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DoD study urges sweeping retirement overhaul

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 the tools to retain or separate service members based on force requirements, a Pentagon study recommends.

And to try it on for size, the Defense Department should initiate a multiyear field test with volunteers who, at the end of the test, could choose to opt back into the traditional system and its 20-year retirement baseline.

That is the biggest issue to come out of Volume II of the 10th Quadrennial Review of Military Compensation, released Tuesday at the Pentagon.

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Report of the 10th Quadrennial Review of Military Compensation Vol. II

Report of the 10th Quadrennial Review of Military Compensation Vol. I

Unlike Volume I, published in March with a focus on cash compensation for active-duty members, the new study covers deferred and noncash payments in the areas of retirement, Tricare premiums and fees and other quality-of-life programs, and also addresses the recruiting and retention of military medical professionals.

The study’s recommendations are just that — recommendations. The QRMC, conducted every four years by law, does not set policy but periodically attempts to shape the tenets of the military’s compensation programs, which in 2007 totaled more than $118 billion — 23 percent of the defense budget.

Any proposal to change the retirement system draws immediate concerns about the potential impact on retention and anger over a possible delay in the receipt of retirement pay, as did somewhat similar proposals made in January by the Commission on the National Guard and Reserves. Some of the new study’s other convention-busting proposals also are sure to spark heated debate.

For instance, the QRMC recommends that “working-age” retirees — those under age 65 — pay more for Tricare Prime, reflecting their ability to do so, as well as the QRMC’s recommendation that their rates be made more equitable with those of older retirees, who must pay Medicare Part B premiums in order to qualify for Tricare for Life insurance coverage.

The study also concludes that the services should adopt dependent care and flexible spending accounts for military beneficiaries to cover the costs of common expenses not covered by Tricare, such as eyeglasses and dental braces.

And with a sense that the Tricare system “should be biased toward prevention rather than treatment,” the QRMC calls for eliminating co-pays for preventative care, the idea being to encourage enrollees to seek out that care, stay healthier and reduce overall health care costs.

The QRMC also said the Pentagon should create education vouchers from Impact Aid — federal money that subsidizes the cost of public school education for military dependents — to provide more choices for parents unhappy with the education systems near their assigned bases.

The QRMC would also permit the formation of military charter schools; implement a child care voucher system to make that benefit more convenient for people with long commutes; and ask national and regional grocers to provide military discounts, which would benefit those not living close to installations with commissaries.

Under the retirement pay proposal, which active and reserve forces would share, retirement pay would equal 2.5 percent of their average basic pay over their 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 basic pay over their three highest earning years in uniform.

That would be supplemented by a defined Pentagon contribution to service member’s Thrift Savings Plan accounts. The Pentagon would continute nothing in the member’s first year of service, but after that, it would contribute 2 percent of the member’s basic pay in the second year, 3 percent in the third year, 4 percent in the fourth year and 5 percent in each subsequent year.

Service members would not have to contribute anything themselves to receive the defined Pentagon contributions, but they could if they desire, up to the limit currently allowed for 401(k) plans —$15,500 per year. This plan would also vest after 10 years of service, and would begin paying out at age 60.

Reservists, however, would generally earn less because they serve fewer days than their active-duty counterparts over the course of a career.

The aspect of this plan that is likely to draw the most reaction from troops is that annuity payouts would be deferred for many years.

Under the current system, active-duty members with at least 20 years of service begin receiving annuities immediately upon retirement, without penalty.

Under the new proposal, those with less than 20 years of service would begin receiving retirement payments at age 60; those with more than 20 years would have to wait until age 57 to get their full annuity.

Those with 20 or more years could withdraw the money early, but it would be subject to an early withdrawal penalty — a reduction in their annuity of 5 percentage points for each year the member is short of age 57.

For example, a 45-year-old service member who retires with 25 years of service and waits until age 57 to begin drawing retirement benefits would receive the full annuity of 62.5 percent of his average basic pay over his three highest earning years in uniform. If that same retiree opted for an immediate annuity at age 45, the benefit would be reduced by 5 percentage points for each of the 12 years he is under age 57, or 60 percentage points. So the member would receive 40 percent of the annuity he otherwise would have been paid at age 57.

The Commission on the National Guard and Reserves made a similar retirement plan proposal in its final report.

