http://www.militarytimes.com/story/military/pentagon/2015/04/30/dod-rejects-tricare-reform-does-not-oppose-retirement-changes/26638471/
It is looking more and more likely that the US military retirement system, which is based upon a pension that cliff vests at 20 years of service, will change.
Thoughts?
I hear you, but you're reading Military Times. They (and MOAA) have been whipping their readers into a frenzy for over a year on this topic. I've never seen so much ink and so many electrons devoted to a study and some Congressional subcommittee hearings. Remember the Defense Business Board "retirement overhaul" of 2011? Remember all the Quadrennial Reviews of Military Compensation which could have overhauled retirement before now?
I think that the MCRMC retirement recommendation needs more analysis before there's popular comprehension and a consensus. Right now the CPAs can't even agree on how the dollars work out, and DoD is rightfully concerned about retention.
I also think DoD can't afford a "new" retirement plan, and here's why.
The existing retirement system is funded by special-purpose Treasuries. DoD has to follow GAAP rules for pension funding and interest rates are very low, so it already takes a lot of these Treasuries to cover the actuarial pension obligations. In the current pension system, DoD is trying to reduce this obligation by being able to use other assets with higher returns (and higher risks). They're also trying to automate and outsource as much of the rank & file as possible, because they don't have to fund pensions for drones, robots, or contractors.
Only 17% of the military's servicemembers vest in the current pension, and the cost is already getting smaller as the services get smaller. Even if the new pension started at age 60 instead of 20 years of service, the savings is not a large percentage of DoD's expenses.
But what if DoD had to fund a TSP match and give cash to servicemembers when they left the downsizing military? That's 83% of the force, and that's a current expense (not a deferred liability). It might not be much money per servicemember, but that's nearly five times as many people. I doubt that the savings will be significant, and indeed many financial analysts claim that the new retirement system is largely revenue-neutral for the servicemember. But now DoD has to pay money up front instead of setting aside a little every year for deferred liabilities.
I bet DoD feels that it's a lot easier to hand out GI Bill benefits (paid by the VA) and transition benefits (paid by the Dept of Labor) for departing vets, and to save their DoD funds to buy retention-- not separation.
With the current cliff-vesting pension system, two kinds of people stick around for 20: those who are having fun (and might not really care about the pension vesting), and those who are afraid to leave before vesting. If the second group is given a TSP match and can leave at the end of an obligation with some cash in hand and a deferred pension, then why would they stick around? Most humans can't calculated the future value of a present amount anyway. Retention will plummet.
So in effect, the new pension system will saddle DoD with higher current expenses (and lower deferred expenses) in exchange for lower retention. Sounds a lot like REDUX.
Then there's the expense of implementing the new retirement system. Nobody even knows how much it will cost to reprogram DFAS computers and do the analysis & auditing as well as the contracting. Again that bill is footed by DoD, not by deferred liabilities or other agencies like the VA.
I've been paying attention to this as well. I agree with some of the arguments in favor of overhaul (specifically that the REAL warfighters are least likely to benefit from the current system), but make no mistake, the real reason behind it is so that Uncle Sam can cut benefits overall.
As far as trying to get a severance, that would typically only happen if you hit High Year Tenure or get forced out via other means, and the payouts are nowhere close to a real retirement. For myself, it would mean the difference between ~$120K for severance at 15 YOS, or the pension equivalent of ~$1.1M 401K if I can retire.
As long as they grandfather the existing soldier in I think it is a good idea. I've meet too many senior NCO with 8-12 who have after their 3rd deployment to Iraq or Afghanistan said I'm getting out. I feel these guys really got screwed by the existing system.
There will be grandfathering. This retirement proposal does not affect anyone in uniform today, although they can choose the option... just like REDUX sucks in a few hundred servicemembers every year.
BTW, JMusic, you need a better phrase than "REAL warfighters". How about "high OPTEMPO" or "physically punishing" or "labor intensive"? One team, one fight, right? Even the SF and the SEALs can't bang on doors until the support forces gain the intel and the logistics guys produce the gear. And I've seen plenty of those REAL warfighters lose their cool when they're underway underwater on a nuclear-powered taxi service.
But I digress. Back to the retirement overhaul.
The military gets the retention that they're willing to pay for. Right now, retention sucks so badly in my daughter's community (nuclear-trained surface warfare officers) that at the five-year point she'll be eligible to sign 3-5 year retention contracts for two different bonuses at the same time. In addition to her base pay of roughly $62K/year, she'll be eligible for $65K/year in bonuses.
How badly does a job have to suck for the military to double your base pay?
Another aspect is the advanced training. By the time she's developed five years of leadership & management skills (along with 30+ credit hours of graduate-level nuclear engineering training) she'll easily be able to pull down six figures in a civilian engineering career.
So how does the military persuade these people to stick around? Outrageous bonuses work once or twice, but eventually even lieutenants realize that the fun is dwindling. During recessions they still have the skills to leave active duty for a bridge career. It's very easy for them to move to the Reserves for some of the fun with much less suckage.
One of the effective retention mechanisms is keeping it fun. Another very effective retention mechanism is cliff vesting, with the possibility of reaching financial independence in your 40s. In my daughter's case, she's already saving more than half of her income (easy to do on sea duty as an unqualified O-1) and planning to go to the Reserves after she finishes her five-year obligation. She'll work a bridge career (or a lot of Reserve duty) and save enough assets to retire in her 40s (but, being my daughter, will probably try to reach FI in her 30s) and she'll have a Reserve pension waiting for her at age 60.
