If you were a FERS employee retiring before age 62, the difference in your starting annual annuity between using the high-3 base and a high-5 base would be $19,675 vs. $19,113. Less $562 / month. Image: Andrii Yalanskyi/Shutterstock.com
By: FEDweek StaffCongress once again is working on proposals to reduce the cost to the government of retirement benefits for federal employees who retire in the future—that is, to degrade the value of those benefits to those new retirees.
One of those ideas has been to base the calculation on the retiring employee’s highest five consecutive years of average basic pay rather than their highest three years currently used. That has been proposed year after year by some Republicans on Capitol Hill, ultimately to fall aside.
That apparently will be the case again, as Republican leadership deleted a provision that would have done so from the “reconciliation” bill that the House has now passed and sent to the Senate. However, this was as close as “high-5” ever has come to enactment, so it is worth knowing the potential impact. History suggests that it will return.
Under that bill as it was drafted in the House, that change was to effect with those retiring in calendar year 2028 or later—originally, 2027 or later—with the exception that high-3 still would apply to employees under special retirement rules for law enforcement officers, firefighters and air traffic controllers.
Let’s say your current salary is $60,000 and you will become eligible to retire, and want to do so, in five years with 30 years of service at that time. Let’s also assume that you will receive pay raises during your next (last) years of work of 3 percent per year, all the potential types of raises combined—basic annual raises, within-grade increases, higher pay upon promotion, and so on.
Note: You can easily substitute other figures for any of these; the key is to understand how this works.
Under these assumptions, your salary for those five years would be $60,000, $61,800, $63,654, $65,564 and $67,530. Using a high-3 salary base, only the average of the last three years, $65,583, would be used for calculating your annuity. But including all five years for a high-5 base, the figure used would be $63,710.
Here’s how that would translate into a difference in the annuity (remember that this is just one illustration, based on the above assumptions):
If you were a FERS employee retiring before age 62, the difference in your starting annual annuity between using the high-3 base and a high-5 base would be $19,675 vs. $19,113 – $562. If you were to retire at age 62 or later with at least 20 years of service—pertinent here because we’re assuming 30 years—the figures would be $21,642 vs. $21,024, a difference of $618.
If you were a CSRS employee, the difference in your starting annual annuity between using the high-3 base and the high-5 base shown above would be $36,890 vs. $35,837 – $1,053.
Those differences would not only continue year after year through your retirement but also would compound, because each year’s cost-of-living adjustment (COLA) would be added to smaller amounts.
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See also
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