WASHINGTON — Pentagon planners may be closer than ever to radically overhauling the military retirement system, threatening an end to the longstanding practice of guaranteed lifetime payouts for retirees with 20 years of service.
Last month, officials from the Defense Business Board outlined their plan for changing the way military retirees are paid, abandoning the 20-year service target in favor of a 401(k) style plan.
That board is expected to issue final recommendations later this month, just a few weeks before a congressional panel begins its own three-month push to find billions in spending cuts (and possibly new taxes) to balance the federal budget. Budget analysts say that puts everything under scrutiny, including military retirement benefits.
“Going back 40 years, this is something that has always been talked about,” said Todd Harrison, a fellow for defense studies at the Center for Strategic and Budgetary Assessments. “But it’s getting more serious attention now than it has in the past.
“In the current environment, when you’re looking at major changes to entitlement spending like Social Security and Medicare, that makes it easier to talk about changing military retirement.”
On Tuesday, Defense Secretary Leon Panetta said that no changes in military retirement have been finalized, but he reiterated that they are under consideration. That includes breaking away from the 20-year plan, and possibly reducing the generous payout that future retirees will be eligible for.
The current military retirement systems act essentially the same as a corporate pension plan. Anyone who serves at least 20 years is eligible to receive payouts equal to at least half of their military pay (and up to 75 percent of it, if they serve longer) starting the day they retire.
Those payouts continue for the rest of the veteran’s life. Those who serve fewer than 20 years receive nothing.
The Defense Business Board’s proposals would act more like a corporate investment program or 401(k) plan, offering partial benefits payouts to individuals who serve at least 10 years. Money would be invested in the military’s Thrift Savings Plans, allowing them to accumulate interest.
Board planners argue that such a move would more equitably distribute the department’s retirement funds. Currently, 83 percent of all military personnel receive no retirement payouts from the department.
But it could reduce the payouts for troops who serve more than 20 years, since they’ll be tied to a fixed sum of money, instead of the endless annual payouts.
And many details of the plan — whether troops could collect any of the retirement funds before their 65th birthday, for example — have not been finalized.
The plan is expected to save nearly $250 billion over the next 20 years. Without a change, the Defense Department’s retirement payouts are expected to more than double over that time period, due to rising inflation and longer life expectancy.
Harrison said even a lesser plan that holds the retirement payouts steady would return huge dividends for the department, trimming billions in anticipated future spending.
“There are few private companies that offer a pension plan as generous at the military’s retirement plan,” he said. “So, in many respects, the Defense Department is in a worse situation in this economy than someone like General Motors.”
Last month, as news of the recommendations began to spread, Joint Chiefs Chairman Adm. Mike Mullen fielded questions from troops at Kandahar Airfield in Afghanistan. He said he did not anticipate any quick changes to the system, and he would push for those serving now to be grandfathered into the old system, to ensure they aren’t faced with unexpected, mid-career changes.
In a statement, Pentagon officials said any changes to the system will be made “with thoughtful analysis, to include considerations of impacts to recruiting and retention.”
The Defense Business Board is expected to offer final recommendations on the idea later this month, but any changes would still have to be approved by Congress before they could be put in place.
And defense hawks in Congress have been reluctant to make even modest changes in military benefits in recent years. Plans to increase co-pays for retirees’ prescription drugs have met fierce opposition from lawmakers, despite Pentagon backing and the support of both a Republican and Democratic White House.
Claude Chafin, spokesman for the House Armed Services Committee, called the new retirement proposal “likely a non-starter in the House.”
“The proposal puts cost savings ahead of the long term consequences for national security,” he said. “One of our great national challenges in the next few years will be to retain the service and experience of the men and women who have fought so valiantly over the past decade. You can’t do that with a mediocre retirement plan.
“The Defense Business Board seems to be looking at the military as a private sector corporation. It is not.”
Still, if the joint House/Senate budget cutting panel can’t agree on modest military cuts, legislation passed earlier this month calls for nearly $1 trillion in defense spending reductions over the next decade.
Pentagon planners have said that cuts that steep would jeopardize the entire fighting force, including future retirement payouts.