The Pentagon just approved a major plan to reform the military retirement system by reducing current pension size by 20 percent. That plan is now in the hands of Congress.
A blended system maintains the current, though downsized pension system, and adds individual retirement accounts for personnel, called Thrift Savings Plans (TSP). Government contributions equivalent to 1 percent of basic pay accrue to the account and cannot be withdrawn before the veteran is 59 and a half.
Contributions from personnel are automatically set at 3 percent. Opting out is possible, but personnel will first have to receive training in financial literacy. After four years of service, the government will match individual contributions to the account up to the equivalent of 5 percent of basic pay. If individuals kick in 5 percent of their pay to the account, the government will also add 6 percent of basic pay.
Back in March, President Barack Obama hinted at support for the reform recommendation stemming from the Military Compensation and Retirement Modernization Commission’s two-year study which came out earlier this year. (RELATED: Obama Hints At Support For Downsizing Military Pensions By 20 Percent)
For the longest time, the Pentagon avoided taking a concrete position, but approval from top DOD officials means one more obstacle out of the way in moving the proposals through to law.
With the new change in place, some amount of retirement benefits would be available for the vast majority of personnel who exit before they reach 20 years of service—the time it takes to be approved for the normal pension system.
Individual retirement accounts is a concept supported both by a Republican-dominated Congress and many veterans’ advocates, though with some qualifications.
“While IAVA is still reviewing the details of the recommendations, we support an update to this system to allow for more options for service members, particularly those who serve fewer than 20 years,” Mark Szymanski, chief communications officer at Iraq and Afghanistan Veterans of America (IAVA), told The Daily Caller News Foundation.
“Our position is driven by IAVA’s members, who have voiced support for reforming the military retirement system to include non-careerists. In our 2014 Member Survey, of those supporting reform, 67 percent favored a 401k-style benefit for non-careerists, 33 percent favored increasing the overall value of the current retirement benefits, and 59 percent favored a partial early retirement benefit for 10 or 15 years of service. For our members, it is clear that they want to see a system where all service is eligible.”
Other groups were more specific, highlighting the incentive structure as an element of the new system that could go awry if not carefully observed.
“One of The American Legion’s concerns was that the new plan would reduce the incentive for enlistments or re-enlistments, so if the new plan is approved and implemented, and they find that they’re losing ground as far as encouraging people to join the military goes, then they’ll have to go back and relook at the system,” Joe Grassi, director of the national security division for The American Legion, told TheDCNF.
Grassi noted that the plan includes a grandfather clause, meaning that currently serving military personnel will have two years to decide whether they’d like to opt in to the new system or continue with the old system.
The Military Officers Association of America (MOOA) is decidedly more skeptical. President and CEO of MOOA Norb Ryan told Government Executive that “the current system provides great predictability and the TSP’s rate of return is at the whim of market fluctuation. We still have concerns that the 20-percent reduction in a service member’s retired pay will fail to draw members to 20 years of service and beyond.”
The total value of the benefits under the new system, defense officials maintain, is equivalent to the old system, though there is room for variance because of the element of individual choice in contributions.
With the new system in place, estimates place the amount saved for taxpayers at $1 billion dollars annually.