Proposal May Jump-Start Retirement System Reform

Report suggests less drastic cuts than DoD board

(NAVY TIMES 12 AUG 13) … Andrew Tilghman

The all-but-stalled effort to reform the military retirement system may get a jump-start with a new proposal that would dramatically curtail benefits for tomorrow’s troops, but reduce them far less than a controversial scheme floated at the Pentagon two years ago.

The proposal, dubbed the “10-15-55 plan” and published by the U.S. Army War College in July, outlines a way to cut the long-term costs of the military’s 20-year cliff-vesting retirement model without making the kind of radical changes that could trigger retention problems and threaten readiness.

Major Features Of The Proposal:

  • Troops who serve a full career of 20 years or more would continue to qualify for a traditional annuity, but those monthly checks would not begin until retirees reached age 55.
  • Troops could separate after serving 10 to 15 years and walk away with a relatively generous 401(k)-style retirement account that includes government matching contributions of up to 10 percent of base pay. Active-duty troops who invest in the federal Thrift Savings Plan currently get no government matching contributions.
  • Tricare coverage for working-age retirees under 65 would be restricted. Until retirees reached age 55, Tricare would be available only as a second payer to private-sector insurance, presumably through civilian employers. The 35-page report includes targeted criticism for a previous retirement overhaul proposal that came from the Defense Business Board, a Pentagon advisory group, in 2011, that called for eliminating the 20-year cliff-vesting model.

The board recommended replacing the current system with a 401(k)-style account that the Defense Department would help contribute to and that troops would manage themselves. All troops who served at least four years could leave the military with some form of retirement account, an effort to address fairness concerns that more than 80 percent of all troops leave service before 20 years and receive no retirement benefit.

The 2011 proposal triggered a fierce backlash from troops and veterans’ advocates. Since then, neither the Pentagon nor Congress has provided any detailed proposals to further public discussion of the issue, a reaction that reinforced the belief that significant changes to military pay and compensation are a political third rail that few people outside academia have any interest in touching.

“There’s a real political issue here. Everybody knows we’ve got a problem, but nobody wants to do anything about it,” said Larry Korb, a defense expert with the Center for American Progress, a think tank in Washington.

Top Pentagon officials for years have decried soaring personnel costs as a long-term threat to national security. Some projections suggest the cost of military pay and benefits such as health care and retirement, if left unchecked, will eat up the Pentagon’s entire budget for research and modernization.

That pressure on personnel programs likely will intensify as the Pentagon tries to absorb the latest round of budget cuts known as sequestration, which have forced the cancellation of training programs, the delay of overseas deployments and the furlough of defense civilian employees.

Congress recently recognized that military compensation might be simply too politically sensitive for Washington’s traditional policy- making process. Last year, lawmakers created a special blue-ribbon panel, the Military Compensation and Retirement Modernization Commission, and tasked it with developing some detailed solutions. Under the current DoD benefits system, for each $1 paid in base compensation, the Pentagon sets aside about 34 cents just to cover the future retirement costs, according to the latest report.

Earlier Benefits

A key component of the new proposal would encourage troops to stay until the 10 or 15 year mark, but also give manpower planners moreleewaytopushoutunder-performingtroopsbeforetheyreach20 years.

Specifically, the plan would create a 401(k) account for all troops starting with their first paycheck, and DoD would automatically contribute 5 percent of base pay into that account. DoD also would provide a dollar-for-dollar match of up toanadditional5percent if service members elect to contribute their own money.

The catch is that those government contributions will not be vested— placed under the control of individual service members — until they reach10 years of service. At that point, service members would take control of 50 percent of the government contributions in their accounts.

Control of another 10 percent of those government contributions would transfer to servicemembers’ control each year for the next five years, so that when they reach 15 years of service, they are fully vested.

Troops who leave before 10 years would have only the money they elected to contribute themselves, with no matching funds from the government.

The authors of the new proposal say the current system is flawed because it may “encourage the military to retain service members who are not sufficiently productive” — yet a new system must guard against concerns that radical change could “negatively affect retention rates.”

Under federal law, money from a 401(k) account is not available without tax penalties until the owner reaches age 591⁄ 2. It’s impossible to calculate the precise value of a 401(k) account for a service member who serves 10 or 15 years because that will depend on fluctuations in the stock market and personal investment decisions over time.

One of the biggest differences between the latest proposal and the Defense Business Board’s concept involves “transition” pay. The DBB proposed a generous lump-sum payment equal to one year’s pay for any and all troops who serve four years. The newer plan provides “transition pay” only to troops who reach 20 years of service, and even then, offers only a lump sum equal to six months pay.

The report emphasizes a “grandfather” clause that would ensure today’s troops get the retirement benefits they were promised when they signed up. It also suggests a transition period when the newest recruits could opt in or out of the new system, a decision based on their likelihood of staying for 20 years compared with preserving a limited retirement benefit available after 10 years of service.

The bottom line is that troops who stay for a full 20-year career would get less. Specifically, the total estimated value of the 20-year retirement package would be about 18 percent to 28 percent less than the current system. But that is a far smaller reduction than the 2011 Defense Business Board proposal, which would have slashed the overall lifetime value of military retirement by up to 40 percent.

The report was published by the Army War College’s Strategic Studies Institute. Its authors included Roy Wallace, the Army’s assistant deputy chief of staff for personnel; Army Lt. Col. David Lyle, director of the Office of Economic and Manpower Analysis at the U.S. Military Academy; and John Smith, director of research in that office.

The proposal does not reflect any formal recommendation by the Defense Department or legislative proposal from Congress.

Despite months of debate about defense spending, top officials at both the Pentagon and Capitol Hill have rarely mentioned retirement reform. But experts say the political calculus may change after the combat mission in Afghanistan ends next year.

“Ithinkafter2014whenwe’reout of Afghanistan, it’ll be politically easier to do,” Korb said. “You’re going to be at a point where you don’t have people on the front lines anymore.”

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