Reforming Military Compensation

8/2/2019 Reforming Military Compensation

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Reforming Military CompensationAddressing Runaway Personnel Costs Is a National Imperative

Lawrence J. Korb, Alex Rothman, and Max Homan May 2012

www.americanprogress.o


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Reforming MilitaryCompensationAddressing Runaway Personnel Costs

Is a National Imperative

Lawrence J. Korb, Alex Rothman, and Max Homan May 2012


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Contents 1 Introduction and summary 2 Pay

3 Health care

4 Retirement

8 Military pay

9 Active-duty cash compensation

11 Rising costs of cash pays and benefits

12 Secretary Panettas pay plan

14 Tricare reform

16 The Tricare military health care system

18 Reasons for rising health care costs

21 Secretary Panettas reforms

23 Next steps

27 Military retirement

27 Inequality

28 Inflexibility

28 Unsustainable costs

30 The transition

30 The current military retirement system

33 Problems with the military retirement system

36 Recommendations

40 Conclusion

41About the authors

42Endnotes


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1 Ceter or America Progress | Reormig Miitar Compesatio

Introduction and summary

Miliary personnel coss have nearly doubled since scal year 2001 and now

consume one-hird o he Penagons base budgeabou $180 billion per

year.1 I hese coss are allowed o coninue rising a heir curren rae, hey will

ea hrough he enire deense budge by FY 2039 unless he overall budge is

increased o accommodae hem.2

Te Penagons personnel budge is composed o hree major iems: pay, healh

care, and reiremen. Te rapid cos growh in each o hese programs presens aserious obsacle o he Obama adminisraions eors o bring deense spending

under conrol aer he massive increases ha occurred over he pas decade. I

le unreormed, increasing expenses or each o hese hree programs will ea up

a growing share o he deense budge, divering unds rom oher criical naional

securiy iniiaives such as raining and modernizaion.

Te hrea ha mouning personnel coss pose o miliary readiness has no gone

unnoiced by he naions poliical and miliary leaders. In he Penagons FY 2013

budge reques, Secreary o Deense Leon Paneta and he Join Chies o Sa

highligh he need or signican changes o he Deense Deparmens exising

pay, healh care, and reiremen sysems. In ligh o he pressing need o reorm he

miliarys compensaion sysems, his repor idenies opporuniies or responsible

savings in each o hese hree areas ha do no break aih wih he men and women

who are serving or have served. Nor will hese recommendaions in any way aec

hose who have suered physical or menal wounds in service o he counry.

Pay

Each year he Penagon spends $107 billion on salaries and allowances, which

amouns o abou 20 percen o is base budge.3 Tese coss have grown rapidly

in he pas 12 years, primarily due o a series o pay raises auhorized by Congress

over and above he Deense Deparmens budge requess.


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Since 2000 acive-duy compensaion (excluding healh care benes) has

increased by 28 percen, wih he cos per service member growing rom $64,606

in 2000 o $80,292 in 2012.4 Tis growh is parially atribuable o he coss o he

wars in Iraq and Aghanisan bu is primarily due o repeaed increases in basic pay

auhorized by Congress.

o ensure he orce atracs and reains high-qualiy recruis, he Deense

Deparmen ies basic miliary pay o civilian salaries as measured by he

Employmen Cos Index, ensuring ha service members are paid in-line wih

comparably educaed civilian employees. Bu in 2004 Congress mandaed

ha miliary pay increase by he Employmen Cos Index plus 0.5 percen

hrough 2006 and coninued auhorizing hese larger pay increasesagains

he Penagons wisheshrough 2011.5 Congress also ignored he ac ha he

Deparmen o Deense has me or exceeded is recruiing and reenion goals

each year since 2006, indicaing ha he compensaion package was very compei-

ive and allowed he miliary o mainain he orce i required.

Bu by repeaedly passing pay raises above and beyond he Penagons reques,

Congress has driven miliary pay ou o line wih he Penagons own sandards.

Basic pay accouns or abou hal o miliary cash compensaionservice mem-

bers also receive ax-ree allowances or housing and subsisence, a variey o oher

ax breaks, and an array o special and incenive pay. By 2006 he average service

member earned $5,400 more in cash compensaion han a comparably qualied

civilian counerpar, and he average ocer earned $6,000 more han a civilian

wih similar educaion and experience.6 Tis dispariy has coninued o grow in

he pas six years. Whas more, hese numbers do no include he value o he

generous healh care benes received by miliary personnel.

Wheher he resul o a lack o congressional undersanding o he ull range o

miliary compensaion or poliical expediency, repeaedly raising basic pay above

he Employmen Cos Index is scally unsusainable. I ignores he advice o

miliary leadership and he recommendaions o he Penagons own commissions

such as he Quadrennial Review o Miliary Compensaion.

o is credi, he Deparmen o Deense has atemped o ackle his problem inis FY 2013 budge reques, oulining a plan ha would gradually bring miliary

pay back in line wih he Employmen Cos Index wihou cuting any service

members pay, by slowing down miliary pay increases beginning in FY 2015. Te

Penagon esimaes ha is plan would save $16.5 billion over he nex ve years.7

By repeatedly

passing pay rais

above and beyo

the Pentagons

request, Congre

has driven milita

pay out o line w

the Pentagons o

standards.


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Congress should demonsrae poliical courage and allow he Deparmen o

Deense o execue his long-erm plan.

Health care

Te miliary mus also ace he challenge o resraining runaway healh care coss.

As he Cener or American Progress noed is 2011 repor, Resoring ricare:

Ensuring he Long erm Viabiliy o he Miliary Healh Care Sysem, he need

or miliary healh care reorm is undeniable.8 Beween scal year 2001 and scal

year 2012, he miliary healh care budge grew by nearly 300 percen and now

consumes abou 10 percen o he baseline deense budge.9 Mos o his cos

growh sems no rom providing care or acive-duy roops bu rom caring or

he naions miliary reirees and heir dependens.

Encouragingly, he Penagons scal year 2013 budge reques includes smarreorms o he miliarys ricare healh care program ha, i implemened by

Congress, would be a rs sep oward resoring scal balance o he program. Te

Deense Deparmen proposes o do he ollowing:

Raise enrollmen ees and deducibles or working-age reirees o refec he

large increases in healh care coss since he mid-1990s Peg enrollmen ees o medical infaion o ensure he long-erm scal viabiliy

o he ricare program Implemen an enrollmen ee or ricare or Lie, a Penagon-run plan which

augmens reirees Medicare coverage Incenivize generic and mail-order purchases or prescripion drugs

Ye hese reorms alone will no be enough even o hold he deparmens healh

care coss seady a curren levels, much less reverse he cos growh ha has

occurred over he pas decade. When ricare was creaed in 1996, working-age

reirees conribued abou 27 percen o heir healh care coss; oday ha number

has allen o jus 11 percen.10 Should he Penagons recommendaions be imple-

mened by Congress, miliary reirees would sill conribue jus 14 percen o

heir healh care coss, abou hal o wha hey did in 1996.

Te Penagons proposals would slow he projeced growh o he miliarys healh

care coss, allowing savings o $12.9 billion beween FY 2013 and FY 2017.11

Bu o ruly resore he ricare program o sable nancial ooing he Deense


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Deparmen should enac measures o reduce he overuilizaion o services and

limi double coverage o working-age miliary reirees. Tese reorms, in addiion

o hose in he Deense Deparmens budge proposal, would enable savings o up

o $15 billion per yearenough o hold ricare coss seady in he near erm. I is

imporan o noe ha none o hese recommendaions would aec disabled ve-

erans, who receive a separae healh care plan hrough he veerans adminisraion.

Retirement

Te nal area o budgeary concern explored in his paper is miliary reiremen.TePenagon also calls or an overhaul o is reiremen program in is scal year 2013

budge reques. In he documen, Secreary Paneta calls on Congress o auhorize

he creaion o a Miliary Reiremen Modernizaion Commission. Te commission

would be designed o help Congress and he Penagon make he poliically dicul

decisions necessary o reorm he miliarys oudaed reiremen sysem, which hasbeen long criicized or is inequaliy, infexibiliy, and high coss.

Te miliary reiremen program, which has no been signicanly updaed since

he 1940s, adheres o a sric vesing srucurepersonnel wih a leas 20 years

o service receive a subsanial pension or lie; personnel who serve less han 20

years receive no reiremen benes. In addiion, hose who qualiy o receive ben-

es can begin collecing heir pension immediaely upon reiring, allowing many

miliary reirees o begin receiving reiremen pay in heir lae 30s or early 40s.

Tis ype o vesing sysem leads o hree major problems. Firs, he vas majoriy

o veeransparicularly enlised personnelleave he service wih no reire-

men benes: Only 17 percen o service members remain in he orce long

enough o qualiy or he miliarys reiremen program.12 Perhaps mos roubling,

enlised roops in ground-comba unis in he Army and he Marineshe men

and women who have borne he brun o he ghing in Iraq and Aghanisan

are among he leas likely o achieve any reiremen benes.

