About That “High-Five” Retirement Calculation

The federal retirement plan is one of the biggest benefits of being a federal employee. Changes are coming that will impact many readers and most of the changes are not going to improve the program.

One of the biggest benefits of being a federal employee is the federal retirement system. Whether under CSRS or FERS, the federal retirement program is valuable. With some financial planning and paying attention to your expenses, the federal system generally enables a person to retire and to live in relative comfort for the rest of their lives. Many of my colleagues over the years have retired earlier than 65, some much earlier, and are able to travel, eat well and live comfortably.

Before the comments start rolling in, I realize that the federal program does not guarantee a life of luxury. If a person retires before turning 65, there will be a cut in benefits and there are some private companies that have better retirement plans. But, in my experience, we  have a better retirement system than most Americans.

With the massive federal deficit, printing new money in huge amounts each month to add to the deficit, millions of people no longer looking for work, the number of Americans on food stamps or other welfare programs climbing rapidly,  there is little doubt that the standard of living is declining for many Americans. In this environment, changes are likely going to be made to the federal retirement plan or other related benefits (such as the federal employee health insurance plan) that we can carry into retirement. (See Your Best Benefit? Ability to Keep FEHB in Retirement)

One proposed change to the federal retirement system that keeps popping up is changing the retirement annuity calculation from using the “high three” average salary to the “high five” average salary.

High Three vs. High Five: What Does That Mean?

Your high-three average salary  is the “largest annual rate resulting from averaging an employee’s rates of basic pay in effect over any period of 3 consecutive years of creditable civilian service, with each rate weighted by the length of time it was in effect.”  (See How is My “High-3 Average Pay” Calculated?) The proposed change would modify this to the high-five average instead of the high-three average salary.

The change would, in effect, reduce the retirement payment received by most federal employees. There are too many differences in individual situations to know how everyone would be impacted. Author Robert Benson calculated that the different for most people would be a reduction between 2% and 5%. (See High Five vs. High Three: Is There a Difference In Your Retirement Annuity?)

Proposal to Reduce the Deficit

While the change to the federal retirement program has been proposed off and on over the last decade, the most recent proposal is from the Simpson-Bowles duo. As you may recall, they were tapped by President Obama (with considerable press coverage) to come up with a plan to reduce the federal deficit.

After their proposals were issued, the president ignored the report. But, despite the cold shoulder from the White House, the proposal has been around since it was issued, taken seriously by some in Congress and has had an impact on the federal budget—probably because many in Congress see a need to try to reduce our large deficit and the political will to do so is generally lacking.

Will The Change Be Enacted?

At present, we do not know if this proposal will ever be enacted. My best guess is that it will eventually be enacted.

Here is why.

Proposals to change the retirement annuity calculation in this way have been around for a number of years. The idea has appeal and it has “staying power.” Author John Grobe notes that he first heard about such a proposed change about 40 years ago.

A proposal that keeps popping up like this one does eventually comes up at the right time to garner enough political support to become reality.

One report suggested this change in 2005—long before the Simpson-Bowles commission was ever formed. The proposed change would allegedly save $500 million in government spending in 2015 and about $5 billion through 2020. Moreover, concluded the commission, the change would bring the federal retirement system more in line with what is generally done with retirement programs in the private sector.

Congress and the administration are loathe to make changes to programs that are popular with the general public. Modifying Social Security or Medicare in various ways could save a great deal of money. But, if that were done, the people affected would likely be upset and may vote out of office any politician willing to make changes to reduce the cost of these programs.

Changing the high three federal employee retirement calculation to a “high five” calculation will not save anywhere as much money as bigger changes but many fewer people will be impacted. The argument that bringing federal employee benefits “in line” with the private sector also provides political cover without creating considerable political risk for elected officials. An argument that Congress is making changes to bring down the deficit while creating little political fall-out has considerable appeal to our elected leaders.

The “chained CPI” has a similar appeal. It also has a good chance of being enacted for many of the same reasons—and it would impact everyone who receives Social Security benefits which is a much larger number of people than just federal employees who are or will be retiring.

For some federal retirees, the high five calculation would not make a significant difference. The pay freeze will have a bigger impact on your future retirement than this proposed change. As author Ann Vanderslice noted:

With 30 years of service, the  High 3 scenario would provide an annuity of $29,379, and the High 5 annuity would drop to $29,148.  This annual difference of $231 amounts to less than $20 a month difference – probably not a deal breaker in your overall retirement plan.

She also observed that “This proposed change causes more federal employees to threaten to retire than any other”—probably because most career federal employees recognize their retirement package is one of their biggest benefits and the key to living well for a couple of decades after retirement and there is a visceral negative reaction to any changes proposed to the retirement system.

The result of the pay freeze that has already occurred, a chained CPI and changing the retirement calculation will be a less generous retirement package for all federal employees. For several decades, proposed changes that would have a negative impact on federal benefits generally did not occur. As we know from changes that have occurred in the past several years, the political environment has changed and federal employee benefits are more likely to be altered.

The changes will save the government money and all career employees will eventually be impacted to some extent. In all likelihood, current retirees will be “grandfathered” and the proposal will not have any impact on these former federal employees. When and how such a change would be implemented won’t be known until legislation is actually passed.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47