The FED Weekly 13-19 Jul 2025 (Episode 7)

Each week, we cut through the noise to bring you the critical updates on budget negotiations, pay raises, workforce policies, and the legislative battles that directly impact the federal community. Let's get you up to speed on what happened this past week.

Section 1: Issues That Affect Current and Retired Federal Workers This section addresses the overarching economic and healthcare developments that will financially impact nearly every member of the federal community, from those currently serving to those in retirement.

The 2026 Economic Outlook: A Looming Financial Squeeze The financial forecast for 2026 presents a challenging picture for the federal community, where anticipated benefit adjustments are on a collision course with escalating healthcare costs. Early projections for the annual Cost-of-Living Adjustment (COLA) suggest only modest gains, which are likely to be significantly eroded, if not entirely erased, by a substantial hike in Medicare premiums.

Based on the latest inflation data from June 2025, the 2026 COLA is projected to fall within a range of 2.3% to 2.7%. The National Association of Letter Carriers (NALC), using the June Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), projects a 2.3% COLA for annuitants under the Civil Service Retirement System (CSRS). However, this same data translates to a lower 2.0% COLA for those under the Federal Employees Retirement System (FERS).

This discrepancy stems from the FERS "diet COLA" formula, which caps the adjustment. If the official CPI-W increase is between 2% and 3%, FERS retirees receive a flat 2% increase. If the increase is 3% or more, they receive the full amount minus one percentage point.

Independent analysts and organizations like The Senior Citizens League (TSCL) are forecasting a slightly higher COLA, between 2.6% and 2.7%, citing persistent inflationary pressures, some of which are attributed to newly imposed tariffs. Compounding the issue of a modest COLA is a projected sharp increase in healthcare expenses. The 2025 Medicare Trustees annual report forecasts a significant 11.6% increase in the standard Medicare Part B premium for 2026.

This would raise the monthly premium from $185.00 to $206.50, an increase of $21.50 per month and the largest such jump since 2022. For a large segment of the federal retiree population, this confluence of factors makes a "net loss" year highly probable. The mechanics are straightforward: a FERS retiree with a $2,000 monthly annuity would see a 2% COLA add $40 to their gross monthly payment. However, after subtracting the $21.50 Medicare Part B premium hike, the net gain shrinks to just $18.50.

If Federal Employees Health Benefits (FEHB) program premiums also rise significantly, as they did in 2025 with an average 13.5% increase for non-postal workers, this small gain could be completely nullified, resulting in a decrease in real-dollar disposable income. This creates a significant financial planning challenge that goes far beyond the headline COLA number. Some relief may come from the newly signed "One Big Beautiful Bill Act" (OBBBA), which introduces a tax credit for seniors.

The law provides a $6,000 credit for single filers with incomes below $75,000 and a $12,000 credit for couples with incomes below $150,000. While this could provide a meaningful offset for many middle-income retirees, it is important to note that an estimated half of all seniors do not have a federal tax liability on their Social Security benefits, meaning many of the lowest-income annuitants will not benefit from this provision.

The Federal Employees Health Benefits (FEHB) Program: Navigating Costs and Changes in 2026 The FEHB program, a cornerstone of federal benefits, is facing a period of transformation and tension. The Office of Personnel Management (OPM) is pushing for benefit enhancements and a more user-friendly experience, even as the program confronts the dual threats of rising premiums and potential structural changes.

In its annual "call letter" to insurance carriers, a document outlining policy goals for the 2026 plan year, OPM stressed several key initiatives. It is important to note that this letter was issued under the previous administration, and its policies are subject to change. The letter directs carriers to streamline plan administration by implementing online claims submission portals by the end of 2026 and improving the accuracy and usability of online provider directories.

On the benefits side, OPM is mandating coverage for fertility preservation for individuals at risk of iatrogenic infertility (e.g., from chemotherapy) and is strongly encouraging carriers to expand their mental health provider networks to reduce appointment wait times and improve access to care. While these benefit enhancements are welcome, the premium outlook remains a significant concern.

