After a long silence on the issue, the Pentagon has sent its formal recommendations for changes to the military retirement system - changes that include a "blended" retirement option that includes a smaller pension plus government contributions to an individual retirement account.
The Pentagon's Changes
We've gone over some of the details of the plan proposed by Congress, which is broadly similar to the plan submitted by the Department of Defense. One small change requested by the DoD is the elimination of the lump-sum payment option after 20 years of service - under the Congressional plan soldiers could opt for a single lump-sum payment instead of monthly pension payments. In general, the lump-sum payed out much less than the traditional monthly payments, and its elimination should reduce the confusion in comparing payout options for those soldiers retiring after 20+ years.
Another change requested by the Pentagon was adjusting the "continuation bonus" that pays out at least 2.5x a soldier's monthly salary after 12 years if they sign up for at least an additional 4 years. The Pentagon requested more flexibility in continuation payments and would likely result in more and higher cash payments for mid-career troops. The "mid-career" years - from around year 8 to 16 - are where many soldiers leave the military, and having more frequent and higher paying bonuses during this period would boost retention, according to deputy assistant secretary of defense for military personnel policy Anthony Kurta.
The "Blended" Retirement Plan
The cost of these payouts would be offset by a reduction in the pension payout for those that retire after 20 years or more - the Pentagon's recommendation include a 20% cut to pension payouts. This decrease would be offset by the Thrift Savings Plan (TSP) that would be automatically created for each soldier. The DoD also suggested that government contributions into a soldier's TSP start at 1% (with the soldier's voluntary contribution at 3%), and the account is legally transferred to the soldier after 2 years of service. After 4 years of service, the government would match a soldier's contribution at up to 5%. This matching would continue for the duration of the career, and allow a 6% contribution by the government for a 5% contribution by the soldiers. Soldiers that serve 20 years or more would still receive a (somewhat smaller) pension payout in addition to the TSP payments.
Compared to the Current System
Current soldiers would have the option to stick with their current retirement/benefits plan, or adopt the new blended plan. The Pentagon hopes to have the plan in place for new soldiers by January 2018, and give current soldiers a two-year window to decide between the old and new plan by then. The DoD projects that if a soldier invests 3% of their pay into the TSP (the default amount), after 20 years their overall retirement benefit will be the same as the current system. Those financially-savvy individuals who invest the maximum matching amount could be much better off.
It's unclear whether this plan will save the DoD and taxpayers money in the long run - much depends on how much individual soldiers invest into their TSP accounts, since the government will be matching those contributions (up to 5%).
Although opposed by some groups, the proponents of this plan see it as a way to give a modest retirement benefit to those soldiers who serve less than 20 years, and the TSP and government matching will (hopefully) get soldiers interested and educated about financial matters and their retirement benefits.
You can read more about the Pentagon's recommendations by downloading the .PDF file below.