Retirement Redux

hat if they had a war and nobody came?"

For decades, that line expressed only the idle fantasies of ultra-pacifists. Now, in the late 1990s, it has become the nightmare of military leaders. After years of dramatic post-Cold War personnel cuts in the Defense Department, the downsizing is supposed to have stopped-yet the ranks keep thinning. Not only is recruiting ever more difficult in a booming economy, but the military is also struggling to retain experienced mid-career troops. If young recruits are the military's muscles, and the high command the brains, then these noncommissioned officers and junior commissioned officers are the backbone of the force. They are experienced, they are expensively trained-and they are leaving.

The Pentagon places much of the blame on the Military Retirement Reform Act, passed nearly 13 years ago, over the bitter objections of the armed forces. Dubbed "Redux" by the troops, the law reduced retirement benefits for any service member inducted after its Aug. 1, 1986, enactment. Although the troops who entered service after that date have not yet served the full 20 years at which they would become eligible to retire, the first wave of them is about 12 years in. In the past, such mid-careerists have toughed it out to 20 years, encouraged by generous retirement benefits sometimes cynically called "golden handcuffs." But under Redux those handcuffs have lost some of their shine-while the civilian economy gleams ever more brightly.

To keep the mid-careerists in, the military wants its old benefits back. With the federal budget in surplus, and concern about military readiness mounting, the country's civilian leadership is ready to oblige. So with the military cheering, the Clinton administration and key senators of both parties are racing ahead, offering competing proposals to repeal Redux-before it ever kicks in. But many outside experts-and, quietly, some congressional staffers-question whether retirement reform will really solve the military's problem.

Back to the Future

Twenty years ago, in the early days of mounting government budget deficits, cutting military retirement benefits was a policy wonk's Holy Grail. Even Pentagon study panels called for cuts, and the late Rep. Les Aspin, D-Wis., made the cause a personal crusade. He finally prevailed in 1986, after years of legislative maneuvers-and after his rise to the chairmanship of the House Armed Services Committee.

Aspin's strongest argument was that overly generous benefits, payable immediately upon retirement, encouraged departures of the most competent and highly trained troops at the 20-year mark, and discouraged 30-year careers.

To shift those incentives, the 1986 Military Retirement Reform Act-largely crafted by Bob Emmerichs, then Aspin's top aide-kept military retirement benefits at 75 percent of basic pay for troops staying in 30 years. But it decreased the benefit for those retiring earlier, giving 20-year retirees just 40 percent of basic pay instead of 50 percent. The 1986 act also trimmed annual cost-of-living adjustments (COLAs) in retiree checks to 1 percentage point less than the rate of inflation. Then, when a retiree hit age 62, Redux gave a one-time catch-up, boosting benefits to what the pre-1986 system would have provided. The age-62 bonus was designed, says Emmerichs, to provide for older retirees who were no longer working, while avoiding overcompensating military retirees who leave service in their early 40s and go into second careers.

"I was here [in 1986]," recalls Rep. Ike Skelton, D-Mo., who is now the top Democrat on the Armed Services Committee. "The purpose was to cause people to want to stay the full 30 years. . . . It didn't work that way."

Why? Emmerichs, now a consultant, argues that "the [monthly retirement] payment at 20 years is just too large, even at 40 percent," and provides an all-but-irresistible incentive for service members to leave at the 20-year point.

"That's baloney," counters retired Air Force Col. Paul Arcari, a lobbyist at the Retired Officers Association both in 1986 and now. Redux did not increase retention, he says, for one key reason: "They didn't change the personnel policies." The system known as "up or out," which kicks out service members who do not reach a certain rank in a certain number of years, survived 1986 unchanged. Of the military's 10 pay grades for enlisted personnel, only those who reach E-9-the second-highest rank-are allowed to stay in for a full 30 years.

As a result, says Congressional Research Service analyst Robert L. Goldich, Redux has "had minimal, if any, impact" on the number of soldiers, sailors, airmen and marines staying past 20 years. Because "Redux was not accompanied by any other changes in personnel management [policies] and statutes, it was pretty unlikely that that was going to happen. I think that most people who talked about it at the time knew that," he says.

Redux, agreed one Hill staffer, "was basically a budget-driven exercise." And it was a successful one: The Congressional Budget Office estimates savings since 1986 of $7.5 billion in unfunded liabilities alone.

