By Tom Philpott: Military Update
More than 800,000 military retirees who declined the Survivor Benefit Plan at retirement will get another chance to buy into a much-improved program, starting this fall. But delayed enrollment won’t be cheap, particularly for retirees who left service during the last six years.
Congress voted last year not only to raise SBP benefits, by phasing out a sharp drop in payments that surviving spouses saw at age 62, but also to allow a year-long “open season,’’ which will begin Oct. 1.
Under SBP, retirees forfeit 6.5 percent of monthly retired pay as plan premiums. In return, surviving spouses, ex-spouses or dependent children receive an annuity when retirees die. Surviving spouses, for example, get 55 percent of “covered’’ retired pay until age 62, when benefits drop as low as 35 percent.
Congress voted to end the age-62 benefit drop in four steps. Monthly SBP for 270,000 older beneficiaries will climb to 40 percent of covered retired pay in October, to 45 percent next April, to 50 percent in April 2007 and to 55 percent in April 2008. The value of the added benefits is about $6.8 billion over 10 years.
Retirees who turned down SBP at retirement have a better plan to consider. They can buy in for a lump-sum payment and future premiums. The buy-in must include all missed premiums since retirees’ initial SBP eligibility, plus interest of 6.25 percent a year, the same rate Defense actuaries use to calculate the “normal cost’’ of sustaining the military retirement fund to protect future benefits.
Congress directed that buy-in premiums include a third element, an actuarial increase, if the open season would add “risk’’ to the retirement fund. The actuaries decided the simple buy-in formula is fine for members retired at least seven years. But those retired six years or less will have to pay more. Their lump-sum payments are to be set high enough that they wipe out any government subsidy for SBP these retirees would have received had they elected coverage at retirement. The subsidy recently has been 17 percent of SBP costs. Now the only costs the government will cover of these newer retirees will be the added benefits payable after age 62.
Steve Strobridge, director of government relations for the Military Officers Association of America, called the buy-in premiums for recent retirees “ridiculously high.’’
A member retired less than a year will face a buy-in equal to 38 months of premiums. A retiree who left more than a year ago but less than two years ago will face an SBP buy-in equal to 48 months of premiums.
“It’s just an inordinate penalty,’’ said Strobridge. “For a guy who’s been retired one year, they are making him pay four years worth of premiums. That just doesn’t make sense.’’
Air Force Lt. Col. Ellen G. Krenke, a press officer for DoD pay officials, said the higher charges for delayed enrollment by recent retirees reflect the fact that SBP premiums “are front-loaded’’ as with whole-life insur-ance. Retirees with more premium years to pay back will have larger buy-in obligations, Krenke said. The bigger the buy-in, the smaller the risk that a retiree will draw more in benefits than he or she pays in premiums. For members retired seven years or more, there is no risk to the retirement fund, and therefore no need to end their government subsidy of SBP.
Tom Philpott can be contacted at Military Update, P.O. Box 231111, Centreville, Va. 20120-1111, or by e-mail at: email@example.com