Second, he miliarys reiremen sysem resrics he abiliy o he Deense

Deparmen o manage he size and skillse o he orce. Due o he 20-year vesingrequiremen, Penagon managers are relucan o separae personnel who have

served more han 10 years bu less han 20, no waning o leave service members

wihou a job and reiremen savings. As a resul, he Deense Deparmen is

orced o eiher separae service members early in heir careers or keep hem unil

Only 17 percentservice membe

remain in the o

long enough to

qualiy or the

militarys retirem

program. Enliste

troops in groun

combat units ar

among the least

likely to achieve

any retirement

benets.


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hey reach 20 years, even i hey are underperorming, unhappy, or ill-suied o he

immediae needs o he miliary.

Lasly, while he miliarys reiremen program serves only a small minoriy o he

orce, i provides an exceedingly generous bene, oen providing 40 years o pen-

sion paymens in reurn or 20 years o service. As a resul, he program now cossaxpayers more han $100 billion per year, an exceedingly seep price ag or a

program hampered by serious faws.13 Tis number is projeced o double by 2034.

Cerainly Secreary Paneta is righ o draw atenion o he miliarys roubled

reiremen sysem, bu a hird miliary reiremen commission is unnecessary. In

recen years he Deense Deparmen has appoined wo separae askorces o

sudy he faws in he miliary reiremen sysem, and boh have already provided

he Penagon and Congress wih answers o is reiremen problem.

We urge Secreary Paneta o use his auhoriy o work wih Congress o reorm hesysem by replacing he curren reiremen sysem wih a 401(k)-syle conribuion

program and implemening compensaion incenives such as gae and separaion

pays o assis wih orce shaping. Under our 401(k) modelbased on he recom-

mendaions o he Penagons Deense Business Boardhe Penagon would con-

ribue a leas 16 percen o each service members base pay annually, abou wice

he average privae-secor conribuion. Tis paper deails how such reorms would

grealy decrease he number o veerans leaving he orce wihou any reiremen

benes, would increase he Penagons orce managemen opions, and would begin

o address he long-erm scal challenges acing he reiremen sysem.

In making our recommendaions we undersand i is imperaive ha changes

o he miliary reiremen sysem do no negaively aec service members who

have planned heir reiremen around hese benes. We conend, however, ha i

would be wrong o allow so many o he men and women who have ough in Iraq

and Aghanisan o remain on a sysem ha will deny he vas majoriy o hem

any reiremen benes, as would be he case under he curren sysem.

Specically, we recommend a hree-par ransiion o a 401(k)-based reiremen

sysem:

Miliary personnel wih more han 10 years o service would have he opion o

remain in he curren sysem or swich o he 401(k). Personnel wih less han 10 years o service would have he opion o enroll-


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ing in he new 401(k) sysem or enrolling in a slighly modied version o he

curren pension sysem, which would ves a 10 years bu provide slighly less

reired pay (40 percen o base pay a 20 years, raher han he 50 percen per-

mited under he curren sysem) and begin paying ou a age 60.All new recruis would auomaically enroll in he 401(k) sysem.

I le unreormed, miliary reiremen coss are projeced o grow o $217 billion

by 2034.14 Miliary pay and healh care reorm will allow he Penagon o achieve

subsanial savings in he near erm. Ye i is reiremen reorm ha presens he

greaes opporuniy or savings. Implemening hese recommendaions would

allow savings o approximaely $13 billion per year in he near erm. More impor-

anly, hough, hese reorms would hold he governmens reiremen coss o

somewhere beween $114 billion and $146 billion in FY 2034, ensuring savings o

a leas $70 billion in ha year.15

Admitedly, rying o decide on an appropriae level o compensaion or hosewho risk heir lives in service o heir counry and heir ellow ciizens is a dicul

ask. Tis is rue regardless o wheher i involves members o he armed orces or

rs-responders such as policemen, reghers, or ederal law enorcemen agens.

In deciding how much is enough, he governmen mus ensure ha i recruis

and reains sucien numbers o qualied people while compensaing hem airly.

Our men and women in uniorm, our veerans, and our naions miliary reirees

deserve access o op-qualiy pay and benes. Bu in hese imes o scal auseriy,

i is imporan o evaluae he eeciveness o he Penagons personnel programs,

paricularly given he explosive cos growh hey have experienced over he pas

decade. Does i make sense, or example, a a ime when job-raining programs

or veerans are acing cus, or he ederal governmen o bankroll a $100 billion

reiremen program ha ails o cover more han 80 percen o veerans?

Secreary Paneta has proposed smar soluions o he Penagons personnel prob-

lem. Allowing miliary pay o reurn o he levels mandaed by law will help he

Deense Deparmen conrol is personnel coss wihou cuting any service mem-

bers pay. Resoring ricares original cos-sharing balance will ensure he program

remains viable or uure generaions o miliary reirees. And ransiioning o a401(k)-model reiremen sysem, as recommended by he Deense Business Board,

will expand he Deense Deparmens reiremen program o cover a ar larger per-

cenage o veerans while conaining coss o amouns he counry can aord.

Does it make seor example, at a

time when job-

training program

or veterans

are acing cuts,

or the ederal

government to

bankroll a $100

billion retiremen

program that a

to cover more

than 80 percent

veterans?


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Military pay

Te Deparmen o Deenses personnel coss have risen seadily since he shi o

an all-voluneer orce in he early 1970s. Te majoriy o his increase has appeared

in he pas 12 years as a resul o rapidly rising healh care coss and excessive

increases in base miliary pay, repeaedly passed by Congress above and beyond

he Penagons requess. Excluding unding or he wars in Iraq and Aghanisan,

personnel coss wihin he base budge have increased by nearly 90 percen since

2001abou 30 percen above infaiondespie an increase o only 3 percen

in he number o miliary personnel.16 As a resul, he Penagon currenly spends$107 billion on salaries and allowancesabou 20 percen o he base budge.17 I

Congress does no cooperae o bring miliary salaries and cash allowances back

in line wih he Deparmen o Deenses esablished guidelines, hese person-

nel expenses will coninue o consume a larger share o he oal miliary budge,

evenually divering unds rom oher criical deense needs.

In order o ensure sucien numbers o high-qualiy recruis or he orce, he

Penagon has long ied basic miliary pay o civilian salaries as measured by he

Employmen Cos Index. Tis Deparmen o Deense guideline is mean o ensure

ha miliary service members basic pay is equivalen o he salary o civilians o com-

parable educaional background and qualicaions, hus ensuring he miliary remains

a compeiive choice or qualied candidaes. Ye since 2001 Congress has eschewed

he Deparmen o Deenses sandards, repeaedly awarding pay raises above he

Employmen Cos Index sandard and beyond he Penagons own requess.

Te osensible reason or raising pay is o help he miliary mee is recruiing and

reenion goals and mee he personnel requiremens o he orce. Bu he uniormed

services have me or exceeded heir recruiing and reenion numbers in each o he

pas ve years, despie he wars in Iraq and Aghanisan. Tis consisency indicaesha he miliary compensaion package remains very compeiive wih he oer-

ings o he privae secor, rendering he pay raises auhorized by Congress aer 2006

unnecessary. Such raises are poliically popular and may have been accepable when

he oal miliary budge was rising, bu scal discipline requires ough choices.


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Tis susained growh in salaries may sem in par rom he ac ha miliary com-

pensaion is no well-undersood or widely known by mos people in and ou o he

armed orces. Mos Americans ocus on basic salary as he primary means o com-

pensaion and one o he cenral incenives or choosing a paricular job. Bu or he

men and women in our miliary, basic pay represens only he mos obvious orm o

compensaion, accouning or roughly hal o heir cash compensaion.

As a resul, basic pay is no a very accurae measure o he oal value o our ser-

vice members compensaion. In addiion o ree healh care or hemselves and

heir dependens and nonconribuory reiremen pay i hey complee 20 years

serviceboh o which we will discuss laer in his reporacive-duy service

members can receive numerous special and incenive cash pays, housing and

subsisence allowances, and ax exempions. Excluding healh care benes, acive-

duy compensaion has increased by $26.4 billion (28 percen) since 2000, wih

he cos per service member growing rom $64,606 in 2000 o $80,292 in 2012.18

In is scal year 2013 budge, he Deense Deparmen proposes a plan o bring

miliary pay back in line wih he Employmen Cos Index by implemening

reduced pay raises beginning in FY 2015, allowing miliary personnel ime o

adjus. Te deparmen esimaes ha his slowed pace o pay raises will save $16.5

billion over he nex ve years. Tis is a necessary move o resore miliary com-

pensaion o a susainable pah and will ensure ha nobodys pay is reduced.

Active-duty cash compensation

Basic paywhich is awarded according o a pay able based on rank and enure

in he serviceaccouns or roughly hal o miliary cash compensaion. In

2012 he Deparmen o Deense requesed roughly $57 billion or basic pay o

acive-duy service members, up more han $9 billion rom 2000, or an increase

o abou 15 percen. Despie a small increase in he size o he acive-duy orce,

he cos o basic pay per service member also increased subsanially, rom

$33,000 in 2000 o $38,000 in 2012.19

In addiion o basic pay, acive-duy miliary service members receive cash or in-kindallowances, which cover he necessiies o daily lie, including ood and housing.

Food is provided hrough he basic allowance or subsisence, eiher provided in-

kind hrough he meals served on miliary insallaions or as a ax-ree cash paymen.

In 2012 hese benes oaled $8.8 billion, or abou $5,800 per person, accouning

Basic pay is not

a very accurate

measure o the

total value o ou

service membe

compensation.


