Overview

The military retirement system is a government-funded benefit system that has been viewed historically as a significant incentive in retaining a career military force. The system includes a defined benefit element for all retirees and a defined contribution element for certain eligible retirees. The defined benefit includes a monthly annuity for qualified active and reserve retirees paid out of the Military Retirement Fund. The defined contribution benefit includes government-matching payments into an individual retirement Thrift Savings Plan (TSP) account. The amount of the retirement annuity depends on years of service (YOS) and basic pay at retirement. It is adjusted annually by a Cost-of-Living Adjustment (COLA) to help protect the annuity from the effects of inflation. Military retirees are also entitled to nonmonetary benefits, which include health care benefits, exchange and commissary privileges, and access to Morale, Welfare and Recreation (MWR) facilities and programs.

The military retirement system has evolved since the late 1800s to meet four main goals.

• To keep the military forces of the United States young and vigorous and ensure promotion opportunities for younger members,
• To enable the Armed Forces to remain competitive with private-sector employers and the federal Civil Service,
• To provide a reserve pool of experienced military manpower that can be called upon in time of war or national emergency to augment active forces, and
• To provide economic security for former members of the Armed Forces during their old age.¹

Among active-duty personnel, eligibility for a monthly pension is generally based on a service requirement of at least 20 years of (active) service. For reserve component personnel, the system is based on a point system, and reservists do not generally begin to receive retired pay until the age of 60. Both the active and reserve component retirement systems vest at 20 years of qualifying service.² However, some members who are retired with a physical disability may receive a pension with fewer years of service. Disability retirement offers two retirement compensation options: based either on years of service (longevity) or on the severity of the disability.

In FY2022, DOD obligated $60.9 billion for approximately 2 million military retirees, and an additional $4.4 billion for 304,197 survivors.³ (see Table 1).

Congress grapples with constituent concerns as well as budgetary constraints in considering military retirement issues. In the past, some have viewed military retirement as a potential source of substantial savings, arguing that the military retirement compensation is overly generous relative to pension systems in the civilian sector.⁴ In particular, they note that active-duty military personnel become eligible for retirement at a relatively young age. In FY2022, the average retirement age for an active-duty, non-disability enlisted retiree was 42.1 years old and the average retirement age for an active-duty, non-disability officer retiree was 46.5.⁵

Other observers argue that the military retirement system contributes to military readiness and is fair given the unique demands of military service.⁶ In addition, some have argued that past modifications to the system intended to save money have had a deleterious effect on military recruiting and retention, particularly in times of strong economic performance.

While congressionally mandated changes to the military retirement system have been infrequent, any potential changes are closely monitored by current servicemembers, retirees, survivors, and the organizations that represent them.⁷

Retirement System Eligibility and Pay Calculations

There are currently three separate but related retirement pathways for Armed Forces retirees: (1) for active-duty members; (2) for reservists; and (3) for those who become medically disabled and are unable to complete a 20-year military career. Each of these systems pathways has distinct eligibility requirements and formulas for calculating the retirement annuity.

Retirement pay calculations are based on the date when the servicemember first entered active duty and their pay base at the time of retirement.⁸ The defined benefit portion of the active and reserve component retirement systems cliff-vests after 20 years of service. This means servicemembers who leave the service prior to completing 20 years of eligible service typically will not receive any nondisability retirement benefit.⁹ Members who become eligible for a disability retirement are vested on their disability retirement date regardless of years of service. For those who retired with a disability retirement in FY2022, the average number of years of service was 13.3 years for enlisted members and 14.9 years for officers.¹⁰

Active Component Retirement¹¹

For active-duty military personnel, there are four methods of calculating retired pay based on longevity: the Final Basic Pay System, High Three, Redux, and the Blended Retirement System (BRS) (see Table 4 for a comparison of the benefits under each method). The applicable retirement calculation is based on the date when the servicemember first entered active duty, their pay base at the time of retirement, their years of service, and whether they chose the Redux system or the BRS (if eligible). Figure 1 shows how eligibility for retirement calculation is determined.

Figure 1. Active-Duty, Non-Disability (Longevity) Retirement Eligibility Flowchart

Source: CRS, derived from Title 10, United States Code. Note: YOS = Years of Service.

