2026 Federal Employee Pay Raise, Along with Cuts to Benefits, Not in “Big” Bill – Will There Be a Pay Freeze?

The “One Big Beautiful Bill” (OBBB), a sweeping budget reconciliation package, passed before the fourth of July 2025 and the final version did not include provisions that would have cut federal employee and retiree benefits. This was mostly because many of those proposals violated the Byrd Rule, which limits what can be included in reconciliation bills. However, Congress also did not include any federal civilian pay raise for 2026, making it more likely that there will be a pay freeze in 2026. 

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2026 Budget Passes – Cuts to Retirement and Pay for Government Employees Removed

Over the course of this past spring, there were extensive cuts being proposed for federal worker retirement benefits on Capitol Hill. As we reported a couple of weeks ago, all of these were removed by the Senate except for new, higher contribution rates to FERS for new hires. After final passage into the law, the budgetary resolution did not include this pay adjustment either. Here’s a recap of what was being considered: 

High 3 is Not Changing to a “High 5” Average Salary

The proposed change from High-3 to High-5 for pension calculations was dropped. This would have effectively lowered retirement income by adjusting the FERS annuity calculation. Instead of using the highest pay received in 36 consecutive months of one’s federal career, 60 months would’ve been used to determine one’s average salary. Although it would not have gone into effect until 2028, it still had the potential of significantly impacting the retirement plan for several workers across the federal government. 

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Federal Employee Retirement: FERS Supplement Remains Intact 

At one point, terminating the FERS special retirement supplement (SRS) altogether was considered by Congress. Then, leaving it intact just for those who are subject to mandatory retirement ages, eliminating it for everyone else who retires before 62, was discussed. Finally, like most other provisions pertaining to federal employee compensation and benefits, this provision was removed. 

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Increased Contribution Rates and Civil Service Protections

Also not included in the final legislation: 

• Civil service surcharge: The plan to charge more for civil service protections was removed.
• MSPB appeal fee: The $350 fee to appeal personnel actions was eliminated.
• Union/official time fees: Proposals to charge unions for official time and property use were struck.
• New hire contributions: Increasing FERS contributions for new employees, especially those seeking civil service protections, was removed from the final bill, too. 

FEHB Audit and the Potential of Future Cuts to Retirement Benefits

The only item pertaining to federal employee benefits that was left in the budget bill of fiscal year 2026 was an audit of the Federal Employee Health Benefits (FEHB) program that could result in employees paying more of the cost for healthcare. Currently, the government pays up to 75% of active federal employee premiums. While this remains the case, the audit might result in higher premium costs for employees and retirees. The newly formed Postal Service Health Benefits (PSHB) program does not appear to be impacted. 

Because most of the proposed adjustments did not pass into law, it gives reason for much of the federal workforce to breathe a sigh of relief, but they might not be out of the woods yet. It is unclear if the Republican-led House and Senate will seek to adjust federal benefits through some other, non-budgetary, standalone legislation that wouldn’t be subject to the aforementioned Byrd rule. 

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2026 Pay Raise for Federal Employees: Likelihood of Pay Freeze Increased 

What was left out of the “big, beautiful bill” and the White House budget request was an increase to civilian employees’ salaries. This makes the prospect of a zero percent pay increase for federal pay in the upcoming year much more likely. 

Pathway to Pay Raises for Federal Workers

Before Congressman Gerry Connolly sadly passed away this year, he proposed his FAIR Act for the 10th time, which would’ve meant a 4.3 percent pay raise for 2026 had it become law. While this bill has never passed, and it remains unclear if another Congressman will resume the tradition, it acted as an indicator for the actual pay raise. It is also one way a pay raise gets through – a standalone bill by Congress. With that not appearing likely this year, the other pathways to an annual pay increase are through a budget appropriation act or an executive order from the White House. Most federal salary increases have recently been enacted by the President and not lawmakers so the spring publication of the President’s budget suggestions is the biggest signal of a potential pay bump for feds. With nothing included in the recently passed budget and the Trump administration recommending no annual increase, a pay freeze appears very likely at the moment for 2026. 

Next Steps – Locality Pay and Alternative Pay Plan

Should the White House and federal salary council not release by an alternative pay plan before the end of August, there would be a sizeable automatic salary increase for federal workers due to the Federal Pay Comparability Act. While highly unlikely, this marks the next step for the upcoming year’s raise. The alternative pay plan would also make the White House’s decision to enact a 0% across-the-board raise more official. Locality pay, however, is not determined the same way but rather by the cost-of-living of given designated localities. Like how the 2025 pay raise was 1.7 percent across-the board, but an average of 2.0% – the 2026 raise will likely be an average of around 0.5 percent instead of a flat 0.0%. So, depending on where certain feds live, some would see a modest salary increase even with the proposed raise of zero. 

Federal Pay Raise Overview

The federal pay raise is a significant consideration for government employees and workers across the federal workforce. For the fiscal year 2026, a proposed pay raise for federal employees has been a topic of interest, with many advocating for a fair compensation increase to keep pace with inflation and rising living costs. This could be particularly important for the Department of Defense and other agencies that rely heavily on skilled federal employees, as well as for those in the civil service retirement system, particularly the FERS (Federal Employees Retirement System) and CSRS (Civil Service Retirement System) participants.

Impact on Morale of Government Civilian Workers

Retirement benefits remain a crucial aspect of the conversation, as federal employee retirement plans, including the Thrift Savings Plan (TSP), are influenced by salary adjustments. The American Federation of Government Employees continues to advocate for improved conditions and retirement savings for federal workers, emphasizing the need for a 3.8 percent pay raise to ensure workers receive fair compensation. In summary, the federal pay raise is a multifaceted topic that affects federal employees’ salaries, government budgets, and overall workforce morale.