Blended Retirement Talking Points
• There is no need to be anxious about the blended retirement system in the current FY2016 NDAA. Everyone who is currently serving as well as those who enter the force on or before December 31, 2017 is grandfathered under the current military retirement system. Additionally, the FY2016 NDAA repeals the COLA-1% formula that would adjust future retired pay calculations. As a result, both retirees under the current system and under the blended retirement system will be protected against inflation in their retirement years.
• Any member who has fewer than 12 years of service on December 31, 2017, has a choice and may elect either to remain under the current military retirement or choose to opt into the new system. Only members who join on or after January 1, 2018 will automatically be covered by the blended retirement system.
• Currently, approximately 81 percent of those members who join leave with no retirement benefit. Under the blended military retirement system, approximately 85 percent of those who join will receive a retirement benefit, even if they leave before qualifying for full retirement. Of those 19 percent who currently stay until retirement, they have the opportunity to do better than under the current system.
• The blended retirement system provides automatic government contributions of one percent into a member’s Thrift Savings Plan account plus will provide up to an additional four percent in matching contributions. Even with a slightly lower retired pay benefit, the member has the opportunity to do as well or even better than the current system.
• Military members will be provided financial education instruction and training to assist them in making a decision whether or not to opt into the new system. The DoD is already working on those products and delivery strategies so that they are ready and fielded well in advance of the opt in period in 2018.
Military Retirement Background
• The current military retirement system is a defined benefit retirement plan. A member who serves on active duty for twenty years is vested in the current retirement system and will receive retired pay upon retirement.
• For members who entered on or after September 8, 1980, military retired pay under the current system is calculated as 2.5 percent times the number of years the member served times the average of the highest-36 months of basic pay the member received. For example, a member who served 20 years would receive 50 percent of the average of the highest 36 months of basic pay.
• The Fiscal Year 2016 National Defense Authorization Act (NDAA) contains a new retirement system (“blended military retirement system”). This system combines a reduced defined benefit, like the current retirement system, with a defined contribution component (automatic plus matching contributions to a member’s Thrift Savings Plan account) and continuation pay. The blended retirement system uses a 2.0 percent rather than 2.5 percent multiplier in calculating military retired pay. Thus, a member who served 20 years would receive 40 percent of the average of the highest 36 months of basic pay, a Thrift Savings Plan account that contained government and optional member contributions, as well as continuation pay at the 12th year of service.
• All members who enter military service on or before December 31, 2017 are grandfathered under the current system. Those members who, on December 31, 2017, have served fewer than 12 years will have the option to remain under the current military retirement system or choose to change to the new, blended military retirement system.
Does the Department support the Congress’s military retirement modernization recommendation?
• The Department is committed to protecting the long-term viability of the All-Volunteer Force, and we support the objective of modernizing the military retirement system.
o The Congress’ proposal of a blended retirement system in the NDAA is similar in some ways to what exists in the private sector and has merit in that it will help more of our troops save for retirement.
o DoD’s proposal is also similar in most ways to the recommendation made by the Congress, with adjustments that the Department believed are necessary to promote retention.
Under a blended retirement system, would the Department favor reduced annual cost-of-living adjustments such as the so-called COLA-1%, or would it favor “full COLAs”, like those under the current retirement system?
• The DoD favors a blended system with a full COLA and the Congress reinstated the full COLA as part of a comprehensive retirement reform.
How much does the Department think this will save over the long-run?
• The Congress’s proposal will achieve real tangible savings to DoD over 10 years (approximately $4.8B, FY17-26) and annual DoD budget savings in steady state (2048) are projected to be $1B.
How many people would receive some type of retirement with this plan?
• Vesting occurs upon the beginning of 3 years of service (YOS). This would ensure that approximately 85% of Service members would receive some measure of retirement benefit. About 15% of Service members attrite between enlistment and the completion of 2 YOS.
How is this good for service members when the Department saves money?
• This policy allows for the power of compounding interest, and informed financial decision making. This is about modernizing our retirement policy.
• Additionally, we believe this proposal will help ensure that approximately 85% of Service members will be started on their way to long-term retirement savings.
Secretary Carter’s public comments
(excerpt of March 30, 2015 speech):
“We're looking down the road for you as you think about how long you're going to be in and what life will be like for you afterwards. So we're looking, for example, I'm looking very hard right now at blended retirement plans that would be similar to the 401(k) mechanism that is widespread in civil society. Because 80 percent of our troops leave service before 20 years are up, of service.
And in the current system, if they leave before 20 years, they leave with nothing. So we want to look at that and see if we can create a choice that opens up opportunity and is -- allows us to be more similar to other institutions and therefore competitive with them in getting people join us and stick with us.”