What the 2025 Federal Pay Raise Means for Your Pension and Retirement

If you're a federal employee, the 2025 federal pay raise may feel like a welcome boost to your paycheck, but it also carries long-term implications for your retirement benefits. Beyond the immediate increase in income, this pay raise could have a direct effect on how much you receive in your pension, your contributions to the Thrift Savings Plan (TSP), and even your Social Security benefits.

One of the most important ways the 2025 raise affects your retirement is by increasing your high-3 average salary—the average of your highest-paid 36 consecutive months—which directly impacts your pension. Whether you're close to retirement or still building your career, understanding the ripple effects of a federal pay raise is key to making smart decisions for your future.

What Is the 2025 Federal Pay Raise?

The 2025 federal pay raise includes an average increase of 2% for federal civilian employees. This is made up of:

• A 1.7% across-the-board increase to basic pay

• A 0.3% locality pay adjustment, which varies depending on your geographic area

While this raise may seem modest on paper, it can significantly influence your long-term financial outlook, especially if you’re nearing retirement and thinking about your high-3 salary, which plays a crucial role in pension calculations.

How a Pay Raise Affects Your High-3 Average

One of the most significant ways the 2025 federal pay raise influences your retirement is by increasing your high-3 average salary—the average of your highest-paid 36 consecutive months—central to your pension calculation.

If you're nearing retirement, this raise could directly improve your pension if 2025 falls within your high-3 window (for example, if your highest earning years are 2023, 2024, and 2025). Locking in a higher salary across multiple years can make a noticeable difference in your annuity.

Even if you’re not planning to retire soon, consistent pay raises like this one can compound over time. A higher high-3 average translates into a larger monthly benefit for life.

Why Timing Your Retirement Matters

If you’re nearing retirement, the timing of when you leave federal service can make a significant difference. Because your pension is tied to your high-3 salary, it might make sense to:

• Delay retirement by a few months or even a year to lock in a higher average if you're benefiting from this year’s federal pay raise.

• Consult with a retirement specialist to determine whether the increase significantly alters your projected monthly benefit.

  
  

This strategic timing can have a bigger impact than many employees realize, especially when combined with factors like accumulated sick leave, unused annual leave, and potential cost-of-living adjustments (COLAs).

Mid-Career and Long-Term Thinking

If you’re still a decade or more away from retirement, the 2025 federal employee pay raise still matters. Raises now will likely be part of a steady progression toward your eventual high-3 average. Think of each raise as one more step up on the pension ladder—laying the groundwork for a larger retirement annuity when the time comes..

Additionally, more pay now means:

• More money is going into your TSP

  • If you’re contributing a percentage of your salary to the Thrift Savings Plan, every raise increases the actual dollar amount going into your account—even if your percentage stays the same. Over time, this builds a significantly larger retirement balance.

  • Tip: If you're approaching the IRS annual contribution limit, consider adjusting your TSP percentage to maximize your savings.

• More employer matching

  • The government matches up to 5% of your salary in TSP contributions if you're under FERS. A higher salary = a higher 5%, which means free money toward your retirement grows along with your raise.

• Higher potential compound growth over time

  • The earlier those increased contributions hit your account, the more time they have to grow. Thanks to compounding interest, even small increases now can turn into thousands of extra dollars by the time you retire—especially if you're investing consistently in growth-oriented funds.

What Else Changes When Your Pay Goes Up?

The 2025 federal pay raise doesn't just affect your pension—it also has ripple effects across your retirement contributions, insurance, and leave payouts. Here’s what to keep in mind:

Higher Payroll Deductions

A raise also means higher deductions for:

• Social Security and Medicare taxes

• FERS retirement contributions. While these reduce your take-home pay slightly, they increase your retirement savings, Social Security credits, and long-term benefits.

  
  

Other Compensation-Linked Benefits

• FEGLI (Life Insurance): A Higher salary may increase your coverage amount (and premiums).

• Annual & Sick Leave: Leave payouts are based on your final salary, so a raise now makes unused leave more valuable.

• Cost-of-Living Adjustments (COLAs): While COLAs apply after retirement, they’re calculated from your pension base—so a larger pension today means larger COLAs later.

Final Thoughts

The 2025 federal pay raise is more than just an increase in your paycheck—it’s a long-term opportunity to strengthen your retirement foundation. Whether you’re focused on your high-3 average, building your TSP, or just beginning to think about retirement planning, understanding how pay changes ripple through your benefits is key.

At FedAdvantage, we’re dedicated to helping federal employees make confident, informed decisions about their financial futures. From educational resources to supplemental protection that fills the gaps in federal benefits, our mission is to support your journey every step of the way.

If you’re planning for retirement, evaluating your benefit options, or simply want to make the most of this year’s raise, or if you have any questions along the way, we’re here to help.