{"id":51057,"date":"2016-04-30T09:02:42","date_gmt":"2016-04-30T09:02:42","guid":{"rendered":"https:\/\/one.sightlinemg.com\/marinecorpstimes\/uncategorized\/2016\/04\/30\/the-new-military-retirement-system-has-major-flaw-financial-experts-warn\/"},"modified":"2026-08-08T10:15:16","modified_gmt":"2026-08-08T10:15:16","slug":"the-new-military-retirement-system-has-major-flaw-financial-experts-warn","status":"publish","type":"post","link":"https:\/\/one.sightlinemg.com\/marinecorpstimes\/pay-benefits\/military-retirement\/2016\/04\/30\/the-new-military-retirement-system-has-major-flaw-financial-experts-warn\/","title":{"rendered":"The new military retirement system has major flaw, financial experts warn"},"content":{"rendered":"\n

Top financial experts are worried about a key piece of the military’s\u00a0new blended military <\/span>\u200bretirement system and are urging the Pentagon not to shortchange avoid ripping off <\/span>\u200bcareer troops \u2014 especially enlisted service members.Specifically, the American Academy of Actuaries is scrutinizing\u00a0element of <\/span>\u200bthe new system’s \u2013 taking effect in 2018 \u2013 that is under scrutiny involves the <\/span>\u200blump-sum payout option\u00a0and precisely how\u00a0the fine-print details that <\/span>\u200bthe Pentagon will use to <\/span>\u200bcalculate it for those who elect to precisely how much career troops would get for <\/span>\u200bcashing<\/span>\u200b\u00a0such in <\/span>\u200ba large portion of their pension benefit<\/span>\u200b. The American Academy of Actuaries has sent a letter to the Defense Department Pentagon Wednesday voicing concerns about the how the Defense Department will peg a number to the present value of a promised military retirement pension.<\/span>\u200bMilitary The new military <\/span>\u200bretirement reform that <\/span>\u200bbecame law last year and takes effect in 2018, giving will gave <\/span>\u200bfuture retirees the option of taking traditional monthly pension checks or, alternatively,<\/span>\u200b accepting\u00a0smaller a diminished <\/span>\u200bmonthly pay pension check <\/span>\u200balong with a lump-sum cash payment at the time of separation. The lump sum would total\u00a0that is equal to <\/span>\u200beither 50 percent or 25 percent of a service member’s their <\/span>\u200bpromised pension benefits.It\u2019s similar to the military’s longstanding “REDUX” retirement option, which offers cash up front in exchange for smaller monthly checks. But unlike REDUX, which offers a flat $30,000 cash payment, the new lump-sum option will offer cash payments that will vary for individual troops based on the value of their personal retirement package as defined by pay\u00a0grade and years of service. \u00a0\u00a0Determining The controversial question that Pentagon officials will have to answer during the next several years is how to actually peg a specific number to the present value of a promised military retirement pension and its annual cost-of-living increases.\u00a0Figuring out <\/span>\u200bthe actual <\/span>\u200bamount of that lump-sum check is more complicated than simply totaling\u00a0just adding up the total value of <\/span>\u200bfuture monthly pension checks. Rather, the calculations will rest upon a “discount rate,” a device that financial professionals use to measure the current value of future payments.\u00a0Discount rates assume money today is more valuable than money tomorrow. Akin \u2014 akin <\/span>\u200bto reverse interest rates, the process shaves\u00a0shaving <\/span>\u200bmoney from the current value of a future benefit. So The <\/span>\u200bhigher the <\/span>\u200bdiscount rates yield smaller\u00a0applied, the lower the value of the<\/span>\u200b lump-sum payments today<\/span>\u200b.Therein lies the actuaries’ concern.\u00a0The American Academy of Actuaries notes that the difference between the present value of a benefit paid over 20 years discounted at, for example, 11.5 percent is about half of the present value of the same benefit discounted at 3 percent.<\/span>\u200bDuring the debate over military retirement reform, estimates varied dramatically for on <\/span>\u200bthe total value of a service member’s retirement benefit varied dramatically<\/span>\u200b. An\u00a0For example an <\/span>\u200bindependent military retirement <\/span>\u200bcommission, for example, said last year that retirement benefits for <\/span>\u200ba senior enlisted service member in the E-7 pay grade could expect retirement benefits worth\u00a0were pegged at <\/span>\u200b$201,282. By contrast, the Defense Department suggested that same E-7 could expect\u00a0\u2014 a small fraction of the <\/span>\u200b$1.1 million in figure cited for <\/span>\u200b”lifetime retirement income.” for the same hypothetical E-7 retiree in an earlier Defense Department report.<\/span>\u200bThe key <\/span>\u200bdifference hinged on the a <\/span>\u200bdiscount rate. As it evaluated the consequences of reform,\u00a0In\u00a0their letter to the Pentagon, this week, the actuaries American Academy of Actuaries targeted their concerns on the discount rate and the extraordinarily high rate that was proposed last year by <\/span>\u200bthe independent Military Compensation and Retirement Modernization Commission assumed a.\u00a0The commission suggested a discount<\/span>\u200b rate of 8 percent for officers and 12 percent for enlisted service members. In \u2014 far higher than the discount rate that is widely used in <\/span>\u200btoday\u2019s financial markets, discount rates typically hover\u00a0of <\/span>\u200bbetween 2 and 4 percent.“This higher rate would result in settlement amounts \u2026 that are, in some cases, less than half the amount that the same benefit would be settled for in a corporate pension plan, as part of a domestic relations action, or in the broader financial markets,” according to the letter from <\/span>\u200bWilliam Hallmark, chairman of the American Academy of Actuaries’\u00a0pension practice council, wrote to the Defense Department this month.\u00a0<\/p>\n\n\n\n\n\n

Such<\/p>\n\n\n\n

Hallmark said such<\/p>\n\n\n\n

\u200ba steep discount rate would be a bad deal for troops, Hallmark warned,<\/p>\n\n\n\n

and may<\/p>\n\n\n\n

\u200bappealing\u00a0primarily to those who don\u2019t<\/p>\n\n\n\n

really<\/p>\n\n\n\n

\u200bunderstand what they risk losing or who face such financial hardship they simply don’t have another choice<\/p>\n\n\n\n

money<\/p>\n\n\n\n

\u200b. He<\/p>\n\n\n\n

“Those who accept lump sum amounts determined at higher personal discount rates,” he wrote, “are likely to either not understand the financial value of their annuity benefits, or have an immediate financial need that cannot be met through the annuity payments,” he wrote.”\u00a0Hallmark<\/p>\n\n\n\n

\u200balso questioned the military compensation commission\u2019s suggestion that different discount rates should apply to officers and enlisted troops, resulting in<\/p>\n\n\n\n

meaning<\/p>\n\n\n\n

\u200benlisted troops receiving<\/p>\n\n\n\n

would get<\/p>\n\n\n\n

\u200bfar less money. The commission based that recommendation on studies<\/p>\n\n\n\n

that<\/p>\n\n\n\n

\u200bsuggesting enlisted troops would be more eager to take the cash up front and therefore won’t require<\/p>\n\n\n\n

the Defense Department does not need to offer as<\/p>\n\n\n\n

\u200bmuch<\/p>\n\n\n\n

to<\/p>\n\n\n\n

\u200bconvincing<\/p>\n\n\n\n

e them<\/p>\n\n\n\n

\u200b to take an option that, ultimately, would saves\u00a0the government money.<\/p>\n\n\n\n

Veterans advocates have criticized the disparity, likening it to a payday loan \u2014 one that<\/p>\n\n\n\n

calling it that a “payday loan mentality” that<\/p>\n\n\n\n

\u200bexploits people<\/p>\n\n\n\n

troops<\/p>\n\n\n\n

\u200bwith less financial education and fewer options for a traditional bank loan.<\/p>\n\n\n\n

Many make the comparison to a gallon of gasoline, which typically costs a few dollars, yet someone stranded on the roadside with an empty tank likely would be willing to pay far more for that same gallon of gas.<\/p>\n\n\n\n

\u200bThe American Academy of Actuaries said the Pentagon should set a fair and across-the-board discount rate similar to those applied by large corporations<\/p>\n\n\n\n

and should avoid a “personal discount rate” which reflect individual preferences<\/p>\n\n\n\n

\u200b.<\/p>\n\n\n\n

“We<\/p>\n\n\n\n

In selecting the appropriate personal discount rate under the Act, we<\/p>\n\n\n\n

