Federal Employees Facing 2025 Federal Budget Cuts
2025 has been a stressful year for many federal employees. To be blunt, more stress is probably on the way.
Many of the actions that have already been taken impacting the federal workforce are the result of executive decisions. Changes in the workforce have largely been through a combination of executive orders, court decisions, and lawsuits.
One item worth watching for the federal workforce is the budget process, which is now underway. If the Republicans’ budget proposal passes, it would significantly impact the federal workforce.
The Republican-led budget resolution has passed in the House and Senate. The resolution sets the stage for major tax and spending legislation through the reconciliation process. These provisions could significantly reshape federal employee compensation, retirement benefits, healthcare, and job security.
This article focuses only on the budget proposal for 2025. There are various bills pending in Congress related to these topics, but they are not the topic of discussion in this article.
Here are some key points that potentially impact the federal workforce.
Increased Contributions for Retirement Benefits
One of the most important items for the federal workforce would be a proposed increase in contributions to the Federal Employees Retirement System (FERS). Currently, FERS participants contribute between 0.8% and 4.4% of their basic pay, depending on the date they were hired. The Republican budget proposal includes a plan to standardize this contribution at 4.4% for all FERS employees.
Additionally, the proposal suggests eliminating the FERS annuity supplement for employees who retire before age 62. This supplement is particularly critical for federal law enforcement officers, who often face mandatory retirement at age 57. Removing this benefit would disproportionately affect those employees.
Changes to Federal Employee Health Benefits (FEHB)
The Federal Employees Health Benefits (FEHB) program is also a target for reform. The Republican plan proposes shifting from the current model—where the government covers approximately 72% of premiums—to a voucher system.
Under this system, the government would provide a fixed contribution that may not keep pace with rising premium costs. Over time, this could shift a greater share of health care costs onto employees and retirees, potentially reducing the government’s contribution.
The FEHB is a good quality health insurance program. It has gotten more expensive for employees with expanding coverage for politically popular benefits that may impact a small percentage of the workforce.
FEHB premiums increased an average of 13.5% in 2025, 7.7% in 2024, and 8.7% in 2023. A voucher system could impact the FEHB system, potentially increasing costs and leading employees to opt for lower-cost, less comprehensive plans.
Elimination of Automatic Pay Raises
The Republican budget proposal seeks to end across-the-board annual pay raises for federal employees and replacing them with merit-based increases. Advocates of the plan argue this would save $57 billion over a decade and align federal compensation with private-sector practices.
Federal employee pay has long been a point of contention, with the Republican Study Committee (RSC) claiming federal workers are overpaid by 17% compared to private-sector counterparts when benefits are included. However, Bureau of Labor Statistics data indicates that federal workers earn 27.54% less on average (but not including federal employee benefits) as the Federal Salary Council has rejected adding in the benefits package.
Reduced Retirement Benefits and Pension Reforms
Beyond increased contributions, the proposal includes measures to reduce federal retirement benefits. One suggestion is to base pension calculations on an employee’s highest five years of salary (High-5) rather than the current highest three years (High-3). This change would result in lower annuities for future retirees. Here is the summary of some of the proposed retirement changes.
Federal employees hired since 1984 are entitled to a two-part retirement program, including the Federal Employee Retirement System (FERS) defined benefit plan and a 401k-style plan with up to a 5 percent government matching contribution. This budget recommends a number of commonsense reforms to bring federal employee retirement costs in line with the private sector. This includes: requiring new federal workers to be enrolled in the defined contribution TSP system rather than the defined benefit FERS pension system – which would give workers needed control over their retirement savings, ensure solvency for federal pensions and save taxpayers more than $235 billion over 10 years; computing a retiree’s benefit based on their highest five, and not three, years of earnings; increasing the share of employee contributions to FERS over time; reducing or eliminating the COLA for FERS and the Civil Service Retirement System (CSRS); eliminating the Special Retirement Supplement (SRS), which provides additional benefits for retirees younger than 62 but who had a long federal work history; and reforming the interest rate provided by the G Fund in the Thrift Savings Plan (TSP) to more accurately reflect the yield on a short-term T-bill rate.
The RSC budget also proposes eliminating FEHB benefits for new hires after retirement, a benefit that is rare in the private sector. This could make federal employment less attractive, particularly for younger workers who value long-term benefits. NARFE has criticized these proposals as breaking the government’s promise to employees who have dedicated their careers to public service.
Weakening Job Security and Union Rights
The budget resolution includes provisions that would reduce federal employees’ job security and collective bargaining rights. One proposal would require new hires to choose between maintaining current merit-based civil service protections or opting for an “at-will” classification with a lower FERS contribution rate.
Employees who retain civil service protections would face higher retirement contributions, creating a financial penalty for job security.
Additionally, the plan would result in charging unions for the use of agency property and official time. It also proposes to end the federal government collecting union dues, presumably to reduce union influence within federal agencies by cutting off a source of some union revenue.
Potential Workforce Reductions and Buyouts
The budget framework calls for $2 trillion in mandatory spending cuts, with at least $50 billion targeting federal retirement and health benefits. These cuts could necessitate workforce reductions, either through layoffs or voluntary separation incentive payments (buyouts).
Conclusion
The Republican budget proposal for 2025, if enacted, would significantly alter the financial picture for federal government employees. Higher retirement contributions, a shift to a voucher-based health care system, the elimination of automatic pay raises, reduced pension benefits, and weakened job protection could erode the financial stability and workplace rights of federal workers.
Proponents argue these changes are necessary to align federal compensation with the private sector and reduce the massive federal deficit. Critics contend it will harm the financial security of federal employees and threaten the government’s ability to deliver essential services.
As the reconciliation process unfolds, the final legislation will determine the extent to which these proposals become reality. As the budget process continues in Congress, FedSmith will provide updated information.
