Military Retirement: Background and Recent
Developments
Charles A. Henning
Specialist in Military Manpower Policy
July 27, 2010
Congressional Research Service
7-5700
www.crs.gov
RL34751
CRS Report for Congress
P
repared for Members and Committees of Congress
Military Retirement: Background and Recent Developments
Summary
The military retirement system is a non-contributory, defined benefit system that has historically
been viewed as a significant incentive in retaining a career military force. The system currently
includes monthly compensation and benefits after an active or reserve military career, disability
retirement for those physically unfit to continue to serve, and survivor benefits for the eligible
survivors of deceased retirees. The monthly retirement annuity is adjusted annually by a Cost-of-
Living Allowance (COLA) to ensure that the annuity is protected from the adverse consequences
of inflation. Military retirees are also entitled to non-monetary benefits which include exchange
and commissary privileges, medical care through TRICARE, and access to Morale, Welfare and
Recreation facilities and programs.
The active component retirement system provides a choice between two retirement options based
on career expectations and an individual’s financial situation. Eligibility is based on years of
active duty, generally becoming retirement eligible after completing 20 years of service. For
reserve component personnel, their retirement system is based on “points” and reservists do not
generally begin to receive retired pay until age 60. There is a third retirement system for those
who are retired with a physical disability regardless of the amount of time they have spent on
active duty. Disability retirement offers a choice between two retirement options; one based on
longevity and one on the severity of the disability.
Congress grapples with constituent concerns as well as budgetary constraints when considering
military retirement issues. While congressionally mandated changes to the military retirement
system have been infrequent, any potential future changes are closely monitored by current and
future retirees, and the veterans’ service organizations who support them. Today, there are
approximately 2.2 million military retirees and survivor benefit recipients, and roughly 6 million
to 8 million family members, who are generally believed to be an articulate and well-educated
constituent group.
It is estimated that approximately $50 billion will be paid to military retirees and survivor benefit
recipients in FY2010. With military retired pay protected from inflation by annual adjustments
due to the Cost of Living Allowance, retirement costs will continue to increase.
The 10th Quadrennial Review of Military Compensation (QRMC) recently recommended a
revision of both the active and reserve retirement systems. However, with ongoing military
operations in Iraq and Afghanistan, and the recruiting and retention challenges being faced by the
Services, the executive branch and the 111th Congress may be reluctant to alter the present
system.
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Military Retirement: Background and Recent Developments
Contents
Overview .................................................................................................................................... 1
Three Systems, Different Retired Pay Calculations...................................................................... 2
Active Component Retirement .............................................................................................. 3
Final Basic Pay System ................................................................................................... 3
“High Three” .................................................................................................................. 4
Redux ............................................................................................................................. 4
Reserve Component Retirement ............................................................................................ 6
Disability Retirement ............................................................................................................ 8
Military Retired Pay, Social Security and Federal Income Tax............................................... 8
Retired Pay and the Cost-of-Living Allowance ............................................................................ 9
COLAs for Pre-August 1, 1986 Entrants ............................................................................... 9
COLAs for Personnel Who Entered Service On or After August 1, 1986 ............................... 9
Non-Redux Recipients .................................................................................................... 9
Redux/$30,000 Cash Bonus Recipients ......................................................................... 10
Costs and Benefits of the Two Retirement Alternatives........................................................ 10
Military Retirement Budgeting and Costs .................................................................................. 10
Accounting for Military Retirement in the Federal Budget................................................... 10
Unfunded Liability.............................................................................................................. 11
Military Retirement Cost Trends ......................................................................................... 12
Reforming the Military Retirement System ............................................................................... 12
Tables
Table 1. DOD Retired Military Personnel, Survivors and Program Costs,
FY2005-FY2009 ..................................................................................................................... 2
Table 2. Comparison of Retirement Methods ............................................................................... 5
Table 3. Retirees by Category and Service................................................................................... 6
Table 4. Military Retirement Outlays......................................................................................... 12
Contacts
Author Contact Information ...................................................................................................... 14
Congressional Research Service
Military Retirement: Background and Recent Developments
Overview
The military retirement system is a non-contributory, defined benefit system that has historically
been viewed as a significant incentive in retaining a career military force. The system currently
includes monthly compensation and benefits after an active or reserve military career, disability
retirement for those physically unfit to continue to serve, and survivor benefits for the eligible
survivors of deceased retirees. The monthly retirement annuity is adjusted annually by a Cost-of-
Living Allowance (COLA) to ensure that the annuity is protected from the adverse consequences
of inflation. Military retirees are also entitled to non-monetary benefits which include exchange
and commissary privileges, medical care through TRICARE, and access to Morale, Welfare and
Recreation facilities and programs.
