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Defense Bill Alters Military Retirement System

Changes include auto-enrollment into TSP for new service members, and a less generous pension for those who retire after 20 years.

A House panel on Wednesday approved a major bill that would allow non-career military service members to boost their retirement nest eggs.

The fiscal 2016 National Defense Authorization Act, which the House Armed Services Committee reported out late on Wednesday, would automatically enroll new troops into the Thrift Savings Plan at 3 percent of their pay with a 1 percent government match, similar to the way it works now for federal civilian employees. Military members currently can contribute to the TSP, but are not enrolled automatically and do not receive a matching contribution from the government. Under the provision, the government match could go as high as 5 percent, if the service member contributed that amount.

The nine-member Military Compensation and Retirement Modernization Commission in January recommended increasing the role of the TSP in troops’ retirement benefits, along with several other proposals to overhaul the military’s compensation system. The commission argued for a more blended retirement plan for a better mix of benefits and retention rates. The legislation aims to help both new career and non-career service members accrue more retirement benefits as a result of the increased role of the TSP.

Personnel who serve less than 20 years—about 83 percent—currently do not receive a defined retirement benefit, which some believe is unfair given their multiple deployments during the wars in Iraq and Afghanistan. Those who do spend a career in the military can hit the 20-year mark relatively early, retire from service in their 40s or 50s, draw a pension and work elsewhere for a while. About 17 percent serve 20 years or more in the military.

Service members would be fully vested in their retirement plans after two years of service. To encourage members to stay in the military, the measure includes a commission proposal to provide “continuation pay” after 12 years of service. Under the bill, service members who stay in the military for 20 years, and are thereby entitled to a retirement pension, would receive a less generous calculation for their annuity. The provisions “would modernize the current uniformed services retirement system by blending the current defined benefit, cliff-vesting retirement plan with a defined contribution plan, lump sum career continuation pay, and retention bonuses paid at defined career milestones, while continuing a 20-year defined annuity,” the legislation said.

“This is a biggie,” said Kim Weaver, the director of external affairs at the Federal Retirement Thrift Investment Board, during an interview with Government Executive. “For uniformed service members, this would be a real game-changer, to get an employer match and automatic contributions.”

The board manages a program that now has 4.7 million participants, so it’s already big. Auto-enrolling service members would add roughly 250,000 new participants each year.

The new blended retirement system, which would take effect in October 2017, would only affect new service members. The Pentagon would have to give Congress an implementation plan by next March. Current service members are grandfathered into the current system, but could opt into the new one. The legislation also calls for a program to educate troops about the modified retirement system.

There was lengthy debate during the markup over whether to include the retirement provisions. Rep. Christopher Gibson, R-N.Y., introduced an amendment that would have held off on implementing the changes in favor of further study on the issue and to clear up any confusion among stakeholders about how the new system would work. But Democrats and other Republicans, including House Armed Services Committee Chairman Rep. Mac Thornberry, R-Texas, argued the amendment would just further delay reforms to the military retirement system that are necessary to recruit and retain a modern fighting force.

“There’s always going to be an excuse for delay, and we’ve been hearing that for years. I think this is the time to act,” Thornberry said. “Secondly, it is absolutely not true that this means if you’ve been in 20 years that you get less retirement. It means your defined benefit check will be less, but every look at it says when you add it with the 401(k) for the new people coming in, you are going to end up with more after 20 years, not less.” Thornberry also added that “if we ask for another plan, next year is an election year, this doesn’t get easier.”

The fiscal 2016 NDAA is silent on a pay raise for service members, which effectively allows President Obama to move forward with the 1.3 percent boost he called for in his budget.  By not suggesting an alternative, committee members are embracing an automatic cost-of-living adjustment of 2.3 percent for service members in 2016, but also tacitly allowing Obama to intervene. Service members have received a 1 percent raise in each of the last two years.

Since 2000, changes in basic military pay have been linked to the Employment Cost Index, which historically has increased faster than prices. Congress added to Pentagon spending on pay, too, by enacting large military pay raises to boost recruitment of an all-volunteer force and to adjust for a significant pay gap at the time between the military and the private sector. That gap closed in 2010 and subsequent pay increases have been set equal to the Employment Cost Index. Under the law (Title 37, Chapter 19, Section 1009) the president has the authority to set an alternate pay raise for military personnel, citing a national emergency or fiscal concerns, if Congress doesn’t pass legislation adjusting the amount or canceling it. 

The Defense authorization bill also would provide improved financial literacy programs for troops, as well as enhanced counseling for victims of sexual assault.  

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