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or 7 percen o oal compensaion.20 Te cos o eeding our men and women in

uniorm has grown by 30 percen in he pas 12 years, largely as a resul o he wars

in Iraq and Aghanisan.21 Te miliary also subsidizes he Deense Commissary

Agency, which provides discouned groceries o service members and heir amilies,

a a cos o $1.4 billion, or $917 per service member in FY 2012.22

Service members are also provided ree housing hroughou heir ime on acive

duy. Housing is eiher provided direcly as on-base miliary housing or as a ax-

ree cash paymenha is, he basic allowance or housing. While his housing

allowance varies depending on locaion, number o dependens, marial saus,

and pay grade, he overall coss o providing housing or acive duy service mem-

bers has risen rom $13.5 billion in 2000 o more han $21 billion in 2012, up

rom $9,312 per person in 2000 o $13,856 per person his year.23 Tis 60 percen

growh is largely due o he process o privaizing he provision o miliary housing

and represens anoher large, ax-ree orm o compensaion.

Finally, miliary basic pay is supplemened by an array o special and incenive

pays and bonuses designed o reain crucial capabiliies, incenivize he acquisi-

ion and mainenance o valuable skills, reward hose who ace he added risks

o comba, and keep experienced personnel in hard-o-ll posiions. Primarily

because o he need o invoke sop loss or o exend acive duy beyond he

enlismen commimen, as well as acquire added language and medical experise

due o he wars in Iraq and Aghanisan, he cos o providing hese special and

incenive pays has grown rapidly in he pas 12 years. In 2012 he Deparmen o

Deense requesed $10.4 billion or hese various pays, up 36 percen rom 2000

levels.24 While hese special pays have allen somewha rom a peak in 2004, hey

sill averaged $2,027 per service member in 2012, up rom $1,597 in 2000.25

Tese special and incenive pays give he Penagon he fexibiliy needed o mee is

many requiremens and compensae hose who underake dangerous asks, includ-

ing comba and fying. Since he 2008 review o compensaion, he Deparmen o

Deense has been in he process o sreamlining wha had been more han 60 ypes

o special and incenive pays, and we would encourage he compleion o his paring

down process. Hopeully his raionalizaion, coupled wih he winding down o he

wars in Iraq and Aghanisan, will bring personnel coss down while mainaining herequired fexibiliy in compensaion. I is imporan o remember he value o hese

pays when considering he real value o miliary compensaion.


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Rising costs of cash pays and benefits

Te rise in basic pay since 2000 was originally moivaed by legiimae concern

ha he economic prosperiy o he lae 1990s ha had buoyed civilian salaries

and he oubreak o war in 2001 migh render he miliary an unatracive and

uncompeiive alernaive, hus harming he qualiy o he orce. Indeed, basic mil-

iary pay had lagged behind he consumer price index, meaning service members

pay ell behind infaion in he prices o consumer goods and services or much o

he 1990s (alhough his measure does no accoun or he numerous oher cash

and in-kind benes service members received).26 Congress aced on hese con-

cerns by awarding a 6.9 percen across-he-board pay raise (2.3 percen above he

Employmen Cos Index) in FY 2002 and a 4.7 percen across-he-board pay raise

(0.6 percen above he index) in FY 2003.27

As a resul o hese acions by Congress, by 2004 basic payno couningassored oher cash compensaion and ree healh carehad been brough back

in line wih he consumer price index, and in ac exceeded he Penagons own

sandards. In addiion, Congress mandaed ha miliary pay would be required

o rise a he Penagons sandard raehe Employmen Cos Indexplus 0.5

In the drat era, rom 1948 through 1973, the Pentagon had a mixed

orce o volunteers and conscripts. During the rst two years o ser-

vice, volunteers, drat-induced volunteers, and conscripts were paid

subsistence wages. Likewise, compensation or those who stayed be-

yond two years was also below comparable pay in the civilian sector.

Putting this into perspective, in 1968 the average cost o an individual

on active duty was $5,780, and the total military personnel budget

or 3.4 million people was $19.9 billion, or 25 percent o the total

military budget. In FY 2012 dollars the cost o the individual service

member would be $30,415, and the total military personnel budget

would be $104.7 billion or 3.4 million people.

In 1974, one year ater the end o the drat, the cost per individual

service member had risen to $10,895, and the total military personnel

budget had increased to $24.2 billion. In FY 2012 dollars this wo

amount to $42,140 per individual and a total military personne

budget o $93.8 billion.

By 2000 the military personnel budget had risen to $73.8 billion

percent o the total military budgetor 1.3 million people, at a

$58,769 per person. In FY 2012 dollars the FY 2000 personnel bu

was $95 billion, and the cost per service member was about $75,

By FY 2012, the personnel budget had reached $160 billion, or

percent o the military base budget, and the cost per individua

risen to about $115,000 per person. In real terms, this was almo

times higher than in 1968, almost three times higher than in 19

and twice as high as in 2000.

The growth of personnel costs since the end of the draft


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percen rom 2004 hrough 2006. By 2006 he Deparmen o Deenses own

Quadrennial Review o Miliary Compensaion repored ha he average service

member earned $5,400 more in cash compensaion han a comparably qualied

civilian counerpar. Tis discrepancy was even more apparen moving up he

pay scale, wih he average miliary ocer earning $6,000 more han a civilian o

similar educaion and experience.28

Tis series o increases o basic pay, puting iabove he Employmen Cos Index, coninued rom 2004 o 2011, as Congress

coninued o award miliary pay raises a he index level plus 0.5 percen.29 Since

2011 miliary raises have revered o he index sandard.30

Te miliary pay raises above he Employmen Cos Index in he years aer 2004

were auhorized wih litle regard o he desires o he Penagons leadership, and

hey canno be susained. In 2001 a privae wih dependens and hree years o

experience deployed o a comba zone ook home $26,700 in ax-ree pay. By 2012

ha gure had risen o $36,000. Under his same scenario, a lieuenan colonel wih

dependens and 20 years o experience deployed o a comba zone in 2001 broughhome $84,000 in ax-ree pay. By 2012 ha amoun had increased o $120,000.31

Again, hese cash ake-home gures do no accoun or he value o ree healh care

or service members and heir dependens, special and incenive pays, or reiremen

benes (in his case, only or he colonel who had served 20 years).

We would no argue ha hese salaries are exorbian, or ha he men and women

o our miliary do no deserve o be generously compensaed or heir proession-

alism and bravery. Bu he rend, coninued by boh Democras and Republicans

in Congress, o increasing pay each year by more han he esablished Penagon

sandard, despie he advice o miliary and civilian leadership, mus come o an

end i deense spending is o be brough under conrol.

Secretary Panettas pay plan

In he Deparmen o Deenses FY 2013 budge reques, Secreary Paneta has

oulined a plan o save $16.5 billion over he nex ve years, o re-esablish he

sandards governing miliary pay, and o resore he long-erm viabiliy o he

miliarys sysem o cash compensaion. Under he Penagon plan, miliary paywill coninue o rise a he rae o he Employmen Cos Index or he nex wo

years, meaning an across-he-board increase o 1.7 percen in January 2013 and

a similar raise (depending on he index and oher economic acors) in FY 2014.

Aer 2014, however, pay raises will be held down o bring miliary compensa-


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ion back in line wih he Deense Deparmens sandards. Te FY 2013 reques

also includes raises o he basic allowance or housing and he basic allowance or

subsisence bu ies he acual increases o local price analyses o be conduced by

he Deparmen o Deense and he Deparmen o Agriculure.32

While many o he deails o he Penagons proposal need o be feshed ou, he pahSecreary Paneta has oulined will serve he deparmen well in he long run. We

would encourage miliary leadership and Congress o suppor he plan. We under-

sand ha he poliical pressures o oppose any reducion in he growh rae o mili-

ary pay will be severe, bu Congress should ac responsibly and gran he Penagon

leadership he budge auhoriy o execue heir long-erm plan. In considering his

issue Congress mus ake ino accoun he many orms o miliary cash compensa-

ion and he generous healh care benes, sudy he growh over he pas decade,

and mainain a long-erm oulook. For oo long, poliical posuring has rumped he

scal susainabiliy and he long-erm healh o he U. S. miliary.


17/48


Tricare reform

As he Cener or American Progress noed in is 2011 repor, Resoring ricare,

he need or miliary healh care reorm is undeniable.33 Beween scal year 2001

and scal year 2012, he miliary healh care budge grew by nearly 300 percen,

up rom $19 billion in 2001 o $52.8 billion in 2012.34

Te majoriy o his cos growh can be atribued o providing care no o acive

duy service members bu raher o miliary reirees and heir amilies, who are

allowed o remain enrolled in he Penagons healh care plan or exremely lowees. Under he curren sysem, reirees under age 65 pay jus $520 per year or

ricare coverage or a amily regardless o size; reirees over age 65 can enroll or

ree in ricare or Lie, a Penagon-run plan which augmens heir Medicare cover-

age. Congress has repeaedly blocked he Penagons eors o increase hese ees

in order o accoun or rising healh care coss naionwide.