The active component retirement system provides a choice between two retirement options based
on career expectations and an individual’s financial situation. Eligibility is based on years of
active duty, active duty personnel generally becoming retirement eligible after completing 20
years of service. For reserve component personnel, their retirement system is based on “points”
and reservists do not generally begin to receive retired pay until age 60. Both the active duty and
reserve component retirement systems “vest” at 20 years of service1. Those who separate
voluntarily prior to the 20-year point generally receive no retirement benefits. However, there is a
third retirement system for those who are retired with a physical disability regardless of the
amount of time they have spent on active duty. Disability retirement also offers a choice between
two retirement options; one based on years of service and one on the severity of the disability.
Congress grapples with constituent concerns as well as budgetary constraints in considering
military retirement issues. While congressionally mandated changes to the military retirement
system have been infrequent, any potential future changes are closely monitored by current and
future retirees, and the veterans’ service organizations who support them. Today, there are
approximately 2.2 million military retirees and survivor benefit recipients2, receiving
approximately $49.13 billion annually. In addition, there are roughly 6 million to 8 million family
members, who, combined with the retirees and survivors, are generally believed to be an
articulate and well-educated constituent group.
While the importance of a viable military retirement system is frequently cited by DOD officials
and defense analysts, the reality is that only 15% of enlisted personnel and 47% of officers will
eventually become eligible for the retirement annuity.3 Military personnel also become eligible
for retirement at a relatively young age. The average enlisted member is 42 years old and has 22
1/2 years of service at retirement while the average officer is almost 45 years old and has nearly
24 years of service.4
1 Vesting in the military retirement system is commonly referred to as “cliff vesting”. Until the 20 year point, there is
no vesting. At 20 years, the servicemember becomes fully vested.
2 1,905,000 military retirees receiving retired pay and 292,000 survivors receiving benefits as of September 30, 2009.
Fiscal Year 2009 DOD Statistical Report on the Military Retirement System, DOD Office of the Actuary, May 2010.
3 Department of Defense, Valuation of the Military Retirement System, September 30, 2008, Office of the Actuary,
December 2009, p. 13.
4 Department of Defense, Fiscal Year 2009 DOD Statistical Report on the Military Retirement System, Office of the
Actuary, May 2008, p. 120.
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Military Retirement: Background and Recent Developments
It is estimated that approximately $50 billion will be paid to military retirees and survivor benefit
recipients in FY2010. In the past, some have viewed this budget item as a place where substantial
budgetary savings could be made. However, past modifications intended to save money have had
a deleterious effect on military recruiting and retention. With ongoing military operations in Iraq
and Afghanistan, neither the executive branch or Congress have recently proposed altering the
present system.
As shown in Table 1, the number of military retirees and the cost of their retirement has increased
annually over the past several years. These figures differ somewhat from those in Table 4 due to
accrual accounting. The minor differences between the two are purely technical. The section on
“Military Retirement Budgeting and Costs” provides a full discussion of the accrual accounting
system.
Table 1. DOD Retired Military Personnel, Survivors and Program Costs,
FY2005-FY2009 5
Retirees and
Survivor
Total Program
Retirees from an Active
Disability
Reserve
Benefit
FY
Cost
Duty Military Career
Retirees
Retirees
Recipients
FY2009
2,201,788/
1,468,377
91,460/
344,393/
297,558/
$49.17 billion
$39.54 billion
1.38 billion
$4.65 billion
3.60 billion
FY2008
2,170,812/
1,466,706/
85,499/
328,664/
289,943/
$46.19 billion
$37.21 billion
$1.29 billion
$4.31 billion
$3.38 billion
FY2007
2,146,403/
1,461,724/
85,306/
312,647/
286,726/
$44.44 billion
$35.89 billion
$1.27 billion
$4.00 billion
$3.28 billion
FY2006
2,116,690/
1,452,505/
87,232/
293,014/
283/939/
$41.71 billion
$34.18 billion
$1.26 billion
$3.60 billion
$2.67 billion
FY2005
2,091,253/
1,441,931/
89,511/
280,680/
279,131/
$39.28 billion
$32.44 billion
$1.26 billion
$3.32 billion
$2.26 billion
Sources: Department of Defense. Office of the Actuary. DOD Statistical Report on the Military Retirement System,
May 2010. Document available at http://www.defenselink.mil/actuary/.
While some posit that the military retirement system is overly generous, others argue that it is
fair; especially given that repetitive tours of duty in Iraq and Afghanistan remain a likely prospect
for today’s active duty and reserve personnel. As a result, they believe that now is not the time to
make changes based on cost savings.
Three Systems, Different Retired Pay Calculations
There are three separate and distinct but related retirement systems within DOD: one for active
duty members, one for the Reserve Components, and one for those who become disabled and are
generally unable to complete a normal 20-year military career due to their physical disability.
