High 5 vs High 3, 2015 edition


It’s baaaack! In 2011 a bill was introduced in Congress that would change the way your annuity is calculated from the average of your highest three consecutive years of basic pay to your highest five.

While that bill died a quiet death, Rep. Bruce Westerman, R-Ark.,introduced a new bill that would do the same thing.

In his words, “This bill would simply change the formula for determining pension benefits for civilian federal employees from the best-earning three years to the best-earning five years of service. The bill ensures that the program employees of the federal government have paid into for their careers is available in retirement and sustainable for future generations.”

As always where money is involved, the Congressional Budget Office had to provide an estimate of how much this change would cost or save. In their view, it would save $3.1 billion over a 10-year period.

If you are already retired, this change would have no effect on you. However, if it became law and you planned to retire on or after Jan. 1, 2017, some of these “savings” would come out of your pocket.

Before we get into the impact the change would have on you, I need to remind you about how a high-3 annuity is calculated today. The process starts with the following formulas:

Civil Service Retirement System

0.015 x your high-3 x 5 years of creditable service, plus

0.0175 x your high-3 x the next 5 years of creditable service, plus

0.02 x your high-3 x all remaining years and full months of service.

Federal Employees Retirement System

0.01 x your high-3 x all years and full months of service.

Special category employees covered by both CSRS and FERS, such as law enforcement officers, firefighters and air traffic controllers, contribute more to the retirement fund and are eligible for increased benefits.

To show how your retirement benefit would be affected if the formula was changed from a high-3 to a high-5, I’ll provide you with some simple examples.

In each case, I’ll start with the premise that you have met the requirements for a full, immediate annuity. Further, I’ll assume that your current average basic pay is $80,000, an amount that was increased by 3 percent in each following year.

First, determine your average salary over a three-year period:$84,872+$87,418 + $90.041 = $262,331. Divided by three gives a high-3 average of $87,444.

For a five-year period, you would need to back up  two years and add $80,000 + $82,400, Then the five year total would be  + $84,872 + $87,418 + $90,041. Divided by five comes to a high-5 average of $84,946.

Next we’ll plug those dollar figures into the CSRS and FERS annuity formulas to see what your actual annuity would be (look for this column online to see the details of the calculations):

CSRS using a high-3: $49,187

CSRS using a high-5: $47,782

FERS using a high-3: $26,233

FERS using a high-5: $25,485

While both the high-3 and high-5 CSRS calculations provide an annuity that is 56.25 percent of your high-3, and the FERS calculations 30 percent, those numbers disguise two important facts. First, you’d have to work two years longer under the high-5 scenario. Second, under the high-3 calculation, you annuity would be 3 percent higher under the high-3 calculation than under the high-5.

Just remember, percentages translate into bucks. And those bucks will come out of your pocket if Congressman Westerman’s bill becomes law.

Reg Jones was head of retirement and insurance policy at the Office of Personnel Management. Email your retirement-related questions to fedexperts@federaltimes.com, and view his blog at retirement.federaltimes.com.


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Reg Jones was head of retirement and insurance policy at the Office of Personnel Management. Email your retirement-related questions to fedexperts@federaltimes.com.

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