Military Retirement: Background and Recent Developments

Military Retirement: Background and Recent Developments

Updated July 28, 2022

Congressional Research Service RL34751

Military Retirement: Background and Recent Developments

Summary

The military retirement system is a government-funded, noncontributory, defined benefit system that has historically been viewed as a significant incentive in retaining a career military force. The system currently includes monthly compensation for qualified active and reserve retirees, disability benefits for those deemed medically unfit to serve, and a survivor annuity program for the eligible survivors of deceased retirees. The amount of compensation is dependent on time served, basic pay at retirement, and annual Cost-of-Living-Adjustments (COLAs). Military retirees are also entitled to nonmonetary benefits including health care benefits, exchange and commissary privileges, and access to Morale, Welfare and Recreation (MWR) facilities and programs. Currently, there are three general categories of military retiree?active component, reserve component, and disability retiree. Active component personnel are eligible for retirement (i.e., vested) after completing 20 years of service (YOS). Reserve personnel are eligible after 20 years of creditable service based on a points system, but do not typically begin to draw retirement pay until age 60. Finally, those with a disability retirement do not need to have served 20 years to be eligible for retired pay; however, they must have been found unqualified for further service due to a permanent, stable disability. In FY2020, DOD obligated $61.8 billion for 2.3 million military retirees and survivors. Given the size of the program, some have viewed military retirement as a place where substantial budgetary savings could be made. Others have argued that past modifications intended to save money have negatively affected military recruiting and retention. Military retirees, families, and veterans' interest groups closely monitor potential changes to the retirement system. When considering alternatives to the current system, Congress may choose to consider the balance among (1) the benefits of the military retirement system as a retention incentive, (2) budget constraints, and (3) the needs and concerns of constituents.

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Military Retirement: Background and Recent Developments

Contents

Overview ......................................................................................................................................... 1 Retirement System Eligibility and Pay Calculations....................................................................... 3

Active Component Retirement.................................................................................................. 4 Final Basic Pay (prior to September 8, 1980) ..................................................................... 4 High Three .......................................................................................................................... 5 Redux .................................................................................................................................. 5 Blended Retirement System (BRS) .................................................................................... 6

Reserve Component Retirement.............................................................................................. 10 Disability Retirement .............................................................................................................. 12 Extraordinary Heroism Pay ..................................................................................................... 13 Military Retired Pay, Social Security, and Federal Income Tax .................................................... 13 Retired Pay and the Cost-of-Living Adjustment (COLA) ............................................................. 14 COLAs for Pre-August 1, 1986, Entrants ............................................................................... 14 COLAs for Personnel Who Entered Service On or After August 1, 1986 .............................. 14

Non-Redux Recipients ...................................................................................................... 14 Redux/$30,000 Cash Bonus Recipients ............................................................................ 14 Military Retirement Budgeting and Costs ..................................................................................... 15 Treasury Payments for the Unfunded Liability ....................................................................... 17 Concerns about Implementation of the BRS ................................................................................. 19 Retention Effects ..................................................................................................................... 19 Effects on Financial Well-Being ............................................................................................. 20 Lump Sum Option ............................................................................................................ 20 Effectiveness of Financial Literacy Training .......................................................................... 21

Figures

Figure 1. Active Duty, Non-Disability (Longevity) Retirement Eligibility Flowchart ................... 4 Figure 2. Normal Cost Contributions to the MRF, FY1985-FY2020............................................ 19

Tables

Table 1. DOD Retired Military Personnel, Survivors, and Program Obligations, FY2007FY2020......................................................................................................................................... 2

Table 2. Government Automatic and Matching Contributions........................................................ 8 Table 3. Potential Continuation Pay Multipliers ............................................................................. 9 Table 4. Retirement System Comparisons..................................................................................... 10 Table 5. DOD's Normal Cost Percentages (NCPs) for FY2017 and FY2021............................... 16

Appendixes

Appendix. Retirement Reform Recommendations in Selected Prior Reviews ............................. 22

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Military Retirement: Background and Recent Developments

Contacts

Author Information........................................................................................................................ 23 Acknowledgments ......................................................................................................................... 24

Congressional Research Service

Military Retirement: Background and Recent Developments

Overview

The military retirement system is a government-funded benefit system that has been viewed historically as a significant incentive in retaining a career military force. The system includes a defined benefit element for all retirees and a defined contribution element for certain eligible retirees. The defined benefit includes a monthly annuity for qualified active and reserve retirees paid out of the Military Retirement Fund. The defined contribution benefit includes governmentmatching payments into an individual retirement Thrift Savings Plan (TSP) account. The amount of the retirement annuity depends on years of service (YOS) and basic pay at retirement. It is adjusted annually by a Cost-of-Living Adjustment (COLA) to help protect the annuity from the effects of inflation. Military retirees are also entitled to nonmonetary benefits, which include health care benefits, exchange and commissary privileges, and access to Morale, Welfare and Recreation (MWR) facilities and programs.

