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Military retirement is about to get a lot more complex

How to retire early

More than 1 million members of the military will start 2018 needing to make an important financial decision, as the government rolls out the biggest change to military retirement since World War II.

Members of the US Army, Marines, Navy, Air Force and Coast Guard with fewer than 12 years of service will have to choose whether to stay on an all-or-nothing path toward a traditional pension after 20 years of service or to opt for a new "blended" retirement system that Congress approved as part of the 2016 National Defense Authorization Act.

The new system combines a 401(k)-style plan with a continuation bonus after 12 years of service and a traditional pension (albeit less generous than before) after 20 years. The upshot: Those who don't reach the 20-year milestone required to qualify for a pension -- which amounts to more than 80 percent of those who serve -- will no longer leave with nothing saved for retirement.

Under the new plan, those who do stay for 20 or more years will see a 20 percent cut in their pension payouts, though the difference should be offset in part by the contributions to the plan's 401(k)-style component. The changes, which amount to a test case for entitlement reform in the civilian world, are expected to save taxpayers billions and also boost recruitment efforts for millennials, who tend to change jobs more often but are reluctant about putting off saving for retirement.

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CBS MoneyWatch discussed the changes with Michael J. Meese, a retired Army brigadier general and current executive vice president and secretary of the nonprofit American Armed Forces Mutual Aid Association, or AAFMAA. The interview has been edited for length and clarity.

MoneyWatch: These are big changes. Who are the winners and the losers?

Meese: The winners are anybody who leaves the service short of 20 years. Previously, in the old system, the military had a very generous retirement system, but if you left short of 20 years -- which about 83 percent of those serving in the military did -- you left the military with nothing for your retirement savings.

Military retirement is now going to be modernized so that starting immediately after you join, the military is going to contribute an automatic 1 percent of your salary and will match up to another 4 percent, for a total of 5 percent of your salary. And then you vest after two years and take that with you.

MoneyWatch: What does this mean for those who do stay for 20 years? Does the pension phase out?

Meese: If you stay for a career, you still have a generous pension, but it's 20 percent smaller at 20 years than it would have been previously. For example, in the old system if you stayed for 20 years, you would get 50 percent of your salary after 20 years. In the new system, you'll only get 40 percent of your salary, but you will have benefited from the fact the military has contributed matching funds throughout your career.

MoneyWatch: It's surprising, and sad, that 83 percent of service members leave with nothing for retirement. So this seems like a positive for those folks.

Meese: Another positive, for everybody as well as taxpayers, is it's forecast to save about $2 billion a year in terms of retirement costs. It really is the first time the government has done entitlement reform. When military retirement was set up, kind of like with Social Security, people were living into their 60s. Now they're living into their 80s. By curling back the defined-benefit pension at 20 years, it saves taxpayers quite a bit of money.

MoneyWatch: Does this apply to new service members only, or everyone?

Meese: It applies to everyone who joins the service after the first of January. If you have greater than 12 years in the military, you're grandfathered into the legacy system. There are between 1.1 million and 1.6 million people who have less than 12 years of service and have to make a choice sometime during calendar year 2018, whether to opt into new system or stay in the legacy system. 

If you do not make an affirmative choice to go to the less-generous pension system, then you will stay in the legacy system and not get the defined contribution.

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MoneyWatch: What was the impetus for the change? Is this going to benefit any private-sector businesses?

Meese: It initiated with a 2011 Defense Business Board report, and then there was some additional study by experts at West Point. It was a government commission, the Military Compensation and Retirement Modernization Commission, that recommended this proposal, which was eventually adopted in a bipartisan way in the National Defense Authorization Act of 2016. It really was just good government.

After World War II, if people were joining the military, you thought of them either as career military or just going in for a short amount of time, so they didn't care about retirement. This change really adapted our compensation and retirement system for the millennial generation. 

People in their first job expect to have some sort of 401(k) kind of plan. In that sense, it was entitlement reform where the military met millennials. There isn't a huge private-sector component to it, because both the military person's funds and the government matching contributions go into the Thrift Savings Plan, a government-administered retirement system established in the 1980s for civil servants.

MoneyWatch: Do you anticipate a smooth rollout? Is it widely known already among members of the military?

Meese: There still is a fair amount of confusion. There are some complicated parts. It's not hard if you take a look at it, but like many of these things involved in finances, the devil is in the details. You have to know what to look for and ask the right questions.

MoneyWatch: What does this do in terms of fairness and equity for military members compared to their non-military peers?

Meese: It should be a helpful and attractive recruiting tool for young men and women to consider joining the military and seeing they have a good 401(k)-type plan with matching contributions. Two years from now, once implemented, people who may have joined the military before before because of money for college, will see it's a good first opportunity. Even if they serve for three years, they've got a jump-start on retirement savings. Hopefully it'll continue to attract quality people to our military.

MoneyWatch: Folks won't spend 15 years and leave with nothing.

Meese: The all-volunteer force was implemented in 1973, but we never updated the retirement system to reflect we have a much more professional force that's serving for a longer period of time.

MoneyWatch: What's your advice to service members who have an option here?

Meese: It's a very difficult and personal decision, and it depends on how likely you think you are to stay for an entire career. As we have counseled at the American Armed Forces Mutual Aid Association, if you're sure you're going to opt in, you should opt in right away so you get the match for January. 

If you're not sure, and you're able to put the 5 percent in for matching funds, the new system will ensure that you have the defined contribution, and the pension, while smaller, is still fairly generous. If you make the wrong decision, and you stay for a whole career, the worst case is you get a pension that is still pretty substantial plus you've had the benefit of matching funds. 

If you've got four years in and are absolutely sure you're going to stay for a career, and then five years from now something happens, you're not able to stay, or you don't get a good promotion, you leave with nothing. Choosing the least bad option probably means opting into the new system.