Scrambled Nest Eggs

As 2011 began, two separate blue-ribbon panels made wide-ranging recommendations to address the national debt crisis - $14 trillion and climbing at that point - and each raised anew the specter of military-retirement reform.

Both debt panels suggest replacing the current "all-or-nothing" 20-year retirement system with one perceived to be more equitable, flexible and, most importantly, cost-efficient.

The final report of the bipartisan National Commission on Fiscal Responsibility and Reform, released in December, characterized both military and federal-
civilian retirement plans as "out of line" with pensions in the private sector.

The report urged Congress to create a federal workforce-entitlement task force to recommend ways to make federal retirement and health benefits alike more consistent with those generally available in the private sector, with a goal of saving $70 billion over the next decade.

An example of structural changes sought by the commission, co-chaired by former Republican Sen. Alan Simpson and Erskine Bowles, chief of staff to President Bill Clinton, would be to defer any cost-of-living adjustment on federal annuities until age 62, when a one-time catch-up raise, to match inflation, would be permitted.

The commission said that this and other cost-saving measures for federal entitlements should get fast-tracked through Congress.

The Debt Reduction Task Force, led by former Republican Sen. Pete Domenici and Alice Rivlin, the first director of the Congressional Budget Office, wields a sharper knife over military retirement. It urges adoption of the four-part "flexible" retirement package, proposed in 2008 by the 10th Quadrennial Review of Military Compensation (QRMC), and wants it applied to any active-duty member today with less than 16 years of service.

That plan's annuity would be set using the same formula as the current system: 2.5 percent of average basic pay over the member's three highest-earning years, multiplied by years served. But retired pay couldn't begin until age 57 for those who served at least 20 years, or until age 60 for those who served 10 to 19 years.

A second feature would be a government-funded thrift savings plan that members would be vested in after only 10 years of military service. The government would make all contributions, starting in the second year of service. At first, they would equal 2 percent of basic pay, but would gradually rise to 5 percent. Withdrawals could be made at age 60 or older.

The final two features would be separation pay, and special "gate pays" to entice members through specific year-of-service milestones. The timing, size and availability of these would be left to each service branch.

The Domenici-Rivlin report says this plan should replace the current system of immediate annuities after 20 years for any member who, at the time of the plan's enactment, would have served fewer than 16 years.

Stuart H. Rakoff, a manpower-policy consultant and former Defense Department executive who worked on personnel issues for the task force, said he would personally prefer to grandfather a large portion of the current force, protecting them from any involuntary change in retirement. But he endorsed the changes as more efficient and fairer than the current plan.

He cited three major flaws with the 20-year, cliff-vesting retirement plan used by the military since the end of World War II. One is that "only 15 percent of folks who enter ... serve long enough to get any retirement benefit at all." Thus, the plan builds no wealth for 85 percent of today's volunteers.

Point two is its cost. "When the system was conceived, nobody had the vaguest notion we would pay people to be on active duty for 20 years, and then pay them to be retired for 40 years (on average)," he said. "When the Germans first thought of a military-retirement system 150 years ago, the average officer retired at age 62 and died at 65."

That system made fiscal sense. "When people retire at 38 and live to be 90," however, "it's not such a good bargain for the taxpayer anymore."

Finally, the 20-year retirement plan "has really negative effects on force-shaping," Rakoff said. "For the most part, pilots never see a cockpit after 10 to 12 years of service. It has to do with the nature of assignments. So what happens to (them) after they finished their flying days? They get desk jobs for eight to 10 years because the service won't send them home without a retirement benefit. And so we draw people out to 20 years, to that cliff-vesting point, when really, in many cases, we don't have useful work for them."

The QRMC retirement plan, by contrast, has many more tools to smooth out the force profile and still keep the right number of personnel with the right skills to meet any service need, Rakoff said. Cash is always the most efficient incentive to influence behavior, yet more than half of total military compensation today is deferred.

Steve Strobridge, director of government relations for the Military Officers Association of America and co-chair of The Military Coalition, a consortium of 32 military associations and veterans organizations, testified before the Simpson-Bowles commission last June and warned against changing military retirement to become more like civilian 401(k) plans.

Strobridge said he was stunned to see the Domenici-Rivlin plan propose that its cost-cutting ideas be applied to such a large portion of the current force - those with fewer than 16 years of service. "I cannot express too strongly how egregious a breach of faith that would be," he said. "To have supposedly responsible people who have held senior government positions feel no more sense of obligation than that to people who have borne the country on their backs through this last decade of war is just unfathomable."

Strobridge reminded the commissioners last summer that Congress enacted a cheaper retirement plan, called REDUX, for new entrants after October 1986. Fourteen years later, the reduced career "pull" of that plan began to harm retention and, at the urging of the Joint Chiefs, Congress restored the old retirement plan and added $30,000 for any member who wanted to stay under REDUX.

Initiatives to reduce military-retirement costs by making the service plan more like civilian-retirement packages, Strobridge said, overlook the fact that the military's annuity plan "is an essential offset to the unique and arduous service conditions inherent in a multidecade service career."

Private-sector employees don't face combat, hazardous duty in foreign lands, extended force separations from family, or frequent relocations that impact the ability of spouses to build their own careers, he explained.

"One cannot expect to civilianize the career benefits for military service when military
service conditions simply cannot be civilianized," Strobridge said.

Without the drawing power of the 20-year retirement system, the service branches could not have retained the quality force that it has "over the past decade of constant combat deployments," he added.

President Obama and congressional leaders, spurred on by Tea Party members elected in November on promises of cutting federal spending, have promised to consider the debt panels' recommendations and take serious steps this year to begin to address the swelling national debt.

Whether military retirement will be exempt from the wave of changes ahead, as some prominent politicians have asserted, remains to be seen.

As for The American Legion, it has opposed similar proposals before and will again, National Commander Jimmie Foster said.

"Every time Washington wakes up with a deficit hangover after decades of spending binges, those who study the serious problems of our national debt can't resist the easy but unfair route of trying to balance the budget on the backs of veterans," he said. "It is unfair, and if these ridiculous proposals are passed into law, it will hurt America's ability to defend itself from our enemies.

"I want these commissions to look a 22-year-old Marine in the eye and say that if you retire at age 40 - after 20 years of service and three, four or even more tours of being shot at in Afghanistan - you still have not done enough to receive your retirement. I want these commissions to tell the soldiers in Iraq that the benefits they are receiving are too much.

"America has a huge debt, all right. And it is owed to these men and women who protect our freedoms every day. It is a debt that must be repaid."

Tom Philpott writes the Veterans Update column for The American Legion Magazine.