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Rising living costs likely to offset pay hikes

The average U.S. worker in the private sector can expect about a 3 percent salary increase in 2013, a little bit more than she received this year, according to compensation consultants.

How much of that the worker will keep depends on a host of factors: If inflation remains under control; if the employer charges workers more for health care benefits; and if a payroll tax break that has boosted paychecks for two years is allowed to expire at the end of the year.

Aon Hewitt, a human resources consultant in Lincolnshire, Ill., is forecasting an average salary increase of 3 percent next year. Those in education will get only a 2.5 percent increase and government workers can expect 2.6 percent more, but mining and energy workers can expect 3.8 percent and 3.6 percent increases respectively, the firm said.

In addition, more companies are offering performance-based merit increases on top of salary increases. Aon Hewitt said 90 percent of U.S. companies offer bonuses to workers below the executive level and about 75 percent of those that do make all employees eligible.

“We’re seeing record high levels of funding for bonuses based on the 37 years we’ve been tracking the data,” said Ken Abosch, Aon Hewitt’s compensation practice leader.

Before the recession, a 4 percent annual salary increase had been the norm. But the recent recession savaged salaries more than did previous downturns.

The cost of living is increasing 2.2 percent annually, according to the latest government report. Health care costs also could eat into salary increases. Companies will pay about 5 percent more to provide their workers with health insurance next year, according to a survey conducted this fall by Mercer.

Paying more for health care could mean a smaller retirement fund for many workers. Nearly a third of the workers who were asked to pay more for health care benefits in the past year reduced their contributions to retirement plans, according to the Employee Benefits Research Institute.

Another hit to paychecks could come if Congress allows the Social Security tax deducted from a worker’s paycheck to rise from 4.2 percent to 6.2 percent next year. The cut, which provided more than a $100 billion annual windfall to workers, was enacted in 2011 to boost economic growth.

Merit- or performance-based pay increases may lighten the impact of inflation, rising health care costs and payroll taxes.

Jeffrey Bacher, a principal with Buck Consultants, said merit raises on top of across-the-board salary raises will help some workers do better than break even. More companies are using performance-based pay to reward their better workers, he said.

Abosch said companies like the plans because, unlike salaries, bonuses are not fixed costs. Employers “are not unwilling to invest in employees. They just want to do it in a way that they are protected,” he said.