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New Plan Calls for Military Retirement Changes

10:23 PM, Jul 28, 2011   |    comments
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(Military Times) -- A sweeping new plan to overhaul the Pentagon's retirement system would give some benefits to all troops and phase out the 20-year cliff vesting system that has defined military careers for generations.

In a massive change that could affect today's troops, the plan calls for a corporate-style benefits program that would contribute money to troops' retirement savings account rather than the promise of a future monthly pension, according to a new proposal from an influential Pentagon advisory board.

All troops would receive the yearly retirement contributions, regardless of whether they stay for 20 years. Those contributions might amount to about 16.5 percent of a member's annual pay and would be deposited into a mandatory version of the Thrift Savings Plan, the military's existing 401(k)-style account that now does not include government matching contributions.

A critical new feature would adjust those contributions to give more money to troops who deploy frequently, accept hardship assignments or serve in high-demand jobs. It would also give the services a new lever to incentivize some troops to leave or stay on active duty longer.

The new proposal was unveiled July 21 by the Defense Business Board, the wellspring for many cost-saving initiatives adopted by the Defense Department in recent years. The new retirement plan would mark the biggest change in military retirement in more than 60 years and require approval from Congress.

"The current system is unfair, unaffordable and inflexible," said Richard Spencer, a former finance executive and Marine Corps pilot who led the board's eight-month retirement study.
This alternative plan would "enhance the ability of the service member to build a meaningful retirement asset [with] complete flexibility for their lifestyle or desires," Spencer said.

It's unclear whether troops would have immediate access to all the retirement money or whether it would be partially or completely withheld until a traditional retirement age, such as 65. Under the current TSP, troops cannot withdraw money until age 59½ without incurring a significant penalty, except in certain specified circumstances.

Fairness is a key factor, Spencer said. Along with saving the Pentagon money, the new plan offer significant retirement benefits to the roughly 83 percent of troops who leave service before reaching 20 years.

Unlike other proposals to overhaul military retirement that would grandfather current troops, the board suggests that DoD could make an "immediate" transition to the new system, which would affect current troops quite differently depending on their years of service:

• Recruits. The newest troops out of boot camp after the proposed change would have no direct incentive to stay for 20 years and would not get a fixed-benefit pension. Instead, they would receive annual contributions to a Thrift Savings Plan account and could leave service with that money at any time - although under current rules, they can't withdraw the money until age 59½ without paying a penalty, except in certain specified circumstances.

• Five years of service. Troops would immediately begin accruing new benefits in a TSP account. If they remained in service until the "old vesting date" - the 20-year mark - they also would get one-fourth of the "old plan benefit," or about 12 percent of their pay at retirement, as an annuity. If they separated, for example, after 10 years, they would walk away with no fixed-pension benefit but would have a TSP account with five years of contributions.

• 10 years of service. Troops would immediately begin accruing new benefits in a TSP account. If they remained in service for 10 more years, they would receive half of the "old plan benefit," about 25 percent of their pay at retirement, as an annuity. If they separated after 15 years, they would walk away with no fixed-pension benefit but would have a TSP account with five years of contributions.

• 15 years of service. Troops would immediately begin accruing new benefits in a TSP account. If they remained in service for five more years, they would receive three-fourths of the "old plan benefit," about 37.5 percent of their pay at retirement, as an annuity.

• 20 years and beyond. Troops who stayed in past 20 years would continue to receive annual TSP contributions.

The far-reaching proposal comes at a time of immense pressure on the military to cut spending and help reduce the national debt. President Obama has talked about cutting $400 billion over the next 12 years, while some proposals gaining support on Capitol Hill would call for cutting more than $800 billion over the same period.

Military retirement costs have soared in recent years because of rising life expectancy. If not contained, they will eventually "undermine future war-fighting capabilities," Spencer said.

A new system may allow the military to make rapid changes in the size and structure of the force. For example, troops with 15 years of experience are likely targets for downsizing, and this plan would provide them with a significant retirement benefit, Spencer said.

The proposed change would have no affect on current retirees or disabled veterans.

Most private-sector companies contribute 4 percent to 12 percent of base pay into an employee's retirement savings account. By comparison, the current military retirement benefit, for those who ultimately get it, amounts to a 75 percent contribution each year, the board said.

The board considered keeping the current system with some major changes, but concluded that those changes would not save enough money or fix the fairness and flexibility issues.
Those changes included withholding pension payments until a traditional retirement age; reducing pensions to 40 percent of regular pay rather than the current 50 percent; or calculating retirement pay based on the average pay over a member's last five years in uniform, rather than the three years under the current system. Those changes would save about $254 billion over 20 years, the board said.

Gannett

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