After years of resistance, Congress has spoken on military compensation reform. But only about one aspect of the whole package: retirement. Left undone? Healthcare and education reform.
Why does it matter? Retirement “reform” was mostly about expanding and adding new and generous benefits for over 80 percent of the force that only serves one or two tours of duty, then exits the military.
New benefits are expensive. Especially when other in-kind compensation is left unchanged. Because defense budgets are not rising, this is one reason the annual defense policy bill is at an impasse. There are no viable offsets to help pay for this generous retirement subsidy.
{mosads}The largest cost driver of all of these is military healthcare. Reform of this system, known as TriCare, in particular is about getting better outcomes at reduced cost, and, yes, saving money. Both are important goals because military healthcare has been the largest cost driver of personnel costs over the past decade.
Further exacerbating rising spending on personnel will be the costs of the new retirement subsidies, which only grow for the next 20 years before the possibility of breaking even when the “lump sum” payments end. By only enacting broader retirement benefits, Congress is virtually certain to have implemented a net neutral proposal that will generate no savings.
Further, by cherry picking one benefit to “reform” and leaving behind the hard ones like healthcare and education, any meaningful change in other areas of compensation will be that much harder for Congress to achieve in the near future. The expansion of military retirement benefits is an overall win, but its stand-alone enactment sets back holistic changes needed across the portfolio of pay and benefits for those in uniform.
Any changes from here on out to military compensation are simply “all pain, and no gain.” Generous new retirement benefits to those who previously received nothing should have been the motivational grease that kept the wheels of change spinning forward on the more difficult changes needed in military healthcare. Without the broad-based political support inherent in the expansion of retirement benefits, lawmakers will find it difficult to address military healthcare and education reform in a piecemeal approach.
“Force of the Future” should apply to compensation, not just talent management
It is yesterday’s news that America’s youth want much different things than our grandparents and great-grandparents. Yet the military compensation system was largely built during those generations and has changed little since. The push for compensation reform comes amid a larger move in the Department of Defense to provide flexible, attractive benefits to 21st-century recruits. Secretary of Defense Ash Carter’s “Force of the Future” initiative complements compensation reform by better positioning the Pentagon to recruit and retain the kind of talent needed in the present day — a job made increasingly difficult by the World War II-era compensation system.
The Military Compensation and Retirement Modernization Commission advanced a package of complementary reforms earlier this year. The commission’s flagship proposals included instituting a blended 401(k) retirement system, and moving everyone but active-duty service members off the TriCare program to an analogue of the federal civilian healthcare system. This proposed restructuring promised $27 billion in savings over five years and $7 billion annually in perpetuity.
Not only would this deliver better outcomes at reduced cost, but it makes sense to pair a more portable package of retirement benefits with a more convenient and easily transferable package of healthcare benefits.
The move to a blended 401(k) retirement system from a defined-benefit system is designed to improve morale and retention by improving incentives for the vast majority of service members who do not meet the military’s retirement requirement of 20 years in service. Now, service members will receive an automatic matching contribution up to 5 percent of basic pay from the government through 20 years. All other things being equal, such a retirement system better postures the U.S. military to field a more flexible future force that allows for longer sabbaticals and mid-career entrances for needed specialties like cyber operators and advanced technicians.
Yet the touted cost savings of this retirement reform are unlikely to materialize. A groundswell of lobbying efforts are poised to convince Congress to expand government matching throughout a service member’s entire career, which will cut proposed savings by at least 25 percent. A second lobbying effort — this one by the Pentagon itself — will give the military services near-total leeway to bestow mid-career “retention bonuses,” a tool likely to be overly used as services attempt to meet yearly retention goals without due consideration of cost. According to the Congressional Budget Office (CBO), the plan will increase the deficit over the next 20 years as the government is forced to contribute matching funds and send “lump sum” payouts to retirees grandfathered into the old system.
On the other hand, the commission’s proposed healthcare reform would not only improve the perceived value for beneficiaries, but also produce tangible cost savings. Those beneficiaries shifted into a version of the federal civilian healthcare system would receive a Basic Allowance for Health Care to use flexibly at a health provider of their choosing.
The military will spend just under $50 billion on its TriCare health care program this year, despite the fact that only 1.3 million of its nearly 8 million beneficiaries are active-duty service members. Healthcare spending as a percentage of the defense budget has doubled since 2001, even as the active-duty force shrunk nearly 5 percent. At last estimate, the military healthcare enterprise employed 85,000 military personnel and 65,000 Pentagon civilians — and it probably employs another 60,000 contractors. Absent intervention by Congress, the CBO projects that military healthcare spending will grow to consume 11 percent of the Pentagon budget in 2028. Yet the most Congress is considering this year is a marginal increase in pharmacy fees, and even this ineffectual change in terms of outlays may not even survive conference.
Service members need portable benefits to take with them throughout their careers, including healthcare
In the end, conversations about cost savings in military compensation are largely treading water unless they propose military healthcare reform. Other areas of compensation — basic pay, commissary benefits or Basic Allowance for Housing — all enjoy near-unanimous support among military families. Reductions to each benefit were proposed by different stakeholders in this year’s National Defense Authorization Act (NDAA) process, and each had met stone walls of resistance from Congress, advocacy groups, or the military itself.
The unwieldly and unnecessarily complex TriCare system, by contrast, is not perceived by military families as having the same level of value. This fact led the National Military Family Association to tacitly endorse the commission’s healthcare reform, even if it did want to enact the commission’s specific plan before studying the issue further. Congress could, and should, have waited for that study to be completed and pursued both retirement and healthcare reform concurrently next year.
At the very least, Congress should commission a year-long focused study with heavy input from military families to prepare a well-considered, widely supported set of healthcare reforms for a new administration.
Disjointed efforts at reform make hard choices harder, confuse those thinking about joining the military and hinder analysis on the impact of changes to recruiting and retention — key indicators to determine what is working and what needs fixing after changes are enacted.
Eaglen is a resident fellow at the Marilyn Ware Center for Security Studies at the American Enterprise Institute.