What difference does 2.5% make?

Here it is, almost Friday, Dec. 13. It might be considered an unlucky day according to folklore, but hopefully federal workers will get lucky next year if they are granted a larger pay raise in 2025 than the 2% average increase proposed by President Biden earlier this year. 

According to a recent Government Executive report, a group of Democratic lawmakers across both the House and Senate have urged Biden to increase the pay raise planned for civilian federal workers next month to 4.5%, restoring military-civilian pay parity. Using the two options – 2% or 4.5% -- it might be interesting to see what a Dec. 31, 2025 retirement might look like with a 4.5% increase in pay for 2025 compared with only a 2% increase. Of course, with locality pay, there will be differences in the actual pay adjustment, so this comparison is just for fun.   

Here is an example of how a FERS retirement would be computed (assuming the highest three years of basic pay were the last three years of the career) at each option if the employee retires at the end of 2025: 

Example: 

• High-3 average salary used for this example shows a GS 13-10 using the Rest of U.S. (RUS) Locality table (no step increase or promotion in the last three years) for the three-year period from 1/1/2023 - 12/31/2025: 

• Service Computation Date (SCD) used for retirement: 6/11/95 

• Unused sick leave credited to length of service and projected to 12/31/2025: 1,127 hours that converts to 6 months, 15 days of additional service credit used in the computation. Retirement Facts #8 (this will work for FERS as well as CSRS computations) has more information about converting hours of sick leave to service credit. 

• Length of service on 12/31/25: 30 years, 6 months, 20 days, with sick leave added increases to 31 years, 1 month, 5 days (the 5 days aren’t used in the computation and convert back to 29 hours of “use or lose” sick leave as long as the SCD and retirement date are accurate and don’t change). 

Computing the retirement with a 2% pay adjustment in 2025: 

High-3 average salary calculation: 1/1/23 through 12/31/25 

1/1/23, through 1/13/24 

• Salary rate:  $128,043  

• Rate in effect for 1 year, 0 months, 13 days or a factor of 1.036111   

• 1.036111 of $128,043 equals $132,666.76 for this period 

1/14/24 through 1/11/25 

• Salary rate:  $134,435  

• Rate in effect for 11 months, 28 days or a factor of .994444  

• .994444 of $134,435 equals $133,688.07 for this period 

1/12/25 through 12/31/25 (see below): 

Compute retirement benefit with a 2% pay adjustment for 2025:  

 1/12/25 through 12/31/25 (2% pay adjustment) 

• Salary rate: $137,123.70  

• Rate in effect for 11 months, 19 days or a factor of .969444  

• .969444 of $137,123.70 equals $132,933.74 for this period 

Total basic pay from 1/1/23 through 12/31/25: 

• $132,666.76 plus $133,688.07 plus $132,933.74 equals $399,288.57 (total basic pay during High-3 period) 

• $399,288.57 divided by three equals a High-3 average of $133,096.19 

FERS Retirement under age 62:  

• 1% of 31 years and 1 month or .31083333 of $133,095.96 (High-3) = $41,370.66 per year 

•  $3,447 per month (gross amount before any reductions or withholdings). 

FERS Retirement age 62 or over:  

• 1.1% of 31 years and 1 month or .341916 of $133,096.19 (High-3) = $45,507.79 per year or 

•  $3,792 per month (gross amount before any reductions or withholdings). 

Compute retirement benefit with a 4.5% pay adjustment for 2025: 

High-3 average salary calculation: 

1/12/25 through 12/31/25 (4.5% pay adjustment) 

• Salary rate: $140,484.57   

• Rate in effect for 11 months, 19 days or a factor of .969444  

• .969444 of $140,484.57 equals $136,191.92 for this period 

Total basic pay from January 1, 2023, through December 31, 2025: 

• $132,666.76 plus $133,688.07 plus $136,191.92 equals $402,546.75 (total basic pay during High-3 period) 

• $402,546.75 divided by three equals a High-3 average of $134,182.25 

FERS Retirement under age 62:  

• 1% of 31 years and 1 month or .31083333 of $134,182.35 (High-3) = $41,708.31 per year 

•  $3,475 per month (gross amount before any reductions or withholdings). 

FERS Retirement age 62 or over:  

• 1.1% of 31 years and 1 month or .341916 of $134,182.25 (High-3) = $45,879.14 per year or 

•  $3,823 per month (gross amount before any reductions or withholdings). 

For this employee, the difference in a higher basic pay adjustment for 2025 would result in the following benefits: 

FERS Retirement Difference: $28 per month or $336 per year more with the 4.5% pay adjustment if the employee were under age 62 and $31 per month or $372 per year if the employee were age 62 or over.   

Salary difference: $3,360 or $129 per pay period before tax with a 4.5% pay increase instead of a 2% increase (based on a GS 13/10 RUS pay rate in 2024).   

More to invest in the future: Additional benefits of the higher pay increase is more to invest in the TSP account.  It is always a good idea to invest at least a portion of your pay increase in the future no matter how large or small the pay increase will be. 

Social Security increase: With a 4.5% pay adjustment instead of only 2%, the Social Security retirement benefit would increase by approximately $14/month at age 67 or $10/month if the benefit was claimed at age 62. At age 62, an individual born in 1960 or later will have a 30% reduction in their Social Security retirement benefit for applying before the full Social Security retirement age (67 for individuals born in 1960 or later).     

If this employee worked for an additional three years at a higher pay rate, they would see a larger difference in their retirement benefit with a 4.5% pay adjustment but remember that there could be additional pay adjustments in 2026, 2027, and beyond. Remember that your high-3 average pay will continue to increase, no matter how much longer you work as you are always trading a day of today’s salary for the salary rate that was in effect three years ago (this assumes that your final three years of pay rates is the highest average over your career).   

The difference for YOU will depend on your current salary rate, the locality pay adjustment that will be computed with the pay adjustment, along with how much longer you plan to work. It will also make a difference if you retire under a different retirement benefit formula such as CSRS or FERS special provisions for employees serving in positions subject to mandatory retirement such as law enforcement officers. The best time to retire is when you can afford to retire comfortably and have enough savings to supplement your retirement for many years to come and when you are mentally ready for this new chapter of life.