The Financial Impact of a Salary Freeze or Retirement Computation Change On Your Future Income

This article quantifies some of the changes that have been proposed to the federal retirement system. How much would a pay freeze impact your future income? How much of an impact would you see if the “high three” were changed to a “high five?” Here are examples of how you may be impacted.

What might the proposals of the co-chairs of the National Commission on Fiscal Responsibility and Reform (NCFRR) mean to me as a federal employee? This article is an attempt to quantify some of the changes that have been proposed to the federal retirement system. It is understood that there is a long way to go from a proposal to a law and that we might not see any of the proposals that have recently been floated by the co-chairs turn into law anytime soon (or ever, for that matter). But, if we’re inclined to worry anyhow, this will let us know what we are worrying about.

The examples in this article are not very nuanced and perhaps a bit simplified. I am sure that some readers whose math skills surpass mine (not a very high hurdle by the way) have come up with more detailed computations. If you have, feel free to share them with other fedsmith readers via the comments feature.

Impact of A Three-Year Pay Freeze 

First, let’s look at the proposal for a three-year pay freeze.

If an employee were making $100,000 at the beginning of the “freeze period,” they would still be receiving $100,000 at the end of three years. If he had received pay increases of 1.5% per year, he would have made $101,150 at the end of one year, $103,022 at the end of two years, and $104,567 at the end of three years.

Assuming that some type of pay increases resume/continue after three years, the gap of $4,567 would slowly increase as pay increases are applied. For example, if a 1.5% pay increase were granted in the fourth year, the “frozen” employee would receive $101,150 (an increase of $1,150) in year four and the “unfrozen” employee would receive $106,135 (an increase of $1,568).

Let’s take the fourth year salaries and see what would happen to a retirement annuity that was computed on “high-three” salaries of $101,150 and $106,135. The “frozen” employee who had a high-three of $101,150 and had worked 30 years would have a CSRS annuity of $57,093 and a FERS annuity (1% factor) of $30,450. The “unfrozen” employee with a high-three of $106,135 and had worked for 30 years would have a CSRS annuity of $59,700 ($2,607 more) and a FERS annuity (1% factor) of $31,950 ($1,500 more). COLAs added to these amounts after retirement (after age 62 in most FERS situations) would increase the discrepancy.

Impact of Changing “High-Three” to “High-Five

The above examples do not take into account the proposal to change the “high-three” computation to a “high-five” computation.

Let’s assume our prospective retiree is making $100,000 five years before retirement and receives annual raises of 1.5%. Under a high-three formula, a CSRS retiree would receive a pension of $58,818 and a FERS retiree (1% factor) would receive $31,370. With a high-five formula substituted, the CSRS pension would be $57,949 ($869 less) and the FERS pension (1% factor) would be $30,906 ($464 less).  COLAs would again compound the difference over time. Of course, combining a pay freeze and a change in the computation formula would multiply the effect.

Speaking of COLAS, another proposal is to change the Consumer Price Index used in computing the cost-of-living adjustment for federal retirees and Social Security recipients from the Consumer Price Index for Urban Wage Earners (CPI-W) to the Chained Consumer Price Index for all
Urban Consumers (C-CPI-U). According to the National Active and Retired Federal Employees Association (NARFE) this would have resulted in a loss of 3% in federal annuities and Social Security benefits had it been in place over the last decade.

Proposals to means test Social Security benefits would also have an effect on FERS and CSRS Offset retirees, as well as on CSRS retirees
who have picked up the 40 credits necessary to become eligible for Social Security.

Though the proposals may sound confusing now, it could get more confusing if any of them are enacted. Keep in mind that Congress is made up of federal employees (primarily FERS) and, in the past when they have changed benefits for federal employees, they have engaged in extensive “grandfathering.” Stay tuned to see what happens next.

Agencies can request to have John Grobe, or another of Federal Career Experts' qualified instructors, deliver a retirement or transition seminar to their employees. FCE instructors are not financial advisers and will not sell or recommend financial products to class participants. Agency Benefits Officers can contact John Grobe at to discuss schedules and costs.

About the Author

John Grobe is President of Federal Career Experts, a firm that provides pre-retirement training and seminars to a wide variety of federal agencies. FCE’s instructors are all retired federal retirement specialists who educate class participants on the ins and outs of federal retirement and benefits; there is never an attempt to influence participants to invest a certain way, or to purchase any financial products. John and FCE specialize in retirement for special category employees, such as law enforcement officers.