Each of these retirement systems includes a provision for an annual Cost-of-Living Allowance
(COLA) that will be discussed later.
5 Survivors include the spouse, children and others with an insurable interest who are entitled to death benefits from the
DOD Military Retirement Fund.
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Military Retirement: Background and Recent Developments
Active Component Retirement6
For active duty military personnel, there are three methods of calculating retired pay: the Final
Basic Pay System, “High Three” and Redux. The applicable retirement calculation is based on the
date when the servicemember first entered active duty and their basic pay7 at the time of
retirement,8 and, in the case of Redux, a voluntary election regarding a $30,000 bonus. The active
and reserve component retirement systems “vest” after 20 years of service. Vesting for the
disability retiree occurs at their disability retirement date and, in some cases, at the personal
choice of the servicemember.
Final Basic Pay System
For persons who entered military service before September 8, 1980, the retired pay computation
base is final monthly basic pay being received at the time of retirement multiplied by 2.5% for
each full year of service and prorated by 1/12th for each complete month less than a full year.9 The
minimum amount of retired pay to which a member entitled under this formula is therefore 50%
of the retired pay computation base (20 years of service X 2.5%). A servicemember who retires at
25 years receives 62.5% of the computation base (25 years of service X 2.5%). Historically, the
maximum, reached at the 30-year mark, has been 75% of the computation base (30 years of
service X 2.5%).
However, the FY2007 National Defense Authorization Act extended the previous pay table to 40
years, allowed additional longevity raises,10 and provided additional retirement credit for service
beyond 30 years at the rate of 2.5% per year.11 As a result, a servicemember who retires with 40
years of service will qualify for 100% of their final basic pay in retirement. A servicemember
with 41 years of service will retire with 102.5 % of their final basic pay (41 years of service X the
2.5% multiplier = 102.5%).
The Final Basic Pay cohort that entered the military before September 8, 1980 and will have 30
years of service in 2010. They are quickly aging out of the system, and it is expected that all will
be retired by 2016.12
6 Also frequently referred to as regular nondisability retirement.
7 Basic pay is the principal element of Regular Military Compensation (RMC). The other elements include the Basic
Allowance for Housing (BAH), the Basic Allowance for Subsistence (BAS) and the federal tax advantage that results
from BAH and BAS being non-taxable allowances. Basic pay is between 65% and 75% of RMC, depending on
individual circumstances. Thus, a 20-year retiree may receive 50% of their basic pay upon retirement, but only 33% of
RMC. RMC excludes all special pay and bonuses, reimbursements, educational assistance and any value associated
with non-monetary benefits such as health care, commissaries and post exchanges. For additional discussion of military
pay and RMC, see CRS Report RL33446, Military Pay and Benefits: Key Questions and Answers, by Charles A.
Henning.
8 Unlike some civilian retirement plans, there is no provision in any of the military retirement systems for a lump sum
withdrawal upon retirement.
9 Section 1405(b), P.L. 99-348, July 1, 1986.
10 Section 601, P.L. 109-364, October 17, 2006.
11 Section 642, P.L. 109-364, October 17, 2006.
12 Department of Defense, Valuation of the Military Retirement System, September 30, 2006, DOD Office of the
Actuary, November, 2007, p. 12.
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Military Retirement: Background and Recent Developments
“High Three”
For those who entered service on or after September 8, 1980, the computation base is the average
of the highest three years (36 months) of basic pay rather than the final basic pay. Otherwise,
calculations are the same as under the Final Basic Pay method.
Redux
Reductions in retired pay for future retirees were enacted in the Military Retirement Reform Act
of 198613 (now referred to frequently as the “Redux” military retirement system) because it was
thought that the pre-Redux system was too generous. The repeal of compulsory Redux in late
1999 by the FY2000 National Defense Authorization Act indicated that many in Congress
believed the pre-Redux system was the appropriate way to compensate retirees.
Congress began taking notice of potential recruiting and retention problems related to Redux14 in
1997, well before the executive branch addressed the issue. During the fall of 1998, the
Administration announced that it supported Redux repeal. The FY2000 National Defense
Authorization Act contained provisions for repealing compulsory Redux; it allows for post-
August 1, 1986 entrants to retire under the pre-Redux (“High Three”) system or opt for Redux
plus an immediate $30,000 cash payment.
Personnel who first enter service on or after August 1, 1986 are required to select one of these
two options for calculating their retired pay within 180 days of reaching 15 years of service.
Option 1: Pre-Redux
They can opt to have their retired pay computed in accordance with the pre-Redux formula,
described above as “High Three.”
Option 2: Redux
They can opt to have their retired pay computed in accordance with the Redux formula and
receive an immediate $30,000 cash bonus called a Career Status Bonus (which can actually be
paid in several annual installments if the recipient so wishes, for tax purposes). Those who select
the Career Status Bonus (CSB) must remain on active duty until they complete 20 years of
service or forfeit a portion on the bonus.
