Monday, May 11, 2015

Endorsing a Bad Deal

As we've noted in recent weeks, Congress and the Administration are rushing headlong to reform the military retirement system.  Late last month, the House Armed Services Committee rejected an amendment that would delay implementation of reform plans, now scheduled to take effect in 2017.  The final vote on that measure was 55-8; the only Congressmen who voted for the delay were all veterans of the conflicts of Iraq and Afghanistan.  One member of that group, New York Republican Chris Gibson, pushed for a year-long review of the reform plan.  "We're in no rush to do this," he told USA Today, "We're better off listening first."

But the committee chairman, Congressman Mac Thornberry of Texas, dismissed Gibson's concerns. In fact, he rejected Gibson's claims that some retirees will actually receive smaller pensions under the new plan, claiming the combination of new investments and other changes will actually give troops more money--in some cases.  "The time to act is now," he said.

The reform plan has also picked up support from powerful advocacy groups, including the Iraq and Afghanistan Veterans of America, and most recently, the Veterans of Foreign Wars.  Last month, the VFW and four other veterans groups sent a letter to Congress, endorsing reform proposals that will create a 401k-style retirement plan for individuals who join the military in 2017 and beyond.  Representatives from those advocacy groups--and other organizations--note that the current system provides no benefits to individuals who don't serve for at least 20 years.

Under the new plan, service members would contribute up to five percent of their base pay toward the plan, with the federal government matching those contributions up to three percent.  Participants would be vested during their first enlistment, so virtually everyone who serves would have a small nest egg from their military service.  Since most VFW members did not serve for 20 years, the group sees it as a boon for future military personnel, who (presumably) will join the organization when they leave the armed forces.

Not surprisingly, the "benefits for all" proposal comes at a price.  To receive a full pension, most military retirees would have to wait until age 62--roughly 20 years after many leave the service.  Former service members who want their money sooner could take a lump sum payout when they leave the military (a bad idea for almost any retiree), or take a smaller annuity payout over a longer period, beginning with their retirement from the military.

To "sweeten" the deal, the new system would offer a small "bonus" at the 12-year point, equaling 2-3 months of basic pay for service members.  That would supposedly persuade military personnel to re-enlist and serve another eight years (or longer), ensuring that the armed forces retain experienced leaders and allowing them to keep building adding to their 403b-style nest egg.

But you don't need to be a personnel officer to understand that "bonus" will become separation pay for many service members.  As the military continues to downsize, the 12-year mark is a convenient point to get rid of "excess" personnel, saving the government millions in matching contributions to the retirement plan, along with reduced training costs and all other expenses related to keeping someone in uniform.  For thousands of future E-5s, E-6s and O-3s, their 12-year bonus will come with a pink slip.

It's also worth noting that the new compensation scheme will have an impact that goes far beyond the retirement program.  Retired Air Force Colonel Talbot Vivian, a former medical administrator, did an excellent job of summarizing the burden being placed on service members in a recent letter to Air Force magazine (subscription required).  Colonel Talbot accurately calls the reform proposal for what it is--an effort to "find more money to buy stuff and pay for flying hours by shifting the cost of services and benefits to airmen and retirees."

He offers the example of an Air Force Staff Sergeant (E-5), stationed in the CONUS, with a stay-at-home spouse.  Before taxes, the Sergeant's base pay is $2,951.40; when you add in their allowing for housing ($889.20) and subsistence, their gross pay rises to $4,202.52.  But if the airmen and his/her family live in older-style, federally-owned base quarters, they lose the housing allowance and when you deduct that (and federal taxes), the E-5s take-home pay is about $2,952.15 a month, or just over $35,000 a year.

From that modest salary, the government will deduct $147.57 for the Sergeant's contribution to the new retirement plan.  Meanwhile, the NCO will be paying more to feed his family, since the compensation commission has recommended eliminating commissary subsidies.  That means military families will pay the same prices for groceries as their civilian counterparts; the SSgt in Colonel Vivian's example will be paying roughly $1,037.50 a month for groceries, leaving him or her with $1,767.07 in spendable income to cover all other expenses.

But before the Sergeant can make his car payment, fill his tank with gas or pay the credit card bill, there's the matter of health insurance for his family.  Wait a minute--aren't military dependents and retirees covered under the TRICARE program?  They are (for now), but the compensation panel has recommended eliminating that option and replacing it with a choice of "commercial insurance options," read: Obamacare.  With commercial options drying up, it's a likely bet that dependents and retirees now covered by TRICARE will be forced into the exchanges, with higher premiums, deductibles and other out-of-pocket expenses.

A quick look at the Obamacare exchange shows a number of plans with monthly premiums between $100-$200.  However, the copays average 30% and the deductibles are $1000-$2500.  As Colonel Vivian observes, many military families will be forced to put aside thousands of dollars to cover potential medical emergencies, before they can save for other contingencies, or put aside money for a child's college education.  And remember: we're talking about a family with a gross income of $35,000 a year.

Among the various military advocacy groups, the Military Officers Association of America (MOAA) has been largely alone in opposing the new compensation scheme.  MOAA observes--correctly--that radical changes in pay and benefits has a direct impact on military readiness, as illustrated by the failed REDUX plan of the 1990s:

"Past reform proposals have been enacted into law, including conversion of retired military base pay into a high 36-month average base pay in 1980 and introduction of the so-called REDUX system for new entrants after October 1986.  The REDUX plan envisioned a reduced formula for service members who retire with less than 30 years of service and a CPI-1% COLA system and a one-time retired pay "catch-up" recalculation at age 62.

When Congress was considering REDUX legislation, senior defense officials expressed concern that the reduced career pull of lower retirement pay compared to the sacrifices inherent in military service would eventually undermine retention.  Those concerns proved justified in the 1990s, as surveys of separating service members highlighted REDUX as a significant reason behind their decision to leave the service." 

REDUX was eventually repealed, but rejection of the "new" compensation reform bill appears unlikely.  The politicians understand that military members, dependents and retirees represent less than 1% of the nation's population.  With the exception of a handful of Congressional districts, the military voting "bloc" isn't large enough to influence the outcome of elections, so it's convenient (and safe) to push the burden of retirement and benefits on current and former service members and their families.

As for the "readiness" issues created by the new plan, those won't become apparent until the mid-career NCOs and officers make their "stay or go" decision a few years down the road.  By that time, the "wise men" (and women) who created this scheme will be long since retired, and with a far better plan than the one being foisted on those who wear the uniform.   
FLASHBACK:  Another take on this issue in an earlier post, "The Problem With Petty Officer Gurney" from 2010.  Then as now, we were told that the "typical" military retiree--an E-6 collecting about $1700 a month (after taxes) was breaking the DoD budget and reform was imperative.  Did we mention that the head of the compensation panel, a retired Major General in the Marine Corps Reserve--earned $2.9 million during his last year of employment before retiring from SAIC?  As we observed at the time, that tidy package was far more than Petty Officer Gurney will ever collect in his military pension--even if he lives to the age of 90.                                 



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