Due o he unprecedened growh in he Penagons healh care coss, nearly 10

percen o he baseline deense budge now goes o miliary healh care. Wihou

reorm, he Penagons healh care bill is esimaed o rise by anoher 28 percen o

$64 billion by 2015.35 Should hese coss coninue o grow, healh care expenses

or reirees will consume an increasingly ousized percenage o he budge and

will begin o diver unds away rom oher Deense Deparmen programs.

o address his problem, he Deense Deparmens scal year 2013 budge

reques proposes a number reorms o he ricare healh care sysem, which,

aken collecively, would be a rs sep oward addressing he unsusain-

able growh o he Penagons healh care coss. Specically, he Deense

Deparmens budge reques proposes:

Higher enrollmen ees and deducibles or working-age reirees o accoun or

increased healh care coss since he mid-1990s when ricare was esablished Pegging enrollmen ees o increases in medical infaion o ensure he long-erm

scal viabiliy o he ricare program


18/48


Implemening an enrollmen ee or ricare or Lie Incenivizing generic and mail-order purchases or prescripion drugs

I approved by Congress, he Penagons proposals would slow he projeced

growh o he miliary s healh care coss, allowing savings o $12.9 billion

beween FY 2013 and FY 2017.36

Ye hese reorms alone will no be enougheven o hold he deparmens healh care coss seady a curren levels, much less

reverse he cos growh ha has occurred over he pas decade.

o ruly resore he ricare program o sable nancial ooing, in addiion o he

proposed ee increases, he Deense Deparmen mus also reduce he overuiliza-

ion o services, along wih limiing double coverage o working-age miliary reirees.

Tese reorms, in addiion o hose in he Deense Deparmens budge proposal,

would enable savings o up o $15 billion per year, enough o hold ricare coss seady

in he near erm. Moreover, hese proposals would gradually rebalance he cos shar-

ing beween miliary reirees and axpayers, would incenivize he responsible use oservices, and would guaranee he scal uure o he miliary healh sysem.

Congress and he American public are righly wary o asking veerans, service

members, and heir amilies o shoulder increasing healh care coss when so many

service members have been engaged in operaions in Iraq and Aghanisan. I is

imporan o noe, however, ha he Deense Deparmens proposals would no

aec acive-duy service members, who will coninue o receive healh care a no

cos. Addiionally, he proposed changes exemp he survivors o service members

who died on acive duy. Te changes would also no impac lower-income or seri-

ously injured veerans, who receive healh coverage hrough he Deparmen o

Veerans Aairs raher han hrough he Deense Deparmens ricare program.

Moreover, as we will discuss in he nex secion on miliary reiremen, only 17

percen o veerans serve he 20 years necessary o achieve reiremen benes,

including he righ o remain on ricare aer leaving he service.37 As a resul, he

vas majoriy o veerans would be unaeced by hese reorms, ye hey provide su-

cien revenue o ensure he coninued nancial viabiliy o he ricare program.

Te reorms oulined in his repor, i implemened by he Deense Deparmenand Congress, would begin o resore he cos-sharing balance beween miliary

reirees and he American axpayer, a balance ha was esablished in 1995 and has

no been updaed sucienly o refec he massive growh in he cos o healh

care in America or even basic infaion.


19/48


The Tricare military health care system

Te Deparmen o Deense provides high-qualiy healh care coverage o 9.6 mil-

lion service members, reirees, and heir dependens hrough he ricare sysem.

I is imporan o be aware o he hree basic caegories o beneciaries o under-

sand he primary scal challenges acing he sysem:

Acive-duy miliary personnel and heir dependens Miliary reirees younger han 65 years o age (who have served 20 years or

more) and heir dependens Miliary reirees older han 65 years o age (who have served 20 years or more)

and heir dependens

Te coss and benes o coverage vary depending on a beneciarys career sage

(acive duy, working-age reiree, or reiree older han 65) and on his or her

ricare plan (Prime, Exra, Sandard, or ricare or Lie). Nex we examine ingreaer deail he healh care opions currenly available o miliary personnel and

heir dependens a each sage in heir careers.

Health insurance for active-duty personnel and their dependents

As weve already noed he Deparmen o Deense unds op-qualiy healh care

or acive-duy personnel and heir amilies a litle o no cos. Acive-duy service

members and heir amilies are auomaically enrolled in ricare Prime, an HMO-

ype opion under which enrollees receive reamen primarily a miliary acili-

ies. For acive-duy personnel and amilies covered by ricare Prime, healh care

is essenially ree. Service members and heir dependens don pay enrollmen

ees, deducibles, or monhly premiums or healh care under his plan.

Acive-duy service members are required o use ricare Prime, bu heir depen-

dens can choose o enroll in eiher o he oher wo ricare plansricare Exra

or ricare Sandard. Boh plans oer greaer fexibiliy in choosing docors in

exchange or slighly higher coss in he orm o deducibles and co-pays.

FIGURE 1

Tricare for Life hasbeen a significantcause of rising milit

health costs

Deense Department

estimates o actors

contributing to deense

health case spending

increases, FY 2000 to 20

Tricare for life

Global war on terrorism

Medical care inflation

Increase in retirees and

dependents under age 65Factors not accounted for

Other benefit enhanceme

required by law

48%

6%

24%

7%

9%

5%

Source: U.S. Government AccountabilitDODs 21st Century Health Care SpendChallenges, p. 14, available at http://wwgov/cghome/d07766cg.pd


20/48


Military health insurance for retirees under age 65 (working-age retirees)

Members o he miliary who serve a leas 20 years become eligible or generous

reiremen benes, chie among which is access o excellen, inexpensive healh

care coverage. All reirees regardless o lengh o service and heir dependens

also remain eligible or ree reamen a miliary reamen aciliies, subjec oavailabiliy. Bu miliary reirees who have served a leas 20 years in he armed

orces are allowed o remain on ricare. Tey become responsible or small annual

enrollmen ees or he plan o heir choice and or co-pays or care a civilian

aciliies. Under his opion, or example, reirees younger han 65 choosing

ricare Prime coverage beginning January 2013 will pay an enrollmen ee o only

$260 or individuals and $520 or amilies per year.

Tese enrollmen ees have been raised only once since ricare was rs imple-

mened in 1995.38 Had he ees been adjused o refec naionwide increases in

healh care coss, he amily enrollmen ee would have risen rom $520 in 1995 osomehing closer o he average U.S. worker conribuion in 2011 or an employer-

sponsored amily plan: $4,129.39

Te Deparmen o Deense illusraes he gap beween ricare coss and reiree

conribuions by poining ou ha, In 1996, when RICARE was ully imple-

mened, a working-age reirees amily o 3 who used civilian care conribued on

average roughly 27 percen o he oal cos o is healh care. oday ha percen-

age has dropped o only 11 percen.40

Military health insurance for retirees 65 and over

All miliary reirees aged 65 or older become eligible or ricare or Lie, a healh

insurance plan creaed in 2001 ha supplemens Medicare or miliary reirees.

Tere are currenly no enrollmen ees or ricare or Lie, bu plan paricipans mus

purchase Medicare Par B and pay he premiums required or ha plan. ricare or

Lie pays or mos expenses no covered by Medicare, ensuring ha reired miliary

personnel have access o inexpensive, op-qualiy healh care or lie.

Te requiremen o purchase Medicare Par B premiums means ricare or Lie

beneciaries have experienced some cos increases since he programs creaion

in 2001, unlike working-age reirees who have experienced no ee increases since

1995. Because Medicare Par B premiums have been increased over ime, miliary


21/48


reirees older han 65 have aced he same subsanial premium increases as civilian

Medicare paricipans, according o he Deense Deparmens 10h Quadrennial

Review o Miliary Compensaion in 2008. Paradoxically, reirees younger han 65,

who ypically have higher incomes han heir older counerpars, have enjoyed

sable ees over he same period, he quadrennial review ound.41

Federal civilian employees and retirees receive coverage through

the Federal Employees Health Benets program. Federal civilian

health benets are generous and are, according to the U.S. Oce

o Personnel Management, a signicant piece o [each employees]

compensation package. Unlike military health care, however, civilian

health premiums have been adjusted over the past decade in order to

compensate or the dramatically increased cost o health care.42

Federal civilian health insurance premiums grew by 65 percent

2000 to 2005. Tricare premiums, on the other hand, have only b

raised onceby $5 per month or a amily and $2.50 per mont

an individualsince the programs inception in 1995. That mea

that or an annual enrollment ee o just $260 per individual or

per amily, military retirees get coverage that would cost a civil

ederal retiree approximately $5,000 annually.43

Federal civilian versus military health care

Reasons for rising health care costs

Te majoriy o he U.S. miliary healh care budge goes o providing healh care

or miliary reirees and heir dependens, no or acive-duy roops. In 2007, or

example, more han hal o he miliary healh sysem budge was spen caring

or reirees over age 65 and heir dependens, while only 20 percen was spen on

acive-duy service members and heir amilies.44 As a resul, he cos growh in

he miliary healh care sysem sems primarily rom programs or reirees.

