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The "inequitable, inflexible, inefficient" military retirement system should be replaced with a combination of cash and deferred compensation that would allow for vesting with as few as 10 years of service and special pays that would give service officials tools to better shape the force, according to a major new Pentagon-sponsored study.
A multiyear field test should be staged with volunteers who, at the end of the test, could opt back into the traditional system and its 20-year retirement baseline, the study says.
The plan would compensate many of the troops who receive no retirement annuity if they leave before 20 years of service, while giving personnel managers more flexibility and reducing overall personnel costs, said retired Air Force Brig. Gen. Denny Eakle, executive director of the 10th Quadrennial Review of Military Compensation.
Eakle, former deputy director of the Defense Finance and Accounting Service, said that today, "The compensation system is actually shaping the force, rather than having the force managers be able to do any force-shaping. We can use this system to shape the force, we can save some money, and people will like what they're getting better."
But a compensation expert and advocate for veterans benefits said the proposal may have an unappealing complexity for a force accustomed to the certainty of the current system.
"The No. 1 career retention incentive, the one thing it has going for it, is that it's transparent and powerful," said Steve Strobridge, director of government relations for the Military Officers Association of America and a co-chairman of the Military Coalition, an umbrella group of 35 military- and veterans-related associations.
"This is very complicated," said Strobridge, a retired colonel who served as the Air Force's director of compensation. "These kinds of proposals have the service managers in mind, not the service members."
The proposal is the highlight of Volume II of the 10th QRMC. Volume I, published in March, focused on cash compensation for active-duty members. Volume II covers deferred and noncash payments in the areas of retirement, Tricare premiums and fees, and other quality-of-life programs, and also addresses recruiting and retention of military medical professionals.
Its recommendations are just that. The QRMC, conducted every four years by law, does not set policy, but periodically attempts to shape the tenets of military compensation programs, which last year totaled more than $118 billion — 23 percent of the defense budget.
Under the proposal, which would cover both active and reserve forces, retirement pay would equal 2.5 percent of average basic pay over a member's three highest earning years in uniform, multiplied by years of service.
Vesting would begin at the 10-year mark. So someone who serves the minimum 10 years and then leaves the military would qualify for a retirement annuity of 25 percent of their "High-3" average basic pay.
However, those who leave before serving 20 years would not be able to keep their Tricare medical coverage, Eakle said.
Annuities would be augmented by defined contributions made by the Defense Department to members' Thrift Savings Plan accounts, regardless of whether members contributed more. Contributions would be a percentage of annual basic pay. The percentage would increase from the second through fifth years of service and remain steady after that.
However, the plan has one major feature likely to spark huge debate: a long deferral of retirement annuity payouts.
Active-duty members with at least 20 years of service now receive annuities immediately upon retirement, with no penalty. Under the QRMC plan, those with less than 20 years of service could not begin receiving their full annuity payments until age 60; for those with 20 or more years, it would be age 57.
Those with 20 or more years could withdraw the money early, but they would pay a penalty.
A delay in receipt of retirement pay of perhaps 20 years "is a huge problem," Strobridge said, "particularly in an environment like today. That's not a retention-friendly proposal."
Two new incentives
To address that issue, the QRMC plan would introduce two other incentives designed to keep people in uniform: "gate pay" and separation pay.
Gate pay would be cash given to service members in the form of a percentage of annual basic pay at specific time-in-service points; the QRMC suggests 12 years and 18 years. This would be an incentive to encourage longer careers in select critical skills, but would not supplant the current system of retention and re-enlistment bonuses, Eakle said, although she added, "It would be conceivable over time that might change."
Separation pay would do just the opposite, providing what Eakle called "a check to walk out the door" — compensation for a combat arms specialist who voluntarily leaves before 20 years of service, for example.
"This is how the services could begin to shape not only their whole service, but individual skills," Eakle said.
Defense officials said that the vast majority of those who serve never come close to qualifying for retirement pay under the current 20-years-or-nothing system.
"We're trying to draw people to the 10-year point," Eakle said. "And this is how we'll do it."
With both cash and deferred elements, the QRMC's proposal would cost less but give more to service members, Eakle said.
But Strobridge said he thinks it would be difficult for troops to bank on the promise of such pays. "We never know what next year's force requirements are going to be," he said. "So to me, excessive flexibility is not a good thing in an uncertain world."
The Pentagon admits it does not know how this might play out for service members in real dollars — thus the need for the multiyear demonstration. "We have not had a chance to fully review the report's calculations and recommendations, and ... cannot speculate as to costs or benefits," said Eileen Lainez, a Pentagon spokeswoman.
The test proposed by the QRMC would give volunteers a lot of options. Those selected would be drawn from all services, all ranks and multiple skills, and would have one year to eight years of service and their Thrift Savings Plans paid up through that point. The test program's vesting rules would apply, so they would become fully vested if they reached the 10-year mark during the test. They also would receive any applicable gate pay. At the end of the test, they could go back to the traditional 20-year-retirement system.
The QRMC's modeling indicates the plan would save the Pentagon and the services a lot of money.
For example, soldiers now serve an average of seven years, only 10.5 percent serve to 20 years, and the average active-duty cost per man-year, not including medical expenses, is $46,346. Using a combination of gate payments of 15 percent of annual basic pay at 12 years and 18 years of service, and one year of annual basic pay as separation pay to those between 20 and 26 years of service, those figures would change to 7.6 years, 12.5 percent and $45,839, the study says.
With the ability to retain people longer, Eakle said, "We also could maintain the force with many fewer people. It would reduce the pressures on recruiting. And you would save all of the recruiting and training costs."
Proposed changes at a glance
The 10th Quadrennial Review of Military Compensation proposes a sweeping overhaul of the military retirement system that Pentagon pay experts say would have a higher total value to service members while also giving more flexibility to personnel managers to shape the force and lowering the services' overall personnel costs. Features of the proposed plan:
* Defined retirement annuity
The value of the retirement benefit would be 2.5 percent of the member's average basic pay over their three highest earning years, multiplied by years of service. Members would be fully vested after reaching 10 years of service.
* TSP defined contributions
The military would make defined contributions to Thrift Savings Plan accounts, regardless of the amount contributed by members. The annual contributions would be a percentage of annual basic pay and would increase with years of service:
Less than 1 year: 0 percent
More than 1 year, less than 2: 2 percent
More than 2 years, less than 4: 3 percent
More than 4 years, less than 5: 4 percent
More than 5 years: 5 percent
Contributions would be fully vested after a member reaches 10 years of service.
* Gate pay
Troops would be offered gate pay at 12 and 18 years of service in amounts that could be adjusted to encourage shorter or longer careers. To support the current force structure, the QRMC suggests gate pay be set at 15 percent of a member's annual basic pay. To encourage people to stay in longer, the study says, gate pay could, for example, be set at 25 percent of annual basic pay at 12 years of service and 35 percent at 18 years.
* Early withdrawal option
Those retiring with less than 20 years would have to wait until age 60 to begin drawing their full annuity; those with more than 20 years would have to wait until age 57. Members with 20 or more years could draw payments earlier, but the value of their annuity would be reduced by 5 percentage points for each year they are under age 57 at the time. For example, someone drawing the annuity at age 45 would receive only 40 percent of the annuity he would have received at age 57.
* Separation pay
Members who retire with 20 to 26 years of service would get lump-sum separation pay equal to one month of basic pay for each year of service. Someone retiring at 24 years, for example, would get two years of basic pay.