But those savings have not come cheap. In a 1989 CRS report, Goldich predicted that the late 1990s would bring a retention crisis-when the first wave of troops subject to Redux started to come up on the mid-career decision to stay or go.

Goldich's prediction, the military says, is now coming true. We are "hearing the senior enlisted-who are under the old system, by the way-raising this as one of their biggest issues of concern for the next generation," says Rudy de Leon, Defense undersecretary for personnel and readiness.

"I am convinced, from talking to hundreds and hundreds of military personnel, [that] it's a big issue for our people," says Sen. John McCain, R-Ariz., a leading advocate of Redux repeal. Rep. John Murtha, D-Pa., another repeal leader, agrees: "I've gotten more e-mails about this issue than anything I've ever done."

"What's happened is what we predicted [in 1986]," says Arcari. "We told you so."

But the unforeseen has also intruded on military life, worsening the retention crisis. "The world and military life have fundamentally changed in a decade," de Leon says. In 1986, a force of 2.2 million troops, most of them young and single, typically sat in fixed bases as the United States stared down the Soviet Bloc. In 1998, a smaller and more educated force of 1.4 million troops, many of them older and more of them married, were sent on constant deployments to put out brushfires around the world. Frequently separated from their families by this punishing tempo of operations, many troops want out of the military.

And while the booming Information Age economy offers ever-higher wages for the troops' increasingly high-tech skills, 20 years of deficit politics have eroded the value of their retirement pay. Military pay raises were capped at levels below civilian wage growth for 12 of the past 17 years. And what extra income the troops did receive often came as one-time or short-term special pay and bonuses (flight pay, housing allowances, re-enlistment bonuses, and so on) that saved the Treasury money-and that were left out of retirement-pay calculations. A Redux retirement check for 40 percent of basic pay today would amount to only about 25 percent of what the troops were actually earning before they retired.

As a result, says de Leon, "in 1986 . . . our focus was on retaining people past 20 [years' service]. In 1999, our key challenge is to get people to stay in that 10-to-12-year period so that they'll do 20-let alone 24, or 25, or 30."

So, with the President's blessing, the Pentagon has proposed to spend $30 billion over the next six years on three incentives: a 4.4 percent pay raise for all the troops in 2000 (and 3.9 percent annually from 2001 to 2005); extra raises targeted at mid-career troops; and the partial repeal of Redux. The retirement reform would loosen the 1986 COLA caps by applying a system derived from the Federal Employee Retirement System for civil servants. Finally, and most crucially, the administration would restore the benefit for retiring after 20 years to the full 50 percent.

Politics of the Irresistible

The President's proposal is the second attempt at a major pay boost for the military in the past four months. Last fall, the White House and Congress moved late in the congressional session to spend some part of the budget surplus to bolster what they feared was becoming a "hollow force."

That effort was kick-started last September, when the Joint Chiefs of Staff, after months of demurrals, testified before the Senate Armed Services Committee that military readiness was slipping, retention of key personnel was eroding and that fixing Redux was their top priority. Hill staffers agree that before the hearing, Redux had been largely off the radar screen. But with a national security threat to arouse the Right, and struggling middle-class soldiers to arouse the Left, both parties had Redux-repeal bills out within two weeks.

McCain and fellow Armed Services Republican Pat Roberts of Kansas introduced their bill on Oct. 7. But House Democrat Murtha had beaten them by two days. Murtha, a senior member of the Appropriations Committee, got the committee's ranking member, David R. Obey of Wisconsin, to bring up Redux repeal in conference with the Senate. "I asked the Republicans," Obey recalled, but "they said it cost too much money."

So Murtha went to the White House. The administration had been pondering the problem all year-but Murtha catalyzed a quick decision: Go for it. White House budget negotiators proposed partial Redux repeal-restoring the 50 percent benefit, but keeping the COLA caps-to then-House Speaker Newt Gingrich, R-Ga., and Senate Majority Leader Trent Lott, R-Miss. Clinton's then-chief of staff, Erskine B. Bowles, "offered it twice to Gingrich and Trent Lott," says Murtha. "They turned it down twice."

A Republican staffer countered that "Gingrich and Lott wanted to do this," but says that disputes with the White House over funding, combined with a reluctance to resolve such a major issue in haste, caused them to defer the issue until 1999.

"You could've done this reduced package for about the same cost as Newt's additional C-130s [military transport planes, built in Georgia]," gibed Obey, "a hell of a lot better investment than that pork."

