Military prepares for overhaul in retirement benefits

ultralow cost and simplicity. Under the new plan, the Department of Defense will automatically contribute 1% of basic pay, and will match contributions to a participant’s first 3% of contributions dollar for dollar, and 50 cents on the dollar for the participant’s next 2%. (Five percent of basic pay is the ceiling on the automatic plus matching contributions).

  • Continuation pay. The new system will encourage troops who complete 12 years of service to stay an additional four years in order to earn a pay bonus that can be paid out as a lump sum or a series of payments.
  • Lump sum pensions. Service members in the new system will be offered lump sums at retirement in exchange for a portion of their pension. The service member will be able to take either 25% or 50% of their pension as a lump sum, and the pension will be reduced accordingly. The changes will affect personnel who elect to move to the system and those who enter service starting Jan. 1, 2018.
  • The reforms aim to spread retirement benefits more equitably, but also save money. The Congressional Budget Office has estimated that the new retirement system will reduce costs by $13.5 billion from fiscal years 2017 to 2025–although that funding likely will be repurposed for other defense needs.

    And the plan may change a bit before all is said and done: The Pentagon is seeking changes, requesting that Congress revisit the continuation of pay provision and timing of the matching contribution provisions. The armed services are seeking more flexibility on when the lump sum payments would be made, and for some revisions in the matching contribution formulas.

    Changes of this magnitude are bound to generate some pushback, and a survey found that 73% of current military families would prefer to be grandfathered into the old system. The survey was conducted by First Command Financial Services, a financial planning firm specializing in serving military households. At the same time, however, 61% said they are at least somewhat favorable toward the plan for government contributions to a new service member’s TSP account.

    The best strategies–and outcomes–depend on the individual’s situation, says Scott Spiker, CEO of First Command. “If you have less than 12 years of service and you know you plan to make the military your career, stay in the old plan. If you have less than 12 years and know you’ll be getting out, take the new deal and max out the TSP as best you can–at least you’ll get a benefit that you wouldn’t have had otherwise.”

    The shortfalls of the new system, Spiker says, aren’t very different from the problems in the private sector defined contribution system–getting people to contribute and save, and making good investment choices. Currently, just 42% of armed forces personnel participate in the TSP, according to a First Command analysis of federal data.

    “My fear is that we are leading people down a path with long-term deleterious consequences,” Spiker says.

    Financial education is another concern. An independent commission that crafted the reform proposals recommended creation of a robust retirement saving literacy initiative to bring service members up to speed on how to get the most out of the new blended system. Currently, all service members go through a mandatory eight-hour general financial readiness training that covers everything from how to buy a home to investing and avoiding credit card scams. The commission had recommended separate funding to beef up the retirement saving education component, but Congress has not allocated funding.

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