Career military worried about changes to new retirement plan

A new Pentagon proposal to make changes to the military retirement overhaul passed just last year is gaining the attention of America’s career military. And they don’t like what they see.

The First Command Financial Behaviors Index reveals that half of middle-class military families (commissioned officers and senior NCOs in pay grades E-6 and above with household incomes of at least $50,000) are aware of the changes unveiled in February as part of the proposed Defense budget for fiscal 2017. While the recommendations include some potentially positive changes, the negative ones are clearly of the greatest concern. Eighty two percent of survey respondents feel anxious about the proposal.

“This proposal is understandably challenging for our men and women in uniform,” says Scott Spiker, CEO of First Command Financial Services, Inc. “Career military families are still trying to sort out how the recent overhaul of the military retirement system may affect their financial futures. The new military retirement reduces the size of the traditional 20-year pension, cutting monthly retired pay by 20 percent. That’s a big change.

“Not surprisingly, three out of four say they prefer to be grandfathered into the traditional system,” he adds. “Now the Pentagon is seeking to make even more changes. Service member families are feeling overwhelmed by the pace of change, and their anxiety stems from that fact.”

The Pentagon’s 2017 budget proposal recommends four changes to the new military retirement system that was approved in November as part of the 2016 National Defense Authorization Act. Those changes are:

• Extending the government’s matching contributions to an individual service member’s actual retirement date. The 2016 law cuts off government matching contributions at 26 years of service. This is a positive change for the small percentage of military members who serve beyond 26 years.

• Raising the cap on government contributions to the Thrift Savings Plan (TSP) to 6 percent of basic pay. That’s up from 5 percent in the 2016 law.

• Delaying the start of TSP matching contributions to the fifth year of military service. The 2016 law begins matching contributions at the third year of service.

• Removing the new retirement system’s mandatory minimum continuation pay for all troops reaching 12 years of service, and giving each of the services flexibility to set continuation pay based on their individual needs. The 2016 law ensures that all troops reaching 12 years of service receive continuation pay equal to a multiple of their basic pay (ranging from 2.5 months to 15.5 months as determined by their service department).

How does retirement income look at the 20-year mark if career military members make their full TSP contributions to earn the extra government match, matching does not begin until the fifth year of service, but continuation pay is zero? The additional 1 percent available TSP match, delayed starting at the fifth year of service, can net a greater TSP balance than that included in the 2016 law.

However, it does not make up for the loss caused by eliminating the minimum 2.5 months of continuation pay. Based on a detailed analysis of the future finances of two hypothetical career military members (one enlisted, one officer) who retire after 20 years, First Command projects that monthly retired pay under the 2017 proposal could fall roughly 5 percent short of that under the 2016 law. Assuming a maximum 15.5 months of continuation pay, the shortfall would be even larger.

Perhaps the most notable impact of delaying the start of matching contributions to the fifth year of service would be felt among those who do not make a career of the military.