What a Pay Freeze and the Reduced FERS COLA Cost Over a 30-Year Career

A reader of the earlier article, What the 2027 Pay Freeze and FERS COLA Do to Your Pension When Retiring, asked for the other half of the story: how someone early in a federal career can plan to make up for pay freezes and the reduced cost-of-living adjustment (COLA) under the Federal Employees Retirement System (FERS) and still retire comfortably. She also made a point worth stating up front. A freeze early in a career can lower the pay path that eventually determines the high-3 salary, even though retirement may be decades away.

This article answers with a worked example for a hypothetical 30-year-old federal employee. It puts a dollar figure on three things: what one frozen year does to the high-3 and the pension, how the FERS COLA rules can affect purchasing power after retirement, and how much additional Thrift Savings Plan (TSP) saving could compensate for those effects. Every input, including salary growth, investment returns and inflation, is hypothetical. The example illustrates the financial effects and a method for estimating them. It is not a forecast or a guarantee of investment results.

The short version: in this example, the frozen year has a relatively small effect on the pension compared with the long-term COLA gap. Saving enough to compensate for both would require approximately $95 per pay period starting at age 30. Waiting until age 40 raises that amount to about $204, while waiting until age 50 raises it to approximately $570. The difference comes from having fewer years for savings to compound.

Why one frozen year early in a career still matters

The Office of Personnel Management (OPM) defines the high-3 as the highest average basic pay over any three consecutive years of service. The regular FERS basic annuity multiplies the high-3 by years of creditable service and by 1.0%, or by 1.1% for someone who retires at age 62 or older with at least 20 years of service, as OPM’s computation page explains. Special retirement categories have different rules.

A frozen year matters because general pay adjustments ordinarily build on the salary already in place. If an employee misses one adjustment and future percentage increases are applied to the resulting lower salary, the difference can persist throughout the remaining career. The pension eventually reflects that lower pay through the high-3.

The 2027 general pay freeze is announced but the final pay tables have not yet been issued. Under the Federal Employees Pay Comparability Act of 1990, the President may submit an alternative pay plan. The August 2026 plan calls for a zero general adjustment for most civilian employees in 2027. Final rates are normally established later in the year. The General Schedule pay scale page tracks the status.

A general pay freeze does not necessarily prevent every other salary increase. During the 2011–2013 freeze, OPM’s December 2010 memorandum explained that promotions, within-grade increases and quality step increases could continue. That memorandum describes the earlier freeze and does not establish every detail of the 2027 rules. The hypothetical below assumes career-related salary growth continues while the general adjustment is frozen.

The hypothetical 30-year-old and every assumption

The example follows a federal employee who begins service at age 30 with a $70,000 salary and retires at age 60 after 30 years. It compares two otherwise identical careers: one with a 2% general adjustment every year, and another with no general adjustment in 2027.

For simplicity, the model assumes an additional 1.5% in annual salary growth from career progression, including the frozen year. Actual General Schedule (GS) step increases and promotions do not occur at a uniform annual rate. Some employees will advance faster, others more slowly, and some may remain at the same grade and step for extended periods.

The salary model applies the 2% general adjustment and 1.5% career growth as separate, compounding factors. The simplified high-3 calculation uses the final three annual salaries rather than the exact 36-month pay history that OPM would use for an actual retirement application.

All pension and retirement funding figures are expressed in future dollars, meaning the dollars of the year in which they are paid or needed. At 3.0% annual inflation, a dollar 30 years from now has roughly 41 cents of today’s purchasing power. The $55,494 starting pension in the no-freeze scenario would therefore have purchasing power equivalent to approximately $23,000 today.

What one frozen year does to the high-3 and the pension

In the hypothetical, the 2027 general adjustment is zero and every subsequent percentage increase builds on the resulting lower salary. By the final year, basic pay is approximately 2% lower than it would have been without the freeze.

The lost general adjustment reduces the high-3 by approximately $3,627 and the starting pension by $1,088 annually, or about $91 per month. The earlier article estimated a roughly $240 annual pension effect for an employee retiring in December 2027 under its assumptions. The difference reflects the much longer period over which the missed adjustment compounds in this example.

The $91 monthly difference is measured in dollars at retirement, 30 years from the beginning of the example. It is not a $91 reduction in today’s purchasing power. Nevertheless, the lower starting pension can continue to affect retirement income because future COLAs are applied to the pension amount being received.

There is an important limitation. A real employee might receive promotions, changes in locality pay, special salary rates or other increases that alter the relationship between the two salary paths. The model isolates one missed general adjustment and assumes everything else remains the same.

