Mixed News on the House Military COLA Bill

With the debt ceiling having been reinstated last Friday, lawmakers are scrambling to come up with legislation to lift or suspend it again before extraordinary measures likely run out by the end of the month. Originally, House Republicans had planned on attaching a repeal of the military retirement cost-of-living adjustment reduction for people who joined the service prior to 2014 to a debt ceiling suspension through March 15 of next year. Now it appears they will pursue the "beware the ides of March 2015" strategy separately from the military COLA change, opting to vote on a clean debt limit suspension instead.

Avoiding default on the national debt is, of course, a good thing. The military COLA bill is more of a mixed bag.

As we have said before, the reduction in COLAs for working age military retirees in the Ryan-Murray deal is a modest change in the military retirement system that is need of reform.  Funding the obligations for health and pension benefits for military retirees is placing an increasing burden on the defense budget. Repealing or limiting application of the COLA provision in Ryan-Murray without offsetting it with other changes reducing obligations for pension or health benefits for military retirees will require further cuts in other defense programs to accomodate higher accrual payments to fund these obligations.

The bill the House is considering would exempt current service members and retirees from the COLA reduction and apply the reduction to service members who enlisted after January 1, 2014. As a result, the policy would not achieve any savings for at least twenty years, which is the vesting period for military pensions. Grandfathering current enlistees and retirees would cost $7 billion over the next ten years. These costs would be offset by extending the mandatory spending sequester through 2024 (it had previously been extended to 2022 and 2023 in the Ryan-Murray deal).

The good news is that unlike the legislation currently being considered by the Senate, which would completely repeal the military COLA reduction without offsetting the costs, the bill the House will consider would be fully offset within the ten-year window, and it would at least maintain the COLA policy for new service members. The less good news is that it partially rolls back one of the few entitlement reforms in Ryan-Murray, and it offsets the cost with savings in the tenth year, meaning that interest costs will accrue on higher debt in the years prior. Also, it will be replacing a targeted cut with the across-the-board cuts from the mandatory sequester. Moreover, it accelerates the timing of the sequester cuts in 2024 to move some of the savings that would have otherwise occurred in FY 2025 (outside the ten year budget window) into FY 2024. Finally, the COLA reduction repeal has costs over the longer term whereas the sequester extension only produces savings in two years.

As a side note, the legislation also contains $2.3 billion for a "Transitional Fund for Sustainable Growth Rate Reform," which would provide funds for the Secretary of Health and Human Services to supplement Medicare physician payments in 2017. Most likely, though, the fund will be rescinded and used as an offset in SGR reform legislation.

The military COLA bill at least complies with PAYGO on paper but just barely clears the bar. While it is encouraging that the legislation the House will be considering offsets the costs, replacing savings from a specific reform of an entitlement program with one-time savings from an across-the-board spending cut is a step back from responsible budgeting.