The Redux Formula
Redux is different from the “High Three” formula in two major ways.
13 P.L. 99-348, July 1, 1986.
14 Department of Defense, Military Compensation Background Papers: Compensation Elements and Related
Manpower Cost Items, Their Purposes and Legislative Backgrounds, April 2005, p. 707.
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Military Retirement: Background and Recent Developments
Under Age 62 Retirees
First, for retirees under age 62, the retired pay multiplier will be reduced by one percent for each
year of creditable service less than 30 years. Under this new formula, therefore, a 20-year retiree
will receive 40% of his or her retired pay computation base upon retirement (20 years of service
X 2.5% minus 10%), and a 25-year retiree will receive 57.5% of the computation base (20 years
of service X 2.5% minus 5%). A 30-year retiree, however, will receive 75% of the retired pay
computation base (20 years of service X 2.5% minus 0%), the same as the “High Three” retiree.
The Redux formula, therefore, is “skewed” much more sharply in favor of the longer-serving
military careerist, theoretically providing an incentive to remain on active duty longer before
retiring.
Retirees 62 and Older
Second, when a retiree reaches age 62, his or her retired pay will be recomputed based on the old
formula, a straight 2.5% of the retired pay computation base for each year of service. Thus,
beginning at 62, the 20-year retiree receiving 40% of the computation base for retired pay,
according to the new formula, will begin receiving 50% of his or her original computation base;
the 25-year retiree’s annuity will jump from 57.5% of the original computation base to 62.5%;
and the 30-year retiree’s annuity, already at 75% of the original computation base under both the
old and new formulas, will not change. (Note: this change is an increase in monthly retired pay,
not a lump sum at age 62.)
A summary of these three retirement methods is portrayed in Table 2.
Table 2. Comparison of Retirement Methods
Final Basic Pay
“High Three”
Redux
Applies to
Servicemembers
Servicemembers
entering
from
Servicemembers
entering
entering before
September 8, 1980 through July
after July 31, 1986 and
September 8, 1980
31, 1986 and persons entering
accepting 15-year Career
after July 31, 1986 but opting not
Status Bonus with additional
to accept the 15-year Career
5-year service obligation
Status Bonus
Basis of
Final rate of
Average monthly basic pay for the Average monthly basic pay
Computation
monthly basic pay
highest 36 months of basic pay
for the highest 36 months of
basic pay
Multiplier
2.5% per year of
2.5% per year of service
2.5% per year of service less
service
1% for each year of service
less than 30 (restored at age
62)
Cost-of-Living
Full CPI
Full CPI
CPI less 1% with one-time
Adjustment
catch up at age 62, then
resumption of CPI less 1 %
Additional
$30,000
Career
Status
Bonus
Benefit
payable at the 15-year
anniversary with assumption
of 5-year obligation to
remain on active duty
Source: Military Compensation Background Papers, Department of Defense, Sixth Edition, April, 2005.
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Military Retirement: Background and Recent Developments
Table 3 reflects retirees by service and by retired pay system. Those retiring under the Final Pay
system will soon begin to decrease significantly since the junior member of that cohort who is
still on active duty will have 30 years of service in 2010. While the numbers for High Three and
Redux should continue to increase, these figures suggest that Redux is the least popular
retirement system with less than 1% of current retirees selecting this option.
Table 3. Retirees by Category and Service
(As of September 2009)
Army
Air
Force
Navy
Marine
Corps
Total
Final Pay
591,601
574,365
394,731
84,532
1,645,229
High Three
77,749
75,303
74,551
16,873
244,476
Redux 3,621
3,542
6,491 951
14,605
Total 672,971
653,210
475,491
102,356
1,904,310
Source: Department of Defense, Defense Management Data Center
Note: Includes Active, Reserve and Disability retirees.
Reserve Component Retirement15
There are many similarities among the active and reserve retirement systems. First, Reserve
Component members16 must also complete 20 “qualifying” years of service to become eligible for
retirement. Second, the reserve retirement system also accrues at the rate of 2.5% per “equivalent
year” of qualifying service (explained below) at retirement eligibility. Third, the reserve
retirement system uses either Final Basic Pay or the “High Three” to calculate retired pay; Redux
is not an option for reservists. The primary differences between the two systems is the point
system used to calculate “qualifying years,” equivalent years of service, and the age at which the
retirement annuity is paid.
For retirement purposes, a year of “qualifying” service is a year in which a Reserve
servicemember earns at least 50 retirement “points.” Points are awarded for a variety of reserve
activities:
• One point for each day of active duty or annual training.17
• Fifteen points a year for membership in the Selected Reserve.
• One point for each inactive duty training (IDT) period.18
• One point for each period of funeral honors duty.
