Two of the fed-related items being considered by a joint House-Senate conference committee would reduce the starting benefits of future retirees or trim future cost-of-living adjustments for all retirees and survivors. They are part of a long laundry list of proposals that were floated, considered, then ignored by Congress last year.
The conference committee is due to report by Feb. 29, and — if all goes as planned — Congress will vote up or down (no amendments) on its recommendations. Insiders say Congress may actually deliver this year (it failed to follow a similar script in 2011) because the current payroll tax reduction and extension of unemployment benefits are also at stake. And this is an election year.
The fed-related plan getting the most attention would, if approved, base annuities of feds retiring in the future (probably Jan.1, 2013) on their highest five-year average salary. Under current law, annuities are based on the employees’ highest three-year average salary.
Many people have said that the change would have a minimal impact on the annuities of people retiring in the future — especially if the pay-raise freeze continues. They say that people could get their higher benefit (under the high-five system) by working a little longer. True, in some cases …
But for some people, moving to the high-five would be semi-catastrophic. They would get a lot less than they planned and felt they were promised. In yesterday’s column we used the example of John, a long-time fed who ran his own numbers and said switching to the high-five would reduce his starting FERS benefit by $2,248. While his example is accurate, his situation isn’t typical. Whereas he’s planning on an annual starting benefit of $47,750, the average FERS retiree now gets a civil service benefit of $12,780, and the typical CSRS retiree today gets about $35,000.
So what would a switch from a high-three to a high-five calculation do to the average fed? We turned to the expert, Tammy Flanagan. She is a columnist for Government Executive magazine and works with the National Institute of Transition Planning. She was our guest on Wednesday’s Your Turn show.
She crunched the numbers for a more typical fed. See how close this comes to your situation:
“… For most employees under FERS, the difference wouldn’t be as much as it is in John’s example. He … has a good point and he’s done the math for his own situation. To have a $200 per month difference in his FERS annuity between the high-five and high-three has to mean that he has had some major pay adjustments… such as a big promotion or several step increases in the past five years. It wouldn’t be that big of a difference for most employees if it took effect in the next year or so. Let’s say that an employee has been a GS 12 step 10 for the last 5 years … here’s their salaries for each year:
2012 – $97,333
2011 – $97,333
2010 – $97,333
2009 – $95,026
2008 – $90,698
If they retire on December 31, 2012… their high-three average would be $97,333 and their high-five average would be $95,544.
If they had 30 years under FERS, their benefit would be $29,199 using the high-three and $28,663 using the high-five — A difference of $536 per year or $44.66 per month
If they had 30 years under CSRS, their benefit would be $54,749 using the high-three and $53,743 using the high-five — A difference of $1,005 per year or $83.79 per month
This isn’t huge … but the problem would be if Congress begins granting annual pay adjustments of 3 – 6 percent as they used to do… then you’re looking at a much bigger difference. Also… an employee who gets promoted during that five years and may also have a step increase… that could make a bigger difference as well.
Let’s see if they were promoted during that same time from a GS 11, step 10 to a GS 12, step:
2012 GS 12, step 7: $89,846
2011 GS 12, step 7: $89,846 (quality step increase for good performance)
2010 GS 12, step 6: $87,350
2009 GS 12, step 6: $85,281 (6 months = $42,640)
2009 GS 11, step 10: $79,280 (6 months = $39,640)
2008 GS 11, Step 10: $75,669
Now… the high-three = $89,014 (30 years under FERS= $26,704 and 30 years under CSRS = $50,070) and the high-five = $84,998 (30 years under FERS = $25,449 and 30 years under CSRS = $47,811)
Now the difference is $1,255 per year ($104.58 per month) for the FERS employee and $2,259 per year for the CSRS employee ($188.25 per month)
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