Editorial Boards: Tiny Military Pension Cut is a Good Move

Among the elements of the budget deal that passed Congress last month was a small $6 billion change to the way military pensions are calculated for military retirees younger than 62. In the face of lawmakers who would roll back this change, both the Washington Post and Wall Street Journal editorial boards defended the provision in the last two days. 

The change would reduce by 1 percent the cost-of-living increases for retirees that are younger than a normal retirement age. Depending on the exact rank and year of retirement, an average retiree's lifetime payments would be reduced by less than 3 percent, and payments to retirees over 62 would be unchanged. This policy is far more modest than the recommendation of the Bowles-Simpson Fiscal Commission, which recommended completely eliminating COLAs for retirees under age 62.

The Wall Street Journal criticized proposals to repeal the provision in an editorial this morning, stating:

The budget act signed in late December by President Obama takes a modest step to alleviate the Pentagon's crisis in pension costs, but good deeds in Washington rarely go unpunished. Some in Congress who should know better are now pledging to overturn the reforms as soon as this month.

Pensions are taking an increasing share of the Department of Defense's budget, and Defense officials such as Defense Secretary Hagel to Army Chief of Staff Ray Odierno have noted the need to reform military compensation. CRFB's Moment of Truth project warned that the current military retirement system is not sustainable and does not serve in the best interest of our national security.

On Monday, the Washington Post editorial board put context around how small the change is, and how few retirees are affected:

For one thing, the cut is an exceedingly modest one on a pension plan that is already far more generous than private-sector equivalents. For someone who enlisted at age 18 and retired as an Army sergeant first class at 38, lifetime retirement pay would decline from $1.734 million to $1.626 million, according to House Budget Committee staff. And that $1.626 million would still be filled out with generous military health coverage and earnings for working in the civilian sector, which most military retirees do. 

This is not “breaking faith with the promise that was made to these folks that have waged war for this nation for the last 12 years,” as the president of the Military Officers Association of America, Vice Adm. Norbert Ryan, said on the PBS NewsHour Thursday. It is a small shift in resources toward training and equipping those who might have to defend us in the future. Rhetoric notwithstanding, many of the war-fighters who bear the biggest combat burdens get no pension at all; only one-eighth of enlisted personnel serve the 20 years necessary to qualify, according to a 2011 report by the Defense Business Board. As these numbers imply, most recruits didn’t join for the pension. “Surveys consistently report that military retirement has little value in recruitment or retention for at least the first 10 years of service,” the board found.

As we’ve said before, the Ryan-Murray budget agreement is a small step forward, but far short of the $2.2 trillion still needed to put debt on a downward path as a share of the economy. Since discretionary spending is already at historic lows, most reforms that meaningfully change the trajectory of long-term debt must come from the mandatory side of the budget. It is a discouraging sign that there are already efforts to repeal one of the few entitlement reforms that were in the agreement.

The Washington Post described the causes for disappointment:

It’s impossible to say whether either the Democratic or Republican proposals to undo the pension trim will pass; their respective “pay-fors” seem equally unacceptable to members of the opposing party, while the White House seems disinclined to revisit the issue. It’s sufficiently depressing that the debate sank to this level so quickly. Like civilian entitlements, military retirement — a $50 billion-plus item in the defense budget — is overdue for deeper reforms, such as adjustment to the all-or-nothing 20-year service requirement. And it does the men and women of our armed forces no dishonor to say so.

It is encouraging that most of the proposals thus far have respected the "pay-as-you-go" principle by suggesting alternative savings when repealing this provision, but offsets put forward thus far are unlikely to receive bipartisan support. Any remaining offsets that could receive bipartisan support should be reserved for more pressing needs such as extending emergency unemployment benefits or paying for a package of tax extenders, rather than undoing budget savings that have already been decided.

Moreover, the pension provision is designed to produce greater savings over time, so even if legislation offsets the $6 billion cost over the next ten years, it is unlikely to replace the greater savings over the long term. In addition, repealing the COLA provision would also require the Department of Defense to shift an additional $8 billion in defense spending towards retirement accounts which would require an additional $8 billion in cuts in military programs and could create additional pressure to increase or evade the limits on defense discretionary spending.

As the Wall Street journal described it, the pension shift actually frees up money for more pressing defense needs:

Few things in politics are easier than seeming to stand up for the men and women in uniform—or in this case as disingenuous. The Paul Ryan-Patty Murray compromise begins to slow the spiraling personnel costs in the Pentagon budget in order to free up resources to keep America's active military strong into the future. As Mr. Ryan has noted, the Pentagon brass endorsed the idea as a way to maintain adequate budgets for current readiness and new weapons.

To help make politically sensitive changes, Congress created the Military Compensation and Retirement Modernization Commission to provide reform recommendations by May of this year. However, the Commission has been granted an extension until 2015, putting off much needed reforms for at least another year. But Congress does not need to wait for that commission report to consider reforms of the military retirement system since it already has proposals from the Defense Business Board and the Quadrennial Review of Military Compensation.

