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DoD: Give reservists immediate retirement pay

Mar. 6, 2014 - 08:04PM   |  
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Reservists would be eligible to begin receiving military retirement pay immediately after completing 20 years of part-time service under a new Pentagon proposal for overhauling the retirement system.

The plan would blur the lines between active and reserve careers by allowing both to qualify for “working age” retirement checks that for decades have been limited to the full-time active-duty force.

The fundamental change for reservists — who today must wait until age 60 to collect their first nickel of retirement pay — is one element of a broader set of proposals that the Defense Department unveiled Thursday in a report sent to Capitol Hill and also to the Military Compensation and Retirement Modernization Commission, which is conducting an in-depth study on the issue and preparing recommendations for Congress early next year.

The new Pentagon proposal would convert both active and reserve retirement packages into a “hybrid” that promises smaller monthly retirement checks supplemented with a 401(k)-style investment account that troops and retirees would own outright.

Reservists would get the same annual government contributions equal to 5 percent of basic pay, and ownership of those investment accounts would transfer to service members after six years of service. That would mark the first time that a limited retirement benefit would be provided to troops who do not complete a 20-year career in either component.

Under one option, reserve pension checks would be structured similar to the current system, forcing reserve retirees to wait until age 60 before drawing any retirement pay.

A second option, however, would create a two-tiered pension system that provides only a “partial benefit” during the early retirement years, increasing to a “full benefit” after retirees reach a more traditional retirement age, such as 62.

Under that two-tiered option, both active and reserve troops would be eligible for the “partial benefit” pension check after completing 20 years of service.

Those checks would be exceptionally small for reservists who spend an entire career in drilling status, perhaps several hundred dollars a year. But for troops who spend years in the active-duty force and then complete 20 years of service in a reserve component, the working-age pensions become more generous and more closely resemble active-duty career benefits.

Reshaping career decisions

The change could reshape the decision-making process for millions of individual troops. It might motivate younger reservists to stay in uniform for a full career. It may also make some active-duty troops view the reserves more positively if transferring into part-time status does not eliminate the possibility of early retirement checks.

It’s part of a broader goal inside the Pentagon to bring both active and reserve troops under a single retirement system.

“The two-tiered defined benefit was designed with the reserves in mind,” said a defense official who helped draw up the proposals.

The plan would reinforce a push inside some parts of the Pentagon to increase future use of the reserve components. During the wars in Iraq and Afghanistan, reservists mobilized far more often than any previous era of the all-volunteer force. Some officials want to retain that high level of readiness and increased operational role for the reserves.

“In these times of emergency, they move back and forth between active duty and reserve duty, between the two components. So our attempt was to see whether or not changes to retirement might facilitate that movement a little more easily,” the defense official said.

The proposal is also designed in part to save money. For most reservists, the two-tiered plan ultimately would lower the value of the total economic value of the retirement package when based on current life expectancy. Under the most aggressive scenarios, that total lifetime value could be reduced by as much as 20 percent.

But military manpower experts are banking on the belief that reservists would place more value on the prospect of getting a small pension earlier in life rather than a larger package that is back-loaded to provide more benefits in old age.

The proposal offering early checks for reservists requires a “delicate balance” when determining how much to pay in the early retirement years, officials say. If payments are too generous and approach standard drill pay, most reservists would retire immediately after becoming eligible.

Also, a generous retirement for part-time troops may provide an incentive for those on active duty to transfer into the reserves and potentially create a retention problem for the active components.

Offering a new retirement benefit to “gray-area” reservists — those who serve long enough to qualify for military retirement benefits but are not yet age 60 — would likely change the shape of the force, according to the Pentagon report.

Today, the reserve components struggle to retain midcareer service members, but those who stay tend to stay for many years and remain in the force well into their 40s and 50s.

Early retirement checks would likely boost retention among midcareer reservists as individuals who are motivated by the early pension but also incentivize some older reservists to go ahead and retire and begin collecting benefits.

In the end, the composition of the reserves would look more like the active-duty force under this proposal, according to the Pentagon report.

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