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Military pay (ECI) vs military retiree pay (CPI)
Old 11-05-2005, 11:51 AM   #1
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Military pay (ECI) vs military retiree pay (CPI)

This is of limited interest if you're not military, but The Military Officers Association of America has an interesting summary of military pay increases in their weekly legislative update. These guys are somewhat less than objective, but the history is a perspective that you don't get during an enlistment or even during a 20-year career. Although both the ECI and the CPI underestimate the actual rise in their respective indices, my spouse is not amused that she's still working while I'm getting the bigger raise.

2007 Military Pay Raise: 2.2%

The U.S. Department of Labor announced this week the annual (Sep 04-Sep 05) private sector Employment Cost Index (ECI) is 2.2%. That means, unless Congress legislates otherwise, the 2007 military pay raise will be 2.2%.

For over 30 years, the private sector ECI (which measures pay growth for the average American) has been the basis for military pay raises. That's to ensure military pay maintains a state of "reasonable comparability" with that of civilian workers with similar skills, education, and experience.

Unfortunately, reality has often departed from that theory. Due to budgetary reasons, the Executive and Legislative Branches regularly capped military raises below comparability levels throughout the 70s, 80s, and 90s. That practice caused all-too-predictable retention problems in the late 70s and late 90s that forced action to restore military pay comparability.

In 1981 and 1982, Congress enacted two double-digit "catch-up" raises. In 1999, Congress passed legislation specifying that pay raises for 2000-2006 would exceed the ECI by 0.5% per year. In fact, Congress provided even larger raises in most of those years to help close the "military pay gap" faster. In 2004, Congress finally repealed the law capping future raises below private sector pay growth, and passed a permanent law tying military raises to the ECI for FY2007 and beyond.

Retired pay cost-of-living adjustments (COLAs), on the other hand, have a different purpose and are calculated differently than military pay raises. Whereas military raises are meant to ensure the services can compete with the private sector for high-quality manpower, retired pay COLAs are intended to prevent erosion of retirees' purchasing power over decades of retired life. For that reason, COLAs are tied to the Consumer Price Index (CPI), a metric that tracks inflation. Without COLA protection, inflation would erode nearly half of real retired pay value for a 20-year retiree by age 62.

The different formulas mean that retiree COLAs and military pay raises are rarely the same in any given year, which regularly prompts inquiries from whichever group receives the smaller percentage increase.

From the 1970s through the mid-1990s, retirees received larger increases in most years. For the last nine years, military pay raises have been higher, prompting some grumbling from retirees.

With the recent jump in inflation, retirees find themselves on the plus side once again for 2006, receiving a 4.1% COLA vs. a 3.1% military pay raise. Barring a significant slowing of inflation in the coming year, the new ECI number means retirees probably will again do somewhat better in 2007.

Before 1958, military retired pay was increased by the same percentage whenever the military pay table was adjusted. But when the military went without any pay raise at all between 1958 and 1963, Congress acted to protect military (and federal civilian) retired pay by tying COLAs to the Consumer Price Index.

For the next 10 years or so, there was constant debate over the change, including a retiree lawsuit seeking to revert to the old rule - which was ultimately rejected by the U.S. Supreme Court. With 40 years of COLA experience behind us, the protective value of this long-standing statutory precedent has proven invaluable in defeating multiple attacks on the military retirement system.

Similarly, Congress' recent action to permanently link military pay raises to private sector pay growth establishes an important standard to protect active duty, Guard and Reserve members' long-term pay value.

Annual budget constraints and other threats will almost certainly continue to come and go, but the principles set in these laws provide crucial protections for currently serving and retired members alike.

Their relative raises may vary from year to year because of their different statutory protection rules. But in the long run, both are well served by their respective laws.

BTW if you're a Navy Reserve O-5 or O-6 who didn't get a billet this year and have been placed IAP, PM or e-mail me to learn more about the mobilization of over 1000 (so far) of the roughly 4000 people in that category. Being IAP means that you don't yet have a billet with your gaining command, and that makes you worldwide assignable. A friend of our is over 57 years old, under medication for high blood pressure, 30 pounds overweight, and in the middle of a job change from San Diego to Hawaii, but he's spending the next 12 weeks at Ft Bragg enroute a year's desert lifestyle that has nothing to do with his designator or any of his billet qualifications. Although he's gung ho to get back in shape and pretty sanguine about living in a combat zone, he's not yet ready to tackle the most dangerous mission of all-- telling his spouse.

Co-author (with my daughter) of “Raising Your Money-Savvy Family For Next Generation Financial Independence.”
Author of the book written on "The Military Guide to Financial Independence and Retirement."

I don't spend much time here— please send a PM.
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