Policy Veterans Network

A Review of the Proposed U.S. Military Retirement Changes

Written by AJ Powell

Service members of the U.S. Armed Forces have been able to receive retirement benefits after a career in uniform in the service of the nation since 1861 (for officers), and 1885 (for enlisted), and although legislation over the last century has led to many improvements in the military retirement system, there is still a long way to go before the military retirement system is on par with the fair compensation expectations expressed by service members themselves. Currently, Congress, the White House, and the Pentagon support legislation to overhaul the U.S. military retirement system in favor of a combined 401(k)/Annuity system. The new system would remove the long-standing “all or nothing” hallmark of the current system and finally give service members with less than 20 years of service retirement benefits closer to those their civilian counterparts receive. This resounds of the long overdue improvement Veterans have been demanding for a long time now, and to which many studies have suggested are required in order to retain the best talent while reducing the systems burden on the federal budget.

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Yet, while this bill would finally bring the Department of the Defense closer to alignment with the types of benefits received in the civilian sector, evidence suggests that changing the current system has been brought up repeatedly since the 70’s, and data analysis shows consistent patterns of legislative actions putting off DoD benefit system reform time and again to focus on the systemic issues within the Veterans Administration instead. The only real questions that remain, are how exactly will the new system be implemented, when, and how will it impact current and future retiree’s? How will it address service member and retiree concerns? And how will the new system be effective at improving retiree benefits while lowering costs to the federal government?

Purpose of the U.S. Military Retirement System

The current United States Military retirement system is a clearly defined benefit in the form of a fixed annuity plan based on percentage of base pay at time of retirement, and further indexed for inflation. For the most part, despite legislative tweaks over the years, the current military retirement system we all know today hasn’t changed much since all services adopted full retirement authority in 1948. Some of the changes over the years have included system alteration to compute payment under the “High 3” principle in 1981. In 1984, payment for retiree pay was moved into a new Retirement Fund. In 1986, the “REDUX” plan was added to the system followed by the introduction of the Thrift Savings Plan. And finally, early retirement at 15 years of service has been offered and retracted numerous times since WWII, and is once again being offered to service members today.

There are some major differences between the military retirement system and any other retirement system in the federal government or any retirement system offered to any civilian employee as well. To start, retired service members are subject to recall to service at any time. No other retired federal employees are required to suffer such obligations, and very few civilians in the nation who have never served in uniform would ever accept such a contractual obligation. Further, retired service members are still subjected to certain restrictions imposed by the Uniformed Code of Military Justice. These two facets alone are enough to set the military retirement system apart as unique, but there is a very misunderstood reason as to why these impositions are incorporated into the system itself. The vast majority of people have little to zero understanding of the intended purpose behind the military retirement system. It is often referred to as “Retainer Pay”, and the Supreme Court has even characterized it as “Reduced pay for reduced levels of military service” (Breth, 1998). What most people fail to understand is that military retiree’s are not actually “retired”. Instead, they are placed on a retiree reserve list and, should the nation ever go to war and require them for augmentation purposes and for their experience, they may be recalled at any time. This means that retired U.S. military service members are – in fact – still service members for life.

As noted in the in-depth analysis of Breth (1998), “The principle motivations guiding the evolution of the military retirement system have been to ensure that:

  1. Continued service in the armed forces is competitive with the alternatives;
  2. Promotion opportunities are kept open for young and able members;
  3. Some measure of economic security is made available to members after retirement from a military career;
  4. A pool of experienced personnel is available for recall in times of war or national emergency; and,
  5. The costs of the system are reasonable” (p. 7).

What this means, is that the military retirement system was never really intended to be exactly that – a system for individual retirement – but rather instead, was designed as a tool for the DoD to use in recruitment and retention, resource and manpower allocation, and additional force projection capabilities if and/or when needed. The single aspect of providing “some measure of economic security” is, in reality, limited pay for limited service. However, that in no way means that service members have not historically seen their retirement benefits exactly as such.

Service members who qualified for retirement have traditionally viewed the transition as exactly as the name would imply – retirement from the military. While some who have spent a career of 30 years or more in uniform often take the opportunity to retire completely, also traditionally, this is very often only afforded to officers – who’s privileged pay is far greater than their enlisted counterparts, even for those at the very top of the enlisted pay scale. What this means is that most service members who retire chose to do so at the more common 20-year-mark. At 20 years, the current system only offers the retiree a mere 50% of their current basic pay, leaving many unable to retire. Historically, a service member who served for 20 years, and now needs to seek a second career due to massive loss of income, finds themselves between a rock and a hard place. Very often it is the case that they are told by prospective employers that they are too old for a second career. Even still, despite that, legislative reform has consistently sought to reduce retiree pay benefits entitled to service members in order to save money for use elsewhere in the federal budget. A notion to which has angered the nations service members and Veterans too many times to count for reasons that will be discussed later.

