Military Retirement: Background and Recent
Developments
Kristy N. Kamarck
Analyst in Military Manpower
April 30, 2015
Congressional Research Service
7-5700
www.crs.gov
RL34751
Military Retirement: Background and Recent Developments
Summary
The military retirement system is a government-funded 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 for qualified active and reserve retirees,
disability benefits for those deemed medically unfit to serve, and a survivor annuity program for
the eligible survivors of deceased retirees. The amount of compensation is dependent on time
served, basic pay at retirement, and is adjusted annually through a Cost-of-Living-Adjustment
(COLA). Military retirees are also entitled to nonmonetary benefits including exchange and
commissary privileges, medical care through TRICARE, and access to Morale, Welfare and
Recreation (MWR) facilities and programs.
Currently, active component personnel are eligible for retirement or “vested” after completing 20
years of service (YOS) and have a choice between two options (High-Three or Career Status
Bonus/Redux) based on career expectations and the individual’s financial situation. Reserve
personnel are eligible for retirement after 20 years of creditable service based on a points system,
but do not typically begin to draw retirement pay until age 60. A third category of retirement is
disability retirement.
In FY2013, $54 billion was paid to approximately 2.2 million military retirees and survivors.
Given the size of the program, some have viewed military retirement as a place where substantial
budgetary savings could be made. However, others have argued that past modifications intended
to save money have had a deleterious effect on military recruiting and retention. Military retirees,
families, and veterans’ service organizations closely monitor potential future changes to the
retirement system. When considering alternatives to the current system, Congress will likely
consider the balance between budget constraints and the needs and concerns of this constituent
group.
The National Defense Authorization Act (NDAA) for FY2013 established a Military
Compensation and Retirement Modernization Commission (MCRMC) to provide the President
and Congress with specific recommendations to modernize pay and benefits for the armed
services. The commission recommended substantial changes to the current retirement system
from a purely defined benefit system to a blended system. The new system would allow more
servicemembers to develop retirement savings earlier in their careers through contributions into
the Thrift Savings Plan (TSP) coupled with government matching and early vesting, and would
reduce the defined benefit multiplier for calculating the retirement annuity from 2.5% to 2.0%.
The new multiplier would provide Servicemembers retiring at 20 years of service with 40% of
their “pay base” at retirement rather than 50% under the current system. Under the commission’s
proposed changes, existing servicemembers and retirees would be able to remain in the old
system or opt into the new system.
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Military Retirement: Background and Recent Developments
Contents
Overview .......................................................................................................................................... 1
Retirement Systems and Pay Calculations ....................................................................................... 2
Active Component Retirement .................................................................................................. 3
Final Basic Pay System ....................................................................................................... 4
“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 ....................................................................................... 9
Retired Pay and the Cost-of-Living Adjustment (COLA) ............................................................... 9
COLAs for Pre-August 1, 1986, Entrants ................................................................................ 10
COLAs for Personnel Who Entered Service On or After August 1, 1986 ............................... 10
Non-Redux Recipients ...................................................................................................... 10
Redux/$30,000 Cash Bonus Recipients ............................................................................ 10
Bipartisan Budget Act of 2013 ................................................................................................ 11
Reforming the Military Retirement System ................................................................................... 11
10th QRMC Recommendations ................................................................................................ 11
11th QRMC Recommendations ................................................................................................ 12
MCRMC Proposals ................................................................................................................. 12
Proposed Changes to the Defined Benefit System ............................................................ 14
Proposed Changes to Continuation Pay ............................................................................ 15
Proposed Changes to Disability Retirement ...................................................................... 16
Military Retirement Budgeting and Costs ..................................................................................... 16
Unfunded Liability .................................................................................................................. 17
Figures
Figure 1. Active Duty Non-Disability (Longevity) Retirement Eligibility Flowchart .................... 3
Tables
Table 1. DOD Retired Military Personnel, Survivors, and Program Costs, FY2005-
FY2013 ......................................................................................................................................... 2
Table 2. Active Duty and Reserve Non-Disability Retirees by Category and Service .................... 6
Table 3. Cost-of-Living Adjustments 2006-2015 ............................................................................ 9
Table 4. Comparison of Current Retirement System to MCRMC Proposals ................................ 13
Table 5. DOD’s Normal Cost Percentages for FY2014 ................................................................. 16
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Contacts
Author Contact Information........................................................................................................... 18
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Military Retirement: Background and Recent Developments
Overview
The military retirement system is a government-funded 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 for qualified active and reserve retirees,
disability benefits for those deemed medically unfit to serve, and a survivor annuity program for
the eligible survivors of deceased retirees. The amount of compensation is dependent on time
served and basic pay at retirement. 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 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,” or become eligible for retirement
benefits, at 20 years of qualifying 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 (longevity) and one on the severity of the disability.