15 Also referred to as nonregular retirement. For additional information on reserve pay and benefits, see CRS Report
RL30802, Reserve Component Personnel Issues: Questions and Answers, by Lawrence Kapp, March 14, 2008.
16 Reserve Component generally describes the six reserve components of the Department of Defense: the Army
National Guard, the Army Reserve, the Navy Reserve, the Marine Corps Reserve, the Air National Guard and the Air
Force Reserve.
17 Annual training is a two-week period of active duty that usually results in 14 retirement points.
18 A day of active duty for training represents one Unit Training Assembly (UTA). The normal drill weekend consists
of 4 UTAs and therefore results in four retirement points. A year of weekend drills earns 48 UTAs/retirement points.
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Military Retirement: Background and Recent Developments
• One point for every three satisfactorily completed credit hours of certain military
correspondence courses.
With multiple opportunities to earn points, it is relatively easy for a reserve component member
to accrue the requisite 50 points per year and thus earn a qualifying year for retirement. The
maximum number of points per year, exclusive of active duty, has varied over time but is
currently capped at 130 points.19 When active duty points are added to this total, the reservist
cannot earn more than 365 points a year. The number of points is critical in determining both the
number of years of qualifying service and the number of “equivalent years of service” for retired
pay calculation purposes.
A reservist may retire after completing 20 years of qualifying service; there is no minimum age.
Upon retirement, the individual is normally transferred to the Retired Reserve and is entitled to a
number of military benefits to include commissary and exchange privileges, access to Morale,
Welfare and Recreation programs and facilities, and limited space available travel on military
aircraft. Reservists in the Retired Reserve and not yet retired pay eligible (generally age 60) are
referred to as a “Gray Area” retirees since they are in the Retired Reserve but not yet eligible for
retired pay or retiree medical benefits. Time spent in the Retired Reserve counts for longevity
purposes and ultimately results in higher retired pay. For example, a lieutenant colonel (LTC)
who transitions to the Retired Reserve at age 45 will have their retired pay at age 60 calculated on
the basic pay of a lieutenant colonel with an additional 15 years of longevity. The reservist will
usually become eligible for retired pay at age 6020 and also then becomes eligible for military
medical care.
The date the reservist became a member of the armed forces determines whether their retired pay
is calculated based on the Final Basic Pay or “High Three” system. Those entering before
September 8, 1980 will retire under the Final Basic Pay system while those entering after
September 8, 1980 will retire under the “High Three” system.
The actual calculation parallels the active duty system but requires a separate calculation for each
individual. For example, a reserve component lieutenant colonel with 5000 points reverted to the
Retired Reserve in 1993 after completing 20 qualifying years of service. In 2008, he turned 60
years of age and became eligible for retired pay. To calculate his retired pay, divide the total
points by 360 to convert the points to years of equivalent service (5000 / 360 = 13.89). Then
multiply the years of service by the 2.5% multiplier (13.89 x .025 = .3472). Using the Final Basic
Pay option, the 2008 base pay for a lieutenant colonel with 20 years of service is $7,372.80 per
month. Multiply earlier sum by the base pay (.3472 x $7,372.80) to determine that the monthly
retirement annuity will be $2560 per month.
19 Section 648, P.L. 110-181, January 28, 2008.
20 Section 648 of the FY2008 National Defense Authorization Act reduced the age for receipt of retired pay by three
months for each aggregate of 90 days of specified duty performed after January 28, 2008 (the date of enactment of the
FY2008 NDAA). This authority was not made retroactive to September 11, 2001. The retired pay eligibility age cannot
be reduced below 50 and eligibility for medical benefits remains at age 60.
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Military Retirement: Background and Recent Developments
Disability Retirement21
Servicemembers determined to be unfit for continued service and who have a permanent and
stable disqualifying physical condition may qualify for disability retirement, commonly referred
to as a Chapter 61 retirement. Eligibility is based on having a DOD disability rating of 30% or
greater and at least 6 months or more on active duty and the disability was not noted at the time of
entrance on active duty.22 As a result, some disability retirees are retired before becoming eligible
for longevity retirement while others have completed 20 or more years of service.
A servicemember retired for disability may select one of two available options for calculating
their monthly retired pay:23
1. Longevity Formula. Retired pay is computed by multiplying the years of service
times 2.5% and then times the pay base (either final pay or “high three,” as
appropriate).
2. Disability Formula. Retired pay is computed by multiplying the DOD disability
percentage by the pay base.
The maximum retired pay calculation under either formula cannot exceed 75% of basic pay.24
Retired pay computed under the disability formula is fully taxed unless the disability is the result
of a combat-related injury. Retired pay under the longevity formula is taxable only to the extent
that it exceeds what the individual would receive for a combat related injury under the disability
formula.
