Implementation Steps DOD should seek legislation to permit the increased use of multiyear contracts and the Secretary of Defense should implement the recommendations discussed above to improve stability in the weapons acquisition process. II. ISSUE AND RECOMMENDATION SUMMARIES (CONT'D) C. RETIREMENT ISSUES OVERVIEW Its Because of its extremely high cost and radical difference from conventional retirement programs, the military retirement plan has come under considerable criticism. current and rapidly escalating costs have been highlighted by the popular press, as well as by retirement experts. According to a 1982 Congressional Budget Office report, five major studies and legislative proposals from two previous Administrations, have recommended providing more of the total military compensation package "up front," rather than in retirement years. By October 1, 1983, the Fifth Quadrennial Review of Military Compensation will report its findings to the Secretary of Defense and to Congress. Over the past few years, substantial steps have been taken to upgrade military pay. Today it is considered competitive with civilian Government pay. It is also comparable to private sector pay, except at the top officer levels, where salary compression limits upward progress. Despite this fundamental shift to comparability in active duty compensation, the military retirement system offers benefits unmatched in any other system. Military personnel may retire after 20 years of service at 50 percent of base pay. Since some begin their service careers at age 17, 37-year-old retirees can expect to receive more in retirement income than they received in active duty base pay, even before considering cost of living adjustments. As has been observed by Congressman Les Aspin, 87 percent of all military retirees collecting pensions are still of working age. Furthermore, 40.2 percent of all military retirees were in their fifties in 1982, while 30.6 percent were in their forties. Of all those who retire on military pensions, 26 percent are in their thirties when they do so. Of those who retired from the military in 1982, only 0.1 percent retired after age 60, and only 8 percent who did so were in their fifties. The most common age at retirement is 43 for officers and 39 for enlistees. (All data pertain to non-disability retirees.) It is instructive to look at what happens to those who retire, since for most it means retirement for another job. According to a study prepared for the Office of the Secretary of Defense (OSD) by Richard V.L. Cooper, published in February 1981, the combination of retired pay and postservice earnings results in an average income for military retirees that substantially exceeds the average income for non-retired veterans. For those fully employed, the combination of post-service earnings and retired pay places retired officers in the upper 10 percent of all fully employed military veterans. Enlisted retirees generally fall between the 75th and 90th percentiles. There are many who feel that the military retirement plan has become unaffordable for the Nation, particularly since many of the retirees launch successful second career jobs in the private sector. Congressman Aspin inquires, "Is it fair to millions of taxpayers who don't collect military pensions that we pay so much 'retired pay' to so many 'retirees' who aren't retired at all?" Because of the unique nature of military sevice, it may be desirable to have a retirement system that is somewhat better and somewhat more costly than even the better private sector plans, but we question whether it should be as much better as it is. Consider the following: The military plan provides immediate, unreduced benefits for early retirement, generally at ages 20 or more years below those prevailing in the private sector. The military plan provides a higher ratio of pay credit for fewer years of service than private sector plans do. The military plan provides more generous cost of living protection through earlier and greater indexing than that prevailing in the private sector. The military plan does not provide for Social Security integration (i.e., the pension is not reduced by some portion of Social Security payments), even though this is generally provided by private sector plans. The OSD Task Force restricted its comparisons to "good private sector plans," those of the top several hundred companies in the United States, although we recognize that about half of private sector workers do not participate in a pension plan. It is demonstrably clear that the benefits of the military plan are far in excess of those available through the private sector. Perhaps the easiest way to illustrate how much is by reference to cost. The usual way to measure pension costs is by comparing the "normal cost" of different plans. Normal cost is defined as that percentage of the pay of an entering group of employees which must be placed continuously in a fund to be sufficient to pay the retirement benefits of those who eventually qualify for the benefits. Essentially, it measures that level percentage of the payroll necessary to fund pension benefits over the working careers of the covered employees. The normal cost of good private sector plans is between 5 and 6 percent of payroll. The normal cost of the military plan is 35 percent of basic military compensation, or 50.7 percent of basic pay. The need for action to contain these costs is clear. The dilemma is whether to reduce the pension benefit (and cost) for all retirees or to limit 'retirement' benefits to those who are truly retired below a threshold age, say 62. From the viewpoint of a recipient or future recipient this is a difficult choice, one that is hardly welcome. But it appears certain that, as a Nation, we cannot afford to pay a competitive wage during active duty years, and at the same time provide for a pension benefit that costs more than six times as much as the better private sector plans. Mitigation of this cost must be found in some manner. The OSD Task Force has developed two quite different approaches to reduce the cost of military retirement. One, OSD 24A, copes with the problem by deferring the age at which full retirement benefits are collectible, while providing reduced benefits for those who choose to start collecting earlier. The other, OSD 24B, recognizes the financial need of those who cannot or choose not to work following military retirement. Their benefits would be untouched. This proposal would introduce an "earned income offset" to retirement income, similar in concept to the Social Security earned income offset, for those who earn more than a threshold amount. Both proposals provide incentives for military service beyond 20 years. |