Pensions for Military Personnel in Ukraine: Years of Service

Since the beginning of the full-scale invasion, the strength of Ukraine’s defense and security forces has tripled, reaching nearly 1 million personnel. From February 24 to December 31, 2022, UAH 721.9 billion has been allocated from the general state budget for the financial compensation of military personnel, which is almost six times more than in 2021. This increase is a result of the rise in the number of the military personnel and higher allowances for them.

Simultaneously, pensions for retired military personnel have also risen with increased financial compensation. Moreover, the growing number of military personnel will lead to increased expenditures on their pension provision in the future. How can these increased needs be reconciled with the limited resources of the state budget, which are constrained both now and for a considerable period ahead?

In this article, we focus on the special pensions for retired military personnel based on years of service. The right to receive this type of pension does not apply to all individuals currently defending the country but only to career military personnel.

We conducted an analysis of Ukrainian legislation regarding pension provisions  for military personnel. We compared it with the practices of the United States, the United Kingdom, Germany, France, and Israel. The aim was to determine whether our country’s pension programs align with those of developed nations and to suggest potential solutions to the Ukrainian government for improving pension policy concerning military  personnel.

We have identified the following key differences that distinguish the Ukrainian pension legislation for military personnel from foreign ones: 

• Abroad, the rules for those retiring in different years may vary due to changes in pension calculation rules;
• Military personnel abroad retire later than in Ukraine. Still, in some cases, they become eligible for pension payments only upon reaching the general retirement age. Additionally, motivational instruments for long-term service have been implemented in those countries.
• In the examined countries, the pension amount for retired military personnel solely depends on the years served and the earnings during their service. In contrast, in Ukraine, pensions are tied to the financial compensation of the active military personnel.

We believe these differences are essential to consider during the review of Ukrainian legislation. The countries in question have strong militaries and provide enhanced social protection to their citizens, who contribute to the defense and security of the nation.

Calculation of pension provisions for military personnel based on years of service in Ukraine

Pension matters for military personnel in Ukraine are governed by Law No. 2262-XII, “On Pension Provision of Military Men, Persons of Senior Staff and the Ranks of Bodies of Domestic Affairs and Some Other Persons”. This law defines the eligibility and calculation of pensions based on years of military service for enlisted personnel, non-commissioned officers, warrant officers, and officers, excluding conscripted service. According to this law, pension provisions for military personnel are financed from the state budget and calculated as follows:

1. For 25 years of service: 50% of the service member’s financial compensation for the last 24 months of their service, and an additional 3% for each extra year of service.
2. Upon reaching 45 years of age and a total service record of 25 years, of which military service constitutes no less than 12 years and six months: 50% of the financial compensation for the last 24 months, and  an additional 1% for each other year of service.
3. Upon discharge due to health reasons with at least 25 years of service: 55% of the financial compensation, plus an additional 3% for each extra year of service.

The maximum pension based on years of service for a retired military service member can reach 70% of their financial compensations for the last 24 months of service. For military personnel who were liquidators of the Chornobyl Nuclear Power Plant accident and are classified under Category 1, the maximum pension provision can be up to 100% of their financial compensations. For those in Category 2, it can be up to 95%.

The main differences in the formulas for calculating pension provisions for military personnel compared to the pension calculation for civilian citizens under Law No. 1058-IV, “On Mandatory State Pension Insurance”, are as follows:  

• Higher maximum replacement rate: For military personnel, it can be up to 70%, while for civilians, it is half as much.
• For military personnel, the pension calculation utilizes their financial compensation for the last 24 months of service, whereas for civilians, it is based on the person’s salary over their entire professional life. This significantly reduces the average wage used for pension calculation (according to the Ministry of Social Policy of Ukraine data, in 2022, the average pension for military personnel was UAH 8,879.4, whereas the average pension for civilian pensioners was more than twice as low at UAH 3,831.8).
• In the military, pension recalculation occurs both due to inflation indexation and increases in the financial compensation of active military personnel. In contrast, in the civilian pension system, recalculation occurs only through indexation, which considers inflation and the average wage growth rate.

Mobilized individuals who have not previously served in the military are not eligible to receive a pension based on years of service for retired military personnel, as provided by Law No. 2262-XII. They can only obtain this right if, after the war, they remain in the ranks of defense and security forces until they reach the minimum required military service of 12.5 years.

Combatants who do not have the required years of military service can retire early: men at 55 years of age (with a total insurance record of 25 years) and women at 50 years of age (with a full insurance record of 20 years). In this case, the years of military service are  not relevant.

The main problem with Law No. 2262-XII is that Article 63 provides for the recalculation of pensions due to increased financial compensations for relevant categories of active military personnel. The decision on pension recalculation is made by the Cabinet of Ministers of Ukraine, after which the Pension Fund of Ukraine compiles lists of individuals whose pensions are subject to recalculation. Based on these lists, the heads of defense and security agencies provide certificates to the Pension Fund of Ukraine regarding the amount of financial compensation to be considered for pension recalculation. This process not only applies to military personnel but also to employees of many other law enforcement agencies (see the box).

