The Pentagon is fending off criticism that another round of updates to the military's retirement system would benefit older career-minded personnel at the expense of younger troops who fulfill only a short-term obligation.
The proposed changes are outlined in the Defense Department’s 2017 budget request, revealed Feb. 9, which urges Congress to rework several pieces of the new retirement plan that was passed into law last year and is slated to take effect in January 2018.
“We absolutely do not agree that this is something that is trying to benefit the most senior people at the expense of junior people,” Defense Department Comptroller Mike McCord told Defense News, a Military Times partner, during an interview following the budget’s release.
“I think this has been misconstrued or mis-portrayed as something that is only going to benefit generals. This is for people, senior enlisted and senior officers, and we think these are changes we’ve proposed before that would help us manage the force better,” McCord said.
Defense Department Comptroller Mike McCord discusses military retirement benefits during a taping of "Defense News with Vago Muradian." Video by Lars Schwetje/Staff
The Pentagon supports Congress's transition to a blended retirement system, which will shrink military pensions for future troops by 20 percent yet offer cash contributions to individual investment accounts for most troops, even those who separate long before serving a full 20-year career.
But now defense officials want Congress to make “modifications” meant to help the individual military services meet “retention needs,” budget documents show. Those proposed changes seek to:
Delay contributions for junior troops. The Pentagon wants to delay the start of government matching contributions to individual investment accounts until troops reach their fifth year of military service. Under the current law, matching contributions begin when troops reach their third year of service. Since about half of the enlisted force leaves the military before reaching five years, this change would significantly reduce the retirement benefit for the non-career force.
Expand contributions for senior troops. The Pentagon wants to extend government matching contributions for senior leaders by continuing matching payments until a service member’s retirement date. Current law suspends those contributions at 26 years of service. While only a small fraction of the force stays beyond 26 years, this change would have a big impact on those individuals. A 5 percent government match for someone at the O-6 pay grade — colonels in the Army, Air Force and Marine Corps, captains in the Navy — amounts to more than $500 monthly. For generals and admirals, it would be worth even more — and officials hope to boost the max contribution from 5 to 6 percent (see below).
Eliminate required bonus rates for mid-career troops. The Pentagon wants to remove the new retirement system’s mandatory minimum "continuation pay" for all troops reaching 12 years of service, and give the services flexibility to set continuation pay based on their individual needs. Current law ensures that all troops reaching 12 years of service receive continuation pay equal to 2.5 months basic pay. Removing the mandatory element of this benefit would make it similar to the existing system used for retention bonuses and would hit the less-competitive, easy-to-fill career fields hardest.
Boost the maximum matching contribution. The Pentagon wants to raise the current cap on government contributions to individual investment accounts to 6 percent of basic pay. Current law limits that to 5 percent. Theoretically this would impact most of the force equally. But in practice this revised benefit would flow to the troops and families who can most afford to maximize their own personal contributions and draw the bigger matching contribution.
These proposals have drawn criticism from members of the Military Compensation and Retirement Modernization Commission, a blue-ribbon panel whose recommendations last year formed the basis for the law Congress ultimately passed.
“Money is driving the attitude at the Department of Defense,” said Michael Higgins, a retired Air Force personnel officer and longtime Capitol Hill staffer who served on the commission, which supports two of the proposals — extending matching contributions for senior leaders serving more than 26 years and raising the cap on those contributions from 5 to 6 percent.
But the other two — eliminating the matching contributions for the lowest-ranking troops and removing the mandatory element of the 12-year continuation pay — contradict the commission’s specific recommendations.
On the issue of whether third- and fourth-year troops should receive matching contributions, Higgins said the Pentagon is “reluctant to see expenditures outlayed for individuals who are not going to be on the DoD team for the long run.” But leaders may be underestimating the subtle impact those benefits would have on recruiting by offering prospective troops an "early recognition of service with credible benefits."
"It's a terrific incentive that is going to reach the very talented, very aggressive kind of individual. There is a quality cut there that DoD really benefits from, because you're really appealing to the individual who is thinking more responsibly. And I think DoD is really missing that," Higgins said.
McCord underscored the Defense Department's support for the new retirement system, noting that the Pentagon floated these proposals last year but Congress opted against them in the final National Defense Authorization Act passed in November.
"Overall we think it was a good reform passed last year. We're happy to have seen it accomplished and we support it," he said. "We are going back and saying [to Congress]: 'We asked for a set of changes. You did most of them ... but a couple of things that we think you missed.'
"The biggest one is continuation pay," McCord said, "which we intended to be a force management tool at the 12-year point — not something given to everyone at the 12-year point," he said.
"The changes we are asking for would allow us to manage the force better — to keep the people we want to keep. ... And we don’t think its fair, especially for the senior enlisted, to have their benefit go down because they reach 26 years of service."
Congress will decide whether to adopt these changes as part of its annual budget negotiations. So far lawmakers have not signaled any strong support or opposition.
The existing law offers all current troops a grandfather clause to remain under the traditional retirement system if they choose. Alternatively, those who joined after 2006 have the choice to opt into the new system and begin receiving monthly government contributions once the new benefit begins in 2018.
To help service members make that decision, the Defense Department will roll out a force-wide financial education program later this year, officials said.
Studies suggest the new retirement system will be popular among the youngest troops, and that opting in may be a good decision for those who might not plan to serve a full 20-year career.
Future troops entering the military after January 2018 will be automatically enrolled in the new system.
As is, the new system calls for creation of individual investment accounts, known as a Thrift Savings Plan, for all recruits who show up at boot camp. Troops will automatically receive monthly deposits equal to 1 percent of their basic pay. They can select an investment fund and hope to accumulate market gains and interest over time as financial markets grow.
Ownership of the TSP accounts will be handed off to individual troops after they reach two years of service, and they'll be given incentives to contribute their own money to the retirement account. Specifically, the Defense Department will offer a dollar-for-dollar match to individual contributions up to an additional 3 percent of pre-tax basic pay.
That means that for troops opting to contribute 3 percent of basic pay, the Pentagon will contribute 4 percent, which would be the initial 1 percent automatic contribution plus a 3 percent dollar-for-dollar match. In total, troops contributing 3 percent would sock away monthly pre-tax contributions equal to 7 percent of basic pay.
The current system also offers an additional contribution worth 50 cents on the dollar for individuals who invest either 4 percent or 5 percent of their pay. To receive the maximum possible retirement benefit, troops would have to contribute 5 percent of their basic pay in exchange for 5 percent from the government.
Again, the changes proposed in the 2017 budget would extend dollar-for-dollar matches up to five percent, meaning troops could receive a maximum of 6 percent government matching money — the 5 percent dollar-for-dollar match plus the 1 percent automatic contribution.
Higgins said these proposals could put the military compensation system at risk. "At the end of the day, are these two proposals, if they should be adopted, going to kill the system? I don’t know. I think it puts the success of the new system at risk unnecessarily,” he said.
“If you tinker with it … you are really going to change service members perspective on this system. And if you do that, you put the system at risk to where it’s not going to produce the retention or the force structure that the department desires," he said.
THE DIFFERENCE 1% CAN MAKE
Under the military’s new retirement system, service members who contribute at least 5 percent of their salary to an individual investment account will receive the government’s maximum matching contribution of 5 percent. A new Pentagon proposal would raise the government’s max contribution to 6 percent. For an individual, it could mean a difference of tens of thousands of dollars. A comparison: