Too many opting out of valuable benefit plan

A typical officer retiring today who declines to enroll in the Survivor Benefit Plan lets the government off the hook for a subsidy worth $50,100 in "net present value," say Department of Defense actuaries.

The typical enlisted retiree who chooses not to enroll in the benefit plan is turning down a subsidy toward the spouse's financial well-being having a net present value of $22,300.

Net present value is the dollar amount a new retiree would have to invest at the time of retirement so that, when combined with monthly premiums, it would build an annuity for the surviving spouse of equal value to the Survivor Benefit Plan.

This is the yardstick to measure the value of the benefit plan. Here's another:

A 40-year-old retiree with a 38-year-old wife who elects fullcoverage on a $2,000 monthly retirement could expect to pay $62,000 in total premiums if he died at age 65. If his widow were to live just seven more years, until she reaches 70, she would receive $401,897 in benefits.

Anita Hattiangadi and Lauren Malone, scientific analysts for think tank CNA, used this last example in a Sept. 30 memorandum to the Marine Corps' deputy commandant. The memo suggested that too many retiring Marines are opting out of the Survivor Benefit Plan and likely won't get another chance to sign up.

The Survivor Benefit Plan is a great deal, pay officials say. That's been particularly true since Congress eliminated a sharp reduction in plan annuities that occurred at age 62 when surviving spouses became eligible for social security.

Despite the plan's recent improvements, including a premium "paid-up rule" after 30 years and attainment of age 70, many

retirees, with consent of their spouses as the law requires, turn down plan coverage. The take rate is particularly disappointing among new retirees from the sea services.

Sign-up rates in fiscal 2008, the latest data available, show that only 68 percent of married Navy members and 70 percent of married Marines elected Survivor Benefit Plan coverage as they retired. By contrast, 85 percent of new Army retirees and 82 percent of new Air Force retirees are buying coverage.

The results suggest the sea services aren't doing enough to educate their retiring members and spouses on the SBP plan.

Why is it such a good deal? For starters, the government subsidizes 47 percent of the cost, said Gary McGee, assistant director for military pay policy in the office of the secretary of defense. Commercial life insurance plans aren't subsidized. Indeed, insurance companies set their rates at least high enough to make a profit.

McGee calls the Survivor Benefit Plan a great benefit. Enrollees pay premiums equal to 6.5 percent of monthly retired pay. These are "before tax" dollars which already is an advantage over premiums paid for commercial insurance which are after-tax dollars. "This can make a significant difference," McGee said.

If a member dies before the spouse -- a probability of about 68 percent given relative ages and gender differences -- the surviving spouse gets an annuity equal to 55 percent of covered retired pay.

"I don't really envision anybody who should opt out of this unless they think by taking that 6.5 percent (of) retired pay, they could invest that some place where they could get a return equal to the amount of subsidization, which is nearly 50 percent," McGee said.

The Department of Defense Office of the Actuary ran numbers to illustrate the average value of the plan for a typical officer and enlisted retiree.

An O-5 retiring at age 42 has a life expectancy of 83. Assuming his wife is 40 years old at his retirement, the net present value of SBP premiums paid over the retiree's lifetime is $48,500. The net present value of the annuity payable to the surviving spouse, given her longer life expectancy to age 91, is $98,600. So the present value of the government's subsidy is $50,100.

An equivalent insurance payout for this officer retiree would need to be $590,000 to match the value of the Survivor Benefit Plan.

Life expectancy for an E-7 retiring at age 38 is 79. Assuming his wife is 36 years old when he retires, net present value of premiums paid over the retiree's lifetime is $27,700. The present value of the plan's annuity payable to the surviving spouse, given her life expectancy to age 90, is $49,000. So the net present value of the government subsidy for the SBP benefit is $22,300.

The equivalent commercial insurance payout at the retiree's death would need to be $350,000. Other ways to judge the relative value of the Survivor Benefit Plan are found at the Department of Defense actuary Web site: www.actuary.defense.gov. Look under "SBP Program" on the left side of the screen.