Military Finance Report: February 2015

Tuesday, February 17, 2015

Changes to Military Retirement

This January the final version of the Report of the Military Compensation and Retirement Modernization Commission was published. (http://www.mcrmc.gov/index.php/reports) We’ve been hearing a lot about changing the military retirement plan since Secretary of Defense Hagel announced his ideas in 2013. Unfortunately, this topic is highly political, causes emotional stress and is very misunderstood so much that normal conversations quickly turn unproductive. Here are my thoughts on the situation.
THE PROBLEM
I’ve only been in for 15 years, but I’ve conclude that one of the major problems in the military is the inability to address the root problem. Here are the problems with the current military retirement system—as I see it.

1)      The Defense Budget is one of the largest expenses in discretionary spending. This post isn’t intended to discuss the ideologies about Mandatory and Discretionary spending; however, if there are cuts in the budget to be made, the Defense Budget would be the first place politicians look toward. Like all forms of business, Personnel and Labor are the largest cost drivers. For the military, our unique 20-year, annual inflation-adjusted, retirement plan is one of the most costly expenses. So the first problem is…budgets need to be cut and military retirement is a major cost driver to focus on by politicians.

2)      The second problem is the 20-year cliff dive. We have many Armed Forces members who serve honorably for less than 20 years and decide to separate. Besides what they’ve managed to save in their TSP or other savings, they do not receive any portion of their military retirement. This creates a 20-year, all or nothing, retirement plan. Many civilian jobs offer matching 401(k)s and pensions which compensate employees after an outlined amount of years.
SOLUTIONS (so far)

1)      Status Quo - Like I said, this issue is highly political and emotional. On most news sites, there are 300+ comments from retired military members and veterans regaling their war stories and any change to the military retirement plan offends them. All current recommendations would only apply to new military members so they wouldn’t even be impacted anyway. This solution will not last. There are some strong proponents of the status quo, including high-ranking members of professional enlisted and officer organizations. Regardless, the political pressure is getting stronger every year with little appetite to cut any budget anywhere else.

2)      Commission’s Recommendations - Senator Graham (R-NC) recently supported the Commission’s recommendation which is 40% of base pay at 20 years instead of 50%. Military members will get matching TSP contributions so if they choose to honorably separate before 20 years, they will have some retirement savings. (http://militaryadvantage.military.com/2015/02/graham-defends-pay-commission-after-hearing-its-critics/#idc-cover) Many professional organizations are opponents of this solution. They point several inconsistencies with the analysis the commission performed on their recommendation. These inconsistencies must be addressed because mathematically, even a one-percentage slip could cost a military member hundreds of thousands of dollars over several decades.

MY THOUGHTS
Personally, I believe the military retirement should be changed. Military members separating before 20 years should receive sufficient compensation; especially in light of how inept Veteran’s Affairs (VA) is. It’s is unacceptable to leave the fates of veterans with the support from the VA. Selfishly, I would not like the amount of retirement to change. I don’t have a solution at this time but I think about it regularly and I do know that if we're going to change it then we should provide a solution before Congress provides one for us.

What solutions do you have?