Outdated fees for working-age retirees

Despie skyrockeing healh care coss naionwide, he Deparmen o Deense

has raised enrollmen ees or working-age reirees only once since he creaiono ricare in 1995. In he scal year 2012 budge, ormer Secreary o Deense

Rober Gaes requesed and Congress approved an increase in enrollmen ees by

$2.50 per monh or individuals and $5 per monh or amilies. While his marked

he only ee increase or he program since is incepion, he acual increases were


22/48


so small ha hey were largely symbolic. Te resuling enrollmen ees or work-

ing-age reirees rose rom $460 a year o $520 a year or amily coverage, and rom

$230 a year o $260 a year or individual coverage.45 Tese ees do no come close

o accouning or he rise in he coss o providing healh care. As we noed earlier,

in 1996 a working-age miliary reiree paid or 27 percen o heir amilies healh

care coss; oday his porion has allen o 11 percen.46

Double coverage

Because o hese exremely and aricially low enrollmen ees, reired service

members increasingly choose o say on miliary healh insurance, even i hey are

eligible or civilian plans. Over 85 percen o reirees 4549 years o age and 50

percen o reirees beween 6064 years o age had access o oher group healh

insurance, bu many choose ricare insead, according o he Deparmen o

Deense.47 Tis group has included reirees making six-gure salaries wih deensecompanies and even a member o Congress.

ricare is designed o be supplemenary insurance or reirees wih oher healh care

coverage, bu heres no law prevening working-age reirees rom declining civil-

ian coverage enirely in avor o ricare (alhough i is illegal or employers o give

miliary reirees incenives o choose ricare raher han he company plan). Fully

hree-quarers o he naions 4.5 million miliary reirees and heir dependens have

access o civilian plans. wo million o hese reirees, or abou 45 percen, choose o

accep miliary coverage, saving hemselves and heir companies housands o dol-

lars per year per person bu cosing he Penagon and axpayers billions.48

Tricare for Life

A major source o he growh in he miliary healh care budge sems rom

Congresss 2001 decision o expand ricare eligibiliy o miliary reirees older

han 65 hrough he ricare or Lie program and o provide more benes or

members o he reserve componen. Tese expansions, suppored by boh he

George W. Bush and Clinon adminisraions, also lowered ees or acive-duymiliary amilies.49 Te 2007 ask Force on he Fuure o Miliary Healh Care

repored ha he ricare or Lie program accouned or 48 percen o he increase

in miliary healh care expendiures rom FY 2000 o FY 2005.50


23/48


Prescription drugs

Te cos o prescripion drugs is increasing naionwide. Tese prescripion drug

coss are among he mos sharply rising elemens o miliary healh spending,

according o he Congressional Research Service.51 Over he pas decade, he

amoun he Deense Deparmen spends on prescripion drugs has increased by

400 percen, rom $1.6 billion in 2000 o $8 billion in 2011.52

Congressional inaction

Te Deparmen o Deense has sporadically atemped o conrol coss in he pas

decade, primarily by recommending increases in ricare ees. In Presiden George

W. Bushs budge or scal year 2009, or example, he Penagon asked Congress

o slighly raise he ees or ricare services, which would have saved $1.2 billion

in ha year alone.53 Tese measures have no been aimed a acive-duy roops.

Raher, hey have been direced a conrolling coss or dependens and reirees,

who accoun or he majoriy o miliary healh care spending.54

Neverheless,Congress has hus ar blocked such proposals, wih he excepion o he oken

increases in he scal year 2012 budge. Given he scal problems acing he

ricare program, however, i is imperaive ha Congress enacs he reorms he

Penagon proposed in is FY 2013 budge reques.

Asking retirees to share costs with taxpayers oten invokes claims

o a broken promise. Retirees and their lobbyists, including the

Military Ocers Association o America and the American Legion,argue that ree care is among the benets they were promised

in exchange or at least 20 years o service in the armed orces.55

Tricare or Lie and the other Tricare programs ensure that retired

service members and their dependents have access to afordable

top-quality health care or lie. Further, in 2002 the courts ruled that

the ederal government has never made a commitment to provide

ree health care to military retirees.

The U.S. Court o Appeals or the ederal circuit made this ruling

William O. Schism and Robert Reinlie v. United States: The cour

that the government was not obligated to provide ree care dethe promises made by unscrupulous recruiters because Congr

and only Congresscan authorize the benets that a retired e

employee, whether civilian or military, is entitled to receive. Th

ound that while Congress had repeatedly exercised its authori

prescribe military benets, it had never authorized deense o

to create benets outside o those guaranteed by lawand th

existing law did not obligate the Deense Department to provid

lietime care, something the military lobby is well aware o.56

Free health care for life, a bargain never struck


24/48


We have oulined he reasons or rising healh care coss, he scal unsusainabiliy

o he curren miliary healh care sysem, and he legal and moral basis or reorm.

Ye he quesion remains: How hen can we deliver excellen medical services o

miliary reirees, resore he sysem o rm nancial ground o provide or uure

acive-duy service members and veerans, and ensure air reamen or he

American axpayer?

Secretary Panettas reforms

In our 2011 repor, Resoring ricare, we surveyed he various proposals o

reorm miliary healh care in an eor o ideniy common guiding principles.

Te Penagons 2007 ask Force on he Fuure o Miliary Healh Care, he

2008 Quadrennial Review o Miliary Compensaion, he Congressional Budge

Oces analysis o miliary healh care opions, and Presiden Barack Obamas

deci commission all idenied our basic sraegies or craing a susainablemiliary healh care sysem. o do so, hey all argued ha Congress and he

Deparmen o Deense mus:

Resore a air cos-sharing balance beween axpayers and beneciaries Esablish procedures o ensure air uure cos sharing Limi double coverage or working-age reirees above a cerain income level Creae incenives o reduce he overuse o ricare or Lie services

Te proposals oulined in he Deparmen o Deenses scal year 2013 budge

reques o Congress would go a long way o resore a air cos-sharing balance

beween axpayers and miliary reirees and o ensure ha his balance will no

again become skewed. Specically, he Penagon proposes a number o respon-

sible ee increases on miliary reirees based on heir abiliy.

Bu addressing only wo o he core problems acing he ricare sysem will no

be enough o resore he long-erm scal healh o he program. I he Deense

Deparmen and Congress are ruly serious abou solving he miliarys ricare

problem, hey mus also limi double coverage or wealhy working-age reirees, as

well as ackle he overuilizaion o services.


25/48


Restore a fair cost-sharing balance

In 2007 he Deense Deparmens own ask Force on he Fuure o Miliary

Healh Care said, healh coverage or miliary reirees should be very generous,

bu no ree.57 Te Penagon his year has requesed auhoriy o increase he con-

ribuions expeced o working-age miliary reirees, as advocaed by he DeenseDeparmens own ask orce, he Congressional Budge Oce, and he Cener

or American Progress. Te Deense Deparmen proposes o increase he ricare

Prime enrollmen ee, insiue an enrollmen ee or ricare Sandard and Exra,

and increase deducibles or ricare Sandard and Exra.58

Te new ricare Prime ees and deducibles will be phased in over our years and

iered based on he level o he beneciarys miliary reiremen pay, while he

ricare Sandard and Exra programs will be phased in over ve years.59 Perhaps

mos imporanly, in he uure hese ees will be indexed o medical infaion so

adminisraion and congressional inacion will never again hreaen he nancialinegriy o he miliary healh care program. Tese sipulaions will mean ha

miliary reirees can conribue in line wih heir abiliy o pay and will allow ben-

eciaries and heir amilies he ime o adjus o increased paymens.

Secreary Panetas proposed ee increases are signicanly larger han he oken

increases implemened in 2011 and, i implemened by Congress, would be a major

sep oward bringing miliary healh care coss under conrol. Under he Penagons

proposal, working-age reirees wih annual pensions o more han $45,179 would

pay $2,048 per year or healh care.60 As a resul, even he wealhies miliary reirees

would coninue o pay ar less han heir civilian counerpars or healh care. Ye

hese modes ee increases will help o ensure ha he miliary healh care program

remains scally viable in he long erm. Reirees who make $22,589 or less annually

in reiree pay would pay only $893 or healh care or a amily each year.

Once again, i is imporan o noe ha hese changes will aec only working-age

reirees, no acive-duy service members, medically reired service members,

reirees older han 65, he survivors o members who died in acive duy, or

wounded or disabled veerans.

Addiionally, or miliary reirees over he age o 65 using he ricare or Lie

program, he Penagon would inroduce a modes annual enrollmen ee o

beween $158 and $475 per year, based on he beneciarys reiree pay. Again,

hese ee increases would be phased in over our years. I enaced, his would keep


26/48


he miliary healh sysem rom ooing he enire bill or wha is essenially ree

Medigap coveragecoverage ha would cos an individual abou $2,100 a year

in he civilian secor.61

Establish procedures to ensure fair future cost sharing

Te Deense Deparmen recognizes ha one-ime ee increases or reirees will

no by hemselves conrol uure cos growh in he miliary healh care sysem.

Te deparmen has likewise eschewed proposals o move o high-deducible

healh plans in combinaion wih healh savings accouns and subsidies o reirees

who choose civilian insurance. Tereore he FY 2013 plan would ensure scal

susainabiliy by linking miliary healh care coss o civilian premiums.

