Pay and pension benefits of the nation's 5 million federal and military retirees and civil servants will be a major topic tomorrow when the Senate goes back to work on a budget for the fiscal year that begins in October. The first item of business will be a compromise proposed by the Senate just before the Fourth of July recess.

Although the Senate still wants to freeze federal retirement benefits next year, it has dropped its demand that civil servants put another 2 percent of their salaries toward their retirement program costs. That's a major compromise for the Senate, which originally proposed that worker contributions -- now 7 percent of salary -- be raised to 9 percent.

The Senate is still seeking greater dollar cuts from federal employe programs than those being sought in the deficit-reduction package proposed by the House. But the Senate position is softening in areas of importance to government workers.

A major difference between the Senate and House plans is over Social Security benefits. The Senate wants them (and other federal retirement plans) to skip the cost-of-living raise due in January. The House favors the inflation adjustments.

The Senate compromise would require federal workers to wait an extra year before they get their next longevity step-pay increase. Those raises are worth 3 percent. Nearly 300,000 people become eligible for the raises annually.

Under the Senate plan, employes -- who now get the raises every 12 to 36 months depending on their time in grade -- would have to wait an extra year before they got the raises, which are awarded in addition to any general pay increase.

There is a possibly troubling proposal in the Senate plan that would make almost a billion dollars in "unspecified" cuts in the civil service retirement program during the next three years. Federal and postal unions warn that this could be the vehicle to raise the retirement age, from 55 to 65, but doubt that it will happen. Senate sources have long insisted there are no hidden gimmicks in this budget to tamper with the retirement age.

The Senate also proposes to save $600 million in the federal employe health insurance program. Most of those cuts, insiders say, would come from a bookkeeping change and from additional cost-containment features rather than from cuts in current benefits.

Although most federal workers and retirees favor the House budget plan as the lesser of two evils, the latest Senate compromise is relatively good news. It means that after some earlier stonewalling, the two sides are closer to compromising. It will be weeks before any agreement is reached, if indeed there is agreement. But both sides appear to be trying, and attempts so far have been favorable to feds.