Written By Summer 2021 M-VETS Student Advisor Mike Smiley
Summary
Military retirees and current Servicemembers ought to be aware of the military pension system that is applicable to their circumstance and the implications it can have on their financial wellbeing. The system of service member pensions is periodically revised, most recently and radically, as of January 1st, 2018, the Department of Defense has fully implemented the Blended Retirement System (BRS). This system modifies portions of the previous defined benefit plan and allows for matching contributions for the servicemember through matching contributions to the Servicemembers Thrift Savings Plan (TSP). Perhaps most impactful, it opens the doors to service members being able to develop a retirement nest egg even if they do not have the intention of serving a 20+ year military career. However, this added benefit also adds responsibility on the Servicemember who must take responsibility to participate in the program as they best see fit. Servicemembers participating in the BRS and any servicemember receiving retirement benefits should ensure that they are adequately educated on its impact on their retirement posture and planning.
Background
Throughout the history of the military, there has been some type of pension available for servicemembers meeting eligibility criteria. As far back as the Revolutionary War, a Servicemembers pension was implemented to encourage enlistment and prevent desertion amongst the ranks.[i] The concept of the 20 year military pension became standard around World War II and has remained a key component to military retirement eligibility to date.[ii] Currently, there are four different pension systems applicable to servicemembers based on their entry date of service: the Final Pay system; the High-3 system; the Career Status Bonus (CSB) or “Redux” system; and the current BRS.[iii]
1) Servicemembers who joined the military prior to September 8th, 1980, fall under the Final Pay system. Under this program a Servicemember that has accrued more than 20 years of applicable service is eligible for retirement pay equal to their final pay times a multiplier of 2.5 percent times their years of service. To protect the purchasing power of the retiree, the final pay system incorporates an adjustment annually by the percentage increase in the average Consumer Price Index (CPI).[iv]
2) Servicemembers who joined on or after September 8th, 1980 (but before implementation of the BRS) with 20 years of creditable military service have their final pay calculated by an average of their final three years of service, this is referred to as the High-3 System. This 36-month average still utilizes a 2.5 percent multiplier times the years accrued by the Servicemember and continues to use the CPI for an annual Cost of Living Adjustment (COLA).[v]
3) The CSB/Redux system was designed to provide incentive for service members on the fence about completing a 20-year military career to stay by providing an up-front payment with a reduction to their subsequent pension. A Servicemember who joined on or after August 1st, 1986, who also had 15 years of service before December 31st, 2017 (the start of the BRS) could opt for the CSB instead of the High-3 system. The system provided a $30,000 bonus at the Servicemembers 15th year of service but subject to a multiplier penalty if the servicemember retired with less than 30 years of service. This penalty (if enforced) is removed when the servicemember reaches age 62 and is then recomputed according to the high-3 system. Additionally, the COLA adjustment for those who elected the CSB is the CPI minus 1 percent except when CPI is less than a percent. Again, this CPI adjustment is converted back to the standard high-3 system when the Servicemember reaches the age of 62.[vi] This program ended on December 31, 2017.[vii]
4) Blended Retirement System (BRS): All Servicemembers who joined the military after December 31st, 2017, are automatically enrolled in the BRS.[viii] Additionally, Servicemembers with less than 12 years of service prior to December 31st, 2017, had the option to opt into the BRS if they did so by election in calendar year 2018 (without opting in Servicemembers remain on a High-3 system). The BRS combines components of the defined benefits programs with components more typical to a civilian employer-sponsored retirement program with matching contributions from the employer.[ix]
The Blended Retirement System
The Fiscal Year 2016 National Defense Authorization Act introduced the BRS and made it official beginning January 1st, 2018 and consists of three distinct components: a matching thrift savings plan (think traditional 401k), a career continuation bonus, and a pension.[x]
The Thrift Savings Plan or “TSP” is a defined contribution plan for federal employees to include Servicemembers. Servicemembers in the BRS will start with a default contribution of 3% of their base pay[xi] and after 60 days will automatically receive a 1% contribution from the Department of Defense. After two years, the service member will receive matching contributions up to 5% of their base pay as follows:
- A 1 percent contribution from the Department of Defense automatically;
- A 1 percent matching contribution for the first 3 percent of the Servicemembers base pay;
- An additional .5 percent matching contribution for each additional 1 percent of the Servicemembers contribution.[xii]
This means that after two years a Servicemember can receive up to 5 percent matching contributions from the DoD in their TSP by investing 5 percent of their base pay into the program. All matching contributions become fully vested after completion of two years of service.[xiii]
The career continuation bonus looks and acts a lot like a reenlistment bonus but will occur between 8 and 12 years of service and is not actually affected by or limited by any reenlistment bonus that may exist.[xiv] Each service will implement different guidelines for the bonus but to be eligible the Servicemember must sign up for at least an additional 3 years (service dependent). The amount of the bonus will be determined based on the individual services needs and will range between 2.5 and 13 percent of the Servicemember’s base pay.
