PHILPOTT: Military retirement benefits continue to diminish in value

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What is your retirement worth?

Service members usually don't focus on the issue until deep in their careers. That was fine a generation ago when the military only had one retirement plan, and a good one at that. Careerists heard a lot about "half pay after 20 years" and "inflation protection for life" and grew confident they would do OK.

Today, the military has three retirement plans. Many people aren't sure what plan they come under or how annuities are set. Given the money involved, and the potential impact on career decisions, they should learn more.

A member's claim on a particular plan is determined by the date he or she entered active duty or signed a delayed-enlistment contract. The disparity in benefits between plans can be harsh. A day's delay entering service during the summer of 1986 cut lifetime retired pay for some individuals by more than $100,000.

Here's a rundown on the three plans and dates that determine eligibility:

FINAL BASIC PAY -- This plan is top of the line. It covers almost all current retirees but only 16 percent of the active force -- persons who entered service before Sept. 8, 1980.

Annuities are set at 2.5 percent of final basic pay for each year served. So a retiree who completes 20 years receives 20 times 2.5 percent, or 50 percent of final basic pay. But it's incorrect, service officials insist, to say the plan provides "half pay" after just 20 years. One third of active duty compensation is tax-free housing and food allowances, which are ignored when setting retired pay.

Still, the Final Basic Pay plan remains the crown jewel of military compensation and more attractive than most private pension programs. The benefit is worth twice as much to an officer as an enlisted retiree. Estimated lifetime value for a colonel or Navy captain (O-6) who retires after 28 years of service is $1,567,000, according to the Defense Department's Office of the Actuary. That figure is in constant 1997 dollars.

The lifetime value of the same plan for a senior chief petty officer (E-8) with 26 years of service is estimated at $706,800. For an E-7 with 20 years of service, the lifetime value is $445,750.

HIGH-3 -- This formula is identical to Final Basic Pay except it uses an average of the member's highest three earning years, rather than final basic pay, to calculate annuities. During times of low inflation and slow wage growth, High-3 cuts about 6 percent from the benefit.

Nineteen percent of the force -- anyone who entered from Sept. 8, 1980, through July 31, 1986 -- falls under High-3.

REDUX -- Twothirds of the current active force entered service after July 31, 1986, and therefore are stuck with the discounted plan. Redux. Benefits for the 20-year retiree are 25 percent below those offered under the Final Basic Pay plan. Annuities after 20 years of service are set at 40 percent, not 50 percent, of High-3 basic pay. For each year served beyond 20 years, annuities grow at a faster pace, 3.5 percent of basic pay per year.

Under Redux, too, cost of living adjustments are capped one percentage point below the CPI. There will be a one-time restoration of lost purchasing power at age 62, but partial COLAs would continue thereafter.

Data from the Defense actuary show how retired pay stacks up under each of the three plans using 1997 pay rates. A technical sergeant (E-6) who retired Jan 1. after 20 years would get $13,975 a year under Final Basic Pay, compared with $13,132 under High-3 and $10,505 under Redux.

For a lieutenant colonel or commander (O-5) with 24 years of service, annuities would be $36,928 under Final Basic Pay, $34,996 under High-3 and $31,496 under Redux.

The sharp drop in benefits from the High-3 plan to Redux creates a dilemma for service career counselors. If they draw attention to the disparity, they risk losing good people at critical career points. If they downplay the disparity, some careerists could face an unpleasant surprise at retirement, leaving them embittered or financially unprepared.

"It's a big concern for us. We're worried about retention," said a service pay official.

Adding to that worry is the Senate Budget Committee's formation of a new task force on entitlement reform, to look for new ways to cut military retirement and other government programs.

Sen. Judd Gregg, R-N.H., task force chairman, directed an entitlement study in 1995 that recommended deep cuts in retirees' cost-of-living adjustments. Congress ignored that effort. The services think they should do so again.

"The key words right now should be preservation and stability," said the service pay official. "We don't know the effects of (Redux) on retention. ... But at the 8-to-10-year point, members start to really look at benefits."

A 25 percent drop in retired pay, he said, could "have a major difference" on force quality.

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