Final Basic Pay (prior to September 8, 1980)

For persons who entered military service before September 8, 1980, the pay base is the final monthly basic pay received by the servicemember at the time of retirement multiplied by 2.5% for each year of service.¹² The minimum amount of retired pay to which a member is entitled under this formula is therefore 50% of the retired pay computation base (20 years of service times 2.5%). For example, a servicemember who retires at 25 years receives 62.5% of the computation base (25 years of service times 2.5%).¹³

High Three

Those who entered service on or after September 8, 1980, and before January 1, 2018, have their retired pay base calculated by the High Three system. For this system the computation base is the average of the highest three years (36 months) of basic pay rather than the final basic pay. Otherwise, calculations are the same as under the Final Basic Pay method.

Redux

The Redux military retirement system was initiated with the Military Retirement Reform Act of 1986 (P.L. 99-348). The Redux formula reduced the amount of retired pay for which military servicemembers who entered the Armed Forces on or after August 1, 1986, were eligible. This system was broadly unpopular, and by 1997 Congress began to take note of potential recruiting and retention problems associated with the change.¹⁴ In 1998, the Clinton Administration announced that it supported Redux repeal.¹⁵ The National Defense Authorization Act for Fiscal Year 2000 (P.L. 106-65, §§641-642) repealed compulsory Redux. It allowed post-August 1, 1986, entrants to retire under the High Three system or opt for Redux plus an immediate $30,000 cash payment. The FY2016 NDAA, enacted on November 25, 2015, terminated the Redux option.

Those who entered the service during the time when Redux was an option were required to select one of the following two options for calculating their retired pay within 180 days of reaching 15 years of service.

Option 1: Pre-Redux

Eligible servicemembers can opt to have their retired pay computed in accordance with the pre-Redux formula, described above as High Three.

Option 2: Redux

Eligible servicemembers can opt to have their retired pay computed in accordance with the Redux formula and receive an immediate $30,000 cash bonus called a Career Status Bonus.¹⁶ Those who select the Career Status Bonus (CSB) must remain on active duty until they complete 20 years of service or forfeit a portion of the bonus.

Blended Retirement System (BRS)

In the FY2016 NDAA (P.L. 114-92), based on recommendations from the Military Compensation and Retirement Modernization Commission (MCRMC), Congress adopted a new retirement system, shifting from a purely defined benefit system to a blended defined benefit plus defined contribution system. Servicemembers with 12 or fewer years of service as of December 31, 2017, were afforded an opportunity to choose the BRS. The BRS is mandatory for individuals who entered the service on or after January 1, 2018. For these servicemembers, the computation base for the defined benefit will be the average of the highest three years (36 months) of basic pay, as in the High Three System; however, the multiplier is reduced to 2.0 from 2.5. This means that the pay base is the high three average at the time of retirement multiplied by 2.0% for each year of service. Therefore, a servicemember retiring at 20 years would receive 40% of his or her pay base under the new formula and a 30-year retiree would receive 60% of his or her pay base.

The Lump Sum Payment

The Blended Retirement System also allows regular retirees (those with non-disability retirements) to receive a portion of their retired pay as a discounted lump sum. An individual entitled to retired pay may, no later than 90 days before the date of retirement, elect to receive

A lump sum payment of the discounted present value at the time of the election of an amount of the covered retired pay¹⁸ that the eligible person is otherwise entitled to receive for the period beginning on the date of retirement and the date the eligible person attains the eligible person's retirement age.¹⁹

For those who elect to receive a lump sum payment, after reaching the full retirement age for Social Security (usually 67), they will again receive 100% of their regular monthly annuity, which will be adjusted for annual cost of living increases.²⁰ A reservist may elect the discounted lump sum to be calculated from the date the member first became eligible for retired pay (typically 60 years old) until Social Security retirement age. The law also allows retirees to take their lump sum payment as a single payment or up to four annual installments. The lump sum is discounted to the present value based on the annual rate published by DOD in June of each year and which goes into effect on January 1 of the following year.²¹ The lump sum discount rate for calendar year 2024 is 6.26%.²² Lump sum payments are considered earned income and are taxed accordingly.

