Hatching a new nest egg - Military Retirement - Navy Times

Hatching a new nest egg

A new plan to overhaul the military retirement system proposed by the Defense Business Board would radically reshape military retirement — scrapping the 20-year retirement model in favor of a civilianlike system that would pay much less to those who make the military a career, while providing retirement cash to everyone, no matter how little time they spend in uniform.

Congress would have to approve any change to military retirement. But with the pressure on to cut the deficit — particularly entitlements, such as pensions — the mood on Capitol Hill is open to any plan that helps cut federal spending.

The stunning, detailed proposal shifts money from the 17 percent of service members who actually serve 20 years or more to the 83 percent of overwhelmingly enlisted members who do four, six or eight years and leave.

Those already serving would be partially grandfathered under the old system, earning a hybrid of the old benefits and the new, reducing the value of their potential retirement and the incentive for troops to stick it out to the 20-year mark.

So vast would the shift be, in fact, that the plan could transform the military culture by reshuffling the incentives that underpin career choices.

Many troops and at least one major advocacy group reacted swiftly to reports of the new plan, which would cut the Pentagon’s long-term budget by as much as $338 billion over 12 years.

Officers, who make up the majority of those who earn a 20-year retirement, generally oppose the idea. But the radical redistribution of retirement benefits would likely win over the majority of the enlisted force, which would receive benefits under the new plan but don’t get a dime under the existing plan.

Younger enlisted troops would be the biggest winners. They would begin accruing retirement savings immediately, at the rate of about 16.5 percent of basic pay per year, and would be fully vested in the plan after three to five years of service, according to a briefing prepared by the board.

Like civilian 401(k) accounts, troops would choose how the money is invested and manage their own funds. And they take it with them if they leave, regardless of whether that’s after five, 10 or 15 years of service.

For example, an enlisted member who makes it to the E-3 paygrade and then leaves after four or five years will depart the military with about $20,000 in retirement savings. Properly invested, that might grow to $100,000 or more by age 65.

A briefing prepared by the board said the money would be payable without penalty at “age 60 to 65 (or Social Security age),” indicating it would be rolled over into an individual retirement account or employer-sponsored 401(k) and couldn’t be withdrawn early without penalty except in certain specified circumstances, such as for education, health care or other designated emergencies.

However, board members say an alternative option would be to give troops access to the money immediately upon retirement.

Where will all the money for those government contributions come from? The answer is straight from the coffers of the longest-serving careerists. Their retirement payouts will be far less valuable than under today’s formula, which pays 50 percent of basic pay after 20 years — adjusted annually for inflation and paid out over the entire course of a member’s life.

Indeed, the reduction in value would be staggering: The average officer retiring after 20 years today can look forward to about $1.1 million in retirement benefits over a lifetime. Under the proposed system, however, that same officer would instead get a savings account valued at $355,000, according to data compiled by the Pentagon’s Office of the Actuary.

Protecting current troops

The Defense Business Board proposal includes a plan for phasing in the new benefit so the Pentagon can start accruing savings more quickly. Current members would get credit for time served under the original plan up to the date of the change in law; after that, they’d earn benefits under the new plan only.

For each year of service under the old plan, troops would get 1/20th of the original benefit. So members who had served 10 years before the change and then stayed for 10 more would receive monthly retirement checks equal to half the value of the current retirement benefit for 20 years of service, along with whatever benefits they accrued over the course of the rest of their service.

Under this provision, members would have to stay past 20 years to receive the annuity but could walk away with the money in their retirement savings accounts regardless of time in service.

More money if you deploy

The plan is constructed to give Pentagon personnel planners flexibility to incentivize various types of behavior and decisions. For example, government retirement contributions could be increased for those willing to take on the hardest assignments, such as overseas deployments, or for those with skills in particularly short supply.

The board says a number of other factors could affect the size of retirement contributions: • Combat troops could receive higher payments, while those in administrative career fields could receive less.

• Deployed troops, or those who accept hardship assignments, could receive more money, while those in the most comfortable jobs would not.

• Highly skilled members, such as pilots, doctors and lawyers, might receive greater retirement contributions as retention incentives.

The board analyzed scenarios with government contributions of 16.5 percent of a member’s basic pay, as well as others in which the monthly contribution was as great as 40 percent of basic pay for those in combat zones, high-risk jobs or hardship tours.

