NEW YORK (MainStreet) -- The retirement savings crisis began when corporate America began trimming – and then eliminating – pension plans for workers. The burden of financially preparing for life after work shifted from the employer to the employee. And so did the cost. Now, U.S. service members face a similar transition as the government looks to shrink pension benefits while expanding its “401(k) like” savings plan.
The Pentagon proposes a “blended” military retirement system. The 20-year service pension would be cut 20% -- as the Thrift Savings Plan, similar to a 401(k), would institute automatic enrollment at a 3% participant deferral. The government would offer a dollar-for-dollar match of 1%, increasing to 5%, depending on a service member’s length of service.
Members could opt out of the default enrollment after completing “financial literacy” training. In many ways, the changes reflect the retirement benefits currently offered to federal civilian employees.
Service members “would have the opportunity to achieve nearly equivalent or better retirement benefits when they reach retirement age,” said Defense Department spokesman Navy Lt. Cmdr. Nate Christensen in a statement.
In a white paper delivered to Congress, the DOD admits the significance of the proposal.
“The current defined benefit military retirement system is a significant incentive in retaining a career military force and has served us well for decades," the brief says. "Changes to the system have been infrequent and incremental; our proposal is, and will be perceived as, a momentous change to a tried and true system.”
“DOD modeling and experience indicate that any reduction to the defined benefit, and particularly one of this magnitude, will have negative retention impacts,” the paper continues. In order to lessen that impact, the Department is implementing retention bonuses, called Continuation Pay, to members with eight to 16 years of service.
Reaction to the proposal has been mixed. But Maj. T. H. Bonham, a former investment advisor with 26 years of active and Reserve service is not persuaded.
“Changing the current retirement system for U.S. service members will have far more detrimental effects to the service member and will cost more than the current system,” Bonham wrote in a guest post for the Military Times. “Essentially, just like the 1970s corporations, the new hybrid plan removes the risk from the government and places it on the Soldier, Marine, Airman or Sailor. In an attempt to further capitalize on these savings, envision a gradual shift from the hybrid model to the Full Monty — the defined contribution plan only.”
Initial projections estimated the new system would save taxpayers about $1 billion annually, but forecasts are hard to come by due to the variability of potential service member participation.
The Department of Defense submitted the proposal to Congress last week for consideration. The Pentagon is seeking to implement changes to the retirement system in January 2018. Current service members could opt into the new system while new recruits would automatically be enrolled in the new plan.