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Summary:
Pay increases for current federal employees and cost-of-living adjustments (COLAs) for retired
federal employees often differ because they are based on changes in different economic variables.
Increases in pay for civilian federal workers are indexed to wage and salary increases in the
private-sector, as measured by the Employment Cost Index (ECI), whereas federal retirement and
disability benefits are indexed to price increases as measured by the Consumer Price Index (CPI).
Both the ECI and the CPI are calculated by the Bureau of Labor Statistics of the U.S. Department
of Labor.
Under the terms of the Federal Employees? Pay Comparability Act of 1990 (P.L. 101-509), pay
for civilian federal employees is adjusted each year to keep the salaries of federal workers
competitive with comparable occupations in the private sector. The annual increases in federal
employee pay are based on changes in the cash compensation paid to workers in the private
sector, as measured by the ECI. Under certain circumstances, the President may limit the annual
increase in federal pay by executive order. Federal law also requires Social Security benefits and
the pensions paid to retired federal employees to be adjusted each year. The COLAs for both
Social Security and civil service pensions are based on the rate of inflation as measured by the
CPI.
Congress has linked increases in federal pay to the ECI so that wages for federal employees will
remain competitive with wages paid by firms in the private sector. Congress has linked COLAs
for Social Security and federal retirement benefits to the rate of increase in the prices of goods
and services in order to protect retirement income from losing purchasing power through the
effects of inflation. In general, wage increases reflect both improvements in the productivity of
labor and increases in the general level of prices in the economy. Consequently, when measured
over long periods of time, wages tend to rise faster than prices. Because COLAs for retirees do
not reflect increases in the productivity of people who are still in the work force, COLAs do not
make retirees financially better off. COLAs merely protect retirees from becoming financially
worse-off as prices rise over time.
Increases in retirement benefits for retired federal employees were first linked to the CPI by law
in 1962. Increases in Social Security benefits have been linked by law to changes in the CPI since
1973. Before then, Congress periodically adjusted Social Security benefits through legislation.
Congress chose to tie increases in these benefits to the CPI in order to make the process less
subject to political influences. At year-end 2008, the overall price level as measured by the CPI
was 473% higher than it was in 1969. As of January 2009, Social Security benefits have risen by
626% since 1969, while federal civil service retirement benefits have risen by 496%. Average
wages among all workers in the economy have risen by 643% since 1969. Salaries for civilian
federal employees have increased by 418% since 1969, and the salaries of Members of Congress
have increased by 309%.
This report is updated annually.
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