The Senate Armed Services Committee recently passed the FY 2016 National Defense Authorization Act, which features several major proposals, including military retirement reform, personnel reform, and headquarters and management reform. One of the primary goals of the 2016 NDAA is to find areas where the government can cut back and save money. This will come in many shapes and sizes, including reducing troop numbers, retiring old weapon systems, reducing the acquisitions of new weapon systems, and much more.
Perhaps one of the biggest proposed changes would happen to the military retirement system, which has seen few changes in the last 70 years. This new plan is proposed to go into effect on January 1, 2018. But don’t worry – current servicemembers and retirees are grandfathered into the current system, though current servicemembers would be given the option to change to the new retirement system if they wish.
We’ll give a brief overview of the current system, then highlight the proposed changes and how they might impact current or future military retirees. Note: the focus of this article is entirely on the defined benefit, or pension, of military retirement benefits. The recent proposal didn’t include any major changes to other military retirement benefits, such as health care.
Current Retirement System
The current military retirement system is a “cliff-vesting” retirement plan, which basically means it’s all or nothing. Once you reach the required 20 years of service, you qualify for the entire retirement plan. Failing to reach the required 20 years of service nets servicemembers zero retirement benefits (with the exception of early retirees and medical retirees, which is out of the scope of this article).
Here is a basic overview of the current retirement pension plans available today:
- High Pay
- High-3 (average of highest three years of pay)
- REDUX (reduced multiplier in exchange for a Career Status Bonus of $30,000 cash at the 15 year mark).
These three systems all reward retirees with an immediate pension once they reach 20 full years of service. The High Pay and High-3 Systems give retirees a pension based on 2.5% of their base pay for each year they served on active duty. Under this plan a 20-year retirement pension is worth 50% of the member’s base pay. There is also a Cost of Living Adjustment (COLA) each year based on the Consumer Price Index (CPI).
The REDUX pension plan is slightly different. Retirees who choose this plan receive a $30,000 cash bonus at their 15 year mark, in exchange for receiving a retirement multiple based on 2.0% of their base pay for each year served. Under this plan a 20-year retirement pension is worth 40% of the member’s base pay. In addition, the annual COLA pay raise is based on CPI – 1. So if the CPI is 2.0%, REDUX retirees would only receive a 1% COLA increase. In general, REDUX is not a good deal for military members.
Here is a more in-depth analysis of active duty retirement benefits, including a podcast.
Need for Change
There are several reasons given for the proposed change. The annual fixed cost to the government is certainly a concern, as it is growing every year with more retirees and COLA increases. But there is also a desire to make the military retirement system closer to what people might find in the civilian sector (except very few civilian companies offer pension plans these days). Many civilian employees have portable retirement plans they can take with them when they leave their job, often in the form of a 401k or similar retirement plan.
Very Few Military Members Receive any Retirement Benefits: Only about 17% of military members remain on active duty long enough to serve the full 20 years required to earn a military pension. That means roughly 83%, or about 5 out of every 6 servicemembers, don’t receive any long term retirement benefit from their military service. Servicemembers do have access to the Thrift Savings Plan, however, they can only contribute funds from their own pay and bonuses. The military does not currently make matching contributions like many civilian companies offer.
Solution: The government is proposing a plan that would offer service members a 401k-style retirement plan (using the TSP) in conjunction with a pension plan that vests at 20 years. Members would be free to take their TSP account and matching contributions with them when they leave the military. This would come at the expense of a lower multiplier for the pension. However, the total retirement benefit under the new plan may actually exceed the current plan for some retirees.
Let’s look at the proposed plan.
Proposed Retirement Plan
The new military retirement plan, as proposed, is a blended retirement plan that utilizes the Thrift Savings Plan, a Career Continuation Bonus, and a pension. This plan is the same plan that was proposed in the 2015 Military Compensation Modernization Recommendations.
Officials estimate that at least 75% of active duty servicemembers will receive some form of retirement benefit under the new plan, as opposed to the roughly 17% who receive benefits under the current plan. The difference comes from the Thrift Savings Plan contributions made by the government, which would start after the servicemember has completed 2 years of service. Under this plan, the only servicemembers who wouldn’t receive some benefits would be those who serve fewer than 2 years.
Here is an overview of how the plan would work:
- Thrift Savings Plan Contributions: Servicemembers would automatically be enrolled in the TSP and would begin receiving matching contributions up to 5% of their pay once they have completed two years of service (starting at 2 years, 1 day of service).
- Continuation Pay Bonus: Military members would receive a Career bonus upon reenlisting for 4 years at their 12-year mark. This would equal 2.5x their monthly base pay. This does not take into account other reenlistment bonuses which may be in effect. The servicemember would be able to take the payment in a lump sum, or as annual payments during their reenlistment. Like all reenlistment bonuses, the Continuation Pay would be subject to being recouped if the servicemember failed to finish their enlistment (with limited exceptions).
