Inflation, COLA’s and the 2009 Federal Pay Raise

Everyone has noticed that prices are going up. Inflation may have an impact on your paycheck next year. The annual increase in retirement checks will go up next January, probably at least 4.5%. Current federal employees may be looking at an average increase of 3.9%–but locality pay will make a big difference in the actual check for current employees.

Here is food for thought.

Inflation seems to be a significant factor in our economic situation this year. Gas prices are now around $4.00 per gallon for regular; health costs are rising about 10% and the increasing cost of oil is undoubtedly going to be reflected in a variety of products that all Americans use.

The annual increase in pay for federal retirees is pegged to a consumer price index. With several more months to go, the current amount of the increase for retirees is chugging along at 4.5%. That means federal employees  eligible for the full increase would see their retirement checks go up about 4.5%. And, with more time to go before the 2009 calculation becomes final, the 4.5% figure is likely to actually go higher.

President Bush has proposed a pay increase for active federal employees of 2.9%. The final figure for 2009 will almost certainly be higher than that. A House panel has already approved a raise of 3.9% for next year which means that the federal civilian pay raise would match that approved for military personnel in 2009 by the House as part of the authorization bill for the Department of Defense.

Keep in mind that the 3.9% figure for federal civilian employees is an average figure. Locality pay plays a big role in how much an individual employee will receive. To take a recent example, the average federal pay raise for 2008 was 3.5%. Federal employees in the Washington, DC metro area actually got 4.49%. A number of readers wrote and asked why their check had gone up less than 3.5% since that was the federal pay raise. The reason is because of locality pay. Employees in cities such as Cincinnati (2.84%) and Indianapolis (2.96%) and the Rest of the U.S. (2.99%) got less than the 3.5%. (Check the article on Understanding the 2008 Federal Pay Raise (Maybe).)

So, if the average federal pay raise next year does turn out to be 3.9%, your actual pay raise will probably be higher or lower than the average depending on where you live. Don’t expect a final figure until much later in the year though. Based on past experience (See 2008 Pay Raise Approved and Implemented), the decision on the 2009 raises will not be made until well after the start of the next fiscal year.

One other consideration: If the CPI translates into a "raise" for federal retirees (more accurately a cost of living adjustment) of 4.5% or even 5.5%, that does not mean that the salary of active federal employees will go up that much. Congress and the President will make the decision of the 2009 federal pay raise. The COLA increase for retirees may have an impact on their decision but the salary for federal employees is not an automatic calculation like the average COLA increase. (See COLA’s Pay Raises and the Federal Community)

And, finally, if you are looking forward to a higher retirement check, don’t cheer too loudly. If your retirement check does go up 5% or so in 2009, your overall expenses are likely to go up more than that. Medical expenses (including medical insurance premiums) are likely to hit retirees (who are older) harder than active federal employees and other expenses that are part of everyday life may go up more than the amount of the COLA. (See Retirement Shock Number Three: Inflation)

As the long, complex dance in arriving at a decision on the annual pay increase continues throughout the year, we will keep you up-to-date.


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