This already creates significant problems since the Ministry of Defense of Ukraine or the Ministry of Internal Affairs of Ukraine cannot substantially increase the financial compensation for active military personnel as it would entail a corresponding increase in pensions for all categories of military pensioners, which the Ukrainian government is currently unable to finance.

Furthermore, in Ukraine, military pension legislation defines equal rights for regular military personnel and employees of all other law enforcement structures (such as the tax police, the State Bureau of Investigation, the National Anti-Corruption Bureau, etc.), even though the risks to life are vastly different. Additionally, the rules for pension provisions calculation hardly differ between those who were involved in combat and those who served during peacetime, in rear positions, or even during the Soviet regime. The only difference is that combatants receive a pension supplement of 25% of the subsistence minimum for persons who have lost their ability to work, which in 2023 amounts to UAH 523.25. Evidently, this is unfair and could lead to increased social tension in the future. However, before formulating policy recommendations, let’s examine the experiences of other countries.

The principles of appointing and calculating pensions for retired military personnel in foreign countries

To qualify for retirement based on years of service, a US service member must have 20 or more years of active duty service. While every service member in the US can retire at the age of 40-45 years old, a significant number of them choose to continue their military service beyond that age. This is primarily because the social and financial benefits package, as well as career advancement opportunities, incentivize military personnel to not retire immediately upon reaching retirement eligibility age.

The United States has four retirement programs based on years of service without limitations of working capacity. New programs were introduced in parallel with the previous ones, so the program that a military service member may qualify for depends on the date of their entry into service: 

• The Final Pay Plan applies to those who began military service before September 8, 1980. Pensioners receive monthly payments (defined benefits).
• The High-36 Retirement Plan is for those who began service between September 8, 1980, and January 1, 2018. It provides the right to receive a monthly pension payment (defined benefits).
• The REDUX Retirement Plan is for those who began service after August 1, 1986. It includes monthly payments and a Career Status Bonus (CSB) of USD 30,000 after 15 years of service, with an obligation to serve a total of at least 20 years. This program encourages at least 20 years of service. 
• The Blended Retirement System (BRS) is for those who entered military service on or after January 1, 2018. The pension includes a monthly payment and a defined contribution, which begins to accumulate in a retirement account after 60 days of service and amounts to 1% of the base pay in the first ten months and 4% from the second to the 26th year of service.

The last two programs include a motivating component for more extended service: a one-time payment or a cumulative contribution. The previous conditions remain unchanged for those who entered service before these programs were introduced.

There are two methods to determine the pension base. These are the Final Pay method and the High-36 method. The first method is used in the Final Pay Plan, which establishes the pension base at the level of the basic salary for the last month of service. In the other plans, the High-36 method is applied, which calculates the average of the highest basic pay over 36 months and is more advantageous for the retiree.

In the Final Pay and High-36 retirement plans, the replacement rate for each year of service is 2.5% of the pension base. For the REDUX plan, the replacement factor is 1.5% for each year of service up to 30 years, and then it increases to 2.5% at the age of 62 years old and beyond. In the BRS, the replacement factor is 2% for each year of service.

So, for a service member in the USA to reach a pension payment equal to 100% of the pension base under the first three plans, they must have 40 years of service. In the BRS, introduced in 2018, the pension payment reaches only 80% of the pension base with 40 years of service. However, the government uses a motivating component for long-term service in the form of a defined contribution payment that accumulates during the service.

Pension indexing in the USA follows general rules across the country. Funding for military pension provision comes from the federal budget.

A review of the pension conditions also took place in the United Kingdom, which has three pension schemes for Regular Army personnel in the Armed Forces.

Military personnel must serve at least two years to qualify for an army pension. The funding for military personnel pensions comes from the government budget. Currently, there are immediate or deferred pension schemes. Immediate pension means being eligible to receive an army pension immediately after completing service if the service member is discharged at 55 (or 60) years or older. Deferred pension means becoming eligible to receive military pension payments after reaching the general retirement age of 66 years old if the military personnel is discharged before reaching 55 (or 60) years old. In this way, the state incentivizes military personnel to continue their service until the designated term.

In the pension system for military personnel in Germany, the pension amount is 1.79% of the last salary for each year of military service but not exceeding 75% of the salary. Reaching the maximum pension typically requires 40 years of military service. Military personnel who have served for 40 years receive a pension bonus of up to 12.55%, and commissioned officers with up to 41 years of service receive a bonus of 16.86%.

