GAO report urges hands-off approach to fed retirement formula

For years attempts have been made to tinker with the calculation of federal retirement benefits. A new report from the General Accounting Office illustrates that such attempts could have an adverse effect on the federal budget.

Currently the government calculates a federal employee's "average earnings" based on the three years in which employees earned the most money. Average earnings serve as the basis for calculating retirement benefits. This formula is commonly referred to as the "High 3."

Recently John Mica (R-Fla.) chairman of the House Government Reform and Oversight Subcommittee on Civil Service asked GAO to determine the impact on federal employees of changing the High 3 formula to a High 4 or a High 5. Such a change would mean that the government would calculate benefits based on an employee's salary over more than three years.

Because salaries go up every year - either through promotions step increases or cost-of-living increases - the High 4 or High 5 formula most likely would reduce benefits. That is why federal employees and members of Congress believe a High 4 or High 5 formula would force employees to work a significant number of additional years to qualify for the retirement benefit they would get under the High 3 formula. Although previous efforts to change the formula have been unsuccessful they were always motivated by the desire to cut outlays for retirement benefits.

The response GAO gave to Mica was so shocking that I didn't believe it at first. According to GAO retiring federal employees (under the Civil Service Retirement System or the Federal Employees Retirement System) would have to work longer under a High 4 or High 5 formula to achieve the same benefits they do now but not that much longer. Under a High 4 formula employees would only have to work between three and five additional months to qualify for the benefits they would get under the present formula. Under a High 5 formula the additional work time would range from five to nine months.

Hard to believe isn't it? It makes you wonder why these formulas were proposed in the first place. If federal employees would only need to work slightly longer to qualify for the benefit that they would get now under the current formula then rest assured that they would work the few extra months required to "catch up."In that case where are the budgetary savings? If the formula was changed and federal employees did work three to nine additional months to make up for the formula change wouldn't it actually cost the government more? During those extra months of work the government would be paying employees their full salaries plus benefits. That is quite a bit more than the cost of a retirement annuity.

In its explanation of why the change in formulas would not produce a more significant financial impact GAO reported that federal employees who work longer may qualify for step increases and annual cost-of-living increases which would raise their average earnings. Also working longer increases length of service - an important factor in benefits calculation.

According to GAO's computation employees whose salaries are rising would have to work somewhat longer than those whose salaries have stabilized to achieve the same benefits. Although this seems counterintuitive GAO explained that people with relatively stable salaries would not have to work too much longer to receive a similar retirement benefit because they have been earning about the same amount for years. If the formula is changed their average earnings would not be all that different. And by working a bit longer they may qualify for another step or cost-of-living increase and would certainly increase their length of service. Consequently they would increase their retirement benefits.

Employees whose salaries have been on the rise because of promotions would fare slightly worse so they would need to work a bit longer to achieve the same benefits they now get.

In my opinion GAO's analysis shows that members of Congress who advocated a change in the retirement formula never stopped to calculate what the impact of a change would be.

Equally amusing is the fact that federal employees have long feared a retirement-benefit formula change believing it would seriously damage their financial position. Whenever it was rumored that Congress was considering a formula change many who were eligible to retire got out "while the getting was good." It now turns out they really didn't have to retire when they did.

If my hypothesis that feds would work longer to preserve their retirement benefits is correct then the idea of changing the benefits calculation should be abandoned. It will not save the government a dime and it might even cost the taxpayers money.

-- Bureaucratus is a retired federal employee who contributes regularly to Federal Computer Week.


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