In FY2013 $54 billion was paid to approximately 2.3 million military retirees and survivors.2 As
shown in Table 1, the number of military retirees and the cost of their retirement benefits have
increased over the past decade. Congress grapples with constituent concerns as well as budgetary
constraints in considering military retirement issues. In the past, some have viewed military
retirement as a place where substantial savings could be made, arguing that the military
retirement compensation is overly generous relative to pension systems in the civilian sector. In
particular, they note that active duty military personnel become eligible for retirement at a
relatively young age. The average active duty3 enlisted retiree is 43 years old and has 22 years of
service at retirement while the average officer is 47 years old and has nearly 24 years of service at
retirement.4
Others argue that the military retirement system is fair given the unique demands of military
service, pointing out the high operational tempo and repetitive tours of duty in overseas combat
areas that servicemembers have endured over the past decade and a half. In addition, some have
1 Vesting in the military retirement system is commonly referred to as “cliff vesting.” Until the 20-year point, there is
generally no vesting. At 20 years, the servicemember becomes fully vested. However, individuals can receive
retirement benefits with fewer than 20 years of service under the disability retirement system and under Temporary
Early Retirement Authority (Section 4403, P.L. 102-484, October 23, 1992).
2 Department of Defense, FY2013 DOD Statistical Report on the Military Retirement System, Office of the Actuary,
May 2014.
3 These figures are for all of DOD non-disability retirees, excluding reserve retirees.
4 Department of Defense, Fiscal Year 2013 DOD Statistical Report on the Military Retirement System, Office of the
Actuary, May 2014, pp. 81 and 98.
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argued that past modifications to the system intended to save money have had a deleterious effect
on military recruiting and retention, particularly in times of strong economic performance.
Table 1. DOD Retired Military Personnel, Survivors, and Program Costs,
FY2005-FY2013
Retired Pay
Recipients and
Survivor
Total Program
Retirees from an Active
Disability
Reserve
Benefit
FY
Cost
Duty Military Career
Retirees
Retirees
Recipients
FY2013
2,284,179/
1,470,803/
103,106/
383,490/
326,780/
$54.00 billion
$43.09 billion
$1.43 billion
$5.62 billion
$3.85 billion
FY2012
2,272,295/
1,472,087/
95,910/
376,052/
328,246/
$52.61 billion
$42.1 billion
$1.38 billion
$5.36 billion
$3.81 billion
FY2011
2,260,112/
1,471,219/
94,886/
366,823/
327,184/
$50.65 billion
$40.5 billion
$1.36 billion
$5.06 billion
$3.7 billion
FY2010
2,216,720/
1,467,936/
92,704/
356,602/
299,478/
$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/
$45.66 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/
$43.57 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/
$41.13 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/
$38.79 billion
$32.44 billion
$1.26 billion
$3.32 billion
$2.26 billion
Sources: Department of Defense, FY2014 Military Retirement Fund Audited Financial Report, Office of the
Comptrol er, November 7, 2014.
Department of Defense, FY2013 DOD Statistical Report on the Military Retirement System, Office of the Actuary,
May 2014. Statistical documents available by fiscal year for FY2005-FY2013.
Notes: Total Program Cost is the total obligations and expenditures for that Fiscal Year. Survivors include the
spouse, children, and others with insurable interests that are entitled to survivor benefits from the DOD Military
Retirement Fund.
While congressionally mandated changes to the military retirement system have been infrequent,
any potential future changes are closely monitored by current servicemembers, retirees, survivors
and the veterans’ service organizations that support them. 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.
