I plan to run a multi-part series on the Survivor Benefit Plan over the next few months. This first post pays the groundwork for understanding the underpinnings of the plan that takes care of military families after their service member dies.
In my experience, it surprises more than a few military members to learn that when they die, their pay stops. If they have not paid into Survivor Benefit Plan (SBP) or set aside ample savings, their surviving spouse is effectively left with only social security as a safety net. Given the geographic instability and resulting difficulties finding sustained, well-compensated employment, military spouses are at an acute risk they might otherwise not face if their spouse had not served for 20+ years. SBP is one way to fix this.
Enacted in 1972, SBP provides money for surviving spouses and/or children. SBP replaced a system that was paid for by military members that was actuarially neutral, but that meant that military members were on the hook for most of the costs, so only 15% of Retirees opted in. Today’s SBP’s opt-in rate is approximately 67% across the services, but the cost – a whopping $3.68 billion – is borne largely by the U.S. taxpayer nowadays. Participation rates have increased as the benefit has become more generous – having risen from 58% of all members retiring in 1993 to current levels. Table 1 from the most recent Congressional Report on SBP shows the numbers in detail.
Approximately 1.1 million military retirees are enrolled in SBP. Members in active service do not need to be enrolled to be eligible for benefits (I’ll go into the specifics of active duty eligibility in a future article in the series). While I was not as surprised on the ratio of participation from officers versus enlisted given the discrepancy in size of retirement check, I found the following data on what services participate most to be surprising since the Army loves self-flagellation on the topic of Soldier money management:
I’m sure it will come as a shock to many Army folks to see Soldiers near the top of the opt-in rate, but my guess is that the Navy and USMC do not automatically opt their folks in (like the Army and USAF), so their participation rates are lower.
Under 10 U.S.C. 1452(a), retirees pay 6.5% of their retired base pay each month to participate in SBP. For example, an E-5 with exactly 20 years of service, whose salary is $1,616 (indexed to inflation), would pay $105 per month ($1,616 x 0.065). Automatically enrolled, each retiree must actively opt out of SBP, which also helps explain the high participation rate. If service members aren’t married and don’t have kids when they retire, but have either of those life events in retirement, they have one year to opt in.
Once enrolled, a retiree can generally not opt out of SBP; however, a few exceptions apply:
· Upon request between the 25th and the 36th month of retirement (with spouse concurrence);
· Receiving a VA rating of totally disabled;
· If an election was made while the member was deemed mentally incompetent and then subsequently determined to be mentally competent (rarely if ever the case); or
· Upon divorce from a designated beneficiary (depending on requirements imposed by a court-ordered decree).
How SBP repays you
The maximum SBP benefit is 55% of the base amount of military retired pay at the time of the retiree’s death – though the retiree can elect less coverage (subject to a $300 minimum).
Depending on the option the service member chooses, the money is typically paid to their spouse until the spouse dies, and then it goes to the kids if they have not reached the age of maturity. Service members can also elect to give SBP proceeds to their children directly (assuming spousal approval), but this is riskier as the proceeds expire when the children reach age 18 or 22 (if they are enrolled in college). Spouses can no longer defer payments to their children, but they also don’t need to typically as Congress has killed the Widow’s Tax.
If a retiree elects not to participate, or to participate at a reduced level of coverage, the retiree’s spouse must be notified, and the spouse must concur with the election for it to be effective. This is different from how the military handles life insurance where notification to the spouse that they are not the beneficiary is all that is required by law.
Any decision not to participate or to participate at a reduced level is usually irrevocable. However, under certain circumstances, a retiree who is unmarried at the time of his or her retirement and who elects not to participate in the SBP, but who marries after his or her retirement, may elect within one year of marriage to provide SBP benefits for the new spouse. This election takes effect only after a one-year waiting period.
I will cover how SBP deals with divorce, remarriage and court orders in a different post; it’s a question I have received frequently given the high rate of divorce and remarriage among military members, and so it deserves its own post. In a future article, I will also offer my thoughts on why I am theoretically opposed to opting in to SPB (but only if the service member has set aside enough money that the math supports financial coverage for his/her survivors). One reason I am opposed to SBP generally (though very in favor of it in certain circumstances) is that you may end up paying for nothing.
So, what happens if you pay into SBP, and you do not have an eligible recipient when you die (I.e., your spouse predeceases you)? The payments are for naught. However, as an astute Colonel once pointed out during the inevitable grumbling that occurred whenever I covered this topic in one of my classes to Brigade and Battalion Commanders at The Judge Advocate General’s Legal Center and School, “You are paying for peace of mind.”
That is what SBP does – it buys you peace of mind that your family will be taken care of when you die. It’s sort of like an open-ended, annuitized life insurance policy. In addition to chipping in 6.5% of one’s retirement pay, the $3.6 Billion subsidized payment by the government is a fair tradeoff to help military spouses (and kids) given that the nation and its military requires service members to move frequently, stifling the ability for spouses to consistently earn a high salary and optimally save for their own retirement.