The military retirement system has evolved since the late 1800s to meet four main goals.

To keep the military forces of the United States young and vigorous and ensure promotion opportunities for younger members,

To enable the Armed Forces to remain competitive with private-sector employers and the federal Civil Service,

To provide a reserve pool of experienced military manpower that can be called upon in time of war or national emergency to augment active forces, and

To provide economic security for former members of the Armed Forces during their old age.1

Among active duty personnel, eligibility for a monthly pension is generally based on a service requirement of at least 20 years of (active) service. For reserve component personnel, the system is based on a point system, and reservists do not generally begin to receive retired pay until the age of 60. Both the active and reserve component retirement systems vest at 20 years of qualifying service.2 However, some members who are retired with a physical disability may receive a pension with fewer years of service. Disability retirement offers two retirement compensation options: based either on years of service (longevity) or on the severity of the disability.

In FY2020, DOD obligated $57.8 billion for approximately 2 million military retirees, and an additional $4.0 billion for 317,163 survivors.3 As shown in Table 1, the number of military retirees and the cost of their retirement benefits have increased over the past decade.

1 Department of Defense, Military Compensation Background Papers: Compensation Elements and Related Manpower Cost Items, Their Purposes and Legislative Backgrounds, Eighth Edition, July 2018, p. 55.

2 Vesting in the military retirement system is commonly referred to as "cliff vesting." Until the 20-year point, there is generally no vesting. At 20 years, the servicemember becomes fully vested. However, individuals can receive retirement benefits with fewer than 20 years of service under the disability retirement system and under Temporary Early Retirement Authority (Section 4403, P.L. 102-484, October 23, 1992; 10 U.S.C. ?1293 note).

3 Department of Defense, Statistical Report on the Military Retirement System; Fiscal Year Ended September 30, 2020, Office of the Actuary, September 2021, p. 22.

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Military Retirement: Background and Recent Developments

Table 1. DOD Retired Military Personnel, Survivors, and Program Obligations, FY2007-FY2020

Fiscal Year

Recipients and Total Program

Cost

Regular Retirees from an Active Duty Military

Career

Disability Retirees

Reserve Retirees

Survivor Benefit Recipients

2020

2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007

2,321,120 $61.79 billion

2,315,870 $60.49 billion

2,318,431 $58.69 billion

2,315,806 $57.4 billion

2,312,880 $57.01 billion

2,308,073 $56.49 billion

2,297,889 $55.13 billion

2,284,233 $54.00 billion

2,272,295 $52.61 billion

2,260,112 $50.65 billion

2,211,580 $50.12 billion

2,196,397 $49.16 billion

2,170,803 $45.66 billion

2,146,961 $43.57 billion

1,448,021 $48.63 billion

1,459,083 $47.77 billion

1,465,692 $46.41 billion

1,469,751 $45.51 billion

1,472,140 $45.22 billion

1,474,116 $44.93 billion

1,473,315 $43.92 billion

1,470,803 $43.72 billion

1,472,087 $42.05 billion

1,471,219 $40.53 billion

1,467,936 $40.19 billion

1,468,377 $39.54 billion

1,466,705 $36.90 billion

1,461,724 $35.51 billion

128,911 $1.88 billion

125,915 $1.80 billion

123,251 $1.68 billion

118,029 $1.59 billion

116,141 $1.56 billion

112,260 $1.52 billion

107,751 $1.46 billion

103,160 $1.43 billion

95,910 $1.38 billion

94,886 $1.36 billion

92,704 $1.38 billion

91,460 $1.38 billion

85,502 $1.29 billion

85,306 $1.29 billion

427,025 $7.32 billion

417,697 $6.96 billion

412,400 $6.66 billion

408,595 $6.40 billion

401,580 $6.23 billion

395,808 $6.08 billion

389,750 $5.85 billion

383,490 $5.62 billion

376,052 $5.36 billion

366,823 $5.06 billion

356,602 $4.89 billion

344,393 $4.65 billion

328,664 $4.20 billion

312,647 $3.86 billion

317,163 $3.97 billion

313,175 $3.96 billion

317,088 $3.94 billion

319,431 $3.95 billion

323,019 $3.98 billion

325,889 $3.96 billion

327,073 $3.91 billion

326,780 $3.85 billion

328,246 $3.81 billion

327,184 $3.70 billion

299,478 $3.65 billion

297,558 $3.60 billion

296,580 $3.27 billion

293,193 $2.92 billion

Sources Department of Defense, Statistical Report on the Military Retirement System; Fiscal Year Ended September 30, 2020, Office of the Actuary, September 2021, p. 22. Statistical reports available by fiscal year for FY2005FY2020, at .

