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[Excerpt] Cost-of-living adjustments (COLAs) for retired federal employees and pay adjustments for current federal employees often differ because they are based on changes in different economic variables.

Federal retirement and disability benefits are indexed to price increases as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), whereas pay adjustments for civilian federal workers are indexed to wage and salary increases in the private sector, as measured by the Employment Cost Index (ECI). Both the CPI-W and the ECI are calculated by the Bureau of Labor Statistics of the U.S. Department of Labor.

Federal law requires Social Security benefits and pensions paid to retired federal employees to be adjusted for inflation each year. The COLAs for both Social Security and civil service pensions are based on inflation as measured by the CPI-W. Congress has linked COLAs for Social Security and federal retirement benefits to the rate of increase in the prices of goods and services to protect retirement income from losing purchasing power through the effects of inflation.

Congress has linked adjustments in federal pay to the ECI so that wages for federal employees will remain competitive with wages paid by firms in the private sector. 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. These annual adjustments in federal employee pay—which are distinct from any pay raises associated with within-grade step increases or promotions to a higher pay grade—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.

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. In 2011, there will be no automatic COLA for recipients of Social Security benefits or federal civil service pensions because the price level as measured by the CPI-W did not increase over the comparison period.

Increases in retirement benefits for retired federal employees were first linked to the CPI-W by law in 1962. Increases in Social Security benefits have been linked by law to changes in the CPI-W since 1973. Before then, Congress periodically adjusted Social Security benefits through legislation. Congress chose to tie increases in these benefits to the CPI-W to make the process less subject to political influences. At year-end 2009, the overall price level as measured by the CPI-W was 477% higher than it was in 1969, which is the index base year chosen for this report's analysis. As of January 2010, Social Security benefits have risen by 626% since 1969, and federal civil service retirement benefits have risen by 496%. Average wages among all workers in the economy have risen by 632% since 1969. Salaries for civilian federal employees have grown by 428% since 1969, and the salaries of members of Congress have increased by 309%.

This report is updated annually.


Suggested Citation
Isaacs, K. P. (2010). Federal employees: Pension COLAs and pay adjustments since 1969. Washington, DC: Congressional Research Service.