America's Military Needs a New Retirement Plan
After half a decade of study, the Pentagon has proposed to Congress a radical overhaul of the military retirement system. The new plan addresses the unfairness of a system in which most who serve in uniform earn nothing toward their future retirement but makes serving a full career less attractive. More importantly, while the primary incentive for the new plan is to improve military readiness by reducing the cost of retirees, it’s doubtful the plan will actually save money given its reliance on retention bonuses and failure to address the massive issue of healthcare costs.
For generations, the Department of Defense has enticed people to make a career of the military by offering a generous pension after at least twenty years of service. Known as “cliff vesting,” those who served for fewer than twenty years got nothing while those who made it to twenty get 50 percent of their base pay for life upon retirement. Those who stay in past twenty years defer that benefit but accrue an additional 2.5 percent of their pay a year, maxing out at 75 percent at thirty years.
While there has been some modest tinkering with the system over the years, the basic concept has remained the same for some seven decades. When my father retired from the U.S. Army in 1982, his pension was based on his highest paycheck; nowadays, they are based on the average of the highest three years of pay. Additionally, for a brief time starting in the mid-1980s, the pension was reduced to 40 percent at twenty years but with an additional 3.5 percent per year thereafter to entice people to stay in through thirty years; it reverted to the old system very quickly.
If the new plan is adopted, future personnel would get only 40 percent of their base pay at the 20 year mark but they would ostensibly be made whole by a higher payout starting at the age of fifty nine and a half years. And, for the first time, those who served honorably at least two years would get at least something at that 59.5 year mark.
It should be emphasized that the new plan would not affect those currently in uniform unless they opt into it. While it would be mandatory for new personnel, those serving now would have a choice between the existing system and the new one. Indeed, the proposal would phase the plan in starting in 2018 to give the services time to educate their force on the best choices given their personal situation.
Fixing the Fairness Issue
One major problem with this system is that it leaves 83 percent of enlisted personnel and 51 percent of officers with no retirement savings at all. While that wasn’t a major concern in the days of the draft, when every able-bodied man was expected to serve, it seems manifestly unfair after a quarter century of near-constant deployments to combat zones for the 1 percent of Americans who volunteer for service. Additionally, we’re living longer and need much more savings for retirement. The loss of those early years of investment is devastating given the value of compound interest.
The new plan addresses this inequity by automatically enrolling all new personnel into the Thrift Savings Plan (TSP) that other government workers, including DoD civilians, use as their primary retirement vehicle. The DoD would contribute 1 percent of base pay into the account upon entry into service and members would be required to automatically deposit 3 percent of their base pay into the fund, being allowed to opt out only after “completion of financial literacy training at their first permanent duty station.” Additionally, DoD would match member contributions up to 5 percent.
Members would vest after two years and the account would be portable. The plan’s authors estimate that “approximately 85 [percent] of Service members would receive some measure of retirement benefit,” with the balance leaving the service before completion of two years. Like typical private sector plans, the money would not be available until the age of 59.5 absent certain emergencies. Those discharged for punitive reasons would lose the DoD contribution but not their own investment.
Unfortunately, the white paper announcing the plan offers no information on how much this concession to fairness would cost. Given the claim of overall cost savings, however, it’s a transference from those who serve a full career to those who serve only a few years.
Most of the various studies and commissions over the last few years have proposed doing away with the twenty year-50 percent pension model, with some doing so without grandfathering those currently serving. While that would certainly yielded more robust savings, it was both a political non-starter and a breach of faith.