Pay Raises vs. Cost-of-Living Adjustments: What's the Difference?

Acommon misconception among members of the federal community is that annual pay raises for federal employees and annual cost-of-living adjustments (COLAs) for federal retirees are similarly determined. You may even hear the federal employee pay raise mistakenly referred to as a COLA. However, pay raises for employees and COLAs for federal retirees are calculated based on different economic indexes and implemented through different methods. Let’s examine the key differences between the two.

Annual pay raises for federal employees are issued by either the president via an alternative pay plan and executive order, or by Congress as part of an appropriations bill. While the Federal Employees Pay Comparability Act of 1990 (FEPCA) provides the framework for federal employee pay rate adjustments (covered in more detail below), it is ultimately up to the president or Congress to determine the rate. This allows political influence to play a part in pay raise debates, sometimes resulting in undue pay freezes or pay increases that are lower than what FEPCA directs. While this is generally the process, some federal employees, like those in the U.S. Postal Service, have pay raises determined through collective bargaining between the agency and employee unions.

FEPCA provides the framework for federal employee pay rate adjustments by directing federal pay rates to rise by the average increase in privatesector pay, as measured by the Employment Cost Index (ECI), minus 0.5 percent. Locality pay changes may add to the effective increase. Pursuant to FEPCA, federal employees should have received a 2.2 percent increase in pay in January 2022 prior to any amount being provided for locality pay rate increases. This is 0.5 percent less than the 2.7 percent increase in wages

THE EQUAL COLA ACT Current law unfairly reduces Federal Employees Retirement System (FERS) cost-ofliving adjustments (COLAs) and fails to protect the earned value of FERS annuities. The Equal COLA Act, H.R. 304, would address this inequity by providing FERS retirees with the same annual adjustment as CSRS retirees. Use NARFE’s Legislative Action Center, located at www. narfe.org, to send a personalized message to your Representative urging him or her to cosponsor the Equal COLA Act.