Military Update: Panel has designs on retirement pay
June 16, 2005
The Defense Advisory Committee on Military Compensation has adopted an “action plan” to study private-sector-like changes to military pay and retirement, the kind that Defense Secretary Donald Rumsfeld has endorsed for several years.
The committee adopted an agenda that calls for studying over the next few months:
a new military retirement system that would vest members in benefits earlier than the current 20-year retired pay system, but also with reduced annuities for future servicemembers if they retire before age 60;combining that reduced “defined benefit” plan with a 401(k)-type contributory plan, similar to the military’s tax-deferred Thrift Savings Plan but with some government matching of servicemember contributions;streamlining the military’s arsenal of 67 special and incentive pays by eliminating those seen as ineffective, and increasing the use of whatever “targeted” pays would remain;overhauling compensation for Reserve and National Guard forces to “recognize their full integration” into U.S. operational forces, as evidenced by their expanded role in Iraq and Afghanistan; andslowing growth in military healthcare costs by raising Tricare enrollment fees and co-payments, and making Tricare a “second payer” plan for retirees under 65 who have employer-provided health insurance.Studying these issues will help the committee recommend a “strategic architecture” for future changes to military compensation, said retired Adm. Donald L. Pilling, committee chairman. Draft recommendations are due to David S.C. Chu, undersecretary of defense for personnel and readiness, in September.
Pilling, a former vice chief of naval operations, said whatever the panel recommends will be “fair” to the current force. The goal is not to curb compensation, he added, but to design tools to better manage the force. In an interview after the hearing, Pilling said, “I don’t think any of the things we will recommend are going to affect the current force to any significant degree. Maybe [Tricare] co-pays or something like that; nothing big.” The panel should not be perceived, he said, as “scheming to take money out of their pockets, because we’re not.”
Committee members were surprisingly frank, however, in criticizing the current compensation system as outdated, inefficient and weighted too heavily toward “deferred compensation” such as retirement and retiree health care. Rumsfeld and Chu, who shaped the panel, have struck similar themes in testimony before Congress and other venues. Panel member Frederic W. Cook, chairman of a consulting firm on executive compensation, noted that the idea of someone retiring at age 38 with full benefits doesn’t exist in the private sector. Also unique to the government are “pensions indexed to cost of living.”
Private-sector retirees, he said, get a “flat pension” when they retire, “and then periodically the company can take a voluntary, pro-active action and do a catch-up to inflation.” In that way companies “get credit” for helping retirees. With annual indexing, he said, retirees come to view adjustments as “a right, an entitlement” and take them for granted.
“I’m not saying that’s how we ought to proceed,” Cook said. “But I wanted to point out the differences.”
Cook, a former Marine officer, also touted the private sector practice of delaying a “full” annuity until age 60 and giving a “haircut” to anyone who elects to retire earlier.
He joined with John P. White, a former deputy defense secretary, in criticizing as inflexible the current retirement plan which provides no benefits short of 20 years of service. Only 15 percent of enlisted members and 50 percent of officers serve long enough to qualify.
The current system “works very well as long as there is no change to the force structure,” Pilling said. But to help force management, “we may want to vest earlier instead of cliff vesting” at 20, Pilling said. The committee will look at more flexible plans that give force managers the ability, for example, to trim personnel from over-populated specialties without worrying that those separated won’t get any retirement benefits.
One service pay official even suggested, Pilling said, that the services “hold an auction” when they need to trim force structure, inviting careerists to propose compensation packages that would tempt them to leave early.
“That’s really free market,” Pilling said. “I don’t think we’re going to come out with anything like that. But [it shows] there are people thinking about how you could have [new] tools to shape the force.”
The most complex issue the committee will face, Pilling said, will be proposing compensation for “a fully-integrated operational reserve,” which for many members is far different than the reserve system they joined.
Other pay committee members are: economist Martin Anderson with the Hoover Institution; retired Gen. Lester Lyles, former Air Force vice chief of staff; Walter Y. Oi, an economist who worked on the Gates Commission which proposed the all-volunteer force, and Joseph E. Jannotta, a former carrier pilot and founder of a career consulting firm.
Congress would have to approve any changes the committee or the Defense Department recommends for them to take effect.
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