Business Executives for National Security Modernizing Military Compensation Series Summary of Findings, Perspectives, and Recommendations www.bens.org
Overview • Setting the Context for the BENS Modernizing Military Compensation Series • Providing an Enduring Retirement Benefit • Value Based Practices for Military Health Care • The Commissary Benefit and Evaluating the Need for Reform • Review of Key Points and Recommendations
Our Purpose Bringing private sector insight to military compensation reform “If we don’t make some tough choices here along the way, … then we’ll have a military that is heavily As concern for military compensated, but probably a force that is not capable and not ready .” personnel cost and debate Chuck Hagel, Secretary of Defense around compensation reform heightens, BENS believes there “A striking bipartisan consensus exists today across the think tank community on the need...for a are private sector perspectives comprehensive evaluation and modernization of the military compensation system.” that are valuable to the Defense Reform Consensus discussion and business practices available that would “Our greatest challenge in this most dangerous world improve the system. is strengthening the U.S. military in a weak economy whose foundation rests on the quicksand of deficit spending” MajGen Arnold Punaro, USMC (ret.) 3
Our Approach Bringing private sector insight to military compensation reform FY14 DOD Compensation Budget Retirement Health A ten-member Task Force (in billions of dollars) Care, $8.3 was formed and asked to provide perspective and Retirement, $16.8 recommendations that would help policymakers Commissary, $1.4 address key areas of Basic Pay , $52.0 military compensation. $144 The Task Force focused on three areas where Health Care , they believe they could $33.6 provide the most value: Retirement Other Pay & Housing Health Care Allowances, $7.8 Allowance, $19.4 Commissaries Subsistence Food 4 Note: Full explanation of calculation and Allowance, $4.1 sources to be available in forthcoming report.
Overview • Setting the Context for the BENS Modernizing Military Compensation Series • Providing an Enduring Retirement Benefit • Value Based Practices for Military Health Care • The Commissary Benefit and Evaluating the Need for Reform • Review of Key Points and Recommendations
Providing an Enduring Retirement Benefit Initial Findings Modeling for the Defense Business Board raises cause for concern. There is continued growth in total government cost and liability. 6 Graph by: Defense Business Board
Providing an Enduring Retirement Benefit Initial Findings While growing cost should be a concern, projections on Normal Cost Contributions from DoD and liability may be speculative. Unfunded Liability from Treasury The hundreds of billions of 120 dollars of unfunded liability 100 is a cumulative amount to be paid to retirees over the 80 next 50 years, not all at Billions ($) DoD, once. Moreover, Treasury’s 60 Normal Costs liability which resulted from Treasury, Unfunded Liability 40 the implementation of accrual accounting in 1985 20 will dissipate in 2025. 0 Year 1989 1994 1999 2004 2009 2014 2019 2024 2029 2034 2039 2044 2049 2054 2059 7 Data: Department of Defense Office of the Actuary (2010)
Providing an Enduring Retirement Benefit Initial Findings Significant increases in basic pay over the past ten years directly correlates with increased cost of Retirement Accrual & Basic Pay retirement. 20,000,000 58,000,000 19,000,000 56,000,000 As basic pay cost begins to 18,000,000 flatten or reduce due to 54,000,000 17,000,000 expected reductions in 52,000,000 Accrual Cost 16,000,000 force and limited increases Basic Pay Cost 15,000,000 50,000,000 to service member salaries, 14,000,000 retirement cost is also 48,000,000 13,000,000 expected to flatten. 46,000,000 12,000,000 Basic Pay 44,000,000 11,000,000 ..... Retirement Accrual 10,000,000 42,000,000 2004 2006 2008 2010 2012 2014 8 Data: Department of Defense
Providing an Enduring Retirement Benefit Initial Findings Retirement benefits have little effect on initial enlistment, but the current defined benefit plan is a driving incentive for reenlistment – particularly for those reenlisting after 10 years of service.* However, it is unclear if a reduced benefit would significantly hurt retention. More study is needed to determine if other benefits, potentially those less costly to the Department like cash rather than in- kind compensation, could be used as an equivalent or improved retention and force shaping tool. 9 * 11 th Quadrennial Review of Military Compensation – Supporting Research Papers (2012)
Providing an Enduring Retirement Benefit Initial Findings Current system requires vesting and is inflexible: • More than 80% of all who serve do not receive a retirement benefit – which includes many of those who served in combat for the past decade • Military leaders cannot utilize the benefit to shape the force as needed – Services may not necessarily want more traditional, 20 plus consecutive year career troops. Rather, they may prefer highly specialized members, i.e. cyber, to move between the civilian and military career in order to stay relevant in the latest technologies and information. The current 20-year vesting provides little flexibility for rewarding/incentivizing those increasingly sought after individuals. 10
Providing an Enduring Retirement Benefit Comparison of Reform Proposals Potential Percent of all Service Full for Annual Burden of Retirement Plan Members Who Flexibility Payout Accrual Risk Become Eligible Age Savings Immediate Current Defined Benefit Plan w/ 20 year cliff 0% 19% Government upon vesting retirement All proposals Defined Benefit Plan w/ 20 year cliff vesting, but grandfather recipient does not Unknown Less than 19% Government 62 current receive payments till service Social Security age members and retirees BENS Defined Contribution Plan w/ a 80% - 100% Service 22% government Est. 30% Dependent on Vesting 62 contribution for service Member Year members who become vested at 3 or 5 years Sources: DoD – Office of the Actuary, Army Times Defined Contribution- Benefit Hybrid offered Note: Modeling of the Est. 5% – 15% 100% Shared 59½ - 62 by Department of proposed BENS Defense in 2014 11 contribution plan done by Capital Group
Providing an Enduring Retirement Benefit Comparison of Reform Proposals BENS Considered Proposed Hybrid Model - Proposed Defined Proposed Defined BENS Benefit Plan - BENS Contribution Plan - BENS Eligibility Eligibility Eligibility • Open for all Service Members • Open for all Service Members (current Service Members remain • Service Members with >20 (current Service Members remain on current military retirement years of service on current military retirement system) system) • Higher payout for Service All proposals Benefit Benefit Members with >20 years of service • Govt contribution of 22 % of grandfather military annual base pay for all • 50% of “high three” base current vested Service members – Benefit pay for life transferable upon release service • Govt contribution of 10% of • Can increase for longer service military annual base pay for all personnel members and vested Service members – retirees transferable upon release Vesting Payout Age • 40% of “high three” base pay for • 3 or 5 years • Based on current Social life for 20+ year retiree Security retirement age Service Member Tax Free Contribution Limit (Reduced benefits would be Vesting • Equal to IRS standard available at ages equal to • 3 years • $50,000 when member is in Social Security early designated combat zone retirement) Payout Age Payout Age • 59 ½ - 62 • Based on current Social Security retirement age 12
Providing an Enduring Retirement Benefit Initial Perspectives & Recommendations The current system, while not as unsustainable as some perceive, should be reformed Portability and, particularly, flexibility should be important drivers of change Studies should be conducted to determine how reforms would improve or hinder recruitment and retention before implementation While transitioning to a defined-contribution plan would be ideal from a cost point-of-view, BENS recommends a hybrid defined benefit- contribution model that provides flexibility for force shaping while recognizing the likely importance of a defined benefit for retention 13
Overview • Setting the Context for the BENS Modernizing Military Compensation Series • Providing an Enduring Retirement Benefit • Value Based Practices for Military Health Care • The Commissary Benefit and Evaluating the Need for Reform • Review of Key Points and Recommendations
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