Many current Reserve and National Guard members, particularly those who are younger and have fewer years of service, are likely next year to face a difficult choice of retirement plans.
It will be a decision as complex as the one being prepared by Congress for their active duty counterparts. More details of that choice are emerging as architects of the new plan answer questions posed by military associations, veterans groups, congressional staffs and individual reservists.
Some reserve component advocacy groups are delighted by the prospect that their members will be given the choice to stay under their current retirement plan or accept a reduced defined benefit at age 60 in return for participating immediately in a 401(k)-like Thrift Savings Plan.
The TSP would have government matching of contributions up to 5 percent of basic pay to include monthly drill pay. Also, at the 12-year mark, new plan participants, including Reserve and Guard, would be offered a continuation payment in return for obligating to serve four more years.
For Reserve and Guard, the minimum one-time continuation payment would be set equal to a half month of active duty pay for their grade and years of service. That’s one-fifth the minimum of two-and-a-half months’ basic pay to be set for their active duty counterparts.
“It’s insulting,” said retired Army Col. Robert F. Norton, deputy director of government relations for Military Officers Association of America, who along with 21 other associations and veterans groups have urged Congress not to shift future forces to the proposed “blended” retirement if the cost is a 20 percent cut in annuities called “defined benefit.”
The concern is that TSP with government matching, and vesting of account balances after only two years, could create a future retention crisis, particularly in periods of sustained operations. The continuation payment, even if enhanced, might be no match for the pull of civilian life when members have portable TSP and face lowered annuities if they stay.
Other groups, including Reserve Officers Association and the Enlisted Association of the National Guard of the United States, support the retirement changes now moving through Congress as more fair and flexible with the potential to benefit even full-term careerists.
The House next week will begin floor debate on the fiscal 2016 defense authorization bill (HR 1735) including the blended retirement plan. Most features are identical to the plan recommended in January by the Military Compensation and Retirement Modernization Commission.
Next week the Senate Armed Services Committee is to begin marking up its own version of the defense bill. Its chairman, Sen. John McCain (R-Ariz.), signaled this week he largely supports retirement changes endorsed by the House committee and chairman Rep. Mac Thornberry (R-Texas).
Commissioners are proud that their proposal to modernize retirement would more closely align active and reserve plans. But they join critics in emphasizing that its most compelling feature, TSP, will not grow enough to make up for reduced annuities unless members receive enhanced financial education, commit to investing appropriately for their age, which would mean in faster-growing stock index funds, and do so with enough discipline to take advantage of both time and government matching.
For example, under current reserve retirement, a typical senior enlisted (grade E-7) with 20 “good” years, including four on active duty and an average of 78 retirement points earned yearly, would draw annuities from age 60 to age 85 with total current value of $630,035.
That same reservist under the blended plan would see that defined benefit fall by 20 percent to $504,028. But at 12 years, he or she would get taxable continuation pay of $1464, which could be rolled into TSP. Also, as a TSP participant the reservist would see a minimum government contribution of 1 percent of basic pay or drill pay monthly. They also would see the government match member contributions of up 5 percent drill or base pay.
The commission calculates that with a 4 percent government contribution (3 percent of it from matching) and a 7.3 percent return on TSP accounts, government-sponsored lifetime earnings for that E-7 reservist would more than make up the $126,007 loss in defined benefit by age 85. Indeed the reservist would have $62,000 more to pass on to heirs.
The 7.3 percent represents average returns on TSP accounts since 2001 if investments were 85 percent in stock index funds and 15 percent in less volatile government bonds and fixed income securities.
If the reservist contributed less than 3 percent or saw a return below 7.3 percent, TSP values would be lower. For example, a 5.3 percent average return with 3 percent matching would wipe out the net gain in lifetime earnings and leave the reservist with almost $81,000 less than the accumulated value of annuities under their current retirement plan.
Proponents tout the flexibility of having a portion of retirement in funds that can be withdrawn without penalty starting at age 59 1/2, to pay off a mortgage or invest in a business. The commission sought even more flexibility with an option at retirement for active duty or reserve retirees to get a lump-sum payment if they elect to defer any military annuity until age 67. The House committee rejected that as too risky.
Jeffrey E. Phillips, executive director of ROA, said he still finds a lot to like in the proposed plan, including more choice for members and a plan that forces their introduction “to the investment world” without “unreasonable risk” to their portfolios. The riskiest investment options under TSP are stock index funds that reflect broad market changes in the U.S. or overseas.
“I believe that if a service member makes good use of TSP matching, they can come out ahead on their retirement funds,” said Phillips.
Both Phillips and Scott Bousum, legislative director of EANGUS, said the lump sum option wasn’t critical to their group’s endorsement.
“We’ve very supportive that 100 percent of future service members — reserve and active components — will have government-matched retirement contributions” from the time they enter service, said Bousum.
Because everyone now in would be grandfathered from retirement changes unless they opt in to the new plan, “we’re not breaking faith. …No one is giving up anything. You can’t break a contract with a young person who frankly is in high school right now.”
Bousum said he accepts the commission’s argument that it set reserve continuation pay so low based on results of a sophisticated force retention model developed by the think tank RAND, which indicated a higher amount was unneeded to sustain current force profiles, a priority for military leaders.
“If at some point that needs to be readdressed, there will be opportunities,” Bousum said.
Retired Navy Vice Adm. Norbert Ryan, president of MOAA, questioned whether a 401(k)-like TSP should be a priority for Congress, with most active duty members and activated reservists already leaving service today with valuable training and GI Bill benefits worth more than $80,000.
In MOAA’s view the real driver of retirement reform, though denied by commissioners, is to save more than $5 billion annually in future retirement costs, at the expense of the future careerists who will serve 20 years and more and remain the backbone of the volunteer force.
Defense officials told military associations last week they don’t oppose the blended plan, Bousum said, but need until July to decide whether to seek changes and how to implement by the targeted start date of Oct. 1, 2017.
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