Retired Marine Corps Major General Arnold Punaro, former Senate Armed Services Committee staff member, has voiced concerns about current retirement practices in the military. “The military pays some retirees for 60 years for 20 years of actual military service,” he has complained. He fears that as a result, retirement pay could eventually “eat . . . [the Department of Defense] alive.”1 Former Secretary of Defense Chuck Hagel has concurred: “As they are currently structured, military compensation programs are unsustainable.”2
But many of those who retire after two decades have been forced out due to the DOD’s ceiling for years of service, which varies according to rank. Thus, an O-4 will generally retire after 20 years of commissioned service. Based on the typical ages of those beginning their military service as well as the general trend of increased life expectancies, the government can indeed expect to pay this individual for more than 40 years of retirement after 20 years of service.
If paying our hypothetical O-4s for a retirement that is twice as long as their period of service is unacceptable, perhaps they should instead be encouraged to prolong their active service. The government could then pay them less than 40 years retirement for more than 20 years of active-duty service. Since, for example, senior non-commissioned officers (NCOs) should stay in place longer, we must consider creating a culture in which they can extend their careers. To better adapt to changing fiscal conditions, we must figure out how to lower retirement expenditures. Meanwhile, we must also figure out how to increase the expertise of our force.
Official Recommendations
The Military Compensation and Retirement Modernization Commission (MCRMC) has spearheaded efforts to reform the military-compensation system, including retirement pay. It began its work in 2013 and issued an interim report in June 2014 that gave extensive background on military pay and benefits.3 A final report published in late January noted that the military-compensation system functions at least reasonably well.4 According to the commissioner’s letter, “The Services’ compensation system provides the Nation with an All-Volunteer Force [AVF] without peer. This fact has been proven during the last 42 years and decisively reinforced during the last 13 years of war.”5 (This is remarkable, given that the AVF was arguably not well structured for the seemingly endless series of deployments.6)
The commission’s objectives include ensuring the long-term viability of the AVF; providing a framework for successful recruitment, retention, and careers; and modernizing the military-compensation system in a manner consistent with fiscal sustainability and contemporary conditions.7 In regard to the third objective, the final report stated that “substantial changes in demographics and society are not reflected in key aspects of the current compensation system, much of which dates back to . . . the birth of the AVF, or earlier.”8 Indeed, key features of the current compensation period—such as the established maximum years of service—predate the creation of the AVF and originate with legislation from the 1940s (and earlier) crafted with the purpose of ensuring a youthful and vigorous military establishment.9
The commission identified ways to reduce personnel costs while preserving the AVF as close as reasonable to its current form. Its final report gave 15 actionable recommendations in three categories: pay and retirement, medical benefits, and quality of life.10 For pay and retirement, the commission recommended that the current pay table be retained, since “it has proved an effective cornerstone of the compensation system.”11 It suggested a revised retirement system that had a defined-benefit component with vesting at 20 years of service (as is done now), a defined-benefit pension reduced to 2 percent of the “retired pay base” multiplied by years of service, and a defined-contribution component similar to the current civil service retirement system.12
Changing Demographics
To save money and modernize compensation, we must examine the conditions that have resulted in the necessity for retirement reforms, such as recent developments in demographics and military affairs. For example, life expectancies have increased significantly since the late 1940s (age 65 for men and 70 for women), when the foundation of the current military retirement system was put into place. By the end of the 20th century, they had increased to age 74 for men and 80 for women.13 This reflects two demographic revolutions: the reduction in childhood deaths and longer lives after entering adulthood. In Figure 1, the shift upward from 1900 shows the first revolution, the increased probability of surviving childhood. The shift to the right characterizes the second revolution, lower death rates for adults.14
More important, in addition to a longer average lifespan, people function well for more years.15 People can be effective members of the workforce much longer than could be expected when the current military retirement system was put in place. At the time of its enactment, one could closely associate “youth” with “vigor.” Now those who are no longer youthful are still vigorous. There are many anecdotes about people in their 40s—the age many service members must retire—who continue to perform impressively. This list includes major league baseball pitcher Nolan Ryan, who could pitch no-hitters at the age of 44; Olympic medalists such as Dara Torres, 41; and boxing champions—Bernard Hopkins defended, albeit unsuccessfully, his light heavyweight championship in November 2014 at the age of 49, while heavyweight champion Rocky Marciano, born in 1923, retired at 31.16
The current retirement system is likewise based on an obsolete 1940s model that resulted primarily from the interwar military revolutions as well as the advent of nuclear weapons. Broadly speaking, this was Industrial Age warfare. As these methods were refined throughout the Cold War, military operations became increasingly physical-capital intensive—with, for example, larger and more capable armored fighting vehicles and aircraft appearing in the orders of battle for both sides.
