As a major overhaul of the military retirement system continues to gain momentum on Capitol Hill, questions remain about the core of the proposal and whether it will be better or worse than the current pension for career service members who serve 20 years or more.
No question, the proposed changes would offer a better deal for the 83 percent of troops who serve fewer than 20 years. Under the current system, they get no retirement benefit. The proposed new model would offer them a personal retirement savings account with annual government contributions of up to 6 percent of basic pay.
Yet for the much smaller slice of the force that spends — or plans to spend — 20 years or more on active duty, a comparison of the current all-or-nothing plan and the proposed "blended" system is far more complex.
Comparing the two alternatives will be an urgent concern for many troops if the proposal becomes law. Everyone in today's force would soon face a choice: Opt into the new system and start accruing money in their own retirement savings account, or exercise a "grandfather clause" that would allow them to remain under the traditional retirement system and its promise of a more robust pension.
The Military Compensation and Retirement Modernization Commission, which first proposed the basic construct of the alternative plan in January, says all troops would be better off under its the new benefit, even those who serve 20 or more years.
The commission's proposed changes to the retirement system are included in the 2016 defense authorization bill that is moving through Congress. Under that legislation, today's troops would have about 18 months to make a decision by 2017 on whether to stick with the old benefit or sign up for the new plan.
Yet some critics question the commission's analysis that everyone would do better under its proposal — that young troops would get a retirement benefit for the first time, career troops would get a better long-term benefit and the whole package still would save the government billions of dollars each year.
"In the long run, the old system is a better deal for people who serve 20," insisted Rick Jones, director of legislation for the National Association for Uniformed Services.
"I think they are presenting a sales pitch that markets their proposal," Jones said of the commission's analysis.
Running the numbers
But in response to inquiries from Military Times, the commission has, for the first time, made public its data and analysis to support its assertion that career troops will in fact do better under its proposal.
Any effort to compare the real value of future benefits is fraught with uncertainty and subject to debate because that requires penciling in assumptions for unknowable factors like future inflation, military pay raises, stock market returns and individual investment decisions.
The basics of the plan call for cutting the size of the current pension by 20 percent. To make up for that, the Defense Department would open 401(k)-style retirement accounts, known as Thrift Savings Plan, or TSP, accounts. Money placed in the TSP is not available for withdrawal without a tax penalty before age 60.
The government would make automatic contributions to all troops' accounts equal to 1 percent of their basic pay. Troops could then choose to contribute more of their own pay, and the government would offer dollar-for-dollar matching contributions up to an additional 5 percent of basic pay.
After two years of service, troops would be vested in the plan — they would "own" the money — and could keep it whenever they leave the military, even if they never serve anywhere close to 20 years.
To compare the current and proposed retirement packages, the commission offered an analysis of a hypothetical enlisted member who clocks 20 years and retires as an E-7.
Under the current retirement benefit, that member could expect an immediate annual pretax pension of about $23,900, which would be adjusted upward each year to reflect cost-of-living increases, according to the Defense Department's official military retirement pay calculator.
Under the proposed retirement benefit, that E-7 could expect to receive an annual pension that is 20 percent smaller, $19,120 a year. That's a difference of $4,780 compared to the traditional retirement benefit.
However, under the proposed benefit, that member would also have accumulated money in the TSP over his or her years of service. At the time of military retirement, the tax-free savings account would include a government-provided retirement benefit probably valued at about $45,000, according to the analysis provided by the commission — a figure that assumes the member contributed 3 percent of basic pay and received an additional 3 percent in government matching funds.
By the time the retired E-7 reached age 60, that TSP investment, if left untouched, would grow to about $211,000, according to the commission. That figures assumes average annual investment returns of about 7.3 percent.
The commission's analysis then extends further. It suggests that the retired E-7 could, starting at age 60, begin making small monthly withdrawals from the TSP in an amount that essentially would equal the 20-percent monthly reduction in his or her military pension, in effect restoring the E-7's total retirement income to parity with the traditional pension system.
To do that, the retired E-7 would have to withdraw a total of $276,000 from age 60 to age 85.
Meanwhile, over that span, according to the commission's assumptions, the E-7's TSP balance would continue to grow at a healthy annual return so that at age 85, the retiree still would have $566,000 in his or her account.
The commission offers one more important distinction between the current system and its proposal: When a retiree passes away, a defined pension benefit essentially disappears — but any balance remaining in a retiree's TSP can be passed along to a spouse or other heirs.
One factor in the new plan that the commission's analysis does not take into account is the diminished pension check retirees would receive before age 60, when they get access to their TSP accounts without tax penalties. For someone who enlists straight out of high school at age 18 and retires 20 years later at age 38, that's a considerable gap of 22 years.
In effect, the proposed plan shifts the value of the retirement benefit later in life, offering smaller pension checks during the so-called "working-age" retirement years, when most veterans find post-military employment in the private sector, while ostensibly leaving them with more cash in their golden years.
Criticism also has been leveled at some of the assumptions in the commission's analysis, particularly the assumption that TSP accounts will see an average annual return of 7.3 percent. That figure is based on the average annualized investment returns of U.S. public pensions over the past 10 years.
But that is a far higher return than some of the more conservative investment options available to TSP participants, which range from 3 percent to 5 percent over the past decade, according to the government-run TSP website.
The figures in the commission's comparison — and the claim that the new plan offers a better deal for careerists — would change significantly if the analysis assumed those lower annual returns.
Those kinds of uncertainties leave some unconvinced of the commission's claim that the proposed system would be better for careerists.
"I have not seen figures that make me comfortable to say that this new system will be the equivalent or better for what a service member who serves 20 or more years gets under the current benefit," said Deirdre Holleman, the executive director of the Retired Enlisted Association.
"As of now, it looks like the new benefit for people who serve less than 20 is being paid for by cuts in the benefit for those who have served 20 or more."