• Cost of Living Increases
• Table: COLAs Since 1991
• Relationship of Retired Pay to Military Compensation
• Outlook

There are three distinct non-disability benefit formulas related to three populations within the military retirement system. Military personnel who first became members of the armed services before September 8, 1980 have retired pay equal to terminal basic pay times a multiplier. The multiplier is equal to 2.5 percent times years of service and is limited to 75 percent of terminal basic pay. If the retiree first became a member of the armed services on or after September 8, 1980, the average of the highest 36 months of basic pay is used instead of terminal basic pay. Members first entering the armed services on or after August 1, 1986, who elect to receive a mid-career retention bonus, are subject to a penalty if they retire with less than 30 years of service; at age 62, their retired pay is recomputed without the penalty.

Retiree and survivor benefits are automatically adjusted annually to protect the purchasing power of initial retired pay. The benefits associated with members first entering the armed services before August 1, 1986 are adjusted by the percentage increase in the average Consumer Price Index (CPI). This is commonly referred to as full CPI protection. Benefits associated with members entering on or after August 1, 1986, who elect to receive a mid-career retention bonus, are annually increased by the percentage change in the CPI minus one percent. When the military member reaches age 62, the benefits are restored to the amount that would have been payable had full CPI protection been in effect. However, after this restoral, partial indexing (CPI minus one percent) continues annually for life.

For non-disability retirement, the current system allows for voluntary retirement upon completion of at least 20 years of service at any age, subject to Service Secretary approval. The military retiree receives immediate retired pay calculated as base pay times a multiplier. Base pay is equal to terminal basic pay if the retiree first became a member of the armed services before September 8, 1980. It is equal to the average of the highest 36 months of basic pay for all other members. The multiplier is equal to 2.5 percent times years of service, rounded down to the nearest month and is limited to 75 percent. Members first entering the armed services on or after August 1, 1986, who elect to receive a mid-career retention bonus, and who retire with less than 30 years of service receive a temporary penalty until age 62. The penalty reduces the multiplier by one percentage point for each full year of service under 30. For example, the multiplier for a 20-year retiree would be 40 percent (50 percent minus 10 percent). At age 62, the retired pay is recomputed with the penalty removed. In FY 99, 1.35 million nondisability retirees from active duty were paid $26.4 billion.

A disabled military member is entitled to disability retired pay if the disability is rated at least 30 percent (under a standard schedule of rating disabilities by the Veterans Administration) and either (1) the member has eight years of service; (2) the disability resulted from active duty; (3) the disability was incurred prior to the members eligibility for basic pay during the current period of active duty and the member has at least eight years of active service or (4) the disability occurred in the line of duty during a time of war or national emergency or certain other time periods.

In disability retirement, the member receives retired pay equal to the larger of (1) the accrued non-disability retirement benefit, or (2) base pay multiplied by the rated percent of disability. The benefit cannot be more than 75 percent of base pay. Only the excess of (1) over (2) is subject to federal income taxes. Base pay is equal to terminal basic pay if the retiree first became a member of the armed services before September 8, 1980. If the retiree first entered the Services on or after September 8, 1980, base pay is equal to the average of the highest 36 months of basic pay.

Members whose disabilities may not be permanent are placed on a temporary-disability retired list and receive disability retirement pay just as if they were permanently disabled. However, they must be physically examined every 18 months for any change in disability. A final determination must be made within five years. The temporary disability pay is calculated like the permanent disability retired pay, except that it can be no less than 50 percent of base pay. In FY 99, 107,006 disability retirees were paid $1.37 billion.

Members of the Reserves may retire after 20 years of creditable service, the last eight of which must be in a Reserve Component. However, Reserve retired pay is not payable until age 60. Retired pay is computed as base pay times 2.5 percent times years of service. If the Reservist was first a member of the armed services before September 8, 1980, base pay is defined as the active duty basic pay in effect for the retiree’s grade and years of service at the time that retired pay begins. If the Reservist first became a member of the armed services on or after September 8, 1980, base pay is the average basic pay for the member’s grade in the last three years that the member was a member of the armed services. The years of service are determined by using a point system where 360 points convert to one year of service. Typically, one point is awarded for each drill period performed with 15 points being awarded for a year’s membership in a Reserve Component. A creditable year of service is one in which the member earned at least 50 points. A member cannot retire without 20 creditable years, although points earned in non-creditable years are used in the retirement calculation. In FY 99, 233,000 Reserve retirees were paid $2.39 billion.

The National Defense Authorization Act for FY 93 (P.L. 102-484) established Temporary Early Retirement Authority (TERA) for the military services to offer early retirements to members with more than 15 but less than 20 years of service. The retired pay is calculated in the same way a 20-year retirement is calculated except that there is a reduction of one percent for every year below 20 years of service. Part or all of this reduction can be restored at age 62 if the retired member works in a qualified public service job during the period from the date of retirement to the date on which the retiree would have completed 20 years of service. Unlike members who leave military service before 20 years with voluntary separation incentives or special separation benefits, these early retirees are treated like regular military retirees for the purposes of other retirement benefits. This authority is scheduled to expire September 30, 2001. As of September 30, 1999, there were 53,000 TERA retirees receiving retired pay at an annual rate of $637 million.

