Twenty years ago, the military retirement system was the No. 1 benefit that kept people in service for a full career. Members could retire after 20 years of active duty at half of their base pay, or at three-quarters of base pay after 30 years.
It was a good benefit, unquestionably. It sort of evened things up for the family separations, the hazardous duty, the frequent moves, the tours in undesirable locations, and the other “exigencies of the service.” In trying times, military people reminded themselves that “it all counts for 20.”
Outsiders often perceived the benefit as being too good, and there were periodic attempts to whittle it down. In a notable example, Congress in 1958 ended the recomputation of retired pay every time the active duty force got a raise and then, in 1963, linked increases in retired pay to the Consumer Price Index instead. That trick backfired when double-digit inflation sent the CPI soaring in the 1970s.
Congress did not change the basic formula for the retirement system until Sept. 8, 1980, though. For those entering service after that date, retirement pay would be computed on an average of their highest 36 months of base pay rather than on final base pay. That hurt, but the killer was the next step.
The stage was set in 1984, when Congress switched the system from a “pay as you go” basis to accrual accounting, under which the services had to fund the full cost of future retirement pay the same year that future retirees earned the benefit with their service.
Among those thinking the military retirement system was too generous was Rep. Les Aspin (D-Wis.), who became chairman of the House Armed Services Committee in 1985. The shortfall that year in the military retirement trust fund was $2.9 billion, which gave Aspin the leverage to override the objections of the Joint Chiefs of Staff and impose cost-saving “reform” in 1986.
Under the “Redux” plan-the Military Retirement Reform Act-people entering service on or after Aug. 1, 1986, and serving less than 30 years would have their retired pay computed on the basis of 40 percent (rather than half) of their High-3 average. Furthermore, cost of living adjustments would not keep pace with inflation. That made three retirement systems, and the differences were huge.
According to the Fleet Reserve Association, initial retired pay in 1998 dollars for an E-7 (a master sergeant in the Air Force) with 20 years of service in 2006 would be $14,366 a year under the old system, $13,486 under High-3, and $10,813 under Redux.
That initial $3,553 gap between the old system and Redux then widens because MRRA takes away one percentage point from the annual cost of living adjustment until the retiree reaches age 62, when a one-time catch-up with inflation is granted. Army Times estimates the difference for an E-7 in expected lifetime retired pay between the two systems to be about $130,000 in constant dollars.
Now, with the first of those affected by the changes coming up on 20-year retirement in 2000, a consensus is beginning to form that it was a mistake to depart from the old system. Retention of mid-career veterans is a problem for the armed forces. That is precisely the group once held in service most effectively by the retirement system.
The retirement system is no longer the retention incentive it was. Today, less than half the Air Force officers and less than a third of the enlisted force rate the cut-down program as a “very important” factor in their career decision. Only 12 percent of the enlisted force regard the retirement system as “fair and equitable.”
There is some recognition of the problem in Congress. Sen. Trent Lott (R-Miss.), the Senate majority leader, supports a return to the system in which military members can retire at 20 years with 50 percent of their base pay.
“It is my intention to work with the leaders here in Congress and the Secretary of Defense to put us on a track to fix the retirement system,” Sen. Ted Stevens (R-Alaska), chairman of the Senate Appropriations Committee, said in July. “There is no higher defense funding priority, for it has led to a rise of decisions by men and women in the services not to continue because of their feeling about the unfairness of retirement policies.”
This year’s defense authorization bill from the House of Representatives said the retirement system was “seriously degraded” as a retention incentive and directed the Secretary of Defense to examine the harm done by the 1980 and 1986 changes and turn in his findings and recommendations by June 30, 1999.
There is formidable opposition to repealing Redux and High-3. In the past four years alone, there have been 17 proposals to cut the military retirement system further and divert the savings to other uses.
Restoration of the retirement program to pre-1980 form will cost billions. However, that expense is also a measure of how much military members have lost, which explains why the retirement system has lost so much of its retention value.
Les Aspin and others were wrong in the assumption that the retirement system was too “generous” and that a bargain-basement plan would retain experienced people just as well. It is time to correct the mistake.