Retirement concepts ‘hybrid’ plan

Tom Philpott

Tom Philpott

By Tom Philpott

Military Update

Current military members and retirees are to be “grandfathered” from any retirement changes that the Military Compensation and Retirement Modernization Commission recommends to Congress next February.

Current force members shouldn’t let that dampen their interest in the work of the commission or its final recommendations, because any retirement reforms proposed almost certainly will include an “opt-in” feature.

Many currently serving members will get the chance to choose to switch to a more modern, less generous retirement plan. Who would do that?

If past behavior is a reliable guide, thousands will.

Economists use the term “personal discount rates.” More simply, it’s how the promise of cash-in-hand affects you versus larger future rewards.

It’s pretty clear, though, that current members, if they choose, will be able to stay under the “High-3” retirement with its immediate annuities after 20 years of service set to equal 50 percent of average basic pay for their highest three earning years.

Why?

The Joint Chiefs of Staff are insisting on it.

The Obama administration has made retroactive retirement protection part of its guidance to the commission. And the likelihood Congress will buck those promises is slim given the lashes Rep. Paul Ryan, R-Wis., and Sen. Patty Murray, D-Wash., House and Senate budget committee chairmen, felt when their budget deal last December included a cap on military retiree cost-of-living adjustments.

Before the ink dried on that deal, Congress voted to replace the COLA cap with alternative budget savings it still might regret: lengthening the impact of sequestration on future defense budgets by another year.

So to borrow a phrase from recent popular culture: If you like your current plan, you can keep it. But you’ll have something new to consider.

Department of Defense pay experts gave the commission two concepts for reforming retirement. They also advised that a lot more money would be saved for taxpayers if, in adopting either of these ideas, the commission also endorses an “opt in” feature for those in service.

“Steady state” savings from any one of the new retirement concepts if adopted only for new entrants would range from $1.7 billion to $3.9 billion annually, officials told the commission.

“However, if currently serving members were permitted to participate … which DoD believes should be an option, savings to the Department and the Treasury would emerge more quickly.”

The greater the number of members “who opt-in, the faster the full savings of the change would be realized.”

Current military retirement is a “defined benefit” that pays an immediate annuity after 20 or more years. The value of the annuity climbs by 2.5 percent of basic pay for each year served. However, only 15 percent of all members who serve stay long enough to quality.

Both of the new concepts shown the commission is a “hybrid” plan, combining a reduced defined benefit with two new tools.

Tom Philpott can be contacted at Military Update, P.O. Box 231111, Centreville, Va. 20120-1111, or by e-mail at:
milupdate@aol.com