\u200bencourage the department to carefully consider the extent to which the discount rate should reflect a service member\u2019s financial sophistication and immediate financial needs, or whether the discount rate should be independent of these considerations,” Hallmark wrote.\u00a0“Furthermore, we believe consideration should be given to whether all service members should be offered lump sums based on the same discount rate and whether that discount rate should be comparable to the discount rate required for lump sum payments from corporate pension plans<\/p>\n\n\n\n

,” he wrote<\/p>\n\n\n\n

\u200b.<\/p>\n\n\n\n

“Regardless, …<\/p>\n\n\n\n

of the discount rate used,<\/p>\n\n\n\n

\u200bwe strongly encourage the department to provide a full and thorough disclosure about the discount rates used to calculate the settlement offers. Such a disclosure should include comparisons to settlement amounts that are calculated based on widely used discount rates and\/or comparisons to what it would cost to replace the foregone pension benefits in the financial markets<\/p>\n\n\n\n

,” he wrote<\/p>\n\n\n\n

\u200b.”<\/p>\n\n\n\n\n\n

The Pentagon has never explicitly supported the use of “personal discount rates.” Instead, a Defense Department spokesman noted that applying the rate is required by the retirement reform law passed by Congress.\u00a0“The department has made no decisions on personal discount rates and is working with outside experts on this issue,” said Air Force Maj. Ben Sakrisson<\/p>\n\n\n\n

, the spokesman, said Friday<\/p>\n\n\n\n

\u200b.<\/p>\n\n\n\n

The partial lump-sum payout would replace a portion of the retiree’s monthly pension checks until the recipient reaches age 67. After age 67, military retirees would receive full retirement checks regardless of whether they opted for the lump-sum payout.<\/p>\n\n\n\n

When the<\/p>\n\n\n\n

The<\/p>\n\n\n\n

\u200bnew<\/p>\n\n\n\n

military<\/p>\n\n\n\n

\u200bretirement system<\/p>\n\n\n\n

would<\/p>\n\n\n\n

\u200btakes effect in 2018, a<\/p>\n\n\n\n

. A<\/p>\n\n\n\n

\u200bll current troops will have the<\/p>\n\n\n\n

would have a grandfather clause and a<\/p>\n\n\n\n

\u200bchoice to remain under the current system or opt into the new one. Future recruits joining the military in 2018 and beyond will<\/p>\n\n\n\n

would<\/p>\n\n\n\n

\u200bhave no choice other than the new system.<\/p>\n\n\n\n

The new plan also<\/p>\n\n\n\n

would, for the first time, give almost every service member some retirement benefits when they leave the ranks, rather than only the one in five who stay in uniform for at least 20 years. The new plan<\/p>\n\n\n\n

\u200bwould provide<\/p>\n\n\n\n

give almost all troops who serve for more than two years<\/p>\n\n\n\n

\u200bsome retirement benefits, via a new 401(k)-style investment account,\u00a0to almost all troops who serve at least two years<\/p>\n\n\n\n

upon separation from the service. \u00a0vested 401(k)-style investments into their Thrift Savings Plan accounts<\/p>\n\n\n\n

\u200b.<\/p>\n\n\n\n

Career troops would receive the same 401(k)-style benefits, plus<\/p>\n\n\n\n

as well as<\/p>\n\n\n\n

\u200ba traditional pension that is 20 percent smaller than the current one.<\/p>\n","protected":false},"excerpt":{"rendered":"

Financial experts have warned the Pentagon not to shortchange career troops \u2014 especially those in the enlisted ranks.<\/p>\n","protected":false},"author":7,"featured_media":94607,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_yoast_wpseo_meta-robots-noindex":"","_yoast_wpseo_meta-robots-nofollow":"","_yoast_wpseo_canonical":"","_acf":"","_yoast_wpseo_primary_category":85,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","_smg_distribution_targets":[]},"categories":[85,15],"tags":[],"coauthors":[3112],"class_list":["post-51057","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-military-retirement","category-pay-benefits"],"acf":{"subheadline":"","legacy_arc_id":"UV6FNWQF5ZFQRBJZU2EF4RIC7U","arc_canonical_url":"\/pay-benefits\/military-retirement\/2016\/04\/30\/the-new-military-retirement-system-has-major-flaw-financial-experts-warn\/","remove_feature_photo":false,"is_sponsored":false,"subtype":"","redirect_url":"","disable_inline_ads":false,"native_logo_pretext":"Presented By:"},"yoast_head":"\nThe new military retirement system has major flaw, financial experts warn - 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