Current Service Members and Retirees Won't Lose Any Retired Pay Under Reform

The Obama administration reiterated on Thursday that any proposed changes to the military’s retirement system must grandfather in current service members and current retirees.

The president sent Sept. 12 letters to Congress and Alphonso Maldon, Jr., chairman of the Military Compensation and Retirement Modernization Commission, to help guide that panel’s work to reform a costly -- and some would argue, outdated -- compensation and retirement system for service members and military retirees. Total military compensation now eats up about one-third of the Defense Department’s budget.

Current members of the military and retirees could choose to switch to any new retirement system created but would not be obligated to do so, according to the guidance, which Congress directed the president to provide to the panel. Congress also mandated the grandfather clause related to retired pay.

Congress, with Obama’s support, created the commission in the fiscal 2013 National Defense Authorization Act to recommend how the Pentagon can rein in skyrocketing personnel costs without breaking faith with millions of active-duty military members, reservists, and retirees on pay and benefits. Defense also has to be careful not to alienate potential recruits to an all-volunteer force by making military compensation less attractive. One of the guiding principles for the panel is to sustain the size and quality of the all-volunteer force.

Other guidelines include ensuring military compensation is comparable to pay in the American economy and competitive with the private sector, sufficiently flexible to adjust to economic conditions in the country, and fiscally responsible but also generous enough to motivate and retain the most experienced and qualified service members. In addition to pay and retirement benefits, the panel will study the impact of proposed changes to health care, disability, housing and education benefits, among other Defense programs.

“Our nation requires a strong military for our security and for the defense of American values and principles abroad,” the guidance stated. “While we have successfully transitioned from a conscripted force to an all-volunteer force, sustaining this force requires responsive and prudent management, especially given the fiscal challenges we face as a nation.”

There are three major components to military compensation: pay, health care and retirement benefits. In that sense, it’s similar to many pay and benefits packages elsewhere in government and in the private sector. But that’s where the similarities end. Take pay, for example. The military has more than 70 types of pay and allowances for service members. A typical active-duty service member receives basic pay, housing and food allowances; an annual pay increase; and some tax breaks. Service members also are eligible for combat pay or other kinds of incentive pay based on their specific jobs and any special skills, such as proficiency in a foreign language.

Defense annually spends about $107 billion on salaries and allowances, which does not include health care costs or retirement benefits. Those expenses tack on another $75 billion or so each year. Health care and retirement benefits together cost the Pentagon less in actual dollars today than pay, but much more in political capital and good will among troops, retirees and their families. Unsurprisingly, many lawmakers are loath to tinker with the current system.

The military has a 20-year cliff-vesting retirement system, which some believe should be replaced with one providing some benefits to all service members regardless of their tenure. Personnel who serve less than 20 years -- about 83 percent -- do not receive a retirement benefit, which some believe is unfair given their multiple deployments during the wars in Iraq and Afghanistan. Those who do spend a career in the military can hit the 20-year mark relatively early, retire from service in their 40s or 50s, draw a pension and work elsewhere for a while. About 17 percent serve 20 years or more in the military.

The law directs Defense Secretary Chuck Hagel to give the department’s recommendations to reform the military pay and benefits system to the panel no later than Nov. 1, 2013. The nine-person commission is supposed to submit its recommendations to President Obama no later than May 1, 2014. Obama must then send his final proposals to Congress for consideration.

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