As I See It — Purposes and Pitfalls of Retirement Reform

2008/08/13 00:00:00

By Col. Steve Strobridge, USAF-Ret.

The recent report of the 10th Quadrennial Review of Military Compensation (QRMC) recommends yet another version of military retirement reform. It has much in common with previous proposals to overhaul the military retirement system, including:

• greater emphasis on a 401(k)-style program;
• delayed receipt of full military retired pay until age 57-60; 
• greater use of cash incentive bonuses at the discretion of the service; and 
• retirement vesting for servicemembers with 10 or more years of service.

Current career servicemembers and retirees almost universally look on such proposals with dismay — especially the proposed delay in payment of retired pay until later in life.
Most such efforts have been rejected out of hand by past Congresses. And the single, much more modest effort enacted in 1986 (the so-called “REDUX” plan) had to be repealed in 1999 after the Joint Chiefs of Staff complained that it was undermining retention.

So why do these proposals keep coming up? There are several reasons, including:

Equity: One argument is only a relatively small percentage of people who serve in the military actually stay until retirement, and those who leave before that point earn no retirement, whereas civilian careers are increasingly mobile and career-changers can take vested benefits with them.

Efficiency: Military people don’t appreciate the value of long-term, inflation-adjusted benefits, and substituting less costly up-front cash bonuses can generate desired retention behavior at less cost to the government.

Flexibility: This line of logic is that the current 20-year system pulls some people to 20 years that military force managers would prefer to be able to separate selectively — by performance, specialty, or other criteria — and encourages others to leave after attaining 20 years, when service managers would rather have more authority to selectively decide who to retain for longer careers and who to separate or retire.

Let’s start with the last two issues. The efficiency and flexibility arguments clearly indicate that these proposals are designed to suit the management convenience of military force planners rather than to address the question of what we owe military people for agreeing to serve for 20 to 30 years under conditions of service that would be unacceptable to most American citizens.

That one-sided perspective gives inadequate consideration to several issues MOAA thinks are crucial in assessing the pros and cons of such fundamental changes.

Predictability: Servicemembers making career decisions after four to 12 years of service have a good understanding of the demands and sacrifices inherent in a military career. In return, they expect a reciprocal commitment that, once they’ve completed career requirements, they will have earned their own decision flexibility and a compensation package that will help them transition to a second career and the rest of their life. The current system is very predictable, if demanding. If you accept the demands and risks and complete a career, you will be rewarded with a unique lifetime compensation package that’s not available to most civilians for the same period of service. A plan that removes guaranteed compensation during the second-career years and replaces it with a complicated system of non-guaranteed bonuses that could change from year to year at the discretion of future force planners would make it extremely difficult for servicemembers to assess the value and stability of their future retirement package relative to the sacrifices demanded of them.

Proportionality: Career servicemembers have a retirement system that’s not available to civilians because their service conditions are exponentially more arduous than civilian working conditions. The 20-year “cliff vesting” system principle is that the reward is inappropriate unless the full requisite service is completed. The QRMC estimates the cost of its proposed system would be the same or slightly less than that of the current system. But it would pay considerable sums to people who voluntarily separate short of fulfilling a career. That means the money only could come from the pockets of those who serve a career — by deferring the age at which they can draw full retired pay. Taking money from people who complete a military career to pay those who leave service doesn’t amount to equity in MOAA’s book, nor is it a sound retention formula. Imagine what retention would be, in today’s environment, if the Army told a soldier with 10 years of service (and an upcoming third or fourth Iraq tour and an upset family) that his choice was to leave with a share of his retirement or continue serving under these conditions and not draw retired pay until age 57.

Uncertainty: The only thing we can be pretty sure of is that the needs of the force 10 years downstream will be different than the force planners are planning for today. Consider the past 30 years. We had big retention problems in the 1970s, followed by the Reagan buildup of the ’80s, then the Berlin Wall came down and the country declared a peace dividend and couldn’t cut people fast enough in the mid-1990s. Now, after seven years of war, we’re pulling out every possible stop to meet recruiting goals and paying record retention bonuses to keep people from getting out under these terrible war conditions. Thank heaven for the 20-year retirement system. It’s the only reason we still have a viable force. Given a dangerous world, fickle Congresses and administrations, and an inability to foretell the future, giving force planners maximum flexibility to work their force-shaping ways is a good way to make sure we’ll be less ready the next time we need to “plus up” the force.

Responsibility: The fact that military people tend to underestimate the value of retired pay and its annual COLAs is not a reason to take advantage of their misunderstanding. After we’ve extracted two or three decades of service and sacrifice from them, we have a responsibility to do what’s right. We know the value of their retirement, even if they don’t fully understand. The services shouldn’t have the kind of payday-lender mentality that tacitly encourages the troops to trade away a big chunk of their future retirement value in order to take a much lower-value cash bonus now. That’s the “human capital” model that deems it “efficient” to extract the maximum service from them at the least possible cost. That’s not efficiency, it’s usury. The military services have a higher responsibility to protect the long-term interests of families from whom the country has exacted such a terrible price over the past seven years.

Objectivity: Economists and modelers don’t like things they can’t quantify, and such things usually are excluded from their models as nonobjective. So the models give positive “benefit” credit for the cost of VA disability compensation and health care, but fail to account for the terrible suffering that must be incurred to warrant those benefits. The models give positive credit for added bonuses but no negative credit for the increasing angst of wartime conditions and families upset over repeated separations. Then we wonder why the models don’t work in wartime and initiatives like the 1986 REDUX plan (which reduced retired pay value by 20 percent for post-1986 entrants) ultimately hurt retention and have to be repealed. Turns out the system that cut 20-year retirement benefits to encourage longer service ended up reducing the propensity to get to 20 instead. The lesson is that refusing to account for the subjective isn’t quite the same as being objective.