The Ryan-Murray budget agreement made a small but meaningful step forward when they included a modest reduction in entitlement spending. If policymakers want to undo the change, they should offset it with at least the same amount of other entitlement savings that grow over time. Even better, they should keep the policy change and use this as an opportunity to begin a serious discussion of the fundamental reforms of military retirement programs that are necessary. As the Journal concluded:

[...] the real threat to the military isn't the sequester or spending caps. It's the politics of entitlements. Medicare, ObamaCare and Social Security are slowly squeezing defense as a share of overall spending. And inside what's left of the Pentagon budget, pensions and health care are eroding military muscle. Members of Congress who vote to repeal the Ryan-Murray reform will be weakening American defenses.

 

Fact Check

Retirement costs are hardly "taking an increasing share of the Department of Defense's budget."

 

Look at table 6.2 of the DoD Greenbook that accompanied the FY2014 budget - the official historical budget data for the DoD. 

 

Since 1980, the retirement accrual averaged $25.4 billion per year in inflation-adjusted dollars. In 2013, it was $21.1 billion. So it has not increased in dollar terms.

 

Since 1980, the retirement accrual averaged 4.9% of the defense budget; it currently stands at 3.3%.  While that is admittedly higher than the 2.4% (all time low) in 2008, that low percentage was the result of high costs for the war in other parts of the budget, not a lower retirement benefit.

 

Retirements are hardly the source of budget stress in DoD, the rhetoric from defense officials notwithstanding.

 

Re: Fact Check

Thanks for your comments!  You've got a good point to put the retirement accural payments in perspective. In 2013, retirement accrual payments were $21 billion in inflation-adjusted dollars.  This is an increase over the amounts paid any year in the last decade ($17-$18 billion), but less than the accruals paid in the 1980s, which peaked at $34 billion in 1983.  In addition, the accural payments are scheduled to decrease to $19 billion over the next few years as the active-duty force downsizes after the wars in Afghanistan and Iraq.  

 

We went into more detail about increasing personnel costs in our previous blog explaining the retirement provision. Total compensation paid to each soldier (including health and retirement benefits) is increasing faster than inflation, although as we mention, most of that is due to increasing health costs.

We need true reform not targeted cuts

 As one of the military retirees who will be hit with this cut (to a lesser degree than others because I will be 50 before the cuts kick in, I am disgusted by the way military retirees are being targeted.  The minor change is not minor for a SFC retiring with 22 years of service.  As several articles on the other side of this have pointed out, this enlisted person with a pension of a bit over $22K a year would lose 20% of the value of his/her retirement over the life of this change due to the compounding of the reduction.  It should also be noted that the whole point of COLA is to maintain the purchasing value so that any increases in the $22K are not true increases but merely maintain the same purchasing value.  As a result, once the SFC reaches 62, he will merely have the pension adjusted to go back to $22K in today's dollars although it will look higher due to inflation.  Since this is not a huge amount and the unemployment rate for military veterans is high right now, he may well need the full $22K to be able to continue to invest for retirement to supplement the $22K.

 

In addition, why is it that all changes to federal civilian benefits are always for new hires but changes to various military benefits always seem to affect current retirees rather than just new recruits?  How about some equity...

 

Finally, I do not object to being part of the solution if there is true shared sacrifice.  A change to how COLA is calculated using chained CPI would cut all govt payouts increases by .3% a year.  This would impact military retirees for their whole retirement and their social security.  That means in real dollars, we would lose more.  But I would support this change because it would truly bend the cost curve and save hundreds of billions of dollars rather than less that it would cost to extend unemployment benefits three months.  I believe in cutting spending to save our economy but not on something that targets the .2% of the population that serves in the military long enough to earn retirement benefits.

 

 

Broken promise

 The time to negotiate for pay is before the work is done, not after.  Cutting our pensions after we have earned them (in part or in whole) is theft.  

 

If you can steal our COLA today you can take anythng and everything later at your whim because you have already established the precedent.  

 

The real elephant in the room though is the military procurement system and the Defense Contractor Industry with their lobbyists putting campaign contributions (bribes) into the pockets of our politicians.  The Pentagon is all on board since the senior brass there are trying to line up their juicy retirement jobs.  While I was at Fort Lewis recovering from wounds last year Panetta told us "everything is on the table" and then told us how his focus was on keeping the hardware, translated "Defense Contractors have lobbyists and you don't, sucks to be you".  

 

 Did they not learn anything the last two times they tried tinkering with the pay and benefits?  Each time we lost thousands of skilled people to the civilian market and each time they had to crawl back and undo the screw overs (although not entirely).  

 

There is no justification for theft... none.  

 

 

 

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