The military today is confused about its retirement benefits. To test that hypothesis, I called a recruiting office, picked at random, and asked what a new recruit could expect to receive after 20 years of service.
“Fifty percent” of basic pay, said the sergeant in Westchester County, New York. Wrong. The answer is 40%. Perhaps because recruits do not often ask about retirement, the sergeant didn’t know.
The fact is that military retirement has lost some glitter. Trimmed twice by Congress since 1980, the plan in effect today for most active duty members is worth a quarter less than the plan under which older service members retired. That old saw about retiring at “half pay after 20,” always a bit misleading, is flat wrong for a majority in uniform today. With three plans now in effect, only one in five members falls under the most generous. Here are key features of each plan:
Final Basic Pay: Youngsters might come to call this the Cadillac of retirement plans. It applies to all current retirees but only 19% of the active force—those who entered service before 8 September 1980. Annuities after 20 years equal 50% of final basic pay. We should not call it “half pay,” because a third to a quarter of military pay today is allowances, which are excluded from retirement calculations. Still, the plan is attractive. Annuities equal 2.5 percentage points of basic pay for each year served, up to a maximum of 75% after 30 years. Annual cost-of-living adjustments, when Congress does not interfere, provide full inflation protection.
High-3: This plan is only slightly different from Final Basic Pay, but that difference cuts the value of retirement an average of 11%. High-3 applies to anyone who entered service from 8 September 1980 through 31 July 1986. Today, that is 21% of the force. The formula is identical to Final Basic Pay, except that annuities are based on a percentage of average basic pay during the member’s highest three earning years, rather than final pay. High-3, like Final Basic Pay, has full inflation protection.
Redux: This plan is worth roughly 24% less than Final Basic Pay. It applies to those who entered service after 31 July 1986, or 60% of current members. Annuities for 20-year retirees are 40%, not 50%, of High-3 average basic pay. Years served after 20 accrue benefits at a faster pace—3.5% of basic pay—to reach the same maximum of the other two plans of 75% after 30 years’ service. Redux does not offer full inflation protection, however. Annual cost-of-living adjustments (COLAs) are set a percentage point below inflation, with a onetime bump at age 62 to restore lost purchasing power. Partial COLAs continue thereafter.
The chart here compares the value of the plans for select ranks and years of service, both in terms of starting annual retired pay and expected lifetime retired pay. For example, a major or lieutenant commander who retired 1 January 1996 with 20 years’ service, will draw $24,979 this year under Final Basic Pay. If retired instead under High-3, the annuity would be only $23,603. Under Redux, it would fall to $18,883. The figures assume no promotions within three years of retirement. If there had been a promotion, the disparity in benefits would be significantly greater because of High-3 averaging. Expected lifetime retired pay for the 0-4 with 20 years would be $927,700 under Final Basic Pay plan, $876,600 under High-3, and $709,600 under Redux.
Similar differences appear with enlisted benefits. An E-7 who retired 1 January with 20 years’ service will draw $13,568 in retired pay this year. Under High-3, he would receive $12,655 and under Redux only $10,124. Expected lifetime value for the E-7 would be $492,700 under Final Basic Pay, compared with $459,600 under High-3 and $364,900 under Redux. The chart assumes officers enter service at age 23 and enlisted at age 20. Life expectancy is 80 years for officers, 77 for enlisted.
John T. Warner, a Clemson University economist who has studied military retirement for 20 years, said retention problems long feared by the services have not materialized—yet. “Given the downsizing, it’s hard to sort out the effect of Redux,” he said. But Mr. Warner’s economic computer models still show the plan pulling enough members toward retirement. In fact, once they hit 20 years, starting in 2006, he said, a higher proportion than today will try to stay longer to maximize benefits.
Service officials remain wary, saying the full impact of past retirement cuts will not be known for several years.