Federal Government 2-Year Pay Freeze Is A Miracle

When President Obama proposed to freeze Federal Government pay for two years I thought he was taunting us with an April Fool’s joke in November.  I mean really.  Is the public supposed to take the President seriously after he signed off on a 3.9% 2009 pay hike when Armageddon hit in 2008 while attacking the private sector for getting paid too much?  Not only did all Federal Government employees get a 3.9% pay hike in 2009, they also got another 2.9% pay hike in 2010!  In other words, while practically all of America suffered through the financial crisis with pay cuts and job losses, Federal Government employees raked it in!  We’re talking the percentage of Federal Government employees making over $100,000 jumping from 14% to 19% during the meltdown.  Sweet!

If President Obama listened to the hoards of people who implored him to reign in spending and treat people equally, perhaps he wouldn’t have lost many of his key staff as well as lose his party’s mid-term November elections by a landslide.  But, what’s done is done and it’s important to realize that change in the government is on its way.

Hypocrisy is bad.  The government can’t raise taxes on people in a recession and avoid paying taxes like Tim Geithner did.  Shame on the government for telling people and organizations they make too much when the government themselves keep giving themselves raises and providing massive pensions to boot.  The Dow Jones was down 150 points before Obama’s announcement, and rallied to close down only 39 points after his speech.  See what happens when we begin to eradicate double standards?

OUTLOOK JUST GOT BRIGHTER

I’m starting to believe very strongly that 2011 is going to be a wonderful year for the US economy.  Corporate earnings are picking up, which will ultimately lead to increased hiring.  But, what’s most encouraging is the fact that the American Government is returning to honesty and equality!  Anti-business policies have just paralyzed small business owners who employ 90%+ of all Americans.  When you think your taxes are going up, you don’t expand because you aren’t sure what your costs will be.  An unclear regulatory environment is a DISASTER for employment.

President Obama has finally come to admit that he can’t tell others to cut costs without setting an example himself, simply because nobody will listen.  It is wonderful that the government is finally trying to set a good example for the citizens it governs.  An honest American government is great for the economy.  Maybe miracles do happen!

Readers, how encouraged are you that the government will actually start leading by example?  What more can the government do to show they aren’t just selfish politicians who are only looking out for themselves?  Why do people continue to let things slide with government officials who serve us?

Notes: The pay freeze does not affect Congress or their staffs, defense contractors, postal workers or federal court judges and workers.  The reason?  They are more special.

Extending the tax cuts for the middle class will cost ~$3 trillion over 10 years compared to ~$500-700 billion in cost if extended for the top income earners.

Advice to President Obama & Congressional Leadership: Compromise and raise the income limit for tax increases to $1,000,000.  There is no way any millionaire will complain (publicly at least) about a 4% income tax hike.  Furthermore, nobody, Republicans included will feel sorry for millionaires and find the tax hike unreasonable.  Remember, someone making $300,000 in Manhattan is like making $100,000 in Iowa who would not face tax increases under President Obama’s existing $250,000 threshold.  Different parts of the country have different costs of living, surprise!

Best,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    I have to say that I was somewhat shocked when I heard this proposal the other day. We have heard so many stories of overpaid government officials lately, it’s very refreshing to hear that there will be a pay freeze on those overly inflated salaries.

    Now, hopefully we’ll take some more action to reduce the federal debt!

  2. says

    Government employees are just another scape goat like the illegal immigrants and the rich people. American people needs someone to blame and we are going through the list one by one. Sure, there are overpaid crooked officials like those guys in Bell, but many of the 2 million public employees are honest hard working people. The pay freeze is good for the short term to show the government can lead by example. I think we should cut defense, that’s where the biggest chuck of pie goes.

    • says

      Yes, cut defense. Hopefully by 10-15%, we should still have $800 billion+ to defend ourselves from evil empires.

      Are there 2 million Federal government employees? I would check that statement. I don’t think we should cry for Fed government employees who are suddenly asked to take a pay freeze AFTER getting a 4% and 3% wage hike during the crisis when many of us got our pays slaughtered, and many fired.