Members under the BRS with a disability retirement do not have the option of receiving a portion of retired pay as a discounted lump sum. Reserve component members may elect the discounted lump sum option from the date the member first becomes eligible for retired pay (typically 60 years old) until the Social Security full retirement age (typically 67). The DOD Board of Actuaries assumes that for active-duty servicemembers, 5.2% of officers and 22.8% of enlisted members will elect the lump-sum option; for reservists the Board assumes 2.0% for officers, and 8.4% for enlisted.²³

BRS Defined Contributions

Congress's decision to include a defined contribution element in the BRS was driven by the finding that under the legacy retirement systems, 83% of enlisted and 51% of officers did not complete the 20 years of service and thus received no retirement compensation for their service.²⁴ This was at odds with retirement benefits in the private sector where firms increasingly offer a variety of defined contribution packages and are required by law to vest employees within a significantly shorter time period.²⁵

Under the BRS, individuals entering service after January 1, 2018, are automatically enrolled in the Thrift Savings Plan at an individual contribution level of 3% from his or her monthly basic pay or inactive duty pay beginning the first pay period after the member's 60^th day of service. At that time, the services will also begin automatic monthly contributions of 1% of basic pay to the servicemember's TSP account. In addition, DOD will match servicemembers' contributions up to 4% of the servicemember's basic pay starting at two years and one day after the member first enters service and ending at 26 years of service.²⁶ The servicemember is required to make individual total contributions of 5% in order to receive government matching of 4% (see Table 2 for government matching percentages). The servicemember is fully vested after two complete years of service and able to take ownership of the 1% contributions as well as any subsequent matching contributions. Any earnings on government contributions are immediately vested when they accrue. Servicemembers are immediately fully vested in any personal TSP contributions.

The services also automatically enroll new servicemembers in the TSP program for individual contributions at a default amount of their basic pay unless the servicemember opts out. If the servicemember declines to make individual contributions, he or she will automatically be reenrolled every year at the default amount of 3% individual contribution. This requires the individual to make a decision every year to not contribute to the TSP.

Continuation Pay

To provide a mid-career retention incentive under the BRS, Congress authorized continuation pay for members who are between 8 to 12 years of service, in return for a three-year service obligation.²⁷ The pay may be distributed in a lump sum, or in a series of not more than four payments.²⁸ The law allows an active duty (regular component) member or reserve component member who is performing active Guard or Reserve duty²⁹ to receive a minimum amount of continuation pay equal to 2.5 times their monthly basic pay. For reserve component members not on active duty, the minimum continuation pay is equal to at least 0.5 times the monthly basic pay of an active component member of similar rank and longevity.

The law also authorizes an additional amount of continuation pay, at the discretion of the Secretary concerned (see Table 3).³⁰ For active component members that would be the amount of monthly basic pay multiplied by no more than 13.³¹ This flexibility awarded to military department Secretaries on the amount of additional continuation pay is intended to aid force-shaping by allowing the Secretaries to offer higher continuation payments to those in occupational specialties that are undermanned.

Under the blended system, reserve component members within the window of eligibility receive the minimum continuation pay as discussed above (2.5 or 0.5 times the monthly basic pay of an active component member), plus an additional amount at the discretion of the Service Secretary that would be the amount of monthly basic pay multiplied by no more than six.

Reserve Component Retirement³²

There are many similarities between the active and reserve retirement systems. First, reserve component (RC) members must also complete 20 qualifying years of service to become eligible for a defined retirement benefit.³³ Second, the reserve retirement system also accrues at the rate of 2.5% per equivalent year of qualifying service (explained below) at retirement eligibility for those who entered service prior to January 1, 2018, and 2.0% for those who enter on or after January 1, 2018. The primary difference between the reserve and the active system is the points system used to calculate qualifying years and equivalent years of service, as well as the age at which the retirement annuity begins. Also, Redux is not an option for reservists.

For retirement purposes, a qualifying year of service is a year in which a member of the RC earns at least 50 retirement points. Points are awarded for a variety of reserve activities:

• one point for each day of active service, which includes annual training;³⁴
• fifteen points a year for membership in the Ready Reserve;
• one point for each inactive duty training (IDT) period;³⁵
• one point for each period of funeral honors duty; and
• one point for every three satisfactorily completed credit hours of certain military correspondence courses.

With multiple opportunities to earn points, a participating member of the selected reserve normally can accrue the requisite 50 points per year and thus earn a qualifying year for retirement. The maximum number of points per year, exclusive of active duty, has varied over time but is currently capped at 130 points.³⁶ When active-duty points are added to this total, the reservist cannot earn more than 365 points a year. The number of points is critical in determining both the number of years of qualifying service and the number of equivalent years of service for retired pay calculation purposes.

