Older military retirees like Marine Corps Master Sgt. Lanny Bauer, 68, of Stockton, Calif., do not begrudge service members for a string of annual pay raises that have exceeded wage growth in the private sector.
Every dollar they get is deserved and likely is needed to keep quality volunteers in wartime, he says. But Bauer also sees those active-duty pay raises, compared to annual cost-of-living adjustments for military retirees, creating a disparity between annuities paid to members retiring today and folks like him who retired 30 years ago.
“Unless I’m wrong, there’s at least a $500 a month gap right now” between his monthly retired pay and that of an E-8, also with 20 years’ service, who retires under 2008 basic pay scales.
Isn’t it time, Bauer asks, for the government to “re-compute” pay for older retirees?
Associations representing military retirees routinely field questions like this, particularly in years like this one when the active-duty raise, at 3.5 percent, was bigger than the cost-of-living adjustment for retirees, which was 2.3 percent. Indeed over the preceding decade, from 1998 through 2007, raises to basic pay, on which future retired pay is based, have exceeded retiree COLAs for eight of those 10 years. The exceptions were 2006 and 2007, when COLAs were a percentage point higher each year.
Why aren’t advocates for older retirees alarmed by this disparity?
The chief reason is that active-duty raises and retiree COLAs serve separate purposes. Annual COLAs, said Steve Strobridge, director of government relations for the Military Officers Association of America, are “to maintain the same retired pay purchasing power each member had at retirement.” They are based on inflation as measured by the government’s Consumer Price Index. Military retirees each year get the same increase as federal civilian retirees, survivors and social security recipients.
Active-duty pay raises are tied to private sector wage growth and recently have exceeded that growth to close a military-civilian pay gap. These raises are linked to the government’s Employment Cost Index, which tracks wage growth nationwide. The connection to the ECI, Strobridge said, “is essential to sustain a quality force and to maintain readiness.”
Beginning in the 1920s, and for five decades, retiree raises were tied loosely to active-duty pay increases. Then in 1958, with Congress planning to raise active-duty pay 10 percent, another retired pay “recomputation” was deemed to be too costly. Retirees saw no pay adjustment again until 1963 when the link was established between retiree COLAs and the CPI.
Since then active-duty raises and retirees COLAs have differed, and not always in favor of the active force. In six of 12 years from 1969 and 1980, retirees received two COLAs a year. In some years, they even received a 1-percent “kicker” to compensate for lost purchasing power due to time delays between when inflation was measured and a COLA was paid.
“From the mid-‘80’s through the mid-‘90’s,” Strobridge said, “COLAs were generally higher than active-duty pay raises,” primarily because the government intentionally capped military raises below the ECI.
Given that history, advocates for retirees know that economic or political change can swing the pendulum of higher pay adjustments back to retirees. It might even happen soon, given trends in fuel and food prices.
But what older retirees have seen since the late-’90s, are COLAs that generally have been smaller than active duty raises, which they see as creating deeper disparities in retired pay based on when a member retires.
“Higher-than-ECI pay hikes to close a significant pay gap are well deserved,” said Joe Barnes, executive director of the Fleet Reserve Association. “But it’s important to keep in mind that not everyone in the retirement community is receiving the richer retirement benefit. We point to this in discussing the drastic fees hikes proposed by the Defense Department.”
To assess the effect on retired pay, we asked Defense pay officials to compare current retired for some typical ranks and years of service, officers and enlisted who retired in 1998 versus those who retired this year. The results show newer retirees drawing higher retired pay, with the pay differences ranging from $200 to $300 a month.
Bauer’s own estimate of at least a $500 a month disparity with newly retired E-8s was off for another reason. He didn’t know that newer retirees, those who entered service on or after Sept. 8, 1980, come under a “high-three” retirement formula, which lowers their initial annuities significantly.
Older retirees’ annuities are based on a percentage of final basic pay. For example, given Bauer’s 20 years of service, his retired pay is set at 50 percent of final basic pay, plus annual COLAs received since he retired.
But high-three retirees who served 20 years have their 50 percent multiplier applied to average basic pay over their highest-three earning years, which typically means over their last three years on active duty.
Members who retired in 2001 after 20 years were the first group impacted by high-three. They also missed out on the string of above-average pay raises that followed. So an E-8 who retired after 20 in 2001 draws retired pay that is about $400 less a month than a 2008 retiree, and $440 less a month than for an E-8 who retired after 20 back in 1973.
That ‘73 group, it turns out, draws a bigger retirement than any other for 20 years’ service, having benefited from a pop in basic pay as the all-volunteer force began and also from that era of twice-yearly COLAs.
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