I see the MCRMC recommendations as heavily weighted toward the servicemember while burdening DoD with unfunded expenses. As Spartana says, instead of improving DoD's retention, it actually encourages servicemembers to fall prey to hyperbolic discounting and get out before 20 years. Congressional subcommittees will be delighted to hold hearings on behalf of their (voting) constituents (especially during an election year) but I think DoD will drag out the process until it dies. In the meantime DoD will continue to pay targeted bonuses to the 17% it wants to retain, and won't worry about whether cliff vesting is fair for the other 83%.
Hopefully Nords will weigh in on this, as this is his bailiwick.
I try to search the threads every week for keywords like "Nords" and "military.
However there seems to be plenty of expertise here already, both from active-duty and veteran posters. I may be more widely published and have some media contacts, but the MCRMC is pretty new to everyone.
Every W-2 I have received from the Navy for 25 years has had the Retirement Plan box checked. Block 13. http://images-paycheck-chronicles.military.com/wp-content/uploads/2014/01/W-2-without-identifying-information.png?b538d5
Ok, but this prevents us from deducting the Traditional IRA? Why doesn't it apply to the traditional TSP?
The TSP and the IRA are two different portions of the tax code, and they have different rules.
I remember the same frustration in the 1980s when we found out we couldn't deduct our IRA contributions. "Whaddya mean, 'covered by a retirement plan'?!? We don't even know if we want to serve more than five years!!" When I retired in 2002, it took my spouse and I 12 years to incrementally convert our traditional (non-deductible) IRAs to Roth IRAs in the 15% income-tax bracket.
but I'm pretty sure that very few 18 year olds join the Marine Corp primarily because they get a pension in 20 years.
Oh, don't be too sure! I remember a specific conversation between me and my brother:
I did say Marine Corp for a reason. In general Marine Corp recruits (See Making the Corp) are motivated by more patriotic/traditional reason for signing up than the other services. Navy, Air Force (ROTC in my case) and Army typically appeal for multiple reason like your brother. I believe (Nords will correct me if I'm wrong) that the Marines have the lowest percentage of the service collecting pension, Air Force I think is the highest.
But proportionally Marines are engaged in far more of the actual fighting than the other services, so I believe the current system penalizes them unfairly.
I'd say that anyone who joins the military because of the retirement benefits is misguided by fuzzy thinking. Joint the military to learn new skills, to be part of something bigger than yourself, to do more than you ever thought you could, and to serve your country. But to plan to stick it out for 20 years just for an inflation-fighting pension and cheap healthcare is putting a lot of pressure on yourself, and it's excessively rigid planning.
Instead I'd suggest that servicemembers take it one obligation at a time and, when the fun stops, move to the Reserves/National Guard. You can reach financial independence through a bridge career (or a lot of Reserve/Guard duty) and at age 60 you'll still have pension & healthcare benefits to cover your longevity risk.
I wish I could remember where I read the statistics, but the Air Force retirement rate (active-duty and Reserves/Guard) is over 30%. Meanwhile the Marine retirement rate is more like 8%. Officers are about 30%-40% (depending on the service) and enlisted are down around 20%. The overall retirement rate is about 17%.
The Marine Corps acknowledges that their job is physically labor-intensive and they don't want a lot of people hanging around for 20. Instead they want a core leadership (both officer and enlisted) and they're hoping to rapidly ramp up during wartime. As one of the smallest of the uniformed services, this works well for them. It wouldn't work for the Army or the Air Force with their existing infrastructure requirements and specialized larger forces.
It just underscores the fact that, while these changes are probably a good move, completely ignoring Tricare is folly. That's where military retirement spending is about to run off the rails. This makes the temper tantrum that the different military/veteran lobby threw a few years ago look even more ridiculous. Gates wanted to raise premiums and copays by a token amount, but oh man did everyone yelp. Eventually they upped things by an completely insignificant amount.
I think Tricare Prime seemed like a pretty good idea at the time. However an insurance company can't survive when their premiums are frozen at the same rate for 15 years. I think it was a smart move (yet a temporary fix) to index Tricare premiums to the CPI, but I agree that the concept of Tricare Prime is not working. I can see the military either ditching Tricare Prime or turning it back into Tricare Standard. The idea of having incentives for better health outcomes is an enticing feature of the ACA legislation on Medicare payments, and I think that might help Tricare a lot.
One final
rant point:
For those who feel that the military's 20-year active-duty pension is excessively generous, I'll remind you again that America gets the military it's willing to pay for. (We should apply that logic to the State Department, too, and then maybe DoD wouldn't be so busy.) There's a reason that pensions start early for firefighters, police officers, emergency responders, and military. Those jobs have very few candidates who are qualified to join (let alone volunteer), and they're so highly trained & skilled that they're difficult to retain. You should account for survivor bias and work-related risks. For every hundred retirees like me who live in paradise and can surf every day, there are over 500 more veterans who left the military before they vested their pension. There were a few guys who died on active duty (war or training) and a dozen more who are 100% disabled. In my cohort of 100 happy retirees, there are a couple dozen more who have significant disability issues and a permanently shorter lifespan.
Would a MegaCorp pension seem excessively generous if your bosses & clients killed or maimed a few of your co-workers every year?