A reservist may retire after completing 20 years of qualifying service; there is no minimum age. However, the reservist will usually not become eligible for retired pay until age 60, at which time he or she also becomes eligible for military medical care.³⁷ Upon retirement, the individual is normally transferred to the Retired Reserve and is entitled to a number of military benefits to include commissary and exchange privileges; access to Morale, Welfare and Recreation programs and facilities; and limited space available travel on military aircraft. Reservists in the Retired Reserve, but not yet retired pay eligible, are referred to as gray area retirees. Time spent in the Retired Reserve counts for longevity purposes and ultimately results in higher retired pay. For example, a lieutenant colonel who transitions to the Retired Reserve at age 45 will have his or her retired pay at age 60 calculated on the basic pay of a lieutenant colonel with an additional 15 years of longevity.

The date the reservist became a member of the Armed Forces determines whether their retired pay is calculated based on the Final Basic Pay, High Three, or Blended Retirement System. Those entering before September 8, 1980, are eligible to be retired under the Final Basic Pay system while those entering after September 8, 1980, but before January 1, 2018, are eligible for the High Three system. Those who first performed Reserve Component service (with no prior regular or reserve service) on or after January 1, 2018, will retire under the Blended Retirement System. Those reservists with prior service who had accumulated less than 12 equivalent years of service (< 4,320 points) were eligible to elect the BRS.

Disability Retirement³⁹

Servicemembers who, due to a disqualifying medical condition, are no longer able to perform their military duties, may qualify for disability retirement, commonly referred to as a Chapter 61 retirement. Eligibility is based on having a permanent and stable disability rated at 30% or more under the standard schedule of rating disabilities in use by the Department of Veterans Affairs at the time of determination.⁴⁰ Some disability retirees are retired before becoming eligible for longevity retirement, while others have completed 20 or more years of service.

The maximum retired pay calculation under the disability formula cannot exceed 75% of basic pay.⁴² Disability retirees are not authorized to receive a lump sum payment under the Blended Retirement System.

Retired pay computed under the disability formula is subject to federal income tax, unless one or more of the following conditions applies: (1) the member's disability is the result of a combat-related injury, or (2) the individual was eligible to receive disability retirement payments prior to September 25, 1975, or (3) the individual was in the Armed Services prior to September 25, 1975, and later became eligible for disability retired pay.⁴³ Retired pay under the longevity formula (for those entering after September 24, 1975) is taxable only to the extent that it exceeds what the individual would receive for a combat related injury under the disability formula.

Extraordinary Heroism Pay

Retired enlisted members of military services with less than 30 years of service may be eligible for a 10% increase in retired pay when credited with extraordinary heroism in the line of duty as determined by the Secretary of his or her service.⁴⁴ This increase is subject to a maximum of 75% of the member's retired or retainer pay base. In 2002, Congress extended this benefit to enlisted members of the reserve component who are eligible for reserve retired pay.⁴⁵

Military Retired Pay, Social Security, and Federal Income Tax

Military retirees receive full Social Security benefits in addition to their military retired pay. Current military personnel do not contribute a portion of their salary as part of the military retirement pay accrual. However, servicemembers have paid taxes into the Social Security trust fund since January 1, 1957, and are entitled to full Social Security benefits based on their military service. Military retired pay and Social Security are not offset against each other.

Military retired pay is not subject to withholding for Social Security tax. However, all non-disability retired pay is subject to withholding of federal income tax. A portion of the Social Security benefit may also be subject to federal income tax for individuals who have other income.

Retired Pay and the Cost-of-Living Adjustment (COLA)

Military retired pay is adjusted for inflation by statute (10 U.S.C. §1401a). The Military Retirement Reform Act of 1986, in conjunction with changes contained in the FY2000 National Defense Authorization Act (P.L. 106-65), provides for COLAs as indicated below. Congress has not modified the COLA formula since 1995.⁴⁶ However, policymakers regularly discuss COLA modifications, typically with the aim of reducing costs. The COLA for most retirees for 2024 is 3.2% and took effect on December 1, 2023.⁴⁷

COLAs for Pre-August 1, 1986, Entrants

For military personnel who first entered military service before August 1, 1986, each December a COLA equal to the percentage increase in the Consumer Price Index for Urban Wage Earners (CPI-W) between the third quarters of successive years will be applied to military retired pay for the annuities paid beginning each January 1.⁴⁸ This number is rounded to the nearest one-tenth of 1%.⁴⁹ The COLA is applied to the monthly benefit amount and the final payment is rounded down to the nearest $1.00.⁵⁰

COLAs for Personnel Who Entered Service on or After August 1, 1986

For those personnel who first entered military service on or after August 1, 1986, their COLAs will be calculated in accordance with either of two methods, as noted below.

