Luring the current force to ‘reform’ its retirement

Contributing WriterMay 17, 2014 

Current military members and retirees will be grandfathered from any retirement changes that the Military Compensation and Retirement Modernization Commission recommends to Congress next February.

But current force members shouldn’t let that dampen their interest in the work of the commission or its final recommendations, because any retirement reforms proposed almost certainly will include an “opt-in” feature.

Many members will get the chance to choose to switch to a more modern, less generous retirement plan. Who would do that?

If past behavior is a reliable guide, thousands will.

Economists use the term “personal discount rates.” More simply, it’s how the promise of cash-in-hand affects you versus larger future rewards.

It’s pretty clear, though, that current members, if they choose, will be able to stay under the “High-3” retirement with its immediate annuities after 20 years of service set to equal 50 percent of average basic pay for their highest three earning years. Why?

The Joint Chiefs of Staff are insisting on it. The Obama administration has made retroactive retirement protection part of its guidance to the commission. And the likelihood Congress will buck those promises is slim given the lashes Rep. Paul Ryan, R-Wis., and Sen. Patty Murray, D-Wash., felt when their budget deal last December included a cap on military retiree cost-of-living adjustments.

Before the ink dried on that deal, Congress voted to replace the COLA cap with alternative budget savings it still might regret: lengthening the impact of sequestration on future defense budgets by another year.

So to borrow a phrase from recent popular culture: If you like your current plan, you can keep it. But you’ll have something new to consider.

Department of Defense pay experts gave the commission two concepts for reforming retirement. They also advised that a lot more money would be saved for taxpayers if, in adopting either of these ideas, the commission also endorses an “opt in” feature for those in service.

“Steady state” savings from any one of the new retirement concepts if adopted only for new entrants would range from $1.7 billion to $3.9 billion annually, officials told the commission.

“However, if currently serving members were permitted to participate … which DOD believes should be an option, savings to the department and the Treasury would emerge more quickly.” The greater the number of members “who opt-in, the faster the full savings of the change would be realized.”

Current military retirement is a defined benefit that pays an immediate annuity after 20 or more years. The value of the annuity climbs by 2.5 percent of basic pay for each year served. However, only 15 percent of all members who serve stay long enough to quality.

Both of the new concepts shown the commission are hybrid plans, combining a reduced defined benefit with two new tools. One is a “defined contribution” feature, the government making regular payments on a member’s behalf into a Thrift Savings Plan, similar to a 401(k) account. The contributions would be invested and made portable for members to take with them even if they leave before 20 years. They would be fully vested in these accounts after six years’ service.

A third element of the hybrid concept is supplemental pay to give the services greater flexibility to shape force structure and to retain select skills or pay grades. These pays could ease transition to civilian life for careerists no longer needed, or be made “continuation pays” to entice members to serve years longer until the defined retirement benefit is within reach.

Being able to pocket benefits sooner can be a powerful inducement to forfeit more valuable benefits. As Defense officials advised the commission:

“Because service members on average value deferred benefits less than the actual cost to the government to provide these benefits, it is possible to generate savings and sustain retention by altering the mix of current and deferred benefits.”

Defense officials have seen this work with the $30,000 Career Status Bonus offered for the last decade-plus to careerists in their 15th year. In return for that extra cash, to pay off credit cards or buy a new car or put a down payment on a home, careerists are still opting back into “Redux” with its reduced annuities and smaller cost-of-living adjustments to retired pay.

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