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Inflation outpacing military pay hike

Higher cost of living could overcome 3.9 percent raise

Jul. 31, 2008 - 03:05PM   |   Last Updated: Jul. 31, 2008 - 03:05PM  |  
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A 3.9 percent military pay raise for 2009 seemed generous when lawmakers first proposed it in February, but its luster is dimming as rising inflation threatens to erode service members' purchasing power.

The 3.9 percent hike lawmakers would like to see take effect Jan. 1. is larger than the 3.4 percent raise requested by the Bush administration for next year, but it may not seem so big to many service members as worsening economic conditions and soaring crude oil prices hit troops and all other Americans in the wallet.

The Bureau of Labor Statistics, an arm of the Labor Department, reported July 16 that the Consumer Price Index of goods and services for urban consumers was 5 percent higher in June than at the same time a year ago, with transportation and energy costs comprising the bulk of the increase. Energy costs rose 6.6 percent in one month and are almost 25 percent greater than they were in June 2007. Transportation costs rose 3.8 percent in June and were 12 percent higher than they were a year earlier.

A second version of the CPI, which measures increases for urban wage earners and clerical workers, reported an even higher inflation rate, estimating costs were 5.6 percent higher than in June 2007.

The 3.4 percent military pay raise requested by the Bush administration was set to keep pace with private-sector salaries, following a formula set in law for military and federal civilian employees.

The 3.9 percent raise included in the House and Senate versions of the 2009 defense authorization bill was proposed to continue closing the perceived gap between military and private-sector wages that developed between 1982 and 2000, when military raises were capped.

The pay gap, which had grown as large as 13.5 percent in 1999, has shrunk slowly after seven consecutive years in which Congress approved military raises that were slightly larger than private-sector wage growth.

The pay gap stands at about 3.9 percentage points today the same figure as the raise pending in Congress and would drop by half a percentage point if lawmakers have their way.

Over the past decade, military pay increases have been greater than inflation as measured by the CPI survey of the cost of goods and services in eight out of 10 years, with the exceptions being 2005 and 2006. Over the decade, military pay rose about 16.1 percentage points more than the CPI, which not only closed the pay gap but boosted troops' purchasing power.

The difference between military raises and the CPI has, for the last decade, been a source of complaint for military retirees, because cost-of-living increases in military retired pay are based on the CPI.

Military pay is designed to be competitive with wages in the private sector, not to keep pace with inflation, said Steve Strobridge of the Military Officers Association of America and a former compensation director for the Air Force.

For that reason, a military raise that is bigger than the average private-sector increase and that continues closing the pay gap is a good thing for the military, even if it does not keep up with inflation, he said.

Cost-of-living adjustments in retired pay, which also apply to Social Security and federal civilian retired pay, are designed so the annuities do not lose value over time, he said.

Inflation protection

In some ways, service members and their families are protected from price hikes. Tax-free food and housing allowances increase automatically each year to match increases in lodging and food costs. Food costs in June were 5.2 percent higher than 12 months earlier, while housing prices were 3.5 percent higher, according to the Labor Department.

Service members and their families also are exempt or shielded from rising health care costs because members receive free medical care, and health care for their families is either free or has co-payments and other fees that have been frozen for years by Congress, Strobridge said.

Health care costs have gone up 4 percent nationwide in the past year.

Strobridge said high inflation hits service members hard only if it happens at the same time that private-sector wage growth is relatively slow which is what appears to be happening now. He called this a "double-punch" for service members that also comes when jobs in the private sector are harder to find.

But the areas in which service members are protected from inflation do not come close to offsetting the higher fuel and energy costs that account for the biggest share of the increase in consumer prices.

Gas prices rose 10.1 percent in June and are 32.8 percent higher than a year ago, according to the Labor Department. Overall transportation costs rose less, but only because the cost of new and used vehicles has declined.

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