Non-Redux Recipients

Those personnel who opted to have their retired pay computed in accordance with the pre-Redux (High Three) formula will have their COLAs computed as described above for pre-August 1, 1986, entrants. Participants in the Blended Retirement System will also have their COLAs calculated in this manner.⁵¹

Redux/$30,000 Cash Bonus Recipients

Those personnel who opted to have their retired pay computed in accordance with the Redux formula, have their COLAs computed using a different formula. Annual COLAs are held one percentage point below the actual inflation rate. For example, the December 2017 COLA increase was 2.0% and Redux retirees saw a COLA increase of 1.0%. When a retiree reaches the age of 62, there is a one-time recomputation of his or her annuity to make up for the lost purchasing power caused by holding of annual COLA adjustments to the inflation rate minus one percentage point.⁵² This recomputation of COLA, in combination with the recomputation of the retired pay multiplier (discussed earlier), is a one-time increase in the member's monthly retired pay to parity with that of a similarly retired member who did not take the Redux option. After the recomputation at age 62, however, future COLA increases continue to be computed annually on the basis of the inflation rate minus one percentage point.

Military Retirement Budgeting and Costs

Military retirement costs, which include all payments to current retirees and survivors, have risen modestly each year, due to a gradual increase in the number of retirees and survivors coupled with cost-of-living adjustments. DOD budgets through FY1984 reflected the costs of retired pay actually being paid out to personnel who had already retired. That is, Congress appropriated the amount of money required to pay existing retirees as part of each annual defense appropriations bill. In September 1983, as part of the Department of Defense Authorization Act, 1984, Congress modified the retired pay accounting methodology and established a Military Retirement Fund (MRF).⁵³

Since FY1985, the accrual accounting concept has been used to budget for the costs of military retired pay. The unfunded liability resulting from the change in accounting practices is discussed in the next section. Under the accrual accounting system, the DOD budget for each fiscal year includes a contribution to the MRF sufficient to finance future retirement payouts to current uniformed personnel when they retire, not the amount of retired pay actually paid to current retirees.⁵⁴ In the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (FY2021 NDAA, P.L. 116-283), Congress added the U.S. Coast Guard (USCG) to the MRF and USCG contributions began in FY2023.⁵⁵

Under the accrual accounting method, changes to military end-strength, increases or decreases in basic pay tables, or changes to retirement pay formulas, in any given year will result in same-year budget obligations for military retired pay. Once military personnel retire, payments to them are disbursed from the MRF, not from annual appropriations. As such, military retiree payments typically continue to be disbursed during a lapse in appropriations.⁵⁶

The MRF itself is a non-revolving trust fund inside the unified budget of the federal government.⁵⁸ The sources of income for the MRF are

• Normal cost payments (NCPs) from the Armed Forces in annual appropriations to account for future retirees;
• U.S. Treasury payments to amortize unfunded liabilities and concurrent receipt obligations, (see); and
• Investment (interest) income from government securities.⁵⁹

The amount that DOD, DHS, and the Treasury must allocate to the MRF each year to cover future retirement costs is determined by a presidentially appointed Department of Defense Board of Actuaries.⁶⁰ The DOD Board of Actuaries estimates future retirement costs using a model that incorporates past rates at which active-duty military personnel stayed in the service until retirement and assumptions regarding the overall U.S. economy, including interest rates, inflation rates, and military pay levels. The model helps determine the level percentage of basic pay (normal cost percentage) for each active servicemember that DOD and DHS must contribute annually through appropriations to cover future retirement costs—approximately 30 cents on every dollar of basic pay for full-time members.⁶¹ DOD's NCPs are shown in Table 5 and trends in DOD and Treasury NCPs are shown in Figure 2.

Military Retirement Budget-Related Issues for Congress

The DOD Board of Actuaries and other analysts have raised concerns about the long-term costs of the military retirement system and how these costs are accounted in the federal budget. Some of these issues include MRS unfunded liabilities, responsibility for concurrent receipt payments, and relationships between retired pay and military compensation.

