Kathleen Rutherford is the executive director of A Better Delaware, a nonpartisan public policy and political advocacy organization that supports pro-growth, pro-jobs initiatives and greater transparency and accountability in state government.
On July 21, Gov. John Carney signed Senate Substitute 1 for Senate Bill 188 into law before a roomful of National Guard who will not benefit from it.
Amending Title 30 of the Delaware Code will exclude an additional $10,500 of military pensions from taxable income. Lawmakers in Dover say it’s “an incentive for military retirees under age 60 to locate in Delaware,” ignoring dozens of other states where military pensions are 100% tax-free.
Many others, like Virginia, are working to phase in tax exemptions in progressive $10,000 increments to a maximum of $40,000 in 2025.
In 2004, when advocates first began beating the 100%-military-pension-exemption drum, about 20 states were income tax-free. SB 95 was born in 2005; SB 48 followed two years later. Both ended up in desk drawers.
Sen. Spiros Mantzavinos, D-Elsmere, introduced the substitute for SB 188 (originally 100% tax-free) in January 2022, when there were 26 tax-free states. While Delaware struggled to whittle SB 188 down to an amended $10,500 benefit immediately upon retirement, two more states came online. On the day SB 188-1 became law, Delaware trailed much of America.
Furthermore, the bill excludes National Guard even though the Reserve component was in previous versions. One “gray zone retiree” — a Reserve member with “20 good years,” vested for retirement but not yet 60, the age at which they draw their pension — told me he will leave Delaware, so he can keep all his military pension.
Delaware’s new law is unlikely to entice anyone unless they were already coming for other reasons. Our governor points to our excellent retiree tax benefits. A Kiplinger newsletter agrees: Delaware is the most tax-friendly place to retire.
And that is precisely the problem! With so many retirees flocking to Delaware, who will provide goods and services to this aging population? Veterans and military retirees provide a solution, since they tend to be community-minded and physically fit, with solid work ethics in skill sets employers seek.
Delaware ranks 15th in the nation based on the percentage of the population that are veterans (in 2019, 66,896 — 8.8% — were veterans). But working-age veterans only make up 18% of that total (12,053 are Gulf War II-era vets). The same is true for our 9,000 military retirees: Less than 2,000 are of “working age.” \
Veteran vs. retiree
According to the U.S. Code’s Title 38, a veteran is anyone who served on active duty for as little as 180 days and was not dishonorably discharged. The majority of veterans (81%) never reach retirement, either by their own choice or the military’s up-or-out system. While 85% of veterans receive honorable discharges, a veteran may be homeless or have been terminated for medical problems or needs of the service. On the other hand, military retirees stood the test of time and have proven worthy in the knowledge of the job, of dedication to duty and leadership.
Civilian vs. military retirees
Whereas retired civilians cease working, military retirees are just beginning a new career. The average military retiree is a 38-year-old sergeant with a working spouse and college-aged kids. Officers might be 52 because they entered after college. Enlisted or officers, most of them are college-educated. Eighty percent of the force are enlisted, so 80% of the retirees are enlisted. The average enlisted military pension is less than $35,000 per year, less than $46,000 for officers.
Unlike civilians, military retirees earn more in their second careers than the amount of their military pension. Hence, a tax-free military pension is a “loss leader” in attracting highly skilled talent to Delaware, whose civilian income (and that of their spouse) remains 100% taxable.
Military skills are needed. Most military retirees excel in highly technical jobs that are in demand. Any job you can think of, there is a military equivalent. But we cannot attract these skills because Delaware ranks middling to worst as a place for retired military.
Kiplinger ranks Delaware’s tax break as worst in “The Ten Least Tax-Friendly States for Military Retirees.” According to Kiplinger, our $12,500 tax-free pension “is smaller than similar exemptions available in other states that do not fully exclude military pension.” Our new bill does not change this fact. It only makes it available sooner.
Delaware fares better in WalletHub, ranking 26th because WalletHub included nonfinancial comparisons, one of which is Delaware’s low homeless vet population. This factor may apply to veterans but rarely to military retirees.
Delaware needs 100% tax relief on military pensions now, not just an additional $10,500 tax-free advantage for those under 60.
