Proposed Benefit Cuts have Service Members Concerned

New benefits proposal from the Department of Defense has military members worried about the future.

The Department of Defense released a report last Thursday that’s left many service members and their families concerned over the future. Although it’s not an official proposal, the “white paper” details several options for a complete overhaul of the current retirement benefits system.

While the DoD stresses that this is simply a proposal they’re making public to help gauge reaction before their formal report to Congress in February of next year, the latest First Command Financial Behaviors Index® report also released last week found service members were worried about the future even before the proposal was made public.

In fact, the study shows three out of four middle-class military families believe that future defense cuts will have a significant impact on their financial outlooks.

Making retirement benefits more flexible and more available

While most options in the proposal show an approximate ten percent reduction in cumulative lifetime payments, the overhaul actually makes retirement benefits accessible to more service members – specifically those who serve less than 20 years.

Some proposed changes for the better:

  1. After six years, service member would be eligible for a 401(k)-style Thrift Savings Plan with direct annual deposits of five percent of basic pay. Military members would not be required to contribute anything unless they so choose. The money would become available after age 59½.
  2. At the 12-year service mark, service members might be offered a “continuation pay” bonus to encourage them to stay on. Proposals vary in the size of the bonus for troops as well as officers.
  3. Any service member who served at least 20 years would receive a lump-sum amount of transition pay upon final separation of leaving the service. Some proposals allow for as much as three years of basic pay.

Of course again on the last point, there is a tradeoff. A lump-sum transition pay allowance would decrease the size of pension check payments down the road. So a retired service member would get more money upon final separation, but less later.

What’s more, the DoD may revamp the pension payout system as well. The concept would be to offer smaller payments (“partial benefit”) upon final separation until standard retirement age (estimated around 62). The idea is to make the system more flexible, acknowledging that many retired service members go into the private sector even after 20 years of service. As such, it makes sense to have smaller partial payments at the beginning and then full payments once retirement age is reached.

Getting ahead of the overhaul

“It’s not guaranteed that overhaul of military benefits will be negative for all service members,” points out Gary Herman, President of Consolidated Credit, “In fact, this should have a very positive financial impact for the majority service members in the long-term. However those already participating in the current system may see a reduction.”

In any case, service members are faced with the unique financial challenge that they simply can’t know what’s going to happen to their benefits in the future. The system is changing and those changes are imminent – they should come sometime in 2015. However, how exactly those adjustments will affect service members is still up in the air.

“When anyone is faced with this kind of financial uncertainty,” Herman continues, “it’s critical to take steps to bolster up your savings and budget for a worst case scenario. You hope for the best, but you plan for the worst. That way, if the new system ends up having a negative impact on your outlook, you already have a plan on how to move forward.”

Consolidated Credit can help you get ahead of changes in your military retirement benefits. If you’re concerned about how the overhaul will impact your finances, contact us for a free financial evaluation. We also offer helpful financial information for service members online.