MRS Unfunded Liability

Debates over military retirement have included some discussion of the unfunded liability, which consists of future retired pay costs incurred before the creation of the MRF in FY1985 (the initial unfunded liability) and liabilities incurred due to: (1) modifications to military benefits; (2) changes in actuarial assumptions; (3) deviations in actual from expected gains and losses; and 4) the addition of the USCG to the MRF.⁶⁷ The initial unfunded liability as of September 30, 1984, was $528.7 billion.⁶⁸ Obligations for the initial unfunded liability are being liquidated by the payment to the fund each year of an amount from the General Fund of the Treasury and are expected to be fully amortized in calendar year 2025.⁶⁹ According to the DOD Actuary, the initial unfunded liability is amortized over time to

avoid imposing a crippling cash contribution (or expense for financial reporting purposes) requirement on the plan sponsor in the first year of the plan. However, because this plan is included in the federal budget and is only "funded" with U.S. government securities (i.e., a promised allocation of future tax revenues), the Board is aware that the MRF could theoretically be fully funded (i.e., immediately recognizing its entire liability in the national debt).⁷⁰

Congressional action to change basic pay, retired pay, or associated benefits (e.g., concurrent retired pay and veteran disability compensation,⁷¹ or the survivor benefit program) may affect the unfunded liability (see Figure 2). For example, the implementation of the Blended Retirement System reduced the unfunded liability by $800 million.⁷² In the FY2018 NDAA, Congress made a benefit called the Special Survivor Indemnity Allowance (SSIA) permanent, which led to an actuarial loss of approximately $8.1 billion from the fund.⁷³ Subsequently, in 2019, Congress initiated the 3-year phase-out of a requirement that DOD survivor benefits be offset by a benefit called Dependency and Indemnity Compensation (DIC) from the Department of Veterans Affairs.⁷⁴ The removal of this offset, allowing beneficiaries to eventually receive the full amount of both benefits increased unfunded liability by $13.5 billion.⁷⁵

Concurrent Receipt Payments by the Treasury

Since FY2005, following Congress's authorization of concurrent receipt benefits, the Treasury has had to contribute to the normal costs of these benefits. DOD's Board of Actuaries has been vocal about their opposition to this change, stating

The Board is deeply concerned about any legislative efforts to make Treasury, not DOD, pay for additional benefits to military retirees. [ ... ]

While the Board understands that current budget demands on DOD are burdensome, removing DOD's responsibility to recognize, disclose, and include in manpower decisions the full cost of military personnel is short-sighted. Burying such information as an obligation of the general Treasury is misleading and leaves the door open to unrestricted enhancements because DOD has no incentive to hold down retirement benefit costs.

The Board recommends that all future legislation require DOD to pay the full normal costs of all the benefits it promises and pay any past service costs associated with benefit increases.⁷⁶

Figure 2. Normal Cost Contributions to the MRF, FY1985-FY2022 Impact of Selected Legislative Actions

Sources: CRS figure based on DOD, Office of the Actuary, FY2022 Valuation of the Military Retirement Fund, September 30, 2022, January 2024, Table 8, p. 22; P.L. 108-136, §641; P.L. 114-92, §631; and P.L. 115-91, §621, P.L. 116-92 §622. Notes: SSIA is the Special Survivor Indemnity Allowance, a cash benefit for survivors of military servicemembers impacted by the offset of Survivor Benefit Plan (SBP) payments and Dependency and Indemnity Compensation (DIC). The FY2020 NDAA (P.L. 116-92, §622) repealed the SBP-DIC offset and the SSIA as of January 1, 2023.

Relationship of Retired Pay to Regular Military Compensation

The retired pay calculation is based on the amount of basic pay that a servicemember was eligible to receive at the time of retirement. As such, changes to pay tables, especially at higher grades (when servicemembers generally become eligible for retirement) can have broader cost implications.

In addition, when considering the adequacy of retired pay, policymakers might look at comparisons between military and civilian pension programs. Basic pay is the principal element of cash compensation for servicemembers; however, comparisons with private-sector pay are usually made using a statutorily defined metric called regular military compensation (RMC). RMC is the sum of (1) basic pay, (2) housing allowance, (3) subsistence allowance and, (4) the tax advantages accruing to these allowances because they are not subject to federal income tax. As retired pay is based on the high 36-month average of basic pay only; the monthly disbursement to a retiree is actually a smaller percentage of the total cash compensation that the member is receiving at the time of retirement (see Table 6). Because RMC rather than basic pay better represents public- and private-sector salary levels, the DOD Board of Actuaries recommends considering these relationships when comparing military retired pay to civilian pension programs.⁷⁷

Concerns about Implementation of the BRS

Some advocacy groups and servicemembers have expressed concerns about the implementation of the Blended Retirement System, in particular the reduced multiplier for the defined benefit (monthly annuity) and the lump sum payment option. These groups note potential impacts of the BRS on recruitment and retention, as well as on the financial well-being of military personnel. Since the average military retiree upon retirement is in his or her 40s, many choose to pursue a second civilian career and may also accrue retirement savings and benefits from his or her new employer. Estimates of retirement funds available are contingent on the amount a member contributes to the TSP and the return on investment for TSP accounts.

