February Chief's Concerns
By Chief Master Sgt. Mark A. Cronk, Joint Force Headquarters
/ Published January 29, 2016
MCENTIRE JOINT NATIONAL GUARD BASE, S.C. --
Massive changes upcoming to Military Retirement
The 2016 National Defense Authorization Act (NDAA) was signed into law by President Obama in November of last year, putting into law a historic overhaul of our current military retirement system.
The new retirement plan is known as the "Modernized Retirement System" and will become law effective January 1, 2018. The new blended system of accounts and pensions will replace the current retirement system, which pays out only after attaining 20 years of creditable service.
The new retirement system would give all those who serve at least two years (at which point they are vested in the 401k TSP) of some retirement benefits after they leave service; opposed to the current system where only an estimated 17 percent of those who join the military actually end up drawing military retirement pay.
Under the current system at 20 years of creditable service, members receive two-and-a-half percent of basic pay for each year and/or partial year of active duty plus two-and-a-half percent per year of inactive duty points (drills/membership points/correspondence points divided by 360 to convert to years x two-and-a-half percent) times the highest 36 month of base pay for current grade and time in service, unless they opted to take the Active Duty REDUX retirement option.
The new blended systems will be composed of four components.
(1) The two-and-a-half percent for each year of service and qualifying inactive duty service will be reduced to two percent for each year, also reducing the value of each retirement point for traditional personnel.
(2) Automatic mandatory contributions of three percent of base or monthly pay must be withheld and contributed to the Thrift Savings Plan (TSP) (401-k). DOD will then match one percent for the first year of service, and after two years of service, the DOD will match up to five percent. For the match up to five percent, the service member must have five percent of base or monthly pay withheld and contributed to TSP. These matching contributions will be for a maximum of 26 years in service.
(3) In addition, DOD will provide an automatic federal matching contribution to TSP totaling one percent of base or monthly pay.
(4) All service members will receive continuation pay (i.e. bonus pay) at 12 years of service if they agree to an additional four-year commitment. The amount of bonus would be calculated based on status. Active-duty personnel will be eligible for a bonus of between two-and-a-half months and 15.5 months of basic pay and part-time (traditional) personnel will be eligible for between half a month's and six-and-a-half months of monthly pay. Details of the actual bonus amounts are still being worked.
The TSP match is meant to mirror corporate-style retirement incentives, and would be paired with a host of literacy training to help troops make responsible investment decisions over the course of their careers.
The 20-year pensions will remain for all but the reduction from two-and-a-half percent to two percent (50 percent vs 40 percent at 20 years credible service), will not be as lucrative for future service members. To support the new 401(k) style retirement accounts, future monthly pensions will only be worth 80 percent of their current value.
Additionally the law does authorize a one-time lump sum payment at retirement in lieu of the 20-year pension payout which will allows the service members to receive a one-time payout for either 25 or 50 percent of their total anticipated retirement pension up until age 60, at which point the remainder would continue as a reduced monthly pension. The payout will only be a fraction of the total pension value. Details of the actual cash-out amounts and at how it reduces monthly retired pay still have to be resolved. This option was only provided to allow for separating troops who might want to start a business, pay for college, or face other immediate necessary catastrophic expenses.
Service members with less than 12 years of service (i.e. joined the military January 1st, 2006 or later) will be given the opportunity to convert to this new system or remain under the current system. Those who joined the military prior to January1st, 2006 will be "grandfathered" to their current retirement plans.