But in no way does this mean that a change would be a bad thing, or that it would not be worth it. Even decades ago there has been a recognized need for a positive change in the military retirement system. Elmer Staats – the U.S. Comptroller General at the time – conducted an extensive analysis on the current U.S. military retirement system decades ago[1] and concluded that, “Twenty-year retirement, in conjunction with present personnel management policies, is an inefficient means of attracting new members, causes the services to retain more members than are needed up to the 20-year point, provides too strong an incentive for experienced personnel to leave after serving 20 years, and makes it impossible for the vast majority of members to serve full careers” (Staats, 1978). To him, there was a recognized need to change the system because it did not agree with current policies and did not promote effective retention standards. But all that could finally change as restructuring the military retirement system is finally on the systemic agenda for once.

Legislative Actions and Concerns About Changes to the Current System

Introduction

The Military Compensation and Retirement Modernization Commission (MCRM) was established by the National Defense Authorization Act FY 2013 – under Public Law 112-239, 126 Statute 1787 (2013) – to conduct a review of military compensation and retirement systems and to make recommendations to modernize such systems in order to:[2]

  1. Ensure the long-term viability of the All-Volunteer Force by sustaining the required human resources of that force during all levels of conflict and economic conditions;
  2. Enable the quality of life for members of the Armed Forces and the other uniformed services and their families in a manner that fosters successful recruitment, retention, and careers for members of the Armed Forces and the other uniformed services; and
  3. Modernize and achieve fiscal sustainability for the compensation and retirement systems for the Armed Forces and the other uniformed services for the 21st century.

The commission envisions military compensation modernization as creating substantial opportunities to improve the flexibility and overall cost effectiveness of military compensation while providing a benefits package that is valued by and protects the quality of life of the 21st century force.

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The 20-year retirement model has served as a major military recruiting tool for decades, offering service members a limited pension while still in their prime working years. But critics have noted that troops fatigued by multiple combat tours and who have decided to leave the service because of it, who are unsettled by frequent military moves, and even those who are forced out due to budget cuts, are left with no employer-backed retirement offerings, even though most of their civilian counterparts have one. The figures of service members who chose to leave for one reason or another – not including those who are forced into medical retirement due to injuries – constitutes nearly 83 percent. The Commission seeks to push for changes to recognize that estimated 83 percent of service members who leave the military with no retirement benefits at all because they exit service prior to the 20-year mark. The new “blended” style compensation system – complete with a 401(k)-style investment plan – promises all future troops will leave the service with some money for retirement.[3]

Benefits for the Change.

The new system would call for automatic federal contribution equal to 1 percent of a service members basic pay each month into a 401(k)-style investment account, regardless if service members chose to contribute anything at all. Individuals who do choose to participate in investing in the system would have the opportunity to contribute up to 5 percent of their basic pay to which the government would match in an equal amount. This new system would more closely mirror the very same types of 401(k)’s used throughout the private sector, as well as expand upon the already in-use Thrift Savings Plan investment offered as a part of the current retirement benefits system. Further still, the traditional monthly life-long annuity used today by the current system will still be offered to all those who stay for a full 20 years or longer. However, one of the many issues with critics is that this annuity is being reduced by 20 percent.

Service Member and Veteran Retiree Concerns

Many fear that changing the current system today is damaging the potential future of the forces abilities to recruit and retain talented service members, as well as – yet again – destroying the fair compensation benefits service members have rightfully earned. There are fears that recently proposed legislation is nothing more than yet another means of stripping away the nations heroes earned benefits, while at the same time, using them as bargaining tools for corrupt personal political gain in the budgetary war on capitol hill. Many Veterans scream at Congress to reform their own Congressional benefits instead – considering that the lowest paid member of Congress starts off at $141,000 per year and gets 100 percent retirement with full benefits after only one term. Compare that to service members who are required to give a minimum of 20 years doing the nations most dangerous jobs before they are eligible to receive a mere 50 percent of their basic pay only, scaled back benefits, and are still subject to recall at any time.