Retention Effects

There is uncertainty as to whether the reduced multiplier for the defined benefit offers an adequate retention incentive for mid-career personnel. A 2016 study for the Marine Corps that modeled potential retention outcomes found relatively small effects on force profiles, with predicted officer retention being somewhat more sensitive to changes in the retirement system than enlisted retention.⁷⁸ The study also noted that retention may vary by occupational specialty—supporting the notion that flexibility may be needed for the services to vary the continuation pay, to offer other retention bonuses, or to lengthen minimum service requirements for high-demand fields. DOD officials also expressed concerns that the lump sum option might entice a larger number of individuals to retire at the 20-year mark, resulting in manpower deficits.⁷⁹

In 2023, a DOD spokesperson noted that it is still too early to determine whether the new system is having an impact on retention but that, "preliminary analysis shows that the BRS is having little or no effect on retention to date."⁸⁰ Some analysts have suggested that DOD's messaging on the BRS has been "counterproductive and self-defeating."⁸¹ They have suggested that DOD can improve its marketing of the benefit by comparing it to civilian alternatives which are broadly less-generous, rather than comparing it to the legacy system with the more generous multiplier.

Effects on Financial Well-Being

Concerns with respect to financial well-being under the BRS include the effects of servicemember decisions about individual contributions to the TSP and election of the lump sum option. The Marine Corps study cited above found that, in general, those who retire after a 20-year career and contribute to the TSP throughout their career, will have lower take-home pay from retirement to age 60 than those in the legacy retirement system, but will be better off after the age of 60 when eligible to start drawing from the TSP without penalty.⁸² The total lifetime benefit was estimated to be slightly higher under the legacy retirement system than under the BRS.⁸³ Lifetime benefits depend on the amount the member contributes to the TSP, including taking full-advantage of government matching by making contributions at the 5% level.

The 13^th Quadrennial Review of Military Compensation (QRMC) in 2020 included a review of TSP contribution patterns for active component members under the BRS. The review revealed that older and higher income servicemembers saved at higher levels. The report authors noted that, "service members from all four services frequently failed to maximize the amount of matching funds that they were eligible to receive."⁸⁴

Lump Sum Option

Advocacy groups have also expressed concerns about the lump sum option and DOD's discount rate, which is higher than discount rates for similar pension programs in the private sector.⁸⁵ This could lead to a substantially lower lifetime benefit for those military retirees who elect the lump sum. In addition, experts have warned that those most likely to take the lump sum are those with the greatest financial need, and lower levels of financial literacy.⁸⁶ Proponents of the lump sum option have argued that the feature will allow servicemembers more flexibility to use their retirement benefits to, for example, start a business, purchase a home, or make other investments to help transition into civilian life or a second career.⁸⁷

In its 2020 Quadrennial Report to the President and Congress, the DOD Board of Actuaries recommended that Congress modify the lump-sum provision, stating

We have already provided our general concerns about the use of a personal discount rate and we continue to have significant concerns about the DOD [lump sum] policy as it is being implemented. As this new feature is better understood, some may conclude that the use of such a high discount rate is taking advantage of service members. [ ... ] we strongly recommend that Congress anticipate the ramifications that may arise from the use of these high discount rates and replace the personal discount rate with a more market-based rate similar to those used in the private sector.⁸⁸

Effectiveness of Financial Literacy Training

One of the ways that Congress addressed these concerns was to require financial literacy training for servicemembers with the authorization for the new retirement system in the FY2016 NDAA.⁸⁹ At Congress's behest,GAO conducted a review of DOD's financial literacy training programs and, in particular, how this program was helping members to make decisions about retirement savings.⁹⁰ GAO found that the BRS training was delivered in accordance with effective practices. However, the training programs lacked adequate pre- and post-assessment mechanisms to determine whether the training had an impact in individual mastery of the topics. The report authors noted that online/computer-based training, or large group sessions may not be as effective in delivering content, particularly for very junior members with limited life experience and low baseline financial literacy. The GAO's recommendations were

