Military Active Duty Retirement the Research Paper
- Length: 15 pages
- Sources: 5
- Subject: Careers
- Type: Research Paper
- Paper: #45682288
Excerpt from Research Paper :
Third, a service member needs to understand the Cost of Living Adjustment (COLA). All three of the retirement systems feature COLAs, which can significantly increase the amount of a service member's pension benefits. "The COLA for the Final Pay and High 36 systems is determined each year by the national Consumer Price Index. But the COLA for the CSB/REDUX retirement system is the Consumer Price Index minus 1%" (Military.com, 2012). However, the COLA is not completely fixed under the CSB/REDUX retiree. "At age 62 the COLAs and multiplier are readjusted so that the High 36 and CSB retirees get the same monthly pay" (Military.com, 2012).
The fourth factor only really applies to the CSB/REDUX retirees. For those retirees, when they reach their 15th years of service, they must choose between taking the CSB/REDUX with a $50,000 cash bonus and a 40% pension check or the High 36 retirement system with no bonus and a 50% PENSION CHECK (Military.com, 2012). The decision is really based on each retiree's projected individual needs and cannot be determined with looking at the individual's personal scenario.
Another interesting scenario is that the different branches of the military have different definitions of retired. For the Navy and the Marine Corps, a member is considered a retired member for classification purposes if the person is an enlisted member with over 30 years service, or a warrant or commissioned officer (Powers, 2012). "Enlisted Navy and Marine Corps members with less than 30 years service are transferred to the Fleet Reserve / Fleet Marine Corps Reserve and their pay is referred to as 'retainer pay'" (Powers, 2012). Then, "when a Navy or Marine Corps member completes 20 years, including time on the retired rolls in receipt of retainer pay, the Fleet reserve status is changed to retired status, and they begin receiving retired pay" (Powers, 2012). "Air Force and Army members with over 20 years service are all classified as retired, and receive retired pay" (Powers, 2012). Therefore, the service branch membership can help determine how someone's retirement is classified. However, it does not actually impact their pay because retired pay and retainer pay are treated the same way under the law (Powers, 2012).
Finally, there are some special circumstances that can impact retirement eligibility or the computation of base pay under any of the three systems. First, some service members may be eligible for disability retirement, which differs from being discharged because of a disability. Disability retirement is something separate and apart from Veteran's Administration (VA) disability benefits. While disability retirement is outside of the scope of this current research, it is important for people to be aware that the presence of a disability might impact a service member's decision to retire, because it can impact the calculation of retirement benefits. Next, a service member's pay will be computed according to the provisions of the Tower Amendment if the Tower Amendment is applicable to that service member's situation (Powers, 2012). "The Tower Amendment was enacted to ensure that [one] will not receive a lesser amount of retired pay than [one] would have received if [one] had retired on a prior date, because of a recent retired pay cost-of-living (COL) adjustment. In the past, there have been times where the retiree COL exceeded the annual military pay raise, which would have resulted in more pay, had the member retired prior to the COL date. The Tower eligibility date is usually the day prior to the effective date of an active duty pay increase (Powers, 2012). Like disability retirement, pension calculations using that fall under the Tower Amendment are outside of the scope of this research, but service members should be aware that the Tower Amendment exists and may be applicable to them.
Final Pay System
The Final Pay system applies to those service members who entered into active duty prior to September 8, 1980 (Powers, 2012). Under the Final Pay system, retired pay amounts are determined by multiplying the service factor or multiplier by the service member's active duty base pay at the time of retirement (Powers, 2012). "To calculate retired pay, multiply years of service by 2.5% (cannot exceed 75%). Multiply the result by your final base pay. Allowances for housing, subsistence or other special pays are not included in any retired pay calculation" (USAA Education Foundation, 2005). "Under this system, members retiring at 20 years receive 50% of their base pay. The amount increases with years of service up to a maximum of 75% of base pay for those retiring at 30 or more years" (USAA Education Foundation, 2005).
The pros of the final pay system are numerous. First, the final pay system is easy to calculate. It simply looks at the service member's final pay. It does not require looking at historic higher pay or penalize those service members who received significant pay increases within three years of their retirement. It allows people to retire at 20 years at 50% of their highest base pay. It makes cost of living adjustments based on the actual consumer price index, which should mean that it keeps the pension payments in line with inflation and other changes in cost of living.
The cons of the final pay system are also numerous. First, while it may be unusual, it is not impossible for a service member of have a lower pay rate at retirement than historically during service, particularly if someone is a former commissioned officer. The final pay system does not allow the person to receive more than 75 of their base pay, so that there is no real incentive to stay in the service for a period greater than 20 years. Moreover, the final pay system does not have the option of a bonus, so that all pension benefits are payable over time. This limits the service member's ability to exercise discretion in personal investments, but also ensures that they cannot squander the money that they get from the bonus.
An example of a final pay scenario is a service member who first entered service prior to September 8, 1980. The service member retired in 2010, with 40 years of service, at a grade of 0-1E at retirement, with a 3.5% inflation rate, a 3.5% annual active duty pay raise, and a 28% tax rate. Initial pension payments would begin at $2,950 per month and by 2049 would be as high as $18,936 per month if the service member were to live for 40 years after retirement. The following charts, reflecting the service member's pay under these conditions, were generated by the Office of the Secretary of Defense, utilizing the Final Pay calculator, though it is labeled as a High-3 Calculator Output.
(Office of the Secretary of Defense, "Final Pay," 2012)
For service members who entered active duty after September 8, 1980 and prior to August 1, 1986, base pay is not calculated by looking at the final base pay, but by calculating the average of the highest 36 months of active duty base pay received (Powers, 2012). Furthermore, under the high-three system, the initial COLA will be reduced by 1% (Powers, 2012). To calculate base pay, one needs to "Multiply years of service by 2.5%, which equals 50% at 20 years and 75% at 30 years, the same as in the Final Pay System" (USAA Education Foundation, 2005). Once that result is found, one multiplies the "result by the average base pay for the highest 36 months of the member's career, which typically but not always will be the final three years of service" (USAA Education Foundation, 2005).
The pros of the high-three system are similar to the pros of the final pay system. It looks at the highest pay that the service member made, which means that if there has been any decline in pay (which may come with a decline in rank) then the service member would not be punished for having a lower ending pay than beginning pay. The high-three system is easy to calculate. Like the Final Pay system, the High Three system allows people to retire at 20 years at 50% of their highest base pay. It makes cost of living adjustments based on the actual consumer price index.
The cons of the High Three system are also numerous; it does not provide significant incentive to stay in the service more than 20 years. It also does not have the option of a bonus. Moreover, the final pay system does not have the option of a bonus, so that all pension benefits are payable over time. Perhaps the biggest drawback is that it averages pay rather than paying the same…