Understanding the Defense Retirement Reforms in the Bipartisan Budget Act

As CRFB has explained in a recent analysis, the Bipartisan Budget Act under consideration in the Senate would replace a portion of the mindless sequester cuts with more targeted reforms. One controversial proposal in the bill would reduce cost-of-living adjustments for working-age military retirees. This blog explains that provision.

In broad terms, the Bipartisan Budget Act would use $85 billion of targeted deficit reduction to pay for almost $63 billion of defense- and non-defense sequester relief. As a result, the $20 billion defense cut which would occur in mid-January is replaced with a small increase.

The military retirement provision in particular would reduce COLAs by 1 percent (but not to below 0) for working-age pensioners below 62 (many of whom work in second careers), with a one-time catch-up at 62 so that retirees above age 62 are held completely harmless. This provision would save $6 billion in mandatory spending, but by reducing the amount the Department of Defense has to fund their pension accounts, actually allows $8 billion more in defense spending.

In other words, the savings from the military retirement provisions are not actually going toward deficit reduction, but instead toward funding other defense needs. The Pentagon can make much-needed reductions to its compensation costs and free up resources to build an adaptive 21st Century military.

Understanding Military Retirement Benefits

Currently, members of the military become eligible for retirement benefits after 20 years of service. As a result, many start receiving retirement benefits as early as their late 30s, and on average begin collecting by age 42. For 20 years of service, benefit levels generally equal half of a beneficiaries' highest 3 years of work, and 2.5 percent more for each additional year worked beyond 20. Benefits then grow every year with the Consumer Price Index.

The fact that members of the military can retire so young has important implications. For one, most retirees have second careers while collecting their pensions – sometimes as civilian employees at DoD, sometimes as military contractors for high profile companies, and sometimes in fields completely unrelated to their military service.

It also means that a military retiree is likely to spend more time collecting retirement than serving in the military; an officer who serves for 20 years beginning at age 22 and then lives to the average male life expectancy of 82 will have collected 40 years of retirement benefits for 20 years of service. In the private sector and civilian workforce, the opposite tends to be true – most Americans spend closer to 40 years working to collect 20 years of retirement benefits. 

Why Is Military Retirement In Need Of Reform?

According to the Defense Business Board, military retirees eligible for pensions receive a benefit more than 10 times greater than private sector equivalents. Although there is good reason to provide generous benefits for those who serve in the military, many defense experts and officials worry this level of benefits is ultimately unsustainable.

According to Defense Secretary Gates in 2010, "Health-care costs are eating the Defense Department alive, rising from $19 billion a decade ago to roughly $50 billion." Current Secretary Hagel said “Without serious attempts to achieve significant savings in this area, which consumes roughly now half the DOD budget and increases every year, we risk becoming an unbalanced force, one that is well-compensated but poorly trained and equipped, with limited readiness and capability.” 

Although health benefits are a big part of this, funding retirement benefits cost about $16 billion per year – which is about 34 cents for each dollar of basic pay for active duty personnel. The cost of military benefits is growing over time, while sequestration means that the total money available is shrinking. The chart below shows the amount of each service member's total compensation package (including health and retirement costs), which has grown faster than inflation.

Source: CBO

In addition to funding concerns, the current military retirement system is in many ways broken. As a Moment of Truth Project paper explained in 2011, those with 19 years of service get nothing while those with 20 years walk away with one of the most generous pensions in the country. This creates bad incentives, including by encouraging skilled members of the military to exit shortly after their 20th year, but also creates questions of fairness. 

How Does the Bipartisan Budget Act Change Military Benefits?

Although fundamental reform is ultimately needed, the Bipartisan Budget Act makes only a modest change to military retirement benefits – temporarily reducing COLAs for those below the age of 62. This means that instead of receiving 2.3 percent benefit increases in a typical year, working-age military retirees would receive 1.3 percent. In years inflation is higher they would receive more, but in no case could their increase fall below 0. 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.

Yet like the Fiscal Commission recommendations, this policy would provide a one-time "catch-up" in pension levels at age 62 (to what they otherwise would have been), and then grow benefits with CPI after that. This means that there is no change to pensions for beneficiaries older than age 62 either now or in the future.

Some critics have argued that this modest change would reduce the lifetime value of pensions by more than $80,000. Although their figures are accurate, critics fail to put the number in context of an average lifetime benefits for enlisted personnel of $2.4 million. In other words, the total reduction, relative to current law, would be about 4 percent of cash pensions (forgetting health and other benefits) – and this would come when most retirees are working elsewhere and earning supplemental income.

In addition to saving money and enabling more targeted spending on defense programs, reducing COLAs until age 62 could also help encourage longer careers in the military and help retain experienced military officers. The reduced COLA would still leave military pensions better protected from inflation than most of those in the private-sector.

