Bedrock Investment Advisors understands your benefits and can help you with your goals.

Thinking Your Pension Is Safe? Lawmakers Are Rethinking the Rules, and Retirees Should Pay Attention

Missy E
November 14, 2025

Key Takeaways

In 2025, lawmakers are proposing major changes to government pensions—including High-3 pay rules, COLAs, and healthcare contributions—that could impact both current and future retirees.
Whether you’re nearing retirement or already collecting benefits, now is the time to understand how these proposals could affect your long-term financial stability.

The Stability of Government Pensions Is No Longer Guaranteed

have been considered sacrosanct. After years of loyal service, employees expected a predictable retirement benefit, safe from economic and political changes. But 2025 marks a turning point. Budgetary shortfalls, a rapidly aging workforce, and mounting pressure from taxpayers have put these once-untouchable benefits under scrutiny.

Federal, state, and local policymakers are now actively exploring—and in some cases introducing—legislation that could shift how pensions are calculated, funded, taxed, and adjusted over time. While existing annuities are mostly protected from retroactive changes, the future framework for calculating and supplementing those benefits may not look the same in a few short years.

Understanding these changes now puts you in a better position to make informed retirement decisions—whether you’re five years away from retirement or already collecting your annuity.

Current Legislative Proposals in 2025: What May Change Soon

Several legislative proposals introduced or under active discussion in 2025 are raising eyebrows across the public sector. Here are the three biggest potential changes that could alter your retirement picture:

1. Locality Pay May Be Removed from High-3 Calculations

Locality pay adjusts your salary based on the geographic cost of living. Currently, it’s included in calculating your High-3 average salary—the three consecutive years of highest basic pay used to compute your pension. A 2025 bill under debate seeks to remove locality pay from this equation.

Implications: For employees working in high-cost areas like San Francisco, New York, or Washington, D.C., this could lower their High-3 average significantly, leading to thousands of dollars in lost pension benefits annually.
Timeline: If passed by late 2025, implementation could start as early as fiscal year 2026, affecting anyone who hasn’t yet finalized their High-3 period.
Affected Employees: Primarily those in high-locality areas and employees with only a few years left before retirement.

2. Flat-Rate Contributions to Health Benefits May Replace the 70% Model

Under the Federal Employees Health Benefits (FEHB) Program, the government currently pays about 70% of your healthcare premiums in retirement. A new proposal suggests switching to a flat-dollar contribution model.

Implications: If healthcare premiums continue to rise—and they likely will—this fixed-dollar contribution would cover a shrinking share of your actual costs.
Who’s Impacted: While new hires are the primary targets, the structure could eventually be phased in for existing employees and even current retirees depending on political will and fiscal necessity.
Financial Effect: This could lead to hundreds or even thousands more in annual premium expenses, depending on your plan choice and family size.

3. Adjustments to Cost-of-Living Increases (COLAs)

COLAs ensure that your pension maintains its purchasing power over time. Currently, these increases are tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But proposals on the table in 2025 call for switching to the Chained CPI—a metric that generally grows more slowly.

Implications: A retiree living 25 to 30 years could lose tens of thousands in COLA-related increases under a slower-growing index.
Why It’s Proposed: Proponents argue the Chained CPI better reflects consumer behavior and helps contain government costs.

Are Current Retirees Truly Protected?

If you’re already retired and collecting your annuity, your base pension is generally safeguarded from retroactive cuts. But that doesn’t mean your full retirement income is immune to change. Here’s what could still shift:

COLA Adjustments: Even if your pension amount is locked in, your annual increases are vulnerable.
Healthcare Costs: If the flat-rate contribution model is applied to retirees, your premiums could spike.
Taxation Changes: Lawmakers may decide to raise taxes on pension income—either at the federal or state level.

So, while the base check may stay intact, the real value of that check and how much you keep after expenses and taxes could diminish substantially.