- Defined Benefit Changes (Changes to the Pension): The current pension is what most people think about when they think about the retirement system. The new plan would use a 2.0% multiplier instead of a 2.5% multiplier, making a 20-year pension worth 40% of base pay instead of the current 50%.
- Control Over How & When Retirement Pay is Received: Retirees would be able to choose one of three methods for receiving their retirement benefits. They could (1) take an immediate monthly annuity (the pension plan as we know it today), (2) take a lump sum payment with a smaller monthly annuity, or (3) take a larger lump sum with no immediate monthly annuity, but they would be eligible to receive the full annuity they would have been eligible to receive, once they reach Social Security age. For the latter two options, retirees would be eligible to choose to take either 50% or 100% of the discounted present value of their pension that would be due to them before they are eligible for Social Security benefits.
The last section is the biggest curve ball in the plan. It adds flexibility, but also complexity when determining how much the retirement benefits are worth, and this complexity may end up hurting some retirees who end up making a poor decision based on their situation. On the flip side, having the option of taking a lump sum payment up front could help some retirees during their transition into the civilian sector.
Pros and Cons of Proposed Plan
There is a lot to like here, and a lot to be skeptical about. In general, I’m not a fan when military benefits get reduced. Primarily because each reduction makes it easier to repeat in the future. But this proposal has a lot of merit, particularly when it comes to helping the entire military population, not just the 1 in 6 who stay in long enough to retire. I don’t want to take anything away from anyone who served the full 20 years – I have a lot of respect for all of you!
But there are many who served for 12, 14, 16, or 18 years, and just couldn’t complete the full 20. They are sent on their way with whatever they have in savings and whatever they were able to put into their TSP or their own investments. This proposal would give members a greater incentive to save in their TSP, since the matching funds would equate to receiving free money. The Continuation Pay Bonus would also be an incentive to remain in the service and would be a nice bonus for those who were already planning on staying in the military.
Finally, the reduced pension isn’t a catastrophic reduction. Yes, 40% of your base pay is a lot less than 50%. But if the servicemember is able to contribute to their TSP account and receive the full 5% matching contributions, then they should have been saving at least a total of 9% of their base pay into their TSP throughout the majority of their career (I’m assuming the matching TSP contributions would be the same as the Civil Service FERS plan, which is explained in this TSP contribution limit article). Depending on how the markets perform, the compounding effects of time may help erase the gap between the two pension plans.
Of course, that’s the big “what if?” isn’t it? We all know many people won’t save the full amount, even if they receive matching contributions, and we have no way of knowing what the markets will return. There is also a big difference between having a fixed pension for life and having some money in the bank that needs to be managed and withdrawn as needed (it’s more complicated due to the tax implications, need to balance a portfolio, etc.).
Who Wins, and Who Loses?
At the end of the day, the big winners would be the military members who serve a few years, but don’t make it until retirement. They will have the opportunity to save some money for retirement and take it with them when they leave. And since that is the majority of the military population, there will be a lot of winners. The government is also a winner, at least, in some ways. They will save money on their fixed pension expenses, but much of those savings will be redirected to other servicemembers through the TSP and Continuation Pay Bonuses. Some retirees may also end up as winners, depending on how their investments do and how they take their pension payments.
The losers? I hate to use that term here, because everyone in the current system is grandfathered in. So the only people who will be affected are those who haven’t joined yet, or those who elect to transfer into this system. I don’t want to discount our future servicemembers, because they will carry on the traditions and defense of our nation. But they will join the military with that plan in place, so they aren’t losing out – they will be receiving what they signed up to receive.
The biggest question mark around this new plan surrounds the variable nature of the benefit. Trading a fixed monthly payment for a lower fixed payment and some money in your Thrift Savings Plan is a risky proposition because we can’t predict future returns. This it’s impossible to accurately calculate the future value of this plan compared to the current plan. But that is a problem faced by the vast majority of the population, and certainly not unique to military members.
Overall, this is a reasonable proposal, and one that very well could be passed into law in the near future. If it does, then we will likely see some major changes when it rolls out on January 1, 2018.
What do you think about this proposal?
I am not too much in favor of this for 2 reasons. First: your retirement would drop from the already low 50% of your base pay to 40%. Second: It may lead to a lower retention rate in the future of qualified members. Is the government doing this to save money in the long run? If so I think its a shame.
Seeing how only 17% of all military members actually remain in the service long enough to qualify for the 20-year retirement, I don’t see the logic of your argument.
There won’t be lower retention issues under this new system. Retention issues will arise from reduction in military pay that does not keep pace with inflation or cost of living, toxic leadership, or organizational inefficiency to name a few.