Military Retired Pay, Social Security and Federal Income Tax
Military personnel do not contribute a portion of their salary to help pay for retirement benefits.
However, they have paid taxes into the social security trust fund since January 1, 1957, and are
entitled to full social security benefits based on their military service. Military retired pay and
social security are not offset against each other; military retirees receive full social security
benefits in addition to their military retired pay.
Military retired pay is not subject to withholding for Social Security tax. However, all
nondisability retired pay is subject to withholding of federal income tax. A portion of the Social
Security benefit may also be subject to federal income tax for individuals who have other income.
21 For additional information on DOD’s disability process, see CRS RL 33991, “Disability Evaluation of Military
Servicemenbers” by Christine Scott and Don Jansen, January 17, 2010.
22 10 U.S.C. 1201 (b)(3)(B). Prior to the FY2008 NDAA (Section 1641), disability retirement required at least 8 years
of service or a disability that resulted from active duty or was incurred in the line of duty during war or national
emergency.
23 10 U.S.C. 1401.
24 10 U.S.C. 1401.
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Military Retirement: Background and Recent Developments
Retired Pay and the Cost-of-Living Allowance
Military retired pay is protected against inflation by statute (10 U.S.C. 1401a). The Military
Retirement Reform Act of 1986, in conjunction with recent changes contained in the FY2000
National Defense Authorization Act, provide for COLAs as indicated below. Congress has not
modified the COLA formula25 since 1995, although virtually every year between 1982 and 1995
some COLA modifications, always with the aim of reducing costs and hence the payments to
retirees, have been at least discussed.
From 2006 to 2008, COLA increases averaged 3.8% annually. However, there was no COLA in
2009 as a result of negative inflation from the third quarter of 2008 to the third quarter of 2009.
With negative inflation the COLA remains the same for the following year but is not reduced
from the current level. For a discussion of proposed and actual COLA changes from FY1983 to
FY2005, see CRS Report 98-223, COLAs for Military Retirees: Summary of Congressional and
Executive Branch Action, 1982-2004 (FY1983-FY2005).
COLAs for Pre-August 1, 1986 Entrants
For military personnel who first entered military service before August 1, 1986, each December a
COLA equal to the percentage increase in the Consumer Price Index (CPI) between the third
quarters of successive years will be applied to military retired pay for the annuities paid
beginning each January 1. For example, assume that the CPI rises from 400.0 in the period July
through September 2008 to 412.0 in the period July through September 2009, an increase of 12.0
points or 3.0% of 400.0. The monthly retired pay that accrues beginning December 2009, that
will actually be paid to retirees on January 1, 2010, would be increased by 3.0% above that
amount paid the previous month.
COLAs for Personnel Who Entered Service On or After
August 1, 1986
For those personnel who first entered military service on or after August 1, 1986, their COLAs
will be calculated in accordance with either of two methods, as noted below.
Non-Redux Recipients
Those personnel who opt to have their retired pay computed in accordance with the pre-Redux
(“High Three”) formula will have their COLAs computed as described above for pre-August 1,
1986 entrants.
25 The actual index used to adjust COLA is the CPI-W; the index for urban wage earners and clerical workers. It
represents the buying habits of approximately 32% of the noninstitutional population of the U.S. Department of
Defense, Military Compensation Background Papers, Sixth Edition, April, 2005.
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Military Retirement: Background and Recent Developments
Redux/$30,000 Cash Bonus Recipients
Those personnel who opt to have their retired pay computed in accordance with the Redux
formula, and receive the $30,000 cash bonus, will have their COLAs computed using a different
formula. Annual COLAs will be held one percentage point below the actual inflation rate.
Retirees covered by this COLA formula would thus receive a 2.0% increase (rather than 3.0%) in
their military retired pay under the hypothetical example described in the preceding example for
Pre-August 1, 1986 entrants. When a retiree reaches age 62, there will be a one-time
recomputation of his or her annuity to make up for the lost purchasing power caused by the
holding of COLAs to the inflation rate minus one percentage point. This recomputation of COLA,
in combination with the recomputation of the retired pay multiplier, restores the member’s retired
pay to that of a similarly retired member who did not take the Bonus/REDUX option. After the
recomputation at 62, however, future COLAs will continue to be computed annually on the basis
of the inflation rate minus one percentage point.
Costs and Benefits of the Two Retirement Alternatives
An analysis of the economic effects for hypothetical retirees indicates that in almost all cases
opting for the pre-Redux formula will pay the individual much more over time. A report of the
Center for Naval Analyses states that the more liberal retired pay computation formula and COLA
formula of pre-Redux far outweighs the short-term benefits of a $30,000 pre-tax cash bonus. The
report did say that it might be possible for an individual investor to “beat” these negative aspects
of the bonus by wise investment decisions but that it would be difficult.26 Naturally, no study can
know what an individual’s financial situation is. At first, only a fairly small percentage of
personnel opted for the $30,000 lump sum.27 However, the number appears to have been rising.
