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.
General Pay Increases 2012 – 2016 | |
Effective Date | Amount of Increase (%) |
Jan. 1, 2012 Jan. 1, 2013 Jan. 1, 2014 Jan. 1, 2015 Jan. 1, 2016 | 0.0 0.0 1.0 1.0 1.0 |
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:
Date | SF50 Salary |
Jan. 1, 2012 Jan. 1, 2013 Jan. 1, 2014 Jan. 1, 2015 Jan. 1, 2016 Dec. 31, 2016 | $90,136 $90,136 $91,037 $91,954 $92,883 $92,883 |
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”.
Date | SF 50 Salary |
Jan. 4, 2012 Jan. 4, 2013 Jan. 4, 2014 Jan. 4, 2015 Jan. 4, 2016 Jan. 3, 2017 | $128,560 $128,560 $129,852 $131,170 $132,495 $133,833 |
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
Computation of High-Three Average Salary | |||||
From | To | Total Time Yr-Mo-Day | SF 50 Salary X | Time Factor* Equals | Total Basic Pay |
12/31/2013 1/1/2014 1/1/2015 1/1/2016 | 12/31/2013 12/31/2014 12/31/2015 12/31/2016 | 0-00-01 0-12-00 0-12-00 0-11-29 | 90,136 91,037 91,954 92,883 | .003 1.00 1.00 .997 | $270 $91,037 $91,954 $92,604 |
3-00-00 | 3.00 | $275,865 |
* 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
Computation of High-Five Average Salary | |||||
From | To | Total Time Yr-Mo-Day | SF 50 Salary X | Time Factor* Equals | Total Basic Pay |
12/31/2011 1/1/2012 1/1/2013 1/1/2014 1/1/2015 1/1/2016 | 12/31/2011 12/31/2012 12/31/2013 12/31/2016 12/31/2015 12/31/2016 | 0-00-01 0-12-00 0-12-00 0-12-00 0-12-00 0-11-29 | 90,136 90,136 90,136 91,037 91,951 92,833 | .003 1.00 1.00 1.00 1.00 0.997 | $270 $90,136 $90,136 $91,037 $91,954 $92,604 |
0-60-00 | 5.00 | $456,137 |
*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
Computation of High-Three Average Salary | |||||
From | To | Total Time Yr-Mo-Day | SF 50 Salary X | Time Factor* Equals | Total Basic Pay |
1/4/2014 1/4/2015 1/4/2016 1/1/2017 | 1/2/2015 1/3/2016 12/31/2016 1/3/2017 | 0-12-00 0-12-00 0-11-27 0-00-03 | 129,852 131,170 132,495 133,833 | 1.00 1.00 0.992 0.008 | $129,852 $131,170 $131,435 $1,071 |
0-36-00 | 3.00 | $393,528 |
*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
Computation of High-Five Average Salary | |||||
From | To | Total Time Yr-Mo-Day | SF 50 Salary X | Time Factor* Equals | Total Basic Pay |
1/4/2012 1/4/2013 1/4/2014 1/4/2015 1/4/2016 1/1/2017 | 1/3/2013 1/3/2014 1/3/2015 1/3/2016 12/31/2016 1/3/2017 | 0-12-00 0-12-00 0-12-00 0-12-00 0-11-27 0-00-03 | 128,560 128,560 129,852 131,170 132,495 133,833 | 1.00 1.00 1.00 1.00 0.992 0.008 | $128,560 $128,560 $129,852 $131,170 $131,435 $1,071 |
0-60-00 | 5.00 | $650,648 |
*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.