What Near-Retirees Need to Watch Closely

If you’re within five years of retirement, now is a critical planning window. Legislation enacted this year or next could take effect before you’ve locked in your High-3 or your eligibility for favorable healthcare contributions. Here’s where to focus:

Reassess Your High-3 Timeline

If locality pay is removed from High-3 calculations, then:

You may want to retire earlier than planned if you’ve already reached a peak High-3.
Consider negotiating for base pay increases now, rather than relying on locality adjustments.
Look for temporary detail assignments that pay higher base salary.

Plan for Rising Out-of-Pocket Healthcare Costs

A flat-rate contribution system could leave you responsible for an ever-growing portion of your medical premiums.

Build a buffer into your retirement savings specifically for healthcare.
Consider contributing to a Health Savings Account (HSA) if you’re eligible.
Reevaluate your FEHB plan each Open Season to ensure you’re not overpaying for coverage.

Coordinate Pension, TSP, and Social Security

You’ll likely need a more dynamic retirement income strategy in the coming years.

Use the 2025 TSP limits to your advantage: $23,500 in elective deferrals, and up to $11,250 in catch-up contributions if you’re between 60 and 63.
Consider delaying Social Security to increase future benefits, especially if pension COLAs decline.
Model different withdrawal strategies to reduce tax exposure across your accounts.

The State Tax Wild Card

Your pension’s purchasing power can also be affected by state tax law. As of 2025, more than a dozen states tax federal and state government pensions. Several others are revisiting their exemptions as they seek to increase revenue.

States currently reviewing pension taxation policies include:

California: A proposal could cap pension exemptions at a fixed dollar amount.
North Carolina: Lawmakers are debating whether to phase out exemptions for newer retirees.
Illinois and Vermont: Considering tiered systems based on total retirement income.

If you’re planning a relocation in retirement, be sure to account not just for cost of living, but also for how your pension will be taxed—both now and under potential future law changes.

Why These Changes Are Emerging in 2025

Multiple forces are converging to make pension reform more urgent and politically feasible in 2025:

Retirement Wave: A large portion of the public workforce is hitting retirement age, putting pressure on benefit programs.
Federal Budget Pressures: Rising entitlement spending and a growing national deficit are forcing cuts elsewhere.
Private-Sector Comparison: Many taxpayers feel that government retirement benefits are overly generous compared to private-sector 401(k)-based systems.
Longevity and Cost Growth: Retirees are living longer and drawing benefits for more years, making the system more expensive to maintain.

Together, these trends are creating an environment where what was once unthinkable—changing pension rules—is now part of mainstream political conversation.

How You Can Stay Prepared and Protected

Here are actionable steps you can take in 2025 to guard against possible retirement disruptions:

Audit Your Retirement Readiness

Confirm your service history, retirement eligibility date, and projected annuity.
Use retirement calculators to model outcomes under different legislative scenarios.

Maximize Tax-Advantaged Accounts

Contribute the maximum allowed to your TSP.
If eligible, use an HSA to set aside tax-free money for medical expenses.
Evaluate Roth conversions if you expect higher taxes in retirement.

Monitor Legislative Developments

Sign up for OPM bulletins, union updates, or newsletters from government retirement associations.
Set alerts for bills introduced in Congress that pertain to public pensions or retiree health benefits.

Consult with a Licensed Professional

A licensed agent listed on this website can help you interpret proposed changes and customize a strategy.
This is especially important if you’re within five years of retirement or managing multiple income streams.

Preparing for What’s Next in an Uncertain Pension Future

The idea that public pensions are secure forever is rapidly becoming outdated. In 2025, real policy changes are under discussion—changes that could alter everything from how your pension is calculated to how much you’ll spend on healthcare and how your benefits are taxed.

Remaining passive is no longer a viable option. You need to be proactive, informed, and willing to adjust your plans as new laws and policies take shape.

If you’re unsure how these evolving dynamics affect you, reach out to a licensed agent listed on this website. They can help you explore your options, mitigate risks, and align your retirement strategy with the new realities.