The Army needs to find ways to keep it’s costs under control and replacing the current retirement system with a 401(k) system is one that should be done right now.

*WARNING* : Long and number filled article ahead!

      For those that don’t know the military has been reducing and restructuring it’s retirement benefits for some time. The programs offered vary but the  most common for military who entered service after 1986 are High-3, Redux, and Redux-2. The details of each are not terribly important here but suffice to say each basically offers a method of retirement which will garner a retiree a permanent paycheck equal to roughly 40-60% of their pay-grade’s paycheck when they retired.

Example (simplified (Don’t bother writing with exact corrections… this is just an approximation)) :

     A Sergeant Major (E-9) (the highest enlisted grade) retiring this year with enough years of service to qualify for 50% of their active duty pay would receive :

$5,512 per month *.50 = $2,756 per month (not bad for not working) (Pay charts are here)

(Don’t bother writing with exact corrections… this is just an approximation)

A General (O-10) with the same:
$14,000 per month *.50 = $7,000 (Jesus H. Christ!)

     Not a bad deal eh? Well most retirees do not make it quite that far up into the ranks. Lets try it with more modest careerists:

Sergeant First Class (E-7)
$4,204 per month * .50 = $2,102 (also not bad but not huge either)

Lieutenant Colonel (O-5)
$7,373 per month * .50 = $3,687 (Tidy… but not extravagant)

     Keep in mind that this just uses base pay and doesn’t figure in all the additional pays you receive on active duty. Active duty folks make quite a bit more than these numbers might imply. My highest paid year in the Army as a Sergeant E-5 with a bunch of years of service topped out at around $50,000 counting language pay, housing allowances, free health care, combat pay, imminent danger pay etc… My base pay though was less than $30,000. the other allowances add up too :

A General (O-7 or higher) living in Maryland is allotted almost $28,000 per year just for housing costs. Nice.

     If our General leaves the military at age 50 and lives until he is 70 the Military will end up paying him in excess of 1.7 million dollars over the course of his retirement (allowing for annual raises).
    SGM: Over $700,000
    SFC: Over $500,000
    LTC: Over $900,000

     This system isn’t terrible by any means but it is terribly inefficient as far as spending goes. The entire cost of the payments is footed by the taxpayer for the life of the soldier. With a 401(k) program the taxpayer’s commitment ends when the soldier leaves the military.
     401(k)’s (in simplified fashion) work like this as a general rule:

     Employees (soldiers) make a monthly contribution to an account which is tax deferred. A portion of the contribution is matched by the employer. Usually this amount ranges from 5-15% of the employees salary.  Thus an employee making $30,000 per year with a 5% match can have up to $1,500 in matching contributions made by their employer (This is a major factor as compared to simple IRA’s). The employee is not entitled to the employers matching amount until after a few years (generally the longer you stay the more of it you get). 
     This money is then usually invested amongst a host of options chosen by the employee or by a financial management company. The money earns interest or dividends depending on how the employee elects to have it invested.
     Since the contributions are tax-deferred this reduces the employee’s current taxable income (very nice) while saving for retirement (even nicer).

A low-ball example of the results:

Assumptions:
The soldiers sucks and doesn’t get promoted very well capping out with an average of E-5 pay for her career (either they are stupid or stubborn).

Stingy Congress only gives 2% per year in raises

Base salary average: $22,248 per year (crappy for a 20 year career)

Annual rate of return: 4% (horrible!)

Average Monthly contribution: 5% (~$93)

Yearly Taxpayer contribution: 5% (Very low, ~ $1,112/yr)

Results:
Total Taxpayer cost = $22,240 (Would be 2 years of current retirement cost)

Payout = $80,708 (this is enough to start a small business easily)

    The alternative is the soldier “retiring” on ~$11,000/year that the taxpayer could well end up paying for 40 years at a cost of over $500,000 (adjusting for inflation and raises).
     I know $80,000 isn’t a ton of cash but that is the worst of worst case scenarios and it still isn’t bad for a 38 year old!

Let do a more reasonable scenario:

Congress is moderate and allows 4% annual increases in salary

Averages E-6 pay for 25 years

Base salary average: $36,516 per year (decent but not huge for a 25 year career)

Annual rate of return: 6% (still very modest over 25 years in the USA)

Monthly contribution: 7% (~$213)

Taxpayer Contribution: 7% (~$2,556)
Results:
Taxpayer cost = $63,900

Payout :  $438,230 for a 43 year old at a cost to the taxpayer of less than 3.5 years of current retirement pay. That is a massive shift folks.

Last scenario (a moderately successful enlisted career):

Congress sticks with 4% increases

Soldier averages E-7 pay for 27 years to retire at age 45.
(Why no Officers? Cuz F*ck em! That’s why!)

Base salary average: $42,142 per year

Annual rate of return: 7% (most 401(k) use 8% as a starting point)

Average Monthly contribution: 9% (~$316)

Taxpayer contribution : 9% ~($3,792)

Results:

Taxpayer cost = $102,384 (Less than 5 years of retirement pay)

Payout: $902,909. (If this isn't a significant amount of cash then I don't know what would be)

Conclusions:

     Frankly the 401(k) not only saves the taxpayer massive stacks of money, but it also changes the soldier’s post-military status by an order of magnitude. The retiree wouldn’t just be a middle class person on a stipend but rather they would be in the position to become business owners, home owners, and entrepreneurs if they wanted to be.
     It is also plain to see that even if taxpayer matching was higher than my last example it would still be cheaper than paying for 10+ years of retirement pay.
     I would rather have a class of 40 something business people than a class of 40 something pensioners living in my neighborhood! Let’s set up our soldiers for success and not mediocrity.
 

* I will be happy to provide the links to the tools I used for these calculations on request.