Military Pension Guarantees versus Civilian Pension Plan Guarantees
My Military Pension Guarantees…are they the same as my Civilian Company’s Pension Plan?
Service members who remain on active duty or serve in the Reserves or Guard for enough period (usually a minimum of 20 years) may retire and receive retired pay. Members who become disabled while on duty may be medically retired and receive a disability retirement.[i] Depending on the rank of the retiree, the pension can range from a couple thousand dollars a month to upwards of fifteen thousand a month.
Private sector employees, (Civilians) don't receive entitlements like Social Security and Medicare until they are 65 years old. On the other hand, military retirees generally begin collecting benefits in their 40s. Generally, the average age of officers when they retire is 47 and the average age of enlisted soldiers when they retire is 43.[ii]
Many of these military retirees get to work in great private sector jobs when they retire out of the military and go on to work another 20 years or so. They are blessed with yet another pension plan. God Bless America!
So, the question that is often asked of Financial Professionals servicing the military markets: “Is my military pension guarantees the same as my company’s pension plan?”
The answer is maybe…Maybe not. Let’s take a deeper dive.
First, you need to know that from the 1930s through the mid-1970s, defined benefit pension plans were the predominant form of private pension plans in the country. These plans, which guarantee lifelong benefit payments at retirement, are based on a worker’s salary, age, and years of service. The percentage of preretirement income that a defined benefit plan replaces varies from employer to employer. Generally, the longer a person stays with the same employer, the larger the pension. Because benefits are linked to a worker’s salary level, which presumably will continue to rise, the size of the pension will grow fastest in the final five to ten years on the job. Typically, such plans are designed to replace between 60 percent and 70 percent of an employee’s pre-retirement income.
Companies have made a paradigm shift away from traditional defined benefit pension plans toward programs that require workers to fund the benefit and assume more of the investment risk. These types of plans are known as Defined Contribution Plans.
Profit Sharing Plans, Stock Bonus Plans. 401(k) Plans, 403(b) plans, TSP and 457 plans are all forms of Defined Contribution Plans[iii] that do don’t guarantee any specific future benefits; the responsibility for any future payout is placed directly on the employee, teacher or service member who decides how much to contribute and directs where funds should be invested. Under a defined contribution plan, the amount of future benefits an employee will receive is not currently known. Instead, the actual benefit will depend on the amount of contributions plus any investment earnings, expenses, gains, losses, and forfeitures. The length of time that an employee participates and the age at which he or she retires also will affect the amount of an employee’s future benefits.
As mentioned earlier, many of these military retirees go to work for companies that may still have Defined Benefit Plans. This is the focus of this discussion.
Certainty and Income Increases
First, while state and federal (Including FERS employees and military pensions) are typically adjusted for inflation, most private pensions are not. Unfortunately, many civilian workers who received retirement payments under a ‘Defined Benefit Plan’ do not see an annual automatic cost of living increase. You may see or hear these increases referred to as COLAS[iv]. Second, military retirees pension payments not only enjoy COLAS, their payments are guaranteed by the Department of Defense and the United States Treasury Department. So, if G.I Jane retired as an E-7 at 20 years this year, she would receive approximately 50 percent of her base pay…plus COLAs for the rest of her life. This amount would vary based on whether she retired under the traditional retirement plan or the new blended retirement plan. For our purposes…we are using the traditional (Defined Benefit Plan)[v]
Some Certainty and Generally No Income Increases
Civilian pensions are generally guaranteed by the Pension Benefit Guaranty Corporation (PBGC). Congress set up PBGC to insure the defined-benefit pensions of working Americans. Defined-benefit pension plans are traditional pensions that pay a certain amount each month after you retire. If you have a pension from a private-sector job, you are probably one of the 44 million Americans covered by PBGC insurance protection. PBGC insures nearly 26,000 pension plans. The monthly guarantee is not extended to Defined Contribution Plans such as 401k, and 403b plans e.g. TSP and TSA plans. The PBGC covers only Defined Benefit Plans. This monthly guarantee is quite different from your monthly military guarantee. The PBGC maximum guaranteed amount is generally based on your age when you first start receiving benefits from PBGC. However, if your pension plan fails while your employer is in bankruptcy, special rules apply.[vi]
For example, in 2018, a Commissioned Officer (0-8 0) with over 27 years retired. He would receive approximately $14,268.30 for life…with COLA guaranteed. It may be just a little less if he chose the Survivor Benefit Plan (SBP). The nice retirement paychecks end with the death of the service member. SBP will allow retiring service members to purchase coverage that provides monthly income to survivors after the service member’s death. SBP coverage is supplied at no cost while in active service. During retirement, a monthly deduction is taken from your pay to pay for your SBP coverage. This can be no more than 6.5 percent of your gross retired pay. Therefore, I point out that the monthly payment may be a little less[vii].
