A Survey of Military Retirement Benefits

• Author: Major Samuel W. Morris
• Pages: 05

2003] SURVEY OF MILITARY RETIREMENT BENEFITS 133

A SURVEY OF MILITARY RETIREMENT BENEFITS

MAJOR SAMUEL W. MORRIS1

1. Introduction

   This survey is intended to give legal assistance officers an overview of the primary benefits associated with military retirement, and to serve as a starting point when researching basic retirement benefit questions. It explains the primary Department of Defense (DOD) and Department of Veterans Affairs (VA) retirement benefits and answers the most fundamental questions that pre-retirement and post-retirement clients and their family members often raise. In addition to explaining the three DOD retirement formulas, the VA non-disability medical benefit programs, and the authority for each, this survey also outlines VA burial benefits, educational benefits, home loans, and life insurance benefits.

   This survey does not cover topics such as the divisibility of military retirement pay pursuant to divorce proceedings,2 compensation for veterans with service-connected or non-service-connected disabilities,3 VA benefits available to dependents and surviving family members of deceased veterans,4 or the VA claims adjudication process.5

2. Department of Defense Retirement Pay Benefits

   Generally, regular and Reserve commissioned officers, warrant officers, and enlisted members may retire after completing twenty or more years of active federal service.6 Upon completion of twenty years of active federal service, service members are entitled to retirement pay.7

   1. The DOD Military Retirement Pension Formulas

   The DOD uses three formulas for computing non-disability retirement pay. The date that an individual first entered military service determines which formula is used to compute his retirement pay. This date is called the Date of Initial Entry to Military Service (DIEMS) or the DIEMS date.8 The following discussion highlights the three DOD military retirement formulas.

   1. Fifty Percent of Final Basic Pay (Fifty Percent Formula)

      Service members eligible for retirement pay under the "fifty percent of final basic pay" formula (Fifty Percent Formula) include those with a DIEMS date before 8 September 1980.9 The DOD computes monthly

      retirement payments under this formula at fifty percent of final basic pay after twenty years of service with an increase of two and one-half percent for each additional year served up to thirty years.10 For example, under the Fifty Percent Formula, a lieutenant colonel retiring with twenty-two years of military service will receive monthly retirement pay computed as follows:

      Final Monthly Basic Pay $6300 Multiplier (time in service (TIS) X 2.5% per year) x .55 Pre-tax Monthly Retirement Pay Amount $346511

      The DOD annually adjusts the monthly payments under the Fifty Percent Formula to protect the purchasing power of retirement pay.12 Service members retiring under the Fifty Percent Formula receive full inflation protection through annual cost of living adjustments (COLA) based on changes in the consumer price index (CPI).13

   2. Average of Highest Three Earning Years (High Three Formula)

      Service members eligible for retirement pay under the "high-three" pay formula (High Three Formula) include those with a DIEMS date between 8 September 1980 and 31 July 1986.14 The DOD computes monthly retirement payments under this formula similarly to the method used under the Fifty Percent Formula.15 The main difference between the

      Fifty Percent Formula and the High Three Formula is that the DOD applies the two and one-half percent increase (for each additional year after twenty years) to the average basic pay for the highest three earning years rather than the final basic pay at retirement.16 For example, under the High Three Formula, a lieutenant colonel retiring with twenty-two years of military service will receive monthly retirement pay computed as follows:17

      Average Basic Pay For Highest Three Earning Years

      ($6100 + $6200 + $6300 divided by 3) $6200 Multiplier = (TIS x 2.5%) x .55 Pre-tax Monthly Retirement Pay Amount $3410

      Similar to the Fifty Percent Formula, monthly payments under the High Three Formula receive full inflation protection through annual COLA increases based on changes in the CPI.18

   3. Military Retirement Reform Act (REDUX Formula)

      Service members eligible for retirement pay under the reduction in pay formula (REDUX Formula) include those with a DIEMS date after 1 August 1986.19 Acceptance of the REDUX Formula is contingent upon the service member's agreement to accept a mid-career bonus at the fifteenth year of service and remain on active duty for at least twenty years.20

