Points of Interest: Services Choose Sides in Tax-Deferred Savings Fight

By Tom Philpott

Millions of U.S. workers participate in 401(k) or other pretax savings programs. Many have seen the value of their accounts rise sharply along with the stock market.

Service members are beginning to feel left out. That feeling is reinforced by a retirement system that offers no vesting rights before completing 20 years of service. More than 200,000 service members leave military service each year with no pension benefits.

The staff of the Armed Forces Tax Council has proposed opening the TSP to service members, the last large group of federal workers now denied a tax-deferred savings plan.

TSP participants shelter up to 5% of their pay by investing in government securities, common stock, or fixed income accounts. The government does not match any part of the contribution, as it does in the Federal Employee Retirement System, or as many private employers often do with 401(k) plans. But no taxes are paid on contributions or account earnings until withdrawn in retirement.

TSP balances can be used to arrange low-interest loans to buy a home, pay education expenses, cover medical bills, or cope with a financial hardship.

The Air Force and Army voted against TSP during late August budget talks not because they don't like the concept. Instead, officials said they fear any attempt to enhance the retirement package will invite fresh attacks on the system, resulting it more benefit cuts.

Some congressional staff members agreed there is reason to worry, given the number of lawmakers who would like to slice value from the $29 billion retirement plan.

"It's very high risk," warned a House committee staff member. "The enemies of military retirement are ready to pounce. All they need is a little incentive."

Congress changed the retirement formula twice since 1980. Both times lawmakers protected persons already on active duty. Critics of TSP suggest they won't do so again.

Another worry is how the Pentagon would pay for a military TSP. While the program does not increase federal spending, it would lower tax revenues by $59 million over the first five years.

Military associations too are divided over TSPs. Steve Strobridge with The Retired Officers Association said the services should educate members about recent change, in laws governing the Individual Retirement Accounts, and forget about pushing for a Thrift Savings Plan.

Congress won't vote to improve the military retirement package—or make it more like federal civilian plans—without exacting a price, Strobridge said. And those most likely to be hurt are careerists.

"Every step Congress has taken on military retirement for the last 25 years has been to tighten," he said. That history shouldn't be ignored in a "naive" quest to give all service people an attractive savings plan.

Other groups, like the National Association for Uniform Services, believe TSPs make sense for the current force and, if seen as a savings program only, should pose no real danger to retirement benefits.

Navy officials view the TSP as a popular, low-cost way to improve sailors' quality of life. Admiral Jay Johnson, Chief of Naval Operations, expressed surprise to his staff that the Army and Air Force were voting against TSPs.

"He said there appears to be a lot of old thinking going on," said a Navy official. "And it may be time for some new thinking."

To ease Army and Air Force concerns, the Navy has even proposed a compromise: Offer TSP only to persons who entered service on or after 1 I August 1986. These members, about two-thirds of the force, serve under the military's least generous retirement plan, called Redux. Lifetime benefits for a 20year Redux retiree will be 26% less than benefits paid to current retirees.

Frederick Pang, Assistant Secretary of Defense for Force Management Policy, isn't convinced the Navy compromise is either desirable or necessary. And fear, he said, shouldn't decide the outcome of the TSP debate.

"We should be able to defend military retirement on its own merits," he said.

"The fact is, changes are occurring in our society. We can say `We're happy with the way things are.' But military people, correctly, can say `Wait a minute. If it's changing out there, and it works out there, why isn't it good for is?"'

Pang rejected the notion that thrift savings is a first step toward making military retirement contributory.

"It's a savings plan. We encourage people to save," Pang said. "This is a legitimate initiative, and one we ought not to rule out because we're afraid of the potential effect on retirees. If our people want it, we ought to look at it carefully."

 

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