The idea of a contributory retirement system for the military has been brought up a number of times in the past. President Truman proposed it in 1949. Former Representative Paul Kilday, for many years the most knowledgeable member of Congress on military personnel matters, used to say that a contributory system would end criticism of military retirement and give the individual a legal contract so that benefits could not be reduced. It is interesting today to hear an increasing number of officers, faced with a falling off of their benefits in relation to other government personnel, calling for a contributory system to assure better all-around benefits.
The proponents of contributory retirement are usually split into two groups who want the system for diametrically opposed reasons. In the first group are the aforementioned officers who feel that with a contributory system their total benefits would be higher. The second group is made up of those who think a contributory system would save the government an enormous amount of money. Both groups are wrong. The case against contributory retirement is the government’s case—it would not be worth the trouble it would cause.
There is no question but that military pay scales have fallen significantly behind civil service, and the government cannot long continue such a policy without a detrimental effect on the officer corps. Perhaps some shifting of service remuneration from fringe benefits to basic pay would lessen public misunderstanding and help gain needed improvements. But I do not believe a contributory retirement system is a necessary or desirable step toward an improved military pay system, and I do not believe it would save the government any money.
There are some problems with all contributory systems that non-contributory systems do not have, and these are accentuated in the case of the military services. The most obvious is administrative costs. In a non-contributory system, records are kept only on the retirees and are relatively simple. In a contributory system records must be kept on everyone. Since only 10 per cent or less of those who move through the military system stay to retirement, record keeping would be necessary for the first time on the other 90 per cent. The record keeping would start from the day of entry into service, and most of those on whom the records are kept would leave before retirement, taking their contributions with them and having contributed nothing to the fund out of which retirement is paid.
As a practical matter, contributions would have to be refunded for those who leave service before qualifying for retirement. Civil servants get their contributions back when they leave. You could not expect Congress to say to military men: “We are going to make you pay for something you’ve had free in the past but we’re not going to give you the right to take the money out when you leave.” If one of the reasons for the system is to give the military man an equity in it, to give it the force of a legal contract, then it must be presumed he has a legal right to his money.
Most of those coming into military service today are young men with no plans for a military career who are fulfilling their service obligation. I do not think you can expect Congress to force, more or less, these young men to serve and then make them contribute to a fund from which they could derive no benefit.
But you would not just have to refund contributions; you would have to refund them with interest. Presumably this would be the standard 3 per cent generally used by insurance companies. The Civil Service retirement system pays 3 per cent interest. The interest is paid because the government has had the use of the money—money it would otherwise have to raise by selling interest- bearing bonds. So if the contribution is the same 6½ per cent paid by civil servants, the non-career man, on leaving service, would get back 6½ per cent of his monthly pay for each month of service, plus 3 per cent annual interest.
Now let us see what this does to retention rates. One of the chief problems the 1963 pay act is supposed to solve is the retention of technically trained enlisted men at the first reenlistment point. It is here that the man gets his first and heaviest re-enlistment bonus. But the retirement refund would be like a bonus for not re-enlisting. And a young man is likely to have eyes for the short-term cash rather than the long-term credit in the system.
The requirement for a refund with interest is independent of the method of accounting for the contributions. If no separate retirement fund is set up, this does not relieve the government of the obligation to refund what has been paid in, and to pay interest for the use of the money.
A solution suggested is that men not contribute for the first four years, or during initial obligated service. But this system would reduce the period of contributing to only 16 or 18 years in the case of 20-year retirees. At today’s life expectancy rates, the average 20-year retiree can expect to be drawing retired pay for 32 years. The potential saving to the government is going to be considerably reduced if men do not contribute in their early years of service. As it is, the best estimate is that the military man would contribute only about 10 per cent of the cost of his reretirement with a 65 per cent contribution. (In the Civil Service system, which is designed to have employees pay 50 per cent of the cost, contributions actually cover about 16 per cent of the cost.)
With the first four years excluded, the per-centage of cost covered by contributions would drop to 7 per cent.
A problem in all contributory retirement systems is the vesting period. That is, how long does a man have to contribute before he is eligible to leave his money in the fund and later draw retirement. In private industry the period is usually 10 or 15 years. In Civil Service it is five years. Anybody who leaves before five years’ service must take his money out.
The inevitably shorter vesting period increases the number of persons who would be added to the retirement rolls. In military service today, no one with less than 20 years’ service draws retirement. With a contributory system and a vesting period roughly equivalent to that of the Civil Service system, many who serve only five or ten years eventually would find their way onto the retirement rolls. Since any contributor pays only a small percentage of his retirement cost, these added numbers would be a further drain on potential savings by the government.
Deciding when these short-termers could start drawing retirement would be another headache.
In any established system the period of transition to a new system is difficult. For the military the difficulties would be enormous.