To further sculpt the retirement system, the QRMC recommended the introduction of two new incentives: “gate pay” and separation pay.

Gate pay would be cash compensation given to service members at specific time-in-service milestones; it would be offered as an incentive to encourage longer careers in select critical skills.

Separation pay would do just the opposite, providing what retired Air Force Brig. Gen. Denny Eakle, QRMC executive director, called “a check to walk out the door” — compensation for a combat arms specialist who voluntarily leaves before 20 years of service, for example.

Under the current system, said Eakle, former deputy director of the Defense Finance and Accounting Service, “the compensation system is actually shaping the force, rather than having the force managers be able to do any force-shaping.”

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 proposed system would cost less but provide more to the service member, Eakle said.

With the ability to retain service members longer, she 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.”

If adopted in this form, current service members could opt to remain in the current retirement system. But, Eakle said, the QRMC envisions the Pentagon allowing troops the opportunity to transfer into the new system “because we believe that 10-year vesting might appeal to enough people that some will actually want to leave the current retirement system and enter this.”

An earlier study by the 2006 Defense Advisory Committee on Military Compensation recommended that any new retirement system include a defined retirement benefit at age 60 that would vest after 10 years of service; it also called for gate and separation pays. The 10th QRMC used that study as the basis for its own proposals.

The QRMC was careful to note that while its behavior model on the retirement system “provided valuable estimates” of the potential impact, “it is still a theoretical analysis.”

As such, any demonstration project should include a broad cross-section of the services and run a minimum of five years, the group said.

The Pentagon for years has tried to convince Congress to raise Tricare fees for military retirees under 65. The annual enrollment fee for Tricare Prime has never changed from $230 per month for single retirees and $460 for families. And there has never been an enrollment fee for Tricare Standard.

As a result, due to inflation and other costs, Tricare beneficiaries have seen their share of the military’s overall health care costs decline from 27 percent in the mid-1990s to 12 percent by 2006, the QRMC said — in the process turning Tricare into one of the lowest-cost health insurance plans in the nation.

Meanwhile, retirees over 65 who want to enroll in Tricare for Life are required by law to carry Medicare Part B and pay its monthly premiums, which this year, start at $96.40 per month for single people with less than $82,000 in annual adjusted gross income and married couples with less than $164,000 in annual adjusted gross income. Premiums increase on a sliding scale as adjusted gross income rises.

The QRMC proposes that Tricare Prime premiums for single retirees under age 65 be set at 40 percent of the Part B premiums, with family rate set at double the single rate, regardless of family size.

Premiums for Tricare Standard and Extra would be set at 15 percent of the Part B premium for single retirees under age 65, with the family rate again set at twice that.

“There needs to be some parity between our older and our younger retirees,” Eakle said. “It’s not fair to ask the oldest retirees, who make the least, to pay far more for a benefit that is just somewhat more generous.”

The QRMC also expressed concern about the services’ inability to meet recruiting goals in the health care field. As of fiscal 2006, the Pentagon had 98.4 percent of its needed active-duty physicians but only 90.9 percent of its required nurses and 89.1 percent of its required dentists.

The shortfalls occurred even though authorizations for these caregivers declined between fiscal 1995 and 2006 and the military hired more civilians and contractors, the QRMC said.

Moreover, actual inventories have dropped even more sharply, with active-duty declines of 14 percent in physicians, 24 percent in nurses and 21 percent in and dentists.

To help remedy this shortfall, the QRMC proposes increasing the mandatory retirement age for health professionals from 62 to 68, recruiting noncitizens with U.S. health degrees, leveraging the interservice bonus program to encourage doctors with “overage” skills to transfer to services with shortages in those skills, and recruiting nondegreed registered nurses to bolster the Nurse Corps.

The QRMC would also improve conditions for participants in the Health Professionals Scholarship Program, the most widely used program for recruiting doctors and dentists.

Participants would be given access to Tricare health coverage, a housing allowance and funds to cover the costs of all required equipment.

The QRMC also recommends expanding the program to cover the costs of additional training for U.S. citizens who attend foreign medical schools, and residency opportunities for certified foreign medical school graduates.

Major changes in pay have resulted from past QRMCs, sometimes even before the reports were published. A recommendation from Volume I of this QRMC to consolidate more than 60 special and incentive pays into eight broad categories, for example, was adopted early and signed into law in January.