A high-level Pentagon advisory panel is recommending the Department of Defense Military Retirement Fund switch to a defined contribution plan, among other pension reforms.
The reforms are expected to save $250 billion over 20 years. But opponents to changing what has long been considered an untouchable benefit are marshaling their forces for when the Defense Business Board issues its final report later this month.
In its preliminary report issued in July, the DBB — whose members represent various industries involved in defense work — said that simply reforming the current system won't save enough to address current and projected funding shortfalls and won't address inequities, including a 20-year cliff vesting rule that leaves many military employees walking away with nothing.
The report recommends placing new employees in the Uniformed Services section of the $287 billion federal Thrift Savings Plan, Washington. Under that plan, personnel who are in higher-risk positions would receive a larger government contribution. Plus, the vesting period would be shorter, and the plan would offer survivorship rights.
There is a lot at stake. The government expects to contribute $46 billion to military pensions in 2011, in addition to a $64 billion unfunded liability amortization payment from the U.S. Treasury.
Without changes, the Washington-based fund's total liability is projected to grow to $2.7 trillion by fiscal year 2034.
Military retirement payments that were $50 billion in fiscal year 2010 are projected to balloon to $108 billion in 2035, according to a December 2010 valuation from the Pentagon's actuary.
Those stark numbers, plus the federal government's overall fiscal straits, present a rare opportunity for proponents to begin the reform debate in earnest.
DBB panelists argue the current system is too expensive, considering that 83% of service members don't benefit from it because they leave before reaching the 20-year mark, and it has too many inequities, such as not differentiating between desk jobs and high-risk assignments, or among skill levels.
Those who stay 20 years get 50% of their salary for life; if they stay 35 years, they get 87.5%, which raises another problem as life expectancies increase.
Meanwhile, driven in part by the realization that there is no retirement benefit before 20 years, military enrollment in the Thrift Savings Plan has grown, with 30.1% of military personnel in the plan. The TSP was only opened to the military in 2002.
“However (Department of Defense officials) decide they want to move forward, we're happy to help them do it,” Thomas Trabucco, director of external affairs for the TSP, said in an interview. It would be largely a matter of adding new military participants to the uniformed plan at the TSP, and it would be the same investment choices offered, he said. Any changes in fees for asset management and record keeping based on larger enrollments would depend on how contracts are structured, he said.
The Military Retirement Fund gets money from three sources: monthly payments from the participating services; annual payments from the Treasury Department to amortize unfunded liability; and investment income from a variety of Treasury-based instruments overseen by the Department of Defense Investment Board. According to the DBB report, the fund is “not able to be invested in higher yielding equities and bonds.”
Proponents of the current Department of Defense retirement system counter it is not just about the money; when it comes to military preparedness, retention and recruitment, incentives are equally important.
Mike Hayden, deputy director of government relations for the Military Officers Association of America in Alexandria, Va., agrees that 20-year vesting benefits careerists, but argues new entrants join for other reasons, such as benefits under the GI Bill and job training.
The MOAA is leading The Military Coalition, a group working to maintain military benefits and compensation that is fighting efforts to “civilianize” military pensions.