Under he new proposed plan, ees or ricare Prime, ees and deducibles

or ricare Sandard and ricare Exra, and ees or ricare or Lie wouldall be indexed o increases in medical infaion as measured by he Naional

Healh Expendiures.62 Again, hese changes refec he ndings o he Deense

Deparmens own 10h Quadrennial Review o Miliary Compensaion.63

Estimated savings of revised cost-sharing: Up o $6 billion per year

Next steps

Te cos-sharing reorms proposed by he Penagon will save $12.9 billion

beween FY 2013 and FY 2017. I implemened, hese reorms o ricare would

represen a very imporan and poliically dicul sep or he Deparmen o

Deense and Congress. Bu $13 billion over our years won be nearly enough o

hold ricare coss seady. As a resul, he Deense Deparmen should also imple-

men provisions o limi double coverage or wealhy miliary reirees and reduce

overuilizaion o ricare services. Implemening hese reorms could enable sav-

ings o an addiional $9 billion per year.

Limit double coverage for working-age retirees above a certain income level

Virually all reired service members, many o whom are in heir early 40s or 50s, pur-

sue second careers aer leaving he miliary. Tese working-age reirees can remain

The cost-sharing

reorms propose

by the Pentagon

will save $12.9

billion between

2013 and FY 201


27/48


on ricare under curren rules even i hey are eligible o receive coverage hrough

heir civilian employers or hrough heir spouses employer-sponsored healh care

plan. Given he high-qualiy and low cos o ricare, i is undersandable ha many

reirees do in ac choose ha opion.64 Te 2007 deense ask orce on healh care

coss cied survey daa showing ha he majoriy (60 percen) o reirees who are

eligible or privae insurance hrough heir employer are insead using ricare.65

Ta means American axpayers are ooing he healh care bills o reired service

members who have and can aord oher opionseecively subsidizing healh

care coss or heir privae employers.

Te Cener or American Progress has long proposed ha Congress and he

Penagon explore means esing o reired service members who accep miliary

healh care. Te Deense Deparmen and Congress can and should mandae ha

working-age reirees above a cerain income level be allowed o enroll in ricare

only i hey don have access o oher plans hrough heir employer or spouse.Such a requiremen would reduce ricare expenses while ensuring ha low-

income or unemployed veerans reain access o healh care.

While he scal year 2013 budge reques goes a long way oward repairing he

balance o coss beween beneciaries and axpayers, and proposes a more raional

approach o paymens by inroducing iered conribuions, i does no address he

problem o double coverage or employed reirees. Sill, increased ees do a leas

address he wors sympoms o he problem o double coverage by cuting he

losses i imposes on he nancially sreched miliary healh care sysem and will

provide some incenives or reirees o enroll in heir employer healh care plans.

Estimated savings: Up o $5 billion a year

Create incentives to reduce the overuse of Tricare services

ricare or Lie resembles privae Medigap insurance in ha i supplemens

Medicare coverage. By dramaically reducing enrollees ou-o-pocke expenses, how-

ever, ricare or Lie eliminaes disincenives o unnecessary care and leads o infaedexpenses. While he Penagons 2013 proposals inroduce annual enrollmen ees

or he ricare or Lie program, hese annual ees do no aler he basic incenives o

encourage responsible use. Tis is an area where more can and should be done.


28/48


o address his issue, Presiden Obamas Bowles-Simpson deci commission

recommended modiying ricare or Lie so ha i wouldn cover he rs $500 o

an enrollees ou-o-pocke expenses and would only cover 50 percen o he nex

$5,000 in Medicare cos sharing. Ta would reduce he overuse o care, saving

money or boh Medicare and ricare, he commission concluded.66

Te Congressional Budge Oce analyzed a similar proposal in which ricare

or Lie would no cover he rs $525 o ou-o-pocke expenses and would only

cover 50 percen o he nex $4,725 in coss. I ound ha his proposal would

reduce he ederal spending devoed o FL beneciaries by abou $14 billion

hrough 2014 and by abou $40 billion hrough 2019.67

Te Deense Deparmens FY 2013 proposals do a beter job incenivizing he

responsible use o pharmacy and prescripion drug benes. Te plan would

gradually adjus he pharmacy co-pay srucure or reirees and acive-duy amily

members o encourage he use o mail order and generic drugs. Under he plan pre-scripions would sill be lled a no cos o beneciaries a miliary reamen acili-

ies, and he ees would no apply o acive-duy service members. As wih he res o

he proposed program, hese changes would be phased in over he nex ve years.68

Estimated savings: Up o $4 billion per year

Te need or reorm o he miliary healh care sysem is readily apparen. ricare

mus be placed on rm, susainable scal ooing o ensure qualiy, aordable care

or uure acive-duy service members and heir amilies, veerans o pas and

presen confics and heir dependens, and miliary reirees o all ages. Reorm is

no jus necessary o mainain medical excellence and scal discipline bu also o

ensure our naional securiy.

Former Chairman o he Join Chies o Sa Michael Mullen deemed he naional

deci he single greaes hrea o U.S. naional securiy, and ormer Secreary

o Deense Rober Gaes said healh care coss are eaing he Deparmen o

Deense alive.69 Resoring air cos sharing o ricare can play a par in address-

ing his problem. Reorm can also address he poenial or long-erm healh care

coss o consume an ousize porion o he deense budge, which would poen-ially squeeze spending on essenial weapons sysems, operaions and maine-

nance, and research and developmen.


29/48


Tere are also undamenal quesions o airness o uure veerans, o he American

axpayer, and o hose who leave he miliary beore reaching 20 years o service.

While Americas miliary reirees deserve access o excellen, aordable healh care,

i was never supposed o be ree. Nor should he American axpayer be orced o oo

he enire cos o healh insurance or hose wih access o an employers healh plan,

which essenially subsidizes privae healh insurance and privae-secor employees.

I is clear ha he curren sysem does no mee hese requiremens. ricare as

i sands is no susainable over he long erm. Te Penagon has recognized his

and aken a very imporan sep wih is scal year 2013 proposals. Tese propos-

als would reinroduce a airer cos-sharing balance beween miliary reirees and

he American axpayer. Tey would do so wihou aecing acive-duy service

members, wounded veerans, low-income veerans, or he survivors o service

members who have died in acive duy. Whas more, he proposed changes o

reiree benes are iered according o levels o reired pay and sill represen a

very aordable opion or hose who have served our counry.

We applaud he miliary leadership or having he courage o address hese di-

cul problems and ensure ha he miliary personnel and uure veerans can

coninue o enjoy excellen and aordable healh care. Ye here is more work o

be done i Congress and he Penagon are serious abou resoring he ricare pro-

gram o sable scal ground. Reducing double coverage and combating overui-

lizaion boh provide sensible avenues o reduce ricare coss while sill ensuring

all miliary reirees have access o op-qualiy, aordable healh care or lie.

For oo long, poliical expediency has rumped sober, orward-looking consid-

eraion o he challenges acing he miliary healh care sysem. Congress should

give ull and immediae consideraion o he proposals oulined in he scal year

2013 Deense Deparmen budge reques and ac o ensure he uure healh o

our naions miliary service members and veerans.

While Americasmilitary retirees

deserve access t

excellent, aord

health care, it wa

never supposed

be ree.


30/48


Military retirement

In is scal year 2013 budge reques, he Deparmen o Deense calls on

Congress o auhorize he creaion o a Miliary Reiremen Modernizaion

Commission. Modeled aer he Base Realignmen and Closure Commissions o

he pas hree decades, he new deliberaive body would be designed o ensure

ha Congress and he Penagon make he poliically dicul decisions neces-

sary o reorm he miliary s reiremen sysem, which has grown increasingly

unwieldy, ineecive, and expensive in recen decades.

Te Penagon leaderships decision o include reiremen reorm in is FY13

budge reques undoubedly sems in par rom he budgeary pressures ha i is

acing. Bu rising coss are only one acor driving he need or reorm.

Under he curren sysem, miliary personnel who serve a leas 20 years receive a

subsanial pension or lie. Service members who reire aer 20 years, or exam-

ple, receive a lieime annual bene o 50 percen o heir base pay, while hose

who reire aer 35 years receive 87.5 percen o heir base pay.70 Boh o hese

amouns are indexed or infaion.

Miliary personnel who serve less han 20 years, however, receive no reiremen

benes. Due o his srucure, he miliary reiremen sysem suers rom hree

problemsinequaliy, infexibiliy, and high coss.

Inequality

Currenly, only 17 percen o miliary personnel serve or 20 years or more.71 As a

resul, he curren reiremen sysem covers only a small percenage o he orce,leaving 83 percen o veerans wihou reiremen benes when hey leave he

service. Perhaps mos worrisome is he ac ha enlised roops in he Army and

he Marines, who bore he brun o comba in Iraq and Aghanisan, are he leas

likely o remain in he orce long enough o receive reiremen benes.72 In ac,


31/48


less han 10 percen o hose brave young men and women in he Army and he

Marines will serve he ull 20 years required o receive a pension.

Inflexibility

Te one-size-s-all naure o he reiremen program limis he Deense

Deparmens abiliy o shape he size and skillse o he armed orces. Force man-

agers are hereore cauious abou separaing mid-career service members who

have no ye achieved 20 years in he orce or ear o leaving hem wihou a job

or reiremen savings. Tis rigidiy leaves he reiremen program paricularly ill-

suied or periods in which he orce is shrinking signicanly, as i is oday in ligh

o our scal problems and he end o he War in Iraq. Furher, in some specialies a

service members value and perormance may peak aer 20 years, when he reire-

men program provides a srong incenive or men and women o leave he orce.

