Reducing Cost-of-Living Adjustments for Military Retirees and the Bipartisan Budget Act: In Brief

Contents

• Reducing Cost-of-Living Adjustments for Military Retirees
• Most Recent Action
• Demographics of Military Retirees
• Nondisabled Retirees
• Disabled Retirees
• Potential Effects on Military Retirees
• Current Nondisabled Retirees
• Future Nondisabled Retirees
• Current Disabled Retirees
• Future Disabled Retirees

Summary

In addition to raising budget caps in FY2014 and FY2015, the Bipartisan Budget Act (BBA) reduced the cost of living adjustments (COLAs) provided to working-age military retirees under the age of 62 from the full Consumer Price Index (CPI) to the CPI less 1%. Military retirees would then receive a "bump-up" at age 62 that would raise their benefit level to an amount that included full rather than partial CPI adjustments for each year below the age of 62. This new benefit level would then be increased for full CPI adjustments in later years. According to CBO, this change would have saved the Department of Defense $6.235 billion over the decade.

Based on data published by the Department of Defense (DOD) Actuary about the characteristics of FY2012 military retirees and CBO projections of the CPI, CRS estimates that for the average nondisabled future retiree, lifetime retirement income under the BBA's lower COLA would be about:

• $1.67 million rather than $1.73 million in lifetime retired pay, a $69,000 or 4.0% reduction for enlisted personnel; and
• $3.74 million rather than $3.83 million in lifetime retired pay, an $87,000 or 2.3% reduction for officers.

The impact of the BBA's reduced COLAs on disabled retirees would have been larger because they tend to retire younger and thus would have faced COLA reductions for more years. CRS estimates that the lifetime retirement income for disability retirees under the BBA formula would have been reduced by $123,000 or 9.6% for enlisted personnel and $144,000 or 5.3% for officers.

In response to concerns about potential effects, Congress restored full CPI COLA adjustments for disabled military retirees and survivors in the FY2014 Omnibus (H.R. 3547/P.L. 113-76) signed by the President on January 17, 2014. Several bills were also introduced that would reverse the COLA decrease for non-disabled military retirees as well. Although the reduced COLAs would not have gone into effect for non-disability retirees until December 1, 2015, some Members called for action sooner.

On February 11, 2014, the House passed an amended version of S. 25, to modify the impact of the reduced COLA provision of the BBA so it only applied to individuals who become members of the uniformed services on January 1, 2014, or later. The Senate passed this amended version on February 12, and the President signed it into law (P.L. 113-82) on February 15. Hence, all currently serving military personnel who joined before January 1, 2014, and all current retirees are effectively excluded ("grandfathered") from the COLA reduction provision of the BBA. Only those individuals who join in 2014 or later and subsequently qualify for non-disability retirement will ultimately be subject to the COLA provision (along with REDUX retirees, who opt into a reduced COLA retirement in exchange for a cash bonus). Since non-disability retirees typically must serve 20 years before qualifying for retirement, the first major cohort of non-disability retirees to be impacted by this provision will be those who retire in 2034.

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Reducing Cost-of-Living Adjustments for Military Retirees and the Bipartisan Budget Act: In Brief

Reducing Cost-of-Living Adjustments for Military Retirees

One of the offsets for raising the defense and nondefense caps in FY2014 and FY2015 in the Bipartisan Budget Act of 2013 (H.J.Res. 59/P.L. 113-67) was a reduction in the cost-of-living adjustment (COLA) for many current and nearly all future military retirees. Instead of using the full Consumer Price Index (CPI) to adjust retired pay each year, as has been customary in recent years, Section 403 of the Bipartisan Budget Act (BBA) substituted the CPI less 1% for all current and future military retirees under the age of 62 (except those already receiving reduced COLAs under the Redux retirement option).¹

At age 62, beneficiaries would receive a bump-up in their benefit level to the amount they would have received had a full COLA adjustment been included each year rather than the lower COLAs. In subsequent years, this new benefit level would be adjusted using the full CPI.² This change would have affected almost all military retirees below the age of 62, including those collecting disability retirement, as well as individuals receiving survivor benefits. The new formula would take effect on December 1, 2015.³ According to CBO, this change would have saved the Department of Defense $6.235 billion over the decade.⁴

