The Defense Business Board has recommended a radical overhaul of the military retirement system.
Army Times: DoD panel calls for radical retirement overhaul
A sweeping new plan to overhaul the Pentagon’s retirement system would give some benefits to all troops and phase out the 20-year cliff vesting system that has defined military careers for generations.
In a massive change that could affect today’s troops, the plan calls for a corporate-style benefits program that would contribute money to troops’ retirement savings account rather than the promise of a future monthly pension, according to a new proposal from an influential Pentagon advisory board.
All troops would receive the yearly retirement contributions, regardless of whether they stay for 20 years. Those contributions might amount to about 16.5 percent of a member’s annual pay and would be deposited into a mandatory version of the Thrift Savings Plan, the military’s existing 401(k)-style account that now does not include government matching contributions.
A critical new feature would adjust those contributions to give more money to troops who deploy frequently, accept hardship assignments or serve in high-demand jobs. It would also give the services a new lever to incentivize some troops to leave or stay on active duty longer.
The new proposal was unveiled July 21 by the Defense Business Board, the wellspring for many cost-saving initiatives adopted by the Defense Department in recent years. The new retirement plan would mark the biggest change in military retirement in more than 60 years and require approval from Congress.
“The current system is unfair, unaffordable and inflexible,” said Richard Spencer, a former finance executive and Marine Corps pilot who led the board’s eight-month retirement study.
This alternative plan would “enhance the ability of the service member to build a meaningful retirement asset [with] complete flexibility for their lifestyle or desires,” Spencer said.
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Unlike other proposals to overhaul military retirement that would grandfather current troops, the board suggests that DoD could make an “immediate” transition to the new system, which would affect current troops quite differently depending on their years of service:
• Recruits. The newest troops out of boot camp after the proposed change would have no direct incentive to stay for 20 years and would not get a fixed-benefit pension. Instead, they would receive annual contributions to a Thrift Savings Plan account and could leave service with that money at any time — although under current rules, they can’t withdraw the money until age 59½ without paying a penalty, except in certain specified circumstances.
• Five years of service. Troops would immediately begin accruing new benefits in a TSP account. If they remained in service until the “old vesting date” — the 20-year mark — they also would get one-fourth of the “old plan benefit,” or about 12 percent of their pay at retirement, as an annuity. If they separated, for example, after 10 years, they would walk away with no fixed-pension benefit but would have a TSP account with five years of contributions.
• 10 years of service. Troops would immediately begin accruing new benefits in a TSP account. If they remained in service for 10 more years, they would receive half of the “old plan benefit,” about 25 percent of their pay at retirement, as an annuity. If they separated after 15 years, they would walk away with no fixed-pension benefit but would have a TSP account with five years of contributions.
• 15 years of service. Troops would immediately begin accruing new benefits in a TSP account. If they remained in service for five more years, they would receive three-fourths of the “old plan benefit,” about 37.5 percent of their pay at retirement, as an annuity.
• 20 years and beyond. Troops who stayed in past 20 years would continue to receive annual TSP contributions.
For those unfamiliar with the current system, after 20 years of service, service members are eligible to retire and immediately begin drawing 50 percent of their base pay for life. For each additional years of service, up to 30, they earn an additional 2.5 percent. Those who serve 30 years or more draw 75 percent for life.
There have been several short-lived experiments with changing the system. In the late 1980s, they went to a system that only paid 40 percent at 20 years and then an additional 3.5 percent thereafter, so that it would still reach 75 percent at 30 years. They went back to the standard system pretty quickly.
Is it “fair” to give people no retirement benefits if they only stay a few years? Well, no. But the whole point was to incentivize good soldiers to stay in beyond their first tour. The military needs a large number of young people and a decreasing number of people up the rank pyramid. So, a system that encourages people to stay in until their late 30s (for enlisted) or early 40s (for officers) makes a lot of sense.
This particular reform plan seems aimed more at saving money than at “fairness” or “flexibility.” Essentially, it would screw people who made the decision to remain in the service for 20 years at least partly on the basis of a pretty sweet pension at the end of the rainbow. Indeed, while it’s pretty hard to sue the federal government and even harder for soldiers to sue the military, I’d think they’d have a pretty strong breach of contract suit. So, at a minimum, this would have to be phased in beginning with new accessions with existing personnel given various options.
Certainly, paying hordes of people large sums of money for decades after they have left the service is a hard model to sustain. The 20 year pension was not a big deal until the Reagan era, when military pay started to skyrocket. Nowadays, though, soldiers make pretty good money. And someone retiring at 38 or 42 can expect to live another 40 years or so–twice as long as he served in the military!
That’s unsustainable and, well, you know what they say about things which are unsustainable.
Then again, over the last 20 years, our soldiers have been almost constantly deployed into hardship and hostile fire areas. It’s going to be mighty difficult to get people to stay around for more than a couple tours of that–long after the thrill is gone–on the basis of drawing from a pension plan when they turn 59 or whatever. The immediacy of the military pension was its chief draw, after all.
Presumably, the most enthusiastic soldiers, sailors, airmen, and marines are likely to stay on. We’re likely not going to run off our future flag officers and E-9s. But we may well run off a lot of captains and staff sergeants who would otherwise have stayed on to become lieutenants colonel and E-8s. More to the point, we may well have to instead promote mediocrities who saw no better option than putting up with the military in their place.
Proposals like the one on the table here have to be given serious consideration. But fixing this problem is not without risk to our ability to field an effective force with strong mid-level leadership.
