FEDweek

High-5 Versus High-3

Rep. Bruce Westerman, R-Ark., has introduced a bill to change the current method for calculating a federal employee’s annuity from one based on the average of his or her highest three consecutive years of basic pay to the highest five years.

According to Westerman, “This bill would simply change the formula for determining pension benefits for civilian federal employees from the best-earning three years to the best-earning five years of service. The bill ensures that the program employees of the federal government have paid into for their careers is available in retirement and sustainable for future generations.”

If his bill became law, it would be effective for retirements that begin January 1, 2017 and later.

This is not the first time such a proposal has been raised and — assuming that, like the others, it does not gain enactment — it likely will not be the last. Why? Because the Congressional Budget Office has estimated that this change would save $3.1 billion over a 10 year period.

To illustrate, I’ve created an example based on a salary of a nice round $100,000 in the fifth year before retirement and an annual pay increase of 3 percent. For simplicity’s sake, it doesn’t account for variations created by step increases and promotions happening at varying times of the year.

Year 1: $100,000
Year 2: $103,000
Year 3: $106,090
Year 4: $109,272.70
Year 5: $112,550.88

High-3: $109,304.52
High-5: $106,182.72

Under high-3, the figure used in your annuity computation is only $3,246.36 less than your final salary, where under high-5, it’s $6,368.16 less. Looked at another way, the high-3 calculation would be based on a figure that equals 97+ percent of your final year of basic pay. Under the high-5 calculation, the annuity would be based on a figure that equals only 94+ percent of your final year’s basic pay.

How does that affect the value of the annuity? Let’s assume retirement at age 60 with 35 years of service. Under CSRS, that many years of service yields an annual benefit of 66.25 percent of high-3, meaning $72,414 in this example. Under high-5, that would be cut to $70,346.

Under FERS, 35 years of service for someone retiring under age 62 yields an annual benefit of 35 percent of high-3, meaning $38,256 in this example. Under high-5, that would be cut to $37,163. (Note: The reduction would be proportionately larger if retiring after age 62 with at least 20 years of service, when a 1.1 percent per year multiplier is used.)

Those annual differences, of almost $2,100 in the first case and $1,100 in the second, would continue every year throughout retirement. In addition, since future COLA adjustments would be made on those smaller amounts, the COLAs would be worth less, too.

You can do your own estimate based on your salary and raise assumptions but the point will always be the same: that $3.1 billion in savings would come from the pockets of you and your fellow future retirees.

I think you’ll agree with J. David Cox, the president of the American Federation of Government Employees, which opposes Westerman’s bill. He said, “Federal employees have already lost $159 billion in earnings due to pay freezes, pension cuts, and similar maneuvers that made them the scapegoat for an economic downturn they had no part in creating. Federal employees are working class people just like most other Americans, and singling the out for more pain and sacrifice is just plain wrong.”