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Further still is the fact that reducing that 50 percent by another 20 percent will severely damage the financial survivability of those consistently forced into a lower class and standards of living – Enlisted service members and retirees. One look at the U.S. military pay tables of any year in history will show you that officers have always consistently received double, and down the line even quadruple, what their enlisted counterparts receive in basic pay alone. Many have argued that this is rightfully due to educational and occupational differences, however, more than two-thirds of today’s enlisted force have university degrees, some even advanced degrees on-par or greater than their officer commanders, and further still, the NonCommissioned Officers of today are expected and demanded to take on far more leadership roles that directly impact the success of operations in nearly every way. There has – in the last 2 decades – been argument that the traditional social and pay class segregation historically a part of the U.S. military’s structure stands as the final barrier that is responsible for the form of discrimination most prevalent throughout all branches of the military to this day – Rankism – and that it is beyond time to reshape the force into a more integrated structure and finally start compensating NCO’s at a level consistent with their already expected duties and requirements. Those facts aside, as if 50 percent after 20 years isn’t already hard enough for enlisted retirees, slashing another 20 percent from that is an outrage to those who earned what little they are rightfully entitled to.

Attraction of New Recruits and Retention of Current Service Members

Finally, some have made the argument that implementation of the new system would decimate the senior NonCommissioned and officer ranks, by giving them too much incentive to start a civilian career earlier and not enough incentive to stay for 20 years. The concerns are that changing the way the system is setup will remove an incentive for individuals to want to join the military and stay in for a career. It is a long-known fact that recruitment and retention efforts for an all-volunteer force are historically difficult. We can see financial evidence to each department’s adaptive efforts over the years with the use of advertisements, bonuses, and special pays and perk incentives for those in specific career fields. We can also see cultural evidence of this in the historically negative manner in which individuals who expressed an interest in leaving after completion of current contractual obligations have been treated in horribly negative ways. Everything from public shaming to outright being ignored by their own commands during the transition process has been cited time and again by Veterans over the years. However, the commission has at least made the effort to try and address these concerns from the financial aspect. In an effort to further provide an incentive for service members to stay on longer, the new system would also offer a lump-sum-style “continuation pay” bonus for service members who decided to stay in service beyond 12 years. It is the hopes that such a bonus for mid-career level individuals would provide incentive enough to retain much needed talent and leadership until they reach the minimum 20-year mark which qualifies them for retirement and the annuity side of their retirement benefits.

Looking Toward the Future

There have been consistently expressed fears by current service members and retirees that the changes would alter their current retirement benefits. However, Congress prohibits the Commission’s recommendations from affecting the retirement eligibility date or the amount of retirement pay to the detriment of service members serving or who have retired before such recommendations are enacted, and further still, the new plan not only grandfathers current retirees, but offers current service members the option to participate or opt-out if they so choose. For all new recruits after the proposed 2017 implementation date, however, this new plan would bring with it long called for changes to a system that has never fairly compensated service members who chose to leave for one reason or another in congruence with their civilian counterparts. Congress, the White House, and the Pentagon all agree that the new system would – for the first time – provide a retirement benefit to service members who serve for less than 20 years. The key part now will be finding out exactly how Congress and the DoD plan to address the demands of Veterans who scream it is unfair to cut the current annuity rates by 20 percent. All in all, it’s not like the nations heroes 1: haven’t earned it – especially more than the nations lawmakers have gained theirs, and 2: currently already do not make enough to actually retire with by 20 years – unless the service member is an officer.


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References:

Breth, B. (1998). An Historical Analysis and Comparison of the Military Retirement System and the Federal Employee Retirement System. U.S. Naval Post Graduate School. Monterey, CA.

Staats, E. (1978). The 20-Year Military Retirement System Needs Reform. Report to the Congress of the United States. Office of the Comptroller General, General Accounting Office. Washington, D.C.

[1] U.S. Government Accountability Office: Retirement Security – The 20-Year Military Retirement System Needs Reform. FPDC-77—81: Published 13MAR1978. Retrieved from: http://www.gao.gov/products/FPCD-77-81

[2] Military Compensation and Retirement Modernization Commission. Retrieved from: http://www.mcrmc.gov/index.php/about

[3] Shane III, L. (2015). Military Retirement Overhaul on Fast Track. Retrieved from: http://www.militarytimes.com/story/military/benefits/retirement/2015/04/27/retirement-overhaul-concerns/26244915/



About the author

AJ Powell

AJ is a retired U.S. Army NCO who served in both the U.S. Navy and U.S. Army. He is a combat veteran, and has participated in contingency operations around the world. AJ is a graduate of Pennsylvania State University with a focus on Sociology and a degree in Organizational Leadership, and is published in the field of sociology. AJ is an inductive analyst, writer of military and leadership articles, aviator, a certified advanced operational diver, professional mentor and adviser, snowboarder, motorcycle rider, world traveler, and enjoys long distance endurance events.

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