So, let’s say that the retired office worked in the civilian sector for twenty years and retired at age 67. He received $10,234 from his civilian job pension, He would receive this if the company’s pension funding would sustain this level of payment. Unfortunately, his company ran into financial difficulty and had to cut pension funding. They greatly reduced his retirement check but the PBGC stepped in and backstopped the losses. That was the good news. The not so good news is that the PBGC maximum guarantee is $5,902 (2018 Joint and 50% Survivor Annuity). This looks great…but his pension payments were $10,234 a month. Sadly, he would see a decline in retirement income of $4,332 a month.
Here's the deal. Companies can go bankrupt. The United States Treasury…not so much.
GE - GM - and US Steel
Let look at the General Electric Company (GE). One of America’s Flagship companies. It is facing a $31 billion deficit in its pension plan. GE owes benefits to at least 619,000 people…including the almost 300,000 retirees who currently receive defined pension benefits, as well as the 227,000 ex-GE employees with vested plans.
Then there was General Motors (GM). Back in 1999, the automaker spun off Delphi Corp., its auto-parts arm, along with its pension. When Delphi went bankrupt in 2005, GM was forced to take back some of Delphi liabilities. GM, had difficulties during the Great Recession in 2008, leaving the underfunded plans for 70,000 Delphi workers and retirees in the hands of the Pension Benefit Guaranty Corp. Because of the size of Delphi’s pension deficit, which exceeded $6 billion, and a legal limit on how much the PBGC could cover, some retirees were left with less than what they were promised.[viii]
United States Steel Corp.'s freezing of its defined benefit plan puts it on a path to ending a pioneering retirement program that led to a transformation of both employee benefits and investment management. The freeze to the $6.3 billion pension plan, which was announced by Pittsburgh-based U.S. Steel on Aug. 21, comes as no surprise to consultants and academics. Corporations have been moving away from defined benefit plans for much of the 2000s.[ix]
What PBGC Does Not Insure
While we insure most private-sector pension plans, Congress has also defined exceptions that PBGC does not insure. For example, PBGC does not insure[x]:
federal, state, and local/municipal government pensions,
pensions associated with religious institutions (including hospitals and schools with religious affiliation),
pensions for small professional practices (a doctor, lawyer, or other professional with fewer than 25 employees),
employee stock ownership plans (ESOPs),
thrift savings plans, or
money purchase plans.
So, we end with the question answered “My Military Pension Guarantees…are they the same as my Company’s Pension Plan?” So now you know. Companies can go bankrupt. The United States Treasury…not so much.
Consult with your Human Resource Department concerning your retirement plan.
Consult your company’s website for employees. | PBGC Search:
Find your PBGC Maximum Benefits |
RESOURCES and REFERENCES
[i] Military Compensation:
[ii] Cutting Retiree Benefits: A Sore Subject for Military: National Public Radio |https://www.npr.org/2011/12/04/143115964/cutting-retiree-benefits-a-sore-subject-for-military
[iii] Defined Contribution Plans |
[iv] Can Your Pension Plan Afford to Give COLAs? |
[v] Military Pay Charts |
[vi] PBGC Maximum Benefits | https://www.pbgc.gov/wr/benefits/guaranteed-benefits/maximum-guarantee#2018
[vii] Survivor Benefit Plan |
What You Need to Know About Former Spouse SBP |
[viii] GE’s $31 Billion Problem |
[ix] Pensions and Investments Magazine |
[x] What PBGC Does Not Insure: