ILR School

Military Retirement: Background and Recent Developments

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The military retirement system is a government-funded, noncontributory, defined benefit system that has historically been viewed as a significant incentive in retaining a career military force. The system currently includes monthly compensation for qualified active and reserve retirees, disability benefits for those deemed medically unfit to serve, and a survivor annuity program for the eligible survivors of deceased retirees. The amount of compensation is dependent on time served, basic pay at retirement, and annual Cost-of-Living-Adjustments (COLAs). Military retirees are also entitled to nonmonetary benefits including exchange and commissary privileges, medical care through TRICARE, and access to Morale, Welfare and Recreation (MWR) facilities and programs. Currently, active component personnel are eligible for retirement or “vested” after completing 20 years of service (YOS) and have a choice between two options (High-Three or Career Status Bonus/Redux) based on career expectations and the individual’s financial situation. Reserve personnel are eligible for retirement after 20 years of creditable service based on a points system, but do not typically begin to draw retirement pay until age 60. A third category of retirement is disability retirement. In FY2015, $56 billion was paid to approximately 2.3 million military retirees and survivors. Given the size of the program, some have viewed military retirement as a place where substantial budgetary savings could be made. However, others have argued that past modifications intended to save money have had a deleterious effect on military recruiting and retention. Military retirees, families, and veterans’ service organizations closely monitor potential future changes to the retirement system. When considering alternatives to the current system, Congress may choose to consider the balance between budget constraints and the needs and concerns of this constituent group. The National Defense Authorization Act (NDAA) for FY2013 established a Military Compensation and Retirement Modernization Commission (MCRMC) to provide the President and Congress with specific recommendations to modernize pay and benefits for the armed services. The commission recommended changing the current retirement system from a purely defined benefit system to a blended system of defined benefits and government contributions. Many of the MCRMC recommendations were adopted by Congress in the National Defense Authorization Act for FY2016 (P.L. 114-92). The new system under P.L. 114-92 will allow more servicemembers to accrue retirement savings earlier in their careers through contributions into the Thrift Savings Plan (TSP) coupled with government matching and early vesting. It will also reduce the defined benefit multiplier for calculating the retirement annuity from 2.5% to 2.0%. The new multiplier will provide servicemembers retiring at 20 years of service with 40% of their base pay at retirement rather than 50% under the current system. The new changes will go into effect on January 1, 2018. At that time all entering servicemembers will be enrolled in the new system, existing servicemembers and retirees will be able to remain in the old system, and those with less than 12 years of service prior to January 1, 2018, would be able to opt into the new system.

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military; retirement; benefit system; savings


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