  3. says

    How this helps the economy in the long-run I don’t know. We’re already in recovery but to put these salaries on freeze for 2 years hurts. Many say inflation is coming. Well, if it hits in the next 2 years while these workers aren’t getting raises then in effect they are making less.

    • says

      It helps through Leadership and setting a good example. There is no inflation, and why are we crying for those who found stability during the crisis and got pay raises to boot?

      We should be crying for the 10% unemployed who are struggling to find work and make a living!

  4. says

    To solve the huge deficit, I implore the citizens of this country to promote an increase in the social security retirement age! There, I said it (one of the most controversial ideas out there). When this age was set, decades ago, we were expected to live about 10 years past age 62. Now, the life expectancy is more like 20 years. There should be an adjustment to keep up with the changing life expectancy of the population!

      • Norman says

        Mine has already been increased to 66 years and 8 months to get full SS benefits. If you were born in 1960 or later, its been raised to 67. So they have been gradually raising it.

  5. says

    As always, I appreciate the mention of Tim Geithner being a big tax avoider!

    I sure hope you are right about 2011 being a good year for the economy. Our city finances are a disaster, a nice combination of corporations going bankrupt, declining property values, and a mayor from hell. City library is set to close in July, even though we are one of the ‘wealthier’ towns in the state. Finances were mismanaged for years and now it is all coming home to roost.

    It will be interesting to see if the library actually closes. If so, I can’t imagine the rebellion. Politicians were allowed to get away with so much during the ‘good’ times that a lot of things get exposed during the bad times.

  6. says

    Ninja just wrote about this today as well.

    I definitely think this decision is the right one…although would have been much more effective 2 years ago when the rest of us were getting salary freezes and pay cuts. Now he risks losing good people because the economy is recovering and they might jump ship to the private sector where people are starting to lift salary freezes again.

    It used to be that govt workers were paid much less than private sector jobs and the reward was job security and a rockin pension. Now, it seems like the govt employee has it all. The high salary and all the extra benefits.

    • says

      It’s weird that the government is freezing salaries when the economy is recovering and people are getting jobs, and AT THE MARGIN, the labor market is getting tighter. Very good point.

      So, why didn’t the Government initiative pay freezes then when the private sector was going through JOB LOSSES and PAY CUTS?

    • says

      Government employee still get paid less than the private sector. Their benefit package is also not as good as private sector. The only truly better benefit is the pension.

      Disclosure: my wife is a federal employee and she is an honest hard worker and she would get paid much more in the private sector. She is a workaholic though and worked like a nut in the private sector. I like it much better now that she is working in the public sector.

      I am ok with the 2 years freeze, we gotta sacrifice too. I guess it took a while to get the ball rolling on freezing salary. 2008 and 2009, I give Obama free pass because he just started.
      From what I heard on NPR, the freeze does not include promotion and steps so some people will still get pay raises.

      • says

        Sorry mate, but the one thing the public sector ROCKS on is the pension and benefits package.

        I want to make it clear that my message is NOT directly the the thousands of hardworking government employees out there making a living and serving our country.

        My message is to all the HYPOCRITICAL POLITICIANS out there who say one thing and do another. STOP IT GUYS! People aren’t stupid!

        • says

          She wasn’t happy with her job so she went back to school full time to get a Master of Public Administration degree.
          It took two years and once she was done, she got a job that paid about the same as her old job.
          I’ll count that as a pay cut.
          My benefit package is better than her. Health care, stock participation, stock discount, on site gym, vacation time, etc…
          The pension is really nice though.

  7. says

    Wow, the facts in this post are incorrect.

    In 2008, the Feds received a 2.5% overall pay increase.

    In 2009, they received a 2.9% increase. This was signed into law by GWB BEFORE Obama became president. In addition, it was SUPPOSED to be 3.9%, but was lowered to 2.9%

    In 2010, they received the lowest raise in decades at 1.5% from Obama.

    The facts are all here: http://www.opm.gov

    Please note that locality pay is different from the overall pay increase.

  8. says

    This sounds like a change from your previous stance. In the past you’ve stated that you think the “rich” shouldn’t have to pay more taxes, and now you think a 4% tax for only the rich is fair? What happened to the flat tax rate? Do you prefer this method now??

