Military retirement overhaul set to roll out during next two years

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The Pentagon (Stars and Stripes)

Military retirement overhaul set to roll out during next two years

by: Travis J. Tritten | .
Stars and Stripes | .
published: November 12, 2015

WASHINGTON – Congress approved an historic overhaul of the military retirement system Tuesday, all but ensuring it will become law and the Defense Department will begin the roll out.

But troops will not get access to the new 401(k)-style retirement accounts that are the centerpiece of the overhaul until 2018. In the meantime, some key issues such as new programs to educate servicemembers on the tricky world of investing and retention bonuses still need to be worked out, according to the Military Officers Association of America, the country’s largest officer advocacy group.

The new blended system of accounts and pensions will replace the current retirement system, which pays out only after two decades of service, and is included in the 2016 National Defense Authorization Act. Following a vote in the Senate, the annual defense policy bill is now on its way to President Barack Obama, who is expected to sign it.

“I would argue this is the most significant reform legislation that has been passed in 30 years,” Sen. John McCain, R-Ariz., a lead architect of the legislation, said during the floor vote Tuesday.

The $607-billion NDAA bill will modernize the 70-year-old military pensions and extend retirement benefits to include the more than 80 percent of troops who now leave the service with no pension, McCain said.

Sen. Jack Reed, D-R.I., ranking member on the Armed Services Committee, said the reforms will put the DOD on better financial footing and set the stage for further overhauls in military pay and benefits.

Troops will not see any of the retirement changes for two years.

New recruits who sign up beginning in October 2017 will automatically have 3 percent of their pay diverted into a Thrift Savings Plan account, which the DOD will match with an amount equal to 1 percent of their pay. After two years of service, the DOD match could be increased by another 5 percent of pay.

“Anybody who comes in after that date will automatically be in the system, they won’t have a choice,” said Steve Strobridge, director of government relations at the MOAA.

Those future servicemembers will be able to adjust their contribution amounts or opt out of the system, but only after completing financial literacy training at their first permanent duty station.

The 20-year pensions will remain for all but they will not be as lucrative for future servicemembers. To support the new retirement accounts, future pensions will only be worth 80 percent of their current value.

Troops who are already in the military and have less than 12 years of service can choose the assured pensions or opt into the new blended program, which will look very similar to the 401(k) accounts that are the norm in the civilian world.

About 50 percent of those troops can choose to opt in during a one-time signup window through 2018, according to congressional research estimates, but participation will come with the same financial risks inherent with investment accounts, Strobridge said.

“Obviously, the big issue is, ‘How much return are you going to get on your money?’” he said.

During a financial downturn, investment accounts can lose money and novice investors sometimes fearfully pull out their funds – a mistake that can actually cause significant setbacks, Strobridge said.

Servicemembers also might have unreasonable expectations about the profit possible on investments in the short term, he said.

“They’re going to have to come up with an education system to have people do this smartly,” Strobridge said. “There is a requirement that DOD has to have an education plan. Well, DOD does not have a great track record on financial education.”

Another concern is the changes could be an incentive for some troops to leave the military earlier, instead of pushing ahead to the 20-year mark, Strobridge said.

To counter that, the overhaul calls for a cash bonus for troops who reach 12 years of service and agree to sign on for at least another four years. Active-duty personnel will be eligible for a bonus of between 2.5 months and 15.5 months of basic pay. Reserve members could get half a month’s pay or up to 6.5 months.

The exact calculations for the retention pay must be worked out during the next two years, Strobridge said.

“How much that is, is going to be up to the services,” he said.

tritten.travis@stripes.com
Twitter: @Travis_Tritten