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Cost of Living Increases

All non-disability retirement, disability retirement, and most survivor annuities are adjusted annually for inflation. Cost of Living Adjustments (COLAs) are automatically scheduled to occur every 12 months on December 1st and reflected in checks issued at the beginning of January. The “full” COLA effective December 1 is computed by calculating the percentage increase in the CPI from the third quarter of the prior calendar year to the third quarter of the current calendar year. The increase is based on the Urban Wage Earner and Clerical Worker Consumer Price Index (CPI-W) and is rounded to the nearest tenth of one percent.

The benefits of retirees (and their survivors) who retire from the armed services under the pre-August 1, 1986 retirement systems are annually increased with the full COLA; all other benefits are annually increased with a “partial” COLA. The partial COLA is the full COLA minus one percent. A one-time restoral is given to a partial COLA recipient on the first day of the month after the retiree’s 62nd birthday. At that time, the retiree benefit (or survivor benefit if the retiree is deceased) is increased to the amount that would have been payable had full COLAs been in effect. Annual partial COLAs continue after this restoral. Pay increases in recent years have generally followed the CPI-COLA formula, with a few exceptions. The following chart depicts COLAs since 1991.

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COLAs Since 1991

Annual cost of living adjustments are normally effective on December 1 and are received in January checks.

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Relationship of Retired Pay to Military Compensation

Basic pay is the only element of military compensation upon which retired pay is computed and entitlement is determined. Basic pay is the principal element of military compensation that all members receive, but it is not representative, for comparative purposes, of salary levels in the public and private sectors. Reasonable comparisons can be made to Regular Military Compensation (RMC). RMC is the sum of (1) basic pay, (2) cash or in kind allowances (the housing allowance, which varies by grade, location, and dependency status, and a subsistence allowance) and (3) the tax advantages accruing to allowances because they are not subject to federal income tax. Basic pay represents approximately 73 percent of RMC for all retirement eligibles. For the 20-year retiree, basic pay is approximately 69 percent of RMC. Consequently, a 20-year retiree may be entitled to 50 percent of basic pay, but only 34.5 percent of RMC. For a 30-year retiree, the corresponding entitlements are 75 percent of basic pay, but only 59 percent of RMC. These relationships should be considered when military retired pay is compared to compensation under other retirement systems.

Outlook

The issue that concerns military retirees the most is health care. Other important issues include concurrent receipt of military retired pay and disability compensation; survivor’s benefits; cost-of-living increases; mail-order pharmacy services; and the availability and use of commissaries and exchanges. These concerns, as well as others, have been taken up by the Military Coalition, which raises issues of concern to retired military personnel to the Congress. There are numerous associations and organizations that continuously lobby the Congress to improve benefits for military retirees. It is likely that many of the issues that are of interest to military retirees will be considered during this session of Congress. It is also possible that many of the issues will be acted upon early, which will allow members to return to their home states to campaign for the elections.

A major topic of discussion for 2000 focuses on retiree health care. This topic continues to be a top issue not only for retirees but is also having a significant impact on readiness, recruiting and retention. H.R. 2966, the “Keep Our Promise to America’s Military Retirees Act” would restore health care to Medicare-eligible uniformed services retirees, including spouses and widows. It would also ensure that military personnel would receive fully paid health care upon retirement and allow Medicare-eligible military retirees coverage under the Federal Employees Health Benefits Program (FEHBP). In addition, the bill would extend TRICARE eligibility to retirees over age 65. This bill has over 200 cosponsors in the House and is receiving overwhelming support from the military coalition. The Senate will likely introduce a similar bill during the current session.

There are several other bills before the 106th Congress that would affect retirees if enacted. Some of these bills are: H.R. 113 which would remove the cap on the number of enrollees and geographical restrictions for participating in the FEHBP demonstration conducted by the Department of Defense for Medicare-eligible beneficiaries; H.R. 205 which would permit covered beneficiaries also entitled to Medicare to enroll in the FEHBP; H.R. 1067 which would improve access to Military Treatment Facilities for military medical beneficiaries over age 65, provide Medicare reimbursement, and permit such persons to enroll in FEHBP; and H.R. 303 and H.R. 65 which would allow concurrent receipt of military retired pay and Veterans Disability pay, eliminating or reducing the requirement to make a dollar for dollar forfeiture of military retired pay to receive veteran’s disability compensation; and others.

Another measure that is receiving strong support from the military coalition is expansion of TRICARE Senior Prime nationwide and to make it a permanent program. H.R. 1413 and S. 915 would expand TRICARE Senior Prime to ten additional locations and would require implementation across the remaining TRICARE Prime catchment areas no later than October 1, 2002. These bills would also make TRICARE Senior Prime a permanent program and would allow Medicare-eligible beneficiaries to receive care on a fee-for-service basis.

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Much of this information has been provided by the Uniformed Services Almanac.™
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