Since the bonus option first became available in 2001, 50% of eligible Marine Corps enlisted
retirees, 40% of warrant officers, but only 13% of commissioned officers have taken it,28
suggesting the attractiveness of the immediate cash payment to the lower-paid members of the
career force.
Military Retirement Budgeting and Costs
Accounting for Military Retirement in the Federal Budget
All DOD budgets through FY1984 reflected the costs of retired pay actually being paid out to
personnel who had already retired. Congress simply appropriated the amount of money required
to pay current retirees each year as part of each annual defense appropriations bill. Since FY1985,
the “accrual accounting” concept has been used to budget for the costs of military retired pay.
Under this system, the DOD budget for each fiscal year includes, not the amount of retired pay
actually paid to retirees, but rather, a contribution to the military retirement fund sufficient to
26 Crawley, Vince. “Report: Taking Redux Bonus Is ‘Loan’ Against Retirement.” Marine Corps Times, May 21, 2001,
p. 10.
27 Crawley, Vince. “Which Pays Best ... The Bonus or the Egg?” Army Times, April 22, 2002, p. 14; “How the Choices
Compare.” Army Times, April 22, 2002, p. 15.
28 Brinkley, C. Mark. “Skip ‘Redux’ Bonus, Former Top Enlisted Marine Warns: Retired-pay Cut Not Worth It,
Sergeant Major Says.” Marine Corps Times, August 2, 2004, p. 25.
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Military Retirement: Background and Recent Developments
finance future retirement payouts to current uniformed personnel when they retire. These annual
“accrual” contributions accumulate in the military retirement fund, along with interest earned on
them. The amount that the Defense Department must contribute each year to cover future
retirement costs is determined by an independent, Presidentially appointed, Department of
Defense Retirement Board of Actuaries, which decides how much is needed to cover future
retirement costs as a percentage of military basic pay. Once military personnel retire, payments to
them are made, not from the annual Department of Defense budget, but from the accumulated
amounts in the military retirement fund. Estimated future retirement costs are arrived at by
making projections based on the past rates at which active duty military personnel stayed in the
service until retirement, and on assumptions regarding the overall U.S. economy, including
interest rates, inflation rates, and military pay levels. Approximately 30% of military basic pay
costs must be added to the DOD personnel budget each fiscal year to cover the future retirement
costs of those personnel who ultimately retire from the military.
DOD budget authority and outlays in each fiscal year that pay for the estimated cost of future
retirees are transferred in a paper transaction to a Military Retirement Fund, located in the Income
Security Function of the federal budget. The Military Retirement Fund also receives [paper]
transfers from the General Fund of the Treasury to fund the initial unfunded liability of the
military retirement system. This is the total future cost of military retired pay that will result from
military service performed prior to the implementation of accrual accounting in FY1985. Money
is disbursed from this Military Retirement Fund to current retirees. Individual retirees receive
their retired pay from the Defense Finance and Accounting Service (DFAS). Technically,
however, because this money paid to individuals comes not from the DOD budget, but from the
Fund, it is paid out of the Income Security function of the federal budget function. Actual
payments to current retirees thus show up in the federal budget as outlays from the federal budget
as a whole, not from DOD. Under accrual accounting, therefore, total federal outlays for each
fiscal year continue to reflect only costs of payments to military members who have already
retired, as was the case before accrual accounting began. Accrual accounting only changes the
manner in which the federal government accounts for military retired pay; it does not affect actual
payments to individuals in any way.
Unfunded Liability
Current debates over both federal civilian and military retirement have included some discussion
of the “unfunded liability” of both. As noted above, the military retirement system’s unfunded
liability consists of future retired pay costs incurred before the creation of the Military Retirement
Fund in FY1985. These obligations are being liquidated by the payment to the Fund each year of
an amount from the General Fund of the Treasury and will be fully paid, based on current
calculations, by FY2033. The unfunded liability at the end of FY2003 was $628.3 billion; the
estimated liability for FY2004 was $648.3 billion; for FY2005, $666.1 billion; and for FY2006,
$684.2 billion.29 These figures are between $83 and $92 billion higher than the estimated
unfunded liability for the same years at the end of FY2003. This increase is due almost entirely to
the enactment of concurrent receipt-related retirement benefits, since both Combat Related
Special Compensation (CSRC) and Concurrent Retirement and Disability Payments (CRDP) are
paid from the Military Retirement Fund but fully funded by the Treasury contribution.
29 Valuation of the Military Retirement System ,September 30, 2006. Department of Defense Office of the Actuary,
November, 2007, pp. ii, 9, 15, 25. Available online at http://www.dod.mil/actuary/.
