Gates tosses pay, benefits into risk pool
June 2, 2011
Defense Secretary Robert Gates last week delivered his last major policy speech and suggested that politicians show courage by making the military compensation system more efficient.
Gates has the department preparing such a set of recommendations to be part of a $400 billion defense savings package over the next 12 years.
He specifically criticized a “one-size-fits-all approach” to basic pay and retirement, suggesting “tiered and targeted” methods could cost less but pay more to servicemembers in “high demand and dangerous specialties.”
He implied overall pay levels are set too high as evidenced by the services’ continuous ability to meet recruiting and retention targets, except for the Army and only “during the worst years of Iraq.”
Gates again asked that Tricare fees be raised, particularly for working age retirees, and he eyes replacing the all-or-nothing 20-year retirement plan with a more “flexible” system that would allow earlier vesting in benefits but also encourage more members to serve longer careers.
Some of these ideas are decades old. Over the past 40 years other defense secretaries have made similar or even more unpopular proclamations to curb military benefits, from closing discount stores on base to ending tax-free allowances and shifting the military to fully taxable salaries.
Gates had softened some of his remarks in his his May 24 speech at the American Enterprise Institute, a conservative think tank. Weeks earlier, Gates reassured Marines at Camp Lejeune that any changes to retirement should not affect the current force, “so don’t get nervous,” he said.
The reality is that sharp changes to pay or benefits typically don’t occur as a result of policy speeches or even in-depth studies written by commissions. Dramatic changes usually occur during fiscal emergencies, real or perceived.
The House Armed Services Committee, for example, thought it necessary in 1984-85 to move military retirement to an accrual accounting system to ensure that the cost of benefits to future members didn’t encroach on other defense programs.
Lawmakers told Defense officials to design a retirement plan to produce the required result. That turned out to be “Redux,” a plan that cut the value of 20-year retirement by roughly 25 percent for new members. As time passed and retention fell among the Redux generation, Congress repealed the plan.
Redux was the fruit of a crisis tied to rising retirement obligations. The current debt crisis is far more threatening. Total national debt is over $14 trillion. Unless the debt ceiling is raised by Aug. 2, the U.S. Treasury says it will default on some obligations.
Republicans vow not to raise the ceiling unless an agreement is reached with the White House to cut federal spending deeply. Vice President Joe Biden is hosting closed-door meetings with Republicans and Democrats. He promises to bring forth at least $1 trillion in spending cuts over the next 10 years. It’s during such closed-door deals where popular programs, even military benefits, can become tempting targets. Benefit cuts that impact current members and families in wartime could be seen by as unfair, but lawmakers negotiating with Biden have plenty of other options.
A task force co-chaired by former Sen. Pete Domenici, R-N.M., and economist Alice Rivlin proposed a cheaper military retirement plan which could be shaped to target future members only. It would provide some retired pay at age 60 for those with as few as 10 years service but would end the tradition of paying an immediate annuity after 20 years.
The National Commission on Fiscal Responsibility and Reform, co-chaired by former Sen. Alan Simpson, R-Wyo., and former Rep. Erskine Bowles, D-N.C., recommended a study of structural changes to federal retirement plans.
Perhaps the ripest fruit for those arguing federal entitlements are unsustainable is adoption of a modified Consumer Price Index (CPI) that would shave annual cost-of-living adjustments. Both deficit reduction panels endorsed it.
The revised index is a “chain-weighted” CPI. The Bureau of Labor Statistics created it in 2002 to address criticism of “substitution bias” in other CPIs. The idea behind the revised CPI is that, as prices rise, people actually change their behavior and buy cheaper items. The CPI used to adjust federal entitlements assumes consumers buy the same items month after month regardless of price.
Reformers see this as exaggerating inflation and driving up entitlement costs. Defenders of current COLAs argue the index should measure price changes for the same goods and services over time, and not be adjusted continually based on changing behaviors.
Shifting to the new CPI would curb federal entitlement spending, on average, by .25 percent per year. One estimate claims the savings could total $300 billion over the next decade, with at least half coming from Social Security benefits.
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