Federal employees received an average 4.5% pay raise in January 2025, one of the highest increases in recent years.
But for many Feds, that bump hasn’t gone far enough, especially as inflation keeps dragging on essentials like housing, healthcare, and groceries. The question is whether those raises are truly helping employees stay ahead, or simply keeping them afloat.
Understanding how federal pay vs. inflation in 2025 shakes out is key to evaluating whether today’s paychecks can support tomorrow’s retirement goals.
Federal Pay vs. Private Sector Growth
Private sector wages have jumped ahead in 2025, especially in fields like tech, finance, and healthcare. Some companies handed out raises of 5% or more to hold onto talent. By comparison, federal employees saw an average bump of 4.5%. The pay structure for Feds simply moves more slowly and rarely keeps pace with the broader market.
This is especially noticeable for mid-career Feds, who face growing pay compression, where the difference between General Schedule (GS) levels flattens, and limited advancement opportunities.
Locality pay also remains uneven, failing to fully account for rising costs in high-expense regions like California and D.C., making it harder for agencies to compete for experienced workers.
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Retirement Planning Implications
Stagnant or slower-growing federal pay doesn’t just impact today’s take-home pay — it can have long-term effects on retirement readiness. Lower salary growth means smaller Thrift Savings Plan (TSP) contributions over time, especially for those who contribute a fixed percentage of pay. It also affects pension calculations, as the Federal Employees Retirement System (FERS) annuity is based on your “high-3,” which is the average of your highest-paid three consecutive years of service.
While retirees under the Civil Service Retirement System (CSRS) receive full cost-of-living adjustments (COLAs), those under FERS often receive only partial increases. That makes it even more important to adjust savings targets regularly and base retirement projections on actual spending trends and inflation, not just official pay raise numbers. For many, that’s where strategic federal employee retirement planning 2025 can make a meaningful difference.
What Federal Employees Can Do Now
If your pay isn’t keeping up with inflation, your retirement plan may need an update. Start by having a Fed-focused CERTIFIED FINANCIAL PLANNER™ (CFP®) run a retirement income projection using real-dollar assumptions, not just today’s numbers. This helps you determine whether your income will cover actual costs in the long run.
Build a comprehensive financial plan that includes both routine and unexpected retirement expenses, such as travel, healthcare, and long-term care, ensuring those numbers are adjusted for inflation. Many Feds may also want to revisit their TSP allocations, increase Roth contributions while tax rates remain relatively low, or even rethink the timing of a promotion or job change based on locality pay trends.
Make Sure Your Retirement Keeps Up
Even modest differences between your raise and the cost of living can have a major impact on long-term financial health. Knowing where you stand — and how to close the gap — starts with understanding your real purchasing power.
Reach out to the team at Serving Those Who Serve at [email protected] to create a plan tailored to what life costs, not just what the headlines suggest.
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. **
