Keeping the Pentagon's Promise to Taxpayers

Recent changes to military pensions don't renege on promises made to the military.

Soldiers dig for a roadside bomb in Afghanistan.

The recent budget deal changed pension cost-of-living adjustments for members of the military.

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The military retirees lobby is complaining loudly about that the so-called Murray-Ryan budget plan, which lowers the cost-of-living adjustment for working-age military retirees by 1 percent until they turn 62 and reach the full retirement pension. Opponents claim this will reduce the average enlisted retiree's pension by as much as $100,000 over their lifetime, breaking a promise that the government made to members of the armed forces. 

What opponents fail to mention is that the current military retirement system, even with the budget deal's COLA reductions, is far more generous than was promised to current retirees when they joined the armed forces. Moreover, they overlook the broken promises that the U.S. government has made to the taxpayers about the costs of military compensation over the last decade. Let us give a few examples, taking a hypothetical E-7 first sergeant, retired at age 38 after 20 years of service.

Servicemembers who enlisted after July 31, 1986 and served for at least 20 years were promised a pension of 40 percent of their three highest years of base pay earnings. This 40 percent pension would be increased by 1 percent below the cost of inflation annually, with a one-time catch-up at age 62. However, in 1999, the military lobby pressed the Clinton administration to have retired pay returned to the previous level of 50 percent of base pay, and eliminated the lower COLA adjustments. This higher base pension level means that even with the 1 percent COLA reduction, our hypothetical first sergeant receives over $5,000 more than promised in his or her first year of retirement, and about $250,000 more over his or her lifetime.

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However, changing the military pension back to 50 percent of base pay created big costs to the taxpayer. When military pensions were reduced to 40 percent of base pay, Congress allowed the Pentagon to transfer the unfunded liability of the military retirement system to the Treasury and use an accrual system to pay for future retirement payments, saving the Pentagon tens of billions of dollars a year. However, when Congress raised the military pension back to 50 percent, it did not shift back the unfunded liabilities to the Department of Defense. In fiscal year 2014, the Pentagon will pay $16.8 billion in retirement accrual payments, while Treasury paid out another $70.5 billion that would have been DoD's responsibility.

Congress has also increased the value of the retiree's annual pay by raising the base pay by more than inflation in 2004, 2005, 2006, 2008, 2009 and 2010. In 2014, the base pay for the average E-2 Army private with less than two years of service is worth 11 percent more in real terms than it was in 2001. The current pay for an O-3 captain with six years of service is worth 12.5 percent more. Current retirees not only get 25 percent more retirement pay than they were promised (50 percent versus 40 percent of base pay), but also higher base pay.

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Congress has also provided very low-cost health care to military retirees, a benefit that didn't exist when current retirees enlisted. In 1995, Congress created TRICARE, a health care plan for working-age retirees and their families who were unable or unwilling to use the free medical facilities on military bases. The enrollment fee was set at $460 a year for a family and was supposed to be adjusted every year to reflect the growth in health care costs. For the next 18 years, the enrollment fee was not adjusted by a single dime. Finally, in 2013, it was raised by $60 a year. 

If the annual enrollment fees had been adjusted with medical inflation, as intended when TRICARE was created, the fees would be over $1,000 a year instead of the current $547.68 for a family. TRICARE is also far cheaper than average employee contribution for private insurance, saving the average working-age retiree about $4,100 a year currently. Over the past 18 years, a working-age retiree enrolled in TRICARE prime would have saved tens of thousands of dollars in health care expenses compared to private insurance – costs that have been picked up by the government.