As if federal employees don’t have enough to worry about with their pay-scale raises frozen for two years, now there’s talk about a retiring employee’s annuity being calculated with the highest five years of salary instead of the current highest three.

The change is one of the recommendations of the chairmen of the White House-appointed bipartisan deficit commission. Although the full commission rejected the recommendations, lawmakers might still introduce them as cost-savings measures.

If a high-five were used in annuity calculations, what would it mean for you? The short answer is a reduced annuity.

Before we get into why that would be true, let’s first review how an annuity is calculated today. The process starts with differing annuity calculations under the Civil Service Retirement System and Federal Employees Retirement System.

CSRS annuities are the sum of three products: 1.5 percent of your high-three, multiplied by five years of creditable service; plus 1.75 percent of your high-three, multiplied by your next five years of creditable service: plus 2 percent of your high-three, multiplied by all remaining years and full months of service.

FERS annuities are 1 percent of your high-three, multiplied by all years and full months of service. The multiplier is increased to 1.1 percent if you have at least 20 years of service and retire at age 62 or later.

To find out the difference in value between an annuity calculated with a high-three and a high-five, you can substitute the high-five for the high-three above and plug in your own numbers. But 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. For CSRS, that would mean you’ve reached age 55 and have 30 years of service. For FERS, it would mean you’ve reached your minimum retirement age — which ranges between 55 and 57 — and have 30 years of service. Further, I’ll assume that your current average basic pay in the year you retired was \$80,000, an amount that was an increase of 3 percent over each preceding year.

Let’s determine your average salary over a three-year and then a five-year period.

Over three years, your salary would have been about \$75,408 in the first year, \$77,670 in the second year and \$80,000 in the third year — for an average of \$77,693, your high-three.

Over five years, your salary would have been about \$71,080 in the first year, \$73,212 in the second year, \$75,408 in the third year, \$77,670 in the fourth year and \$80,000 in the fifth year — for an average of \$75,474, your high-five.

Now let’s plug those dollar and 30-year service figures into the annuity formula to see what your actual annuity would be.

The CSRS calculation yields \$43,702 using the high-three salary but only \$42,454 using the high-five salary.

The FERS calculation yields \$23,308 using the high-three salary but only \$22,642 using the high-five salary.

Both CSRS calculations provide an annuity that is 56.25 percent of your high-three or high-five and the FERS calculations provide 30 percent. But under the high-three calculation, the figure used in the annuity calculation is 97 percent of the average basic pay you were receiving in the year you retired. Under the high-five calculation, it is only 94 percent.

Because that difference would be permanent, the longer you received that annuity, the greater the total dollar loss of retirement income would be if your annuity were calculated using your high-five average basic pay rather than your high-three.

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