Elusive ‘Grand Bargain’ on Military Benefits

Few issues in Washington are as politically toxic as meddling with military pay and benefits.

That was clearly the lesson from the January 2014 Murray-Ryan budget deal that proposed to reduce the annual cost-of-living adjustment by one percentage point for military retirees under the age of 62. The proposal sparked more outrage than even seasoned beltway insiders had predicted, and the idea was quickly rejected.

The question now is whether the COLA flap effectively poisoned the well for any future change in how military service members are compensated.

The topic will be back on the agenda next year as an independent commission chartered by Congress prepares to deliver a proposal in February to reform military compensation. Proponents of change contend the status quo is financially unsustainable as the cost of pay and benefits grow and the Pentagon’s overall budget declines.

As a result, the military services will have to keep cutting people. Making minor adjustments to retirement and health benefits — to future service members while grandfathering current ones — could relieve the financial pressure and allow the military to sustain an all-volunteer force, experts argue. Reformers also insist that the current retirement system, which rewards those who serve more than 20 years, is out of touch with the needs of most troops who don’t stay in the service that long but still deserve some form of retirement benefit.

“The chickens have come home to roost on this issue,” said Charlie Houy, former Democratic staff director of the Senate Appropriations Committee. The Murray-Ryan miscalculation could make it even more difficult to change the status quo than it has ever been, he said. “We’ve tried this in this past. … We keep kicking the can down the road.”

According to new data compiled by the Bipartisan Policy Center and the American Enterprise Institute, compensation per active duty member has increased by 42 percent — from $88,000 to $125,000 — between 2001 and 2012, in 2012 dollars. Average per-troop annual compensation includes $76,000 for pay and other benefits received in cash, $21,000 for retirement, $21,000 for health care and $7,000 for education, commissaries and other perks. Most of the increase over the past decade was driven by retirement and health care costs.

Although personnel costs consume just one-third of the defense budget, that pot of money will be shrinking over time as the Pentagon cuts spending to comply with the Budget Control Act. One-third of the defense budget in 2012, for instance, funds 30 percent (about 600,000) fewer active-duty service members than in 1980.

Given the cost trends, only two options are available: increase the defense budget and allow these costs to stay the same, or make structural reforms to military compensation.

Ann Sauer, former Republican staff director of the Senate Armed Services Committee, said reforms are the only realistic scenario as there is virtually no chance that military budgets will grow. “Even if we grandfather all current active-duty members, even if we enacted reforms to pensions and compensation today, it would be five to eight years before you saw any savings,” Sauer said.

“We all strongly support the military and understand their sacrifice. However, in the long term, we need to look at [what is happening with the] defense budget. We need to look at both domestic and military entitlements.” In this case, a grand bargain should involve tradeoffs between military and civilian entitlement programs, she said. “Politically, the only way you can start to address military entitlements is to have another look at domestic benefits, the mandatory side of the federal budget.”

The Congressional Budget Office predicts that, unless substantial changes are made to Social Security and major health care programs, spending for these benefits will equal a much greater percentage of GDP than the nation has ever seen. Business as usual cannot be sustained much longer, Sauer said.

The fatal flaw in the Murray-Ryan deal was the inequity of focusing on military retirees without touching domestic entitlements. Any future effort has to spread the pain equally to be politically saleable.

Congress established the Military Compensation and Retirement Modernization Commission in March 2013. It is expected to provide the president and Congress with a package of recommendations to ensure the long-term viability of the all-volunteer force.

“It would be absolutely fabulous if the commission were to come forward with balanced, bipartisan suggestions,” Sauer said. “But I’ve seen a lot of commissions and very good reports from commissions that don’t go anywhere.”

What to do, if anything, about military benefits ought to be part of a broader conversation about the nation’s long-term financial obligations.

“We have a contract with people who serve,” said Linda Bilmes, public policy lecturer at the Harvard Kennedy School of Government. But the nation has been at war for 13 years and all these costs have been put on a national credit card, she said. Now that war spending is coming down and spending caps are in place, “You can’t pass costs through and fudge things around.” There is also the long-term cost of taking care of war veterans, which has yet to be estimated and “we haven’t figured out how to pay for,” Bilmes said.

In the private sector, promised benefits are reported in financial statements as deferred compensation. Military promises, on the other hand, “don’t appear anywhere on the financial statements of the United States,” she said. “It’s extraordinary how poorly we understand the liabilities of the Defense Department and how to account for them. If you don’t know what you owe, you can’t even begin to come up with a sensible way of financing that cost.”

The bipartisan, congressionally mandated National Defense Panel warned that a failure to address the increasing costs of the all-volunteer force will likely result in a “reduction in force structure, readiness, modernization, a decrease in benefits or a compromised all-volunteer force.” To protect recruitment and retention, and to avoid upsetting troops and their families, any changes should grandfather in current service members and retirees, the report suggested.

Washington, though, is not in the mood to take on tough issues. “You have to cut people or change how they’re paid,” said Mackenzie Eaglen, a fellow at the American Enterprise Institute. “Only by changing the current system can you give future service members more benefits.” The takeaway from the Murray-Ryan deal, though, is the notion that you can’t touch military entitlements, she added. “That grand bargain may never come.”

Topics: Defense Department, Defense Watch, DOD Budget, DOD Policy