IT Revolution
New advances in information technology (IT) have spurred new revolutions in military affairs, which we can refer to as Information Age warfare. IT expertise is becoming an increasingly important part of any correlation of military forces. Advanced technical education is now considered a necessity for crews on naval surface combatants. It has been predicted that data-savvy personnel will be increasingly needed in future combat operations. Fifth-generation fighter pilots must be sufficiently skilled and experienced to not only fly and fight their aircraft, but to function as battle managers. U.S. military personnel must be prepared to execute standard military missions and provide the expertise for training and advising allies. Future infantry soldiers will need to master a wide variety of technologies including sophisticated battle suites and sensors. Graduate degrees are now essential for promotion to senior-officer ranks in the Air Force.17
While it’s unlikely all of these predictions will be realized, the shift from physical-capital (manufactured asset)-intensive to human-capital (skills, knowledge, and experience)-intensive warfare has been officially recognized by the U.S. armed forces. For example, the Army’s new operating concept, “Win in a Complex World,” clearly acknowledges this development.18 According to Army Lieutenant General Robert Brown, who commands the Army’s Combined Arms Center, “Today we expect every fighting man and woman to be a master. . . . There is a lot more in the rucksack of men and women on the battlefield.”19
According to retired Marine Corps Lieutenant Colonel Francis G. Hoffman, a Senior Research Fellow at the National Defense University:
The [Army] operating concept replaces the technological “Big Five” of the Air-Land Battle era—the Black Hawk and Apache helicopters, the Bradley fighting vehicle, the Patriot air-defense system and the M1 Abrams tank—with a conceptual “Big Five”: optimized soldier and team performance; capabilities overmatch; joint/interorganization interoperability; scalable and tailorable joint combined arms forces; and adaptive professionals and institutions to operate in complex environments.20
The overall pattern is clear: The DOD needs to continue to recruit, develop, and better retain highly skilled personnel.
But the demographic trends mean that managing for a “youthful” force is increasingly out of touch; a high-degree of expertise (human capital) is vital for successful Information Age warfare. We now need a vigorous and expert force. The good news is that today’s service members retain vigor later in life, which affords more time to acquire expertise—if we’re willing to extend their military careers. If so, we can exploit a great opportunity. If not, the expense of the system will continue to grow, perhaps ruinously.
Comparing Retirement Systems
Are we paying career military personnel too much (for a long retirement) or too little (for a short career)? The answer is the latter. A modernized retirement system with extended careers is a better adaptation to modern warfare and would be less expensive than the current system or the MCRMC recommendation. To illustrate the point, suppose O-4s were allowed to remain on active duty beyond the 20 years at which they generally must retire. (See Figure 2.) The horizontal axis is total years of active-duty service; the vertical shows total compensation, including base pay, basic allowance for housing (BAH) and subsistence (BAS) for active duty, and retired pay. The total amount of retired pay does not vary much as active-duty time increases. (Retired pay rate increases, but expected number of years in retirement decreases.) The total active-duty pay increases, as one would expect.
But a more important part of the story is in Table 1. Assuming our hypothetical O-4 chooses to remain on active duty longer, the total cost per year of active-duty service decreases significantly. There are potentially significant savings to be had with longer careers, even with the current pension calculations. While the total retirement pay stays about the same regardless of years of service at retirement (about $2 million), the longer our hypothetical O-4 stays on active duty, the more the cost per year declines.
Let’s consider a few alternatives to the current system, such as the MCRMC’s recommendation and longer careers. (See Table 2.) In regard to the MCMRC’s proposal, the essentials include a 2 percent defined-benefit pension multiplier, a defined-contribution component through Thrift Savings Plan (TSP) matching, and continuation pay offered at 12 and 16 years of service.
