. One for CSRS and the other for FERS.

In both examples, let’s say your salary was $60,000 in your fifth year out from retirement and your basic pay increased by 3 percent in each succeeding year. Your progression for those years would be: $60,000, $61,800 $63,654, $65,564 and $67,530. And you retire with 30 years of service.

Under the current high-3 calculation, where only the last three of those years would be used, your high-3 would be $65,583. Under the high-5 calculation using all five, it would be $63,170.


With 30 years of service, the CSRS annuity formula would produce an annuity that was equal to 56.25 percent of your high-3: $36, 890. Under the high-5 formula, it would be $35,837. That’s a difference of $1,053 a year.


With 30 years of service (and assuming retirement before age 62), the FERS annuity formula – which is less generous than CSRS – would produce an annuity equal to 30 percent of your high-3: $19,675. Under the high-5 formula, it would be $19,113. That’s a difference of $562 a year.

If you retired after age 62, a different formula would be used and the numbers would be higher but the gap would still remain.


Another difference between CSRS and FERS is that annual cost-of-living adjustments (COLAs) are applied to CSRS annuities, regardless of the age at which you retire. With rare exception, COLAs aren’t paid on FERS annuities until age 62, which would further widen the annuity gap.

Forewarned is forearmed. You need to pay attention to any discussion about changing the current high-3 annuity calculation to a high-5 and let your representatives in Congress know where you stand.

Next week I’ll explain what the FERS special retirement supplement is and the difference eliminating it would make.