President Obama recently signed a new law that reverses the Military Retirement Pay Cuts, which were set to cut military pension Cost of Living Adjustments (COLA) pay raises by 1% until military retirees reach age 62. This law was only recently passed as part of the Bipartisan Budget Act, in early 2014. The backlash from current and former military members, and lobbying groups representing them, was strong. In the end, Congress got the message, and reversed most of the cuts. They did not, however, repeal the law. They simply grandfathered in military members who were serving as of December 31, 2013. Let’s take a look at the impact this has on current and former military members.
The Original Military Pension Cuts
The Bipartisan Budget Bill reduced Cost of Living Adjustments (COLA) for military retirees by 1% until they reached age 62. COLA increases are based on the Consumer Price Index (CPI), which is a a measurement of inflation in the US. The CPI measures over 80,000 items to determine an average inflation measurement.
The resulting CPI rate is used by the government to determine cost of living adjustments for a variety of government benefits including Social Security Benefits, military and government pension plan raises, and VA Service-Connected Disability rates. These Cost of Living Adjustments help benefits recipients maintain purchasing power over time.
The decision to reduce military pensions for retirees under age 62 was based on veterans’ ability to continue working. The cuts would have saved $6 billion over the coming decade.
Impact of the Bipartisan Bill Act COLA Cuts
The Bipartisan Bill Act was passed before there was much opportunity to debate the topic of military pension cuts. And predictably, many military and veterans groups were upset with the bill when it passed. The bill was initially set to go into effect in 2015, then pushed back to January 2016.
The Military Officers Association of America estimated the retirement cuts would have had the following impact:
The cuts will have a devastating and long-lasting impact. By age 62, retirees who serve a 20 year career would lose nearly 20 percent of their retired pay.
For example, an E-7 retiring this year with 20 years of service would see an average loss of over $3,700 per year by the time he or she reaches age 62. For an O-5, the average annual loss would be over $6,200. An E-7 retiring at age 40 today would experience a loss of $83,000 in purchasing power – an O-5 would lose $124,000 (source).
Lobbying groups representing current and former military members voiced their opinions through a variety of means, and they were heard. Both the House of Representatives and Congress voted to retract the largest portion of the bill. However, it was not a full repeal of the bill.
Changes to the Bipartisan Bill Act COLA Cuts
Neither the House nor the Senate wrote bills that would repeal the original language of the law. Instead, they voted to rewrite the law to essentially grandfather in service members who joined before January 1, 2014. Under the new proposed laws, anyone who was serving in the military as of December 31, 2013, would still fall under the old retirement system (High-3 and REDUX, with the current COLA rules).
Anyone who joined the military on or after January 1, 2014, would fall under the COLA-minus 1% rule that was passed as part of the Bipartisan Budget Act.
Impact for Future Retirees
The Department of Defense has traditionally grandfathered military members when they make changes to pay and benefits. At this point it is too early to say what changes may happen between now and the time military members reach retirement. The hope is that the COLA reductions under the Bipartisan Budget Act will be repealed in their entirety, allowing military members who joined after January 1, 2014 to enjoy the same retirement benefits as current service members. If that is not the case, the next best outcome is Congress leaving retirement alone for everyone who is currently grandfathered into the current retirement plans.
The main takeaway is to understand that pay and benefits are under fire. There is only so much the federal budget can handle, and Congress will continue to look for ways to save money, whether that is through retirement benefits, TRICARE cuts, reductions in pay raises, cuts to current benefits, Reductions in Force, cuts to weapons systems acquisitions, or other means of reducing the impact of the military and retirees to the federal budget.
Now is the time to begin taking matters into your own hands and preparing for retirement as though cuts may happen. That means contributing to the Thrift Savings Plan if you are still serving, opening an IRA, contributing to a 401k if you have a post-retirement job, or looking for other ways to earn or save money for retirement. The extra planning can go a long way toward improving your quality of life during your retirement years.