Pentagon outlines ideas for hybrid retirement system
WASHINGTON — Amid attempts to reduce military personnel spending, the Pentagon on Thursday presented its official thinking on the politically touchy issue of how remake the military retirement system.
If enacted, the proposals would result in lower benefits for future troops who retire after full careers, but as a trade-off, could also make many more troops eligible for some retirement pay.
The Pentagon prepared the report, “Concepts for Modernizing Military Retirement,” for the Congressionally mandated Commission on Military Compensation and Retirement Modernization, which is conducting a broad study of how the department pays its current troops and retirees. The commission’s report is due in February 2015.
“This is not a proposal, it’s not a plan, and it’s not a recommendation,” Pentagon spokesman Lt. Cmdr. Nate Christensen said. “It’s something we’re required to submit to the commission for their use as they work toward an ultimate recommendation to Congress and the President.”
The Military Times was the first to report on the paper Thursday.
Officials say the options were prepared under the principle that changes would not apply to currently serving troops or to current retirees. In January, top Pentagon officials came out against a 1 percent reduction in the annual cost-of-living calculation for current working-age retirees.
And in a memo to Secretary of Defense Chuck Hagel that accompanied the new report, Chairman of the Joint Chiefs of Staff Gen. Martin Dempsey wrote, “Any new retirement system should include a ‘grandfathering clause’ of the existing retirement system to cover all military personnel currently serving and retirees at the time of enactment.”
The proposal delivered Thursday keeps some distinct aspects of the current program, while delivering options DOD analysts say could lower the overall yearly cost to the government by $1.4 to $4.1 billion. The current system cost about $25 billion in 2013.
As reported by Military Times, the proposal retains the “cliff-vesting” pension that provides a defined benefit after two decades of service. But yearly payments under the new proposals would be lower than the current ones, which provides 20-year retirees with 50 percent of the average of their basic pay during their three highest-earning years.
And, in a major departure from the current system, the options outlined in the report would provide only partial benefits for working-age retirees, reserving full-size payments until traditional retirement age.
To offset the financial loss and encourage retention, the DOD paper grafts on new incentives, including two new payments. One is a bonus called “continuation pay” at midcareer that could range up to 19 months of basic pay and would vary by service and whether a member is officer or enlisted. The other is an active-component transition pay to encourage separation.
The system would also include a federal Thrift Savings Plan, similar to a civilian 401(k) plan. Under the plan, the military would contribute an amount equal to 5 percent of annual pay to a retirement account, from which troops could begin to take payment before age 60.
Unlike the current system, troops would be vested after just 6 years of service. That means many more servicemembers would eventually be entitled to retirement benefits from the military than under the current plan.
According to the report, analysts used sophisticated computer modeling and calculated retention and force structure would not be hurt by the new plan.
Still, devising changes to the retirement system requires complex trade-offs, the paper acknowledged.
“(If) a primary goal is to generate large up-front savings, it will necessitate a substantial reduction in the retirement benefit, which in turn will translate into less retention and thus requires more up-front costs in the way of retention incentives and bonuses,” the paper’s authors wrote. “Conversely, if a primary goal is to provide more robust benefits in retirement, up-front savings will be less, and, depending on the retirement enhancements, could actually result in increased costs.”
Congress generally rebuffs Pentagon requests that would lower military pay and benefits, and how seriously the current proposals will be weighed is an open question.
Veterans groups meanwhile said they were analyzing the proposals. An official from the Military Officers Association of America said the concepts, if enacted, appear as if they could hurt retention.
“These concepts provide considerable sums to servicemembers who leave short of 20 years of service at the expense of those that stay for two decades or more,” said Mike Hayden, director of government relations for the organization. “From our perspective, this does not provide a sound retention formula nor provide equity by taking from the pockets of those that stay to provide a benefit for those that leave.”