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Proposed Changes to the Military Retirement System

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military retirement system

Members of the U.S. Military enjoy a variety of pay and benefits, both while they serve on active duty and if they serve until they qualify for retirement. In fact, it is easy to argue that military retirees enjoy one of the best retirement programs in the country, if not one of the best in the world. But that may be changing in the near future if the Department of Defense implements some of the  military retirement system recommendations made by the Defense Business Board.

Let’s take a brief look at the current military retirement system, some of the recommended changes to military retirement and the possibility of these changes being implemented in the near future.

The Military Retirement System in a Nutshell

There are many military retirement benefits, but the two most important — and most valuable — are the pension plan and medical benefits. The military retirement system can be fairly complex, so here it is in general terms:

The most popular retirement plan is the High 3 Retirement plan in which military members must serve 20 years to be eligible for military retirement benefits, after which they will qualify for 50 percent of their average base pay for their final three years of service. Members who serve beyond 20 years can earn an additional 2.5 percent of their base pay per year (ex: a military retiree with 30 years of service would receive 75 percent of their base pay as their pension).

Another popular retiree option is called REDUX, which offers retirees a cash option at 15 years of service, 40 percent of their base pay in retirement and an additional 3 percent per additional year served. Both plans also include an annual Cost of Living Adjustment (COLA) which increases the pension payments each year.

Perhaps the most valuable retirement benefit in the military retirement system is the medical care retirees receive in the form of the TRICARE program, which is the health care system available to military members, their families and retirees. Retirees pay a small annual fee to participate in TRICARE, but medical care beyond that is extremely low cost and virtually free.

In exchange for 20 or more years of service, military retirees receive a lifelong pension starting the month after they retire and lifelong medical benefits. Many retirees receive over 40 years of benefits for 20 years of service, with the lifetime value of a military retirement easily exceeding a million dollars per retiree.

Recommended Changes to the Military Retirement System

The Department of Defense annually spends hundreds of billions of dollars on military retiree pensions, health care costs and other retiree expenses. Due to these current and ever-growing expenses, the government is looking into ways to reduce these costs. The Department of Defense and Congress commissioned the Defense Business Board to study possible changes to military retirement and make recommendations on how to implement them.

The Board came back with a study called, “Modernizing the Military Retirement System” in which they stated that current military retirement benefits are “unfair, unaffordable, and inflexible.”

The study contained a list of recommendations that include transitioning the military retirement system into more of a civilian-type retirement program. Some of these recommendations include:

  • Military members would receive defined contributions into their Thrift Savings Plan each year.
  • Members would receive retirement pay at age 60-65, instead of immediately after retirement.
  • Retirement benefits would vest after 3-5 years of service, instead of 20 years (and receive pro-rated benefits starting at age 60-65).
  • Authorize separation or continuation pay to encourage people to leave or remain in the service based on military needs.

Thoughts on Proposed Changes to the Military Retirement System

From a business perspective, these changes make sense. Military retirement pay and benefits are a massive annual expense for the government and Department of Defense, and it won’t get any smaller in the near future, particularly as medical costs continue to rise. But let’s face it, the military is not a business and trying to run it that way is not in the best interest of the government or the general public.

Military members serve for a variety of reasons and they earn these benefits in exchange for the multitude of sacrifices they make, such as putting their lives on the line, sacrificing time away from their families and often earning less while in the service of their country than they would earn in the civilian world.

Changing retirement benefits without changing the underlying structure of military pay and benefits would be a huge disservice to our military members, and potentially cause some of our best and brightest to leave the service prematurely or prevent them from joining in the first place.

Many current military retirees served their 20 or more years for many reasons, and undermining their retirement after they earned it would be a quick way to commit political suicide, not to mention undermine an entire demographic of veterans and retirees.

Odds of Military Retirement System Change

Changes are necessary, and military members will see them at some point; but not in an election year, and most likely not in the near future.

Any current retirees would also likely be grandfathered into the system under which they retired, so it is unlikely they would be affected by any new changes to the military retirement system. The people who would be most at risk are current military members, though it is likely they would also be grandfathered into the old system or receive a hybrid of the old and new plans.

In short, don’t look for changes to military retirement and military retirement pay right away, but be aware that these benefits are on the chopping block.