A detailed proposal to revamp military retirement that was sent to Capitol Hill would shrink the size of future troops’ pensions and end the 20-year, all-or-nothing aspect of the current benefits package by starting 401(k)-style investment funds with government contributions for lower-ranking troops.
After a two-year study, the Military Compensation and Retirement Modernization Commission on Jan. 29 publicly unveiled 15 major recommendations that would give individual troops far more control over shaping and managing their own retirement packages.
One stunning feature of the new proposal is to give individual troops the option to forego immediate monthly retirement checks and instead receive a lump-sum payment for the total value of their working-age retirement benefit between the time they leave service and the time they become eligible for their normal Social Security benefits, usually starting at age 67.
At its core, the new proposal would scale back the size of military pensions by 20 percent. Yet it preserves the current structure by continuing to offer the option of monthly checks immediately upon separation for those who serve 20 years.
Read the report: Military Compensation and Retirement Modernization Commission
To supplement that diminished pension, the proposal calls for government contributions to a 401(k)-style investment account — matching up to 5 percent of base pay — as well as a new lump-sum “continuation pay” for troops who go beyond 12 years of service.
According to the commission’s calculations, the proposed retirement benefit’s total value could be higher than the current system if service members contribute at least 3 percent of their basic pay and also their lump-sum 12-year continuation pay to their TSP account. The total value of the proposed package would be significantly lower for troops who chose not to invest portions of their basic pay and continuation pay.
The recommendations also include big changes to the military health care system by eliminating Tricare coverage and moving millions of military dependents and retirees into health care policies similar to those offered to federal civilian workers.
All these proposals require congressional action, and the commission has drawn up proposed legislation that is ready for lawmakers to vote on, if they choose to do so. Many experts say Congress is unlikely to enact major changes on this controversial issue in today’s political environment.
But the report is likely to spark renewed debate about the military compensation system, which has changed little in the past 40 years. Senior Pentagon leaders say it is costly and unsustainable and will erode the Defense Department’s ability to invest in weapons modernization and high-tech research. The commission was created by Congress two years ago address some of those concerns.
However, the commission’s proposal would not save the Defense Department a large block of money. If adopted, the commission projects this alternative retirement plan would save the Pentagon less than $2 billion per year in the long run. That’s less than 1 percent of the total Defense Department budget.
The cost savings from the reduced pension are limited due to the expense of providing a new retirement benefit to troops who serve less than 20 years.
Commissioners acknowledged that this proposal is not going to resolve the Pentagon leadership’s concerns about rising personnel costs.
“This is a small first step,” said Larry Pressler, one of the nine commissioners who is a former congressman from South Dakota and a Vietnam war veteran. “This isn’t going to solve the big issue.”
Commissioners emphasized that cost-savings was not their primary goal. Instead, they sought to modernize the current system and craft changes that appeal to today’s generation of service members.
“The All-Volunteer Force increasingly comprises Service members born after 1980, members of the ‘millennial’ generation. Research has shown members of this generation change jobs frequently and tend to favor flexible retirement options, rather than the defined benefit pension plans preferred by previous generations,” the commission wrote in its 280-page report.
The commission’s changes could apply only to future recruits and would grandfather today’s service members under the current system — but would give them the choice to opt in. For example, today’s young service members who have no interest in staying for 20 years might choose to opt into the new deal and receive government contributions to their investment account.
The commission surveyed more than 150,000 active-duty and retired service members last year to gauge their preferences on compensation. Extensive analysis suggests that the new proposal would meet the force’s current recruitment and retention needs, the commission said.
Multiplier drops to 2.0
The proposal calls for reducing the “multiplier” used to calculate military retirement. Today’s system calculates future pension checks by taking the amount of basic pay members receive in their latter years of service and calculating a percentage by multiplying the number of years served times 2.5. That means troops who serve 20 years receive checks equal to 50 percent of their final pay.
The proposal would lower that multiplier from today’s 2.5 to 2.0, a change that over time shaves of thousands of dollars in total payments. For a retiree who served 20 years, pension checks would reflect only 40 percent of his final basic pay.
For example, an service member who retires at the E-7 paygrade after 20 years of experience would hypothetically under the proposed system receive a pension with an estimated value of about $161,000, compared to $201,000 under the current system, according to data in the commission’s report. For an officer leaving after 20 years as an O-5, the proposed system would offer a pension valued at about $569,000 compared to about $711,000 under the current system.
One potentially big change included in the commission’s proposal is to give the defense secretary the authority to modify the 20-year service requirement to qualify for a retirement pension. That all-important milestone of 20 years could be adjusted up or down for “an occupational specialty or other grouping of members, as defined by the Secretary,” the report says.
12-year gate pay
The idea of continuation pay is likely to be popular with service members.
Troops who clear the milestone of 12 years of service would receive a lump-sum that will be at least 2.5 times one month’s basic pay, and could range as high as 13 months’ basic pay. For example, an active-duty E-7 would receive at least $10,000 and an active-duty O-4 would get at least $17,000.
The continuation pay would require agreeing to a four-year commitment, through 16 years of service.
The services could raise the continuation pay in particular career fields where they want to retain people. In most cases, retaining officers at today’s rate would require continuation pays that exceed 10 months of basic pay, according to the commission’s report.
Service members would be encouraged to immediately put that lump-sum payment in their TSP account, but would have no legal requirement to do so.