    • says

      A flat tax above a certain income level of around $30,000 for a single, and $60,000 for a couple/family is the ideal solution.

      However, a flat tax is never going to fly because politicians NEED power and a way to reward and punish Americans. Hence, the ultimate compromise to to raise the income limit.

  9. says

    As a federal employee, I have no beef with the salary freeze. The timing is funny, as others have mentioned. Why it wasn’t froze two years ago and last year is beyond me. The only potentially frustrating thing I see with the freeze is the fact that congress (who ultimately decides federal raises) will be exempt from the freeze. It doesn’t say much when the freeze 2 million fed employee’s salaries, but get a raise themselves. It will be interesting to see how it pans out.

  10. George says

    GWB had the power, but didn’t use it. Obama is methodically slow, but he has used the power.

    However… any scheming employee knows that the workaround for a pay freeze is to convince the boss to give you a promotion. You’ll see a lot of scheming in the ranks now instead of employees settling for COLAs… won’t lead to better government since the good employees will be wasting time lobbying against the schemers.

  11. says

    Now if we could just get congress included in the pay freezes, in addition to having huge spending cuts across the board – we’d be in business. It’s so funny to me how we keep talking about how tax cuts will “cost us” so much money if they pass. I think we need to remember that it is the deficit spending that’s causing the problems, not the tax cuts.

  12. Blue Spyder says

    I have to agree with Amber, Bush gave way better increases than Obama is, but yet he will get blamed for anything and everything from spending to the Yankees losing to the Rangers. This country is becoming one of finger pointing than problem solving. Congress needs a serious pay reduction and need to be forced to do hard labor like the people they represent.

  13. StackingCash says

    I’m a tad pessimistic regarding your comment “Corporate earnings are picking up, which will ultimately lead to increased hiring.” From my experience, corporations are earning more because of productivity I.E. slavery. Why would they hire more if they can make more money with less people?

    • says

      Because there will be a breaking point for employees where you can only squeeze so much productivity before they quit or burn out. That time is in the next 6 months, which is why hiring will pick up.

  14. says

    Well, I do applaud the pay freeze. But government needs to cull the herd seriously. Major headcount reductions are needed, kind of what like what was recommended in the initial deficit reduction plan.

  15. B. Mo says

    Yep…I’m a gov’t employee and many of us are over paid…but not all of us. Good luck at the Social Security Administration, IRS, DOT, etc…there will be lots of disgruntled folks around.

  16. says

    Whenever I hear of a salary freeze or even a pay reduction, I always think of all the people without jobs. A freeze or reduced salary is clearly the lesser of two evils, even if this specific freeze is mostly symbolic.

  17. says

    What’s all this complaining about pay raises for federal workers? Just about anyone can become a federal worker either through the military, or any of the other massive departments. We’ll all just pay each other’s taxes. It’ll be one great big ponzie scheme, like social security :)

  18. Mike Hunt says

    A freeze is the ridiculous bare minimum.

    Obama should be a real leader and announce that he is taking a 50% pay cut. He would expect that people below him take less, maybe much less, but it would set the proper tone.

    In most organizations salaries are set by the most senior person, the government is no exception. By taking a pay cut he would create pressure to create cuts down the system.

    It is also about leadership. As CEO of a small company when times were tough in early 2009 I took a 30% pay cut and asked my direct reports to take a 15% pay cut, managers took a 10% cut and staff people took 5%. Hourly people had a salary freeze.

    Too bad Obama is a weak leader and an empty suit. It’s better than putting out a raise but for sure he would be crucified if he tried something like this.

    Remember Obama and Biden are very pro-union. And why should government workers even have a union? They have never been exploited by their employer, have they?

    -Mike

  19. says

    I was also happy with the President’s announcement. As you know Sam, California state employees have already been sacrificing with unpaid furlough days. It’s about time the Feds stepped up to the plate.

    I agree the benefit package is superior to ours; I was once a Federal employee.

