Retirement Planning Just Got Harder Thanks to These Recent Federal Workforce Proposals You Probably Missed

Key Takeaways

• Several 2025 legislative proposals could significantly reduce the retirement benefits you have long counted on, especially if you’re in FERS.

• If you’re planning to retire in the next few years, staying informed and adjusting your strategy now can help you avoid unexpected cuts.

The Changing Federal Retirement Landscape in 2025

If you’ve been thinking your retirement package is set in stone, 2025 proves otherwise. A series of federal workforce proposals introduced this year aim to dramatically reshape how retirement benefits are calculated and delivered to public sector employees. While none of these proposals have become law yet, the direction they’re heading should give you pause.

Whether you’re a few months from retirement or still a decade away, now is the time to pay attention. These changes, if enacted, could reduce your lifetime annuity, increase your healthcare expenses, and limit cost-of-living adjustments that were once a dependable part of your financial planning.

What’s on the Table in 2025

Several bills introduced in Congress have targeted key parts of the FERS retirement structure. Let’s break down the major ones affecting your future:

1. Proposal to Exclude Locality Pay from the High-3 Calculation

Currently, your FERS annuity is based on your “high-3” average salary, which includes locality pay. In high-cost areas like Washington, D.C., or San Francisco, this boosts your pension significantly.

But a 2025 proposal seeks to eliminate locality pay from the high-3 calculation. This would reduce pension amounts for many federal employees, especially those in urban regions. For someone retiring with a $110,000 average salary that includes $20,000 in locality pay, the annuity could drop by thousands of dollars annually if this proposal is enacted.

2. Flat-Rate FEHB Contribution Proposal

The second major proposal involves shifting from the current percentage-based government contribution toward a flat-rate voucher system for FEHB coverage. Presently, the government covers about 70 percent of your premium. A flat rate would not keep up with annual premium hikes.

With 2025 premiums rising by an average of 13.5 percent for retirees, locking in a fixed dollar contribution means your out-of-pocket costs could balloon year after year. This puts pressure on retirees living on fixed incomes to either downgrade their health plans or absorb increasingly higher medical costs.

3. Proposal to Eliminate the FERS Annuity Supplement

The FERS Annuity Supplement has long helped bridge the gap between your retirement and eligibility for Social Security at age 62. This year’s proposals seek to eliminate it entirely for future retirees.

This would disproportionately affect those who retire under MRA+10 provisions or early voluntary retirement options. Without the supplement, there’s a financial gap during the years before Social Security kicks in. This could result in:

• Needing to tap into TSP funds earlier

• Delaying retirement

• Settling for a lower standard of living in the interim

Additional Policy Shifts to Watch

Beyond these core proposals, other policy movements this year could make retirement planning more unpredictable for public sector workers.

4. Push to Increase Employee Contributions to FERS

Some lawmakers are advocating for raising your share of FERS contributions. While current rates vary based on hire date, a new hire could be required to contribute as much as 15.6 percent of salary.

Even if you’re already in the system, future increases could affect take-home pay, especially if Congress passes this without a corresponding pay raise. That makes long-term budgeting more difficult and potentially squeezes younger employees the hardest.

5. Ongoing Hiring Freeze and Workforce Reduction

Since the January 2025 hiring freeze, over 23,700 civilian positions have been eliminated across federal agencies. As departments consolidate and shift workloads, older employees nearing retirement could find themselves with more responsibilities and fewer support resources.

This may accelerate burnout, early retirements, or force you to reconsider your original timeline. While not a direct financial proposal, the ripple effect on morale and planning cannot be ignored.

Timeline of Potential Changes

Understanding when these proposals could take effect helps you adjust now, rather than react later. Here’s what the general timeline could look like if these proposals pass by late 2025:

• January 2026: Locality pay may be removed from the high-3 calculation.

• January 2026: New hires start paying higher FERS contributions.

• Spring 2026: FEHB contribution shift could go into effect during the next Open Season.

• October 2026: Elimination of the FERS Annuity Supplement could apply to retirements after FY 2026.

These are all subject to legislative action, but you should not wait until laws pass to reevaluate your strategy.

What You Can Do Now

It’s easy to feel powerless in the face of shifting federal policy. But there are specific steps you can take to protect your financial future:

Evaluate Your High-3 Timing

If you’re within five years of retirement, now is the time to calculate your projected annuity both with and without locality pay. If this proposal becomes law, retiring before the cutoff could lock in your higher pension.

Consult your agency’s HR or a retirement expert to run comparisons. Don’t delay—January 2026 may be closer than you think.

Review FEHB Options Closely

With government contributions potentially shifting to a flat rate, you’ll want to scrutinize:

• Your plan’s annual premium increases

• Cost-sharing structures (deductibles, coinsurance)

• Prescription coverage caps

You may find that combining Medicare Part B with FEHB still offers savings in retirement, especially if you’re Medicare-eligible. Some plans may waive deductibles or copayments when Medicare is your primary.

Rethink Your Social Security Strategy

If the FERS Supplement disappears, you might consider:

• Delaying your retirement date

• Claiming Social Security earlier than planned (while weighing long-term effects)

• Adjusting your TSP withdrawal strategy to fill the income gap

Talk with a financial advisor familiar with public sector benefits. Many retirees underestimate the cash-flow challenge caused by losing this supplement.

Build TSP Reserves More Aggressively

With multiple risks converging, your TSP is more important than ever. Consider raising your contributions now, especially if you’re not hitting the 2025 elective deferral limit of $23,500 (or $31,000 if eligible for catch-up).

Also evaluate your asset allocation. Lifecycle funds may offer a better glide path toward income if you’re retiring soon.

Prepare for Higher Healthcare Costs

If you’re retiring within the next two years, build a healthcare buffer. With a flat-rate government share of FEHB on the horizon, your premiums could jump more than you expect.

Set aside extra funds to handle:

• Annual premium hikes

• Vision or dental coverage (especially if not included)

• Potential out-of-pocket costs not reimbursed by Medicare

Why These Changes Are Gaining Support

Legislators backing these proposals argue that the current FERS and FEHB structures are too costly and out of step with private-sector norms. There is growing momentum to “modernize” benefits, which often translates to shifting more responsibility onto employees.

While modernization may sound efficient, it often means reduced income security in retirement. You need to prepare accordingly, especially if you’re within five years of your exit date.

What This Means for Your Retirement Timeline

Planning to retire in 2026 or beyond? These proposals could change everything:

• Your pension may be lower than expected

• You might need to work longer to close income gaps

• FEHB costs could take a larger portion of your annuity

Early action could mean the difference between retiring on time or postponing it indefinitely. Procrastination in this climate is expensive.

Staying Ahead of the Curve

Don’t wait for an official announcement. By the time final legislation is passed, your window to act may have already closed.

Sign up for updates from OPM, track legislation through government employee news outlets, and schedule a retirement review annually.

A few proactive decisions this year could offset thousands in future losses.

Make Informed Decisions Before It’s Too Late

If retirement used to feel like a countdown, now it’s a race to stay ahead of legislative change. The landscape in 2025 is less stable than in years past, but that doesn’t mean you’re powerless.

Take control now:

• Run retirement projections with worst-case adjustments

• Review your TSP and FEHB strategies annually

• Consider accelerating your timeline if you’re close to retirement

And most importantly, get in touch with a licensed professional listed on this website who can help you make sense of these proposals and safeguard your future.