Military Compensation Retirement Modernization Commission (MCRMC)
Recommendation 1 for Pay and Retirement: Where is the “net pay neutral” position?
Have you heard of “blended families” as the new normal? The Military Compensation Retirement Modernization Commission suggests “blended retirements” for the new normal among military members and their families. A blended retirement is a portable retirement savings 401(k) plan with retention benefits and bonuses paid at milestones along the military career path. ROA suggests that thinking in terms of the “net pay neutral” position may help understand the retirement recommendation.
A position of “net pay neutral” helps determine the impact to each service member, with an eye toward the least amount of money coming out of each paycheck, if this recommendation goes forward. For example, “net pay neutral” would mean someone making $35,000 a year would take home $1,122.23 each pay period even if they invest in a 401(k). That would not happen under current tax laws and the commission proposal; their net pay would not be “neutral”: they would have less in their paycheck if they invested in the 401(k).
Currently, contributions you make into a 401(k) reduce your adjusted gross income, lowering your overall tax liability and how much pay you take home (net income). For example, if the salary of a single E-5 with over 8 years is $35,000 and they contribute 5 percent of their salary -- $1,750 -- annually into the commission’s proposed 401(k), the income tax saved is $310 annually, or $12.90 per paycheck. At this rate of contribution, their paycheck will be $1,062.21 or a reduction of $120 per month.
This can be a significant amount of money to forgo each month; it might pay an electric bill or daycare.
ROA Recommendation: As a minimum, ROA recommends allowing service members who make a modest salary (i.e. $60,000 or less) to contribute up to 5 percent without a reduction in take-home pay to achieve a “net pay neutral” paycheck; this can be done by adjusting taxable income for their 401(k) contribution. Changing the taxable income amount would reduce the tax burden and thus achieve the “net pay neutral” effect on take-home pay.
MCRMC Recommendation 1: The commission recommendation would help more service members save for retirement earlier in their careers, leverage the retention power of traditional Uniformed Services retirement, and give the Services greater flexibility to retain quality people in demanding career fields: The committee believes the current retirement system only works for 17 percent of service members who stay in 20 years or longer; 83 percent of the enlisted men and women would not benefit according to the report. Here is what the recommendation includes:
1 percent – Automatic Contribution by DoD.
3 percent – Auto-enrollment by each service member (with an annual opt out)
5 percent – Matching Funds are provided up to 5 percent by DoD.
12 years – Continuation Pay would be paid equal to 13 months of basic pay.
2.0 percent – Defined Benefit multiplier reduced from 2.5 percent.
The commission included additional recommendations in their report at http://mldc.whs.mil/. In the coming weeks, ROA will review each recommendation to gauge how it applies to the Reserve Components and how it affects service members and their families.