Retirement Systems and Pay Calculations
There are currently three separate but related retirement systems within the DOD: one for active
duty members, one for reservists, and one for those who become medically disabled and are
unable to complete a 20-year military career due to their disability. Each of these systems has
distinct eligibility requirements and formulas for calculating the retirement annuity. Retirement
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Military Retirement: Background and Recent Developments
pay calculations are based on the date when the servicemember first entered on active duty and
their “pay base”5 at the time of retirement.6 The active and reserve component retirement systems
“cliff-vest” after 20 years of service, which means that servicemembers who leave the service
prior to completing 20 years of eligible service typically, will not receive any non-disability
retirement benefit. Vesting for the disability retiree occurs at their disability retirement date,
regardless of years of service, and some individuals qualify for longevity retirement prior to
attaining 20 years of service under Temporary Early Retirement Authority (TERA).
Active Component Retirement7
For active duty military personnel, there are three methods of calculating retired pay based on
longevity: 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, their pay base
at the time of retirement, their years of service, and whether they opted in to the Redux system.
Figure 1 shows how eligibility for retirement calculations is determined.
Figure 1. Active Duty Non-Disability (Longevity) Retirement Eligibility Flowchart
Source: CRS
5 The “pay base” is either the amount of basic pay being received at the time of retirement (for those in the Final Basic
Pay System) or the average of the highest 36 months of basic pay received (for those in the High-3 System). See 10
U.S.C. §§1406 and 1407. Basic pay is the principal element of Regular Military Compensation (RMC). The other
elements include the Basic Allowance for Housing (BAH) and the Basic Allowance for Subsistence (BAS), which are
nontaxable allowances. Basic pay is between 65% and 75% 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: Key Questions and Answers, by Lawrence Kapp and Barbara Salazar Torreon.
6 Unlike some civilian retirement plans, there is currently no provision in any of the military retirement systems for a
lump sum withdrawal after retirement.
7 This is also frequently referred to as regular non-disability retirement.
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Final Basic Pay System
For persons who entered military service before September 8, 1980, the pay base is the final
monthly basic pay being received by the servicemember at the time of retirement multiplied by
2.5% for each year of service8 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 times
2.5%). A servicemember who retires at 25 years receives 62.5% of the computation base (25
years of service times 2.5%). Historically, the maximum, reached at the 30-year mark, was 75%
of the computation base (30 years of service times 2.5%). However, the FY2007 John Warner
National Defense Authorization Act (P.L. 99-348 §§601 and 642) extended the previous pay table
to 40 years, allowed additional longevity raises, and provided additional retirement credit for
service beyond 30 years at the rate of 2.5% per year. As a result, a servicemember who retires
with 40 years of service will qualify for 100% of their final basic pay9 in retirement.
The Final Basic Pay cohort that entered the military before September 8, 1980, had 30 years of
service in 2010. They have nearly all aged out of the system, and it is expected that all members
of this group will be retired by 2016.10
“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
What is now commonly referred to as the “Redux” military retirement system was initiated with
the Military Retirement Reform Act of 1986 (P.L. 99-348). The Redux formula reduced the
amount of retired pay that military servicemembers who entered the armed forces on or after
August 1, 1986, were eligible to receive. This system was broadly unpopular and by 1997
Congress began to take note of potential recruiting and retention problems associated with the
change.11 During the fall of 1998, the Clinton Administration announced that it supported Redux
repeal.12 The FY2000 National Defense Authorization Act (P.L. 106-65 §§641 and 642)
contained provisions for repealing compulsory Redux; it allowed 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
8 Partial years of service are credited as well, with each month equivalent to one-twelfth of a year. Military Retirement
Reform Act of 1986, Section 1405(b), P.L. 99-348, July 1, 1986.
9 In the FY2015 Carl Levin and Howard P. “Buck” McKeon National Defense Authorization Act. (P.L. 113-291 §622),
Congress reinstated a cap on retired pay of general and flag officers at the Executive Level II salary ($183,300 for
2015). This change applies to only years served after December 31, 2014.
10 Department of Defense, Valuation of the Military Retirement System, September 30, 2006, DOD Office of the
Actuary, November, 2007, p. 12.