In a sign of broad pressure on the health insurance market, insurers participating in the Affordable Care Act (ACA) Marketplace are requesting a median premium increase of 15% for 2026, the largest hike since 2018. While not a direct corollary, this trend signals an environment of rapidly growing healthcare costs that will almost certainly impact FEHB premium negotiations.

This follows the substantial average premium increase of 13.5% for non-postal FEHB enrollees in 2025, an increase driven largely by major carriers. The program is at a crossroads. OPM is pursuing a vision for a more comprehensive and modern FEHB program, with a focus on high-demand services. At the same time, the financial underpinnings of the program are facing significant pressure from market-driven premium inflation.

This is exacerbated by an undercurrent of political discussion around proposals to fundamentally alter FEHB, such as shifting to a voucher-based system or reducing the government's premium contribution from its current level of 72% to 75%. This creates a fundamental tension that may force employees and retirees into a difficult trade-off between plans with better services and plans they can afford, potentially undermining the program's core value proposition.

Thrift Savings Plan (TSP) Updates for All Participants The Thrift Savings Plan (TSP) announced several administrative and structural changes relevant to all participants. As of June 30, 2025, the L 2025 Fund, having reached its target date, was rolled into the L Income Fund. Concurrently, a new L 2075 Fund was established to cater to participants with a longer investment horizon, such as those born after 2009 or planning to withdraw funds in 2073 or later.

Participants should also note that their second quarter 2025 statements, covering account activity from April 1 through June 30, will be made available online in My Account by the end of July. In a broader move toward modernization, the TSP began delivering annual statements electronically by default in 2025 for all participants who have an email address on file with the agency.

Section 2: Issues That Affect Current Federal Workers This section details the profound and rapid changes to job security, employment rights, compensation, and the very nature of the civil service that unfolded this week.

The Unraveling of Civil Service Protections: A Multi-Front Assault The long-standing framework of merit-based civil service protections, designed to ensure a professional and non-partisan government workforce, faced an unprecedented and coordinated challenge this week from all three branches of government. The most immediate blow came from the judiciary.

On July 8, 2025, the Supreme Court struck down a lower court injunction that had barred the administration from conducting mass layoffs, known as Reductions in Force (RIFs). This ruling was widely seen as a "major reversal" of the conventional wisdom that federal workers enjoy significant job protections. It effectively gives the executive branch a powerful tool to reshape the workforce and allows dozens of previously stalled RIF actions to proceed across the government.

Just nine days later, on July 17, the executive branch advanced a radical new legal theory. Justice Department attorneys formally argued before an administrative judge at the Merit Systems Protection Board (MSPB) that the Constitution grants the President the authority to fire many career federal employees "at any time for any reason".

This "at-will" employment argument seeks to dismantle decades of precedent and federal law, most notably the Civil Service Reform Act of 1978, which requires that agencies provide cause, notice, and an opportunity for employees to respond before a termination can take place. On the same day, the President signed an Executive Order creating a new category of federal employee, "Schedule G," in the excepted service.

This new schedule is designed for noncareer positions of a "policy-making or policy-advocating character" that are normally subject to change with a presidential transition. Critically, the order specifies that removals from Schedule G positions are not subject to standard Civil Service Rules and Regulations, effectively making them at-will appointments who serve at the pleasure of the administration. These events do not appear to be random or disconnected.

Rather, they represent a systematic effort to increase executive control over the federal bureaucracy and weaken the merit-based system. The legal argument for at-will employment establishes the ideological foundation. The Supreme Court's ruling on RIFs provides the legal tool for large-scale removals of existing career staff. Finally, the creation of Schedule G provides the mechanism for backfilling influential positions with political appointees who lack traditional civil service protections.