Unsustainable costs

Te miliarys reiremen sysem coss he ederal governmen more han $100 bil-

lion each year$50 billion o pay he pensions o he naions 2.3 million curren

reirees, anoher $20 billion pu ino he Penagons accrual und o pay or he cos

o uure reirees, and $22 billion in ineres or he money borrowed o help pay

or hose already reired.73 Tis cos is projeced o grow o $217 billion per year

by 2034, when he reiremen programs oal liabiliy will exceed $2.7 rillion, up

rom $1.3 rillion oday.74 Unless he deense budge is allowed o coninue growing

signicanly in real ermsa move which would add o he counrys deci or

reiremen reorm occurs, reiremen coss will consume an increasing percenage o

he deense budge and begin divering unds away rom oher key naional securiy

prioriies such as weapons acquisiion or research and developmen.

Secreary Paneta is righ o call or reorm o he miliary reiremen sysem,

which has remained unalered no because o is eeciveness bu raher due o

he poliical diculies involved in modernizing enilemen programs or miliary

personnel. An independen commission, however, is a slow soluion o an imme-diae problem, and he process proposed by Deparmen o Deense provides oo

many opporuniies or poliics o preven reorm. I he Deense Deparmen is o

achieve responsible reiremen reorm, i is imperaive ha Penagon ocials ake

he lead in guiding he process as soon as possible.


32/48


While an independen commission may provide poliical cover, i is no hemos ecien way o drive reiremen reorm. More signicanly, he Deense

Deparmen already has he answers o is reiremen problem. In he pas ve

years, wo separae askorces creaed by he Penagonhe Deense Business

Board and he 10h Quadrennial Review o Miliary Compensaionhave pro-

vided he Penagon wih scally responsible reorms o is reiremen sysem ha

do no break aih wih our men and women in uniorm.

We urge Secreary Paneta o use his auhoriy o work wih he Congress o

implemen he ollowing menu o recommendaions, which builds upon he work

o he Deense Deparmens own askorces:

Inroduce a 401(k)-ype conribuion plan, as recommended by he Deense

Business Board, under which he Penagon will conribue 16 percen o each

service members base pay (abou wice he privae secor average) ino a

reiremen accoun Implemen compensaion incenives such as gae pays and separaion pay o

assis wih orce shaping

Source: Department of Defense, Overview United States Department of Defense Fiscal Year 2013 Budget Request, p. 5-5, available at http://comptroller.defense.gov/defbudget/fy2013/FY2013_Budget_Request.pdf (2012).

The Defense Department

sends its proposalto the Commission.

The Commission considers

input from the Pentagonand other sources before

making its recommendations

to the President.

The President can request

(but not require) that theCommission makes changes.

He will then decide whether

or not to forward the

recommendations to Congress.

If forwarded, Congress

can hold an up or down voteon the proposal

under expedited procedures.

FIGURE 2

Slow and uncertain progress

Proposed Commission to revamp military retirement


33/48


The transition

I is imperaive ha changes o he miliary reiremen sysem do no negaively

aec service members who have planned heir careers and reiremen around

hese benes. Bu i would be wrong o allow so many o he men and women

who have ough in Iraq and Aghanisan o remain in a sysem which denies hevas majoriy o hem any reiremen benes.

As a resul, he Cener or American Progress recommends a hree-par ransiion

o a 401(k)-based reiremen sysem:

All new recruis would auomaically enroll in he new sysem. Miliary personnel wih a leas 10 years o service would have he opion o

ransiion o a 401(k) or o reain heir curren benes. Personnel wih less han 10 years o service would ransiion eiher o a 401(k)

or enroll in a slighly modied version o he curren pension sysem. Tis pen-sion would ves a 10 yearshereby grealy increasing he number o veerans

who qualiy or benesbu provide slighly less reired pay (40 percen o

base pay a 20 years, raher han he 50 percen permited under he curren

sysem) and would pay ou hose benes no earlier han age 60.

In a counry ha rumpes is commimen o is men and women in uniorm, an

asonishing 83 percen o service members leave he miliary wih no reiremen sav-

ings, including nearly 90 percen o enlised people. Adoping he Deense Business

Board reiremen scheme and ransiioning o a 401(k) plan will dramaically expand

he miliarys reiremen program o include all service members. Moreover, he elim-

inaion o he 20-year vesing model and implemenaion o gae and separaion pays

will provide Penagon ocials wih addiional ools o manage he size and makeup

o he orce. Finally, hese recommendaions will help bolser he long-erm scal

viabiliy o he miliary reiremen sysem, hereby ensuring ha uure generaions

o miliary reirees will coninue o have one o he naions mos generous reiremen

plans. Adoping he reorms oulined in his repor will enable annual savings o up o

$13 billion in he near erm and as much as $70 billion annually by he mid-2030s.

The current military ret irement system

Te srucure o he miliary reiremen sysem has remained virually unchanged

or six decades since i was esablished by he Career Compensaion Ac o 1948,

In a country tha

trumpets its

commitment to

men and wome

in uniorm, an

astonishing 83

percent o servi

members leave

military with no

retirement savin


34/48


when acive-duy pay was very low, very ew people served on acive duy or 20

years, Medicare did no exis, and lie expecancies were comparaively shor. Te

Penagon currenly oers a nonconribuory reiremen program ha provides

miliary personnel who serve a leas 20 years wih a dened bene or pension

or lie. Tose leaving he orce wih less han 20 years o service are currenly no

covered by he miliary reiremen program.

As i now sands, service members who are eligible or reiremen benes may

begin collecing heir reiremen pay immediaely aer leaving he orce, regard-

less o heir age. Because many service members begin heir careers in heir lae

eens or early 20s, enlised personnel generally reach he 20-year benchmark

beween he ages 38 and 40; ocers mos commonly achieve 20 years o service

in heir early 40s.75 Te vas majoriy o miliary reirees who elec o leave he

service in heir 30s or 40s go o on o have second careers while simulaneously

receiving miliary reiremen pay and generous governmen healh care benes.

Pension size is based on he basic pay o he individual service member as well as

heir lengh o service. For mos reirees, he ormula used o calculae he size o

his pension is 2.5 percen o he average o he reirees high-hree, or hree highes

years o pay in he service, muliplied by he number o years served.76 A service

member wih 20 years in, or example, would earn 2.5 percen o heir high-hree

pay muliplied by 20 (years), or 50 percen o heir high-hree pay each year. For

he average enlised personnel wih an E-8 pay grade, a 50 percen pension would

come o $23,700 per year; or an average ocer, an O-4 would receive a pension o

$37,000 annually.77 Miliary personnel wih 35 years o experience would receive

2.5 percen o heir high-hree average muliplied by 35, or 87.5 percen o heir

high-hree pay. Tese amouns are indexed or infaion. According o a 2007 law, a

our-sar general or admiral reiring aer 43 years o service can receive 100 percen

o his or her salary, up o $272,892 every year or he res o his or her lie.


35/48


Service members who enered he orce prior o 1980 do no all under he high-

hree sysem; raher, heir reiremen benes are calculaed based on heir pay in

heir nal year in he miliary. Service members who enlised aer July 31, 1986 weresupposed o receive only 2 percen o heir average high-hree years. Bu his was

changed back o 2.5 percen in 1999 because o pressure rom he miliary leaders

and he miliary lobby. Addiionally, some miliary personnel elec o enroll in he

REDUX program, under which hey receive a $30,000 cash bonus upon reaching 15

years in he service in reurn or acceping a lower reiremen payou in he uure.78

Reserviss, similar o acive duy roops, mus also serve a leas 20 years in order

o receive reiremen benes. Reserviss, however, do no become eligible o

receive heir pensions unil age 60 unless hey have been deployed since 2008.79

Te curren reiremen sysem does an incredibly good job o aking care o

service members who remain in he orce or a leas 20 yearshe Deense

Deparmen essenially pays hem 40 years o reiremen or 20 years o service.

In addiion, or hose who receive hem, miliary reiremen benes are 10 imes

greaer han hose in he privae secor.80

Moreover, he 10h Quadrennial Review o Miliary Compensaion noes ha

he 1948 Career Compensaion Ac never inended o make a 20-year reire-

men sandard:

For alhough he legislaion auhorized he Services o coner an immediae

reiremen bene o member wih 20 years o service he Services indicaed

ha he 20-year reiremen opion would be used sparingly. As iniially envi-

FIGURE 3

Calculating military retirement benefits

Retirement pay = 2.5 percent xNumber of

years servedx High-3 pay

Retirement pay at

20 years= 2.5 percent x 20 years x High-3 pay = 50 percent x High-3 pay

Retirement pay at

35 years= 2.5 percent x 35 years x High-3 pay = 87.5 percent x High-3 pay

Retirement pay at

43 years= 2.5 percent x 43 years x High-3 pay = 100 percent x High-3 pay

Source: U.S. Departmet o Deese, Report o the Tenth Quadrennial Review o Military Compensation: Volume I.


36/48


sioned, personnel ypically would have o achieve 30 years o service beore hey

would be graned an immediae reiremen bene.81

Tis, however, has no proven o be he case. Because o indierence on he par o

he Penagon leadership, virually any individual who requess reiremen aer 20

years o service is auomaically allowed o leave.

While he miliary reiremen program does a good job o aking care o a selec ew,

his expensive program covers only a small minoriy o he orce while presening

he Deense Deparmen wih long-erm orce-shaping and scal challenges.

