In the coming days, President Obama will sign legislation putting in motion a massive military retirement overhaul that will affect the personal finances of hundreds of thousands of service members for decades to come.
Just not right away. Defense officials still have dozens of details to work out with the new system, and the first individuals to feel the impact likely haven’t enlisted yet.
The new retirement plan, included in the 2016 defense authorization bill expected to be signed into law by the president before Thanksgiving, represents not only a dramatic shift in the government’s approach to recognizing troops’ service but also a shift toward bringing Defense Department benefits more in line with private-sector offerings.
In contrast to the longstanding current system that reserves pension payouts for troops who serve at least 20 years in uniform, the new, “blended” plan would give troops who serve as little as two years some retirement benefits through vested 401(k)-style investments in their Thrift Savings Plan accounts.
Today, only about one in five service members sees any retirement pay. Under the new plan, officials estimate, about four in five will leave the military with some level of retirement savings.
The plan follows a recommendation from the Military Compensation and Retirement Modernization Commission in February, which found most younger Americans “change jobs frequently and tend to favor flexible retirement options.”
The concept has been discussed among military advocates for years. Commissioner Steve Buyer, who served as a Republican representative from Indiana for 18 years, said lawmakers envisioned the shift from military pensions to investment accounts when they first approved the Thrift Savings Plan in 1999.
Not everyone will shift to the new model; it will cover all troops who enter service after Jan. 1, 2018, but anyone already in the ranks or who signs up in the next 24 months will be grandfathered into the traditional, 20-year retirement system
However, troops who entered service after Jan. 1, 2006, will be given the choice of opting into the new 401(k)-style system — creating some complex financial decisions for midcareer service members once 2018 arrives.
Troops who entered before then — who will have served more than 12 years once the new system launches — could opt in with a special waiver, but lawmakers believe most people in this group would see little financial benefit in switching.
That’s because the automatic investments are designed to grow over time. So an individual with substantial time in uniform already who will reach 20-year retirement in just a few years could lose thousands in pension payouts in the coming years by making the switch.
The new blended retirement plan gives an automatic contribution to troops’ TSP accounts equal to 1 percent of their annual pay. In addition, the military will match troops’ own contributions of up to 5 percent of their salaries.
In exchange, the traditional pension-style payouts are reduced by 20 percent of their current value. And money in the savings plan is not available without tax penalties before age 59.5.
And unlike the pension payouts, which are guaranteed, TSP investment growth depends on fluctuations in the stock market and economy. Riskier investment options could leave some troops with far less or far more than their peers when retirement arrives.
Those concerns are why some veterans groups hesitated to support the retirement overhaul, and why lawmakers and military officials have promised new, robust financial education programs to go along with the change.
Details of those programs are due to Congress next summer, giving the Defense Department about another 18 months to launch the classes before troops will be faced with choosing between the two retirement plans.
In addition, Congress has mandated refresher financial literacy courses throughout troops’ careers: at duty station changes, shortly after promotions, following “life events” like marriage or the birth of a child, and before and after deployments.
The retirement overhaul plan also includes language mandating an annual study on the financial health of the armed forces, in an effort to track whether the expanded education efforts actually are helping troops make better choices about retirement and other family financial hurdles.
Details of that plan still have to be worked out — along with much of the rest of the sweeping changes.