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Public-sector employees will receive a 5% salary increase spread out over three years: 1.5% retroactive to January 1, 2008; another 1.5% starting December 2008; and another 2% in December 2009.

Under the new collective wage agreement, which was signed Thursday, they also will receive a grant of 16.5% of their monthly wage on July 1. The 16.5% represents payment for 11 months of 2008. It will also be paid to retirees who receive a state-funded pension. Retirees who receive their pensions from regular pension funds will not receive anything.

The new agreement, signed by Histadrut labor federation chairman Ofer Eini and the treasury's wages director, Eli Cohen, came at the end of an all-night bargaining session in Tel Aviv.

In addition, pensioners with state-funded benefits will also receive - in addition to the 5% increase - another 5-12% increase for wage erosion. Retirees who left the public service before 2000 will receive the largest amount, 17%, and that figure will decrease for retirees who left in every consecutive year, through 2007.

Another major change is the method for linking state pensions to the cost of living. From now on, government retirees will receive an annual adjustment based on inflation. Until now, they were dependent on changes in new collective wage agreements for such increases, which usually meant only every few years.

The agreement applies to government workers, as well as those in local authorities, government companies, and statutory authorities such as the Airports Authority, National Insurance and university administrations.

A precedent-setting agreement was signed at the end of last week, whereby 350 Defense Ministry employees will retire early. The workers, aged 50-64, will get improved retirement benefits and larger retirement grants, as well as several months' pay to "adapt."

The ministry says it will now be able to promote and move other workers, as well as hire new ones. The Defense Ministry employed 2,090 people as of last December. The number will drop by a net total of 200 after the retirements take effect.

Moti Bassok contributed to this report.