USAA posted on December 31, 2011 11:01
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As part of the deficit debates that have engulfed Washington this year, there's been talk of sweeping changes to military retirement benefits.
The first salvo was issued in July, when the Defense Business Board — an advisory group of business executives tasked with finding cost savings in the Defense Department — recommended a massive overhaul of the military retirement system.
The two biggest proposed changes: converting the existing military benefits package to a 401(k)-style plan, where both the government and service members contribute; and no longer allowing all service members to retire with benefits after 20 years. Instead, the plan would offer partial benefits after 10 years but not award full benefits until veterans are ages 60 to 65. The overhaul, the board estimated, could save the U.S. between $150 billion and $350 billion over 20 years.
A similar shift to 401(k) plans was put in place for federal civilian employees in the 1980s, says Lawrence Korb, an assistant secretary of defense under President Reagan who now serves as a senior fellow at the Center for American Progress. In that switch, existing government workers chose between the old defined-benefit plan and the new 401(k) plan, while new hires were automatically enrolled in the 401(k). Defense Secretary Leon Panetta has said military retirement reform would grandfather in current members of the military in a similar fashion.
The more controversial measure, however, is the elimination of the 20-year retirement threshold, which has been in place since 1948.
"The military retirement system is antiquated," argues Korb. "We're not storming the trenches anymore and riding horses. Officers and enlisted can still serve effectively into their 40s and 50s." At the same time, he notes, more enlistees see the military as just one stop in a more varied career.
Some critics of the plan worry that service members would start retiring even earlier rather than waiting to hit the 20-year mark. Once service members can access retirement pay at 10 years, Joe Davis, spokesman for the Veterans of Foreign Wars, says, "You're going to lose all your mid-level NCOs and officers." For these service members, in their mid-30s and at the peak of their marketability in the private job world, he warns, "there will be no incentive whatsoever to stay beyond the 10-year point."
Davis adds that the shift to a 401(k) could also impact recruitment. "It will make potential recruits think twice about joining, because they can receive a 401(k)-type retirement plan anywhere and earn it much more safely."
What happens next is uncertain. Chairman of the Joint Chiefs of Staff Admiral Mike Mullen declared in August that there's "no immediate plan" to revamp the military retirement system, but Panetta, among others, says that the government needs to at least consider an overhaul. And the National Commission on Fiscal Responsibility and Reform, which President Obama and leaders of Congress agreed to as part of the debt limit deal in August, is expected to include military retirement reform on its agenda.
Both current and former service members will be watching the overhaul debate closely.
"The VFW has been strongly against changing the military retirement system ever since the Pentagon first decided to float it as a trial balloon," says Davis. "It disregards decades of upfront service and sacrifice that's required of the less than 10 percent of the force who choose to make the military a career."
Yet with $350 million in potential savings on the table, some change may be inevitable.
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