Military Retirement Pension Reform

The US Department of Defense is making a concerted effort to bring defense spending under control after the massive increases that occurred over the past decade. Since the cost to pay personnel, provide them health care and support after retirement now consumes one-third of the Pentagon’s base budget — about $180 billion per year — they, along with Congress, will be reviewing proposals for improved budgeting and retirement benefit reforms.

If left unreformed, military retirement costs are projected to grow to $217 billion by 2034, however, reform presents the greatest opportunity for savings. The reports are just the starting point for a conversation about reigning in government and military spending overall, but the process will be difficult as it is also imperative that the Pentagon fairly compensate and support the many members of the armed services and their qualifying families.

Current Military Retirement Standards

Service members who remain on active duty for a sufficient period of time (usually a minimum of 20 years) may retire and receive retirement pay. Members who become disabled while on duty may be medically retired and receive a disability retirement. There are four basic retirement plans available and each plan determines initial monthly retirement pay by taking the member’s retirement pay base and subjecting it to a percentage multiplier (Retired Pay Base X Multiplier %).

Four basic retirement plans:

  1. Final Pay: Prior to September 1980 you are eligible for the Final Pay retirement system which is based on your last month’s pay and a 2.5% multiplier for each year of service.
  2. High-36 Month Average*: Between September 8th, 1980 and August 1986 you are eligible for the High 36 system which is based on the average highest pay for 36 months of service with a 2.5% multiplier for each year of service.
  3. REDUX*: After August 1986 you are under the REDUX system, with the option to choose either the High 36 retirement system or the Career Status Bonus/REDUX (CSB) retirement system. This options is also based off average highest pay over 36 months with a 3.5% multiplier for every year over 20 years. If you decline to make a choice you will automatically receive the High 36 retirement plan.
  4. Disability – Qualified disabled military retirees get paid both their full military retirement pay and their VA disability compensation based on their years of service and/or disability rating.

*Servicemembers must choose between taking the “CSB/REDUX” with a $30K cash bonus (approximately $21K after taxes) and a 40% pension check, or the High 36 retirement system with no bonus and a 50% pension check.

Military Retirement Reforms Proposed to the Pentagon

The current military retirement program adheres to a strict vesting structure — military personnel with at least 20 years of service receive a pension for life while those who serve less than 20 years receive no retirement benefits. In addition, those who qualify to receive benefits can begin collecting their pension immediately upon retiring, allowing many retirees to receive their retirement pay at the age of 30 or early 40. On the whole, the system is becoming unmanageable.

As of March 2014, the Department of Defense began reviewing a range of options to bring equity and sustainability to the costs associated with paying retired servicemembers. They are weighing several options: keeping the current system, adopting a less generous cost-of-living adjustment for retirement pay, and two options for 401K type retirement incentives, both of which would include a defined contribution element that would not require member contributions. The retirement annuity will pay less than under the current system, however, it is offset by the addition of a new defined contribution element and supplemental pays effectively shifting a portion of the deferred compensation to current pay.

The defined-contribution plans would take the form of a Thrift Savings Plan (TSP), in which the department would be required to make contributions on behalf of servicemembers, who would be vested after six years of service — opening financial support to many who serve active duty but do not intend to make a career out of service. The supplemental pay would include a lump-sum separation to service members upon retirement at 20 years, and a continuation pay to enlisted personnel at 12 years of service or officers at 16 years of service.

Navigating Military Retirement from Civilian Professionals

Our active duty military personnel, veterans and their families deserve access to top quality pay and retirement benefits. It is important they have the expert knowledge and support of a financial advisor or retirement planner to help them set and achieve any and all financial goals.

As the government goes through reforms, speak with a trusted financial advisor to ensure you and your family’s needs are being met. If you do not qualify for military retirement benefits, then you will want to consider other options such as savings, personal IRAs, annuities and investment which you can carry over into civilian life.

Need a referral to a great retirement advisor? Let me know. —

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