Pentagon White Paper Looks at Reforms to Military Retirement

A recent Department of Defense white paper takes a close look at what reforms to the military retirement system might look like, even though the Commission on Military Compensation and Retirement Modernization will not make its recommendations in 2015. The white paper does not make any formal recommendations, but it does analyze two possible design concepts for a reformed military compensation system that would include both a defined benefit and defined contribution component.

Currently, members of the military become eligible for retirement benefits after 20 years of service, with some receiving retirement benefits as early as their late 30s. The formula used to determine benefits is based on the average of the beneficiary’s highest 36 months of pay, and an increase of 2.5 percent for every year of service beyond 20. This retirement system offers very generous benefits to those who qualify, but provides nothing to the more than 85 percent of servicemembers who do not remain in the military for 20 years. As a group of retired generals recently wrote, growing retirement payments currently threaten to crowd out other defense priorities.

The first reform concept would offer only partial monthly payments during a former service member’s working-age years before shifting to full benefits once the individual reaches retirement age. The second option would resemble the existing retirement system, but would use a lower multiplier for years of service beyond 20.

Both concepts would complement the current defined benefit system with a 401(k)-style Thrift Savings Plan account available to all service members who serve at least six years, continuation bonuses for active duty members, and a lump-sum transition payment provided upon retirement to those with 20 or more years of service. Current military members would be grandfathered into the current retirement system, while new recruits would be covered under the new design.

These reforms would lead to accrual savings to the Military Retirement Trust Fund, allowing the DoD and Treasury to reduce their annual contributions to the Fund. The DoD estimates that once fully implemented, the first idea would allow contributions of $1.8 to $4.1 billion less to the Military Retirement Trust Fund each year, depending on the multiplier used to calculate benefits. The second would save the DoD and the Treasury between $1.4 and $3.7 billion per year, again depending on the benefit multiplier chosen.

In addition to reducing the amount of contributions necessary, both reform concepts would also lead to savings in the form of reduced benefits. Under both options, outlays would initially increase due to contributions made to the Thrift Savings Plan and more generous continuation and transition payments. In the long run, however, these reforms would save money as service members grandfathered in to the old pension system retire and the share of beneficiaries covered by the reformed system grows. Eventually, the first concept would reduce outlays by between $5.5 and $7.9 billion per year, while the second would reduce outlays by between $6.5 and $10.2 billion per year.

While Congress has shown that it is reluctant to make changes to military pensions, several defense officials have called for reforms to set the military retirement system on a more sustainable path. Smart reforms would help the Pentagon address rising personnel costs without negatively effecting retention and recruitment. As the white paper concludes:

While these concepts do realize savings, they are about more than achieving efficiencies or fiscal savings. These design concepts look to the future to help ensure that military service remains attractive to today’s youth and tomorrow’s service member. At the same time, they reflect the importance of balancing the needs of the member, the taxpayer, and the uniformed services. We believe the framework represented by these concepts will sustain the All-Volunteer Force, foster recruiting and retention, ensure an appropriate standard of living for our members, and maintain fiscal sustainability—as set forth in the guiding principles established at the outset of this paper.