Diet pensions on the menu?

Friday - 1/27/2012, 2:00am EST

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)