Survivor plan not being utilized

By Tom Philpott: CNJ columnist

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 SBP 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 time of retirement so that, when combined with monthly premiums, it would build an annuity for the surviving spouse of equal in value to SBP.

This is yardstick to measure the value of SBP. Here’s another:

A 40-year-old retiree with a 38-year-old wife who elects full SBP coverage 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 SBP.

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 too many retiring Marines are opting out of SBP and likely won’t get another chance to sign up.

SBP is a great deal, say pay officials. 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 SBP coverage. The take rate is particularly disappointing among new retirees from the sea services.

Sign-ups rates in fiscal 2008, the latest data available, show that only 68 percent of married Navy members and 70 percent of married Marines elected SBP coverage as they retired. By contrast, 85 percent of new Army retirees and 82 percent of new Air Force 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 SBP 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 SBP 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,” said McGee.