The Practical Effects of the Proposed Pension Changes

By • January 26, 2012 0 Comments

It seems unlikely the Ross bill, proposed on Jan 25, will become law in its current form, but the interest is so strong, I believe a full comparison – now – is of interest.  Please bear in mind this is all tentative and hypothetical based on the bill as it’s currently proposed. 

CONDITIONS.  Two FERS employees with identical salary histories; each starts at $40,000 and over a 30-year career they each experience salary increases averaging 3.5% annually.  In their final year, each is paid $108,475.  The first person retires in December of 2012 and his contributions, annuity, and annuity supplement are calculated under current rules, while the other fellow, who started on/after Jan 1, 2013, pays the higher rate, receives the smaller percent, receives no supplement, and has his annuity calculated with a high-5 average salary instead of high-3.  Both employees are under age 62 at retirement.

Illustration, hypothetical:

  Total Salary Employee Contributions High 3/5 Average Percent Annuity Supplement Total
 Old  
$2,064,793
 $16,518 (0.8%)  $104,847  30.0 $31,454 $16,596 $48,050
 New $2,064,793  $82,592 (4.0%)  $101,382  21.0 $21,290 $0.0 $21,290

 

Summary.  It appears that with identical salary histories, the person retiring this year will receive more than double the income at one fifth the cost of a “secure annuity” retiree under the new rules.  Of course, when the two persons become 62, the supplement for the “old” retiree will stop, and the difference will be less (i.e., the old guy will have a 50% advantage).

Notes:  

  • Contribution rate for current employees is scheduled to increase 0.5% annually for 3 years beginning in 2013, with a final rate of 2.3%.  Also, current employees retiring after 12/31/12 will not receive a supplement.
  • Percent per year of service for old is 1.0; new = 0.7.
  • Social Security not included in the above.

            

CSRS not included in above, nor are CSRS special or FERS special.  Congress is omitted, too.

How many/which changes will actually come to pass?  Your guess is as good as mine.

My website – fedbens.us – has nine calculators that may be helpful.

© 2014 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.

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About the Author (  |   )

Robert Benson served 35 years in various Federal agencies, as both a management analyst and IT specialist. He is a graduate of Northwestern University and developed the software at fedbens.us.

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