The reformed military retirement system, already unpopular with military members, looks as if it's likely to become a lot more unpopular.
Servicemembers are already hesitant to embrace the new system, a hybrid system that incorporates some aspects of commercial retirement plans in that it offers the options of a lump sum and a 401(k), while offering some benefit to those who don't stay long enough to reach retirement.
That last is the only aspect of the new system that seems popular, since the great majority of active-duty members have indicated that they'd prefer to be grandfathered into the old plan, which provides a pension after 20 years.
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Military members weren't exactly cheered in February to hear the news that the Department of Defense was planning to delay matching contributions to the new retirement plan, so that servicemembers wouldn't be entitled to those retirement contributions till their fifth year of service (instead of their third).
And now it seems there's a new reason for servicemembers to be wary of the new plan: the personal discount rates the military plans to use when determining the value of those lump sums that servicemembers could opt to receive on separation, rather than choosing to collect a lifetime pension.
As is the practice on the private sector side, the lump sums were already going to be considerably less than the value of a pension—but there's concern that military lump sums could be calculated at a rate that would make them worth far less than a comparable civilian retirement lump sum.
The American Academy of Actuaries has gone on record with a letter to the Department of Defense about personal discount rates proposed for use in determining lump-sum settlements for military pensions under the new retirement system.
In its letter, the Academy pointed out that "the personal discount rates on which this legislative provision was based are substantially higher than would be typical for the lump sum settlement of a pension benefit. Such discount rates would result in lower lump sum amounts under the Act than would be paid, for example, by private pension plans."
How much lower? The Academy wrote, "Discount rates typically used for these kinds of settlements (including lump sums from corporate pension plans) might range from 2 percent to 4 percent over the period 2010—2015.
"Based on the studies referenced in the Final Report of the Military Compensation and Retirement Modernization Commission, it is our understanding that 'personal discount rates' may be 8 percent or higher for officers and 12 percent or higher for enlisted personnel. This higher rate would result in settlement amounts under the Act 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."
Considering that servicemembers are not known for their financial acumen, and certainly not for high rates of pay—many military families rely on some form of public assistance to make ends meet—such a personal discount rate will certainly further handicap those who have already sacrificed much to serve their country.
In addition, it is likely to act as a deterrent to prospective enlistees who do understand the financial ramifications.
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