The plan would inject a new major decision into the lives of retiring service members. Those who clear 20 years and earn a pension would have the option of taking monthly checks just like the kind offered today, or to request a lump sum.
The proposal sketches out two lump-sum options. Troops can give up all monthly payments until age 67 in exchange for a check equal to the value of those working-age retiree benefits. Or they can ask for a hybrid arrangement that offers half the value in a lump sum immediately upon leaving the service and the other half spread out in monthly checks.
Regardless of their decision, the monthly pension checks resume at age 67 for all retirees, according to the plan.
Basic pay and matching contributions
The TSP element of the plan may be more controversial because it calls for automatically diverting a small percentage of basic pay into the savings account. Typically money deposited into a TSP is not available for withdrawal without tax penalty until age 59 and a half.
Under the plan, troops arriving at boot camp would be enrolled automatically in the Thrift Savings Plan, the 401(k)-style investment account for federal employees. They would receive government contributions to that account, which they can keep when it vests after completing two years of service.
Initially, the government contribution would be a modest 1 percent of basic pay. After that, service members with between three and 20 years of service would be encouraged to contribute their own money to the TSP and the government would provide matching funds up to 5 percent of basic pay.
The automatic enrollment in the TSP would include diverting 3 percent of troops’ basic pay into the savings account. If they want to change that contribution level, they can contact their financial office to raise it or lower it to zero.
However, every January all service members will be re-enrolled for a 3 percent contribution.
“The military is very accustomed to reinforced training and by doing this every year, hopefully we will condition their thinking to the point where [they think] ‘OK this must be a good thing,'” said Alphonso Maldon, the commission’s chairman who is a former Army officer and former assistant secretary of defense for force management and policy.
According to the commission’s calculations, the proposed retirement benefit’s total value could be higher than the current system if service members contribute 3 percent of their basic pay and their lump-sum continuation pay to their TSP account.
The commission’s survey showed that service members prefer options and want to have more control over shaping their own benefits package.
The new proposal is underpinned with the hope or assumption that service members will make good, informed financial decisions and sacrifice short-term spending power for long-term financial security.
The change might be popular among millennials.
But that flexibility also opens the door to financially risky decision-making. For example, a service member could choose to buy a family car with his or her 12-year continuation pay, which would reduce the long-term value of his or her investment account.
Or, on a larger scale, a retiring service member could request his retirement benefit in a lump-sum check to start a new business. If that business goes bust, that retired veteran could be destitute just a few years after leaving the military.
The commission acknowledged the issue in their recommendations and suggesting the Pentagon pencil in $75 million annually to administer on-going financial literacy education programs for service members. Troops would attend annual classes on money management, according to the plan.
Health care changes
In addition to retirement changes, the commission will unveil a proposal to fundamentally change how health care benefits are provided to military families and retirees. Those now served by Tricare could move into the health care coverage provided to federal employees, according to several people familiar with the report.
The proposal calls for a new health care allowance for troops that would be designed to cover some expenses, such as doctor-visit co-pays and eyeglasses.
The plan also calls for the Pentagon to create a new four-star command to oversee the Pentagon’s sprawling health care system. Consolidation of the military system has been discussed for many years and would mark a significant break from the tradition of allowing each service to operate its own health care command.
The proposal calls for consolidating the commissary and exchange systems. Initially, they would keep their separate branding — Navy Exchange, Defense Commissary Agency, for example — but eventually would be combined.
Another morale, welfare and recreation aspect of the commission plan is building more brick-and-mortar child development centers on military bases, subject to the base commanders’ discretion. Military families have long complained of a lack of sufficient child care on many military installations.
Still unknown is how large the commission’s impact may be. Many experts say real change is unlikely in part because the commission’s proposals will not get fast-tracked to an up-or-down vote but will instead move through Congress’ normal arcane procedures.
Yet some veterans’ advocates say Congress may be spurred to action by several factors, including budget pressures created by the across-the-board spending cuts known as sequestration. And it may prove easier politically to tackle this sensitive topic now that far fewer troops are deployed in combat zones overseas than just a few years ago.
“You have this appetite for change just as long as it saves money. This has created this opportunity, if you could call it that, to give something like this … little scrutiny and quick implementation,” said Mike Hayden, the director of government relations for the Military Officer Association of America, which opposes curtailing military benefits.
One criticism that will swiftly emerge is that moving troops’ retirement into individual investment accounts will saddle them with new responsibilities for managing money, with many lacking the requisite skills.
The commission’s report is hardly the first proposed overhaul of the military retirement system.
In 2011, the Defense Business Board, a Pentagon advisory group, published a detailed proposal that would have replaced monthly pension checks with 401(k)-style investment accounts. That suggested the government contributions should be at least 16.5 percent of basic pay, with higher rates for deployed service members or high-demand career fields.
That plan went nowhere after it was criticized by service members, disavowed by the Pentagon leadership and landed with a thud on Capitol Hill.
Last March, the Pentagon’s personnel and readiness office broke its long silence on the topic and offered several detailed and complex alternatives to the current system: hybrid options that included both a TSP with government contributions as well as the promise of smaller, partial pension checks before traditional retirement age.
That plan also included some lump-sum payments for troops staying at least 20 years, offering a “transition pay” equal to as much as three years’ basic pay.
The nine-member commission is chaired by Maldon and other members are Pressler, Dov Zakheim, Edmund Giambastiani, Peter Chiarelli, Bob Kerrey, Christopher Carney, Michael Higgins and Stephen Buyer.