Military Retirement: Background and Recent
Developments
David F. Burrelli
Specialist in Military Manpower Policy
Barbara Salazar Torreon
Information Research Specialist
May 28, 2014
Congressional Research Service
7-5700
www.crs.gov
RL34751
Military Retirement: Background and Recent Developments
Summary
The military retirement system is a noncontributory, 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 Adjustment (COLA) to ensure that the annuity is protected from the adverse consequences
of inflation. Military retirees are also entitled to nonmonetary 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, with 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. 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 that 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.
Approximately $54.09 billion was paid to military retirees and survivor benefit recipients in
FY2013. With military retired pay protected from inflation by annual adjustments due to the
COLA, retirement costs will continue to increase.
In 2008, the 10th Quadrennial Review of Military Compensation (QRMC) recommended a
revision of both the active and reserve retirement systems, along with other recommended
changes to the military compensation system. However, with ongoing military operations in Iraq
and Afghanistan, the executive branch and the current Congress have appeared reluctant to alter
the current system. In December 2009, the President directed the start of the 11th QRMC, a one-
year effort, with its report expected in late 2010. However, after several delays, the QRMC
published its report in June 2012.
The Bipartisan Budget Act of 2013 (P.L. 113-67) revised the computational formula for military
retirees. Under this formula, military retirees under the age of 62, who would be eligible to have
their retired pay annually adjusted with a COLA of 1% or more, would have that COLA reduced
by 1% until age 62. However, the Consolidated Appropriations Act, 2014, signed into law (P.L.
113-76) on January 17, 2014, repealed the COLA minus 1% formula for Chapter 61 retirees,
Survivor Benefit Plan annuitants, those receiving Combat-Related Compensation, and those
affected by concurrent receipt.
Congressional Research Service
Military Retirement: Background and Recent Developments
Contents
Overview .......................................................................................................................................... 1
Three Systems, Different Retired Pay Calculations ......................................................................... 3
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
Change in Military Retiree Pay Dates ....................................................................................... 8
Retired Pay and the Cost-of-Living Adjustment .............................................................................. 9
COLAs for Pre-August 1, 1986, Entrants .................................................................................. 9
COLAs for Personnel Who Entered Service On or After August 1, 1986 ............................... 10
Non-Redux Recipients ...................................................................................................... 10
Redux/$30,000 Cash Bonus Recipients ............................................................................ 10
Costs and Benefits of the Two Retirement Alternatives .......................................................... 10
Bipartisan Budget Act of 2013 ................................................................................................ 11
Military Retirement Budgeting and Costs ..................................................................................... 12
Accounting for Military Retirement in the Federal Budget ..................................................... 12
Unfunded Liability .................................................................................................................. 13
Military Retirement Cost Trends ............................................................................................. 13
Reforming the Military Retirement System ................................................................................... 14
Tables
Table 1. DOD Retired Military Personnel, Survivors and Program Costs, FY2005-
FY2013 ......................................................................................................................................... 2
Table 2. Comparison of Retirement Methods .................................................................................. 5
Table 3. Retirees by Category and Service ...................................................................................... 6
Table 4. Military Retirement Outlays ............................................................................................ 13
Contacts
Author Contact Information........................................................................................................... 16
Congressional Research Service
Military Retirement: Background and Recent Developments
Overview
The military retirement system is a noncontributory, 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 Adjustment (COLA) to ensure that the annuity is protected from the adverse consequences
of inflation. Military retirees are also entitled to nonmonetary 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 the age of 60. Both the active
duty and reserve component retirement systems “vest” at 20 years of service.1 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 that support them. In 2010, there were
approximately 2.214 million military retirees and survivor benefit recipients,2 receiving
approximately $50.12 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 Department of
Defense (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 43 years old and has 22 years of service at retirement while the average officer is 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 Roughly 1.920 million military retirees receiving retired pay and 294,000 survivors receiving benefits as of
September 30, 2010. Fiscal Year 2010 DOD Statistical Report on the Military Retirement System, DOD Office of the
Actuary, May 2011.