The combined effect is a "pincer movement" that fundamentally alters the relationship between political leadership and the career workforce, creating a more pliable and politicized government apparatus.

Workforce Reductions in Action: RIFs and Buyouts Accelerate With legal barriers removed, several agencies moved swiftly to implement previously announced workforce reductions. Immediately following the Supreme Court's decision, the Department of Education was cleared to proceed with the termination of approximately 1,300 employees, which constitutes roughly one-third of its workforce. These employees had been on paid administrative leave since the RIF was first announced in March.

The Department of State began issuing termination notices to over 1,300 civil and foreign service employees on July 11. The Internal Revenue Service (IRS) has reportedly fired between 6,000 and 7,000 probationary employees, including 120 from the critical Large Business and International division that audits high-asset individuals and corporations. The IRS is reportedly aiming to cut its overall headcount by 20% to 50% through a combination of layoffs, attrition, and buyouts.

Other agencies, including the Environmental Protection Agency (EPA) and the Department of Veterans Affairs (VA), are also proceeding with significant staff cuts. In parallel with these involuntary actions, agencies have been aggressively using "voluntary" measures to reduce headcount. Widespread offers of Voluntary Early Retirement Authority (VERA) and Voluntary Separation Incentive Payments (VSIP) are being used to encourage employees to leave.

The Social Security Administration (SSA), for example, offered VERA and VSIP to all its employees, with financial incentives of up to $25,000, though the window to accept was tight, closing on April 19, 2025. Similarly, the Department of the Interior (DOI) offered VERA/VSIP packages with a maximum payout of $25,000, although many positions were excluded from the offer.

The Future of Federal Pay and the Work Environment The climate of uncertainty extends to federal compensation and the work environment, with new legislative proposals threatening to alter pay structures and benefits. The debate over the 2026 federal pay raise is already taking shape. The administration's Office of Management and Budget (OMB) has advised agencies to plan for a 3% average pay raise.

This stands in contrast to the 4.3% average raise—composed of a 3.3% across-the-board increase and a 1% average boost to locality pay—proposed in the Federal Adjustment of Income Rates (FAIR) Act, a bill introduced by Democrats in Congress. Proponents of the higher raise point to Federal Salary Council data from 2024 showing that federal employees earned 24.72% less on average than their private-sector counterparts.

Meanwhile, several bills introduced in Congress could have a direct and negative impact on federal pay. H.R. 201, the Federal Employee Performance and Accountability Act of 2025, proposes a five-year pilot program for employees at the GS-11 level and above. Under this program, pay would be tied directly to performance: those exceeding metrics could receive up to a 10% raise, but those merely meeting metrics would get no raise, and those rated below expectations would face a 10% pay cut.

Participants would be ineligible for standard annual and locality pay adjustments. Another bill, S. 27, the Federal Employee Return to Work Act, would strip locality pay from any federal employee who teleworks at least one day per week, reverting their salary to the much lower "Rest of U.S." pay scale.

Additionally, the newly passed OBBBA permanently eliminates the tax-free status of employer reimbursements for bicycle commuting and moving expenses, effectively turning these benefits into taxable income. Evidence of growing financial stress among the workforce is already apparent in official data. The Federal Retirement Thrift Investment Board's 2024 annual report revealed a concerning increase in both TSP plan loans and hardship withdrawals.

Loan usage rose to 8.6% of participants, while hardship withdrawals reached a five-year high of 3.9%. This trend was particularly acute among mid-career and lower-paid workers, with the second-lowest salary quintile reporting a hardship withdrawal rate of 8.47%. This combination of aggressive workforce reductions, attacks on pay and protections, and a hostile work environment is creating the conditions for a significant "brain drain" and loss of institutional knowledge.

Experienced employees who are eligible are taking VERA and VSIP offers to escape the uncertainty. Mid-career employees, who are the backbone of agency operations, are facing extreme financial pressure and the threat of pay cuts, making them more likely to seek stable employment in the private sector.

