The cost-of-living adjustment received by thousands of federal white-collar workers in Hawai'i would be phased out and replaced by other payments under legislation proposed by the Bush administration.

The measure, proposed Wednesday, would phase out the COLA program over a seven-year-period for workers here, in Alaska and Guam and other U.S. territories. At the same time, the workers would begin receiving so-called "locality" payments, which boost salaries based on surveys of what's paid by the private sector in local markets.

The workers here receive an as much as 25 percent COLA adjustment to their base pay under a program designed to enhance recruitment and retention of federal workers in high-cost areas. The COLA payments aren't subject to federal tax and aren't counted toward a worker's retirement.

Locality pay, which ranges from 12.6 percent to 30.3 percent, is taxed but can be used in crediting a worker's retirement benefits. Since the late 1990s, there's been a debate about switching to locality pay because of the higher retirement benefits. That's fueled some people's perception here and in other COLA areas that pay and retirement benefits here are eroding compared to the Mainland.

"These perceived disparities between the pay and retirement benefits of those two groups of employees generate actual and potential staffing problems for federal agencies," wrote Office of Personnel Management Director Linda Springer in a letter to the U.S. Senate.

Another difference between COLA and locality pay is for U.S. Postal Service workers. They can receive COLA if they don't work on the Mainland, while people in the contiguous states don't receive locality pay.

The proposal's impact on federal workers is being reviewed by Sen. Daniel Akaka, who is chairman of the federal workforce subcommittee. Akaka put out a statement saying he is seeking input from those who are affected.

The administration's proposal calls for reducing COLA payments gradually to reduce the impact of increased federal withholding taxes. The changes will also include separate specifications for special rates, the Postal Service and some other workers, Springer wrote in her letter.

Reach Greg Wiles at gwiles@honoluluadvertiser.com.