The Pentagon is reviewing its compensation structure for service members, including changes to retirement benefits. This summer the Defense Business Board, an advisory panel of private sector leaders, recommended the department phase out its 20-year cliff vesting retirement system and replace it with one providing some benefits to all service members regardless of their tenure. Currently, personnel who serve less than 20 years -- about 83 percent -- do not receive a retirement benefit, which some believe is unfair given their multiple deployments during the wars in Iraq and Afghanistan. Those with 20 years of military service can receive 50 percent of their base pay when they retire.
The Defense Business Board recommends a 401(k)-style plan for the military with government contributions, which service members could tap at the standard retirement age. Currently, military personnel can invest in the Thrift Savings Plan, though there are fewer service members than civilian employees enrolled. The Defense Business Board is proposing a mandatory TSP program for military personnel that would vest after three to five years and also include annual contributions from the government.
"The department believes reviewing the system is a fair and reasonable endeavor," Jo Ann Rooney, principal deputy undersecretary of Defense for personnel and readiness, told the House Armed Services Subcommittee on Military Personnel. "The review is designed to be deliberate, careful and pragmatic." Rooney called the Defense Business Board's report "one data point as we look at overall compensation."
Rooney's comments are in keeping with those of Defense Secretary Leon Panetta, who has not publicly endorsed any specific recommendations, but does favor the overall review. Panetta also said he supports grandfathering those now serving into the current system and would not "break faith" with service members on the benefits promised to them.
During Tuesday's hearing, Military Personnel Subcommittee Chairman Joe Wilson, R-S.C., pointed out that "there's a great deal of distress" among career service members over the Defense Business Board's recommendations, particularly those related to retirement benefits. "With this report, does DoD intend to support the Defense Business Board?" Wilson asked Rooney. The report has "some very strong limitations," Rooney said.
Critics of proposals to eliminate the 20-year pension system said it will have an adverse effect on the military's ability to recruit. "People think grandfathering is a panacea," said Steve Strobridge, director of government relations at the Military Officers Association of America. Strobridge warned of the possible hollowing out of the services if the government eliminates one of the incentives to a long military career. Strobridge also pointed out that modifying the military retirement system to resemble private sector plans does not properly take into account the sacrifices -- physical and emotional -- that service members and their families make throughout their careers. "Once you have a very powerful career incentive -- like a 20-year [pension] plan -- it's very resistant to the day-to-day manipulation, and that's a good thing," Strobridge said.
Vee Penrod, deputy assistant secretary of Defense for military personnel policy, said the department is working with the nonprofit RAND Corp. to analyze the effects of potential changes to the retirement system. Penrod said the Defense Business Board's report so far "does show it having a negative impact on retention."
The Defense Department faces steep budget cuts heading into 2012 and beyond. The Pentagon is looking at all areas, including the compensation packages of military personnel, although that review began under Secretary Robert Gates, Panetta's predecessor. Rooney said the review is not simply about saving money; it also is aimed at achieving the right mix of pay and benefits incentives to recruit and retain the future force.
Military retirement trust fund payments have risen steadily since 1960, hitting $50 billion in 2010, according to Defense statistics. That figure is expected to rise to $108 billion in 2035. Rooney said, however, that while the department wants to conduct a significant review and analysis of the military compensation system, there is no indication that costs are "spiraling out of control."
Separately, Sens. Carl Levin, D-Mich., and John McCain, R-Ariz., last week submitted recommendations to the deficit reduction super committee in support of the Obama administration's cost-saving proposal related to military personnel. The plan would mandate annual fees under TRICARE for Life, which pays beneficiaries' out-of-pocket Medicare costs. Fees would start at $200 in 2012 and increase annually to align with those paid by all TRICARE enrollees. The proposal also would eliminate pharmacy co-payments for generic mail-order drugs while shifting retail co-pays from a dollar figure to a percentage. The change would affect military families and retirees, but would not apply to active-duty service members. The administration also recommended the creation of a panel to look at reforming military retirement benefits.