DoD Proposes Major Changes to Military Pension System

The Department of Defense is proposing a substantial revamp of its pension system for new service members.

The DoD submitted a proposal to Congress this month that calls for the creation of a “blended defined benefit and defined contribution” retirement pay system for service members.

That means service members would receive a reduced pension payout come retirement — the defined benefit component that is based on years of service and salary — but they could offset that reduction by investing their own money in a 401(k)-style investment instrument used by many civilian employees, the Thrift Savings Plan.

The Thrift Savings Plan is currently one of three retirement revenue streams offered to federal civilian employees — the other two being a standard pension payout based on years of service and salary and distributions received from Social Security.

The DoD would encourage new service members to participate in the Thrift Savings Plan. The Pentagon would automatically contribute “an amount equal to one percent of a service member’s basic pay to the Thrift Savings Plan account from entry into service through separation or retirement,” according to an article posted on the Pentagon’s website.

Service members could also receive up to five-percent matching contributions.

“This change to a blended retirement system is a key step in modernizing the department’s ability to recruit, retain and maintain the talent we require of our future force,” stated Pentagon spokesman Army Col. Steve Warren, according to the article. “We know that future service members will require more choice and flexibility in compensation and retirement.”

If the proposal is accepted by Congress, new service members could still receive 80 percent of the military’s current pension payout, the defined benefit component. In turn, they would have to make-up difference, and potentially exceed it, by investing in the Thrift Savings Plan (TSP).

Therefore, the investment responsibilities somewhat shift to the service member. They need to be committed to setting aside a portion of their salary for their TSP investments. They must also understand that that investment is subject to market conditions.

The TSP offers several investment options, but it may not be the perfect choice for you especially when you retire.

In a previously published blog post, we discussed the complexities and negative aspects of the TSP. While it may be a wise investment choice during active duty, it may not be the best choice to manage your retirement earnings because of strict rules governing distributions and other factors.