Finally, it is important to understand where this money would go. As we've explained before, the Bipartisan Budget Act provides over $22 billion of sequester relief on the defense side – meaning defense spending will be $22 billion higher than under current law. But the $6 billion of savings from this provision would allow DoD to contribute $8 billion less to the Military Retirement Fund to cover future pensions, thus providing an additional $8 billion, beyond the $22 billion, to put toward military readiness and other defense priorities.

How Does This Proposal Affect the REDUX Retirement System?

Currently, service members can choose from two retirement systems – the High-36 system we described above, or an alternative system called REDUX. Although most choose the traditional system, those choosing REDUX receive a one-time $30,000 payment in exchange for accepting initial benefits that are 10 percent lower and a COLA of CPI minus 1 percent. This proposal would not change REDUX at all, and thus might make it somewhat more attractive to servicemembers.

Pension Payments of a Typical Military Retiree Under Three Systems

Source: CRFB staff calculations based on a service member who retired in 2013 at age 38 with an E-8 rank (Sergeant First Class). Salary information from the Office of the Secretary of Defense.

Conclusion

There is broad recognition, from Chairman Ryan to Defense Secretary Hagel to Army Chief of Staff Ray Odierno, on the need to reform military compensation. The changes to military pensions in the Bipartisan Budget Act of 2013 is a modest step in that direction, slowing the growth of one of the nation's most generous retirement systems for those not yet of retirement age.

These changes come with a cost – lifetime benefits will be 4 percent lower, on average, than they otherwise would have been. But these reforms are part of a package with substantial benefits. This package avoids immediate cuts in defense spending, provides relief to the mindless non-defense discretionary cuts, frees up further resources for military readiness, and reduces the deficit by more than $100 billion over the next two decades.

Nothing but Class Warfare

The compensation provided is the price to pay for a military member to be subject to a strict and regimented life.  Either you pay for the services renderred or member receives (to start with):

 

- Overtime and time and a half on a pay base that include all compensations.

- All Holidays off

- Weekends off

- No duty

- No barracks - compensate for lodging in normal wages

- Ten days paid vacation

- Resign/quit without notice regradless if deployed or not; no AWOL or Disertion prosecution

- Throw out NJP and no UCMJ proceedings for anything not equivalent

 

Re: Nothing But Class Warfare

Not to mention:

-No more bullets to the head

-No more buddies blown up by IEDs

- No more rockets shot at your assigned housing

Re: Nothing But Class Warfare

With all due respect for the few that really do put their lives on the line, and deserve much more than they get, DOD says 91% of military jobs do not involve direct combat operations.

 

Re: Nothing But Class Warfare

Obviously written by a non-veteran...  Simple math:  9% (according to your "DOD" statistic) of the POSITIONS involve direct combat operations (btw - "direct fire" means firing back at your enemy, just because "direct fire" is not involved, does not mean the deployed SERVICEMEMBERS are not in greater danger (due to IEDs and indirect fire threats, among others) than civilians performing the same occupational tasks in non-combat theaters, such as their hometown, USA).  If you count the number of "multiple combat tours" of each servicemember, you will see that nearly 50% of those PEOPLE served in those "9% direct combat operations" POSITIONS.  Guess how many of them go on to serve 20 years or more under those conditions?

Re: Nothing But Class Warfare

Probably better for you to disguise your ignorance than try to employ statistics you don't understand.

Congress

 

Isn't cutting their own pensions..... 

 

 

Hagel

 You send the military to war since 1990 and you complain about Healthcare cost to Veterans? What the hell did Hagel expect? Stop spending $50M on Italian Cargo planes that are flown from the factory to the boneyard! Stop spending millions and millions in September at the end of the fiscal year so you get more money next year! Hagel is real piece of work! 

Mr Hagel

 Why did you lie and say that we will be grandfathered if retiring or currently serving? How do you sleep at night or look us in the face? 

Your analysis is almost like

Your analysis is almost like McNamara's in using the dollar and cents rationale. History has shown that Defense is not a Corporation that must have a profit nor make the "Share-Holders" satiated. The population of the 95%+ whom choose never to serve are the share-holders. The security of the nation is not to protect the bottom line of a few.

 

When you enter an aircraft do you feel more safe having a Pilot who is paid just enough to pay the rent, has less than 5 years of flight experience and knows that flying for more than 8 years is not worth the long term financial security of their life span? Military service has rewards just as it has a potential costs. The greatest cost being the life of the Service Member. Can you tell me what inducement you would use to ask a Citizen to become a Warrior and take on such risk if they know that in the end running the Gauntlet will not ensure anything more than what they could get by never risking them selves at in this fashion? How long before you use such rationale to depect law enforcement and fire fighters who in many areas earn a 20 year pension compared to a 30-40 year pension of those who never do such work?