The pension system in France is very similar to the pension system in Germany, as the overall system for the Armed Forces and their pension provisions in European NATO countries are alike. In France, the following formula is used to calculate the pension for military personnel:

Pension provision = average salary amount for the last 6 months * 75% * (actual quarters of service / required quarters)

To achieve the full rate, a military service member must serve the number of quarters required according to the maximum age applicable to their category. With bonuses, the maximum size of the military pension can increase from 75% to 80% of the salary.

In France, to be eligible for retirement, military personnel must have a minimum number of years of service: 27 years of service for officers or 20 years of service for officer-contractors, or 17 years for non-commissioned personnel. Additionally, early retirement is available at 52 years old  for officers of the Armed Forces and related formations and at 47 years old for non-commissioned officers.

Until January 1, 2004, for the military personnel in Israel, there was only a system of budgetary pension provisions, where the military accrued the right to a pension amounting to 2% of their salary for each year of service, but not exceeding 70% of the defined salary. 

After January 1, 2004, Israel introduced an accumulative pension system, which is now used by over 80% of the military personnel (the remaining 20% are on the mixed method). The amount accumulated in the Pension Fund before retirement is directed towards monthly payments after discharge from service, only after reaching the mandatory retirement age of 67 years old. The military personnel of the Israel Defense Forces (IDF) are divided into regular career soldiers, reservists, and conscripted soldiers. The pension conditions for regular career soldiers are financially more advantageous. For instance, regular career soldiers receive a pension bonus of 1% for each year of service beyond ten years if they reach the retirement age eligible for IDF pensions, or 3% otherwise. Regular career soldiers who return to service and those in the (scientific and technical) reserve receive an additional 4% of their pension benefits.

The service model in the Israel Defense Forces envisions officers retiring on average at 43 years old and non-commissioned officers retiring at 53 years. However, they become eligible to receive pension provision at 67 years old. Therefore, IDF retirees receive a monthly assistance payment from the budget starting from their discharge from the army until they reach the mandatory retirement age. This assistance does not reduce their pension accumulations. At the same time, the military personnel are encouraged to work after completing their service years in the army through employment and training programs. Continuing their professional career allows retired military personnel to increase their pension accumulations and receive a higher pension provision in the future.

In the appendix table, we compare the differences in pension systems for military personnel in different countries.

Challenges from the experience of other countries

The experiences of Israel and the United Kingdom show that becoming eligible for a pension based on years of service does not necessarily mean that pension payments start at that age. In Ukraine, early pensions for military personnel actually demotivate them from continuing to work officially and encourage informal employment. If retired military personnel continue to work formally, their civilian income will not be considered to increase their insurance period and will not impact the size of their military pension. Therefore, people are not incentivized to pay taxes officially after completing their years of service. In the country with an ongoing war and a very high demand for labor and its shortage after the war ends, the retirement of several hundred thousand people (active military personnel) at 45 years old  is a significant loss of the workforce.

Another problematic issue is the approach to pension recalculations. In international practice, the size of pensions for retired military personnel depends on the financial compensation they received during their service and increases only through inflation indexing. However, Ukrainian military pensions can be recalculated in connection with raising the level of payments to active military personnel, which puts tremendous pressure on Ukraine’s state budget with each increase in financial compensation. In practice, this hinders the ability to raise the financial compensation for active military personnel, and the government is forced to be “creative,” meaning they have to provide additional allowances to military personnel in order to ensure higher financial compensation.

Therefore, compared to developed countries, the pension programs for military personnel in Ukraine do not incentivize them to serve beyond the established minimum age (or years of service) or to work in the civilian sector. This creates an additional burden on the budget due to the linkage of pension adjustments for existing pensioners to the current financial compensation of active military personnel.

It is necessary to reform the pension system for military personnel in Ukraine to address these issues. 

Proposals

Given the experience of developed countries, we propose the following steps to reform the pension system for retired military personnel:

1. Recognize that pension conditions may vary for military personnel who serve at different times and under different circumstances. This means introducing new rules for calculating pensions for the military who are yet to retire while maintaining the current system for existing military pensioners. 
2. Decouple the pensions of retired military personnel from the remuneration of active military personnel. The pension should be based on the earnings military personnel received during their service (this could be the final years of service or years with the highest financial compensation).
3. Determine whether to equalize pension provisions for Ukrainian Armed Forces service members and personnel from other security structures. In our opinion, individuals who directly participated in combat actions should receive higher rewards.
4. Create incentives for extended service or civilian employment after reaching the required years of service or early retirement age. The government should support military personnel with training and employment opportunities after service ends. For example, civilian employment could be considered in pension calculations, and/or pension payments could be granted from the date of reaching the mandatory retirement age. This approach would benefit both the individual, who will have financial security from the military pension and an official income in the civilian sector, and the state, as the employed individual would pay taxes and remain socially active.

Such comprehensive solutions aim to ensure a thoughtful approach to pension provisions for military personnel, optimize the budgetary burden, and, most importantly, provide dignified payouts to future military pensioners.

Appendix