After years of “starve the beast” policies on retirement systems, some lawmakers are finally starting to come around to the idea that Americans deserve dignity at the end of their lives, and that the coming crisis with our nation’s seniors must be dealt with through stronger retirement security. Expanding Social Security benefits has the support of virtually the entire Democratic Party, and Chris Christie’s bid to force social insurance cuts back into the conversation has even drawn rebukes from other Republican leaders.
But in the name of giving Americans greater retirement security, both political parties plan to revisit exactly the same failed model that has contributed to the current crisis. And they are doing it to the one subset of society that seems to have a magic amulet around its neck when it comes to Washington: the military.
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The current state of military pensions can be best described as appalling. Service members don’t specifically pay into the military pension system — the money comes from the Defense Department personnel budget. Critically, there is a sharp cliff in the existing system: Those who serve a day less than 20 years get nothing, while those with 20 years or more get a full pension for life, and can start taking it immediately, regardless of age. Due to this hurdle, only 17 percent of service members receive pensions, according to the Center for American Progress.
The onerous vesting structure invariably means that enlisted men, the ones who do the fighting, get no retirement benefits, while the top brass take pensions from that personnel budget (which could theoretically go toward higher pay for everyone). The benefits are tremendously generous. In 2007, the Bush administration passed a bill removing the cap on benefits at 75 percent of the highest base salary for the most senior officers. It’s conceivable, says the Congressional Budget Office, that officers could get more than 100 percent of their pay in retirement. Think about all the retired generals you see as television analysts, consultants for defense contractors and lobbyists. They’re also getting large pensions denied to ordinary service members.
Service members can remit a portion of their salary into the Thrift Savings Plan — a 401(k)-style government program — but they get no matching contributions from the Department of Defense, even though the Pentagon has the authority to make the contributions.
Many of the arguments about societal inequality are manifest in that military retirement system. The rank-and-file infantry typically get nothing for years of service, while the officer corps receives lavish benefits. The “corporation,” the Defense Department, has effectively no interest in helping its employees save for retirement, outside of protecting the cream of the crop.
The benefits are so outsized — they cost $51.7 billion in 2012 and are expected to increase to $55 billion by 2017 — that Congress has expressed interest in rolling them back. But the tendency to “support the troops” is powerful, even if only a few troops are being supported. The Paul Ryan-Patty Murray budget deal in 2013 attempted to shave $6 billion from military pensions (through reducing the annual cost-of-living adjustment), but a revolt led to the eventual repeal of that cut, despite the maintenance of a similar cut to the pensions of all other federal employees, who actually do pay into their retirement funds.
The system is obviously a mess, and it cries out for reform, despite powerful resistance. So what has the government come up with? Shifting much of the pension benefit into a 401(k) plan.
The House Armed Services personnel subcommittee this week put forward a “blended” proposal, similar to one recommended by an advisory panel and endorsed by President Obama’s Defense Department, that would end the all-or-nothing 20-year vesting structure, reducing pensions under that model by 20 percent. The plan would allow more service members to walk out with actual benefits, with the government matching up to 5 percent of base pay in Thrift Savings Plan accounts, up from the zero percent they offer currently. There are also lump-sum payments envisioned to keep military personnel in the force beyond 12 years. If a service member maxes out on their 401(k) and takes the lump sum, they might get a higher benefit in retirement.
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The core of the proposal, though, is to cut pensions and save money (over $30 billion over the next five years), instead of delivering benefits to a greater segment of the workforce. And introducing the 401(k) concept into the military, one of the nation’s largest employers, doubles down on the nation’s failed experiment with these retirement accounts. As CBO points out, this just shifts risk onto individual service members, making their retirement more dependent on stock returns.
The average American has just $91,300 saved in a 401(k), barely enough to last a few years in retirement. High fees to Wall Street fund managers rob significant portions of earnings, and while the Thrift Savings Plan projected for use in military retirement accounts likely avoids that problem, it’s hard to see how service members could contribute enough to get back anything meaningful. The Military Compensation and Retirement Modernization Commission, which devised the plan, estimates that the average enlisted man serving eight years would walk out with just $13,000 total in their Thrift Savings Plan account, and that’s assuming a healthy 7.3 percent annual rate of return.
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Military members are covered by Social Security, and they once actually got special credits for their military service. But that program ended in 2001. Veterans who served in a foreign war have access to potential retirement benefits, but unless you received a Medal of Honor, these are mostly means-tested and susceptible to a middle-class squeeze.
So despite the nation’s commitment to veterans, they have increasingly been put into the same predicament as the rest of the population — a wobbly three-legged stool for retirement, where savings and defined benefits have been chopped down to size. Social Security is the only leg left standing, and it doesn’t offer enough to give people a decent living standard. Most Americans are unprepared for retirement, and we are likely to see a return to diminished quality of life for seniors. The way to fix this problem for the military is the same as the way to fix it for the general population: expand Social Security.
The current military pension system has managed the feat of being wasteful and penurious, overly generous and exclusionary. The fix doesn’t seem like a reprieve for most of the force. This is a case where Congress should go looking for a better cure for this disease.
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