September 18, 2011 — As Washington looks to squeeze savings from once-sacrosanct entitlements like Social Security and Medicare, another big social welfare system is growing as rapidly, but with far less scrutiny: the health and pension benefits of military retirees.
Military pensions and health care for active and retired troops now cost the government about $100 billion a year, representing an expanding portion of both the Pentagon budget — about $700 billion a year, including war costs — and the national debt, which together finance the programs.
Making even incremental reductions to military benefits is typically a doomed political venture, given the public’s broad support for helping troops, the political potency of veterans groups and the fact that significant savings take years to appear.
But the intense push in Congress this year to reduce the debt and the possibility that the Pentagon might have to begin trimming core programs like weapons procurement, research, training and construction have suddenly made retiree benefits vulnerable, military officials and experts say.
And if Congress fails to adopt the deficit-reduction recommendations of a bipartisan joint Congressional committee this fall, the Defense Department will be required under debt ceiling legislation passed in August to find about $900 billion in savings over the coming decade. Cuts that deep will almost certainly entail reducing personnel benefits for active and retired troops, Pentagon officials and analysts say.
“We’ve got to put everything on the table,” Defense Secretary Leon E. Panetta said recently on PBS, acknowledging that he was looking at proposals to rein in pension costs.
Under the current rules, service members who retire after 20 years are eligible for pensions that pay half their salaries for life, indexed for inflation, even if they leave at age 38. They are also eligible for lifetime health insurance through the military’s system, Tricare, at a small fraction of the cost of private insurance, prompting many working veterans to shun employer health plans in favor of military insurance.
Advocates of revamping the systems argue that they are not just fiscally untenable but also unfair.
The annual fee for Tricare Prime, an H.M.O.-like program for military retirees, is just $460 for families and has not risen in years, even as health care costs have skyrocketed. Critics of the system say the contribution could be raised substantially and still be far lower than what civilians pay for employer-sponsored health plans, typically about $4,000.
Those critics also argue that under the current rules, 83 percent of former service members receive no pension payments at all — because only veterans with 20 years of service are eligible. Those with 5 or even 15 years are not, even if they did multiple combat tours. Such a structure would be illegal in the private sector, and a company that tried it could be penalized, experts say.
“It cries out for some rationalization,” said Sylvester J. Schieber, a former chairman of the Social Security Advisory Board. “Why should we ask somebody to sustain a system that’s unfair by any other measure in our society?”
But within military circles, and among many members of Congress, the benefits are considered untouchable. Veterans groups and military leaders argue that the system helps retain capable commissioned and noncommissioned officers.
And having volunteered to put their lives at risk, those people deserve higher-quality benefits, supporters argue. The typical beneficiary, they add, is not a general but a retired noncommissioned officer, with an average pension of about $26,000 a year.
“The whole reason military people are willing to pursue a career is because after 20, 30 years of extraordinary sacrifice, there is a package commensurate with that sacrifice upon leaving service,” said Steven P. Strobridge, a retired Air Force colonel who is the director of government relations for the Military Officers Association of America, which is lobbying against changes to the benefits.
A wild-card factor in the debate is the withdrawal of American troops from Iraq and Afghanistan, which some experts say could avoid the stigma of cutting benefits while troops are at war.
“The fact that you are getting out of Iraq and Afghanistan does make it easier,” said Lawrence J. Korb, a senior Pentagon official in the Reagan administration who was a co-author of a recent proposal for reducing the cost of military health care. “When the war in Iraq was in terrible shape, it was hard to get people to join the military, and no one wanted to touch any military benefits.”
By far the most contentious proposal circulating in Washington is from a Pentagon advisory panel, the Defense Business Board. It would make the military pension system, a defined benefit plan, more like a 401(k) plan under which the Pentagon would make contributions to a service member’s individual account; contributions by the troops themselves would be optional. Mr. Panetta has said that if adopted, the plan would not apply to current military personnel.
While health care costs for active and retired troops are growing faster, military pension costs are larger. Last year, for every dollar the Pentagon paid service members, it spent an additional $1.36 for its military retirees, a much smaller group. Even in the troubled world of state and municipal pension funds, pensions almost never cost more than payrolls.
Citing the fiscal hazards and inequities of the system, the Defense Business Board proposal would allow soldiers with less than 20 years of service to leave with a small nest egg, provided they served a minimum length of time, three to five years. But it would prevent all retirees from receiving benefits until they were 60.
The business board says that its proposal would reduce the plan’s total liabilities to $1.8 trillion by 2034, from the $2.7 trillion now projected — all without cutting benefits for current service members.
Steve Griffin of Tallahassee, Fla., is the type of soldier the defense board is trying to appeal to: a former captain who did two tours in Iraq, he left the Army in 2010 after five years of service and thus receives no pension.
Yet in a sign of the deep support for the existing system, Mr. Griffin says it should be left alone because it provides incentives for recruitment and rewards retirees who have endured great hardship.
“Yes, it would be nice for people like me,” Mr. Griffin, 28, said of the proposal. “But I think the retirement system now is fair. We shouldn’t take anything from it. If anything, we should add to it.”
Much like in the debate over Social Security, questions about the sustainability of the military pension system abound.
Each year the Defense and Treasury Departments set aside more than $75 billion to pay not only current and future benefits but also pensions for service many years in the past. But the retirement fund has not accumulated nearly enough money to cover its total costs, with assets of $278 billion at the end of 2009 and obligations of about $1.4 trillion.
The government tries to close the shortfall by simply issuing more Treasury securities each year, thereby adding to the nation’s debt.
Given the political potency of veterans groups, it is unclear whether anyone in Congress will lead an effort to revamp the pension or retiree health systems.
But the debt ceiling agreement approved this summer by Congress, under which the Pentagon must find $400 billion in reductions over the next 12 years, may force cuts once considered unthinkable. And if Congress does not adopt the recommendations of the bipartisan committee studying deficit reduction, the mandated reductions in Pentagon spending would more than double, to about $900 billion, and fall on just about every category of defense spending.
Deficit hawks, led by Senator Tom Coburn, Republican of Oklahoma, have begun taking smaller steps, pushing for an array of cuts to military benefits, including ending subsidies for base commissaries and tightening disability compensation for diseases linked to Agent Orange.
But those trims are considered marginal compared with the deeper reductions many experts say are necessary to contain Pentagon spending.
“If the trend continues, it will call into question the military’s ability to do other things, like buy equipment, do maintenance, train troops and equip them,” said Nora Bensahel, a senior fellow at the Center for a New American Security, a nonprofit organization with ties to the Obama administration.
“At some point, the cost pressures by the retirement benefits will really start to impede military capabilities.”