There is a way to structure and finance the military retirement program that would cost the government less while providing better benefits to retirees.
In his May 1996 article in The Atlantic Monthly entitled "Will America Grow Up Before It Grows Old?" Peter G. Peterson makes a powerful point: the United States will become a fiscally insolvent nation by any objective standard if we do not restructure federal entitlements. President Bill Clinton, in a 1996 interview, notes that "if we don't deal with the entitlements, we can go broke, all right, someplace down the road. . . . whoever is president the next four years will have no choice but to deal with the entitlements."1 As the President's remarks suggest, the only debatable factor is how long it will take for America to go bust.
Something must be done—something bold and courageous. Many very smart people and dozens of organizations and institutions are studying the larger problems of Social Security and Medicare. But while we have the time, why not experiment with an entitlement that is—relatively speaking—much smaller? Why not let the armed forces do what they always have done at critical times in our history—lead the way?
There are feasible, executable, and palatable ways to meet this challenge as it concerns military entitlements—specifically military retirement.2 For purposes of this examination, a proposal must:
- Finance the retirement requirements of military personnel with significantly fewer taxpayer dollars
- Enhance the retirement benefits of military personnel
- Provide for surviving spousal support benefits
- One way to accomplish this is total privatization. Our proposal is a retirement program that incorporates the following:
- Outsourcing to the private sector for management and administration
- Reliance on a lump-sum payment from the government
- Reliance on the profits from a privately managed trust fund to finance the continuing requirements of retired military personnel and to "pay back" to the government any excess profits and the original lump-sum amount at the end of the retiree's life
- Elimination of any government responsibility to make Social Security payments or to give MediCare benefits to military retirees based on their pay-ins while on active duty, and in addition, the retention of these pay-ins by the government as a contribution to the general solvency and upkeep of Social Security and MediCare
Increasing the amount of retired pay each individual receives over the course of his or her retirement; financing a health management organization (HMO); providing a Survivors' Benefit Plan, and providing low-cost mortgage and small business loans to military retirees
This methodology would generate several key initiatives. First, the government would provide a lump-sum payment to an established, privately managed investment trust fund in the name of the military retiree. This sum is the retirement principal. It would be maintained by the trust, with all costs and disbursements being drawn from fund profits. Realizing the advantages of economies of scale (the trust fund will accumulate enormous resources over time), such principals would generate monies to fund retirement benefits, the HMO, survivor benefits, and limited low-cost mortgage or business loans (which also will generate profits for the trust). Loans would not exceed 50% of the value of the retiree's lump-sum retirement account payment.
Financing the lump-sum payment could be accomplished in a variety of ways. The obvious way would be to provide for the payments for each year's eligible retirees in the annual defense budget. This method could be made more financially feasible by limiting the number of early participants in the program—perhaps by just calling for volunteers initially. Another method would be to structure monthly government contributions (for example, equivalent to 5% of all active-duty members' pay) into the trust fund; that principal and any interest that accrues would be counted toward the lump-sum payments for those service members who remain in the armed forces long enough for retirement.3
The income provided by the trust fund to retirees would be a fixed amount determined by a formula; for example:
- If the lump sum is determined to be $597,528 (ten times the base pay of a commander/lieutenant colonel with 23 years of service, as listed in the 1996 pay table), with an estimated 9% return and 1.5% administrative cost—which includes funding the HMO—the fund will yield 7.5%, or about $3,734 in monthly income. This is $871 more than the current Plan 1 (pre-1980) retirement entitlement.4
- A cost-of-living increase could be provided for by creating set-asides for such purposes during the fund's more prosperous years.
The trust fund also would finance a nationwide HMO program for military retirees. Contracting through the private sector to establish a consortium of health-care providers, the program would be similar to TriCare, but without that system's inherent complexity and added expense. If a retiree—by choice or by necessity—received treatment at a Veteran's Administration or military medical facility, then that facility would be paid for its services by the trust fund's HMO.
In addition, the trust fund could provide survivor benefits in accordance with the following procedures:
- At the death of the retiree, 50% of the retirement principal would be returned to the government.
- The remaining 50% of the principal would remain in the trust fund to provide a monthly income and continued HMO coverage for the retiree's surviving spouse.
