Study: Blended retirement won't harm retirees or force
A new study commissioned by the Marine Corps concludes that the new Blended Retirement System (BRS) won't endanger force retention under any reasonable set of economic and behavioral assumptions.
It also suggests that young career-minded service members who opt into the BRS, to get government-matching of their Thrift Savings Plan contributions, will still have potential career retirement benefits that most civilian peers would envy.
As the Defense Department last week launched a new BRS "Opt-In Course" to educate members being offered the chance in 2018 to choose the BRS, the think tank CNA released a report on how the plan would impact Marine Corps force objectives, as well as the lifetime take-home income of career personnel.
The report has a 17-word title and 10 co-authors and may be read online at: www.cna.org/CNA_files/PDF/DRM-2016-U-014008-Final.pdf.
Two of its authors are retired Marine Col. Jeffery Peterson, CNA's research team leader for fleet manpower operations, and Ann Parcell, a principal research scientist for the CNA manpower team. In a phone interview, they discussed why the BRS won't harm the forc, or plan participants if they are young enough when they shift to the BRS and if they commit to steady TSP contributions.
"This is a good news story," Peterson said. He said he had concerns when the CNA study began that the Military Compensation and Retirement Modernization Commission, which designed the BRS, might have used some unrealistic projections of member behavior or growth of TSP savings overtime.
"I was a little skeptical when we started varying a lot of assumptions. I thought we might find some very different things could play out" on changing personal discount rates, opt-in rates, contribution rates or return on investments.
"What we found was, under a wide range of assumptions, their results appear to be pretty stable (and will) keep force profiles looking like they are," Peterson said. So "if that was the goal, then they found a formula that accomplished it."
Under the BRS, careerists who serve 20 years or more receive 20 percent less in lifetime annuities. But the government will match member contributions to the Thrift Savings Plan (TSP) of up to 5 percent of basic pay. And between the eighth and 12th year of service, the BRS offers a continuation payment equal to at least two-and-a-half months' basic pay for active-duty or a month's basic pay to drilling Reserve members if they agree to serve four more years.
The commission sold its plan to Congress arguing the unfairness of legacy retirement that provides no government benefit if members leave short of 20 years. Under the BRS, participants leave with an enhanced TSP that can be rolled into civilian employer 401k plans, or they can stay in and see TSP contributions and investment earnings accrue to produce separate income streams later in life.
Though BRS retirees will draw less in retired pay and can't access TSP balances before age 59 without penalty, CNA notes that banks or insurance firms likely will offer retirees an income stream, payable against TSP accounts, which could replace some or all of reduced retired pay during post-military careers.
"There is a way for households to smooth their income," Parcell said, "especially with income that's promised in the future in a TSP. … There are markets out there where you can actually leverage what may be coming to you (and) mitigate, potentially, the retirement shortfall under the new system," she said.
The 2015 commission had estimated that the BRS would save the military about $18 billion a year in retirement costs by having participants rely on financial markets, and not the government, to grow a portion of their retirement package.
CNA looked only at the impact on Marine Corps budgets. It found that, when fully implemented, the BRS will save the Corps $122 million annually on active-duty enlisted retirement, $22 million on active-duty officer retirement, $1.5 million on Reserve enlisted retirement and $400,000 on Reserve officer retirement. That's a total annual savings of $143 million in a manpower budget of $14.5 billion.
In that light, Peterson said, the savings will be "relatively modest."
But the BRS will, in effect, thread a triple needle, CNA analysts agreed. That is, many more members will have a portable retirement benefit; enough of them still will be enticed to serve full careers, helped in part by a mid-career continuation bonus; and the plan will save retirement dollars for the military and taxpayers.
Anyone who leaves short of 20 years would be better off under the BRS because the legacy plan provides no retirement benefit, only access to TSP with no government matching. So perhaps the most interesting part of the CNA study for members is a comparison of "cumulative lifetime take-home income" under BRS versus legacy retirement, after 20 years, for enlisted (E-7s) and officers (O-5s).
To compare cumulative incomes under the two plans, CNA assumed that all members contributed 3 percent of basic pay to a Thrift Savings Plan. Only the BRS, however, provides government matching on that 3 percent, atop an automatic government contribution of another 1 percent basic pay into TSP annually.
Other key assumptions were that BRS participants accept a lump-sum continuation payment of 2.5 months' basic pay at the 12-year mark; that standard promotion paths hold; and that members are single until four years' service and married thereafter. CNA also assumed a 4.95 percent annual return on TSP investments and no early withdrawals. All calculations use 2016 constant dollars.
The E-7 who retires after 20 years at age 39 will have gained $7,243 more in take-home income, after taxes, due to the continuation payment, plus $29,875 more in TSP, the result of government matching.
After 20 years, however, the legacy plan member will draw 20 percent more in annual retired pay, resulting by age 85 in a cumulative annuity advantage of $247,127. But the BRS members' TSP account will see added real growth, valued at $190,389 by age 85. Considering taxes, the BRS E-7's take home income post service would be $29,563 less than that of the legacy plan retiree. The disparity in total lifetime take-home income would be even more narrow, with the BRS E-7 just $22,320 short, in 2016 dollars, of the legacy retiree.
Lifetime income comparisons for O-5s retiring after 20 years at age 42 show similarly modest differences. The legacy plan would give the officer $57,730 more in take-home income post-service and $46,373 more in total lifetime income.
BRS participants can match the total take-home income of the legacy plan if they just bump their TSP contributions from 3 percent to 4.1 percent (4.2 percent for officers) every pay period over their careers, according to the CNA report.
"It was what the (commission) was shooting for," Parcell said. "To design a plan that wasn't going to dramatically change post-careerists' income, as long as the careerist saved in the TSP" consistently over full careers.
Still, Peterson said, the success of the BRS will depend heavily on service programs to raise the financial literacy of members so they understand the importance of steady TSP contributions, investing to achieve higher returns and avoiding the temptation to stop TSP contributions or to make early withdrawals.
"If the services do that well, and people are making smart choices, you are going to hear a lot fewer complaints" about the BRS "than if we do it poorly and (career) people default to saying, 'This new system screws you over.'"