The current military retirement plan, a defined benefit plan (pension), better serves our service members for the long term retirement benefit. The costs borne by the pension plan are little in comparison to the cost tolerated by the patriot who dedicates some of the best years to his/her country. The men and women who sacrifice to serve their country deserve better than a "profit-sharing" contribution that burdens them with the investment risk.
Richard Spencer, who led the Defense Business Board's eight-month retirement study, assessed the current system as unfair, unaffordable and inflexible and that an alternative plan would enhance the ability of the service member to build a meaningful retirement asset with complete flexibility for their lifestyle or desires. These talking points persist and our elected leaders continue to promote a change in the current military retirement system. Pending defense authorization bills in both the House and the Senate promise to make sweeping changes to military retirement for future generations of service members.
As a former registered investment advisoer, I disagree. Sure, the current pension plan does not allow for a benefit to be "rolled" after a short stint in the Armed Service and that aspect is "inflexible." ," h However, that benefit can continue to accrue in the rReserve component or be converted in federal service and some state service positions. Pensions were meant to be inflexible and to offer security to those who were covered . T — their value is in the cash flow. Service members who complete their qualifying time can build a meaningful retirement asset with their civilian employer, . I if they are lucky enough to work for one that offers to contribute 4 percent to 12 percent of base pay. That's a subject of another matter.
A recent article written by Ms. Sallie Krawcheck (a former Merrill Lynch CEO) and published on LinkedIn (https://www.linkedin.com/pulse/retirement-savings-crisis-ahaand-why-really-matters-sallie-krawcheck) reminded me of the looming retirement savings crisis in our society. Her article referred to the retirement savings crisis that by some estimates puts Americans under-saved by up to $14 trillion. In fact, most recent studies illustrate that many Americans are ill-prepared for retirement. They are ill-prepared because most households fail to save. Half of private sector employees don't even have access to an employer-sponsored retirement plan. and of t Those who do have access to a retirement plan are more likely to be enrolled in a defined contribution plan (i.e. 401K) rather than a defined benefit plan (i.e. pension). Today's retirement savings crisis likely grew out of the shift to defined contribution plans.
Under defined benefit plans, an employer promised the employee a retirement check. Providing for or sourcing that retirement check was the responsibility of the employer. During the 1970s, U.S. Ccorporations suffering under the burden of underfunded pension liability lobbied cCongress to allow defined contribution plans. This legislation led to the demise of defined benefit plans and gave birth to the 401k and other defined contribution plans. This allowed corporations to move the risk from the corporation and place it on the employee. Today, few companies offer a pension plan.
Now, pending legislation proposes a hybrid mixture of plans in exchange for reducing the long- standing military pension. Our elected officials want to help our future veterans contribute to the retirement savings crisis by determining the extent of reform for the current military retirement plan. If passed, the new retirement plan would mark the biggest change in military retirement in more than 60 years. Although the proposed changes profess exorbitant savings, I'm not convinced. These proposed changes intend to save $254 billion over 20 years at the expense of U.S. service members. This projected savings includes using the proposed matching of member contributions and continuation pay. The projected savings is derived from the decreased accrual contributions and the anticipated decrease in future retirement costs calculated by the DOD Retirement Board of Actuaries. It's not that I don't believe these proposed changes will create a savings; I'm just not convinced it needs to be accomplished by shifting the risk to the American service member. By the looks of things, the result will likely be a hybrid plan using a modified version of the current defined benefit plan with a defined contribution plan (TSP).
While this hybrid mix is not necessarily all bad, drawbacks exist. My long-term concern is that it sets the stage for further erosion of retirement benefits. Once the shift moves to a defined contribution type retirement plan, future reformation may continue to cut the security of the military pension.
One drawback is that now an employee must make several decisions and make the correct decisions, in order to achieve the same or better results for retirement. The employee under a defined contribution plan must first decide to participate (sign up), then decide how much to participate (contribute) and finally decide how to participate (invest the contributions). Additionally, the employee now has access, though restricted, to a monetary amount that is annotated on a statement. Whenever a "crisis" occurs the employee views his/her long-term money (the retirement account) no differently than his/her savings account. No restriction prevents the employee from making bad decisions.
Changing the current retirement system for U.S. service members will have far more detrimental effects to the U.S. service member and will cost more than the current system. Essentially, just like the 1970s corporations, the new hybrid plan removes the risk from the government and places it on the Soldier, Marine, Airman or Sailor. In an attempt to further capitalize on these savings, envision a gradual shift from the hybrid model to the fFull mMonty — the defined contribution plan only.
Such a change in the design of the retirement plan proposes an expansion of financial education programs. Are those cost calculated into the projected savings or are they to be contracted out? Will we be expanding the offerings of the Veteran's Administration in order to care for more destitute veterans? How much expansion to the Thrift Savings Plan will occur? Will the employee base be expanded to offer unbiased advice to the service member? How much time will we dedicate to the 18 year old service member to educate?
Maj. T. H. Bonham serves on the Army Staff. His service includes 26 years in both the active component and the Reserve component. Prior to returning to active service, Todd advised individual investors and operated a branch office for a major investment firm.