11 Department of Defense, Military Compensation Background Papers: Compensation Elements and Related
Manpower Cost Items, Their Purposes and Legislative Backgrounds, April 2005, p. 707.
12 U.S. Congress, Senate Special Committee on Aging, Developments in Aging: 1999 and 2000, Volume 1, 107th Cong.,
2nd sess., S.Rept. 107-158 (Washington DC: GPO, 2001).
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one of the following two options for calculating their retired pay within 180 days of reaching 15
years of service.
Option 1: Pre-Redux
Eligible servicemembers can opt to have their retired pay computed in accordance with the pre-
Redux formula, described above as High Three.
Option 2: Redux
Eligible servicemembers 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.13 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.
The Redux Formula
Redux is different from the High Three formula in two major ways.
1. Retirees under age 62: 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 formula, a 20-year retiree will receive 40% of his or her retired
pay computation base upon retirement (20 years of service multiplied by 2.5%
minus 10%), and a 25-year retiree will receive 57.5% of the computation base
(25 years of service multiplied by 2.5% minus 5%). A 30-year retiree, however,
will receive 75% of the retired pay computation base (30 years of service
multiplied by 2.5% minus 0%, the same as the High Three retiree). The Redux
formula, therefore, is “skewed” much more in favor of the longer serving
military careerist, theoretically providing an incentive to remain on active duty
longer before retiring.
2. 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 his or her pay base under the Redux formula
will begin receiving 50% of his or her pay base; the 25-year retiree’s annuity
will jump from 57.5% of the pay base to 62.5%; and the 30-year retiree’s
annuity, already at 75% of the pay base under both the old and new formulas
will not change.14
Table 2 reflects retirees by service and by retired pay system. There are very few now serving in
the military that are eligible to retire under the Final Pay system since the junior member of that
cohort who is still on active duty had at least 35 years of service in 2015. Although the numbers
13 37 U.S.C. §354. The bonus can actually be paid in several annual installments if the recipient so wishes, for tax
purposes.
14 Note that this change is an increase in monthly retired pay, not a lump sum at the age of 62.
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for High Three and Redux should continue to increase, these figures show that Redux is the least
popular retirement system with fewer current retirees selecting this option.
Table 2. Active Duty and Reserve Non-Disability Retirees by Category and Service
(as of September 2014)
Army
Air Force
Navy
Marine Corps
Total
Final Pay
599,991
539,243
368,717
85,747
1,593,698
High Three
178,554
131,333
116,624
34,979
461,490
Redux 17,238
15,348
15,852
3,710
52,148
Total 784,548
684,924
501,193
124,436
2,107,336
Source: Department of Defense, Office of the Actuary. Data provided to CRS on March 26, 2015.
Notes: Totals include all of those eligible to receive non-disability retired pay including those who are eligible
but not receiving retired pay due to 100% VA offset for disability or gray area reserve retirees.
Reserve Component Retirement15
There are many similarities between 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 are the point
system used to calculate “qualifying years” and equivalent years of service, as well as the age at
which the retirement annuity begins.
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 service, which includes annual training.17
• Fifteen points a year for membership in the Ready Reserve.
• One point for each inactive duty training (IDT) period.18
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 and Barbara Salazar
Torreon.
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 service that usually results in 14 or 15 retirement points.
18 A day of inactive duty for training typically includes two Unit Training Assemblies (UTAs). The normal drill
weekend consists of four UTAs and therefore results in four retirement points. A year of weekend drills earns 48
UTAs/retirement points.
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• 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.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.
However, the reservist will usually not become eligible for retired pay until age 60,20 at which
time he or she also becomes eligible for military medical care. 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 are referred to as “Gray Area” retirees. 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 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 adjustment to reflect the part-
time nature of reserve duty. For example, consider a reserve component lieutenant colonel with
5,000 points who joined the military in January 1980, and transferred to the Retired Reserve in
2000 after completing 20 qualifying years of service. In 2015, he turned 60 years of age and
became eligible for retired pay. The process for calculating his retired pay is to divide the total
points by 360 to convert the points to years of equivalent service (5000 / 360 = 13.89). Next
multiply the equivalent years of service by the 2.5% multiplier (13.89 times 0.025 = .3472).
