Federal government employment can offer multiple benefits, including health insurance, competitive base pay, flexible leave policies, and the satisfaction and pride that comes with a lifetime of service.
One fly in the ointment for Feds, however, is the possibility of federal pay freezes. If you're facing one down, it could mean the automatic cost-of-living adjustment (COLA) you might be counting on hangs in the balance.
But don’t panic. A pay freeze isn’t on the horizon currently; however, it can be a good idea to prepare your financial health in case one is announced. A comprehensive plan can support you and your family while letting you make ongoing contributions to your benefits and retirement plan if a freeze should occur.
Federal Salaries and Politics
In the private sector, salaries and bonuses are determined by several factors, including profits. Senior management might decide to freeze (or even cut) salaries and cancel bonuses if a company goes through a rough year or two with dwindling profits.
When discussing federal worker salaries, freezes, raises, and bonuses, things operate differently. “Senior management” consists of the President of the United States, Congress, and congressional appropriations committees. Specifically:
- The White House proposes a salary freeze
- Congressional appropriation committees debate the topic and authorize it, passing it on to Congress
- Congress votes on the legislation; if approved, federal salaries are frozen
There is generally a time limit on salary freezes. A freeze in 2011 impacted the federal government rank and file for two years. Meanwhile, in 2019, the Consolidated Appropriations Act froze the pay of senior officials. That freeze remains in effect today.
What Happens With a Salary Freeze
Here’s the good news. In most cases, salary freezes won’t impact step increases or bonuses (meaning if you’re promoted during a salary freeze, you’ll still see a bump in pay). The bad news? Unless you’re in line for a promotion or bonus, you won’t get a raise during the freeze.
Even if you’re earning enough on your current salary, a freeze impacts your bottom line by:
- Reducing your spending power. While your salary isn’t increasing, your costs of living and buying are due to inflation and other factors.
- Reducing your retirement contributions and annuities. Your plan’s minimum contribution is based on your salary, whether you participate in the Federal Employees Retirement System (FERS) or the Civil Service Retirement System (CSRA).
For example, if you participate in the FERS, your employer matches your salary-based contribution to the system’s Thrift Savings Plan (TSP). However, a wage freeze could decrease those contributions and employee match amounts. Your TSP won’t grow as fast or as much, leaving you with less in retirement.
Check out our webinars for federal employees!
Strategies to Reduce Pay Freeze Impacts
Financial preparation can help mitigate the effects of a pay freeze on your life and retirement annuities. Such a plan can include the following:
- Building a robust investment portfolio
Income generated from a quality investment portfolio can help you weather a salary freeze. Furthermore, as a long-term planning tool, the portfolio can add to your retirement earnings.
Like most of financial planning, however, building a quality investment portfolio may be more difficult than it initially appears. Feds looking to structure their portfolio appropriately should consider factors like health status, retirement goals, mid-term goals like kids’ college expenses, tax and estate planning concerns, and, of course, risk management when building out their portfolio. Check out our primer on Investing for Feds for more information.
We believe that a good investment strategy should be developed and implemented with a qualified professional who helps you base your strategy around your own unique financial situation, planning goals, and personal values. Consider working with a fed-focused financial advisor to determine the right investment mix for you.
- Opening — and contributing to — high-yield savings or money market accounts
Money market accounts (MMAs) and high-yield savings accounts are high-interest tools ideal for building an emergency fund to tide you through a salary freeze.
These account types tend to be more effective for short-term strategies versus long-term planning, and have certain pros and cons. Talk with your CFP® to determine the right kind of account for your purposes.
- Ensuring ongoing retirement contributions
As mentioned above, a pay freeze could also interfere with retirement pension contributions. This calls for being flexible with your financial plan. Even with a salary freeze, contribute at least the minimum to your pension plan and (where applicable) to ensure a full employer match.
Federal Pay Freeze: Preparation Is Key
It’s essential to plan for a federal salary freeze by understanding the impact on you and your family, both now and in retirement. Building a comprehensive financial safety net, consisting of an income-generating portfolio and emergency fund, can help maintain your income level while supporting pension plan contributions.
For assistance in developing a strategic financial plan to support you during economic bumps and ensure a successful retirement, contact the fed-focused CFP® experts with Serving Those Who Serve. These seasoned professionals can analyze where you are now and provide recommendations to build and maintain financial resources during your work life and post-job years.
To learn more and to schedule a no-obligation consultation, visit the website or email [email protected].
Written by Thomas Lee CFP®. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Katelyn Murray and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
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The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **
