Furloughs? Their effect is immediate and painful, but not really long lasting. That is, your salary rate is unchanged, your service time is not impacted, and your high-three is also safe. With the pay freeze, things are different. Both your salary rate and your high-three take a “hit.” Of course, if you are not within a few years of retirement, the negatives are washed out by subsequent step increases, promotions, general and locality raises, and the like.
So, what is the overall impact of the pay freeze on employees retiring in the near future? Let’s run some numbers and see how it looks.
The hypothetical person is FERS, and he will retire in the last quarter of this year (2013), after 36 months of -0- salary increases and 30 years creditable service. His pay is $70,000. If he had experienced, say, a 2% pay raise each year, his salary at retirement would be $74,284 and his high-three would be $72,837. For 30 years service he would receive an annuity of (72,837 * 0.3), or $21,851.
The “frozen” $70,000 salary, however, would yield a high-three of – surprise! – $70,000, and an annuity of $21,000. So, in this case the freeze would cost the retiree (21,851 – 21,000), or $851. But, it is really worse than that. In retirement, there are no step increases or promotions. For FERS, there are no COLAs until age 62, and even then the COLA raise for FERS (except at the lowest levels) is one percentage point less than the official increase in the cost of living.
If the employee retires at, say, age 58, he can look forward to no annuity increases at all until he reaches 62, and all subsequent increases will be based on a starting annuity $851 less than if there had been no pay freezes. If he lives, say, 20 years in retirement, then his eventual payout (ignoring the effects of compounding and COLAs) will be (20 * 851), or $17,020, less.
To cut his losses, what can the employee do? He can postpone his retirement until at least three full years after the end of the pay freeze era. But then he will “pay” for the increased annuity with at least three fewer years of retirement. Good luck!