How does a career average pay plan determine retirement benefits?

A career average pay plan calculates retirement benefits by averaging the total compensation an employee receives over their entire career, rather than focusing on a specific high-point in their earnings or the final year's salary. This approach provides a more equitable method of determining retirement benefits, particularly for individuals who may have had a more consistent income over the years rather than sharp increases in pay.

In a career average pay system, the formula takes into account the salary earned in each year of service, adds those amounts together, and then divides that sum by the total number of years worked to arrive at an average pay figure. This average is then applied to a benefit formula to determine the monthly retirement benefit amount.

This method is beneficial in that it often results in less volatility in retirement benefits compared to plans that focus solely on peak earning years or the last year's salary, which can fluctuate significantly based on market conditions or employer salary increases.