Republicans found themselves in the unaccustomed and uncomfortable position of having lost control of a defense issue. "There was a feeling that we needed to win back a core constituency, which was the military," says the Republican staffer, though "that was not the primary focus."

So, while the White House rolled out its new pay plan as a Christmas present to the troops in December, McCain and Roberts rallied Republicans for a bill "raising the ante a little bit," Roberts said, on a Clinton plan that was "a good first step, [but] maybe too little, too late."

Introduced on Jan. 19 and co-sponsored by all Senate Armed Services Republicans and Lott, the GOP plan went the President one better. It offered $5 million a year in "special subsistence allowances" for military families on food stamps (a longtime personal passion of McCain's); a military thrift savings plan so that service members could set aside money for retirement in tax-free accounts; a basic pay raise half a percentage point higher than the administration's; and a choice of retirement plans. Each career service member could either opt for the full pre-1986 system, with a 50 percent benefit after 20 years' service, fully adjusted for inflation every year-worth from about $100,000 to $200,000 more over a soldier's lifetime, depending on rank; or choose the lower, COLA-capped Redux benefits, plus a $30,000 up-front bonus.

Because data from the exit incentives used during recent Defense downsizing efforts show that more troops chose the smaller lump sums than opted for the larger lifetime annuities, Republicans tout their bill as combining greater choice with lower cost.

Democrats felt left out of this bidding war for the hearts and minds of the troops: The Republicans "jumped the gun," complained Senate Armed Services Democrat Max Cleland of Georgia, "and put their bill in first, without any consultation with us." So, on the same day the Republicans introduced their plan, Cleland put forward his own proposal-endorsed by all the committee Democrats and Minority Leader Thomas A. Daschle, D-S.D.

The Democrats matched the Republicans' pay raises and retirement savings plan. In place of McCain's food stamps allowance, Cleland, a former Veterans Administration head, added his own passion: increasing Montgomery GI Bill education benefits by 13 percent and letting troops use them for their children's education. "When they get into that eight-to-10-year mark in the military," says Cleland, "they've got young kids. . . . They're thinking about college already." Take care of the kids, and you keep their parents in uniform, he says. On retirement reforms, however, Cleland offered only the administration plan.

The compromise: the best of both worlds for the troops-and perhaps the worst of both for budgeteers. On Jan. 27, Senate Armed Services Chairman John W. Warner of Virginia announced a composite bill with all the Republicans' increases plus the Democrats' potentially bank-busting boost to education benefits. The full Senate passed the bill on Feb. 24, by a vote of 91 to 8. The Congressional Budget Office estimated that, over 10 years, the Senate plan would be more expensive than the administration's by $18 billion.

Bidding War

Prior to the Senate vote, Defense Secretary William Cohen, the former senator from Maine, tried to de-escalate what he called a "bidding war" among his old colleagues. He touted the original administration plan both on the Hill and as far afield as the Illinois House of Representatives, warning Warner in a letter that, without an increase to the overall Defense budget, the compensation package could drain scarce funds from other priorities such as training or new equipment.

In the House, it was none other than Murtha who rallied to the administration's plan by introducing it, rather than one of the more generous Senate packages, as the year's first military benefits bill in the House. The administration has "come up with a package that we can live with and we can afford," he said at the time. "We'd be misleading the troops if we make them think we can give them the kind of increase the Senate's talking about."

The original inclination of the House was to wait until Redux reform and other military benefits issued could be addressed in the context of the main Defense authorization bill, which can take all year to get passed. But in early March, momentum was building to move more quickly on a separate package. Skelton, the Armed Services panel's top Democrat, has already declared: "This is the year to take care of the troops."

Even archliberal Rep. Barney Frank, D-Mass., who opposes the administration's proposed Defense increases in general, says, "I'm for the pay and benefits parts. . . . It is not fitting for a great nation to take lower-income people to defend it."

With such broad consensus, some form of Redux repeal seems sure to pass.

Yet, as many of their bosses rush to embrace the idea, a surprising number of senior congressional staff members express grave doubts about overturning the hard-won 1986 reform so quickly. Most declined to be quoted, even anonymously, but one Senate staffer describes their chief concern: "The military does not seem to have done a lot of study of what would result in increased retention for military personnel. [We are] worried that a lot of the support for the retirement benefit is anecdotal."