The risk of this talent exodus is not merely theoretical; the administration has already had to rehire some "critical" employees it had previously laid off, demonstrating a lack of strategic foresight in the reduction process. This exodus will inevitably degrade agency performance, delay critical public services, and weaken national security and public health functions as expertise built over decades walks out the door.

Section 3: Issues That Affect Retired Federal Workers This section distills the most critical financial and healthcare news for federal annuitants, providing a clear-eyed view of the challenges and opportunities on the horizon. Your 2026 Bottom Line: The COLA vs. Healthcare Cost Collision For federal retirees, the financial outlook for 2026 is dominated by the collision between a modest COLA and sharply rising healthcare costs.

As detailed previously, the projected 2026 COLA of approximately 2.3% to 2.7% is on a direct path to be consumed by a projected 11.6% increase in Medicare Part B premiums. The practical impact of this collision will not be felt equally. Because FERS retirees will likely receive a COLA capped at 2.0%, the $21.50 monthly Medicare hike will consume a much larger portion of their adjustment compared to their CSRS counterparts, who will receive the full, uncapped COLA.

This dynamic widens the already existing gap in retirement outcomes between the two systems. The FERS "diet COLA" mechanism, designed in a different economic era, is proving inadequate in the current volatile inflationary environment. It provides less inflation protection precisely when it is needed most, leading to a faster erosion of purchasing power for FERS annuitants and testing the long-term financial viability of the system to provide a secure retirement.

It is therefore imperative that all retirees plan their 2026 budgets based on their anticipated net income after these mandatory deductions, not on the headline COLA figure. Navigating Your Health Benefits in Retirement Maintaining health coverage is a primary concern for annuitants, and navigating the FEHB program requires diligence.

A critical and non-negotiable requirement is the "5-Year Rule," which stipulates that an individual must have been continuously enrolled in an FEHB plan for the five years immediately preceding their retirement date to be eligible to carry that coverage into retirement. Furthermore, the annual Open Season will be a more critical decision point than ever.

With OPM pushing for changes in coverage for mental health, fertility, and obesity care, and with the likelihood of another round of significant premium increases, retirees must carefully reassess their plans. A plan that was suitable one year may become financially untenable or medically inadequate the next.

New retirees must also remember that FEHB premiums, which are paid with pre-tax dollars during active employment, are paid with after-tax dollars in retirement, increasing the effective cost of the insurance. New Financial Relief for Annuitants: The OBBBA Senior Tax Credit The "One Big Beautiful Bill Act" offers a new form of financial relief that could benefit many middle-income retirees.

The law establishes a tax credit of $6,000 for single filers and $12,000 for couples, provided their incomes are below $75,000 and $150,000, respectively. This credit could help offset some of the rising healthcare costs for annuitants who have a federal tax liability. However, it is important to recognize its limitations: the credit will not benefit the lowest-income retirees who already have no federal income tax burden.

Annuitants should consult with a qualified tax professional to understand how this new credit applies to their specific financial situation. The complexity and volatility of the current environment—with interacting variables like COLA calculations, Medicare premiums, FEHB plan changes, and new tax laws—mean that retirees can no longer afford to be passive recipients of their benefits. A high degree of financial literacy and proactivity has become essential.

Annuitants must understand the nuances of their specific COLA, track how rising premiums will affect their net income, and investigate their eligibility for new tax provisions. This transforms retirement planning from a one-time event into an ongoing process of active financial management, making advocacy and informational organizations more critical resources than ever.

And that’s a wrap on this week’s Federal Workforce Roundup. The landscape for federal employees and retirees is constantly shifting, with major decisions being made about everything from pay and job security to retirement benefits and the very structure of the civil service. Staying informed is your best tool. Be sure to subscribe wherever you get your podcasts, so you never miss an update. Thanks for tuning in.

We’ll be back next week to track the latest developments and what they mean for you. Until then, stay engaged and be well.