3 Department of Defense, Valuation of the Military Retirement System, September 30, 2010, Office of the Actuary,
January 2012, p. 13.
4 Department of Defense, Fiscal Year 2010 DOD Statistical Report on the Military Retirement System, Office of the
Actuary, May 2011, pp. 122 and 127.
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Military Retirement: Background and Recent Developments
It is estimated that approximately $54 billion was paid to military retirees and survivor benefit
recipients in FY2013. In the past, some have viewed this budget item as a place where substantial
budgetary savings could be made. However, some have argued that past modifications intended to
save money have had a deleterious effect on military recruiting and retention.
As shown in Table 1, the number of military retirees and the cost of their retirement 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-FY2013
Retirees and
Survivor
Total Program
Retirees from an Active
Disability
Reserve
Benefit
FY
Cost
Duty Military Career
Retirees
Retirees
Recipients
FY2013
2,244,000/
1,470,000/
102,000/
382,000/
290,000/
$54.09 billion
$43.20 billion
$1.45 billion
5.68 billion
$3.76 billion
FY2012
2,270,00/
1,470,000/
96,000/
376,000/
328,000/
$52.65 billion
$42.1 billion
$1.38 billion
$5.36 billion
$3.81 billion
FY2011
2,259,700/
1,470,000/
95,000/
367,000/
327,000/
$50.62 billion
$40.5 billion
$1.36 billion
$5.06 billion
$3.7 billion
FY2010
2,214,000/
1,470,000/
93,000/
357,000/
294,000/
$50.12 billion
$40.2 billion
$1.38 billion
$4.89 billion
$3.65 billion
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 Comptrol er, FY2013 Military Retirement Fund Audited Financial
Report, December 9, 2013, at http://comptroller.defense.gov/cfs/fy2013/13_Military_Retirement_Fund/
Fiscal_Year_2013_Military_Retirement_Fund_Financial_Statements_and_Notes.pdf.
Department of Defense. Office of the Actuary, FY2012 DOD Statistical Report on the Military Retirement System,
May 2013. Statistical documents available by fiscal year for FY2005-FY2011 at http://actuary.defense.gov/.
Note: Survivors include the spouse, children, and others with insurable interests that are entitled to death
benefits from the DOD Military Retirement Fund.
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 Afghanistan and other overseas areas 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.
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Military Retirement: Background and Recent Developments
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 COLA that will be discussed
later.
Active Component Retirement5
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 pay6 at the time of
retirement,7 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.
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 one-twelfth for each complete month less than a full
year.8 The minimum amount of retired pay to which a member is 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 John Warner National Defense Authorization Act extended the previous
pay table to 40 years, allowed additional longevity raises,9 and provided additional retirement
credit for service beyond 30 years at the rate of 2.5% per year.10 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%).
5 Also frequently referred to as regular nondisability retirement.
6 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 nontaxable 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 nonmonetary 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 Lawrence Kapp.
7 Unlike some civilian retirement plans, there is no provision in any of the military retirement systems for a lump sum
withdrawal upon retirement.
8 Military Retirement Reform Act of 1986, Section 1405(b), P.L. 99-348, July 1, 1986.
9 Section 601, P.L. 109-364, October 17, 2006.
10 Section 642, P.L. 109-364, October 17, 2006.
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Military Retirement: Background and Recent Developments
The Final Basic Pay cohort that entered the military before September 8, 1980, had 30 years of
service in 2010. They are quickly aging out of the system, and it is expected that all will be
retired by 2016.11
“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 198612 (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 Redux13 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 of the bonus.
11 Department of Defense, Valuation of the Military Retirement System, September 30, 2006, DOD Office of the
Actuary, November, 2007, p. 12.
12 P.L. 99-348, July 1, 1986.
13 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
The Redux Formula
Redux is different from the High Three formula in two major ways.
