Story here.
Budget/Authorization
This year's defense authorization bill may be the most closely watched bill in many, many years by those currently serving.
Because it does not affect me, I have not been follwing this year's defense authorization bill (which was vetoed by President Obama). Ironically, it may be the most watched bill by those currently on active duty.
The proposed authorization bill has huge retirement benefit reforms; the bill does not affect me, so I had not been following it, but when the president vetoed it -- which is almost as rare as hen's teeth for a president to veto a defense authorization bill, my interest was piqued.
I predicted this would happen when they introduced TSP (401k for the military) -- back in 2000 or thereabouts.
Individual TSP accounts have gotten so huge, that Congress is asking -- why generous pensions ON TOP of TSP? This was not the intended consequence, but it was predictable.
Again, it won't affect current retirees.
Here's the story (I may have some points on the margin incorrect):
1. Right now, those who serve less than 20 years get no pension, no retirement. But they can leave with TSP account. But most younger enlisted probably don't enroll.
2. Congress / military want more young enlisted to enroll in TSP for the member's own good.
3. TSP is now optional, but new bill would mandate / require ALL members place at least 1% of their salary into TSP (I don't know what the max is).
4. The government WILL MATCH up to 5% -- huge, huge benefit. This is quite amazing. This is new and the government will match your first 5% contribution. $50,000 annual salary x 0.05% = $2,500 from the govt to invest in the stock market, essentially.
5. So, even though those leaving the military before 20 years won't get a pension, they could have a huge TSP account. A million-dollar TSP is not out of the question.
6. THE BAD NEWS and why current active duty are watching closely: to pay for this -- to pay for the matching 5% from the government, pensions will be reduced by 20%. Retirees at 20 years now get 50% of their base pay; going forward they would get 40%, a significant reduction.
For 30 year-retirees, the current pension is 75% of base pay (if disabled even 10%, fully tax-free). 30-year retirees would get 60% of their base pay, hardly better than what 20-year retirees get now.
7. Some things to consider:
it would result in a lot of 20-year vets to get out of the service, which is good; a lot of 20+ active duty members are dead weight, simply waiting to retire at 30 years for full pension
a huge amount of government money would go into the stock market
of course, everyone in the military, even those leaving before 20 years, would have something in their bank account.
The bill was vetoed for other reasons but my hunch is that the retirement reform portion is a huge reason for the veto. McCain is the prime mover on this bill and he hates the military "pork" and I think he hates "lifers" -- the kind of stereotypical "lifers" he probably sees in his home state.
His bill would help get rid of "lifers" and would certainly make pensions less of a "red flag" by non-military folks who think retirees have way too many benefits.
President Obama was probably pushed by the military generals he sits with (periodically) to veto this retirement reform as written.
They are probably working the numbers, trying to get the 40% for 20-year retirees close to 45% or even all the way back to 50%. Same for the 30-year retirees; there it's even more important -- 75% cut to 60% (very, very close to present day 50% for 20-year retirees) -- is probably not palatable.
[$150,000 pension would be cut by $22,500 / year if the pension went from 75% base pay to 60% base pay. That's almost $2,000/month -- a house payment. Withdrawing 4% from the TSP on an annual basis at time of retirement, one would need a TSP account of $562,500 to get the $22,500, and that just brings one back to "even." The guys who thought of this expected the TSP would be "in addition to the pension" not to make up for cuts in the pension. As I said earlier in the article this was predictable. I was on active duty when they introduced the TSP and we talked about this, saw this coming.]
If most retirees are like me they don't look at the TSP as part of their retirement, or something to live off, unless they have to. Rather, they never cash in their TSP. They leave it to their spouse. That was a change in the TSP some years ago -- unlike classical 401k which must be spent by time of death, the military TSP can be left fully intact to the spouse. And, of course, if the spouse dies before spending it all, it goes to the grandchildren.
The higher ranking officers (from O-5 -- lieutenant colonels; O-6 -- colonels or captains [US Navy]) and lower-ranking general officers (one- and two-star) don't want to lose their 75% retirement which is huge, and a cut to 60% would probably not offset the TSP, even though it could be huge.
The cut for 20-year retirees would almost be a slap in the face. Obviously most 20-year retirees get back into the civilian work force, but they start out as a new employee, not as an employee with 20 years of seniority.
