Has Your Federal Raise Kept Up? Analyzing the 2025 Employee COLA

Many federal employees approach retirement expecting that each year’s pay increase will keep them on track with the cost of living. However, when the inflation numbers come in higher than your raise, you might find that your paycheck doesn’t stretch quite as far as it used to. If you’re wondering whether the 2025 cost of living increase for employees will carry you comfortably into your golden years, it’s time to take a closer look at the details.

At PlanWell, our financial advisors hold the ChFEBC, CFP, and AIF designations and combine over 30 years of experience serving federal employees. We’ve developed our proprietary Fed-Expert Financial Blueprint specifically to help those who serve our nation retire with confidence. In this post, we’ll examine how the 2025 pay raise measures up to inflation, point out why retirees under CSRS and FERS see different COLA adjustments, and highlight key benefit changes federal employees need to keep on their radar. Whether you’re still on the job or already retired, understanding these changes is essential for protecting your long-term financial security.

The 2025 Pay Raise: Breaking Down the Numbers

For the upcoming year, federal employees will receive an average raise of about 2%. That number includes a 1.7% across-the-board increase to base pay and an additional 0.3% average increase allocated to locality pay. While any raise sounds like good news, you might wonder whether that 2% is sufficient to keep up with the rising prices of everyday expenses.

The new pay tables go into effect during the first full pay period of 2025. General Schedule (GS) employees will see their base salary bump up by 1.7%, while the average locality rate increase of 0.3% will vary depending on your region. Similar increases apply to the Executive Schedule and Administrative Law Judge (ALJ) pay scales. Your exact pay raise may be slightly above or below the 2% figure, depending on where you live, but that’s the national average all agencies are focusing on.

To put this shift in perspective, here’s how the 2025 raise rates compare to recent years:

As you can see, the 2% average increase for 2025 represents a noticeable drop from the successive boosts of 4.6% in 2023 and 5.2% in 2024. If you’re used to pay raises that easily cover inflation, 2025 may feel like a bit of a squeeze. Still, it’s critical to know exactly how your locality affects your personal pay situation, so reviewing OPM’s new pay tables for your area can give you a more precise understanding of what to expect on your paycheck.

Inflation vs. Pay: Does a 2% Increase Keep Pace?

Any conversation about pay raises wouldn’t be complete without discussing inflation. For 2025, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is projected to be around 2.5%. If those estimates hold true, the average 2% pay increase falls short of matching the cost of living. That gap—however small—can gradually erode spending power, especially for those edging closer to retirement age. Across the board, federal employees are also contending with a substantial pay gap (nearly 24.72%) when compared to their private-sector counterparts, a disparity that the 2025 raise is unlikely to improve significantly.

Of course, historical trends always carry some weight. In 2023, most federal workers received a 4.6% average boost, and in 2024, they saw 5.2%. Both of those increases were larger than inflation at the time, helping employees keep pace. By contrast, 2025’s 2% raise is lighter, which means paying attention to the finer details of your benefits—from TSP (Thrift Savings Plan) contributions to health coverage—becomes more important than ever for maintaining financial stability.

Understanding the Retirement Angle

While we often talk about “COLA” as shorthand for a cost-of-living adjustment, there’s a difference between the wage raises active employees receive and the retirement COLAs for federal retirees. For 2025, retirees covered under the Civil Service Retirement System (CSRS) will see a 2.5% increase in their pension checks, while those under the Federal Employees Retirement System (FERS) will receive a 2% bump. This discrepancy happens because once inflation climbs above 2%, FERS retirees typically experience something often called a “diet COLA,” which is consistently 1% less than the CSRS benefit in years of higher inflation.

Meanwhile, Social Security benefits are also projected to adjust by 2.5% in 2025. If you’re drawing Social Security in addition to a FERS pension, you’ll receive different cost-of-living increases on each portion of your retirement income. Here’s a quick look at how COLAs differ for retirees:

When planning for retirement, these varying COLAs can have a real impact on long-term financial well-being. FERS retirees who anticipate inflation increases in the future may need to make more conservative spending decisions—or consider working longer—to ensure their pensions and Social Security benefits will meet ongoing expenses. For that reason, it’s helpful to think not just in terms of your monthly retirement check but also your overall portfolio, which may include TSP contributions, IRAs, and other taxable investments.