Under Age 62 Retirees
First, for retirees under the age of 62, the retired pay multiplier will be reduced by 1% 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 the age of 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 after July
entering before
September 8, 1980, through July
31, 1986, and accepting 15-year
September 8, 1980
31, 1986, and persons entering
Career Status Bonus with additional
after July 31, 1986, but opting not
5-year service obligation
to accept the 15-year Career
Status Bonus
Basis of
Final rate of monthly
Average monthly basic pay for the
Average monthly basic pay for the
Computation
basic pay
highest 36 months of basic pay
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 1% for
service
each year of service less than 30
(restored at age 62)
Cost-of-Living
Full CPI
Full CPI
CPI less 1% with one-time catch up
Adjustment
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 had 30 years of service in 2010. Although the numbers for High Three and
Redux should continue to increase, these figures suggest that Redux is the least popular
retirement system with fewer current retirees selecting this option.
Table 3. Retirees by Category and Service
(as of January 2014)
Army
Air Force
Navy
Marine Corps
Total
Final Pay
605,785
231,538
261,229
87,190
1,185,742
High Three
163,474
122,377
112,112
32,492
430,455
Redux 15,287
13,545
14,806
3,276
46,914
Unknown 2
316,538
113,892 0
430,432
Total 784,548
683,998
502,039
122,958
2,093,543
Source: Department of Defense, Defense Management Data Center (DMDC) prepared for CRS, February 19,
2014.
Notes: Total Services include Army, Air Force, Navy, and Marine Corps only. Retiree Population includes only
those currently receiving or eligible but not receiving pay. Retiree Population includes both temporary and
permanently disabled retirees.
Reserve Component Retirement14
There are many similarities among the active and reserve retirement systems. First, Reserve
Component members15 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 are the point
system used to calculate “qualifying years,” and equivalent years of service, as well as 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.16
• Fifteen points a year for membership in the Selected Reserve.
14 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 and Barbara Salazar
Torreon.
15 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.
16 Annual training is a two-week period of active duty that usually results in 14 retirement points.
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Military Retirement: Background and Recent Developments
• One point for each inactive duty training (IDT) period.17
• One point for each period of funeral honors duty.
• 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 participating member of the
Selected Reserve 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.18 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 “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 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 6019 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 5,000 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 $2,560 per month.
17 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.
18 Section 648, P.L. 110-181, January 28, 2008.
19 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 Retirement20
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 six months or more on active duty and the disability was not noted at the time
of entrance on active duty.21 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:22
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.23
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.
Change in Military Retiree Pay Dates
Monthly pay for most military retirees has been accomplished through direct deposit to a
financial institution on the first day of the month. However, if the first day of the month was a
20 For additional information on DOD’s disability process, see CRS Report RL33991, Disability Evaluation of Military
Servicemembers, by Christine Scott and Don J. Jansen.
21 10 U.S.C. 1201 (b) (3) (B). Prior to the FY2008 NDAA (Section 1641), disability retirement required at least eight
years of service or a disability that resulted from active duty or was incurred in the line of duty during war or national
emergency.
22 10 U.S.C. 1401.
23 10 U.S.C. 1401.
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weekend or national holiday, the pay would not be deposited until the first business day of the
month, which could actually be the second or third day of the month.
In response to numerous complaints from military retirees about not receiving their pay on the
first and with support from veterans’ service organizations, the FY2011 Ike Skelton National
Defense Authorization Act24 required that military retiree pay be processed on the first day of the
month. When that day falls on a weekend or holiday, the pay date is moved to the previous
business day. This change resulted in calendar year 2011 having 13, rather than the normal 12,
military pay dates and the potential tax implications associated with increased annual income.
Since the tax year 2012 and beyond, military retirees will receive their normal 12 payments.
Retired Pay and the Cost-of-Living Adjustment
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, provides 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.