Ryan,
I can’t read your long articles because they are not formatted correctly for iOS. They are cut-off on the right margin. Your newsletter page via email is okay. In your newsletter you continue to refer to military retired pay as a pension. That is incorrect and part of the problem! Military retired pay is deferred compensation. The concepts are vastly different. Retired personnel are subject to recall to active duty by their Service Secretaries. No civilian pension has that string attached. We must not continue to try to civilianize the military! It won’t work and it is dangerous to our national defense. These retirement pay changes are bad for our country. They will lead to another retention nightmare, recruitment slide, and a hollow force.
Mike, Thanks for contacting me and letting me know about the iOS issue. I will look into this and try to get the site formatted correctly.
Regarding retirement pay: I’ve also heard it referred to as “reduced pay for reduced current services.” Here is a legal reference to that statement.
Yes, this is technically different than a pension. But they are very similar, and for colloquial use and for shorthand, the term pension is generally acceptable. Using the phrase, “when calculating your reduced pay for reduced current services,” ten times in an article would be cumbersome and a disservice to the reader.
Can military members be recalled to active duty? Yes, certainly. But it is rare, even in times of war, including recent times such as after 9/11. It is an unlikely situation for most retirees. There is no requirement that retired servicemembers maintain the physical standards or on the job training standards required for military duty. There are also age requirements for military service. After a certain point (usually age based or if they are not physically fit enough to serve), most retirees fall outside of the recall window and would not be recalled under any circumstance.
In general, the risk of being recalled only falls upon those who are recently retired, and even then, usually those where there is a shortfall in their specific skill set, job (MOS, AFSC, Rating, etc.), or rank.
Of course, this could theoretically all go out the window in the event of a large scale war. But we could always address that point if it happens.
Thanks again for your comment, and I’ll look into the site design to see if I can get a coder to help with the layout.
yes the military is less likely to call service members back to active duty, but they do it. what they will do and have done by the hundreds of thousands is use stop loss, that is to say you can not leave even if your time is up. that makes your stay as long as they want it to be, you can see your family when they say you can. there is no civilian job like that any where in the country. this new retirement will help to erode the military. there is no reason to stay for 20 years or even any longer than it takes to learn a skill and leave. that 17% would probably be 2% if there was no sure fire retirement at 20 years. these are the leaders and trainers that are going to leave, and what happens when the market crashes again like it did in 2008, everyone’s retirement accounts will loose 80% of its value or more. its just a bad bad deal for the military retirees .
COLA? What is the proposed COLA under the new retirement system? Is it “equally to” like the high 3 or “minus 1” like redux?
CB, Thank you for contacting me. The COLA is the same as the High-3 retirement system. It is not a reduced COLA similar to the REDUX retirement program.
Do you have an official source for this information? I am conducting some research and have been unable to find where COLA is addressed in the BRS documentation.
Hello Bret, Thank you for contacting me. This is a great question.
I recently participated in a Blogger Roundtable that was hosted by the Pentagon group that is overseeing the creation and release of the official BRS training. They gave us some references, including the official site. So far I haven’t heard of any changes regarding COLA. So far as I am aware, this is the same as under the High-3 system, and follows the same COLA used by the Social Security System. There is not a reduction in COLA as is found in the Redux system.
Thank you for the information. I still haven’t found any mention of the COLA calculation in the BRS documents that have been released.
However, I did find it in the DOD Actuary’s 2016 statistical report. You were right, it is full CPI. Just in case you were interested, it is on page 15 of this report.
I believe that those opposed to re-thinking the current system are those that are receiving or plan to receive the generous pension of either 40% or 50% after 20 years of service. This really boils down to helping those young 18-35 year olds who put their life on the line, jeopardize their family happiness, get out, and walk away with a pat on the back. I am an active duty officer and can tell you that the 20-year retirement system encourages the worst of the military to stay in because they fear anything outside the military. Once you hit the 10-year mark, one’s mind begins to shift from doing this job for your country, to doing this to hit the 20-year mark and people literally turn in to slaves of the 20-year retirement. We need incentives for good people to stay in up to the 12-year mark and give them two good options for either staying or leaving. The current all or nothing system encourages laziness and an over emphasis on getting a fat check when you retire. It needs to change.
First of all 50% of your base pay for retirement isn’t enough to survive specially if you have a spouse and kids to support, and if you are lower than an E-7 rank you are screw. Might as well find yourself another decent paying job just to survive since everything has gone up so high, and your cost of living increases are not that good. What need to be done is to lower the salaries of all congress members to a decent level and set term limits on this people. We in the military spend 90% of our lives defending this country against foreign and domestic enemies and get a misery of a retirement while this politicians serve one term and get the same salary all their lives, I don’t think that is fair, increase the military retirement pay to 100% of base pay or at least 75% and maybe it will be decent enough to call it a living, the majority of people who never been in the military believe that anybody who retires from the military are get thousands of dollars in retirement pay, very naive thoughts.
