Congress Cuts Military Pensions

Let’s talk about contingency financial planning. I don’t mean life insurance or a medical crisis– I mean how you’ll maintain your financial independence when a leg of your retirement stool is kicked out from under you. Notice that sentence is “when”, not “if”.

I generally ignore the news on military legislation until it’s been signed into law. The evolving situation changes too much among the press releases, the hearings, and the final version of the military pay tables. Normally I’m not even going to attempt to provide blow-by-blow commentary on the process. However, the events of the last couple of weeks are a powerful example of how quickly you can be blindsided by the benefits bus– or even thrown under it.

The Military Officers Association of America and veteran reporter Tom Philpott were among the first to note that the House and Senate budget committees have voted to cut military pensions. “Working-age” military retirees (younger than 62) and current servicemembers who reach retirement eligibility would have their pension’s annual cost-of-living adjustments reduced by one percentage point below the Consumer Price Index.

Before I get into the legislation’s financial details, let me briefly mention how it happened. Congress and DoD are perpetually attempting to reform the military pension. Several committees, commissions, and think tanks have proposed new systems for years. One of the latest Congressional groups (and DoD, and even the White House) stated earlier in 2013 that changes would only apply to new recruits. Servicemembers and retirees would be grandfathered under the current system.

Grandfathering didn’t happen this time. The Congressional budget committees (not the armed services committees!) reached a comprehensive agreement that reportedly resolves a number of sequestration issues and avoids a government shutdown. Any member of Congress who votes against the amendment’s military retirement cuts could be accused of threatening to waste billions of dollars on another government shutdown. There was not even a debate on the pension change, let alone a hearing or any other discussion. The House of Representatives has already passed the amendment. Despite vocal discord in the Senate, the amendment is also expected to pass there as well with no debate or further changes. In other words, the budget compromise is more important than the cuts to military pensions.

The Legislation

Alert reader “Powerplay” at provided a summary of the Bipartisan Budget Act of 2013. Page 3 of that PDF link notes:

This provision modifies the annual cost-of-living adjustment for working-age military retirees by making the adjustments equal to inflation minus one percent. This provision would go into effect in December 2015. At age 62, the retired pay would be adjusted as if the COLA had been the full CPI adjustment in all previous years, and the service members would receive the full COLA from then on. Service members would never see a reduction in benefits from one year to the next and it will save approximately $6 billion over ten years.”

Thanks to my good friend “SamClem” at, here’s the text of the amendment to House Resolution 59, the Bipartisan Budget Act of 2013. The military pension text starts on page 53, and Section 403 essentially says:

(A) IN GENERAL.—Effective on December 1 of each year, the retired pay of each member and former member under 62 years of age entitled to that pay shall be adjusted in accordance with this paragraph …
(B) CPI MINUS ONE.—If the percent determined under paragraph (2) is greater than 1 percent, the Secretary shall increase the retired pay of each member and former member by the difference between
(i) the percent determined under paragraph (2); and
(ii) 1 percent.
(C) NO NEGATIVE ADJUSTMENT.—If the percent determined under paragraph (2) is equal to or less than 1 percent, the Secretary shall not increase the retired pay of members and former members under this paragraph.
When a member or former member whose retired pay has been subject to adjustment under this paragraph becomes 62 years of age, the Secretary of Defense shall recompute the retired pay of the member or former member, to be effective on the date of the next adjustment of retired pay under this subsection, so as to be the amount equal to the amount of retired pay to which the member or former member would be entitled on that date if increases in the retired pay of the member or former member had been computed as provided in paragraph (2) or as specified in section 1410 of this title, as applicable, rather than this paragraph.

EFFECTIVE DATE.—The amendments made by subsections (a) and (b) shall take effect on December 1, 2015.”

If there’s any good news here, it’s that military retirees receiving a disability pension are covered by a different section of federal law, so this change does not apply to them.

Other good news is that implementation of the latest COLA reduction is delayed by nearly two years. The Senate Armed Services Committee is already planning to review this legislation. MOAA and over two dozen other military advocacy organizations are campaigning against the Senate vote and will continue to pursue corrective legislation. 2014 is also an election year, so our elected representatives might even pay attention.

You’re Being REDUXed!