To institute a contributory system that would require a 6J per cent contribution would mean a cut in take-home pay that would be intolerable from a morale and retention standpoint.
Basic pay would have to be increased by an amount equal or close to the amount of contribution. If the increase in pay were the same as the contribution, take-home pay would still be reduced somewhat since the increased pay is taxable. The University of Michigan Committee that studied military retirement in 1961, under a contract with the Senate Armed Services Committee, said an employee in the minimum tax bracket would have to receive a raise of $1.25 for every dollar he contributed if he were not to receive a cut in take-home pay.
The need to increase basic pay, of course, would cut down on any real return to the government from the contributory system for some years. But, more than that, since 90 per cent of those who move through the military system eventually leave before retirement and have their contributions refunded, and since they obviously would have to share in the basic pay raise, the government’s heavy initial cost to introduce a contributory system would mainly benefit non-career men.
Another problem that would be accentuated greatly in the military services is that of prior service credit. When you convert to a contributory system you have to give credit in the new system to those already on the rolls—in this case on active duty—who may have anywhere from one to 30, or more, years of service. The employer, in this instance Uncle Sam, must pay the cost of giving them equity for their past service. Strictly speaking, this means the government must contribute, or be liable, for an amount equal to what everybody on active duty would have contributed if the system had been contributory when they entered service.
For the millions in service, that would be a considerable sum; it would mean either that the government would have to put in a huge, lump-sum amount at the beginning or have a deficit that would plague the system in the same way a big actuarial deficit plagues the Civil Service system.
There would also be some problems with a contributory system which would be unique to the military.
What would you do about reservists? With some difficulty, a contributory system could be applied to those in a drill-pay status. But how about the thousands of reservists who maintain their status and earn retirement points without pay? Would you require them to mail in a certain amount “out of pocket” each month? Would it be equitable to give them free credit while active duty regulars were required to contribute? And what would all this do to reserve retention?
Another problem is how to handle officers with constructive credit. Would they have to “buy in” for those years?
The provision of law allowing free credit in the Civil Service retirement system for military service would have to be repealed.
And a thorny problem would be the treatment of those already retired. Is their retired pay to be financed by a fund they have never contributed to? If the government is going to “buy in” to the fund for them, or incur a liability to the fund for them, it adds to the beginning deficit mentioned above for those already on active duty. Back in 1960, some Defense Department actuaries estimated that to meet the actuarial deficiency for those already retired and those on active duty the government would have to put close to three billion dollars a year into a fund for an indefinite period in addition to its regular contribution. If it did this it would mean the government’s annual cost, for the first several years at least, would be more than the cost of the present system, which hardly helps the chance of getting a contributory system enacted. The more likely course, supposedly, is that the government would delay making these payments until necessary—the same sort of deficit accounting that plagues the Civil Service retirement system and the Social Security fund. But the obligation would still be there, and there would be the same concern over inevitable future costs that we now have with the “free” system.
Admittedly, the government already has a monetary obligation for the retirement of those on the retired rolls and for many of those on active duty. But handling that obligation under a funded system would be difficult.
Future retired pay raises—virtually a necessity the way the pattern of cost of living has run—would present tricky problems in treating the two classes on the retired rolls, those who have contributed and those who have not. And those who contribute in the future would be paying in part for benefits for those who have never contributed.
It is interesting to note that in private industry the trend is away from contributory systems. A study by the American Management Association shows that in 1948 a survey found 26.9 per cent of industrial plans noncontributory, while in 1960 a similar review found 48 per cent of industrial plans noncontributory.
This trend developed even though contributory systems in private industry have an advantage not enjoyed by government plans: earning power.
The money in a contributory system in private industry can be invested to produce additional income and help pay the cost of benefits. But in government contributory plans the money can only be invested in government securities. Since the government pays the interest on the securities, the earnings of the retirement fund, or the retirement account, are a paper saving as far as Uncle Sam is concerned. The money comes from the taxpayers. What appears as earnings to the retirement trust fund appears in another place in the budget as a charge against the national debt.
The military retirement system could stand some improvement, notably in greater survivor benefits for retirees’ dependents and the right to greater equity in his retirement for the military man. But introducing a costly and complex contributory retirement system to gain these needed improvements or to gain needed revisions in pay rates would be like curing a headache with a sledge hammer.
A solution could be found, perhaps, for almost any one of the drawbacks to a contributory retirement system listed in this article. Taken all together, however, they provide a convincing case against a contributory system for the military. The problems would be very big and the savings, if any, very small. The Michigan University study group came to the same conclusion. Recommending against a contributory system for the military services, the Michigan group said in its report, “It can be concluded that any saving in retirement costs by introducing a contributory provision is small at best and possibly non-existent.”