The military retirement system is one of the most loved – and valuable – benefits available to military members. It is unique in many ways, and one of the few retirement plans in the US which starts paying beneficiaries immediately upon retirement without a standard waiting period or age limit.
Unfortunately, it is also a target by cost-conscious members of the government who are looking for ways to decrease the military budget and cut costs over the next few decades. Because of the high cost of the military retirement system, the Defense Business Board which was tasked with studying the military retirement system and making recommendations on how the government can save money on the military retirement system in the coming decades.
The basic conclusion by the Defense Business Board, found in this pdf entitled, Modernizing the Military Retirement System, was that the current military retirement system is “unfair, unaffordable, and inflexible.”
What follows is the slideshow prepared by the Defense Business Board, containing their recommendations and how they would affect the military. Afterward, we give our take on the proposed changes:
Proposed Changes to Military Retirement Benefits
The current military retirement system – why it’s good for members and why it might change. In the current system, active duty servicemembers who retire after 20 years can expect to begin receiving their pension almost immediately and the payments will not only continue through the remainder of their lives, but will also increase based on Cost of Living Adjustments (COLA). A military retirement is worth millions over the course of a lifetime. While military retirement benefits may not be enough to live on for everyone, the system is a fairly generous program, and one that is hard earned by its recipients.
The problem with the military retirement system, according to the government, is that it is becoming increasingly more expensive and potentially unsustainable in the long run, especially when factoring in the full health care coverage given to military retirees and their family members. TRICARE has its critics, but overall, it is a very affordable insurance program which is basically unmatched in the civilian sector.
All of this leads us to cost: the government has been seeking out ways to reduce the overall cost of the military retirement system, which, if left unchanged, will spiral out of control in the coming decades. Here are some of the main notes from the study, which support the need for change:
- The military retirement system has not materially changed for over 100 years
- The current military retirement system was designed for an era when life spans were shorter
- Pay was not competitive with civilian pay
- Second careers were rare since military skills did not transition easily to the private sector
These additional reasons were given to support a new military retirement system:
- DoD pays retirees 40 years of retirement benefits for 20 years of service
- Military skills are transferable to the private sector
- Second careers are now common for those retiring in their 40s
What follows are a couple of recent recommendations which have been making headway.
Defense Business Board Recommendations:
Please keep in mind these are only proposed changes by the Defense Business Board, and have not yet been put before Congress or the President and have not been voted on for becoming part of law.
- Convert military retirement to a civilian-style retirement system similar to a 401k plan; retirement pay wouldn’t be paid until age 60-65 (or Social Security age)
- Retirement benefits would vest after 3-5 years of service
- Authorize “gate pays” and separation pay to encourage separation from active duty or to continue service on active duty
Let’s take a look at each of these and how they might affect military members.
Military Retirement Changes: Defined Benefit Plan
Perhaps the biggest proposed change is moving away from the traditional pension style system to a defined benefit plan, similar to a civilian 401k plan. In this proposed system, military members would receive a mandatory Thrift Savings Plan account into which annual contributions would be made by their member service (the average DoD contribution was listed at 16.5% of annual pay).
There are several versions of the defined benefit plan discussed, with vesting starting as soon as 3-5 years of active duty service. These plans would also be portable into the civilian sector and back into military service if there is a break in service.
Individual members would have the ability to contribute “gate pays” or additional funds to their account and each service would be able to contribute additional funds to members based on high deployment schedules, hardship, troops who are at risk, for bonuses and as a retention tool, and for other reasons as each service sees fit.
What this proposed plan is – and isn’t. Basically, this proposed plan is what you would find at many companies in corporate America – a 401k plan with matching benefits which would vest after serving a few years with the company. After your defined benefit plan vests, you could take it with you when you go to another company. What this plan is not, is a pension plan, which pays servicemembers a defined benefit at a specific time.
Will Current Servicemembers Be Grandfathered in?
The proposal by the Defense Business Board did not plan on changing any benefits to current retirees. So if you have already retired, then your benefits probably won’t be touched, at least by this set of proposals.
But there were two different scenarios given regarding how these proposed changes would be implemented for current military members – a low cost proposal and a high cost proposal – low cost meaning low cost to the government, and high cost meaning high cost to the government. Let’s take a look at both options.
The low cost proposal would go into effect as soon as it was voted into law and would affect current military members on a graduated basis. For example, if you had already served 20 years, you would be grandfathered into the old system and would receive your pension benefits under that plan. If you had had fewer than 20 years of service, you would get a combination of the old retirement plan (the pension, or annuity) and the new plan (the 401k style plan). To receive the pension, military members would still be required to serve 20 years. Here is how the “low cost” proposal would affect current servicemembers.
- 20 years of service or more, no change
- 15+ years of service, 37.5% of base pay in a pension plan, and the rest under the 401k-style plan.
- 10 years of service, 25% of base pay, and the rest under the 401k-style plan.
- 5 years of service, 12.5%, and the rest under the 401k-style plan.
- New recruits, new retirement system.
The high cost proposal would mean that everyone currently in the military would continue to be under the current retirement system and could receive their normal pension after they reach 20 years of service or more. The new retirement system would only affect servicemembers who join active duty after the new retirement system is voted into law and takes effect.
Will a New Military Retirement System be Voted into Law?
Right now it’s too early to tell. This is only one recommendation for change and it has been sent back to be studied further and will be presented again in February of 2012. Though we don’t know what will happen, we can say two things for certain:
- Something will need to change with the military retirement system.
- It will be fought tooth and nail by military interest groups.
1. The numbers don’t lie. Like the Social Security System and Medicare, the military retirement system is quickly growing out of control. Changes need to be made – how or when, I don’t know. But I would hope that the government would find a middle ground between the current retirement system and any proposed changes.
2. Any changes to the military retirement system will be highly contested by military and veteran organizations. And rightly so. Military servicemembers put their lives at risk and make more physical and emotional sacrifices than the average office worker who earns a 401k and a pat on the back. The military retirement system is just one manner in which military members are rewarded for their sacrifices.
I also don’t believe the changes should affect anyone who is 1) already receiving military retirement benefits, or 2) already serving with the understanding that they are eligible for benefits under the current retirement system. Taking away benefits from someone after they had earned them or made life changing decisions based on what they would receive is not the way to take care of the people who protect our freedom.
What are your thoughts on these proposed changes to the military retirement system?
photo credit: USAF