Come January, some military retirees are sure to ask why they haven’t seen an annual cost-of-living adjustment (COLA) in first-of-year paychecks.
About the same time, some active duty members will grumble that their annual pay raise has been capped again, this time at 1.3 percent, on the heels of record-low one percent pay hikes in both 2014 and 2015.
That’s also when some military folks might begin to wonder whose paydays have been pinched harder lately, service members or retirees?
To that question we have an answer, thanks to Pentagon pay experts who helped to crunch the numbers. Over the past decade, to include January 2016, military basic pay will have seen cumulative raises of 23.7 percent versus cumulative retiree COLAs of 21.6 percent.
The two-percent disparity formed across a decade that saw the bloom of wartime spending fade, the U.S. economy tank, and Congress slow walk its recovery, and play havoc with defense budgets, via mindless political gridlock. [Former Defense Secretary Robert Gates recounted for senators this week the enormity of defense dollars lost to political “cowardice.”]
The military-versus-retiree raise comparison, while interesting to ponder, is also irrelevant, say the pay experts. COLAs and pay raises have different purposes. They rely on different government indices. Military raises of late also have been influenced by the tough spending choices forced on the department by the 2011 Budget Control Act and its sequestration tool.
Results of active-versus-retiree raise comparisons also shift based on period examined. Add one more year, 2006, to our decade comparison above and the gap in cumulative raises falls by half, to only one percent.
COLAs are set to protect purchasing power against inflation as tracked by the Bureau of Labor Statistics’ Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). As announced last week, the CPI-W supports no COLA in January for military and federal civilian retirees, survivor benefit annuitants, disabled veterans or Social Security recipients.
This will be the third year in the past seven with no federal COLA. The other two were 2010 and 2011. BLS economist Steve Reed said there has been no period like it since BLS began using CPI to set COLAs in 1975.
To set COLAs, the BLS compares average prices for a market basket of goods and services, as measured by CPI-W, from the third quarter of one year to the third quarter of the next. The past year it shows the cost of living fell by 0.4 percent so federal benefits need no protection from inflation, at least as measured by CPI-W.
Reed said he’s sympathetic to elderly who feel federal payments aren’t keeping up with expenses. They likely aren’t for the elderly, he said, because their spending patterns are different from the general population.
“Everybody has their own inflation rate because we all buy different stuff,” Reed said. “CPI-W tracks what everybody buys. And if you’re not buying a lot of things that are decreasing in price, then your inflation rate might be quite a bit higher than our official measure.”
Elderly use more health care, which has been rising. They also drive less so they haven’t felt the full effect of gas prices falling almost 30 percent this past year, Reed said. Remove energy from the CPI-W and that index would support a 1.7 percent COLA, he said.
BLS runs a separate index, CPI-E, to broadly track inflation for the elderly. It could be made more precise, he said. But Congress continues to require that COLAs be set using overall inflation as captured by CPI-W.
Because that index shows the cost of living fell 0.4 percent the past year, inflation will have to exceed 0.4 percent to support a COLA next year.
But no COLA means no inflation, if the index used tracks a market basket appropriate for the COLA-protected populations. In periods like this, when CPI shows living costs falling, there is no reduction in federal retired pay. Annuities hold constant until new CPI calculations justify an increase.
“Even when you are not getting a COLA you are still getting inflation protection. It’s just that there’s no inflation,” Reed said.
Military pay raise caps are a different situation, viewed more critically than no COLAs due to falling prices. By definition, a pay cap fails to keep pace with private sector wage growth, as measured by another BLS yardstick, the Employment Cost Index (ECI.) For about a decade ending in 2010, Congress set military raises a half percentage point above ECI. That was followed by three years of military raises to match ECI.
In 2014, a string of pay caps began with one-percent raises that year and next rather than 1.8 percent to keep up with outside wage growth. This January the raise will be a 1.3 percent instead of 2.3 percent to match ECI.
Military associations fight the caps, arguing that along with health care fees creeping higher, dampened housing allowances and threats to on-base shopping, the caps hurt morale and, over time, will impact force quality.
Defense compensation officials, however, said in a statement that military pay still “is robust and compares very favorably with the private sector. Even with basic pay increases…set slightly below changes in private sector compensation, military members remain very well compensated.”
They gave assurances that “how military pay compares with the private sector” is monitored continually so “it remains healthy and robust.” They noted that the department and Congress aren’t freezing pay levels, merely slowing growth so dollars can be diverted to other priorities to “balance capability, capacity and readiness.”
The pay raise cap in January will save $672 million in basic pay in fiscal 2016. More savings roll through other parts of the budget, lowering retirement accrual costs, retention bonuses, separation payments and more.
Whether the administration pushes for more pay raise caps will depend on multiple factors including recruiting and retention and the U.S. economy. Pay officials said they are not losing sight of “the unique demands placed on service members, including deployments and forced family separations.”
They call steps taken so far to slow compensation “responsible and fair,” considering budgetary pressures, and “disproportionately small” relative to cuts taken elsewhere in the defense budget.
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