This trend continued in 2010 with no COLA increase being paid. For both 2009 and 2010,
negative inflation did not result in a decrease in retired pay but kept it the same as the previous
year. However, 2011 saw a 3.6% COLA increase paid beginning January 1, 2012. 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 2010 to 412.0 in the period July through September 2011, an increase of 12.0
points or 3.0% of 400.0. The monthly retired pay that accrues beginning December 2011, that will
actually be paid to retirees on January 1, 2012, would be increased by 3.0% above that amount
paid the previous month.
24 Section 646, FY2011 NDAA.
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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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.
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 the age of 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 age 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 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
When the bonus was first introduced in 2001, 50% of eligible Marine Corps enlisted retirees,
40% of warrant officers, but only 13% of commissioned officers took it,28 suggesting the initial
26 Vince Crawley, “Report: Taking Redux Bonus Is ‘Loan’ Against Retirement,” Marine Corps Times, May 21, 2001,
p. 10.
27 Vince Crawley, “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 C. Mark Brinkley, “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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attractiveness of the immediate cash payment to the lower-paid members of the career force.
Since then, Marine Corps participation has declined steadily. In 2009, the “take rate” was 23% for
enlisted Marine personnel, 19% for warrant officers, and only 3% for officers—an overall rate of
17.7%.29
Bipartisan Budget Act of 2013
P.L. 113-67 (Bipartisan Budget Act of 2013)30 includes a section (§403) that modified how
COLAs are computed for current and future retirees under the age of 62. Under this proposed
formula, if the CPI used in computing the COLA is 1% or greater, then that CPI amount is
reduced by 1% during each year the retiree is under age 62. For example, if the CPI is determined
to be 2.5%, a CPI of 1.5% would be applied. If the CPI in any year is 1.0% or less than 1%, it is
considered to be 0 and no COLA occurs (i.e., there cannot be a negative COLA). Upon reaching
age 62, for the purposes of computing future retired pay, retired pay is re-computed as if the full
CPI had been used each year while the retiree was under age 62. This formula would take effect
December 1, 2015. This change would not apply to those under the Redux retirement plan who
are already under the CPI minus 1% formula.
Retirees earning a higher retirement pay will lose more as the result of this change than those
earning smaller retirement pay due to the compounding effect of these changes over time. In the
first example, an E-7 who retires in 2015 at the age of 40, and is eligible to receive $23,532 per
year, would be affected by the reduced formula in the following manner. If at the time the CPI is
computed, it is determined to be 2.5% (or $588) but a reduced 1.5% COLA is applied, the retiree
would receive a $353 increase, or $235 less than under the original formula.31 Assuming a
constant 2.5% increase in the CPI over the next 22 years (until the year this retiree reaches age
62), the difference would be $40,512 in annual pay at age 62 under the 2.5% formula, compared
with $32,652 annual pay at age 62 under the revised 1.5% formula, or a difference of $7,860. The
cumulative difference between receiving a 2.5% increase and those receiving a 1.5% increase,
over this 22-year period, would be $79,050.
In the second example, an O-5 retiring at age 42 in 2015 (using 2013 pay tables) would receive a
High Three monthly retired pay of approximately $4,114. Using the same CPI and reduced COLA
in the first example (2.5% CPI/1.5% COLA), over the next 20 years, the amount of retired pay
this retiree would receive would be $133,923 less than if he or she had received the full CPI
amount each year.
An E-7 and an O-5, who are already retired and age 52, would see a loss of $14,359 and $30,618,
respectively. Thus, for those who are already retired, the effect of Section 403, P.L. 113-67 would
be reduced the closer they are to age 62.
29 Center for Naval Analysis, “Retirement Choice: 2010,” p. 17, March 2010.
30 P.L. 113-67; H.J.Res. 59; December 26, 2013.
31 All amounts have been rounded to the nearest dollar. Monthly retired pay has been computed using the high-three
method for those at the past 20-year mark using FY13 pay tables, these amounts are multiplied by the different
percentages. Finally, the cumulative differences between retired pay over the differing time periods has been
calculated. These estimates do not apply to any particular retiree but rather are used for exemplary purposes.
