Pension Calculation Changes

One of the cost-saving proposals awaiting Congressional action is the change from the current high-three average salary to the high-five average salary in the calculation of a retiring federal employee’s CSRS or FERS annuity. Employees who are intending to retire within the next five years are very concerned with this possible change and how much of a negative effect this change will have on their CSRS or FERS annuities.

Federal employees should also beware that the proposed change to the high-five average salary has been around for years; in fact, it was first proposed in 1992. No action has been taken to date. But given the current budget/fiscal crisis facing the country, there is little doubt it will happen sometime in the near future. The question then becomes when it will be first used in calculating the annuities of retiring federal employees.

Federal Pension Calculation Example

Most importantly, the question is how much will the average retiring federal employee lose in his or her annuity if the high-five average salary is adopted for purposes of calculating a CSRS or FERS annuity? To answer this question, this column looks at two examples of employees who retired earlier in 2017. One employee is a FERS employee who retired on Dec. 31, 2016 at a GS-12 step 10 grade level. The other employee is a CSRS employee who retired on Jan. 3, 2017 at GS-14 step 10 grade level.

In both examples, assume that the employees were earning their highest salaries at the end of their federal service, whether in the last three years or in the last five years. Also, it is important to know that there were General Schedule pay raises that took effect during the years 2012 through 2016. To make the calculations simpler, any locality pay adjustments are not considered. Finally, while government-wide (General Pay) pay increases become effective on the first day of the new leave year in January, assume that in the examples here government-wide pay increases become effective each year on January 1.

Federal Employee #1 (FERS): GS-12 Step 10 as of 12/31/2011. Retires on 12/31/2016. The employee’s SF 50 salary history used to determine the high-three average salary or the high-five average salary is as follows:

Federal Employee #2 (CSRS): GS-14 Step 10 as of 12/31/2011. Retires on 1/3/2017. The employee’s SF 50 salary history used to determine the high-three average salary or high-five average salary is presented under “SF 50 Salary”.

Federal Employee #1. FERS employee retires on 12/31/2016 with 32 years of service, including one year’s worth of unused sick leave, at age 60.

 Calculation of FERS Annuity

(1) Using high-three average salary

* For Computing Total Amount for Any Period of Time at a Given Annual Rate. Found at https://www.opm.gov/retirement-services/publications-forms/csrsfers-handbook/c050.pdf

High-Three Average Salary = $275,865/3 = $91,995

(2) Using high-five average salary

*For Computing Total Amount for Any Period of Time at a Given Annual Rate. Found at https://www.opm.gov/retirement-services/publications-forms/csrsfers-handbook/c050.pdf

High-Five Average Salary = $456,137/5 = $91,227

Difference in high-three average salary versus high-five average salary is

$91,955 – $91,227 = $728

The difference in the FERS annuity for an employee who retires from federal service with 32 years of service for computation purposes:

FERS annuity using high-three average salary = $29,426

FERS annuity using high-five average salary = $29,193

Difference in FERS annuity = $233/year, or $11.65 per month

Federal Employee #2. CSRS employee retires on 12/3/2017 with 41 years 11 months of service and two years’ worth of unused sick leave at the age of 67.

Calculation of CSRS Annuity

(1) Using high-three average salary

*For Computing Total Amount for Any Period of Time at a Given Annual Rate. Found at https://www.opm.gov/retirement-services/publications-forms/csrsfers-handbook/c050.pdf

High-Three Average Salary = $393,528/3 = $131,176

(2) Using high-five average salary

*For Computing Total Amount for Any Period of Time at a Given Annual Rate. Found at https://www.opm.gov/retirement-services/publications-forms/csrsfers-handbook/c050.pdf

High-Five Average Salary = $650,648/5 = $130,130

Difference in high-three average salary versus high-five average salary is

$131,176 – $130,130 = $1,046

The difference in the CSRS annuity for an employee who retires from federal service with 41 years and 11 months of service, with two years’ worth of unused sick leave :

CSRS annuity using high-three average salary = $110,188

CSRS annuity using high-five average salary = $109,309

Difference in CSRS annual annuity = $879; difference in CSRS monthly annuity – $73.25

 Various other examples of high-three versus high-five average salaries were performed. The difference between the high-three average salary and high-five average salary ranged from $500 to $1,500. This leads to a financial decrease in the annual CSRS annuity of a maximum of $1,200 ($100 per month) (assuming 41 years and 11 months of CSRS service) and in the annual FERS annuity of a maximum $600 ($50 per month) (assuming 40 years of FERS service). These differences are not that significant. Furthermore, if the change to the high-five average salary becomes law in the near future, employees can likely make up the annual and monthly differences in their annuity payments by contributing more to the TSP and to their IRAs.