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Will Congress change military retirement?

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Brandi commented in the previous post:

I can’t wait to snag a copy of your book this summer, and I am looking forward to your post on asset allocation considerations when you are getting a military pension. I do have a question for you – with politicians in Congress in charge of our compensation, and the nation facing a large budget deficit, do you see any changes to the current retirement system in the future? I can’t see Congress making drastic changes without grandfathering people in, but I am 15 years and 3 months from collecting a pension, and that seems like plenty of time for something to change. We know changes could be coming to TriCare premiums soon, but what else do you see as possible? Eliminating COLA increases? Reducing the percentage of base pay given? Increasing the age at which you can start collecting the pension? A shift to a defined contribution plan? Just curious to see what theories are out there – and trying to keep my expectations low!

I can understand everyone’s concern that military pay and benefits could suffer yet again as Congress tries to balance the budget and maybe even cut the nation’s debt.  However I don’t see any major changes to the military’s pay or retirement systems– it’s been tried before and it didn’t work out so well. Here’s the background.

I’ve been retired for nearly nine years after a 20-year career, and I’ve seen a few pendulum swings. I was a midshipman when Ronald Reagan was elected president. At a morning formation shortly after the inauguration I learned that my pay had jumped by nearly 25%. Enthusiasm was running hot for a long time after that news. The “hollow force” post-Vietnam era was ending and the all-volunteer force began to improve.

I started my career under what became known as the “Final Pay” retirement system. A different kind of “enthusiasm” swept the military later in the 1980s when Congress tinkered with Final Pay. The new “High Three” calculation reduced the retirement system’s “base pay” about 5% by averaging the highest three years of pay before retirement. These changes were seen as typical adjustments to the federal retirement system, along with the federal government’s civil-service retirement changes and the nation’s growing 401(k) programs. Back then the military was still struggling to expand and confront the Soviet Union’s “Evil Empire”, and this retirement change wasn’t met with exactly the same sort of enthusiasm as the pay raises received. However the economy was still recovering from high inflation, jobs were scarce, and the military was hiring. The military was able to meet its retention goals by introducing more targeted bonuses for officers and by raising re-enlistment bonuses, so the personnel situation didn’t seem so bad.

Then Congress passed the REDUX retirement bill. The original version of this system encouraged longer career service by reducing the 20-year retirement to 40% of base pay (instead of today’s 50%). By the mid 1990s, however, retention had plummeted. Some of this was due to the end of the Cold War, the disruption of the DESERT STORM mobilization (for active duty as well as Reserves/National Guard), the subsequent “peace dividend” drawdown, and the roaring Internet economy. To make matters worse, DoD actually offered cash to some servicemembers to separate before their obligations ended. Many of the military’s best performers stampeded for the exits.

Unfortunately recruiting had been cut back under the assumption that retention would stay about the same as historical rates. Personnel shortages grew even more severe despite attempts to raise retention. Bonuses spread and grew, and targeted pay raises were applied to some ranks, but servicemembers still thought they could make more money as civilians than by hanging on for a REDUX retirement. By 1999 the Joint Chiefs of Staff, notorious for their interservice rivalries, actually appeared together before Congress to explain that retention could only be raised by eliminating the REDUX system.

Individual members of Congress may have a short institutional memory, but the nation’s military support groups and a number of think tanks haven’t forgotten what REDUX did to the services. Any proposed pay or retirement changes will be subject to intense media & lobbying scrutiny, and if retention suffers then Congress will take the blame at the next election. So it seems difficult to reduce the retirement system’s base-pay percentage or to raise the pension’s starting age.

However I believe there are some areas of military retirement that could be modified without provoking widespread outcry. Any changes to the Social Security system (such as a smaller Cost of Living Adjustment, or COLA) could be applied to federal civil-service retirements and the military pension system. Some skeptics and cynics already claim that the Consumer Price Index (CPI) is manipulated to reduce COLA adjustments. Delaying a retirement COLA or tying COLA to a percentage of the CPI (instead of raising it by the CPI) would reduce pensions without appearing to be a significant benefits cut.

Another retirement-change possibility would be raising the “Career Status Bonus”. It’s been $30,000 since REDUX was repealed, and if the CSB was doubled then a number of math-challenged servicemembers would volunteer for a reduced retirement. This might actually be hailed as a benefit, but there are a number of reasons why REDUX is a bad deal. I’ll cover that analysis in a separate post.

With less than five years of service, you certainly could be affected by these changes. However I suspect that they’d only be applied to new recruits, not current servicemembers. You’d be subject to more traditional methods of reducing the military’s retirement expenses: giving targeted pay raises and bonuses only to high-demand occupations, or even “force shaping” by discharging members before they’re retirement eligible.

Changes to the military’s retirement system are a big concern to all, but you have a more important issue to consider at this stage of your career: whether or not it’s fulfilling and “fun”. (It’s probably already “challenging”.) No matter how attractive a military retirement seems from your perspective, it’s not worth 15 years of misery. If you enjoy what you’re doing now then you should keep doing it, just one obligation at a time. But you should also make sure that you’re qualifying for promotion while making your skills even more valuable through college courses (funded by tuition assistance) and advanced training. This is hard when you’d rather be enjoying liberty, but stay motivated by studying subjects that interest you and could benefit you in the military or out of it. Learn everything you can about the Reserves and the National Guard and consider whether you’d rather stay on active duty. Then when the fun stops you can make your retention decision with the confidence of your skills, not just hoping to find a job.

