Military Advantage

Congress Steps Toward New 'Blended' Military Retirement

By Tom Philpott

Congress on Thursday took a first, perhaps historic step toward phasing out the 20-year-or-bust retirement system the U.S. military has used to shape and retain its career forces since the end of World War II.

The replacement plan, as endorsed by the House armed services’ personnel subcommittee, is a blended system that would cut by 20 percent the value of future force annuities in return for an added tool to build nest eggs earlier -- a 401(k)-like Thrift Savings Plan with government matching of service member TSP contributions.

The enhanced TSP, with matching of monthly deposits of up to five percent basic pay, would provide something the current High-3 plan cannot: portable retirement benefits available not only to careerists but most of the 83 percent of service members who leave service short of 20 years.

To ensure enough members stay for careers, the blended plan also would offer at the 12-year mark a continuation payment, to be paid usually as a lump sum equal at least to 2.5 percent times monthly basic pay, if members will commit to serving four more years. At 16 years, the pull of an immediate lifetime annuity at 20, even though reduced, still should be effective, according to force modeling tools.

The personnel subcommittee, led by Rep. Joe Heck (R-Nev.), would mandate the revised retirement plan for anyone entering service for the first time on or after Oct. 1, 2017. Members already in service, or reentering the military after that date, would be given the choice to stay under the current High-3 retirement plan or opt in to the blended plan.

The House panel endorses all but two features for reforming retirement that the Military Compensation and Retirement Modernization Commission unveiled in January. Heck and colleagues rejected the idea of allowing members on date of retirement to accept a lump sum rather than full or partial military annuities until age 67.

The lump sum was to give new retirees a cash-out option until old age to be able to buy a home or start a business years before actual retirement. It would have saved the government money over time. It seems Heck and colleagues feared potential financial disasters that could befall retirees who would trade 20 or more years of inflation-adjusted annuities for ready cash. For members eyeing longer careers, the House panel also rejected the commission’s premise of ending government matching of TSP contributions at the 20-year mark. The House panel plan would allow matching to continue through 30 years of service. This would lower projected cost savings from the new plan by about $150 million a year.

Still the blended plan, by encouraging both active and reserve component members to use markets to grow part of their own retirement, is expected to lower Defense Department retirement costs by more than $30 billion through 2021. Annual steady state savings, in 2016 dollars, would be $8.5 billion when fully implemented in 2047.

Both critics and some commissioners had advised lawmakers to provide government matching of TSP contributions beyond 20 years. Otherwise, lifetime benefits for longer-serving members would be significantly reduced compared to current benefits under High-3 plan.

But even without matching past 20 years, the commission said its blended plan still would allow the services to sustain force profiles -- that is, keep desired numbers and quality of personnel out to 30 years. So the step taken by House panel is to quell complaints or ensure more fairness across generations of retirees and not a move to ensure career force requirements.

The retirement reforms are found in the personnel section of a draft fiscal 2016 defense authorization bill that the full House Armed Services Committee will vote on next week. Rep. Max Thornberry (R-Tex.), chairman of the full committee, said Senate colleagues also are ready to take up retirement reforms as endorsed by the commission after two years of study.

Sens. John McCain (R-Ariz.), chairman of the Senate Armed Services Committee, and Lindsey Graham (R-S.C.), personnel subcommittee chair, have signaled they believe military retirement needs to be modernized. The current plan, adopted in 1945, provides an immediate annuity equal to 50 percent of basic pay after 20 years of service. Annuities climb by another 2.5 percent of basic pay for each year served beyond 20.

The blended plan would provide only 40 percent of basic pay after 20 years and two percent more for each added year served. Thus the new plan would pay 60 percent of basic pay after 30 years versus 75 percent.

Blended plan participants, however, automatically would be enrolled in a TSP with government matching and be fully vested in the account balance after only two years service. Enrollment would be automatic with members having to opt out annually to avoid making even minimum contributions and matching. The services would have to develop financial education plans to ensure members understand TSP investment options and other factors impacting their financial health.

Most current members with 12 or more years of service would be expected to decline the new plan. They wouldn’t be eligible for the continuation payment and older careerists would not have enough service years remaining to build TSP balances big enough to cover the 20 percent hit to immediate annuities after 20 years or more service.

Still, the commission estimates 40 percent of the current force would switch to the blended plan. Some military associations criticize it for offering new benefits to those who leave early by lowering retired pay of future careerists. They also worry too much of the burden and risk of securing a robust retirement will shift to individuals. They argue too that portability of TSP accounts could create force retention challenges particularly in times of sustain conflict or booming civilian job markets.

The House panel appears to accept commission arguments that TSP options are relatively safe and conservative, that even careerists stand to gain in total lifetime benefits if they are steady, informed and disciplined fund investors, and that a good education programs will ensure that most are.

Meanwhile, rather than leave service with no retirement, the typical enlisted at four years could have a TSP worth $4400, assuming they contribute four percent of basic pay and see average annual returns of 7.3 percent, the return rate on TSP overall since 2001, the commission said.

The typical enlisted member who serves eight years, under the same assumptions, would have savings of $13,000, it said. An officer after four years could leave with almost $8500 or, after eight years, with $26,000.

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