Using the Final Basic Pay option, the 2015 pay base21 for a lieutenant colonel with 35 years of
service (20 years of qualifying service plus 15 years in the Retired Reserve) is $8,762.40 per
month. Multiplying the pay base by the retired pay multiplier ($8,762.40 times 0.3472) produces
a monthly retirement annuity of $ 3,042 per month.
19 P.L. 110-181 §648
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.
21 2015 Military Pay Chart at http://www.dfas.mil.
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Disability Retirement22
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 permanent and stable disability,
rated at 30% or more by DOD, and the disability was not noted at the time of entrance on active
duty.23 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:24
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 the disability formula cannot exceed 75% of basic
pay; however, it can be higher under the longevity formula.25 Retired pay computed under the
disability formula is subject to federal income tax unless the disability is the result of a combat-
related injury or if the individual was a member of the Armed Services or eligible to receive
disability payments prior to September 25, 1975.26 Retired pay under the longevity formula (for
those entering after September 24, 1975) 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 military 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 non-
disability 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.
22 For additional information on DOD’s disability process, see CRS Report RL33991, Disability Evaluation of Military
Servicemembers, by Christine Scott and Don J. Jansen.
23 10 U.S.C. §1201 (b) (3) (B). Prior to the FY2008 NDAA (P.L. 110-181 §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.
24 10 U.S.C. §1401.
25 10 U.S.C. §1401.
26 26 U.S.C. §104.
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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
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 Act (P.L. 111-383 §646) 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. From tax year 2012 and beyond, military retirees will receive their normal 12 payments.
Retired Pay and the Cost-of-Living Adjustment
(COLA)
Military retired pay is protected against inflation by statute (10 U.S.C. §1401a). The Military
Retirement Reform Act of 1986, in conjunction with changes contained in the FY2000 National
Defense Authorization Act (P.L. 106-65), provides for COLAs as indicated below. Congress has
not modified the COLA formula27 since 1995. However, COLA modifications are regularly
discussed among policymakers, typically with the aim of reducing costs and hence the payments
to retirees.
For non-Redux retireees from 2006 to 2009, COLA increases averaged 3.9% annually. However,
there was no COLA in 2010 as a result of negative inflation from the third quarter of 2008 to the
third quarter of 2009. This trend continued in 2011 with no COLA increase being paid. For both
2010 and 2011, 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 and
from 2013 to 2015 COLA has remained fairly steady around 1.6% as shown in Table 3.28
Table 3. Cost-of-Living Adjustments 2006-2015
Year
COLA Year COLA
2006 4.1%
2011 0.0%
2007 3.3%
2012 3.6%
2008 2.3%
2013 1.7%
2009 5.8%
2014 1.5%
27 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 United States, Military
Compensation Background Papers, Seventh Edition, November 2011, p. 637.
28 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).
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Year
COLA Year COLA
2010 0.0%
2015 1.7%
Source: Office of the Under Secretary of Defense (Comptrol er), DOD 7000.14-R Financial Management
Regulation, Vol. 7B, Chapter 8, February 2015
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 414.4 in the period July through September 2011, an increase of 14.4
points or 3.6% 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 3.6% 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.
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, have their COLAs computed using a different
formula. Annual COLAs are held one percentage point below the actual inflation rate. Retirees
covered by this COLA formula thus receive a 2.6% increase (rather than 3.6%) 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 is 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 (discussed earlier), 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 continue to be computed annually on the basis
of the inflation rate minus one percentage point.
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Bipartisan Budget Act of 2013
The Bipartisan Budget Act of 2013 (P.L. 113-67 §403) modified how COLAs are computed for
current and future retirees under the age of 62. Under the new 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 was intended to go into effect on December 1,
2015 for all current and future servicemembers.
However, in response to concerns about potential effects, Congress first restored full CPI COLA
adjustments for disabled military retirees and survivors in the Consolidated Appropriations Act of
2014 (P.L. 113-76). Congress has since amended the provision twice; first in 2014 (P.L. 113-82
§10001; formerly known as South Utah Valley Electric Conveyance Act) to apply only to
servicemembers joining on or after January 1, 2014, and then again in the Carl Levin and Howard
P. “Buck” McKeon National Defense Authorization Act for Fiscal Year 2015 (P.L. 113-291 §623)
to apply only to servicemembers joining on or after January 1, 2016.