For you veterans who’ve been around for a while, this proposal bears a suspicious resemblance to the last major overhaul to military pensions. REDUX was enacted in 1986 but by 1999 was declared a miserable failure that was killing retention. The High Three “classic” pension system was restored and REDUX was offered as an alternative that almost no servicemember ever chooses. Even with a $30,000 bonus and a five-year head start on a High-Three pension, DoD’s own math shows that REDUX costs a military retiree nearly $100K by the time they reach age 62.

How badly does Congress’ 1% CPI lag affect a military retiree? MOAA saysThe cuts will have a devastating and long-lasting impact. By age 62, retirees who serve a 20-year career would lose nearly 20 percent of their retired pay. An E-7 retiring at age 40 today would experience a loss of $83,000 in purchasing power – an O-5 would lose $124,000.

Several groups have come up with different numbers. However, Kate Horrell at Paycheck Chronicles (who’s also a military spouse) did her own analysis of the claims made by different organizations and came up with results comparable to MOAA.

Let’s take a real-life look at what would have happened to another retiree: me. When I retired in 2002 my pension (O-4>20 “Final Pay”) was $2655/month. In a couple of weeks, my 2014 pension deposit will be $3507/month. In just under 12 years, both the Consumer Price Index and my pension have risen by 32.1%. When I apply “CPI-1” instead of the full COLA, my 2014 pension amount only rises to $3180 for a 12-year gain of just 19.79%. More importantly, my total pension received over that 12 years dropped by over $25,000. Compounded in an equity fund at just 3% over inflation, I would have lost nearly $30K over less than 12 years.

Extending that lag out over another nine years to my 62nd birthday costs even more. Assuming that the CPI stays at 1.6%/year for a decade (Ha!) would raise my full-COLA pension by over 52% between 2002-2023. If the COLA is “CPI-1” for 21 years then that raise drops to only 26%. The compounded losses have risen to just over $100K. Looks a lot like the REDUX math of the earlier example, doesn’t it?

Sure, at age 62 my pension would be boosted to the amount it would have been with 20 years of full COLA. But in the meantime, I would have permanently lost $100K.

I know how I feel about that change. Imagine how you’d feel if you had 15 years of service and expected to stick around until 20. Imagine what you’d do if you were halfway through your first enlistment contract and the retention team dropped by to discuss your re-enlistment.

What You Can Do

Let’s get back to my point in the first paragraph: how can you plan for financial independence when the rules keep changing in the middle of the plan?!?

My first suggestion would be to take a good hard look at the Consumer Price Index and compare it to your own personal inflation rate. Your expenses will change considerably over the years (especially if you’re raising a family) but the national rate of inflation will probably not apply directly to you.

In fact, when you stop working for a paycheck and start living your own life, you’ll find many ways to avoid inflation. You’ll use home energy more efficiently, you’ll drive less, and you’ll shop for bargains. You’ll buy less clothing and you’ll spend less on maintaining a wardrobe. You’ll travel when airfares are on sale, and you’ll live like a local instead of in a resort. You’ll handle your own home/yard maintenance (or eliminate it with a condo) and you might even do your own repairs.

Even if Congress decides that your military pension COLA will be “CPI-1” and you lose $100K from your planning, I think it’s still reasonable to assume that your own personal inflation rate will resemble “CPI-1” as well. You may not need the $100K. That’s my personal experience, and other retirees have reported similar anecdotes.

Next, take a look at your financial independence calculations with inflation rates of both CPI and “CPI-1”. If you can reach your goals with either number then your planning is robust enough to handle a nasty surprise or two.

That’s the real lesson that we can learn from this latest example of political risk. When you’re striving for financial independence, you can’t predict the future. You have to build enough contingency planning into your spreadsheet to enable you to shake off a nasty surprise. If your retirement can be derailed by a single point of failure like this one, then your retirement plans was already too fragile to survive.

The best action you can take to fend off these unpleasant surprises is to keep tweaking your plans. If your retirement forecast can survive the loss of $100K over two decades, then you should be fine.

Note: this is a military personal-finance blog, not a political polemic. Please stay classy in the comments or they’ll be moderated.

