Keeping The Faith: Can the military save on pay and benefits without breaking faith? By Kellie Lunney

DeM Banter: Probably too close to this to comment…

Government Executive
August 15, 2012

America’s military community has long felt disconnected from the civilian population it protects. In the latest survey from the nonprofit military support group Blue Star Families, 95 percent of respondents, who included service members, veterans, spouses and children, agreed with the statement: “The general public does not truly understand or appreciate the sacrifices made by service members and their families.”

What happens when service members and their families start to feel unappreciated by the institution that has promised to take care of them?

That’s the current situation confronting the Defense Department, which is trying to rein in skyrocketing personnel costs without “breaking faith” with millions of active-duty members and retirees on pay and benefits. The Pentagon also has to be careful not to alienate potential recruits to an all-volunteer force by making military compensation less attractive. The department, at least at the rhetorical level, understands that challenge. “When you ask young men and women to deploy three to five times, we do take on an obligation to take care of them,” Army Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, said at the National Press Club breakfast Government Executive hosted in June. “The fabric that holds the institution is trust.”

That trust is shaky right now. The same survey that Blue Star Families conducted showed that potential changes to pensions, pay and other benefits rank at the top of issues weighing on military families. Thirty-one percent of respondents listed retirement benefit changes as their No. 1 concern while 20 percent ranked pay and benefits issues in general as their biggest worry. A lot of the anxiety is being driven by proposals from various think tanks and the Pentagon’s own Defense Business Board to restructure the pension system, which currently favors those who have served 20 years or more, and increase the amount retirees pay for their health care. The health care fees for military retirees and their families, which have stayed relatively flat since 1995, are a particular point of contention for critics. Winslow T. Wheeler, director of the Straus Military Reform Project at the Center for Defense Information, called TRICARE—the health care system that covers 9.6 million active-duty service members, reservists, retirees and their dependents—the “most extravagant government health care program in the country,” in a 2011 column titled “Defense Budget Reform or Hysteria?”

Determining a fair price for sacrifice, especially at a time of high unemployment, when troops are returning from Iraq and Afghanistan and budgets are shrinking governmentwide, is like walking a tightrope blindfolded. Missteps are a constant threat and the end is never in sight. Service members and their families understand the pressure to corral spending. But like their civilian counterparts in government, they don’t want to be the poster children for belt-tightening.

“To a certain extent, it’s a generous compensation package, but it is a difficult job,” says AnnaMaria White, director of public relations at Blue Star Families, whose husband serves in the Marine Corps. “How many times does a postman get shot at? How many nights does he not get to spend with his family?”

Guns and Butter

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. All told, military compensation eats up about one-third of the department’s budget.

According to the Pentagon, personnel costs have grown so fast over the past decade that they are up almost 90 percent since fiscal 2001. During that same period, active-duty troop levels grew by less than 3 percent. The size of the active-duty force grew in the years following the Sept. 11, 2001, terrorist attacks, but has remained constant during the last half of the decade.

There are several reasons the Pentagon’s personnel costs have ballooned. The stable economy in the late 1990s prompted Congress to enact large military pay raises to help the Pentagon continue to recruit an all-volunteer force and to adjust for a significant pay gap at the time between the military and the private sector. That gap closed in 2010, and subsequent pay increases have been set equal to the Employment Cost Index. Service members are on track to receive a 1.7 percent pay raise in 2013, the figure the Obama administration recommended.

“Our members are now paid equal to or better than the majority of their civilian counterparts,” Defense spokeswoman Eileen Lainez said in an email to Government Executive. The Pentagon’s latest review of military compensation released in June agreed, finding that service members typically earned more by 2009 than most private sector workers of similar age and education. The administration has proposed limiting annual military pay increases beginning in fiscal 2015, saying it will save the department $16.5 billion over five years.

Reining in pay, however, is relatively simple and somewhat less controversial compared with increasing the amount retirees pay for their health care or restructuring the retirement benefits for career service members. 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. The House this spring shot down the administration’s recommendations to raise health care premiums for military retirees based on their retirement pay, in addition to other fee hikes. The Senate is on track to follow suit. Until 2011, TRICARE enrollment fees for military retirees younger than 65 had remained the same since 1995.

“If we keep paying for all this health care, there isn’t going to be any left over to pay for weapons,” says Lawrence Korb, former assistant Defense secretary during the Reagan administration, military retiree, and senior fellow at the Center for American Progress.

As of Oct. 1, retirees enrolled in TRICARE Prime will pay $39 to $79 more than they currently do in annual enrollment fees. Those enrolled after Oct. 1, 2011— considered new enrollees—already are paying the higher rates.

Making the Case

The Pentagon’s overview of its fiscal 2013 budget request contains an analysis of its personnel costs. The section is called “Taking Care of People,” and the wording is very cautious, cognizant of the political minefield any discussion of changes to pay and benefits creates.

The only significant proposal affecting military pay and benefits that the administration has pushed so far relates to TRICARE. The recommendations, called “outlandish” by retired Vice Adm. Norb Ryan Jr., president of the Military Officers Association of America, would increase fees for retirees in the family plan over the next five years, with those in the upper-income bracket seeing the biggest hike. For example, some enrollees could see their annual fee jump from $520 in fiscal 2012 to $2,048 in fiscal 2017, depending on their income. The administration also supports raising some enrollment fees and prescription drug co-pays.

Ryan says his organization agrees with some modest increases to health care costs for enrollees, but calls the Defense proposal unfair. “When you try to triple these fees, you are basically breaking your promise to these [people]. Retirees pay their fees up front in decades of service and sacrifice,” he notes.

Most lawmakers agree with Ryan, at least politically if not in principle. Congress is loath to make any radical changes to military pay and benefits. The fiscal 2013 Defense authorization bills include some modest hikes to drug co-pays under TRICARE but nothing as far-reaching as the administration’s proposals. A bipartisan bill introduced in May by Sens. Frank Lautenberg, D-N.J., and Marco Rubio, R-Fla., would cap certain increases to fees under TRICARE.

The pushback from Congress and military advocacy groups is one reason the Pentagon is rolling out its recommendations for compensation reform slowly. It’s notable that the administration has not yet come out with any recommendations to change retirement benefits. Obama’s budget calls for a commission, similar to those that study base closure and realignments, to review the retirement system. The administration though has not publicly favored any of the myriad proposals from think tanks or the Defense Business Board regarding retirement reform.

Korb says he believes Defense Secretary Leon Panetta has taken a “good first step” in looking at the problem of rising personnel costs from a comprehensive standpoint. But Panetta needs to be more candid about the repercussions of maintaining the status quo, Korb says. The difference between current attempts at reform and those initiated under former Defense Secretary Donald Rumsfeld is telling, and important. “This is the first time the [military] chiefs have been on board,” says Korb. “When Rumsfeld tried it, he didn’t have a lot of support from the chiefs.”

Pension Tension

Nowhere is the fine line between advocating for compensation reform and protecting the interests of service members and retirees more evident than the debate over the military pension system. The Defense Business Board, an advisory panel of private sector leaders, last summer recommended the department phase out its 20-year cliff-vesting retirement system and replace it 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 vast majority of military retirees who elect to leave the service in their 30s or 40s go on to have second careers while simultaneously receiving military retirement pay and generous government health care benefits,” Korb wrote in a May report from the Center for American Progress. Korb, along with the Defense Business Board and other observers, believes the military should transition to a 401(k)-type plan that includes government contributions. Other recommendations call for modifying the system so retirees have to wait until age 60 to receive their pensions. Ryan slams some of the proposals to modify the pension system, particularly those that would change retirement benefits for folks with 20 years or more in the military. “Well, hello, it’s a tough life [to spend a career in the military],” he says. “To say this retirement system has to change because only 17 percent benefit from it is so naïve and cynical. So, to think we need to have more people to get out in three, four, six, seven years is just foolhardy.”

The Pentagon has downplayed the Defense Business Board’s role in revamping military retirement. During a hearing on Capitol Hill last fall, Jo Ann Rooney, principal deputy undersecretary of Defense for personnel and readiness, sought to tamp down concern over the panel’s proposals on changing the retirement system. “The review is designed to be deliberate, careful and pragmatic,” Rooney said at the time, calling the board’s report “one data point as we look at overall compensation.”

Panetta, for his part, has said repeatedly that those serving in the current system would be grandfathered in and he does not intend to break faith with service members on the benefits promised to them. Still, it’s not clear that message is resonating with service members. White says people are very concerned about not being sheltered from reforms. “If they are changing benefits to people who are already retired, it could have a huge impact on them, it could have a lot of negative effects.” White, whose husband already has served seven years, says he still has time to make a change based on retirement considerations if it’s necessary. “If you have someone at 18 years, and they spent 18 years banking on that pension, I think [eliminating the 20-year cliff vesting] would affect them more,” she says.

Looking Ahead

Most agree that any changes to military compensation will come after the November election. The government is facing automatic spending cuts because of Congress’ failure to agree on a comprehensive deficit reduction plan. The sequester is set to begin in January 2013; if that happens, the Pentagon will have to come up with $500 billion or so in reductions over the next decade. How will that affect military compensation? It’s tough to say, but some believe Obama would exempt any cuts affecting the pay and benefits of service members, as compensation falls into the mandatory spending category. Reform could be a long way off, after all.