For more information on military retirement COLAs and the Bipartisan Budget Act of 2013 see
CRS Report R43393, Reducing Cost-of-Living Adjustments for Military Retirees and the
Bipartisan Budget Act: In Brief, by Amy Belasco and Lawrence Kapp.
Reforming the Military Retirement System
There have been several recent efforts to modify the military retirement system. A number of
these previous studies have noted that the military retirement system should be more flexible,
equitable, and efficient.
10th QRMC Recommendations
Every four years, the President is required by law29 to direct a comprehensive review of the
military compensation system and to forward the review, along with his recommendations, to
Congress. In the 10th Quadrennial Review of Military Compensation (QRMC), 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.”30 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
29 37 U.S.C. §1008(b)
30 Presidential memorandum, Subject: Tenth Quadrennial Review of Military Compensation, August 2, 2005.
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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.
11th QRMC Recommendations
The DOD submitted the 11th QRMC final report in June 2012. While this QRMC did not have the
same focus on the entire retirement system as the previous QRMC, DOD recommended more
closely aligning active and reserve retirement systems with the goal of eventually transitioning to
a “total force” single-system approach for both the active and reserve components. The report
recommended the following modification to the reserve retirement system31:
Reserve component members who have attained 20 qualifying years for retirement benefits
could begin receiving retired pay on the 30th anniversary of their service start date or at age
60, whichever comes first. Reserve members would receive one retirement point for each day
of service, and the points needed for a qualifying year would be reduced from the current 50-
point requirement to 35.
Neither the executive branch nor Congress has taken any action to modify the military retirement
system based on the recommendations of the 10th or 11th QRMC.
MCRMC Proposals
The National Defense Authorization Act (NDAA) for FY2013 (P.L. 112-239) established a
Military Compensation and Retirement Modernization Commission (MCRMC) to provide the
President and Congress with specific recommendations to modernize pay and benefits for the
armed services. In terms of retirement the commission was mandated to provide
recommendations to “Modernize and achieve fiscal sustainability for the compensation and
retirement systems for the Armed Forces and the other Uniformed Services for the 21st century.”32
Notably, Section 674 of P.L. 112-239 mandated that the commission comply with conditions that
would grandfather existing servicemembers and retirees into the existing retirement system,
stating:
(i) For members of the uniformed services as of such date, who became members before the
enactment of such an Act, the monthly amount of their retired pay may not be less than they
31 Report of the 11th Quadrennial Review of Military Compensation, June 2012.
32 National Defense Authorization Act for FY2013, P.L. 112-239 subtitle H, 126 Stat. 1632, 1787 (2013).
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would have received under the current military compensation and retirement system, nor
may the date at which they are eligible to receive their military retired pay be adjusted to the
financial detriment of the member.
(ii) For members of the uniformed services retired as of such date, the eligibility for and
receipt of their retired pay may not be adjusted pursuant to any change made by the
enactment of such an Act.
The commission delivered its final report and recommendations to Congress on January 29, 2015.
The recommendations, if implemented, would substantially change to the military retirement
system.
Table 4 summarizes the systems currently in use alongside the proposed changes. The
commission found that under the current system of “cliff-vesting,” which is contingent on a 20-
year career, 83% of enlisted and 51% of officers do not receive retirement compensation for their
service.33 This is at odds with retirement benefits in the private sector where firms increasingly
offer a variety of defined contribution packages and are required by law to vest employees within
a much shorter time period.34
Table 4. Comparison of Current Retirement System to MCRMC Proposals
Final Basic
MCRMC Proposal
Pay High
Three
Redux
Applies to
Servicemembers Servicemembers
Servicemembers
Future servicemembers
entering before
entering from
entering after July 31,
with all current members
September 8,
September 8, 1980,
1986, and accepting 15-
and retirees able to opt in
1980
through July 31, 1986,
year Career Status
and persons entering
Bonus with additional
after July 31, 1986, but
five-year service
opting not to accept the
obligation
15-year Career Status
Bonus
Basis of
Final rate of
Average monthly basic
Average monthly basic
Average monthly basic pay
Computation monthly basic
pay for the highest 36
pay for the highest 36
for the highest 36 months
pay
months of basic pay
months of basic pay
of basic pay
Defined
2.5% per YOS
2.5% per YOS
2.5% per YOS, less 1%
2.0% per YOS
Benefit
for each year of service
Multiplier
less than 30 (restored at
age 62)