This provision of the Bipartisan Budget Act generated significant debate. Some called for a reversal, arguing that retaining the full COLA adjustment is part of a commitment to servicemembers to preserve benefits including future COLAs at the full CPI to offset inflation. Some servicemembers and advocates also argued that retirement changes should be delayed until the April 2015 report of Military Compensation and Retirement Modernization Commission provides a "holistic" solution.⁵ Others defended the COLA adjustments, arguing that the effect on most retirees would be small compared to their lifetime benefits. They also argued that the change would help restrain the growth in military compensation over the past decade.⁶ Admiral Winnefeld, Vice-Chair of the Joint Chiefs of Staff, recently suggested that these increases have "more than closed previously existing gaps with the rest of our nation's workforce."⁷ Some argued further that military retirement benefits are exceptional because servicemembers do not contribute to their basic retirement benefits, and that military personnel have also been insulated from one of the major expenses for older persons, higher health insurance premiums, because premiums for military personnel have been frozen since 1995.⁸

Most Recent Action

In January, responding to concerns raised about the effect on disabled military retirees who tend to retire younger and have shorter life expectancies, Congress reversed the COLA adjustments in the BBA for disability retirees and survivor benefit recipients with passage of the FY2014 Consolidated Appropriations Act (H.R. 3547/P.L. 113-76).⁹ The new formula, as revised by P.L. 113-76, would have still taken effect for nondisabled retirees on December 1, 2015, but Congress would take further action.

On February 11, 2014, the House passed an amended version of S. 25, to modify the impact of the reduced COLA provision of the BBA so it only applied to individuals who become members of the uniformed services on January 1, 2014, or later. The Senate passed this amended version on February 12, and the President signed it into law (P.L. 113-82) on February 15. Hence, all currently serving military personnel who joined before January 1, 2014, and all current retirees are effectively excluded ("grandfathered") from the COLA reduction provision of the BBA. Only those individuals who join in 2014 or later and subsequently qualify for non-disability retirement will ultimately be subject to the COLA provision (along with REDUX retirees, who opt into a reduced COLA retirement in exchange for a cash bonus). Since non-disability retirees typically must serve 20 years before qualifying for retirement, the first major cohort of non-disability retirees to be impacted by this provision will be those who retire in 2034.

Demographics of Military Retirees

Note: The following sections were largely written before the BBA was revised by the FY2014 Consolidated Appropriations Act and S. 25. They now reflect what would have happened had the original BBA language remained in effect.

Based on the profile of the 1.94 million military retirees collecting benefits as of FY2012, about 40% or 750,000 would likely have been affected in some way by the lower COLAs that were adopted in the BBA.

To get a picture of the potential effect of reducing the COLA by 1%, the demographic portrait in Table 1 shows average age, years of service, and retirement benefits, with separate entries for officers and enlisted. While active-duty personnel are eligible for immediate retirement benefits after 20 years of service, reservists generally are not eligible for retirement until age 60, and so would generally be affected by the BBA's COLA minus 1% provision for a year.

Excluding reservists, some 1.6 million military retirees currently receive benefits. For nondisabled military retirees as whole, about half are below the age of 62, and most of those would face reduced COLAs for 1 to 10 years based on DOD Actuary statistics.¹⁰

Nondisabled Retirees

To illustrate the effect of the original BBA, Table 1 shows that among the current retiree population, the average disabled retiree retired at age 42 after 22 years of service, receives $30,550 in retired pay per year, and is now 62 years old. Officers generally are several years older than enlisted personnel, and receive benefits about twice as large as enlisted personnel: an average of $51,450 vs. $23,650 in retired pay per year. The table breaks out new FY2012 retirees because the data on them are later used to estimate effects on future retirees had the original BBA formula remained in effect.

Based on the most recent DOD Actuary data, those servicemembers who retired in FY2012 were, on average, slightly older than those who retired in earlier years (age 44 vs. 42), with one additional year of service, and received somewhat higher average retired pay ($37,700 vs. $30,550) (Table 1). Higher average pay for the latest group may reflect a variety of factors, including pay raises above the Economic Cost Index (ECI) received in the past decade.¹¹

Future retirees would have been more affected by the BBA's lower COLAs than the current beneficiary population because they are generally younger, so the reduced COLAs would have affected them for a longer period of time. The benefits of today's older retirees would have only been reduced for those under the age of 62.

Disabled Retirees

To illustrate the effect of the original BBA, Table 1 shows that today's disabled retirees generally retire at 33-34 with 10-11 years of service with lower benefits. Compared to nondisabled retirees, disabled retirees generally retire some 10 years earlier, with roughly half the number of years of service, and over $10,000 less in annual retired pay. Those retiring in FY2012 show similar characteristics (see Table 1).

The congressional decision to exempt disabled retirees from the lower COLAs may reflect, in part, the fact that disabled retirees generally retire at younger ages, meaning that lower COLAs would affect them for a longer period of time, and that their benefits are lower as well. In addition, the life expectancy for disabled retirees is about 8 years below that of nondisabled retirees, meaning that there would have been fewer years after 62 with full COLA benefits had the original BBA remained in effect.¹² Because of these two factors, disabled retirees would have experienced a greater loss of retirement income than nondisabled retirees.

