Panel will propose new military retirement system

By Andrew Tilghman, Staff writer

The long-awaited report on military compensation set to drop Thursday will propose fundamental changes to military retirement and health care benefits, according to several people familiar with the report.

The Military Compensation and Retirement Modernization Commission will propose detailed legislation to phase out the current 20-year cliff-vesting pension payable immediately upon leaving service, according to people who have been briefed on the report but requested anonymity before discussing its recommendations.

The plan calls for Congress to create a hybrid system that includes a smaller defined-benefit pension along with more cash-based benefits and lump-sum payments. A significant portion of troops’ retirement benefits would come in the form of government contributions to 401(k)-style investment accounts, those familiar with the report told Military Times.

Specifically, the proposal calls for automatically enrolling each service member in the federal government’s Thrift Savings Plan, or TSP, an investment account that accrues savings. Individual troops will be responsible for managing their accounts, and the money is typically not available for withdrawal without penalty until age 59.5.

The government contributions likely would be a percentage of basic pay and could vary depending on years of service and/or deployment status. Full ownership of the TSP account would come only after troops have completed several years of service.

By allowing many troops to keep their TSP government contributions after separation, the new proposal would give limited retirement benefits to the vast majority who leave the military before hitting the traditional retirement milestone of 20 years of service, most of them enlisted members who do four, six or eight years, then leave.

That’s a big potential change from a system that now offers retirement benefits to about only 17 percent of the force — many of them officers — who serve 20 years.

Any change to military retirement would require Congress to pass changes in law.

A grandfather clause would shield today’s service members from any retirement changes; a new retirement system would apply only to future recruits.

However, the commission is proposing some changes in health care benefits that could affect troops now on active duty.

Many experts say Congress is unlikely to summon the political will to take action on the controversial issue of military compensation. Nevertheless, the report is likely to trigger a new battle in that arena.

Congress created the commission two years ago as pressure mounted on the Pentagon to cut costs after defense spending peaked in 2010. Top military officials increasingly make the argument that the current military compensation system is unsustainable, and personnel costs, if not reined in, will threaten the military’s ability to pay for weapons modernization and high-tech research.

A spokesman for the commission, Jamie Graybeal, declined to discuss the details of the new proposal prior to Thursday’s official release.

In addition to the 401(k)-style benefits for troops serving fewer than 20 years, the commission will suggest promising a defined-benefit pension to troops who serve a long-term career. That pension would be more modest than the one military retirees receive today, according to one defense official briefed on the plan.

The commission’s recommendations are based in part on an extensive survey of thousands of active-duty troops conducted last year to identify which types of compensation troops most prefer.

The commission will unveil a proposal to fundamentally change how health care benefits are provided to military families and retirees: Those now served by Tricare could move into the health care coverage provided to federal employees, according to several people familiar with the report.

The proposal calls for a new health care allowance for troops that would be designed to cover some expenses, such as doctor-visit co-pays and eyeglasses.

The plan also calls for the Pentagon to create a new four-star medical command to oversee the Pentagon’s sprawling health care system. Consolidation of the military system has been discussed for many years and would mark a significant break from the tradition of allowing each individual service to operate its own health care command.

Sources said the commission also will recommend keeping intact current commissary benefits, to include continuing to sell products at cost plus 5 percent surcharge. That runs counter to a separate DoD budget proposal that is expected to call for increasing prices to fully cover the costs of operating commissaries.

The commission also is expected to recommend consolidating the commissary and exchange systems. Initially, they would keep their separate branding — Navy Exchange, Defense Commissary Agency, etc. — but eventually would be combined.

Another morale, welfare and recreation aspect of the commission plan reportedly will call for building more brick-and-mortar child development centers on military bases, subject to the base commanders’ discretion. Military families have long complained of a lack of sufficient child care on many military installations.

Still unknown is how heavy the commission’s impact may be. Many experts say real change is unlikely in part because the commission’s proposals will not get fast-tracked to an up-or-down vote but will instead move through Congress’ normal arcane procedures.

Yet some veterans’ advocates say Congress may be spurred to action by several factors, including budget pressures created by the across-the-board spending cuts known as sequestration. And it may prove easier politically to tackle this sensitive topic now that far fewer troops are deployed in combat zones overseas than just a few years ago.

“You have this appetite for change just as long as it saves money. This has created this opportunity, if you could call it that, to give something like this … little scrutiny and quick implementation,” said Mike Hayden, the director of government relations for the Military Officer Association of America, which opposes curtailing military benefits.

One criticism that will swiftly emerge is that moving troops’ retirement into individual investment accounts will saddle them with new responsibilities for managing money, with many lacking the requisite skills.

“They are going to have to have a certain amount of financial literacy, which is hard to achieve. Maybe some people will say that is unfair,” said one defense official familiar with the plan.

Inside the Pentagon, some top officials say the vigorous debate about compensation should be expanded to include the entire military personnel system.

Vice Adm. William Moran, chief of naval personnel, worries that the “closed loop” system in today’s military is inefficient compared to corporate America.

“We know our recruiting, training, and career management systems have not evolved anywhere near the pace of change in the civilian market,” Moran wrote last year in an op-ed published in The Hill newspaper.

Moran pointed to laws that govern military promotions based on time served in paygrades and suggested that today’s force is losing some of its best and brightest future leaders because the youngest service members are frustrated with stovepiped career fields and inflexible career tracks.

“They watch their corporate peers rising past others based on merit, not merely when they joined the firm. Or they see opportunities to master a profession without worrying about an ‘up or out’ system which assumes everyone must be groomed for the highest possible rank,” Moran wrote.

“They wonder why they can’t do the same, in service to their country.”

The commission’s report is hardly the first proposed overhaul of the military retirement system.

In 2011, the Defense Business Board, a Pentagon advisory group, published a detailed proposal that would have replaced monthly pension checks with 401(k)-style investment accounts. That suggested the government contributions should be at least 16.5 percent of basic pay, with higher rates for deployed service members or high-demand career fields.

That plan went nowhere after it was criticized by service members, disavowed by the Pentagon leadership and landed with a thud on Capitol Hill.

Last March, the Pentagon’s personnel and readiness office broke its long silence on the topic and offered several detailed and complex alternatives to the current system: hybrid options that included both a TSP with government contributions as well as the promise of smaller, partial pension checks before traditional retirement age.

That plan also included some lump-sum payments for troops staying at least 20 years, offering a “transition pay” equal to as much as three years’ basic pay.