Defined
Individual
Individual contributions
Individual contributions
1.0% minimum
Contribution contributions to to TSP, no matching
to TSP, no matching
contribution into TSP
TSP, no
from Service with up to
matching
5.0% matching
contributions
Lump Sum
Monthly annuity Monthly annuity only
Monthly annuity only
Option for ful or partial
Option
only
lump sum payment at
retirement with full
annuity restored at
33 Military Compensation and Retirement Modernization Commission Final Report, January 2015. p. 23.
34 The Employee Retirement Income Security Act (ERISA) requires firms to vest employees in company-provided
defined benefit retirement plans either gradually over a period of seven years or by five years for cliff-vesting. In
addition, a defined contribution plan must cliff vest within three years or up to six years for gradual vesting.
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Final Basic
MCRMC Proposal
Pay High
Three
Redux
eligibility age for full social
security payments
Additional
$30,000 CSB payable at
Incentive pay of 2.5 times
Continuation
the 15-year anniversary
monthly base pay for AC
Benefit
with a five-year
and 0.5 times monthly
obligation to remain on
base pay for RC with a
active duty
four-year duty obligation
Source: Adapted by CRS from Military Compensation Background Papers, Department of Defense, Seventh
Edition, November 2011, and Military Compensation and Retirement Modernization Commission Final Report, January
2015.
Proposed Changes to the Defined Benefit System
The commission recommended changing the current system from a defined benefit system to a
blended system which includes a defined contribution element. The defined benefit would remain
similar to the Final Basic Pay system but the multiplier would be reduced from 2.5% to 2.0% per
year of service. Thus, an active duty servicemember with 20 years of service would receive 40%
of base pay (2.0% times 20) rather than 50% (2.5% times 20) under the current system. For
reserve component, the same multiplier would be used although reserve years of service would
continue to be calculated under the points system mentioned earlier in this report.
The proposed defined contribution element is intended to make up the shortfall incurred with the
new multiplier and would be deposited through the Thrift Savings Plan (TSP). The services
would begin monthly contributions of 1% of the members’ basic automatically into the
servicemember’s TSP account upon service entry date until 20 years of service. The
servicemember would be fully vested after two complete years of service and would be able to
take ownership the 1% contributions as well as any individual or matching contributions.
The services would also automatically enroll new servicemembers into the TSP program at an
amount of 3% of their basic pay unless the servicemember opted out. The servicemember would
automatically be enrolled every year at the 3% amount unless they actively opt out. The service
would also make matching contributions up to 5% of monthly basic pay. Matching payments
would cease at 20 years of service.
Another change proposed by the MCRMC is that active and reserve members could choose to
receive their retirement annuity in various forms. For active component members the
recommended options are:
• a monthly payment beginning at their retirement date;
• a partial lump sum amount at retirement, combined with a reduced monthly
payment until eligibility for full social security payments, at which point the full
monthly annuity would begin; or
• a larger lump sum payment with no monthly payment until eligibility for full
social security payments, at which point the full monthly annuity would begin.
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Under the commission proposals, members of the reserve components would be eligible to
receive the lump sum options above upon retirement from the reserves which will generally be
before they are eligible to receive the monthly annuity at age 60.
The MCRMC did not make any recommendations changing the 20-year eligibility for retirement;
however it recommended that the Secretary of Defense be given authority to modify the year of
service requirement to shape the force profile as long as it does not impose involuntary changes
on existing servicemembers. Any proposed change by the SECDEF would require notice to
Congress and a one-year waiting period prior to implementation after Congress has received
notice.