The first two benefits are at the expense of the defined benefit or pension program. The change is in the multiplier for years of service. The standard 20-year vesting period for the defined benefit remains, but the multiplier for years of service is reduced from 2.5 percent to 2 percent. In other words, the standard thought process of a 50 percent retirement at 20 years (2.5 x 20) is now replaced with a 40% defined benefit plus whatever value the servicemember has accumulated through the TSP and continuation of service bonus.[xv]
Why Change the Retirement System?
There are several reasons why the Government opted for an updated retirement system. First, as has been the case in most of corporate America, the traditional pension system had proved to be a high financial burden on the Government. Converting portions of the retirement system to a contribution system is likely a cost savings for the Government. Second, the “all or nothing” aspect of the previous military pension program meant that around 17 percent of military veterans received the benefit of a military retirement while the remaining 83 percent based solely on time in service were ineligible for any military retirement benefits.[xvi] Third, by introducing a retirement benefit available to all Servicemembers regardless of years of service, there is a potential to leverage retirement savings as a useful recruiting tool to Servicemembers not interested in committing to 20+ years of service. This combination of lower costs and an expansion of who may benefit from a military retirement incentive made the conversion largely amicable for Congress and the DoD.
Conclusion
When a Servicemember joined the service and how long they served will have a profound impact on what type of retirement program is relevant to that individual. As good as the BRS may be for the vast majority of Servicemembers (particularly those who likely would not have otherwise been eligible for any retirement compensation), it is also inherently more complex than its predecessors. Understanding this system and how to participate in it is vital to those currently joining or contemplating joining the service. There are several resources to help servicemembers understand this benefit and a great place to start is with the education program the Department of Defense has created to help encourage Servicemembers to both understand their employer funded contribution plan (TSP) and feel confident in the investment decisions they are making. For Servicemembers looking to start their education on managing their BRS, please reference the Department of Defense’s website: https://militarypay.defense.gov/blendedretirement/ and look at its litany of training options
[i] See Waite, Edward F., “Veteran’s Pensions: The Law and Its Administration From the Revolutionary War to the Civil War”, VCU Libraries Social Welfare Project presenting An Article from Harper’s new monthly magazine (Volume 86, Issue 512, January, 1893) found at: https://socialwelfare.library.vcu.edu/social-security/veterans-pensions-early-history/
[ii] Hudson, Rex, “A SUMMARY OF MAJOR MILITARY RETIREMENT REFORM PROPOSALS, 1976–2006” (page 1) Federal Research Division, Library of Congress, November 2007. Found at: Library of Congresshttps://www.loc.gov/rr/frd/pdf-files/CNGR_Summary-Military-Retirement.pdf
[iii] In addition to the retirement programs mentioned above, in certain circumstances, or when allowed by congress, Servicemembers may also qualify for retirement payments when either medically retired or when Temporary Early Retirement Authorization is enacted. These programs when applicable will provide retirement pay relative to the associated program based on date of service but have varying requirements for time in service. For additional information on TERA reference: https://www.dfas.mil/RetiredMilitary/plan/retirement-types/tera/. For additional information on medical retirement pay reference: https://www.dfas.mil/retiredmilitary/disability/disability/
[iv] DOD OFFICE OF THE ACTUARY, July 2018, “Statistical Report on the Military Retirement System” (pages 6-8). Found at: https://actuary.defense.gov/Portals/15/Documents/MRS_StatRpt_2017%20v4.pdf
[v] Id.
[vi] Id.
[vii] National Defense Authorization Act for FY 2016 (NDAA 2016, P.L. 114-92)
[viii] See Id.
[ix] DOD OFFICE OF THE ACTUARY, July 2018, “Statistical Report on the Military Retirement System” (pages 6-8). Found at: https://actuary.defense.gov/Portals/15/Documents/MRS_StatRpt_2017%20v4.pdf
[x] National Defense Authorization Act for FY 2016 (NDAA 2016, P.L. 114-92)
[xi] Military members will have multiple forms of compensation to include but not limited to Basic Allowance for Housing (BAH), Basic Allowance for Subsistence (BAS), and Cost of Living Adjustments (COLA) all of which are not subject to calculation for retirement benefits or defined contribution plans in the BRS.
[xii] Guina, Ryan, “Blended Retirement System (BRS) – Everything You Need to Know About the New Military Retirement Plan”. October 16, 2018. Found at: https://themilitarywallet.com/blended-retirement-system-brs/
[xiii] Id.
[xiv] Id.
[xv] Id.
[xvi]Military One Source, “Frequently Asked Questions Regarding the Blended Retirement System”. Found at: https://www.militaryonesource.mil/financial-legal/personal-finance/retirement-planning/frequently-asked-questions-regarding-the-new-blended-retirement-system/