The COLA gap: the age-62 wait and reduced adjustments

After retirement, regular FERS retirees face two important COLA rules. First, under 5 U.S.C. § 8462 and OPM’s COLA guidance, most regular FERS retirees receive no COLA before age 62. Exceptions apply to certain disability, survivor and special-provision annuities.

Second, once COLAs begin, the FERS adjustment can be smaller than the inflation measure used to calculate it. When the measured increase is 2% or less, the FERS COLA matches it. When the increase is above 2% but no more than 3%, the FERS COLA is 2%. When the increase exceeds 3%, the FERS COLA is one percentage point below that increase.

For example, 3.0% measured inflation produces a 2.0% FERS COLA. At 3.6%, the FERS COLA would be 2.6%. The actual annual COLA is determined using the applicable Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) calculation, rather than an individual’s personal inflation rate.

FERS COLAs are generally effective in December, and the first eligible adjustment can be prorated when the retiree has been on the annuity roll for less than a year. For this illustration, the retiree is assumed to retire at age 60, receive no COLAs in the first three annual age rows and receive the first full 2% adjustment in the age-63 row. This simplifies the actual calendar-based timing.

Table 3 compares the FERS pension in the no-freeze salary scenario with a hypothetical benchmark pension that increases by 3% every year beginning in the second year of retirement. The benchmark is a measure of purchasing-power protection, not a benefit promised by federal retirement law.

Figures are rounded, so individual rows and cumulative totals may differ slightly when added using the displayed numbers.

Over the first ten years of retirement, the hypothetical FERS pension pays approximately $48,885 less than a pension that fully keeps pace with the assumed 3% annual inflation. This is not a reduction in the FERS benefit owed under law. It is the difference between the actual COLA structure modeled here and a hypothetical pension that preserves its initial purchasing power.

The gap reflects both the delay before COLAs begin and the smaller adjustments afterward. These effects compound together. At 3.6% annual inflation, with a corresponding 2.6% FERS COLA after eligibility, the ten-year difference rises to approximately $56,529.

Importantly, the shortfall does not stop at age 69. It continues to grow in dollar terms as long as inflation outpaces the FERS adjustments. A retirement lasting 25 or 30 years can therefore produce a substantially larger cumulative difference than the first ten years alone.

How much extra TSP saving could offset each effect?

Knowing the size of the pension gap is useful, but an employee decades from retirement needs a more practical number: how much additional money should be saved from each paycheck?

The calculation has two steps. First, estimate how much additional money would be needed at retirement to cover the annual differences through age 89. Second, calculate the additional contributions required to accumulate that amount by age 60.

To value the retirement income gaps, the model assumes a 5% annual investment return during retirement and discounts 30 annual shortfalls, covering ages 60 through 89, back to the retirement date. Payments are modeled at the end of each year. The frozen-year shortfall begins at approximately $1,088 annually and grows with the hypothetical FERS COLAs. The COLA shortfall is measured against the fully inflation-adjusted pension shown earlier.

Using these assumptions, the amounts needed at age 60 are approximately $20,311 to compensate for the frozen-year pension difference and $180,543 to compensate for the COLA gap. Combined, the required additional retirement balance is approximately $200,854.

For the savings calculation, the model assumes a 6% effective annual investment return before retirement, converted to an equivalent return for each of 26 pay periods. Contributions are made at the end of each pay period and remain at the same dollar amount throughout the saving period. The model does not assume that contributions increase with salary or inflation.

Amounts are rounded independently. The annual figures use the unrounded per-pay-period amounts multiplied by 26, so they may differ slightly from multiplying the displayed rounded figures.

Starting at age 30, the combined offset is approximately $95 per pay period, or $2,470 a year. Waiting until age 40 raises the amount to about $204 per pay period. Waiting until age 50 raises it to approximately $570. The retirement funding target remains the same in every column; only the number of years available for investment growth changes.

Under the higher 3.6% inflation assumption, the COLA gap becomes larger. The required combined contributions rise to approximately $110 per pay period starting at age 30, $237 at age 40, $374 at age 45 and $660 at age 50.

These estimates are not guaranteed investment outcomes. A constant 6% annual return is a mathematical assumption, not how financial markets behave. Actual TSP investments can experience substantial gains and losses, and the timing of those returns matters. During retirement, market declines combined with withdrawals can make a planned balance less durable than a constant-return illustration suggests.

The calculations also assume that the employee has the same retirement date and funding target regardless of when the additional contributions begin. They do not account for investment expenses, income taxes, changes in contribution limits or the possibility that retirement lasts beyond age 89.

The Internal Revenue Service established a 2026 elective deferral limit of $24,500 for the TSP and similar employer retirement plans, excluding applicable catch-up contributions. The additional amounts in Table 4 count toward that limit along with the employee’s existing traditional and Roth TSP contributions. Someone already contributing near the maximum may need to save part of the offset in another account rather than increase TSP contributions beyond the applicable limit.