Notes: Total Program Cost is total DOD obligations for that fiscal year in then-year dollars. Survivors include the spouse, children, and others with insurable interests that are entitled to survivor benefits from the DOD Military Retirement Fund. Disability retirees includes permanently and temporarily disabled retirees.

Congress grapples with constituent concerns as well as budgetary constraints in considering military retirement issues. In the past, some have viewed military retirement as a potential source of substantial savings, arguing that the military retirement compensation is overly generous

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Military Retirement: Background and Recent Developments

relative to pension systems in the civilian sector.4 In particular, they note that active duty military personnel become eligible for retirement at a relatively young age. In FY2020, the average active duty non-disability enlisted retiree retired at the age of 42-years-old and the average officer retired at age 46.5

Other observers argue that the military retirement system contributes to military readiness and is fair given the unique demands of military service.6 In addition, some have argued that past modifications to the system intended to save money have had a deleterious effect on military recruiting and retention, particularly in times of strong economic performance.

While congressionally mandated changes to the military retirement system have been infrequent, any potential changes are closely monitored by current servicemembers, retirees, survivors, and the organizations that represent them.7

Retirement System Eligibility and Pay Calculations

There are currently three separate but related retirement pathways within the DOD: one for active duty members, one for reservists, and one for those who become medically disabled and are unable to complete a 20-year military career. Each of these systems pathways has distinct eligibility requirements and formulas for calculating the retirement annuity.

Retirement pay calculations are based on the date when the servicemember first entered active duty and their pay base at the time of retirement.8 The defined benefit portion of the active and reserve component retirement systems cliff-vests after 20 years of service. This means servicemembers who leave the service prior to completing 20 years of eligible service typically will not receive any non-disability retirement benefit.9 Members who become eligible for a disability retirement are vested on their disability retirement date regardless of years of service. The average number of years of service for a disability retiree is 11.0 years for enlisted members and 13.5 years for officers.10

4 See, for example, Andrew G. Biggs, Are Military Pensions too Generous?, AEI, Blog Post, August 23, 2011, at .

5 Department of Defense, Statistical Report on the Military Retirement System; Fiscal Year Ended September 30, 2020, Office of the Actuary, September 2021, p. 50.

6 See for example, Lawrence J. Korb, "The High Cost of Military Pensions; Subsidizing Readiness, not Retirement," New York Times, February 17, 1985.

7 See 38 U.S.C. ?5902 and 38 C.F.R. ?14.628 regarding federal recognition of such organizations.

8 The "pay base" is either the amount of basic pay being received at the time of retirement (for those in the Final Basic Pay System) or the average of the highest 36 months of basic pay received (for those in the High-3 System). See 10 U.S.C. ??1406-1407. Basic pay is the principal element of Regular Military Compensation (RMC). The other elements include the Basic Allowance for Housing (BAH) and the Basic Allowance for Subsistence (BAS), which are nontaxable allowances. Basic pay is between 65% and 75% of RMC. RMC excludes all special pay and bonuses, reimbursements, educational assistance, and any value associated with nonmonetary benefits such as health care, commissaries, and post exchanges. For additional discussion of military pay and RMC, see CRS Report RL33446, Military Pay: Key Questions and Answers, by Lawrence Kapp and Barbara Salazar Torreon.

9 Some individuals may qualify for longevity retirement prior to attaining 20 years of service under Temporary Early Retirement Authority (TERA).

10 Department of Defense, Statistical Report on the Military Retirement System; Fiscal Year Ended September 30, 2020, Office of the Actuary, September 2021, p. 54.

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Military Retirement: Background and Recent Developments

Active Component Retirement11

For active duty military personnel, there are four methods of calculating retired pay based on longevity: the Final Basic Pay System, High Three, Redux, and the Blended Retirement System (BRS) (see Table 4 for a comparison of the benefits under each method). The applicable retirement calculation is based on the date when the servicemember first entered active duty, their pay base at the time of retirement, their years of service, and whether they chose the Redux system or the BRS (if eligible). Figure 1 shows how eligibility for retirement calculation is determined.

Figure 1.Active Duty, Non-Disability (Longevity) Retirement Eligibility Flowchart

Source: CRS, derived from Title 10, United States Code. Note: YOS = Years of Service.

Final Basic Pay (prior to September 8, 1980) For persons who entered military service before September 8, 1980, the pay base is the final monthly basic pay received by the servicemember at the time of retirement multiplied by 2.5%

11 This is also frequently referred to as regular non-disability retirement.

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