We all know Federal employees are going to pay more for their pensions, and at retirement they will receive less in return. Many of us suspect that it will reach a point where employees would be better off not participating. However, not participating is not an option, and it almost certainly will not be an option in the future.
In view of the above, and despite all the uncertainty, I thought it would be interesting to try to set up a projected scenario to help see how bad it will be, when the time comes. That is, although opting out of the defined benefit system is not possible, what is possible is to resign shortly before becoming eligible for retirement, and take your money out. This is an extreme move, but it may be justified. Let’s take a look at the numbers.
Assumptions
Employee will have a 30-year career, will see his earnings increase an average of 4.5% per year, will start at the salary indicated, and will have deductions for retirement as indicated. The 4.5% is an arbitrary working number. Some years more, some less. Work with me.
| Salary | |||
|---|---|---|---|
| Starting | Ending | Total Salaries | High-Five |
| $39,460 | $27,622 | $97,602 |
$122,003 |
| Annuity* | Total Deductions | |||
|---|---|---|---|---|
| 1% | 0.7% | 4% | 5% | 6% |
| $39,460 | $27,622 | $97,602 | $122,003 | $146,404 |
The best case is an employee with 4% taken out of his pay, and receiving 1% per year of service. He “paid” $97,602 for an annuity of $39,640, which is a return on investment of 40.6%. The
worst case is the person who paid 6%, or $146,404, in order to receive a
pension of $27,622, which is an 18.8% return on investment. Considering the annuity lasts the balance of your life, these numbers seem reasonably attractive.
I started writing this article thinking the new numbers would be unattractive, to the extent the employee might want to simply withdraw his money rather than collect a meager, not-really-worth-it annuity. It turns out that even the worst case scenario is not so bad. Unless my arithmetic is wrong and/or my estimates are unrealistic, it appears new workers are going to have a worthwhile annuity. (But please don’t compare it to the status quo!)
* The annuity is the stated percent times the high-five, multiplied by years of service.
