October 23, 2015

We’ve told you the FY 2016 Defense Authorization Act includes a dramatic overhaul of the military retirement system that reduces retired pay value by 20 percent and substitutes a lower-value savings match under a 401(k)-style system.

We’ve also told you the new plan will be imposed only on new service entrants on or after Jan. 1, 2018. 

In other words, all currently in uniform and everyone already retired will be grandfathered under the current retirement system.

But that’s definitely not the same thing as saying, “No currently serving or retired servicemember will experience any financial penalty from this change.”

Now that I have your attention, let’s look briefly at the new system.

Reduced retired pay: Instead of providing 2.5 percent of the highest three years’ average basic pay for each year of service (50 percent at 20 years; 75 percent at 30), it provides 2 percent per year (40 percent at 20 years; 60 percent at 30).

Thrift Savings Plan (TSP): To help offset the lost retired pay, servicemembers will be expected to contribute part of their pay to a 401(k)-like TSP.

Government TSP contributions: DoD will put 1 percent of basic pay in each servicemember’s TSP account each year. Starting after two years of service, DoD also will match the servicemember’s contribution up to 4 percent of basic pay. Matching deposits will stop after 26 years of service. 

Vesting: Unlike the current system, servicemembers separating after one or more terms would be able to keep the government contributions to their TSP.

Lump-sum retired-pay option: Retirement-eligible servicemembers will be able, if they choose, to receive a portion of their retired pay as a lump sum. The option is to take 25 percent or 50 percent of the total retired pay they would draw between initial receipt of retired pay and age 67. But the amount would be steeply discounted for every year before age 67.

The new system will save DoD more than $13 billion in the first 10 years alone. 

In effect, it makes people who serve 20-plus years substitute their own money for the government’s. It also makes career servicemembers foot the bill for new payouts to separatees.

We’re also concerned the lump-sum payment will entice too many retiring servicemembers to forfeit a very large amount of retired pay for a small fraction of the value in a lump sum. DoD and Congress bash payday lenders for doing essentially the same thing.

Some ask, “Why are you making a big deal about this, since it will be years and years before anyone retires under the new system, and it doesn’t affect anyone already serving or retired?”

For one thing, wrong is wrong. If these changes were being inflicted on today’s retirees, we’d say the reduced pay is not commensurate with their sacrifice. We don’t think future servicemembers’ sacrifices will be any less. 

MOAA has no problems with a vesting provision, but the fact that the changes save billions even after adding this big new cost tells you this is a drill to save money at the expense of those who serve longest and sacrifice most.

All the talk about rising personnel costs is simply code for “We don’t think your service and sacrifice is worth what we’re paying you.” MOAA disagrees.

But what’s particularly wrong about this drill is it’s not just future retirees being made to foot the bill.

Because of the technicalities of congressional budgeting, the changes “scored” as having some relatively near-term costs.

And to solve that problem, Congress turned to…you.

The next time you pay more for your TRICARE-covered medications, you won’t have to wonder where the extra money went. It went to cover start-up costs for the new military retirement system that (mostly) grandfathered you.