      Under the REDUX Formula, service members have a choice between two retirement options. They may retire under the High Three Formula or under provisions of the Military Retirement Reform Act by electing to take a $30,000 career retention bonus during their fifteenth year of military service.21 To receive this bonus, the service member must agree to complete a twenty-year active duty career.22 The member may continue service

      beyond twenty years, but the service obligation only extends to twenty years.23

      The DOD computes monthly retirement payments under the REDUX Formula at forty percent of the average of the highest three earning years of basic pay after twenty years of service.24 The service member then receives a three and one-half percent increase per year for each additional year served up to thirty years.25 For example, a lieutenant colonel retiring with twenty-two years of military service will receive monthly retirement pay computed as follows:26

      Average Basic Pay For Highest Three Earning Years

      ($6100 + $6200 + $6300 divided by 3) $6200 Multiplier = [40% + (TIS over 20 years x 3.5%)] x .47 Pre-tax Monthly Retirement Pay Amount $2914

      A twenty-four year retiree will receive a 54% multiplier, a twenty-six year retiree will receive a 61% multiplier, a twenty-eight year retiree will receive a 68% multiplier, and a thirty-year retiree will receive a 75% percent multiplier.

      The REDUX retirement formula and the $30,000 career retention bonus are considered components of a package deal. The service member receives the entire $30,000 bonus shortly after he commits to the twenty-year service obligation at the fifteenth year of service.27 If the member does not complete the twenty-year obligation, however, he or she must

      repay a pro-rated share of the bonus.28 The combination of the bonus and monthly retirement pay may be advantageous to some individuals. The REDUX portion provides retirement pay based on length of service and the retention bonus provides funds for savings, investing, or starting a business upon retirement.29

      The DOD also computes the annual COLA adjustments under the REDUX Formula differently than under the two preceding retirement formulas. Under the REDUX Formula, the DOD computes COLA at one percent less than inflation, as measured by the CPI.30

      The recomputation of benefits when the retiree reaches age sixty-two is another unique component to the REDUX Formula. Retirees experience two adjustments to REDUX retirement pay at age sixty-two. First, the retiree's pay is raised to the amount he would have received had he retired under the High Three Formula.31 Thus, a twenty-year retiree will receive a 50% multiplier, a twenty-two year retiree will receive a 55% multiplier, a twenty-four year retiree will receive a 60% multiplier, a twenty-six year retiree will receive a 65% multiplier, and a twenty-eight year retiree will receive a 70% multiplier.32 The DOD applies this multiplier to the retiree's original average of his highest three years of basic pay.33 For example, a lieutenant colonel retiring with twenty-two years of military service will

      receive an increased amount of monthly retirement pay at age sixty-two, computed as follows:34

      Average Basic Pay For Highest Three Earning Years

      ($6100 + $6200 + $6300 divided by 3) $6200 Age 62 Multiplier = (50% + (TIS over 20 years x 2.5%)) x .55 Age 62 Pre-tax Monthly Retirement Pay Amount $3410

      Secondly, in order to restore the purchasing power lost since retirement, the retiree's monthly retirement payment is recalculated to the amount payable had full CPI protection been in effect.35 In essence, the retiree receives a one-time catch up of full CPI for each previous retirement year to reach a recalculated monthly retirement amount.36 This recalculated amount will be the same amount as if the retiree had retired under the High Three Formula.37 Thus, at age sixty-two, the REDUX and High Three monthly retirement payments are the same.38 After age sixty-two, however, annual COLA adjustments for REDUX recipients returns to the original formula of CPI minus one percent, for life, making the High Three Formula a more attractive retirement alternative over time.39

3. Veterans Administration Benefits

   1. Eligibility Requirements for VA Benefits-"Veteran" Defined and the Impact of Characterization of Discharge

      To become eligible for most VA benefits, "the claimant must be a veteran or the dependent or survivor of a veteran."40 The VA defines a "veteran" as a person who "served in the active military . . . and who was discharged or released therefrom under conditions other than dishonorable."41 The term "under conditions other than dishonorable" poses a

      problem for judge advocates because this statutory definition is different from the language the military uses to characterize its discharges.42

      The VA considers most honorable and general discharges as "other than dishonorable," qualifying former service members as "veterans" under the statute.43 Discharge under other than honorable conditions and bad conduct discharges, however, do not automatically disqualify a former service member and his or her dependents from receiving VA benefits.44

      The regional VA office reviews such cases and makes a character of service determination to determine whether the military separated the service member under dishonorable conditions or other than...