The longer-careers alternative would extend years of service for retirement. As in the MCMRC, the pension multiplier is 2 percent. However, the maximum years of service are increased significantly (to 28 years for O-4s, and 40 years for O-5s and O-6s). Accordingly, continuation pay is also offered at 20 and 24 years of service. The alternatives are assessed as notional, equal-sized forces of active-duty officers in steady state. Indicators reported are cost (active duty plus retirement pay) and median time of service.
Consequences associated with the alternatives are summarized in Table 3 and can be interpreted in terms of fiscal implications and maintaining a force with both vigor and expertise. This example is based on a notional force. As such, absolute costs are not informative, but relative costs are. Costs for the current system are normalized to 100 in all categories, with costs for the other alternatives scaled accordingly. The MCRMC alternative costs 8 percent more than the current system in active-duty pay, but 20 percent less in retired pay. The active-duty compensation goes up primarily due to continuation pay at 12 and 16 years, and government TSP contributions (4 percent of base pay). Retirement costs decrease due to a reduction in the defined-benefit pension component.
Meanwhile, the longer-careers alternative increases active-duty compensation by 15 percent while reducing retired pay by 40 percent. The increase in active-duty compensation relative to the MCRMC alternative is due to more continuation-pay offerings to motivate longer careers, and people serving longer on active duty, with accordingly higher base pay. The reduction in retirement pay is due to people serving longer, with an accordingly shorter period of retirement, and pensions not payable until age 50.
Overall, military pay costs (active plus retired) are reduced by 3 percent and 5 percent for the MRCMC and longer-careers alternatives, respectively. The MRCMC reduction relative to the current system is consistent with the reductions claimed in the commission’s cost appendix, as well as a 2012 Congressional Budget Office study of military compensation costs.21 How about achieving an expert force? As shown in the table, median experience increases significantly with longer careers from six to nine years. This allows the cultivation of a more experienced, skilled, and professional force that is better suited to the complexity of contemporary conflicts.
According to Table 3, the MCRMC alternative delivers an equally effective force with cost savings, and the longer-careers alternative provides a more effective force with additional cost savings. The MCRMC has produced thoughtful proposals worthy of serious consideration, but deliberations about military retirement can and should go further than the commission did—and take up the length of military careers.
Through longer careers, we can also take advantage of demographic revolutions, shaping a more professional and skilled force better suited to ongoing changes in the art of war. While saving money is important, increasing combat capability is vital.
1. Frank Oliveri, “Bitter Pills,” Air Force Magazine, vol. 97, no. 2 (February 2014), 46–49.
2. Claudette Roulo, “Budget ‘Step in the Right Direction,’ Hagel Says,” DOD News, 19 December 2013, www.defense.gov/news/newsarticle.aspx?id=121374.
3. “MCRMC Interim Report,” June 2014, www.mcrmc.gov/public/docs/reports/MCRMC-Interim-Report-Final-HIRES-L.pdf. “MCMRC Final Report,” Commissioner’s Letter, 29 January 2015, http://mldc.whs.mil/public/docs/report/MCRMC-FinalReport-29JAN15-HI.pdf.
4. “Final Report.”
5. Ibid.; Commissioner’s Letter.
6. Joseph Collins, “The Rise and Fall of Major Jim Gant (Review of American Spartan),” War on the Rocks, 15 April 2014, http://warontherocks.com/2014/04/the-rise-and-fall-of-major-jim-gant.
7. “Final Report,” 1.
8. Ibid., 5.
9. Joint Chiefs of Staff, “Concepts for Modernizing Military Retirement,” March 2014, http://projects.militarytimes.com/pdfs/military-retirement-report.pdf.
10. “Final Report,” op. cit., with specifics provided in legislative proposals, 3–7.
11. “Final Report,” op. cit., 9
12. Ibid., 37–38. Stephen J. Hadley and William J. Perry et al., “The (2010) QDR in Perspective: Meeting America’s National Security Needs In the 21st Century,” The Final Report of the Quadrennial Defense Review Independent Panel, Washington, DC, 2010, www.globalsecurity.org/military/library/report/2010/qdr_independent-panel_100729.pdf, xv–xvii, 72, 76.
