Defense Business Board Recommends Military Retirement Changes

Defense spending is an area within the federal budget where significant savings can be found, and specifically within the military retirement system. Just take a look at the roughly 30 fiscal plans that have been proposed and you will see that several of them recommend savings from not just civilian but military retirement programs too. Reforms to military retirement are also being considered by the current Secretary of Defense, Leon Panetta, given comments he made in a recent speech.

With that in mind, the Defense Business Board (DBB) released the framework of a reform package of the military pension system, with a full report expected later this month.

First, the problems with the current system. According to the DBB, military retirement is based off a 100-year system that is tied to years served and thus lacks fairness to high-risk positions. Furthermore, 83 percent of those who serve receive no retirement benefit, and the system likely overpays with roughly 40 years of retirement benefits for 20 years of service. For those who serve more than 20 years, they receive a benefit more than 10 times greater than private sector equivalents with the federal government spending a total of $46 billion on military retirement in 2011.

With that in mind, the DBB offers a framework for a new system.

The new proposed system would move to a new defined contribution plan, based on the Uniformed Military Personnel Thrift Savings Plan, but would also include annual contributions from the federal government. The Uniformed Military Personnel Thrift Savings Plan is a defined contribution plan where the retirement income received depends on how much the user contributed to the account, and the earnings on it, during the working years. The plan would include an option for military member contribution and the ability for the plan to be transferred to the private sector, and back to the military after that if needed. It would apply to both reserve and active duty personnel.

The plan would vest after 3-5 years and would be payable after ages 60-65 or Social Security (the ranges depending on type of military position, accounting for things like risks involved). This is different from the current system that vests after leaving the military, which can happen after only 20 years of service (as early as someone in their late 30’s in some cases). Additionally, the level of government contribution is funded based on a percentage that is similar to the “highest end of a private sector plan”. Moreover, the plan would allow for certain payouts for education, home ownership or business acquisition.

Finally, a key element of the plan would be the adjustment for different military roles, something that is currently lacking. The plan would double contributions for years in “combat zones or high risk positions”, would increase contributions for “hardship tours,” or could even have lower retirement ages based on similar metrics.

The plan would not affect the current military retiree population and would exempt fully disabled veterans. Overall, this plan, while not having a cost estimate as of yet, is a proposal that warrants attention from lawmakers and should be on the table for deficit reduction. As Secretary of Defense Leon Panetta recently said, "[changes to retirement benefits are] the kind of thing you have to consider”.