When the first wave of active-duty personnel who opt into the new Blended Retirement System next year start to retire a decade later, they will face a decision on retired pay so unusual that the Department of Defense Board of Actuaries has called it inappropriate and asked Congress to rescind the choice.
The decision they will face might be explained like this:
Congratulations on your pending retirement. Do you want your full immediate annuity? Or do you prefer to get part of its value in a discounted lump sum at retirement, in return for forfeiting either one half or one quarter of your retired pay until age 67, when you would see full annuities restored?
Lump-sum buyouts of pension obligations are common in the corporate world but not the formula Congress has prescribed for setting military lump sums. The amounts offered will be too large to ignore for many retirees. But the lump sum choice also will have members lowering the lifetime value of their own retirement.
Most disturbing to actuaries and other critics of blended retirement is that Congress ordered lump sums calculated using "personal discount rates," a concept that pension guardians don't recognize as actuarially sound or perhaps even fair. Personal discount rates measure an individual's preference for current dollars over promised future dollars. The higher the discount rate assumed for folks being offered lump sums in exchange for reduced annuities, the greater the savings realized by the retirement plan's designers, in this case the U.S. government.
In January, Defense Department officials announced the formula to be used for setting an aggregate personal discount rate for enlisted and officer retirees. It will combine an inflation-adjusted, federal bond date with an adjustment factor of 4.28 percentage points.
It's a formula incomprehensible to most of us. But Air Force Capt. Daniel Kopp, who has an economics degree from Purdue, is studying to be a financial planner and operates a financial advice blog called militarylife planning.com, has it figured out. He said that if adopted today the formula would support applying a discount rate of 7.3 percent.
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