These demographic factors help explain why lower COLAs would be expected to have greater effects on disabled retirees. In addition, enlisted disabled personnel would have been more affected than disabled officers in percentage reductions to their income, because their retirement income is considerably lower (see Table 1).

Potential Effects on Military Retirees

If FY2012 retirees are representative of future retirees, and the original BBA language had remained in effect, then those currently retired would have been less affected than future retirees because of the demographic characteristics described above.¹³ Similarly, disabled retirees would have been more affected than nondisabled retirees had the original BBA remained in effect. To estimate the effects of the original BBA formula on both current and future retirees, CRS used DOD Actuary data about average age, retirement income, and life expectancy for nondisabled and disabled military and CBO's projections of the CPI. To project the effect on future retirees, CRS used DOD Actuary statistics about those who retired in FY2012, the most recent data available.

Current Nondisabled Retirees

On average, lifetime retirement benefits for the current retiree population are about $590,000 for enlisted personnel and $1.37 million for officers based on DOD Actuary figures and CBO projections of Consumer Price Index (CPI).¹⁴ The average age of nondisabled current retirees is 61 for enlisted and 66 for officers, suggesting that many retirees would not have been affected by reduced COLAs under the original BBA or would have been subject to lower COLAs for fewer years than future retirees.

As a point of comparison, had the COLA adjustment for current disabled military retirees in the BBA remained in effect, the average enlisted disabled retiree, with an average age of 53, would have received $13,000 or 3% less in lifetime benefits of $390,000. For disabled officers, with an average age of 66, few would experience reductions in lifetime benefits of $440,000.¹⁵ Disabled retirees who are younger than this average would have been affected by larger amounts and those older by lesser amounts.

Future Nondisabled Retirees

Had the original BBA remained in effect, future military retirees would have been more affected than current retirees. Generally in their early 40s, the average future retiree would have received reduced COLAs for about 18 years until the age of 62. To estimate the effect on future nondisabled military retirees under the BBA formula, CRS calculated average lifetime retirement income for enlisted and officer retirees with a full CPI adjustment and with the CPI less 1% as set in the Bipartisan Budget Act.

CRS based its calculations of the effect on future nondisabled retirees using the DOD Actuary's data on the characteristics of those who retired in FY2012—average age, retirement income, and life expectancy—and CBO's projections of the CPI. These estimates exclude reservists and reflect the bump-up to full-COLA retired benefits at age 62 and full CPI adjustments for the remainder of a retiree's life as provided in the original BBA language.¹⁶

Under these assumptions, the average nondisabled military retiree could be affected by the lower COLAs as follows.

• Enlisted personnel would have received a total of about $1.67 million rather than $1.73 million in lifetime retirement benefits, a $69,000 or 4.0% reduction in a 36-year period;
• Officers would have received a total of $3.74 million rather than $3.83 million in lifetime retired pay, an $87,000 or 2.3% reduction in a 36-year period (see Table 2).¹⁷

For nondisabled enlisted retirees, the estimate reflects an average where servicemembers joined the military at age 21, retired at age 43, received reduced COLAs for 18 years until they reached the age of 62 in FY2034, and then full COLAs for the rest of their lives. DOD Actuary figures project a life expectancy of 79 for these nondisabled, enlisted military retirees (see Table 2 below).

For nondisabled officer retirees, the average reflects servicemembers who joined the military at age 23, retired at 47, received reduced COLAs for 15 years until they reached the age of 62 in FY2030, and then full COLAs for the rest of their lives. The DOD Actuary projects a life expectancy of 84 for the average officer.

Current Disabled Retirees

Had the lower COLAs been applied to disabled retirees as originally required by the BBA, the effect on these retirees would have been greater than for nondisabled retirees because disabled servicemembers tend to retire at younger ages resulting in more years with a reduced COLA. In addition, with an average life expectancy of eight years less than nondisabled retirees, disabled retirees would had have fewer years with full-COLA benefits (Table 1). Because the average disabled retiree is 55 rather than 62, the majority of currently disabled retirees would have experienced several years of reduced COLAs had the original BBA remained in effect.

Future Disabled Retirees

As a point of comparison and to illustrate the effect of the original BBA, CRS used DOD Actuary estimates of the effect on future disabled retirees. Based on those data, CRS estimated that lifetime retired benefits for the average disabled military retiree would have been affected as follows if the reduced COLAs had remained in effect.

• Enlisted personnel would have received about $1.16 million rather than $1.29 million, a reduction of $123,000 or 9.6% in lifetime benefits received over a 37-year period;
• Officer personnel would have received about $2.60 million rather than $2.74 million, a decrease of $144,000 or 5.3% in lifetime benefits received over a 38-year period (see Table 2).¹⁸

Reflecting DOD Actuary data, the estimate above reflects an average disabled enlisted retiree who joined the military at 24, retired at 33 after 9 years of service, and lived until the age of 71. The comparable average disabled officer retiree would have begun service at the age of 28, retired at 40 after 12 years of service, and lived until the age of 77.

These estimates suggest that under the original BBA, the potential effect for disabled retirees would have been about double that faced by nondisabled retirees (Table 2). These estimates, however, do not include income that about one-third of disabled retirees would receive in additional Combat Related Special Compensation (CRSC) or Department of Veterans Affairs (VA) disability benefits. Under concurrent receipt, certain disabled military retirees can receive CRSC or VA disability benefits in addition to their DOD retirement benefits if their disability was combat-related or assessed as 50% or greater.¹⁹

Footnotes

1.	§403 of H.J.Res. 59/P.L. 113-67, Bipartisan Budget Act of 2013 and FY2014 Continuing Appropriations Act for COLA minus 1% provision; H.J.Res. 59 amends Title 10, §1401a(b), which sets COLAs for both military retirement and survivor benefits. The CPI-W tracks price changes for urban consumers; see http://www.bls.gov/news.release/cpi.nr0.htm.
2.	Ibid.
3.	This provision would not affect "REDUX" military retirees who already receive reduced COLAs of the CPI minus 1% in return for receiving a $30,000 bonus at 15 years of service.
4.	CBO, "Bipartisan Budget Act of 2013 as posted on the House Rules Committee website, December 10, 2013," December 11, 2013; http://www.cbo.gov/sites/default/files/cbofiles/attachments/Bipartisan%20Budget%20Act%20of%202013.pdf.
5.	See transcript of hearing before the Senate Armed Services Committee, "Hearing on Changes to the Military Retirement System, Panel 1 and Panel 2," January 28, 2014. During the hearing, arguments were made that retirement benefits of all current retirees and servicemembers should be "grandfathered," that is, not changed.
6.	USA Today, "Paul Ryan: Retirement pay can't take over defense budget," December 22, 2013.
7.	For quote, see Admiral Winnefeld's testimony to the Senate Armed Services Committee, "Hearing on Changes to the Miliatary Retirement System, Panel 1," January 28, 2014.
8.	Servicemembers do not contribute to their basic retirement benefits, which allow an active-duty military member with 20 years of service to receive 50% of their final rate of basic pay or the average of their highest 36 months of basic pay (depending on when they entered military service); see p. 3 and p. 26 in CRS Report RL34751, Military Retirement: Background and Recent Developments, by [author name scrubbed] and [author name scrubbed]. Servicemembers can also contribute to a Thrift Savings Account, but do not receive matching funds, see p. 17 and 26 in CRS Report R42087, Military Retirement Reform: A Review of Proposals and Options for Congress, by [author name scrubbed].
9.	Division C, Title X, §10001 of H.R. 3547/P.L. 113-67. This adjustment reduced the projected CBO savings by about $600 million.
10.	CRS calculation shows that 427,533 or 57% of those under the age of 62 would face 1-10 years of reduced COLAs based on the age distribution shown in the DOD Actuary, Statistical Report.
11.	CRS Report RL33446, Military Pay and Benefits: Key Questions and Answers, by [author name scrubbed]; see p. 6ff or history of military pay raises since 1993; military pay raises in FY2000-2010 generally exceeded the Economic Cost Index (ECI) by ½% or more.
12.	Life expectancy table for disabled retirees was provided by DOD Actuary, January 2014.
13.	FY2012 retirees are likely to be more representative of future retirees than the current retiree population, which is generally older and receives somewhat higher retirement income (see Table 1).
14.	Retirement benefits are often referred to as "retired pay."
15.	CRS calculation based on DOD, Office of the Actuary, Statistical Report on the Military Retirement System, p. 56-59 and p. 144 and CBO, The Long-term Budget Outlook, FY2013-FY2023, 9-17-13; http://www.cbo.gov/publication/44521.
16.	See Table 2 for sources and notes.
17.	This estimate assumes lifetime expectancy of 77 for enlisted and 84 for officers based on DOD Actuary data.
18.	This estimate assumes that life expectancy for disabled military retirees is eight years less than for nondisabled retirees based on a table provided by the DOD Actuary, and higher life expectancy for officers than enlisted.
19.	The DOD Actuary report indicates that a total of 30, 579 of the 95, 610 disability retirees receive both military retired pay and VA disability benefits because of a disability rating of 50% or more or a combat-related injury which makes them eligible for combat related special compensation (see table on p. 192).