Special Reports

55,500 ‘High-3’ retirees might never see back pay

Last November an independent audit of the Military Retirement Fund uncovered a “significant deficiency” in the way the Defense Finance and Accounting Service has been calculating retired pay for about 15 percent of 370,000 retirees who are under a “High-3” retired pay formula.

The result is that 55,500 retirees who first entered service on or after Sept. 8, 1980, have been getting a little less in monthly retired pay than the law directs. That’s because DFAS, for this High-3 generation, has not been applying a pay protection tool from 1975 called the “Tower Amendment.”

If DFAS were to apply Tower protection retroactively, as auditors recommend, these retirees could expect a lump sum average payment of about $1,000, the Congressional Budget Office reports. Individual amounts would vary base on time retired, with the largest payments going to those who retired in fall of 2000 with the first wave of “High-3” retirees.

But if the Department of Defense has its way, DFAS will never have to make those payments. The House Armed Services Committee has included a provision in its fiscal 2014 defense authorization bill (HR 1960) that would revise the law so the Tower Amendment doesn’t apply to High-3 retirees.

If the full Congress agrees, DFAS would avoid having to make $60 million in retroactive payments, CBO explains in a June 13 cost analysis of the defense bill. And future retired pay for affected High-3 retirees would forever be smaller than current law requires, by an average of $200 a year, saving the Military Retirement Fund more than $10 million annually.

So what is the Tower Amendment? It requires annuities of military retirees to be recalculated to take account of any cost-of-living adjustment they would have received if they were eligible to retire on an earlier date, but did not. The idea behind the amendment, named after the late Sen. John Tower, R-Texas, was to spare members a financial penalty of lower retired pay from serving longer and missing a significant COLA.

To illustrate, CBO asks us to consider a member who retired in October after exactly 20 years of service. If initial annuity is $1,000 per month and the first COLA is 3 percent, retired pay after the January COLA would be $1,030. But if the same member waited to retire until January, and in the intervening three months got an active duty pay raise of 1.5 percent, initial retired pay that January, including the effect of serving three more months, would be $1,028. So the member would have been better off retiring the previous October.

The Tower Amendment requires that “look back” so the retiree always draws the higher amount. The Military Retirement Fund audit found that DFAS wasn’t giving Tower protection to High-3 retirees who would benefit.

“We determined these retiree accounts were eligible under Tower if the retirement date was the first day of a quarter and the retiree had at least 20 years and one day of service,” the audit report explained.

Looking at a sampling of 66 High-3 retirees, auditors determined that 13 of them “were underpaid every month.” And the average underpayment wasn’t $2 a month but almost $30. So auditors warned that the “estimated errors could potentially have a significant impact to individual retirees’ pay.”

Annuities of High-3 retirees already lag those of “Final Pay” retirees who entered service before Sept. 8, 1980. A Final Pay retiree with 20 years’ service draws an annuity equal to 50 percent of final basic pay. A High-3 retiree with 20 years would have the same 50 percent multiplier, but it would be applied to average basic pay over the final three years of service.

Congress made the change for this generation of retirees before they even entered service simply to curb future retirement costs. Perhaps unintentionally, DFAS has added insult to the injury by not using the Tower look-back provision since these High-3 members began joining the ranks of military retirees almost 13 years ago.

Auditors who uncovered this advised making retroactive payments and using the look-back formula on future payments. Defense officials instead sought legislative relief. CBO estimates the 10-year savings will total $212 million. And presumably High-3 retirees won’t miss what they never had.

Still to be determined is whether the full Congress will approve this approach or whether DFAS will have 55,500 retroactive payments to calculate.