Locality Pay Isn’t Just a Temporary Bonus—It Can Affect Your Pension for the Rest of Your Life

Missy E
November 14, 2025

Key Takeaways

Locality pay is not just an incentive to offset living costs—it directly affects your retirement annuity if it’s included in your high-3 average salary.
A proposed 2025 bill seeks to remove locality pay from annuity calculations, which could reduce future pensions for government employees in high-cost areas.

What Is Locality Pay, and Why Does It Exist?

Locality pay is an adjustment to base pay designed to bring federal salaries closer in line with non-federal salaries in the same geographic area. The Office of Personnel Management (OPM) sets these rates annually, and they vary by location. As of 2025, there are over 50 locality pay areas across the United States, and the percentage can range significantly—from under 16% to more than 45%, depending on where you work.

This added compensation is essential for recruitment and retention, especially in high-cost metropolitan regions. But it’s not just about take-home pay—it can have long-lasting effects on your retirement income.

How Locality Pay Impacts Your FERS Pension

If you’re under the Federal Employees Retirement System (FERS), your pension is based on your “high-3” average salary—the highest average basic pay over any three consecutive years of service. This high-3 salary includes locality pay, so long as it is part of your basic pay for retirement purposes.

That means:

If your final three years of service are in a high-locality area, your annuity will be higher.
If you move to a lower locality pay area before retirement, your high-3 may decrease.

This makes it essential to plan your retirement location and timing carefully. A misstep in your final years of service could have decades-long implications for your retirement income.

Common Misunderstandings About Locality Pay

It’s Not a Bonus

Many assume locality pay is a separate bonus or temporary adjustment. In reality, it’s part of your basic pay used for computing retirement benefits, Thrift Savings Plan (TSP) contributions, and even life insurance under FEGLI.

It Doesn’t Transfer Equally

If you switch from one agency or region to another, your locality pay might decrease or increase. However, your retirement benefit will still only be based on the highest three years, regardless of agency or location, as long as you stayed under the FERS system.

It’s Not Universal for All Benefits

Although it counts toward your pension calculation, locality pay does not affect:

Overtime
Premium pay for holidays
Certain hazard pay categories

Understanding these distinctions helps you better anticipate how your compensation flows into your retirement calculations.

Timing Your High-3 Years Matters

Because your annuity is calculated based on your high-3 average salary, the final three years of service are crucial. Many government employees make strategic decisions such as:

Staying in a high locality area for three years before retiring
Delaying retirement to accumulate additional high-earning months
Avoiding transfers that would place them in lower-paying locality zones

For instance, someone planning to retire in 2026 may spend 2023–2025 in a high locality area to lock in the highest annuity possible. Once those years are in place, you can retire or transfer without affecting your pension calculation.

Proposed Legislation Could Change the Rules

As of 2025, legislation is under review that proposes removing locality pay from high-3 calculations entirely. If passed, this could:

Lower future retirement annuities for employees in high-cost regions
Create significant disparities between employees based solely on location
Affect retirement planning for mid-career and late-career federal employees

While the bill is still under consideration, it raises critical questions for government workers:

Should you consider retiring before a rule change takes effect?
Should you move to a higher locality area now to secure a better pension under current rules?

For now, locality pay is still included in high-3 calculations. But keeping an eye on legislative updates is essential if your retirement is within the next 3 to 5 years.

Implications for CSRS Employees

If you’re under the Civil Service Retirement System (CSRS), the inclusion of locality pay also applies—provided it was part of your basic pay during your high-3 years. However, most CSRS employees are now retired or nearing retirement, and the majority are not as affected by potential future legislation.

Still, if you’re a CSRS employee still in service, the same principles apply:

Lock in high-locality years before retirement
Avoid low-locality transfers during your final years
Monitor proposed legislation even if it seems to target FERS

The Interplay With Thrift Savings Plan (TSP) Contributions

TSP contributions are also based on your basic pay—which includes locality pay. This means higher locality pay leads to higher contributions and potentially a larger TSP balance at retirement.

This dual effect—on both your pension and your TSP—makes locality pay an even more powerful tool for increasing long-term retirement security.

If the proposed bill passes, your TSP contributions will likely remain unaffected since locality pay will still count as basic pay for that purpose. But the loss of its impact on pension calculations would still reduce overall retirement income.

Don’t Ignore the Long-Term Effects

Locality pay might seem like a short-term benefit while you’re working, but its long-term effect can add tens of thousands of dollars to your retirement income over the course of 20–30 years. Reducing your high-3 salary by even a few thousand dollars annually can:

Lower your annual annuity by hundreds
Multiply into tens of thousands in lost retirement income over your lifetime

Even a 1% change in your high-3 salary can lead to measurable losses in pension payouts. That’s why maximizing your high-3 with strategic use of locality pay is one of the most underappreciated tactics in public sector retirement planning.

Coordination With Other Benefits

Retirement planning isn’t just about your annuity. Locality pay influences other areas, too:

Health Insurance (FEHB)

Your premiums don’t vary based on locality, but your ability to afford higher-cost plans may improve with higher pay.

Social Security

If you’re under FERS, your Social Security benefit is separate from your annuity but influenced by your earnings history. Since locality pay boosts your basic pay, it also boosts your reported earnings to the Social Security Administration.

Life Insurance (FEGLI)

Your coverage under Basic FEGLI is typically one year’s salary rounded to the next $1,000 plus $2,000. Since locality pay is part of your salary for this purpose, it increases your coverage amount.

Action Steps to Protect Your Retirement Income

Given the potential changes and the stakes involved, consider the following:

Check your high-3 calculation using official tools or by consulting your HR department.
Avoid downgrading locality areas during your final working years.
Consider delaying retirement to accumulate a stronger high-3 average.
Stay updated on the proposed legislation affecting locality pay inclusion.
Consult with a licensed agent to explore personalized strategies.

Your Retirement Outcome Depends on What You Do Now

Locality pay is more than just a pay bump—it’s a permanent factor in your retirement outcome. As changes loom and timelines tighten, your proactive planning will determine whether you lock in a higher annuity or leave money on the table.

For government employees planning to retire in the next 3–7 years, every decision now matters. Don’t wait to understand how your locality affects your future. Speak to your HR office, study your earnings record, and get help where needed.

To get expert support, speak with a licensed agent listed on this website to review your options and protect your retirement income.