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The Consolidated Appropriation Act, 2014, was signed into law (P.L. 113-76) on January 17,
2014.32 Among its many provisions was a section that repealed the COLA minus 1% formula for
Chapter 61 retirees, Survivor Benefit Plan annuitants, those receiving Combat-Related
Compensation, and those affected by concurrent receipt. Other nondisability retirees under the
age of 62 would continue to be subject to the COLA minus 1% formula.
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 appropriated the amount of money required to pay
current retirees each year as part of each annual defense appropriations bill, commonly referred to
as “pay-as-you-go.” 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 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
32 P.L. 113-76; 128 Stat. 5; January 17, 2014; §10001.
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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.
The unfunded liability at the end of FY2010 had increased to $903.5 billion, higher than
anticipated but almost entirely due 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.
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. 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
FY2013 54.7
n/a
FY2012 52.6
n/a
FY2011 50.6
n/a
FY2010 50.1
20.3
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Military Retirement Fund Payments
DOD Accrual Payments to the
to Military Retireesa
Military Retirement Fundb
FY2009 49.2
17.5
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
Source: Table compiled by the Congressional Research Service.
a. DOD Office of the Comptrol er, FY2013 Military Retirement Fund Audited Financial Report, p.1 at
http://comptroller.defense.gov/cfs/fy2013/13_Military_Retirement_Fund/
Fiscal_Year_2013_Military_Retirement_Fund_Financial_Statements_and_Notes.pdf. DOD Office of the
Actuary, FY2012 DOD Statistical Report on the Military Retirement System, May 2013, p. 20. Statistical
documents available by fiscal year for FY2005-FY2011 at http://actuary.defense.gov/.
b. DOD Office of the Actuary, Valuation of the Military Retirement System: September 30, 2011, p. 20 at
http://actuary.defense.gov/.
Reforming the Military Retirement System
Every four years, the President is required by law33 to initiate a comprehensive review of the
military compensation system and to forward the review, along with his recommendations, to
Congress. The most recent effort, the 10th Quadrennial Review of Military Compensation
(QRMC),34 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.”35
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 the following:
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
33 Section 1008(b), Title 37.
34 The report of the 10th QRMC can be viewed at http://www.defenselink.mil/news/QRMCreport.pdf.
35 Presidential memorandum, Subject: Tenth Quadrennial Review of Military Compensation, August 2, 2005.
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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.
Although 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 nor Congress has 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. However, after several delays, the QRMC was published in June 2012.36
The National Defense Authorization Act for Fiscal Year 2013 created the Military Compensation
and Modernization Commission, which was established to review and modernize military
compensation.37 The commission’s recommendations are due to the President and Congress on
February 1, 2015. However, an interim report is planned for release in June 2014. “This interim
report will document the Commission’s understanding of the entirety of current military
compensation and benefit programs; relevant laws, regulations, and policies; associated
appropriated Federal funding; and historical and contextual background for each program across
the Federal government.”38
For additional information on the reform or modernization of the military retirement system, see
CRS Report R42087, Military Retirement Reform: A Review of Proposals and Options for
Congress, by David F. Burrelli.
36 Report of The 11th Quadrennial Review of Military Compensation , Main Report, June 2012, at
http://militarypay.defense.gov/reports/qrmc/11th_QRMC_Main_Report_(290pp)_Linked.pdf.
37 P.L. 112-239, 126 Stat. 1787.
38 Military Compensation and Retirement Modernization Commission, FAQs at http://mldc.whs.mil/index.php/faq.
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Author Contact Information
David F. Burrelli
Barbara Salazar Torreon
Specialist in Military Manpower Policy
Information Research Specialist
dburrelli@crs.loc.gov, 7-8033
btorreon@crs.loc.gov, 7-8996
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