13. UC Berkeley, “Life Expectancy in the USA, 1900–98, men and women,” 2013, www.demog.berkeley.edu/~andrew/1918, Figure 2. Karen N. Eggleston and Victor R. Fuchs, “The New Demographic Transition: Most Gains in Life Expectancy Now Realized Late in Life,” Journal of Economic Perspectives, vol. 26, no. 3 (Summer 2012), 137–156.
14. Felicitie C. Bell and Michael L. Miller, “Life Tables for the United States Social Security Area 1900–2100,” U.S. Social Security Administration, 2005, Actuarial Study No. 120, www.socialsecurity.gov/oact/NOTES/as120/LifeTables_Body.html.
15. James M. Poterba, “Retirement Security in an Aging Population,” American Economic Review: Papers & Proceedings, vol. 104, no. 5 (May 2014), http://dx.doi.org/10.1257/aer.104.5.1, May.
16. “Dara Torres,” Wikipedia, http://en.wikipedia.org/wiki/Dara_Torres. “Nolan Ryan,” Wikipedia, http://en.wikipedia.org/wiki/Nolan_Ryan. Carolo Rotella, “Bernard Hopkins, Boxing’s Oldest–and Most Cunning–Champion,” New York Times Magazine, 2 November 2014, www.nytimes.com/2014/11/02/magazine/bernard-hopkins-boxings-oldest-and-most-cunning-champion.html. “Rocky Marciano,” New World Encyclopedia, www.newworldencyclopedia.org/entry/Rocky_Marciano.
17. Sandra I Erwin, “Navy’s Holy Grail: Low-Maintenance Ships, Highly Skilled Sailors,” National Defense, 15 January 2014, www.nationaldefensemagazine.org/blog/Lists/Posts/Post.aspx?ID=1379. Bob Brewin, “Navy Chief Says the Future of War Lies in ‘Information Dominance,’” Defense One, 11 August 2014. David Deptula, “Leveraging Vth Generation Aircraft: Shaping a Cultural Shift From the ‘Legacy’ Mindset,” Second Line of Defense, 11 April 2011, www.sldinfo.com/leveraging-5th-generation-aircraft. Michael Wynne, “An Update on the F-35 Program: Observations from Travels to Eglin AFB,” Second Line of Defense, 10 September 2013, www.sldinfo.com/an-update-on-the-f-35-program-observations-from-travels-to-eglin-afb. Stephen Blank, “The Chinese Concept of ‘Unrestricted Warfare’: Global Competitors up the Ante,” Second Line of Defense, 11 April 2014, www.sldinfo.com/the-chinese-concept-of-unrestricted-warfare-global-competitors-up-the-ante. Walter Pincus, “In planning for the future, the Pentagon sees fewer troops and more technology,” Washington Post, 3 March 2014, www.washingtonpost.com/world/national-security/in-planning-for-the-future-the-pentagon-sees-fewer-troops-and-more-technology/2014/03/03/f529e462-a096-11e3-b8d8-94577ff66b28_story.html. Keith Wagstaff, “Holy Smokes! BATMAN Tests Google Glass for the U.S. Military,” NBC News, 9 April 2014, www.nbcnews.com/tech/innovation/holy-smokes-batman-tests-google-glass-u-s-military-n76096.
18. U.S. Army, Win in a Complex World: 2020–2040, TRADOC Pamphlet 525-3-1, 7 October 2014.
19. Kathleen Curthoys, “Wanted: Soldiers who ‘thrive in chaos,’” Army Times, 15 October 2014, www.armytimes.com/article/20141015/NEWS/310150065/Wanted-Soldiers-who-thrive-chaos.
20. Joe Gould, “New US Army Concept Highlights Innovation, Multi-Agency Strategy,” Defense News, 12 October 2014, www.defensenews.com/article/20141012/DEFREG02/310120016/New-US-Army-Concept-Highlights-Innovation-Multi-Agency-Strategy.
21. “Final Report,” Cost Appendix, 29 January 2015, http://mldc.whs.mil/index.php/reports#final. Congressional Budget Office, “Costs of Military Pay and Benefits in the Defense Budget,” November 2012, www.cbo.gov/sites/default/files/11-14-12-MilitaryComp_0.pdf, Table 4, 6.