In fact, one of the few statistical analyses that the military has made public could undermine the case for Redux repeal. As compiled by the Center for Naval Analysis, a semi-independent think tank, surveys of Army officers and of Army and Navy enlisted personnel show that dissatisfaction with the retirement system has shot up in recent years-but only to, at best, fourth of the top five grievances, consistently well behind "time separated from family."

Lawmakers acknowledge that retirement may not be the only issue prompting troops to leave early.

"The most resonant issue [is] pay and retirement . . . but it's not the only issue; it's part of a complex of factors," says Sen. Jack Reed, D-R.I., a new member of the Armed Services Committee and a former Army Ranger who left the service before completing 20 years. "Pay and benefits, [the tempo of operations], family concerns, [opportunities for] further rank, opportunities outside . . . were the forces that I experienced."

Murtha acknowledges that the troops complain "more about deployment and the tempo of operations than anything else."

Skelton also says that fixing Redux will not be enough: "We have to fix this, but we have to do more than this. We have to have an entire multiyear program aimed at supporting the troops: the pension reform, the pay increase, better housing, better barracks, fuller training, and spare parts for training and actual deployments."

The military argues it has already embarked on such a program. Besides addressing pay and retirement, the services are working hard to ease the tempo of operations. The Air Force and Army are introducing new rotation schemes to spread the burden of deploying to Saudi Arabia, Bosnia and other hot spots more evenly among units; the Navy is eliminating minor inspections and short sea trips, to give sailors more uninterrupted time ashore with their families. "You have to work across the board," says de Leon, on "a host of things." Retirement, he says, is just one axis of an advance on all fronts.

Analysts still doubt that spending billions on retirement benefits is the best use of scarce funds.

"Going back to 50 percent is throwing money down the rat hole," says Emmerichs. "[If] you want to use dollars . . . to affect retention, there are a number of ways to do it, [but] everything I've ever seen [says] retirement is the least effective." Cut the retirement benefit package by a dollar, Emmerichs and other analysts say, and add that dollar back anywhere else-to basic pay, housing allowances, health care, subsidized child care-and it will keep more troops happily in uniform for longer.

One of the military's favorite think tanks, RAND, reluctantly agrees. Computer models do show that repealing Redux would definitely increase retention, says RAND analyst Beth J. Asch-but, when pressed, she allowed that those same models also show "it tends to be much more cost-effective to put your compensation dollars in active[-duty] pay."

Emmerichs argues that such inefficiencies are exacerbated by "a one-size-fits-all system" that offers the same retirement benefits indiscriminately for every career service member across the board. "It doesn't necessarily retain the specific people that the services would like to retain," he says. Emmerichs and other analysts advocate creating a multitiered retirement system in which higher benefits go to the troops with the scarcest skills.

The military bristles at the idea. Similar money-saving approaches have been tried in the past, as with variable combat pay in the Korean War, says benefits lobbyist Arcari, and "it becomes demoralizing. You have two guys in combat side by side, being shot at, subject to bombardment, and one guy's going to retire with a significantly greater [benefit]."

Further, says de Leon, a targeted retirement system would answer the wrong question. "We really have been targeting money, we really have been using bonuses," he says, "but it comes back to the underlying question, 'Do I have confidence that this is a solid way to spend a career?' " While bonuses and special pays have their place, the Pentagon insists that there must be at least one core career benefit-one enjoyed equally by every service member who makes the sacrifice of a career in uniform. Such shared rewards and shared sacrifices have a unifying value that no computer cost-efficiency calculation can adequately assess.

CRS' Goldich shares the Pentagon's skepticism of computer models: "The statistical analysis is virtually impossible to do. . . . It is impossible, I think, to disaggregate the effect of Redux from other things both tangible and intangible."

RAND analyst Asch acknowledges: "Some of that stuff, you just can't measure. . . . How do you get data on people's perceptions of inequity?"

But perceptions count, and count heavily. "Morale is based on perceptions," says McCain, "many times as often as it is on reality." For troops who feel less respected than their predecessors, every dollar lost to Redux is an insult as well as an injury.

In fact, some analysts suggest, even if Redux repeal was not such an emotionally charged issue before the Joint Chiefs of Staff raised its profile last year, it is now.

"If it is repealed, it will have a positive effect on retention; and if it is not, it will have a substantially negative effect-just because it's gotten so much notoriety," says Goldich. "It has such a symbolic value now, it will have very real effects-even if the rationale for it is a symbolic one."

Sydney J. Freedberg Jr. is a reporter for National Journal.