But many details remain vague. The board barely touches on how its plan would apply to reservists or troops with broken service, for example, though board members said the plan would not alter medical disability retirement.

Broad cultural impact

The proposed change would have a seismic effect on military culture, eroding the notion of an elite tier of military professionals who commit to full careers.

The plan would render the hallowed 20-year mark irrelevant, allowing troops to leave at their 19th year with no major penalty or stay until 21 years without major benefit. Calling someone “retired military” would become an ambiguous term and could lose its current meaning and prestige.

“It will just blur the lines on what it means to serve your country for an extended period of time,” said retired Air Force Col. Michael Hayden, who tracks retirement issues for the Military Officers Association of America. He said MOAA is unlikely to support the plan.

“At the end of the day, what will it take for someone to be considered to have served a career in the military?” Hayden said.

Larry Korb, who was the Pentagon’s manpower chief under President Reagan, said he expects major opposition from the service chiefs and senior officers.

“It would be a cultural issue, that this somehow makes military service, quote-unquote, ‘just another job.’ If it’s just like your 401(k), it’s nothing quote-unquote ‘special,’“ said Korb, now a senior fellow at the Center for American Progress.

Such cultural issues will crop up everywhere. For example, some troops are already asking questions about commissary and exchange privileges for those who leave short of 20 years under the new plan, something the Defense Business Board does not address.

Retention: the big unknown

The biggest concerns about switching to the Defense Business Board’s plan are about how it will affect career retention.

“To be frank, it’s an unknown,” acknowledged Richard Spencer, a former finance executive who led the board’s retirement task force.

Junior officer retention already has been a persistent problem across the force during the past decade. On the enlisted side, the military has spent more than $4.5 billion on re-enlistment bonuses in the past five years.

Hayden said the new proposal would only exacerbate whatever pockets of retention problems already exist.

“This would have a devastating impact on retention,” he said. “There is no incentive to stick on for those other 10 years of service. They will be looking at other options. It’s just too lucrative to just take their money and run.”

The prospect of pinning on a star or becoming a senior NCO, however, will still entice many troops to stay, especially in the combat arms, where promotion opportunities are greatest.

But in support-oriented career fields, where making even O-6 is a long shot, that may not be the case, said Air Force Maj. David Long, an administrative contracting officer.

“I think most of my O-4 or O-5 colleagues probably would have left the service had this type of change been implemented,” he said.

On the plus side, a more flexible retirement plan would help the military push out weak performers and reshape an officer force that is built around the 20-year retirement model.

“There are people who after 13 or 14 [years], you want to get rid of them, but you don’t because that would be almost cruel,” Korb said.

Bill Hatch, who teaches manpower classes at the Naval Postgraduate School in Monterey, Calif., said the military must always worry about keeping its best people, and that this plan might make that more challenging.

“It is the best and brightest who recognize opportunities,” he said. “They have a sense of self-confidence. They can say, ‘I don’t need the military, I can do just as well on the outside.’ “The draw [of leaving] is going to be extremely big, especially for those who think they can make that leap seamlessly,” Hatch said. “This could wind up as a leadership issue.”

The political wicket

The current retirement system is at least 60 years old. Until recently, changing it was considered politically impossible.

Not anymore. With pressure mounting on the Pentagon to cut spending, personnel costs are already locked in an ugly competition with major weapons programs and operational costs.

Many top Pentagon officials, including new Defense Secretary Leon Panetta and Army Gen. Martin Dempsey, likely to be the next chairman of the Joint Chiefs, have indicated a desire to find ways to better manage those costs.

“It is time to review the military retirement system for needed changes and efficiencies that will still encourage retention and recruitment,” Dempsey said in written testimony prepared for his July 26 confirmation hearing.

The Defense Business Board proposal also may prompt reconsiderations of past reform plans, such as the Pentagon’s 2008 Quadrennial Review of Military Compensation.

That proposal called for keeping the current 20-year retirement system but with one huge change: Troops would not begin receiving monthly payments until they reached age 60.

MOAA’s Hayden said he is resigned that changes to the existing system likely are inevitable.

“We’re going to see some kind of retirement reform,” he said. “Especially in the current debate about federal spending, this is going to gain further traction.”