Related articles:
Over a decade later, REDUX still sucks
The military drawdown and benefits cuts
Effect of inflation on a dollar
Military pension inflation protection
Effect of inflation on a REDUX military pension
From the 2011 archives: Changing military pensions
and Military retirement: the latest overhaul

WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

  1. I am sitting at almost 19 years of service and honestly pisses me off pretty badly that we are not grandfathered in. I will be retiring soon and have suffered a few service related injuries along the way and am predicting that I may be rated 20-30% disabled by the VA. Would this make me exempt from the law?

  2. So people that are already on Redux what happens to their retirement? This has not been covered yet they have a contract that was signed to this effect already.

    • Tim, the amendment didn’t touch the REDUX part of the federal law. I think that means there’s no change to those retirements.

      When Congress modifies one part of a military benefit without addressing a related program, DoD and DFAS usually obtain legal advice on the correct implementation. That’s also subject to additional guidance from Congress. If DoD made the “wrong” choices then they’d also be exposed to legal challenges by veteran’s groups.

      I think this question will be rendered moot by more Congressional revieions to the amendment.

  3. I’ll hold off on the political commentary, but this is exactly what prompted me almost two years ago to get our financial ship in order, and now it has come to pass. The loss here is at least a couple of quality college educations; what a shame!

  4. I’m At 18 years and plan to retire at 25. My concern about this situation is that my retirement is not set in stone. I had the belief that I could plan on a certain number for FIRE based on my military pension. Now I can’t rely on my full pension, because the precedence has been established. Although this is a relatively small change, it may open the floodgates for other opportunities to reduce the national budget. Ugh. I can’t even retire earlier to “lock in” my retirement, since this change affected those already relying on their pension.

    • I wouldn’t let this political risk abort a retirement, but a good plan for financial independence has to account for an unpleasant surprise. If you crank the new numbers into a retirement calculator and still get approximately the same chances of success then you’re probably going to be fine.

      Personally I think the Congressional members who pushed this amendment through without hearings or debate or amendments… stepped on a lot of toes. The next 24 months will be plenty of time to let the process work the way it’s supposed to– especially during an election year. Again, however, a solid plan for financial independence has to have enough margin for just these sorts of unexpected events.

    • I wouldn’t let this political risk abort a retirement, but a good plan for financial independence has to account for an unpleasant surprise. If you crank the new numbers into a retirement calculator and still get approximately the same chances of success then you’re probably going to be fine.

      Personally I think the Congressional members who pushed this amendment through without hearings or debate or amendments… stepped on a lot of toes. The next 24 months will be plenty of time to let the process work the way it’s supposed to– especially during an election year. Again, however, a solid plan for financial independence has to have enough margin for just these sorts of unexpected events.

  5. Thanks Nords for some analysis…emotions still run high on this issue and it is beneficial to step back from that and look at what can be done moving forward. I understand that some elected officials have come out and say they have two years to address this issue until its planned implementation in 2015, but it is obvious that they are willing to use veterans and military compensation as bargaining chips for political expediency…so I am not inclined to put any stock in what they say. I am, however, taking note of how my elected officials voted regarding this budget deal.

    I was one of the tens of thousands, if not hundreds of thousands, who sent my concerns to the president, two senators, and our House Representative (with MOAA-formatted letters). Interestingly enough, I only received a response from my House Rep who informed me that she voted against the budget deal, mainly because of the disproportionate financial damage to veterans and their families…and to think I was not going to vote for her come next election.

    Just like you, I feel confident that my financial independence is not at risk, even if this budget deal stands as it is. I just hope that for other military retirees and their families, they can tweak their retirement plans accordingly to account for this bump on the road.

  6. Thanks! This is exactly the kind of analysis that I’ve been looking for. too much emotion has been flowing around the interwebs on this.

    I didn’t understand the ‘catch-up’ rule, and I couldn’t find it. Thanks for putting that out.

    Overall this is bad, but not the end of the world. I would not be totally against this plan for new accessions. I know it’s selfish, but to not grandfather the plan is ‘not cricket’.

    The reporters also don’t seem to realize that ‘the generous military pension’ is often only 1/3 of gross pay, while cops and teachers may get 90% or more.

    And to justify the cuts by saying “only 17% of vets get a pension” is ironic and shameful. That is a HUGE FLAW in the mil pension system, not a feature.

    Comment? Question? What's on your mind?