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Pentagon Probes for Details on Proposed Military Retirement Overhaul

Last month, the Military Compensation and Retirement Modernization Commission released a long-awaited report containing a series of policy proposals designed to decrease the cost of military benefits, including retirement benefits.

One of the more controversial proposals: the phase-out of the military’s current defined-benefit plan in favor of a hybrid plan that features characteristics of a 401(k).

[Proposal details can be read here.]

Now, the Pentagon is digging deeper into the report, and officials are asking for access to the data that was used to form the proposals.

From the Military Times:

“[The commission] claims they’ve done all the analysis but we have not been able to see what’s inside that analysis, so I’m anxious to see it . … We are interested in looking at how the commission came to the conclusion that [its proposed retirement recommendations] would be a better option,” [Defense Department Chief of Naval Personnel Vice Adm. Bill] Moran said.

Military officials are receptive to the idea, Moran said, noting that the Defense Department last year offered its own proposal for military retirement reform that includes some similar features.

Still, Moran said he’d like more information about the commission’s claim that troops would prefer the proposed system and it would not affect retention.

“There are aspects we like and aspects we need more analysis on,” Moran said.

Top personnel officials have been working around the clock to analyze the controversial proposals.

Why is the Pentagon examining the proposals so closely?

The Pentagon’s official view of the report will hold sway on Capitol Hill when it comes time for lawmakers to vote on the proposals.

Photo by Brian Schlumbohm/Fort Wainwright PAO

Government Panel Likely to Call For Military Pension Changes

The Military Compensation and Retirement Modernization Commission has spent the last two years drawing up policy proposals to decrease the cost of military benefits, including retirement benefits.

The Commission will make the proposals to Congress on Thursday, but people familiar with the report have already been revealing its contents to the USA Today and the Military Times.

According to the sources, the report will propose big changes to the military’s retirement system – including the phase-out of the military’s current defined-benefit plan, in favor of a hybrid plan that features characteristics of a 401(k).

More details from USA Today:

The Military Compensation and Retirement Modernization Commission will propose detailed legislation to phase out the current 20-year cliff-vesting pension payable immediately upon leaving service, according to people who have been briefed on the report but requested anonymity before discussing its recommendations.

The plan calls for Congress to create a hybrid system that includes a smaller defined-benefit pension along with more cash-based benefits and lump-sum payments. A significant portion of troops’ retirement benefits would come in the form of government contributions to 401(k)-style investment accounts, those familiar with the report told Military Times.

Specifically, the proposal calls for automatically enrolling each service member in the federal government’s Thrift Savings Plan, or TSP, an investment account that accrues savings. Individual troops will be responsible for managing their accounts, and the money is typically not available for withdrawal without penalty until age 59.5.

But that same proposal would make it easier for troops to keep their retirement benefits after leaving the military. USA Today reports:

By allowing many troops to keep their TSP government contributions after separation, the new proposal would give limited retirement benefits to the vast majority who leave the military before hitting the traditional retirement milestone of 20 years of service, most of them enlisted members who do four, six or eight years, then leave.

That’s a big potential change from a system that now offers retirement benefits to about only 17% of the force — many of them officers — who serve 20 years.

The retirement changes would only apply to new troops – not anyone currently enlisted or retired.

All of these proposals would still need to get through Congress to become law. Military compensation is a controversial area for cuts, so it’s unclear if the political will exists to move forward with the retirement system changes.

Photo by Brian Schlumbohm/Fort Wainwright PAO

New Jersey Lawmaker Puts New Pension Proposal On Table

Chris Christie’s pension commission members aren’t the only ones brainstorming pension reforms in New Jersey lately. A Democratic assemblyman has proposed a plan that would shift new hires into a hybrid plan with some attributes of defined-contribution plans and some attributes of defined-benefit. Reported by The Star-Ledger:

Assemblyman Troy Singleton (D-Burlington) last week sent some public union leaders a draft of a bill he’s considering introducing that would keep the current pension system in place for those already enrolled in it, but shift new public workers to a “collective defined contribution retirement program” – a sort of mix between a traditional pension plan and a 401(k).

“It may be something we don’t introduce, but it may be something we do in a different form. But I’d like to start some dialogue in where our pension system goes in the next step for our pension system,” Singleton said in a phone interview “The only thing I would tell you is it’s still a work in progress.”

The idea did not get a warm reception from the public worker labor unions, even though Singleton himself comes from the private side of organized labor, as an official in the Northeast Regional Council of Carpenters.

And Singleton acknowledged that the plan would not do anything to solve the pension’s unfunded liability of about $40 billion, which he said must be dealt with through increased state payments.

Singleton provided the Star-Ledger with an outline of how the plan would function. The gist:

Workers would establish accounts that both they and their employers would pay into, though the workers would pay three times as much as the employer. The money would be managed by a “professional money management provider” that could charge fees of no more than 0.25 percent of the total, while the plan’s appointed board and the State Investment Council would determine where the money would be invested.

The investment returns would be annually credited to the retirement accounts. But if the return is greater than 8 percent, the excess would go into a reserve fund, which would later be used if the investments lost money. The plan would allow for “bonus” payments to the retirement accounts if the reserve fund is healthy enough.

It’s far from the current pension system, in which workers’ final retirement payments stay the same, no matter how good or bad the funds’ investments are doing.

Christie appointed a commission last month to examine the state’s pension system and propose reform ideas. The commission’s final report will come in the next few months.

Defined-Benefit Plans Continue To Dwindle Among US Firms

States and municipalities are steadily shifting away from defined-benefit plans and moving workers into 401(k)-style or hybrid plans. But the trend isn’t exclusive to the public sector; as a recent survey reveals, the shift is just as pronounced among the country’s largest private sector firms. Reported by Business Insurance:

Just 118, or about 24%, of Fortune 500 companies offered a defined benefit plan to new salaried employees in 2013, down from 123 in 2012 and a steep decline compared with the 277, or 55%, that offered the plans in 2003, according to a Towers Watson & Co. survey released Thursday.

Frequently cited reasons for the decline in employer sponsorship of defined benefit plans include longer employee lifespans, which increases benefit costs; decreased corporate tolerance of fluctuating contribution requirements, which can jump up and down due to investment results; and escalating Pension Benefit Guaranty Corp. insurance rates.

The switch from defined-benefit to defined-contribution shifts more risk onto workers. But 401(k)s carry risk for employers, too, according to Towers Watson.

Such a move “carries risks for employers, such as having workers delay retirement when market performance is poor, which in turn can result in higher benefit costs and less mobility within their organizations,” said Alan Glickstein, a senior retirement consultant at Towers Watson in Dallas, in a statement regarding the survey.

Photo by 401kcalculator.org