How does the 2026 federal pay raise affect locality pay and federal retirees?
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Executive summary
The 2026 federal pay plan proposed a 1.0% across‑the‑board base pay increase for most General Schedule (GS) employees while freezing locality pay at 2025 levels — a decision aimed at avoiding an automatic, formula‑driven locality jump that OPM estimated would average about 18.88% and cost roughly $24 billion [1] [2]. Federal retirees’ annual COLA is determined separately; Social Security and many retirees receive a 2.8% COLA in 2026, while FERS retirees face the statutory “diet” COLA rule and will get 2.0% [3] [4] [5].
1. What the 2026 raise actually does to paychecks
The administration’s alternative pay plan increases GS base pay by 1.0% for 2026 but instructs OPM to set locality pay increases at zero — meaning the geographic adjustments that add a sizable share of total compensation will not climb next year [1] [6]. Because most employees’ pay is base pay plus locality, a frozen locality effectively reduces what many workers expected compared with the automatic FEPCA formula that had implied much larger locality uplifts [6] [1].
2. Why locality pay was frozen — the fiscal argument
The freeze was justified in the White House letter as a budget control: without it, locality pay increases calculated under FEPCA would have averaged 18.88%, with an estimated first‑year cost of about $24 billion [1]. Administration and budget‑focused sources frame the freeze as preventing an unsustainable one‑year spike in locality differentials [7] [1].
3. How freeze interacts with locality area reclassifications
Freezing the percentage rates does not necessarily stop geographic changes to locality areas. OPM’s salary council work shows locality areas and rates are reviewed and can reclassify locations — meaning some workers could be moved into higher‑paying localities even if overall locality percentages remain at 2025 levels [8] [9]. Several reporting outlets note that some employees may still see higher pay because of reclassification rather than a higher overall locality rate [9] [10].
4. Winners and losers: law enforcement and high‑cost areas
The plan carves out an exception for certain federal law enforcement officers, whom OPM is directed to give additional increases to align with a 3.8% military raise — producing larger total gains for eligible LEOs compared with the 1% for most GS employees [1] [6]. Conversely, employees in high‑locality areas — where locality makes up a large portion of pay — are effectively penalized relative to what the automatic formula would have produced [7] [6].
5. What this means for federal retirees’ annuities
Retiree COLAs are set by Social Security’s calculation and separate statutory rules for federal annuities. Social Security beneficiaries and many retirees will get a 2.8% COLA in 2026; CSRS retirees receive the full 2.8% but FERS retirees receive a reduced “diet” COLA of 2.0% because of the statutory offset rules [3] [4] [5]. The pay plan for active employees does not change the COLA methodology; the two processes are independent [11] [3].
6. How the pay raise affects future retiree calculations and near‑retirees
For employees near retirement, a 1% base pay increase increases future pension calculations only modestly because retirement annuities are derived from high‑3 average pay and service. Analysts and benefit advisers point out small base increases translate into a proportionally smaller bump in annuity accruals compared with larger raises or locality hikes (available sources do not mention exact actuarial calculations tying 2026 base pay to future annuity amounts; see [16] for guidance on retiree planning).
7. Political and union reactions — competing viewpoints
Unions and Democratic lawmakers criticized the plan as breaking a tradition of aligning civilian and military pay and urged larger raises; they argue freeze decisions shift burdens onto workers facing rising health‑insurance premiums and inflation [12] [13]. The administration and some budget analysts counter that freezing locality rates thwarts an abrupt, costly surge in locality costs and preserves fiscal discipline [1] [7].
8. Practical takeaways for federal employees and retirees
Active employees should expect a 1.0% base increase on paychecks in early 2026 and no automatic percent rise in locality differentials — though area reclassifications could still change some locality assignments [1] [9]. Retirees should expect the 2026 COLA process to apply as announced: a 2.8% Social Security COLA with CSRS annuities rising by 2.8% and FERS annuities by 2.0% under existing rules [3] [4] [5]. Health‑insurance premium hikes averaging double‑digits for annuitants will blunt the real purchasing‑power effect of the COLA [14] [5].
Limitations: this analysis uses available reporting and government documents in the search results; final pay tables and OPM executive orders issued in December could adjust implementation details [15] [6]. Where sources do not provide specific actuarial or individual‑level calculations, those figures are not asserted.