Speaking of higher Tricare premiums, here’s the latest DoD proposal: a much more modest 13 percent increase for retired TRICARE Prime enrollees for FY2012, with no enrollment fee or deductible changes for TRICARE Standard or TRICARE For Life.  Specifically, the plan calls for:

  • Raising the 2012 Prime enrollment fees by 13% — from $230 single/$460 family per year to $260/$520
  • Indexing those fees in 2013 and beyond to a medical inflation index (based on a measure of Medicare cost growth projected to rise at 6.2% per year)
  • Minor changes to TRICARE pharmacy copays.

Although a defined contribution plan seems as unlikely as a return to REDUX, DoD may still add some version of Roth 401(k) legislation for the military’s Thrift Savings Plan. This would not only allow servicemembers to contribute $16,500 of their pre-tax pay to the TSP (even more under certain conditions) but would allow them to contribute after-tax pay as well. The TSP is the nation’s largest collection of index funds, with the lowest expense ratios, and this would give a great tax-deferred savings boost to any retirement portfolio!

Low expectations are a great plan for never being disappointed.  But as long as you’re having fun then spend as much time as you can maximizing your education & training opportunities.  When the retention decision is at hand, you want to be confident that you’ve done everything possible to be ready to leave active duty if necessary.

And no matter how long you stay on active duty, keep saving as much as you can!  Financial independence means that you can choose a retirement on your terms.

Related articles:
Proposed Tricare fee hikes
How many years does it take to become financially independent?
Tailor your investments to your military pay and your pension
Where to put your savings while you’re in the military
Simple ways to start saving
Start saving early
Reserves and National Guard: Tricare Reserve Select and Tricare Retired Reserve health insurance

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16 Comments

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  8. Doug Nordman

    April 19, 2011 at 7:54 AM

    Kathy, I agree that the military retirement system seems pretty attractive… from the retiree’s side of the fence. From the active duty perspective I think it’s worth keeping in mind that there are a lot of family, deployment, and combat decisions standing between them and their retirement benefits.

    The adverse effects of job-related stress are pretty clearly documented– let alone the effects of military stress. If the military isn’t challenging, fulfilling, and even occasionally fun then the risks of trying to gut out the years to retirement far outweigh the rewards you mention.

    Today’s active-duty members have plenty of alternatives to the “no whining” approach. They even include pension benefits– a change of specialty or community or even service, including a transfer to the Reserves/National Guard. I know quite a few who have gone to the Reserves when their active-duty careers took a turn for the worse, and some who even decided to return to active duty when their lives got better.

    My spouse left active duty just short of 18 years, and it was the right decision. (For the record, her spouse was not whining. I was ready to go where she needed to go and do what needed to be done.) We conservatively calculated that she was giving up roughly $750K in pay and retirement benefits in order to choose a better quality of life. (Hint for those of you on active duty: when you find yourself attempting to assess the quality of the family counseling & support services at your new duty station, then it’s probably not worth the money.) Today she’s retired after another seven years in the Reserves. Life has never been so good. Our family was able to stay in Hawaii. She found plenty of drills and active duty, and the money worked out just fine. She even picked up a promotion (that never would have happened on active duty) and she expects to collect more pension as a retired Reservist than she would have collected by retiring from active duty at the lower rank.

    Among my shipmates who were trying to “gut it out to retirement”, I’ve seen too many divorces. I’ve seen families broken apart. I’ve seen too many disability screenings. I’ve seen antidepressants handed out like candy, and that was on sea duty as well as shore duty. I’ve seen three suicides that didn’t need to happen, and one of them included a homicide. Active duty was not the only cause of their problems, but it contributed. I wish every one of those people (and their families) had considered a transfer to the Reserves or even going cold-turkey civilian.

    The military retirement system is worth a lot. It might even be worth everything that we feel we need for a good life. But is it worth sacrificing everything? I vote “No.”

    But hey, that’s why we wrote the book– to help military members and their families assess the relative benefits and drawbacks of leaving active duty. Financial independence means working and retiring on your terms– and not having to stay on active duty if it’s not the right career anymore.

  9. Kathy

    April 19, 2011 at 5:53 AM

    I’m sorry- I disagree about “No matter how attractive a military retirement seems from your perspective, it’s not worth 15 years of misery”!
    Fun is what your off-duty time is for.
    We have been retired since 1993 and NOTHING and I mean NOTHING beats knowing that our mortgage and property/school taxes are paid in full every month by our retirement!! The service is one of the few occupations left which offer a decent retirement (one that the Bernie Madoffs of the world can’t get their mitts on!)- and it is worth everything. Too many soldiers cave into their spouse’s whining and lose their TRICARE healthcare (NO premiums!!! where do you get that outside?) and their retirements. They are short-sighted and selfish. The US government would have to fail completely to lose our military pensions- will yours be safe?

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  12. Tim

    March 28, 2011 at 9:02 AM

    Good advice and perspective. Sorry, I was trying to figure out how to rate this article and hit the middle of the stars and I got a “thank you” and what looked like a three star rating. I would give the article a four and a half or full five stars if I knew what I was doing.

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  15. Doug Nordman

    February 28, 2011 at 5:51 PM

    Keep saving as much as you can while active duty is still fun, and you guys will win the game. You’re already well on the way.

    My spouse and I found that our priorities began to conflict with the “active duty lifestyle” when we started a family.

  16. Brandi

    February 28, 2011 at 5:03 PM

    Great advice! It’s good to know that one of my fears about cutbacks to military retirement has already been tried and failed with the original version of the REDUX bill. And I am really looking forward to the Roth TSP option rolling out next year. With only five years in, my husband and I have a long trek ahead of us. So far our military careers have definitely been challenging, but also fun and fulfilling. Even when our patience for the military is at its lowest – after some relaxing leave with our families, or when facing yet another deployment – it’s easy to look to our future retirement benefits and see that it is our quickest and most secure route to financial independence.

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