Military Retirement System Reform Starting in 2018

The National Defense Authorization Act of 2016 (Public Law 114-92) has changed the landscape of the military retirement system, as follows:

  1. Persons entering the military on or after January 1, 2018, will be under the new “modernized” retirement system.
  2. Servicemembers with less than 12 years of service as of December 31, 2017 (i.e. those entering between 2006 and 2017), will have a one year “opt-in” period to decide to remain in the current system or transfer into the new system.  The opt-in period runs all of calendar year 2018.
  3. Servicemembers who joined in 2005 or before are grandfathered under the current system. 

In general, the new “modernized” system contains four three features:

  1. A reduced retired pay multiplier.  Instead of earning 2.5% of “high-36” base pay per year, the “modernized” system will provides for 2% of high-36 months’ base pay per year.
  2. Automatic enrollment in the Thrift Savings Plan (TSP) with a government contribution of 1% of base pay.
  3. For Servicemembers who contribute a portion of their own pay to TSP, a government match not to exceed 5% of base pay.

With respect to retired pay, what this means is at 20 years of service, those who retire under the current system will still receive 50% of their high-36 months’ base pay (i.e. 2.5% x 20 years) while those under the modernized system will receive 20% of their high-36 months’ base pay (i.e. 2% x 20 years).  A 5% reduction over a lifetime is huge.  That trade-off is for automatic enrollment in TSP with the possibility of earning up to a 5% government match to contributions. 

From my perspective, the modernized system will prove to be an erosion of financial security in retirement for the many military families that live paycheck-to-paycheck.  These families cannot afford to take full advantage of the government match to TSP.  At retirement, they’ll end up with less, not more.  For those who can and do take full advantage of the government match of their TSP contribution, hopefully the fortunes of the investment marketplace will prove beneficial in the long run.  Time will tell.

The Secretary of Defense is charged with developing implementing instructions.  Once published, they’ll be worth a close read since the devil is always in the detail.  Stand by for more.

Author Jim Cramp is a retired active duty colonel and the founder and principal attorney at the Cramp Law Firm, PLLC.  The firm provides a spectrum of family law-related services to clients in the greater San Antonio region, across the United States and throughout the world.  The firms also provides Wills and Estates and Probate services.