Key Element of Military Pension Reform Remains Unsettled

A recent Congressional proposal to overhaul the military’s pension system gives troops a big choice: take their normal pension, or receive a large lump-sum payment up front.

That choice is a key cog in the proposal, which has already been endorsed by the Pentagon and is likely to become law later this year.

There’s just one problem: the size of the lump-sum payout has not been determined.

More from the Military Times:

That lump-sum option is one of the most controversial features of the new system that appears likely to become law later this year. The Defense Department and many veterans advocates opposed the option, but lawmakers nevertheless included it in their final agreement reached in early October.

Critics say the lump-sum option will be a bad deal for troops. But precisely how bad remains unclear, because Congress is leaving it up to the Defense Department to determine exactly how that lump-sum cash payment is calculated.

That will require Pentagon officials to peg a number to the present value of a promised military retirement pension and its annual cost-of-living increases.

Over the past several years, those estimates have varied dramatically. For example, the Pentagon estimated the total value of lifetime retirement annuities for a retiree leaving at the paygrade of E-7 to be about $1.1 million. But an independent military compensation commission’s projection was just a fraction of that — closer to $200,000.

The estimates don’t necessarily just add up the total lifetime pension payments. Rather, the calculations can rest upon a “discount rate,” a device that financial professionals use to measure the current value of future payments.

[…]

The Pentagon can save billions by setting a higher discount rate and shaving money from those lump-sum payments. Yet officials may not want to squeeze troops too hard on that score, lest large numbers reject the lump-sum deal and opt instead for the long-term benefit of monthly pension checks.

“It puts the government in the position of being a payday lender — convince people to take a small lump-sum value that saves the government a heck of a lot of money over the long term,” said Steve Strobridge, director of government relations for the Military Officers Association of America.

If the overhaul does become law, the lump-sum choice would only affect troops joining the military in 2018 or later.

Photo by Brian Schlumbohm/Fort Wainwright PAO via Flickr CC License