Reforming the Military Retirement System
July 13, 2015
By David Conboy, C’16
After the completion of numerous commissions and studies, such as the Defense Business Board’s report on modernizing military retirement and the Military Compensation and Retirement Modernization Commission, it seems that Congress is finally ready to implement reform of the military retirement system.
Under the current retirement benefits system, military personnel who serve more than twenty years are immediately eligible to receive fifty percent of their basic pay for life. Each year after twenty years that the service member stays, the annuity increases by 2.5 percent, meaning that a service member who retires after thirty years is eligible to receive seventy-five percent instead of fifty. The total annuity was capped at seventy-five percent until 2007 when President Bush removed the cap, which further increased the cost of the retirement program. In addition to these generous benefits, retirees also receive a cost of living adjustment each year, further increasing retirement benefit, but also the cost.
Of course, providing generous benefits to our service members is an important and noble task for our government, but the current retirement system fails to accomplish this goal. Though the current system is extremely generous to career military personnel, it excludes anyone who has served less than twenty years. That means the majority of enlisted personnel, as well as a large percentage of officers, are ineligible for retirement benefits. Currently, eighty-three percent of military service members will receive no retirement benefits for their service. Many of the troops who were deployed to and fought in Iraq and Afghanistan will not receive retirement benefits.
The system stands in stark contrast to civilian retirement programs, which offer retirement programs far sooner than twenty years, granted you wait until a set retirement age to collect. Though the government does offer a Thrift Savings Plan for all service members to put a portion of their paycheck into each month, there is no government matching. Even then, the money that is accrued in the military retirement fund is only invested in extremely low yield government bonds. This too stands in stark contrast to civilian 401 (k) accounts that allow for a much higher return on retirement savings.
Not only is the current plan inequitable and inefficient, it also is extremely costly. Currently, military personnel costs make up one third of the Pentagon’s total budget, accounting for $130 billion dollars annually. Unlike the majority of retirement systems across the country, military personnel do not pay into the retirement fund; rather the Department of Defense absorbs the total cost.
The total cost of the military’s retirement system is nearly $100 billion each year: $50 billion dollars is spent to pay the benefits for the 2.3 million current retirees, $20 billion is paid into an account to save for future retirement benefits, and $22 billion is spent paying interest. The costs of the current system will only continue to grow, making the system unsustainable. Congress must address these costs, while ensuring that military personnel receive their well deserved, but economically responsible retirement benefits.
After years of doing nothing to address the rising costs and inequities of the current system, Congress, with the support of the Department of Defense and the White House, may finally be ready to act. The Military Compensation and Retirement Modernization Commission, which submitted its report to Congress this January, provides a comprehensive plan that is both economical and fair to all military service members, while also preserving the benefits in place for current service members.
The Commission recommends that all military personnel who have served at least two years be vested in the Thrift Savings Plan, the 401(k) like program that already exists for federal employees, as a means for service members to save for retirement. However, the Commission also recommends that all service members receive a matching contribution from the government, which would automatically be set at 3%, but could be increased to 5% if the service member desires. Additionally, the Commission recommends keeping a modified version of the current pension system for those who serve more than twenty years, by decreasing the percentage of base pay that would be paid out upon retirement and holding retirement benefits until the service member reaches the age of 60, modelling what is the norm in the civilian sector. These reforms will not only provide generous benefits to a larger percentage of the force while retaining excellent pensions for career military personnel, but also save the Department of Defense money.
According to the Center for American Progress, if the current system remains as is, the total cost of military benefits each year will be $217 billion in 2034. Reforming the system would allow for smart cuts to the Pentagon’s budget, which could save nearly $13 billion each year.
Congress must act now to reform retirement benefits. Doing so will not only help trim the budget and provide more equitable benefits, but also help modernize the system to meet the current needs of the force.
Additional Blog Posts
Student Blog Disclaimer
The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Wharton Public Policy Initiative’s strategies, recommendations, or opinions.