• 1. The Secretary of Defense should evaluate the results of its financial literacy training assessments to determine where gaps in servicemembers' financial knowledge exist and revise future trainings to address these gaps.
• 2. The Secretary of Defense should provide servicemembers disclosures that explain key pieces of information about the lump sum payment, including some measure of its relative value, the potential positive and negative financial ramifications of choosing the lump sum payment option, and a description of how it was calculated.
• 3. The Executive Director of the Federal Retirement Thrift Investment Board should work with the Secretary of Defense to explore alternative options (including online resources) for servicemembers to receive their initial Thrift Savings Plan password so that servicemembers can access and manage their online accounts without added delays.⁹¹

DOD has indicated that it has fully implemented these recommendations as of March 2023.⁹²

Appendix. Retirement Reform Recommendations in Selected Prior Reviews

Every four years, the President is required by law to direct a comprehensive review of the military compensation system and to forward the review, along with his recommendations, to Congress.⁹³ This review is known as the Quadrennial Review of Military Compensation (QRMC). The Military Compensation and Retirement Modernization Commission (MCRMC) served as the 12^th QRMC.⁹⁴ The sections below summarize the recommendations of these commissions.

10^th QRMC Recommendations

In the 10^th Quadrennial Review of Military Compensation (QRMC), one of the directed areas of assessment was "the implications of changing expectations of present and potential members of the uniformed services relating to retirement."⁹⁵ To accomplish this, the QRMC suggested a major revision of both the active and reserve retirement systems. Selected options were

• 1. A defined benefit plan similar to the current High Three system that would vest personnel at 10 years of service, with benefits to begin either at age 60 (for personnel who have served less than 20 years of service) or age 57 (for those that served more than 20 years of service). Retirees could opt to receive the retirement annuity immediately upon retirement but the annuity would be reduced by 5% for each year under age 57.
• 2. Combined with the above defined benefit plan would be a defined contribution plan that would require the services to contribute up to 5% of annual base pay into a retirement account for each servicemember. The contribution would start at 2% for those with two years of service and increase incrementally until it reached 5% for those with five or more years of service. This plan would also vest at 10 years of service but withdrawals could not begin until age 60.
• 3. A system of gate pays would be established at specified career points to retain selected personnel in specified skill areas.
• 4. Separation pay would be used to encourage personnel in over-manned skills to separate prior to vesting at the 10-year point or becoming eligible for an immediate annuity at 20 years.

11^th QRMC Recommendations

DOD submitted the 11^th QRMC final report in 2012. While this QRMC did not have the same focus on the entire retirement system as the previous QRMC, DOD recommended more closely aligning active and reserve retirement systems with the goal of eventually transitioning to a total force single-system approach for both the active and reserve components. The report recommended the following modification to the reserve retirement system:⁹⁶

Reserve component members who have attained 20 qualifying years for retirement benefits could begin receiving retired pay on the 30^th anniversary of their service start date or at age 60, whichever comes first. Reserve members would receive one retirement point for each day of service, and the points needed for a qualifying year would be reduced from the current 50-point requirement to 35.

12^th QRMC: Military Compensation and Retirement Modernization Commission (MCRMC)

The National Defense Authorization Act (NDAA) for FY2013 (P.L. 112-239) established a Military Compensation and Retirement Modernization Commission (MCRMC) to provide the President and Congress with specific recommendations to modernize pay and benefits for the armed services. In terms of retirement, the commission was mandated to provide recommendations to "Modernize and achieve fiscal sustainability for the compensation and retirement systems for the Armed Forces and the other Uniformed Services for the 21^st century."⁹⁷ Notably, Section 674 of P.L. 112-239 mandated that the commission comply with conditions that would grandfather existing servicemembers and retirees into the existing retirement system, stating

(i) For members of the uniformed services as of such date, who became members before the enactment of such an Act, the monthly amount of their retired pay may not be less than they would have received under the current military compensation and retirement system, nor may the date at which they are eligible to receive their military retired pay be adjusted to the financial detriment of the member.

(ii) For members of the uniformed services retired as of such date, the eligibility for and receipt of their retired pay may not be adjusted pursuant to any change made by the enactment of such an Act.

The commission delivered its final report and recommendations to Congress on January 29, 2015. Congress adopted many of the MCRMC's recommendations in the FY2016 NDAA. Several of the most prominent changes include, reduction of the retired pay multiplier, government matching contributions, and the lump sum option.

The MCRMC did not make any recommendations changing the 20-year eligibility for retirement; however, it recommended that the Secretary of Defense be given authority to modify the years-of-service requirement to shape the force profile as long as it does not impose involuntary changes on existing servicemembers. DOD expressed opposition to this proposal and Congress did not adopt a provision based on this MCRMC recommendation. The 20-year eligibility remains in current law.