The Bottom Line - Budget Vs. Commission

February 12, 2015

By Col. Mike Hayden, USAF (Ret)

In late January, after nearly two years of work, the Military Compensation and Retirement Modernization Commission (MCRMC) came out with its report on modernizing military pay and benefits.

Days later, the White House released its FY 2016 budget proposal that includes a different set of recommended changes to military pay and benefits.

The nearly simultaneous releases have caused some confusion throughout the uniformed services community, so let’s try to clear things up. What are the differences between these proposals?

The administration’s FY 2016 budget rehashes many proposals that don’t attempt to modernize or reform pay and benefits — they simply continue to erode them. Here’s a snapshot of the budget proposal:

  • A third straight year of military pay caps. The president’s budget calls for a 1.3-percent raise, instead of the 2.3-percent raise mandated by law. The budget also includes a plan for four additional years of pay caps. That’s seven straight years of caps below private-sector growth.
  • A 5-percent increase in out-of-pocket housing expenses.
  • A continued erosion of the $1 billion commissary subsidy. The proposed cuts will lead to a 66-percent loss of purchasing power for the consumer.
  • A consolidation of TRICARE's Prime, Standard, and Extra programs into one plan. Working-age retirees will pay for service in military treatment facilities, absorb the Prime enrollment fee, and pay standard copayments and deductibles. The proposal also adds a new, means-tested, TRICARE For Life enrollment fee.

On the other hand, the MCRMC report contains 15 recommendations to totally overhaul pay and benefits. Some appear to be well thought out and have our support.

However, two recommendations in particular look very promising on the surface, but we believe they require serious analysis:

  • Replacing the current 20-year cliff-vesting military retirement system with a blended defined benefit and 401(k)-style retirement package. The proposal would be optional for the current force and mandatory for new service entrants. Current retirees would be unaffected.
  • Eliminating TRICARE for military families and working-age retirees and replacing it with a selection of commercial insurance plans, similar to ones available for federal employees. TRICARE For Life would remain intact.

The commissioners’ recommendations are very appealing to certain segments of the uniformed service community and their families — even to some MOAA members.

For example, critics of the current system say it’s unfair the 83 percent of entrants who leave before 20 years of service receive no retirement benefits. The commission’s hybrid retirement package with a vesting 401(k) and government match would be attractive to those who are uncertain of or do not intend to make the military a career.

However, we’ve got serious concerns whether this proposal will draw people to 20 years of service and our analysis shows these changes come at the price of

reducing the overall pension value to those that stay beyond 20 years of service — and it only gets worse the longer you stay in service. Our conservative estimates show an E-7 retiring with 20 years of service under the new proposal could lose $262,000 in lifetime retirement value. However, if the same E-7 stays for 30 years and is promoted to E-9, the lifetime loss in retirement rises to $740,000. That’s assuming a 5-percent government match and a 5-percent rate of return in the Thrift Savings Plan.

MOAA supports providing a benefit that recognizes a member’s service when they leave honorably. Yet is it fair or wise to have servicemembers who stay for 20 years or more of service sacrifice their benefit to fund the benefit for those who leave?

Additionally, the commission wants to eliminate TRICARE and send active duty families, the National Guard and Reserve community, and working-age retirees into a health program similar to what civil service employees use.

The commission listened to beneficiaries who complained of long wait times and limited access with the current TRICARE program and suggest they will get better access and eliminate wait times by enrolling in a program similar to The Federal Employees Health Benefits program — something even MOAA finds appealing.

But there’s no such thing as a free lunch. The recommendation will have working-age retirees paying more for their health care — after a 15-year phase-in they could see a four-fold increase in their premiums.

We are concerned the combined reduction to these career benefits — along with providing an even greater incentive to leave with the transportable 401(K) — could seriously affect retention of the mid-grade NCO and officer corps.

So what’s next? The administration has 60 days to analyze and review the recommendations before providing its views to Congress.

However, some members of Congress already are heaping praise on some of the proposals before understanding the true impact on the uniformed service community and without hearing the concerns — which we have — from military and veterans’ associations or the Pentagon. It’s our job to ensure Congress does not act too quickly without understanding the proposal impacts.

Congress must deal with the FY 2016 budget submission. They don’t have to deal with the MCRMC recommendations right now.

Even the strongest proponents of the all-volunteer force thought the past 14 years of severe and protracted wartime conditions would have put the career force in the ditch. Instead, existing career incentives have sustained a strong national defense and a strong career force. Is now really the time to tinker with the system?

The bottom line : Congress must resist the temptation to blindly accept proposals that could hurt the retention and readiness of the all-volunteer force.

Copyright Military Officers Association of America. All rights reserved.

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Source: www.moaa.org

Category: Forex

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