 

 

Age discrimination

 I think this is age discrimination. Since I have not been retired ten years my pay is classified as retainer pay. Therefore I am still employed by DOD. Once I pass the ten year mark my pay will still come out of DOD payroll funds and I am still subject to UCMJ, therefore they are still my employer. Therefore the Age Discrimination Act is relevant. 

 

Breach of Trust

 We were promised by the Commander in Chief, SECDEF and Military Chiefs of Staff that for those serving now our retirement pland would be grandfathered. Why did we get lied to by our leaders? 

Military Retirement COLA

Hello Mr. Gates, Bowles & Simpson,

 

Why don't you support eliminating foreign aid to any country who has or is currently sponsoring terrorism? This seems like a logical response to ensure that our military veterans receive modest COLA increases that they deserve. Additionally, when was the last time you refused a taxpayer pay increase and/or COLA?

 

Sincerely,

Retired Military

Chris McClaren

Inaccurate info - unfair policy

The article's analysis is inaccurate with respect to the percentage of base pay received by those who elected the REDUX retirement plan vs. High-3.  It is true that, for someone retiring after 20 years of service, retired pay is calculated at 40% of the highest 36 months of base pay.  However, for each additional year of service after 20 years, the retired pay calculation increases by 3.5% (as opposed to 2.5% under High-3), so the differential decreases until, at 30 years of service, both REDUX and High-3 would receive the same, 75%.

 

Retirement policies are typically grandfathered.  Not doing so in this case sure makes a sucker out of those of us who elected High-3.  Had we known then that we were being lied to, I suspect many of us would have opted for REDUX and received the $30,000 cash payout.  We were told that the choice between REDUX and High-3 was irrevocable.  Apparently that "irrevocable" part only applies to us, not to the ones who made the promises.

 

U.S. Navy, Retired

What a slap in the face.....

I'm sure that any one of us who have reached retirement eligibility would be more than happy to continue sacrificing for our country if asked to by our governing body. Let's be honest, there's not a whole lot of difference between 1.3% and 2.3% when you are talking about roughly $30k-40k a year. It's not about the money. It's the fact that our civilian and senior military leadership actually can live with themselves by scraping the pockets of military veterans to re-direct DoD funds, not acutally reduce any kind of defecit. There are just way too many other adjustments that could be made to get more bang for the military buck instead of essentially making veterans pay out of pocket for our active duty force.....It's deeply concerning that the values of our country and government are no longer patriotic and that our country is no longer loyal to itself.

 

On a much less philisophical level....

Do former Presidents pay out of pocket to replenish office supplies for the current administration?

Do former Congressmen and Senators pay out of pocket for the fuel to shuttle their successors across the world?

Sounds kind of ridiculous huh......but asking veterans to pay for equipment and training for active operations doesn't sound ridiculous at all?

 

How dare you arbitrate further sacrifice by veterans without holding the IRS accountable for approximately $13 billion in fraudulent tax refunds issued to non-US citizens in only one year?

How dare you instead of repairing tax loop holes that could easily save over $7 billion in a single year? 

 

There are so many things wrong with this that a simple blog comment couldn't even come close to addressing the immorality of it. It has nothing to do with the money but has everything to do with the judgement exercised by the people who thought it was ok to approve it. I mean seriously, what are you thinking? Why, just why?

Why?

I'm sure that any one of us who have reached retirement eligibility would be more than happy to continue sacrificing for our country if asked to by our governing body. Let's be honest, there's not a whole lot of difference between 1.3% and 2.3% of $30k-$40k per year is not really that much. It's not about the money. It's the fact that our civilian and senior military leadership actually can live with themselves by scraping the pockets of military veterans to re-direct DoD funds, not acutally reduce any kind of defecit. There are just way too many other adjustments that could be made to get more bang for the military buck instead of essentially making veterans pay out of pocket for our active duty force.....It's deeply concerning that the values of our country and government are no longer patriotic and that our country is no longer loyal to itself.

 

On a much less philisophical level....

Do former Presidents pay out of pocket to replenish office supplies for the current administration?

Do former Congressmen and Senators pay out of pocket for the fuel to shuttle their successors across the world?

Sounds kind of ridiculous huh......but asking veterans to pay for equipment and training for active operations doesn't sound ridiculous at all?

 

How dare they arbitrate further sacrifice by veterans without holding the IRS accountable for approximately $13 billion in fraudulent tax refunds issued to non-US citizens in only one year?

How dare they instead of repairing off-shore tax loop holes that could easily save over $7 billion in a single year?

 

There are so many things wrong with this provision of the act that a simple blog comment couldn't even come close to addressing immorality of it. It has nothing to do with the money but has everything to do with the values and judgement exercised by the people who thought it was ok to approve it. I mean seriously, what were you thinking? What is your motive? Why, just why? Shame on you.....

 

 

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