  20. Mars says

    Did you notice how much money the pay freeze will save? It’s a fraction of the cost of budget shortfalls created by extending tax cuts to the top 2%. That’s what makes it such a hypocritical savings measure, and that’s part of a larger cycle. Every few years people declare that federal workers are overpaid and that we can’t afford it, despite the fact that when viewed on a qualifications level, the more qualified the individual, the more they’re underpaid. They have more generous future benefits to compensate but with NJ as an example, the favorite “balancing” measure of governments is to stop paying pension contributions.

    The government starts off by shedding employees (like its done all year) and then eventually calls for a wage freeze, what’s happening right now. Eventually thing come to a head, and occasionally the government gets sued or people strike and an arbitrator forces a wage increase because they’re being paid so much under the market rate. At this point normally we’ve contracted out all of the lower skilled labor to private companies who are benefiting wildly by underpaying their employees. This in turn means that only the management and skilled employees are on the government payroll leading to a higher average pay than the private sector and the calls for pay cuts etc increase again.

    In summary I don’t believe that anything will get done. I believe that this is just another sign that Obama will infuriate his base until its at the point were his own party will refuse to work with him and we’ll be in limbo for another year. By going for the low hanging fruit but most likely to anger his own base measures first, he’s making sure nothing gets done. It’s a part of a larger picture where for years the US has managed it budget by refusing to deal with core revenue and spending issues and instead opted to forgo “optional” payments like returning social security money, pensions, and fixing roads.

  21. says

    I’ve heard that this “freeze” ONLY applies to the civilian subcontractors hired by the Federal government. Is that true? I wouldn’t be surprised …

  22. says

    I think ultimately although the initial savings are a drop in the ocean hopefully it will signify across the board cuts including a ton in the military. War is the biggest drain on funds and although the US had strong support no one really fully understands why USA are in there. Sure you need some defence but not so sure about attack and that is what is costing so much money.

    So yes pay freeze, defence cuts, small raises in tax and then a joint attitude for the whole country to tough it out. Those with money should be encouraged to give to charitable organisations that are truly helping the people who are genuinely suffering too.

  23. Jennifer says

    I am a little shocked by some of your responses. I am a government employee and highly disagree with you all. Government workers are generally unpaid compared to the private sector. In the past the trade off was the retirement benefits were better, but does that truly hold true anymore, I am not certain. The majority of government employees are hard working people trying to make ends meet for their families. If for one second I thought cutting my pay for 2 years would truly help us get out of debt I would gladly, but regrettfully accept the pay freeze, but in this case it doesn’t even make sense. Get rid of Obamacare and then eventually we will build ourselves out of debt. A pay freeze just hurts the average american. Not a smart idea.

    • says

      We’re an exciting bunch of commenters! The private sector got blown out and got massive pay cuts. Isn’t a freeze kind of the bare minimum since we should all be in this together? United we stand!

      • Geek says

        Agreed. You public sector guys get more than us private sector guys on average. http://federaljobs.net/

        Sure, less of you get filthy rich, but you chose to have the govt pay you. Count your blessings that you’re paid so much more than most of the rest of the USA.

  24. Aloysa says

    I work for the local government and we did not have any increases. In fact we had pay cuts and layoffs. I was outraged by the fed gov pay raises. In the times like this, with the deficit growing and budget in a hole, how do you justify the increases? Pay freeze is long overdue.

  25. says

    coming in late, but wanted to weigh in. why is it that everyone thinks that the wealthy won’t care to give up some of their money…in most all cases the wealthy are wealthy because they worked hard and out of anyone they deserve to keep their money because it was not handed to them.

    • says

      That’s a good point that we’ve failed to address! Perhaps it’s notfair to assume that all people are opposed to getting taxed more, and would welcome more taxation for whatever reason.

      The thought is basically whether you or someone else is better at handout your own money.

  26. anonymous says

    I just want to point out that many of the people hit by the wage freeze will be the innovators and scientists that spent many years making very little money and have been forced to relocate to God-forsaken parts of the country for the sake a creating a brighter future for this country. Additionally, many of these have not received compensation increases for years. Furthermore, it is unclear that how much of the deficit will be affected – somewhere between nothing to maybe one percent, but the long term cost of failing to foster and support innovation and technology in this country means that long term the deficit will grow and America will continue to decline.

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