2025 Benefit Changes: More Than Just a Pay Adjustment

Beyond the pay raise, a few other changes in 2025 could have a financial impact on federal employees. One of the most relevant adjustments is in TSP contribution limits, which will rise from $23,000 in 2024 to $23,500 in 2025, giving you extra room to set aside tax-advantaged retirement savings. If you’re 50 or older, you can still make catch-up contributions, which remain at $7,500 for 2025. In addition, there’s a new “age 60–63 catch-up” category, allowing even larger contributions for that cohort. Alongside these TSP changes, the Social Security wage base is rising to $176,100 in 2025, which may affect how much you pay in Social Security taxes.

If you plan to maximize your TSP or are considering catch-up contributions, these new limits might give you the chance to put more aside for retirement—a strategic move if you’re worried about smaller pay raises or future inflation. Health benefits also continue evolving, with potential adjustments to FEHB premiums and out-of-pocket limits. Make sure to review your annual Open Season options thoroughly to ensure any changes you make to your health coverage align with your retirement plans. Often, small tweaks to your plan can help you retain more of your free cash flow in a year when your pay raise isn’t quite matching inflation.

Looking Ahead to 2026 and Beyond

Every year, several legislative proposals aim to shape the future of federal compensation and retirement benefits. The FAIR Act, for instance, has garnered attention for proposing a 4.3% average raise for 2026 (3.3% to base pay plus 1% for locality pay). The Equal COLA Act similarly aims to align FERS and CSRS retiree COLAs. Whether these bills translate into actual changes in 2026 remains uncertain. Legislative outcomes can be unpredictable, and many proposals stall due to budget constraints or political dynamics.

However, keeping an eye on these debates is important, especially if retirement is on the horizon. A significant shift in how FERS COLAs are calculated could have large implications for your long-term financial stability. And if you see an uptick in 2026 raises compared to 2025, that might influence your timing—or your thinking around contributions to TSP, Roth IRAs, or other investments. Staying informed helps you make informed decisions, rather than waiting for a last-minute announcement.

Strategies for Proactive Financial Planning

Whether you’re still an active federal employee or already enjoying retirement, consistent financial planning can help bridge the gap when pay raises fall short of inflation. Here are some points to consider:

• Review your short- and long-term budget regularly. If inflation outstrips your raise, you may need to scale back on discretionary spending or make targeted adjustments to maintain access to the savings and investments that matter most.

• Take advantage of TSP catch-up contributions. If you’re over 50, or between ages 60–63, the upcoming catch-up limits may provide extra opportunities to boost your retirement accounts during your peak earning years.

• Pay careful attention to FEHB options and premiums. Healthcare costs can rise faster than inflation, so keep your health insurance plan updated. Sometimes, choosing a different FEHB plan can result in significant savings.

• Coordinate Social Security and pension benefits. For FERS retirees, the interplay between Social Security, TSP, and your FERS pension is critical. Knowing how each retirement income source adjusts for inflation is key to projecting the long-term trajectory of your retirement budget.

• Speak with an experienced federal benefits advisor. Navigating all these changes—especially if you’re planning to retire in the next five to ten years—can be simplified with expert guidance. Our team focuses on the unique needs of federal workers, combining designations like ChFEBC, CFP, and AIF under our Fed-Expert Financial Blueprint, designed to help you retire with clarity.

Plan for the Future: Your Next Steps

While the 2% average raise for 2025 may not keep perfect pace with inflation, there are steps you can take to ensure you’re prepared. Staying on top of changes to TSP, health benefits, and retiree COLAs can help you maximize your federal compensation and safeguard your retirement plans. If you’re concerned about your personal situation—maybe you’re less than a decade away from retirement or worried that your TSP won’t cover your target income—it’s never too late to adjust and optimize your strategy.

For a more detailed, personalized discussion on how to adapt your plan in light of the 2025 cost of living increase for employees, consider joining one of our free Federal Retirement Planning Workshops. We run regular FERS webinar sessions, and you can find out more details in our Federal Retirement Planning Workshops page. Our team at PlanWell would be glad to guide you through the different retirement scenarios, the best ways to leverage your TSP contributions, and strategies for handling less-than-robust wage increases as you approach retirement.

Ultimately, every federal employee has a unique career path and retirement vision. The key is integrating all the moving parts—pay raises, pension calculations, COLAs, TSP contributions—into a cohesive financial plan that puts you on track to retire comfortably. Even if the 2025 raise isn’t as large as you’d hoped, the right blueprint can keep your goals intact without requiring drastic changes in lifestyle. By staying informed and focusing on strategic planning, you’ll be better equipped to weather any dips in your real spending power and maintain a solid trajectory for your future. If you’re ready for a tailored approach from a financial advisor for federal employees, our team stands prepared to help secure your retirement objectives.