Proposed Changes to the Military Retirement System

Proposed Changes to the Military Retirement System

February 25, 2015
Proposed Changes to the Military Retirement System
Background
MCRMC Recommendations
The military retirement system is a noncontributory,
defined benefit system that has historically been viewed as
The National Defense Authorization Act (NDAA) for
a significant incentive in retaining a career military force.
FY2013 established a Military Compensation and
The system currently includes monthly compensation upon
Retirement Modernization Commission (MCRMC) to
completion of an active or reserve military career, disability
provide the President and Congress with specific
benefits for those deemed medically unfit to serve, and a
recommendations to modernize pay and benefits for the
survivor annuity program for the eligible survivors of
armed services. In terms of retirement the Commission was
deceased retirees. The amount of compensation is
mandated to provide recommendations to:
dependent on time served, and basic pay around the time of
Modernize and achieve fiscal sustainability for the
retirement. Retired pay is adjusted annually through a Cost-
compensation and retirement systems for the
of-Living-Adjustment (COLA).
Armed Forces and the other Uniformed Services
for the 21st century.
The costs of the military retirement program have been
rising modestly each year, due to a predictable slow rise in
The Commission delivered its final report and
the number of retirees and survivors and COLA increases.
recommendations to Congress on January 29, 2015. The
In FY2013, $54 billion was paid to approximately 2.2
report is also being considered by the President, and its
million military retirees and survivors. When considering
recommendations may be subject to revision. The
changes to the retirement system Congress grapples with
recommendations, if implemented, would substantially
both budget constraints and constituent concerns.
change the military retirement system. Under the
Current Retirement System
MCRMC’s proposals, current service members and retirees
would be “grandfathered” into the current retirement
system; however they would also have the opportunity to
There are currently three separate military retirement
opt into the new system.
systems: one for Active Component (AC) members, one for
Reserve Component (RC) members, and one for those who
The Commission found that under the current system of
become disabled and are unable to complete a military
“cliff-vesting,” 83% of enlisted and 51% of officers do not
career due to their disability. For active duty military
receive any retirement compensation for their service. This
personnel, there are three methods of calculating retired
is at odds with retirement benefits in the private sector
pay: the Final Basic Pay System, “High Three,” and Redux.
where firms increasingly offer a variety of defined
The applicable retirement calculation is based on the date
contribution packages and are required by law to vest
when the servicemember first entered active duty and
employees within a much shorter time period.
his/her basic pay at the time of retirement, and, in the case
of Redux, a voluntary election regarding a $30,000 Career
Status Bonus (CSB). A comparison of these three methods
Under the MCRMC’s proposals, current service
and proposed changes are summarized in Table 1 on the
members and retirees would be “grandfathered” into
following page. Reserve Component personnel are able to
the current retirement system; however they would
calculate retired pay under the Final Basic Pay or “High
also have the opportunity to opt into the new system.
Three” systems only. Disability retirement for the AC and
RC is calculated in a different way depending on years
Shift from Defined Benefit to a Blended System
served and the DOD’s disability rating.
The Commission recommended changing the current
The current retirement system includes “cliff-vesting” after
system from a defined benefit system to a blended system
20 years of service (YOS) for active members, and 20 years
that includes a defined contribution element. The defined
of qualifying service (as determined by a points system) for
benefit would remain similar to the “High Three” system
reservists. This means that under a regular non-disability
but the multiplier would be reduced from 2.5% to 2.0% per
retirement, service members who leave the service prior to
year of service. Thus, under the MCRMC proposal, an
fulfilling the 20-year requirement are typically not eligible
active duty servicemember with 20 years of service would
to receive any retirement annuity. Servicemembers have the
receive 40% of base pay (2.0% x 20) rather than 50% (2.5%
option of making contributions to the Thrift Savings Plan
x 20) under the current system. For the RC, the same
(TSP); however the Services do not provide any
calculation would be used except that eligible years of
contributions to the individual’s account.
service would be computed by dividing Reserve points by
360.
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Proposed Changes to the Military Retirement System
Table 1. Comparisons Between Current Retirement Systems and MCRMC Recommendations

Final Basic Pay
High Three
Redux
MCRMC Recommendations
Applies to
Servicemembers
Servicemembers entering
Servicemembers
Future servicemembers with all
entering before
from September 8, 1980,
entering after July 31,
current members and retirees able
September 8, 1980
through July 31, 1986, and 1986, and accepting 15-
to opt in
persons entering after July year CSB with additional
31, 1986, but opting not
5-year service obligation
to accept the 15-year CSB
Basis of
Final rate of
Average monthly basic
Average monthly basic
Average monthly basic pay for the
Computation
monthly basic pay
pay for the highest 36
pay for the highest 36
highest 36 months of basic pay
months of basic pay
months 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 to Individual contributions
1.0% minimum contribution into TSP
Contribution
contributions to
TSP, no matching
to TSP, no matching
from Service with up to 5.0%
TSP, no matching
matching contributions
Lump Sum
Monthly annuity
Monthly annuity only
Monthly annuity only
Option for ful or partial lump sum
Option
only
payment at retirement with full
annuity restored at eligibility age for
full social security payments
Additional

$30,000 CSB payable at
Continuation pay at least 2.5 times
Continuation
the 15-year anniversary
monthly base pay for AC and 0.5
Benefit
with 5-year obligation to
times monthly base pay for RC with
remain on active duty
a 4-year duty obligation
Source: Adapted by CRS from Military Compensation Background Papers, Department of Defense, Sixth Edition, April, 2005.
• A larger lump sum payment with no monthly payment
The proposed defined contribution element is intended to
with full monthly annuity restored at eligibility age for
make up the shortfall incurred with the new multiplier and
full social security payments
would be deposited through the TSP. The Services would
begin automatic monthly contributions of 1% of the
Members of the RC would be eligible to receive the lump
member’s basic pay into their TSP account upon service
sum options above upon retirement from the Reserves
entry date up until 20 years of service. The servicemember
which would generally be before their retirement annuity
would be fully vested after 2 complete years of service and
begins at age 60.
would be able to take ownership of the 1% contributions as
well as any individual or matching contributions.
Continuation Pay
The Services would also automatically enroll new
In order to provide mid-career retention incentives under
servicemembers into the TSP program at an amount of 3%
the new system, the Commission proposed basic
of their basic pay unless the service member opted out, with
continuation pay for all members who reach 12 years of
automatic enrollment at 3% every year up to 20 years of
service in return for a 4-year obligation. Active duty
service. The Service would also make matching
members would receive basic continuation pay equal to at
contributions up to 5% of monthly basic pay. Matching
least 2.5 times the Service member’s monthly basic pay
payments would cease at 20 years of service.
while RC members would receive continuation pay equal to
New Options for Receiving Annuity
at least 0.5 times the basic pay of an AC member.
In addition, the Commission proposed that the services
Another change proposed by the MCRMC is that Active
should budget additional funds for continuation pays above
and Reserve members could choose to receive their
the basic amounts to allow the Services some flexibility in
retirement annuity in various forms. For AC members the
adjusting force profiles to meet future changes in manpower
recommended options are:
requirements.
• Monthly payments beginning at retirement date;
Kristy N. Kamarck, kkamarck@crs.loc.gov, 7-7783
• A partial lump sum amount at retirement, combined

with a reduced monthly payment with full monthly
annuity restored at eligibility age for full social security
IF10141
payments; or
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