Will Military Compensation Reform Get the Green Light?

After a more than a year-long process, the Military Compensation and Retirement Modernization Commission released its final report yesterday, recommending changes to military pay, pensions, health benefits, and other benefits. The report is highly anticipated because of the Pentagon's repeated insistence that personnel costs need to be addressed to avoid other areas from getting squeezed by the defense caps. Lawmakers so far have often ignored or only partially implemented their policies. Since the Pentagon spends some of its current budget paying for future retirement and health benefits in addition to current costs, the longer policymakers hold off, the tighter the defense budget gets.

The report includes fifteen specific recommendations in the three areas of Pay and Retirement, Health Benefits, and Quality of Life programs. The Commission was prohibited from recommending changes to the benefits of existing servicemembers (who could still opt into the new retirement system), so these changes generally only apply to new troops. Using policies that only apply to new servicemembers, as policymakers did for the Murray-Ryan cost-of-living adjustment change, has trade-offs: it reduces upfront savings and creates disparities in benefits among new and old servicemembers, but it also makes changes more politically palatable and ensures that servicemembers can still claim the benefits they were promised, while ultimately achieving similar savings in the long run. Importantly, the report indicates that servicemembers would prefer the new benefit structures by wide margins.

The Commission's recommendations are:

Pay and Retirement

• Reform the current defined benefit pension system
• Provide a new option for servicemembers to purchase survivor's benefits
• Promote financial literacy
• Increase the efficiency of the system of reserve forces

Health Benefits

• Reforms to continue providing excellent medical care in the field
• Add an alternative to TRICARE that increases veteran's health care access, choice, and value
• Improve support for dependents with special needs
• Improve collaboration between Departments of Defense and Veterans Affairs

Quality of Life Programs

• Consolidate commissaries and exchanges into a single organization
• Improve access to child care on military installations
• Consolidate education benefits under the Post-9/11 GI Bill
• Better prepare servicemembers for transition to civilian life
• End a program that provides financial assistance to cover nutritional needs which mostly overlaps with food stamps
• Expand travel on military aircraft to more military families
• Allow tracking educational statistics for servicemembers' children

The centerpiece of the military pay and retirement changes is the reform of the current pension system, which provides no benefit for the vast majority of Service members because it is only available to the small percentage who stay in the military for 20 years vesting period. The proposed system has elements of both defined-benefit and defined-contribution plans. The existing defined-benefit portion would be slightly reduced from 2.5 to 2 percent of base pay, but servicemembers would be automatically enrolled in the Thrift Savings Plan (TSP), a current retirement plan for federal employees. One percent of pay would automatically be contributed to this account each month, and Service members would contribute 3 percent of pay by default (with the option to raise or lower that), and the government would match contributions of up to 5 percent of pay. Retention would also be boosted by offering a lump-sum continuation payment for those with 12 years of service who commit to stay on an additional four years.

Other changes to pay and retirement would offer the option of a choosing a less subsidized survivors' insurance benefit, but one that would not be offset by the receipt of VA survivors' benefits. The recommendations would also reduce the number of reserve duty statuses from 30 to 6.

On health care, the Commission would replace TRICARE for active-duty families and reserve Service members with a system based on commercial insurance. Families would have a Basic Allowance for Health Care (BAHC), which would pay their share of premiums (28 percent) and out-of-pocket costs for an average health plan among a selection of plans provided by the Office of Personnel Management. For non-Medicare-eligible retirees, current TRICARE plans would be replaced with a new plan which would require higher premiums (increase in cost share from 5 to 20 percent phased in over 15 years). Retirees on Medicare would see no change.

Overall, the Commission estimates its recommendations would reduce Department of Defense spending by $35 billion and other federal spending by $12 billion over the next five years. When fully phased in, the plan would result in inflation-adjusted savings of about $13 billion per year.

Savings from MCRMC Report



^{Source: MCRMC}

It remains to be seen whether this report will be an impetus for change. The FY 2015 Defense budget, which included changes to TRICARE, stated that it would wait for the report before suggesting changes to military pay or pensions. The recommendations are too late to be put in the FY 2016 budget, which comes out Monday, but in a statement on the report, Defense Secretary Chuck Hagel said that "they will inform discussions that DoD will have with Congress over the course of this year." Given past statements by  current and former military leaders about the need to reform personnel spending, we certainly hope these recommendations are considered by lawmakers this year.