Four ways to put the offset on autopilot

The calculations show the advantage of starting early, but employees do not necessarily need to find the entire additional contribution amount immediately. They can work toward it as their income grows and their financial circumstances permit.

• Reach the full agency match first. For eligible FERS employees, the agency contributes 1% of basic pay automatically, then matches the first 3% of employee contributions dollar for dollar and the next 2% at 50 cents on the dollar. Contributing at least 5% of basic pay therefore generally produces total agency contributions of 5%, as explained in the TSP fact sheet. Employees should generally avoid giving up available matching contributions while planning additional savings.
• Raise the contribution rate on a schedule. Increasing contributions by one percentage point when financially practical can gradually build additional retirement savings. At the hypothetical $70,000 starting salary, 1% of basic pay equals approximately $27 per pay period. A percentage-based contribution also increases in dollar terms as salary grows.
• Direct part of each raise to retirement savings. Employees who receive a within-grade increase, promotion or general pay adjustment can consider directing some of the additional income to the TSP. This allows contributions to increase without requiring the entire adjustment to come from existing take-home pay.
• Review traditional versus Roth TSP contributions. Both count toward the same employee elective deferral limit, but they receive different income-tax treatment. Agency automatic and matching contributions are generally deposited into the traditional TSP balance under the rules applicable to the employee. The appropriate mix depends on current and expected future tax circumstances.

There is no requirement to use the TSP alone to address these retirement risks. Depending on contribution limits, liquidity needs and tax circumstances, employees may also use an Individual Retirement Account (IRA) or other savings and investment accounts. The goal is to accumulate additional resources that can supplement retirement income, not necessarily to place every dollar in one account.

What this example leaves out

The example isolates two retirement risks: a single missed general pay adjustment and the difference between FERS COLAs and full inflation protection. Real retirement planning involves considerably more.

Future general pay adjustments may be higher or lower than the hypothetical 2%. Career advancement is unlikely to follow a constant 1.5% growth rate. Inflation may vary substantially from year to year, and the actual FERS COLA formula can produce different results depending on those annual changes.

Investment returns are another major uncertainty. The TSP offers funds with different risk and return characteristics, and no allocation guarantees a 6% return during the saving years or a 5% return during retirement. The model also assumes that the additional retirement balance can be drawn down to cover the projected annual shortfalls without running out before age 90.

The calculation excludes federal and state income taxes, the survivor annuity election, changes in healthcare costs, and the FERS Special Retirement Supplement that some retirees at age 60 may qualify for. It also excludes special retirement categories and the different pension calculation for regular FERS employees retiring at age 62 or later with at least 20 years of service.

Retiring at age 62 or later changes the example in two important ways. The employee may qualify for the 1.1% pension multiplier, and the pre-62 COLA waiting period no longer applies. The result could be a substantially different pension and retirement funding target.

Social Security is another major source of retirement income for many FERS employees and is not modeled here. Social Security benefits have their own COLA rules, and their inflation adjustments do not follow the reduced FERS formula.

Finally, the comparison assumes retirement at age 60 and measures the funding requirement through age 89. Someone who retires earlier, lives longer, experiences higher inflation or wants a larger financial cushion may need more savings. Someone who retires later, has other income sources or experiences lower inflation may need less.

What younger federal employees should take away

A pay freeze early in a federal career can affect the eventual pension, but its long-term impact is difficult to judge by looking only at the missing raise in the year it occurs. The effect depends on how subsequent salary increases build on that lower starting point.

The FERS COLA rules present a different challenge. They can gradually reduce the purchasing power of a pension during retirement, particularly for someone retiring before age 62 and spending several decades drawing an annuity. Unlike the one-time freeze in this example, the inflation gap can continue accumulating throughout retirement.

The encouraging part of the calculation is not that an additional $95 per paycheck guarantees a comfortable retirement. It does not. The useful finding is that starting earlier gives an employee more time to build resources that can help absorb these risks. Under the same assumptions, waiting until age 50 requires roughly six times as much saving per paycheck as starting at age 30.

Federal employees cannot control future pay freezes, the FERS COLA formula or investment market returns. They can, however, review their contribution rates, take advantage of available agency matching contributions and periodically adjust their retirement savings plans as their careers progress.

Run your own numbers

Three tools on this site can help turn the hypothetical example into a more personal estimate. The high-3 page and worksheet explain how the 36-month salary window works. The COLA calculator can illustrate how pension income changes under different inflation and adjustment assumptions. The COLA Watch page for FERS and the Civil Service Retirement System tracks the current COLA picture.

Employees who are more than five years from retirement can also join the free newsletter for additional retirement planning articles and the next steps in this series.