Military retirement system should be overhauled, quadrennial review board says

An independent panel examining military retirement, health care and quality of life programs concluded that significant changes should be made, particularly in retirement benefits, to help the military services attract and retain people with needed skills.

The current retirement system is viewed as "inequitable, inflexible and inefficient," the 10th Quadriennial Review of Military Compensation found. The review board released the second volume of a broad study assessing the effectiveness of military pay and benefits, a study that is required by law every four years. The volume released on Tuesday focuses specifically on noncash benefits and deferred compensation. About half of service members' compensation is in deferred retirement benefits and noncash benefits such as health care.

The Defense Department spends about $13 billion a year on military retirement, more than 7 percent of current active-duty personnel costs. Because retirement benefits do not vest until a member has completed 20 years of service, less than 47 percent of officers and 15 percent of enlisted members overall receive anything, and rates are even lower for Army and Marine Corps personnel. Reservists are in a separate retirement system that forces them to wait even longer to collect benefits, even as they are spending more time on active duty than in the past.

Regardless of individuals' skills or the needs of their particular service, the 20-year vesting requirement fosters a career pattern where personnel who serve longer than a decade have a strong incentive to stay for a 20-year career. And the services are reluctant to separate those who reach 15 years of service knowing they will leave with no retirement benefits, said Jan "Denny" Eakle, director of the review.

A retirement benefit that mixes both cash and deferred elements would cost the government less and be of greater value to service members because it would provide some benefits to members after 10 years of service, Eakle said. Based on a model developed by the nonprofit RAND Corp., the board is proposing a retirement plan that would include the following elements:

• A defined benefit plan providing retirement pay equal to 2.5 percent of annual basic pay (the average of the three years of highest earnings before separation or retirement) multiplied by the number of years of service. The benefit would be vested at 10 years and payable at age 57 for those with 20 years of service, and at age 60 for those with fewer than 20 years of service. Members also could opt to receive the defined benefit immediately upon retirement at a reduced rate.
• A defined contribution, whereby Defense annually would contribute up to 5 percent of basic pay (the precise contribution would depend upon years of service) into the government-funded Thrift Savings Plan. This is not a matching contribution --service members would pay nothing themselves. The plan would be vested at 10 years and begin paying benefits at age 60.
• Cash payments, called "gate pays," for specific year-of-service milestones. These essentially would serve as bonuses to reward people with high-demand skills for staying in the service, and they would be awarded at the discretion of the services and vary by years of service.
• Separation pay offered to those military members the services want to encourage to leave. The payments would vary by years of service and be issued at the discretion of the services.

A comparison of retirement benefits paid out under the current retirement system with those potentially paid out under the proposed system showed that service members would earn more under the latter, according to data Eakle provided.

Because the real outcome may prove different from that shown by computer models, Eakle said the board was proposing that Defense conduct a multiyear demonstration project before implementing the system across the force. Participation in the demonstration project would be voluntary, but drawn from a wide range of active and reserve troops in various professions across all the services. At the end of the test period, participants also would be allowed to revert to the current retirement system, she said.

Other recommendations by the board included:

• Restructure TRICARE fees to reflect program cost growth and beneficiaries' ability to pay.
• Expand benefits in the Health Professionals Scholarship Program to attract more health care workers to military service.
• Raise the mandatory retirement age of health professionals from 62 to 68 and allow noncitizen health care professionals licensed to practice in the United States to enlist and apply for expedited citizenship.
• Adopt flexible spending accounts for service members to pay for dependent care and health care.
• Institute a voucher program so military parents can exercise greater choice in selecting schools for their children.
• Increase investment in child care programs and implement a voucher program to help military families pay for child care costs.
• Restructure rates for overseas cost-of-living allowances so service members aren't penalized for shopping at commissaries or exchanges.

Defense, however, already is considering the recommendation to make flexible spending accounts available for service members to fund health and child care costs, and would likely act on that much sooner, Earle said.

Earlier this year, the board released the first volume on cash compensation. In that report, the board reported that service members' pay and benefits were comparable to their civilian counterparts. Subsequent volumes are to contain research papers sponsored by the commission to analyze the issues covered in the review.