Existing service members in active duty, reserve status, and retirees would be “grandfathered”
into whatever retirement system they currently have selected; however, they would have the
opportunity to opt into the new system. The commission recommended removing the Career
Status Bonus component of the Redux system at the date of enactment for reforms; however,
those had already received the bonus could stay in the Redux system. For most mid- and late-
career servicemembers eligible for retirement under the current system, opting into the new
system would put them at a financial disadvantage as they would see a reduction in their
multiplier at 20 years of service, but have not had the benefit of matching government
contributions into the TSP system. However, servicemembers at the beginning of their career,
particularly if they are unsure of whether or not they will complete a 20-year career, may benefit
from opting in to the new system.
Proposed Changes to Continuation Pay
In order to provide mid-career retention incentives under the new system, the MCRMC proposed
continuation pay for members who reach 12 years of service in return for a four-year obligation.
Active duty members would receive continuation pay equal to at least 2.5 times the
Servicemembers’ monthly basic pay while reserve component members would receive
continuation pay equal to at least 0.5 times the basic pay of an active component member of
similar rank and longevity. Therefore an active duty O-4 with over 12 years of service would
receive a continuation pay of at least $17,476.50 (2.5 times monthly base pay of $6,990.60).35 A
reserve component O-4 with over 12 years of service would receive a continuation pay of at least
$3,495.30 (0.5 times monthly base pay of $6,990.60).
The commission also proposed that the services budget additional funds for continuation pays in
addition to the recommended basic continuation pays to maintain the current force profile and to
allow flexibility in adjusting force profiles to meet future changes in manpower requirements.
Based on the retention model used by the commission, it projected a need to offer continuation
pay of up to 4.8 times basic pay for active component enlisted personnel and up to 15.9 times
basic pay for officers.36 The commission also recommended that all base and additional
continuation pay should be paid from an authority used only for the purpose of continuation pay
and should be budgeted as a new budget line item.
35 2015 Military Pay Chart at http://www.dfas.mil.
36 MCRMC Final Report, pp. 29-30 and Table 2. The commission projected the Navy would require the highest
multiples of continuation pay for enlisted personnel (4.8 times monthly basic pay) and the Air Force would require the
highest multiples of continuation pay for officers (15.9 times monthly basic pay) to maintain their active component
force profiles.
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Proposed Changes to Disability Retirement
The commission recommended lifting the 75% cap on disability retirement when a
servicemember uses his or her disability rating as a multiplier. The multiplier for disability
retirement when a servicemember uses years of service (longevity formula) as the multiplier
would be 2.0 instead of 2.5. There were no other changes proposed to the disability retirement
system.
Military Retirement Budgeting and Costs
Military retirement costs, which include all 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
coupled with cost of living increases. All DOD budgets through FY1984 reflected the costs of
retired pay actually being paid out to personnel who had already retired. That is, 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. The unfunded liability resulting from the change in accounting practices is discussed
in the next section. Under the accrual accounting 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 from the accumulated amounts in the military retirement fund, not from the annual
Department of Defense budget.
Estimated future retirement costs are modeled 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. The model helps
determine the level percentage of basic pay for each active servicemember that must be
contributed from the DOD budget every year to cover future retirement costs. This is called the
normal cost percentage (NCP) shown in Table 5.
Table 5. DOD’s Normal Cost Percentages for FY2014
Benefit Formula
Full-Time
Part-time
Final Pay
36.6%
23.8%
High-3 33.3%
22.5%
CSB/Redux 32.2%
NA
Source: DOD Office of the Actuary, Valuation of the Military Retirement System, September 30, 2013, rev. January
2015.
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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. The initial unfunded liability as of September 30, 1984 was $528.7 billion.37
The unfunded liability at the end of FY2013 was $885.1 billion, or 35% of total liabilities. These
obligations are being liquidated by the payment to the fund each year of an amount from the
General Fund of the Treasury and are now expected to be fully amortized by FY2026.38
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) the population of retirees who served under the pre-
accrual system is slowly declining due to deaths; 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 considered to be more affordable when federal retirement outlays are spread over
many decades.
37 Department of Defense, FY2013 Valuation of the Military Retirement System, Office of the Actuary, May 2014.
38 Department of Defense, FY2013 Valuation of the Military Retirement System, Office of the Actuary, May 2014.
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Author Contact Information
Kristy N. Kamarck
Analyst in Military Manpower
kkamarck@crs.loc.gov, 7-7783
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