Problems with the military retirement system

Te miliary has recognized or nearly hal a cenury ha is reiremen sysem was

in rouble. Eors o improve he reiremen program dae back o he DeenseDeparmens rs Quadrennial Review o Miliary Compensaion in he lae

1960s.82 Tis long-erm dissaisacion wih he program sems rom is serious

ailings. Te miliarys curren reiremen sysem does no provide or he vas

majoriy o veerans, resrics he Penagons managemen decisions, and comes a

a remendous cos o he ederal governmen.

Te push or reorm has inensied in recen years, as a diverse chorus o voices

including wo Deense Deparmen ask orces (he Deense Business Board and

10h Quadrennial Review o Miliary Compensaion), he Heriage Foundaion,

and now he Cener or American Progresshas called or he modernizaion o

he Penagons reiremen program. Each o hese groups ocuses on he same hree

srucural faws wih he curren sysem: inequaliy, infexibiliy, and rising coss.

Inequality

Under he curren sysem, a saggering 83 percen o men and women who serve end

up leaving he orce wih no reiremen benes.83 Te miliarys reiremen program

only covers such a small percenage o veerans due o is 20-year vesing period.

No only does he miliary reiremen sysem ail o cover more han our ou o

ve veerans, i also disproporionaely avors ocers. Fory-hree percen o o-

cers serve he 20 years necessary o reire, compared o jus 13 percen o enlised

Not only does t

military retireme

system ail to

cover more tha

our out o ve

veterans, it also

disproportionat

avors ocers.


37/48


roops.84 Because ocers end o be vasly beter compensaed and beter edu-

caed han mos enlised personnel while in he service, he reiremen program

ails o ake care o he veerans wih he highes risk o suering rom povery,

unemploymen, or homelessness upon leaving he service.

Addiionally, enlised ground roops who perorm wha are ermed youh andvigor occupaions such as ground comba and who have borne he brun o he

ghing in Iraq and Aghanisan end o have shorer careers, making hem among

he leas likely o qualiy or reiremen benes.85

Under ederal law, privae employers are required o ves a 80 percen or

heir employees wihin ve years o service and ully aer seven years.86 Firs-

responders, who, similar o miliary personnel, are governmen employees serv-

ing in high-risk posiions, also usually ves aer ve years. Clearly our men and

women in uniorm deserve equal reamen.

Force shaping

Te infexible srucure o he miliary reiremen program also resrics he abiliy

o Deense Deparmen ocials o manage he size o he orce. Due o he 20-year

vesing requiremen, Penagon managers are relucan o separae personnel orm

he armed orces who have served more han 10 years bu less han 20 years, no

waning o leave service members wihou a job or reiremen savings. As a resul,

he Deense Deparmen is orced o eiher separae service members early in heir

careers when hey sill have ime o save or reiremen in anoher occupaion or o

keep hem unil hey reach he 20-year benchmark, even i hey are underperorm-

ing, unhappy, or ill-suied o he immediae needs o he miliary.

Bu a 20-year career is no ideal or even realisic or many specialies wihin he

miliary. Ground comba roops, or insance, are unlikely o remain in acive duy

ino heir lae 30s or early 40s. Fully 75 percen o Marines, or example, leave aer

one our-year sin. As a consequence, orce managers are relucan o keep young

service members on pas heir rs erm, no waning o be orced o le hem go

wih no reiremen benes eigh or 10 years in.87

Similarly, pilos rarely coninuefying or more han 15 years.88 Te upsho is ha he Penagon mus choose

beween orcing people ou wihou reiremen savings or keeping on men and

women who are no longer capable o conribuing o he mission as hey once did.


38/48


While he miliary reiremen sysem encourages service members o say in he

orce or a leas 20 years, i also provides hem wih a srong incenive o leave

upon reaching 20 years o service, when hey become eligible o begin collecing

heir pensions. Seveny-six percen o service members who serve 20 years end

up leaving beore reaching 25 years o service.89 Ye in some specialies, service

member perormance may acually peak aer 20 years, exacly when he currenprogram provides a srong incenive or men and women o leave he orce.

Tere is a consensus ha reiremen benes should no coninue o play such an

ousized role in he Deense Deparmens managemen decisions. Tere is also

a shared acknowledgemen ha reiremen reorm will allow Penagon managers

o base heir decisions on naional securiy needs wih he knowledge ha he

Unied Saes will ake care o all o is veerans.

Unsustainable costs

Implemened in 1948, he miliary reiremen sysem was designed or he dra

era, ye i has remained virually unalered despie he ransiion o an all-volun-

eer orce. No only were liespans shorer in he mid-20h cenury, bu miliary

pay also remained exremely low during he era o conscripion, even or hose

service members who voluneered o say beyond he wo years required by he

dra. In 1968 he average compensaion cos or a man or woman in he service

was $30,000, adjused or infaion. oday i is more han $100,000. Because

reiremen compensaion is calculaed based on a service members basic pay,

hese increases have resuled in reiremen pensions ha are signicanly larger

han iniially envisioned. Te increases in miliary pay passed by Congress since

he Sepember 11 erroris atacks, as discussed earlier in his repor, also conrib-

ue o he Penagons increasing reiremen coss.

Te miliarys reiremen sysem now coss axpayers more han $100 billion each

year$50 billion o pay he pensions o he naions 2.3 million curren reirees, $20

billion o he Penagons accrual und or uure reirees, and $22 billion in iner-

es.90 Tis amoun is projeced o grow o $217 billion in 2034, when he reiremen

programs oal liabiliy will exceed 2.7 rillion, up rom $1.3 rillion oday.91

Tereiremen program currenly has an ununded liabiliy o nearly $1 rillion.92

Despie his enormous invesmen he ederal governmen is no geting a re-

mendous amoun o bang or is buck. Money accrued in he miliary reiremen

In 1968 the

average

compensation

cost or a man

or woman in

the service was

$30,000, adjuste

or infation. Tod

it is more than

$100,000.


39/48


rus is invesed in low-yield governmen bonds.93 Privae-secor companies ha

conribue o heir employees 401(k) accouns can ge a much larger reurn on

his invesmen, paricularly i he employee chooses o inves in higher-ineres

bonds and equiies.

Recommendations

In spring o 2010, as par o his iniiaive o nd eciency savings in he Penagon

budge, hen-Secreary o Deense Rober Gaes ordered he Deense Business

Board o underake a review o he Deense Deparmens overhead expenses.94 Te

Deense Business Board is a 25-member panel wihin he Deparmen o Deense

ha brings business leaders ogeher o analyze he eciency o he deparmen

hrough a privae-secor lens. As par o is sudy, he board chose o evaluae he e-

ciency o he miliary reiremen sysem and released is ndings in July 2011.

Te Deense Business Boards reiremen plan presens a responsible vision or

he uure o he miliary reiremen sysem. In recen decades mos privae-

secor employers have swiched rom dened bene, or pension, plans o dened

conribuion, or 401(k), plans in order o manage heir personnel coss more

eecively.95 Te board and he Cener or American Progress advocae ha he

Deense Deparmen mirror his ransiion, leaving behind is roubled pension

sysem in avor o a more modern, fexible, and susainable 401(k) program mod-

eled aer he ederal governmens Tri Savings Plan.

Benefits of a 401(k) model

Continued high quality of retirement benefits

Under a well-designed 401(k) sysem, miliary reirees would coninue o have

some o he mos generous reiremen benes in he counry. We recommend

ha he Penagon conribue a leas 16 percen o base pay ino a service mem-

bers reiremen accoun. Tis conribuion is abou wice he average received by

workers in he privae secor, and i could be increased or personnel who serve

on hardship ours, in comba, or in cerain specialies.96

For example, he DeenseBusiness Board proposes double conribuions or ime spen in comba zones.97


40/48


Expanded coverage

Addiionally, he 401(k) plan would dramaically expand he number o veerans

who receive reiremen benes. As noed above, he 20-year vesing srucure o

he curren sysem ails o serve 83 percen o veerans. Te ype o 401(k) plan we

recommend should ves aer hree o ve years o service, hereby expanding he

reiremen sysem o serve a much greaer percenage o veerans. Service memberswho chose o leave he orce would be able o ranser heir 401(k) accouns o he

privae secor, and heir benes would become payable beween ages 60 and 65.

Improved flexibility

By leaving behind he 20-year vesing period, he Penagon managers would be

beter able o aler he size and makeup o he orce. Mos signicanly, managers

will be able o make personnel decisions wihou worrying abou leaving a service

member wihou reiremen benes.

Moreover, while shiing o a shorer vesing period will eliminae he currenincenive or roops o remain in he service a leas 20 years, compensaion

incenives such as gae pay can be used o accomplish his goal more eecively.

Te Deense Deparmens 10h Quadrennial Review o Miliary Compensaion

argues ha gae payswhich are paid o members who reach specied years-o-

service milesonescould be used o eecively encourage service members o

remain in he orce.98 Moreover, hese gae pays would be ar more fexible han

he one-size-s-all incenive o he 20-year vesing period and could also be var-

ied by specialy. o illusrae he poin, les consider comba roops. For hem, he

20-year model makes no sense because hey are oen orced ou o service beore

20 years. Insead, o reain experienced roops or as long as makes sense or heir

Documents

Reforming Military Compensation