President Proposes 1% Pay Increase for Federal Workers

Last Friday, President Obama sent a letter to Congress calling for a 1 percent pay raise for federal civilian workers next year. The White House previously included this proposal in its FY 2014 budget, which would save $1 billion in 2014 and $18 billion over the next ten years if measured against current law. Last year, the President proposed a 0.5 percent increase that was rejected by Congress in favor of a continuation of the pay freeze. President Obama will again set the increase by executive order, although Congress has the final authority and lawmakers still have not decided how to handle the especially tight caps for 2014 set by sequestration.

Federal civilian pay has been frozen over the past three years. This was recommended first by the Fiscal Commission in 2010, and then again proposed by President Obama in his FY 2011 budget. The March continuing resolution extended the pay freeze through 2013. Those freezes have saved around $15 billion so far, and will save around $90 billion over the next decade. If slower pay increases continue, savings will be even greater. As overall discretionary spending is capped by the Budget Control Act, pay freezes have not resulted in any additional deficit reduction, but they have freed up funding for other budgetary areas in order to meet the caps.

While some may object to finding savings from the federal workforce, federal employees were well-compensated before the pay freeze, even after adjusting for different levels of education attainment. According to a 2012 CBO report that looked at wages over the 2005-2010 window, federal wages for individuals with a bachelor's degree were roughly comparable to their private sector counterparts. When adding benefits, total compensation for those with a bachelor's degree exceeded that of the private sector. In fact, federal compensation when factoring in benefits remains above the private sector for all levels of educational attainment except those with professional degrees or PhDs. This gap has likely narrowed somewhat as a result of the pay freeze and legislation increasing retirement contributions, but private wage growth has also been slow over the past three years in a recovering economy.

Congress and the White House must decide what amount of pay growth is appropriate given budget constraints. However, as the chart above shows, federal benefits, more so than wages, were particularly generous compared to that of the private sector. Increasing employee contributions to federal retirement was included in the 2012 payroll tax cut extension, and further increases were included in the President's Budget, which could reduce the deficit by $20 billion over ten years. Going even further, the Bipartisan Path Forward proposed additional reforms, including those for military health and retirement programs, which would reduce the deficit by $100 billion over ten years. It is an open question whether additional deficit reduction should come from federal employees, but if lawmakers decide to do so, benefits may offer more opportunities for savings compared to actual pay.

The federal government needs to attract effective employees in order to be most successful, but our fiscal challenges require lawmakers to be prudent when thinking about compensation.