The White House’s 2019 budget proposal contained proposals to cut the retirement benefits for federal employees. Among the proposals is the move from a high 3 to a high 5, the reduction or total elimination of cost of living adjustments, and the increase in federal employee’s share of contributions to retirement.
The Office of Personnel Management called on Congress to make into law some of the proposals with the aim of bringing the benefits more in line with the private sector.
The probability of Congress’s enactment of legislation to alter the federal employees’ benefits is more likely. Also, it could spur the federal employees to make their own retirement plans to make sure they have a bright financial future.
Let us have a look at examples showing how much impact these proposals would have:
High 3 to High 5
Calculating one’s pension from a high 3 salary to a high 5 salary is quite tricky. The calculations demand that you know the exact years of service, the employee’s salary over the years, as well as other specifics that are factored into their pension formula.
Let us use some rough math to put this into perspective.
Assuming that someone worked for the federal government and accrued a pension equal to 20% of their high 3 or high 5, we would need to know their salary for the highest 5years of service. This information is what is referred to as high 3 or high 5.
When calculating the pension, you take the highest 3years of federal employment and find the average. The pension then takes 20% of that average. For example, someone who earned $60,000, $62,000, $64,000, $66,000, and $68,000 during their highest 5 years of service
For this individual, the highest 3 would be the final 3 salaries which would average to $66,000. However, if the formula moves to a high 5, the average would be $64,000.
In either of the above cases, the pension would be 20% of the averages. For the high 3, it would be $13,200 and $12,800.
As you can see, such an adjustment would cause a gross reduction of $400 to the individual’s annual pension.
It is possible that the reduction could be larger to much higher salaries.
Employee Savings towards Retirement
Federal employees usually contribute a part of their paychecks to help fund their pension. The percentage that they contribute depends on the date they started working for the federal government. For example, starting in 2013, the percentage of contribution increased for those hired that year or later.
The proposed adjustment will affect current employees as well as those hired in the future.
The changes might affect some workers more proportionately than others; if some are paying 0.8 and others 4.4%. The increase could go all the way from 0.8% to 5.8%.
If this noticeable jump actually happened, it would increase costs by 5% on salaries. If, say, an individual earns $10,000, the 5% would be $5,000.
The $5,000 is still part of the paycheck; this means that it has to be taxed first.
Employees who are already paying 4.4% towards the cost of their pension will not be significantly affected if it went up to 5.8%.