Reduce the Annual Across-the-Board Adjustment for Federal Civilian Employees’ Pay

Background

Under the Federal Employees Pay Comparability Act of 1990 (FEPCA), most federal civilian employees receive a pay adjustment each January. As specified by that law, the size of the adjustment is set at the annual rate of increase in the employment cost index (ECI) for wages and salaries of workers in private industry minus 0.5 percentage points. The across-the-board increase as spelled out in FEPCA does not, however, always occur. The President can limit the size of the increase if he or she determines that a national emergency exists or that serious economic conditions call for such action. Similarly, the Congress can authorize an adjustment that differs from the one sought by the President. In each year since 2011, policymakers have either lowered the annual across-the-board adjustment for federal employees below the percentage specified in FEPCA or canceled it altogether.

Option

This option would reduce the annual across-the-board adjustment specified in FEPCA by 0.5 percentage points. From 2020 through 2028, the adjustment would equal the growth rate in the ECI minus 1 percentage point. If the growth rate for the ECI is less than 1 percent, which has not occurred during the 27 years the index has been recorded, then no across-the-board adjustment would be granted for that year.

Effects on the Budget

Provided that federal appropriations were reduced accordingly, federal outlays would decline by $58 billion from 2020 through 2028, the Congressional Budget Office estimates. Outlays would fall by $800 million in 2020, and the reduction would grow to $13 billion in 2028. The growth in the annual savings is a result of the smaller pay raises accumulating over time; by 2028, federal employees' pay would be 4 percent lower under this option than it would be otherwise.

The largest source of uncertainty in the estimate of savings over the next 10 years is the projected size of the federal civilian workforce. Over the past 20 years, the federal workforce has fluctuated between 1.8 million employees (in calendar year 2001) and 2.3 million employees (in calendar year 2010). Another source of uncertainty in the projected savings stems from the timing of retirement for eligible employees. If a significant number of retirement-eligible federal workers decide to retire as a result of the smaller increases in pay, then larger retirement costs could boost mandatory spending, which would offset some of the savings in compensation produced under this option. (CBO has not formally estimated the magnitude of those costs, but preliminary research indicates that they would offset only a small portion of the savings.)

For alternative approaches that would reduce the across-the-board adjustment by more than 0.5 percentage points, a couple of considerations could factor more heavily into the estimated savings. First, the increase in mandatory spending from workers' retiring earlier could become substantial. That is because the growth of future annuity payments is based on salary growth for employees who continue to work; for retirees age 62 or older, however, that calculation is based on the consumer price index. Thus, large cuts to the across-the-board adjustment would cause additional years of service to reduce the size of workers' future annuity payments, which could prompt many of those workers to retire instead of continuing to work. Second, the option includes the stipulation that it would not result in across-the-board adjustments that reduced salaries, because research indicates that workers are very averse to such reductions. In CBO's estimation, that stipulation would not affect the savings for this option, but it could reduce the savings from alternative approaches that imposed larger reductions to the across-the-board adjustment.

Other Effects

Compensation for federal civilian employees constitutes about 18 percent of discretionary spending. One argument for this option is that reducing the annual across-the-board adjustment is a relatively straightforward way to substantially cut spending across agencies. In addition, those cuts may not significantly affect the agencies' ability to retain employees for the roughly 40 percent of jobs that do not require a bachelor's degree because those employees would probably still receive higher compensation than similar workers in the private-sector earn, on average.

An argument against this option is that it could make it more difficult for the federal government to recruit and retain qualified employees, especially for agencies that require workers with advanced degrees and professional skills. Recent research suggests that smaller salary increases have led to fewer employees continuing to work for the federal government. Other research suggests that federal workers with professional and advanced degrees are paid less than their private-sector counterparts. Thus, smaller across-the-board adjustments in federal pay would widen the gap in compensation between federal and private-sector workers for jobs that require more education.