Military Retirement Under the New Budget Deal

No where have I read there was a specific cut to military retiree pay percentages.  Currently retirees earn their pension based on a very simple formula.

As Breitbart points out, the cuts are specifically aimed at a cost of living allowance increase that retirees receive to adjust for inflation over the years since they retired.  This increase is directly tied to the Consumer Price Index see the article on retirement from the official military pay website.

Now historically we have had highs and lows in the CPI, as this is entirely based on current inflation and the economy. Military Benefits has a great chart covering the historical Retirement Cola.   I have reproduced it in a spreadsheet form for you here.    http://militarybenefits.info/2013-cola-retired-military-veterans/

As you can see any retiree during 2009 and 2010 didn’t receive an increase based on how the economy was faring during that time frame.  With a 1% cut in Cost of Living Adjustments (COLA) you would simply see a smaller increase in retirement pay.

Next are two charts covering the Military Pay for 2008 and the current 2013 pay.  The full chart can be found here

For 2013 this is the pay chart for a service member at 20 years service or more.

Next I will highlight the retirement pay for a Staff Sergeant (E-6) who retired at 20 years service.  As a retiree will earn final income based on the highest rank held for 3 years of service, at the pay rate for the total years of service multiplied by the percentage listed above for retirement pay.

In this case our SSG would have been earning $3,650.96 per month as his final pay at 20 years.  Divided by two that is $1825.48 per month as his pension.  Or better put the yearly income would be just under $22,000 in retirement.

By contrast a Major (O-4) serving 20 years would have a retirement income of $7,283.64/2=$3641.82 per month or about $44,000 per year.

A Soldier/Marine/Sailor/Airman who enlists in the military at the age of 18 is able to retire before they even turn 40.  At the age of 38 they would be receiving their 50% retirement income.  This means they could easily work a second career before they choose to retire for the rest of their life.  In some cases people can enlist at the age of 17 meaning they have even more time.

This cut while perhaps a bit unpopular among the military is not a drastic issue.  The fact is for the majority of military retirees they don’t just retire they go and take a second and in some cases a third career.

A small little anecdote for you.  While I was in the Navy I purchased a car from a Saturn Dealership in San Diego.  I believe my salesman was named George though I cannot remember his last name.  He had retired from the Navy as a Petty Officer First Class (E-6) after 20 years.  He then worked as an electrician until he could retire from that company with a pension, he then took another career where we worked for 10 years until he was injured and took an early retirement with pension from his third company.  When I met George he was in his early 70s, he was collecting three pensions and because he was bored he was out there selling cars for fun.

When people think of retirees they are thinking of people George’s age or perhaps a little younger lets say as young as 60.  We don’t typically think of people as young as 38 because this is an age where people can still work and are for the most part expected to work.  The pension we receive as military members is a well deserved bonus in starting our second and third careers but it isn’t something that we should at these young ages be fully dependent on.

Furthermore, the Military recognizing how small some of these payments can be has opened up retirement savings accounts.  These accounts are not unlike 401K/IRAs that are out on the market for civilians.  The accounts the Thrift Savings Plan, is a mutual fund that is made up of either conservative slow growth, competitive growth, government bonds, small business, large cap funds … and the outcome of money earned is based on how well those funds do.  Last summer the Military opened up a ROTH version of the TSP.  Meaning that if military members contribute to the ROTH version their income they draw from the TSP in retirement will not be taxed.

So now lets think about this in the worst case scenario.  Under the new deal a 38 year old military retiree E-6 will see a pension of just under $22,000 a year.  Assuming the economy remains as stagnant as it is that retiree will see little to no COLA increase for the next 24 years.  There is potential that the CPI could increase at a rate of 1% every year meaning the Staff Sergeant I mentioned earlier would be earning no COLA increase while under the current system his pension would have risen to about $27,000.  In other words that $22,000 is about 78% of what it would have been under the old plan.  When the full COLA increase kicks in it is only kicking in by the 1% reduction meaning that finally after 24 years of being retired that $22,000 begins to see an increase.  By the age of 75 the retiree is now earning a pension of $25,000 per year as opposed to the $32,000 under the old system.

Of course now the retiree will have had an option to put money into various retirement accounts made very easy by the military.  Meaning the pension would not be the only source of military earned retirement.  Not to mention whatever pittance of Social Security is left over.  And of course not to forget any future pensions or incomes from second or third careers.

Is this a tough pill to swallow for military members?  I personally don’t like seeing that potential cut from my retirement, but I’m young in service years.  I can adjust my savings and I can adjust my plan.  It isn’t the end of the world.  The people I feel worse for is those who just retired, if the plan were delayed or graduated say for people who are planning to retire 5 years from now a half a percent cut at a full percent for retirees who plan to retire in 10 years or more this would be easier to forecast and adjust their financial planning.

As it is I am a bit confused from the tidbits I have read about the bill.  The paragraph describing the issue in the Washington Times implies that this is for people who begin government work after January first.  Does this mean military members who are in now or currently retired won’t see this cut?  If that is the case my previous paragraph is completely moot anyway.

For Conservatives this isn’t the end of the world.  The deal takes the threat of shutdown and therefore distraction off the table.  This means that the important debates such as healthcare and foreign policy can take the front stage and maybe you can win back those seats and get a better deal next year.  This isn’t a bad deal it just isn’t a great deal.  It is a compromise and that, is one of the fist true compromises either party has seen since January of 2009.  Work out some of the little details to end confusion and take the deal.  Then move on and fight the battles that could truly cripple the nation like the total collapse of our health care industry and the loss of jobs and insurance for millions of Americans because of a partisan law that was not a compromise at all.  It isn’t the worst deal and bottom line it allows both parties to debate the issues without the threat of a stupid shut down or worse.