High-5 retirement plan: The mouse that roared?

When it comes to the various threats to a federal employee’s retirement program, it’s probably safe to say that the most-feared and most-talked about is the proposal to change the formula used to determine monthly annuity payments. Currently, the pension is based on the employee’s highest three-year salary average and years of service. A pending plan in Congress would base the annuity on the employee’s highest five-year average salary and years of service.

For some retirement-eligible feds, it’s almost an end-of-the-world scenario. Can (not to mention should) they get out before the legislative equivalent of a nuke is launched at their retirement plans? Or are feds worrying over not very much?

Federal News Radio has received lots of questions and comments from feds. Many want to know that if the formula is changed, how much time will they have to retire under the more generous high-three system. The high-three to high-five plan is one of half a dozen proposals — some from the White House, some from House Republicans — to cut retirement costs. But none have been put into bill form, so none (assuming they were introduced, passed and signed into law) have an official start date.

Compared to the high-three to high-five plan, all of the other proposals are much more serious and would cost feds — both workers and retirees — more, either in higher contributions to the retirement plan while working or reduced benefits each year they were retired. One plan calls for the majority of workers who are under the FERS retirement plan to kick in more of their salary to help finance retirement. One would raise contributions 1 percentage point each year for six years. Think about what that would do to your take home pay. Others would give CSRS retirees diet COLAs (cost-of -living adjustments) each year and eliminate them completely for workers under the FERS plan. Another would eliminate FERS altogether (for new hires) and base their future income-in-retirement on Social Security and whatever they managed to save via the Thrift Savings Plan. And another would eliminate the Social Security supplement that FERS retirees now get if they retire before age 62. That supplement is a big chunk of money for some workers.

Any and all of the above would have a major financial impact on workers, on retirees or in some cases both. By comparison, the high-five threat is small potatoes. Especially in times when federal and postal workers get very small January adjustments or, as during the Obama administration, when they went three years without a January pay hike. So what’s the difference?

Some experts who have done the math say that in many cases, feds could make up any money lost (by switching from the high-three to the high-five formula) by working a few months longer. The calculations vary depending on pay raises, within-grade raises, promotions and length of service. But in the end, the difference isn’t much.

In dollars-and-cents terms, the high-five doesn’t look all that devastating. Edward A. Zurndorfer is a certified financial planner. He’s been tracking federal benefits for years. He writes a regular column for the highly respected MyFederalRetirement.com.

Last month, he confirmed, down to the penny, the difference between the high-three and the high-five formula. And he pointed out that the proposed change has come up almost every year since 1992. So it is not a new threat and in many ways is not much of a threat. Especially when compared to the other proposed changes that would gut-punch workers and retirees big-time.

In one example, Zurndorfer does the high-three vs. high-five calculations for two hypothetical feds. In this example, one retires under the high-three formula with an average salary of $91,995. The other under the high-five system has an average salary of $91,227. In this example, the difference in the two annuities is minimal: $29,426 for the retiree under the high-three year formula, and $29,193 if retired under the high-five. Ed is much more familiar with the numbers than most of us (myself included), so we’ll use his math. He says the difference in the two hypothetical annuity payments is $11.65 a month.

So is that worth worrying? Maybe cutting short a career to get out in time to “beat” the change to the high-five. If it even happens.

To check out his numbers, click here. For long-time workers who have been sweating the possibility of a change, the explanation is a public service.

Nearly Useless Factoid

By Michael O’Connell

The term “small potatoes” originated from the Irish potato famine of 1845-49. It referred the small size of the potatoes that survived the famine, which the Irish depended on as their main food source.

Source: Urban Dictionary

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