Federal Pay: The Good, The Bad and The Ugly

Federal employee pay is a political decision. Natural disasters, war, economics and politics all play a role. This may be a good year for federal retiree pay but not so good for most active feds.

Fall is often an exciting time for federal employees.

It is the start of a new fiscal year. This means that negotiations on the federal budget for the year that just started will soon begin in earnest. With any luck, it will be passed by January.

FedSmith.com frequently gets e-mail from readers–both active federal employees and retirees–wanting to know what their pay raise will be next year. We are not good enough at predicting the future to know with any certainty what Congress will do with an issue as subject to the political winds as a pay raise for federal employees. But here are some background items for both retirees and active federal employees to ponder.

Federal government spending is up and going higher. Between the financial gusher from Uncle Sam that is going to hit the Gulf Coast, the wars in Iraq and Afghanistan and changes to the social welfare program for senior citizens, federal spending is on a trajectory with a top that won’t be known until Congress finishes passing all the spending bills.

There doesn’t appear to be much restraint on spending in the current Congress. Having said that, some subjects are much more politically popular than others. Spending for the Gulf Coast is obviously politically popular and perhaps voting against it would lead to some Congressmen being defeated. These biillions of dollars will be virtually unstoppable and untouchable.

Cutting benefits for senior citizens? Not likely. They vote, they are organized and there are a lot of them (and there are about to be a lot more as the baby boomers feel the rush of the calendar pushing them inexorably toward retirement). Cut back on highway construction? Not very likely as that impacts virtually all Congressional districts. Eliminate new spending for energy related topics? Not in a year with gas shortages and prices impacting every voter in the country.

Some federal expenditures that impact FedSmith.com readers are determined by law so they are also out of bounds. Number one on the list of many readers: COLA increases. The final figures will be released on October 14, 2005. Anyone going to the store, buying gas, purchasing a house or paying for health insurance knows that inflation is up. As a result, federal retirees can look for an increase of something north of 3.5 percent–perhaps even as high as 3.7 or 3.8.

And, while I have written about it before (and beg forgiveness for regular readers who have seen this statement several times), we still get comments from current federal employees who think their January pay raise will be determined by the consumer price index. Retirees who get the full COLA will get the raise of 3.? percent next year based on a pre-determined formula using a consumer price index. (See COLA’s, Pay Raises and the Federal Community) That has little, if any, impact on the rest of our readers as far as the January pay increase is concerned.

It may not be fair. It may not be what you want to hear. But, in all likelihood, current federal employees will probably get something less than the COLA increase–perhaps considerably less. The federal pay raise is a political decision. It is not determined by pre-determined formula. Based on what has happened in past years, you may be in line for an average raise of 3.1 percent but because that happend in the past, that doesn’t have to happen again this year. (See House Approves 3.1 Percent Pay Raise for Most Federal Workers) It is possible that Congress will want to demonstrate its frugality and trumpet holding down federal government spending by passing a 2.1% pay increase.

This is not an average year. Spending is up and arguably out of control. Congress wants to cut spending in some other areas that are not as politically hot. Holding down the federal pay raise would save a few billion dollars and, like it or not, many if not most taxpayers don’t feel the federal workforce is underpaid or overworked. (Heard any FEMA jokes lately?) Congressional representatives in areas with large federal employee populations may feel your pain; those outside these areas won’t be sympathetic. And, while the Federal Pay Council issues a report each year arguing that federal employees are substantially underpaid, most taxpayers outside the executive branch of government think that is a bad joke or just a statistical illusion created by those who stand to make more money as a result of the recommendation. (See 2006 Pay: How Will Federal Increase Compare to the Private Sector)

Here is some more potentially bad news for some readers. The average federal salary in Washington, DC is about $78,000. A couple consisting of two "average" federal employees brings in about $160,000 or so and may have a house mortgage that can easily be in the $500,000 and up range. A Congressional panel has found that tax breaks for wealthier taxpayers can encourage them to buy bigger, more expensive houses. The result may be a change in the tax scheme for deducting mortage interest. That may not impact federal employees living in Huntsville, Alabama or Boise, Idaho. But federal employees (and other taxpayers) in California or large metropolitan areas can easily fall under the definition of "wealthy" taxpayers with large mortgages.

And what about the tax break for federal retirees that would enable them to pay for medical expenses out of pre-tax dollars? That is a possibility this year (or at least it was earlier this year) but with budget negotiators looking for ways to cut spending, not approving a new tax break will be much easier than taking one that was passed into law before.

In short, put as much into your Thrift Savings Plan as you can. The amount of the 2006 pay raise for current federal employees won’t be known for a few more weeks but the increase will be less than inflation and your purchasing power is going to decrease.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47