Hello Ernie, Thank you for sharing your opinion. I agree that most military retirees will need to work another job after they retire from the military. But having the military retirement pay and health care for life reduces the amount one needs to earn to support themselves and their families after they retire. It’s an amazing piece of security that most people will never have.
I would also like to point out that Congress members do not receive their full pay for the rest of their lives after only serving one term. They follow the same rules as federal employees (Federal Employees Retirement System) and need a minimum of 20 years of service to begin receiving a pension at age 50. They can receive a partial pension at age 62 if they have served at least 5 years in the federal service. But it wouldn’t be anywhere close to heir full pay (retirement pay is capped at 80% of their highest 3 years of pay. This article gives some examples of Congressional pensions. Wikipedia also has a good explanation.
It should also be noted that Congressional representatives also pay social security and pay for their own health care. Those are common rumors about Congressional pay and benefits.
Again, thank you for sharing your thoughts on the military retirement system!
Ryan,
Do you know much about this new retirement plan in regard to being able to pull out a portion of your retirement. The REDUX is horrible! Has anything changed? I retire in a a couple years and my wife and I have incurred some debt putting her through med school. I was looking at the idea of possibly pulling from my retirement to pay off some debt. My wife will be making decent money and I’ll be 42 when I retire and plan to work for another 15-20. Can you elaborate a little more on how that might work under this knew system? Thank you!
Jon
Hello Jon, Thank you for contacting me. You are correct – the REDUX retirement plan is terrible. It’s almost never a good idea for the retiree.
The new Blended Retirement System will allow members to take a small percentage of their retirement up front, at a predetermined discount rate. This would reduce the member’s fixed pension. Again, the numbers generally work in favor of the government.
Also, you have to switch to the new retirement system in order to do this. It sounds like you may not be eligible to make the switch if you are already near retirement. (you need fewer than 12 years of service as of January 1, 2018 to be able to change to the new Blended Retirement System). The new retirement system doesn’t make sense for many people with a lot of service, as they won’t have time for the TSP contributions and earnings to make up the lost ground from the decreased pension (the pension is 20% lower under the new plan).
It sounds like your best option is to look for other ways to pay off the student loans. I would start by looking into refinancing to a lower interest rate, and even job placement plans that can allow for faster payoff. Look into government service repayment plans as well, as that may be an option.
I wish you and your wife the best, and thank you for your service!
WHO ARE THE BRAIN DEAD? Where do I start? There was a point when the Defense Department was concerned about retaining the professionals. I believe there are plans for a build-up of personnel. Having a professional force should be the number one objective in the Defense Department. Warfare of today, is certainly different then in the past, particularly with the situation in the middle east. It is bad enough that a soldiers should have to be deployed let alone four or five times and someone wants to decrease their benefits? I retired in 1986 and I didn’t receive all the benefits I was previously entitled too, but to cut a retiree’s pay is an over reach. I want a professional force protecting me. It appears this so called retirement package is a combination of taking from the deserving and giving a handout to a so called weekend warrior i.e. a few years for your service thank you and good bye. So where are the quality soldiers going to come from? I retired as a first sergeant with three children, I lived from pay check to pay check To think that an enlisted man is going to have additional funds to contributed to the Thrift Plan is a total joke. After leaving the service, my next job enabled me to join the Thrift Plan. Government matching funds were 5% not 1% nor 2% or 4%. So here again, it’s not only a cut in the retirement but also a cut in matching funds by the government in the Thrift Plan.
For those who might enlisted for a short time, why not just offer them the opportunity to invest in the Thrift Plan without matching funds. I had been in the Thrift Plan for over 20 years and I was able to make some money but I made some terrible choices when I was in. the Thrift Plan offers a great opportunity and I think all soldiers should have access to it whether it be matching funds or just being able to join. When it comes to a contribution from the government, it should be focused on those who sacrifice everything to serve our country as a career soldier. I would just ask how many of these brain dead people in this dream machine have served? Let’s take a look at their base pay and their retirement. God forbid we do that
5% of pretax dollars matched on enlisted first term pay is as low as $74 and never more than $115 in those first 4 years, and assumes the member elects for a 5% TSP deposit. It’s cool, but if they stay 20 they’ve given up 10% of their retirement pay – at a high rank – for life a (which is, at a minimum of E6 pay at 20yrs of service, $1625/month) where 50% is worth $812. 81/month from 40-54.5yrs old, and $81/month continuing for life. The High-3 system allows more money earlier, as opposed to the risk/reward of a short term of 5% matching. That 5% over short-term service has very little reward (if any, depending on markets) AND cannot make a TSP withdrawal until 54.5yrs old. I think you have to weigh the opportunity cost of that 5% match vs. years of the “extra” 10% retirement pay.