SitRep Major changes to the military's retirement system SitRep Major changes to the military's retirement system

This story was originally published on April 27, 2015

The old, reliable military retirement system is about to be retired.

House and Senate lawmakers are moving ahead with dramatic plans to replace the current 20-year, all-or-nothing deal with a "blended" compensation system, complete with a 401(k)-style investment plan that promises all future troops will leave the service with some money for retirement.

The moves echo recommendations from the Military Compensation and Retirement Modernization Commission earlier this year, which pushed for changes to recognize the estimated 83 percent of service members who leave the military with no retirement benefits.

But some outside advocates still worry that, while well-intentioned, the change could decimate the senior noncommissioned and officer ranks, by giving them too much incentive to start a civilian career earlier and not enough incentive to stay to 20 years.

Lawmakers seem undeterred, at least for now. House Armed Services Committee members are expected in coming days to forward their retirement change proposal to the full House for consideration. Rep, Mac Thornberry, R-Texas, committee chairman, said he believes the move as a whole will strengthen the fighting force.

"This is the sort of change that isn't going to save a lot of money, but it's designed to attract and keep up the quality of talent in the military," he said.

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Senate Armed Services Committee leaders said they'll follow suit early this summer. If those plans ultimately become law, the new retirement system would be in place by October 2017.

House proposal

The 20-year retirement model has served as a major military recruiting tool for decades, offering service members a sizable pension while still in their prime working years.

But critics have noted that troops fatigued by multiple combat tours, unsettled by frequent military moves or forced out due to force cuts are left with no employer-backed retirement offerings, even though most of their civilian counterparts have one.

The new proposal — included in early drafts of the fiscal 2016 defense authorization bill — would address that in dramatic fashion.

The commission recommendation and House committee's plan would offer a 401(k)-style investment account with government contributions that would travel with troops whenever they leave the military.

Plans call for an automatic federal contribution equal to 1 percent of troops' basic pay into their investment accounts, even if troops contribute nothing.

Service members then could choose to contribute up to 5 percent of their basic pay, and the government would provide matching contributions — offerings that mirror private-sector employee benefits.

The new retirement system also would offer a lump-sum "continuation pay" for service members who stay beyond 12 years of service and the traditional monthly annuity for those who serve for 20 years and beyond.

However, the payouts would be reduced by about 20 percent from current offerings, which has raised concerns among critics.

To counter that, Rep. Joe Heck, R-Nev., chairman of the House Armed Services Committee's personnel panel, said lawmakers will allow government matches to savings plans to continue past 20 years of service, a provision that was not a part of the commission's original proposal.

Lawmakers also are looking to dump complex lump-sum retirement payout options recommended by the commission in favor of a simpler plan.

Sen. John McCain, R-Ariz., chairman of the Senate Armed Services Committee, said he supports the idea of the House plan, but his committee will work out its own details in weeks to come.

Still, McCain said the two committees are working closely on the idea and he expects little conflict on the issue between the chambers.

Lingering concerns

Troops already serving at the time the new plan takes effect would be grandfathered under their traditional military retirement system. They could choose to opt into the new plan, but would not be required to do so, as newly enlisting troops would be.

And Heck said the two-year process for implementation should give Congress and the Pentagon plenty of time to troubleshoot unexpected issues and calm fears about the potential effects of the new plan.

So far, it hasn't. Officials from Military Officers Association of America and the American Legion — two of the biggest critics in the debate so far — said they worry the process is still moving too fast, and that more study is needed to determine what effect the 401(k)-style offering will have on retention of older troops.

"Although we support providing a transportable career device for those who leave the service prior to attaining 20 years of service, MOAA has serious concerns that the commission's blended retirement benefit will fail to provide the necessary draw to retain service members to 20 years of service," the group said in a statement.

Heck disagreed with those concerns, as did a number of other outside advocates.

Officials from the Enlisted Association of the National Guard of the United States applauded the move, saying it will improve the financial future of the vast majority of service members. Veterans of Foreign Wars officials echoed that sentiment.

"There is much to like about the new retirement plan because it gives people options," said Joe Davis, VFW spokesman. "It allows them to receive a government match throughout their career where currently there is none. It grandfathers everyone in uniform under the old system, but with an opportunity to opt into the new."

Work ahead

The House and Senate plans also will feature new financial literacy training for troops, so they better understand how the investment savings accounts will work and the risks involved.

Commission members had called that education component critical to the success of any retirement changes, since most troops now don't have enough familiarity with similar civilian retirement plans.

Lawmakers will mandate that Pentagon officials offer a path within six months to implement the new retirement plan, and launch the new system at the start of fiscal 2018.

White House officials are not expected to weigh in on the commission's retirement proposals until April 30.

But Defense Secretary Ash Carter already has talked in broad terms about the need to offer more civilian-type benefits to military enlistees, including 401(k)-style investments.

The plan still must navigate the months-long congressional authorization process before it heads to President Obama's desk for his final signature. But Heck said he is confident his colleagues will back the idea, in the interest of fairness.

"For too long, if you didn't serve 20 you left with nothing," Heck said. "This plan recognizes the service of everyone."