- At the death (or remarriage) of the survivor, the remaining principal would be returned to the government.
- The fund could provide low-cost, limited mortgage and small-business loans as follows:
- Loans could not exceed 50% of the original lump-sum payment amount deposited in the name of the retiree.
- Loans could be repaid through automatic deductions from the monthly payouts due to the retiree.
One quite valid criticism has arisen from discussions of this proposal, summed up this way: These are staggering sums of money. In 1984, Congress created the Military Retirement Fund, to let the Department of Defense and Congress understand their assets and liabilities in terms of military manpower. In 1996, the fund had about $100 billion in assets and a little more than $600 billion in liabilities. There is no question that such an amount of money, managed by a private organization such as the one we propose, would have a great potential to impact financial markets.
For this reason, the corporate structure of the trust fund would have to be carefully crafted. As with investment programs and mutual funds in the private sector (which support most of today's private retirement plans), there must be a trust fund charter that directs its functions and operation. Simply put, the charter would have to:
- Prevent the managers of the trust fund from becoming czars of the nation's stock markets merely by weight of the volume of investments they would control. The charter would ensure that the investment strategy was based on rules aimed at wide diversification and, therefore, low risk. Investment of the fund's assets would be spread-loaded across the entire U.S. economy by a formula identifying the profitable investments in stocks, mutual funds, and other vehicles in all segments of the market. This would prevent a reinforcement of any individual stock or mutual fund to the detriment of the financial markets as a whole or of any individual investment vehicle.
- Maintain a specific percentage of the trust fund's value in liquid assets.
- Maintain a percentage of the trust fund in excess of its projected requirements (a surplus) to ensure its solvency and ability to meet requirements during market downturns.
Crafting the appropriate legislation to establish such a trust fund would be a challenge of the first order, but that is the nature of most things in life that are worthwhile. Hard work should not be a deterrent to good legislation.
1 The Washington Post, 25 August 1996, p A19.
2 Notwithstanding a number of valiant efforts (prominent among which are the President’s Commission on Military Compensation, 1978: the President's Private Sector Survey [Grace Commission], 1983: and the Fifth Quadrennial Review of Military Compensation, 1984), no substantive changes have been made in a retirement system that last underwent such a change at the end of World War II. To be specific, what no one has done is to propose a way to protect-even improve-the military retirement system while curtailing significantly the federal entitlement required to support it.
3 The military retirement compensation system is not a pension plan such as exists in the civilian world. It is a "delayed compensation" system and a force management tool. The military is a profession whose members value service over pecuniary gain and who. because of this, accept pay restrictions over their 25-30 year careers that would not exist in the civilian world. This shortfall is made up by the guarantee of a lifetime compensation that is more equitable. This concept is intrinsic to maintaining an armed force more interested in service than in monetary gain. The compensation system is a force-management tool, because retired compensation is an incentive for the people to stay in the service for the long haul. 'Several well-meaning critics have pointed out that an 8-9% return is highly optimistic. But according to the United Services Automobile Association (USAA) 1996 annual report: "Average annual total returns of the USAA Aggressive Growth Fund as of June 30, 1996, are 1 year: 54.74%; 5 years: 19.89%: and 10 years: 11.69%." As of 25 August 1996, the 12-month return of the Dow Jones Industrial Average stocks was 27.7%; Standard and Poor's 500 Index was 22.52%: Lipper Growth Mutual Fund Index was 13.13%; and Lipper Balanced Mutual Fund Index was 13.33%.
Colonel Wilkerson, an infantry officer, airborne ranger, and attack/scout helicopter pilot, is on the faculty of the Marine Corps War College. Previously, he was special assistant to General Colin L. Powell. He has served in command and staff positions in Vietnam, Korea, Japan, and the United States and is a graduate of the Army’s Armor Officer Advanced Course and Command and General Staff College and the Navy’s Naval Command and Staff College and College of Naval Warfare.
Lieutenant Colonel Kirkpatrick is a member of the faculty at the Marine Corps War College. He has served on the faculty of the Marine Corps Command and Staff College and in a variety of staff, joint, and command assignments, including as Deputy Director of Command Center Seoul and command of a Marine Corps Recruiting Station. He is a graduate of the Armed Forces Staff College and the College of Naval Warfare.