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Some concerns have been voiced about the amount of unfunded liability. However, (1) the
hundreds of billions of dollars of unfunded liability is a cumulative amount to be paid to retirees
over the next 50 years, not all at once; (2) by the time some persons first become eligible for
retired pay under the pre-accrual accounting system, many others will have died; and (3) unlike
the private sector, there is no way for employees to claim immediate payment of their future
benefits. An analogy would be that most homeowners cannot afford to pay cash for a house, so
they get a mortgage. If the mortgage had to be paid in full, almost no homeowners could afford to
do so. However, spread out over 30 years, the payments are affordable. Similarly, the unfunded
liability of federal retirement programs is deemed affordable when federal retirement outlays are
spread over many decades.
Military Retirement Cost Trends
Because military retirement is an entitlement, rather than a discretionary program, its costs to the
total federal budget (payments to current retirees and survivors) have been rising modestly each
year, due to a predictable slow rise in the number of retirees and survivors and cost of living
increases. The cost to DOD (estimated future retirement costs of current personnel) declined after
FY1989 (the beginning of the post-Cold War drawdown), as the size of the force, and therefore
the number of people who will retire from it in the future, declined. As the drawdown stabilized,
so did the DOD budget costs of retirement. Table 4 indicates the costs of military retired pay in
federal budget outlays (payments to current retirees) and Department of Defense accrual outlays
(money set aside to fund future retirees). (As noted above, these figures differ slightly from the
figures for the same fiscal years cited in Table 1 for purely technical reasons.)
Table 4. Military Retirement Outlays
(billions of current dollars)
Military Retirement Fund Payments
DOD Accrual Payments to the
to Military Retireesa
Military Retirement Fundb
FY2008 $44.5
$16.1
FY2007 42.4
14.5
FY2006 41.1
13.7
FY2005 39.0
15.0
FY2004 37.2
14.1
FY2003 35.6
13.7
FY2002 35.1
12.9
a. DOD Office of the Actuary, “Statistical Report on the Military Retirement System”.
b. DOD Office of the Actuary, “Valuation of the Military Retirement System”.
Reforming the Military Retirement System
Every four years, the President is required by law30 to initiate a comprehensive review of the
military compensation system and to forward the review, along with his recommendations, to
30 Section 1008(b), Title 37.
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Congress. The most recent effort, the 10th Quadrennial Review of Military Compensation
(QRMC)31, was convened in August 2005 and submitted the final portion of its report in July
2008. One of the directed areas of assessment was “the implications of changing expectations of
present and potential members of the uniformed services relating to retirement.”32
A number of previous studies have noted that the military retirement system should be more
flexible, equitable and efficient. To accomplish this, the QRMC suggested a major revision of
both the active and reserve retirement systems highlighted by:
1. A defined benefit plan similar to the current “High Three” system but that would
“vest” at 10 years of service and not be payable until age 60 for those who retired
with less than 20 years of service or at age 57 for those with 20 or more years of
service. Retirees could opt to receive the retirement annuity immediately upon
retirement but the annuity would be reduced by 5% for each year under age 57.
2. Combined with the above defined benefit plan would be a defined contribution
plan that would require the services to contribute up to 5% of annual base pay
into a retirement account for each servicemember. The contribution would start at
2% for those with two years of service and increase incrementally until it reached
5% for those with five or more years of service. This plan would also vest at 10
years of service but withdrawals could not begin until age 60.
3. A system of “gate” pays would be established at specified career points to retain
selected personnel in specified skill areas.
4. Separation pay would be used to encourage personnel in over manned skills to
separate prior to qualifying for a normal 10 to 30 year retirement.
A somewhat unique aspect of this retirement proposal is that it would apply equally to active and
reserve component members, apparently recognizing that the Reserves have transitioned from a
strategic reserve to an operational force.To test the feasibility of this retirement option, the
QRMC recommends a five or more year demonstration project that would use volunteers who
would ultimately have the option of remaining in the demonstration or reverting to the current
retirement system.
While not stipulated, it is assumed that personnel currently in the active and reserve components
would be “grandfathered” and remain eligible to retire under the current system or until the new
system is thoroughly tested and evaluated for implementation.
The QRMC did not address the disability retirement system in their review.
To date, neither the executive branch or Congress have taken any action to modify the military
retirement system based on the recommendations of the 10th QRMC. In December, 2009 the
President directed the start of the 11th QRMC, a one-year effort with its report expected in late
2010.
31 The report of the 10th QRMC can be viewed at http://www.defenselink.mil/news/QRMCreport.pdf.
32 Presidential memorandum, Subject: Tenth Quadrennial Review of Military Compensation, August 2, 2005.
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Author Contact Information
Charles A. Henning
Specialist in Military Manpower Policy
chenning@crs.loc.gov, 7-8866
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