Military Active Duty Retirement Systems Explained

Introduction to the Military Retirement System

The military retirement system is controversial. For many retired military members, it seems like an excellent retirement system, but others—mainly Congressional representatives—believe that the system is unduly expensive. Both positions have their merits. On the one hand, the military retirement system is far superior to the retirement compensation packages offered in most civilian jobs. On the other hand, the retirement system does cost taxpayers a significant amount of money. Perhaps that is why people have begun discussing overhauling the retirement system. If they did, it would not be the first major overhaul in the system's history.

When examining the military retirement system, it is critical to recognize that there is not a single unified plan. Instead, there are three distinct retirement systems, and which one applies to a particular service member is determined by when that person entered military service. As such, the military retirement system can seem unduly cumbersome and difficult to understand to outsiders. This paper describes each of the three military retirement systems—the Final Pay retirement system, the High-Three retirement system, and the Career Status Bonus/REDUX system—explains the eligibility requirements for each, describes how they operate, and compares their pros and cons.

The biggest perk of the military retirement system is that it is not dependent on a particular retirement age, which is the case in many civilian retirement systems. Unlike most retirement plans, the Armed Forces offer a pension, with benefits, that begins the day a member retires, regardless of age. That means a service member could start collecting a regular retirement pension as early as age 37. Moreover, that pension check grows with a cost of living adjustment each year (Military.com, 2012). Military members can, and oftentimes do, retire from the military while embarking on a second career, thereby augmenting their income during that period.

However, there are drawbacks to military retirement pay as well. First and foremost, there is no "vesting" in the military retirement system—no special retirement accounts, no matching funds provision, and no interest (Powers, 2012). In other words, a service member either qualifies for retirement pay or does not. In order to qualify, a person must honorably serve in the military for more than 20 years, with the exception of a few early retirement programs that have been implemented at various points in time to reduce the size of the armed forces (Powers, 2012).

It is also critical to look at the difference between enlisted and commissioned service members. A commissioned officer, or an enlisted member with prior commissioned service, must have at least 10 years of commissioned service to retire at his or her commissioned rank (Powers, 2012). Commissioned officers with fewer than 10 years of commissioned service who voluntarily retire do so at their enlisted ranks, and only the highest 36 months of active duty enlisted base pay counts for retirement computation (Powers, 2012). Therefore, while a service member can retire at 20 years and receive retirement benefits, the decision of when to retire may be influenced by multiple factors.

An additional difference between civilian and military retirees is that military retirees can be recalled into service. Under Department of Defense Directive 1352.1, service members with 20 or more years can be called to active duty without their consent if it is deemed necessary for national security. In practice, however, the chances that a military retiree would be recalled to active duty after age 60, or after having been retired for more than five years, are slim. The Department of Defense categorizes retirees into three groups, with Category I being the most likely to be recalled and Category III the least likely. Individuals over the age of 60 are placed in Category III, the same category as individuals with disabilities; recall of Category III retirees is extremely unlikely (Powers, 2012). Nevertheless, the possibility of recall is directly tied to the receipt of retirement benefits—those who leave before 20 years of service are not subject to the same recall conditions.

It is also important to understand how time of service is computed for the purposes of determining pension payments. For all plans, years of service includes credit for each full month of service as one-twelfth of a year. For officers, "years of service" includes all active service, periods of inactive reserve service prior to June 1, 1958, ROTC active duty time prior to October 13, 1964, constructive service credit for Medical and Dental Corps, and drills performed while in the inactive reserve after May 31, 1958. For Fleet Reservists and all other enlisted retirees, "years of service" includes all active service, active duty for training performed after August 9, 1956, any constructive service earned for a minority or short-term enlistment completed prior to December 31, 1977, and drills performed while in the Active Reserves (Powers, 2012).

While members may choose to retire at any age under all three systems, provided they have served 20 years, there are important distinctions among the three plans. Critically, individual service members do not choose which system applies to them—eligibility is determined by the date of entry into service. Those who entered the service prior to 1980 are eligible for the Final Pay retirement system (Military.com, 2012). Those who entered between September 9, 1980 and August 1986 are eligible for the High-36 system (Military.com, 2012). Those who entered after August 1986 are covered under the REDUX framework, meaning they have the option to choose either the High-36 retirement system or the Career Status Bonus/REDUX (CSB/REDUX) system; the High-36 system is the default for those who fail to make an election between the two (Military.com, 2012).

There are also notable similarities among the three systems. Under all three, if a person serves 20 or more years, that person is eligible for a pension based on a percentage of basic pay. Likewise, under all three systems, 40 or more years of service yields a pension based on 100% of basic pay (Military.com, 2012).