The changing terrain: Military retirement
Since details of the military’s new retirement system were introduced in late 2015, many people have rained criticism on the new program. Arguments range from putting more of the retirement planning burden on career service members to introducing a more complicated system for which thousands of service members will have to decide: do I opt in or stay put? This week, two Military Times pieces, one an article and one an opinion, focused on this subject.
A concern with the system, as pointed out by members of the American Academy of Actuaries, focuses on the lump sum payout option at retirement. As a reminder, in the new system (which goes into effect Jan. 1, 2018), retiring service members will have three options for collecting retirement pay:
- 100% retirement pay: At retirement, begin receiving full monthly retirement pay.
- 75% retirement pay: At retirement, receive a 25% one-time lump sum payment and 75% of earned retirement pay.
- 50% retirement pay: At retirement, receive a 50% one-time lump sum payment and 50% of earned retirement pay.
For options 2) and 3), the reduced retirement pay remains in effect until the retiree turns 67. At that time, retirement pay will be restored to the full amount earned. The Actuaries’ concern is with the way that lump sum payment will be figured, by using a “discount rate.” This means the lump sum dollar amount will be figured using a present value calculation using assumed retired pay increases and assumed long-term future value considering inflation, then reduces that amount for assumed investment returns. The Actuaries point out that:
“…the personal discount rates on which this legislative provision was based are substantially higher than would be typical for the lump sum settlement of a pension benefit. Such discount rates would result in lower lump sum amounts under the Act than would be paid, for example, by private pension plans. We respectfully urge the Department of Defense to carefully consider how the Act is to be implemented with respect to the use of personal discount rates.”
Another criticism that surfaced this week is the Pentagon’s proposed plan to begin DoD matching contributions to service members’ Thrift Savings Plan (TSP) accounts at the beginning of the fifth year of service, instead of at the beginning of the third year of service, as the law is currently written. For many who choose not to reenlist after their initial term of service, this would mean zero matching funds in their TSP accounts. Some view this as a slight to those who chose to serve their country, and then decide not to reenlist. The Pentagon’s argument is the opposite. Leaders stress that at the time of reenlistment, knowing that TSP matching contributions will begin at that 5-year mark would prove an incentive to stay in the service.
Sources: militarytimes.com, actuary.org
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