February 15, 2013

Who would’ve thought that the mission to capture or kill Usama Bin Ladin would lead to a debate on the military pension system?

This is exactly what has happened following a lengthy interview of “the Shooter” – the Navy SEAL who killed UBL – in Esquire magazine. According to the article, the Shooter recently left the Navy after 16 years of service, with “[n]o pension, no healthcare for his wife and kids, no protection for himself or his family.” This is because retirement benefits such as an immediate pension for military personnel are only available after 20 years of active-duty service.

The story provoked renewed debate about the military pension system as being inequitable for those with less than 20 years of service – although a Stars and Stripes blog post clarified aspects Esquires’ claims on a sudden halt in benefits.

Writing in the February 14 Wall Street Journal, Michael O’Hanlon of the Brookings Institution and LTC John Barnett – a Federal Executive Fellow at BI – suggested using the Thrift Savings Plan to help provide a more robust retirement package for those leaving service earlier than the necessary 20 years of service. Specifically, they suggested “greater incentives to participate in the federal Thrift Savings Plan,” such as giving matching contributions to the TSP for service members.

This is certainly laudable. The problem is, the Department of Defense itself essentially ruled out that alternative in a February 2010 report to Congress titled “Cost and Impact on Recruiting and Retention of Providing Thrift Savings Plan Matching Contributions.” The report essentially concluded that the cost of matching TSP contributions would be “significant,” but they would not “contribute to meeting the recruiting or retention needs” of the military because young recruits prefer cash bonuses to matching TSP contributions.

Given that the DOD has found that matching TSP contributions do not incentivize longer service and thus appears to have ruled out matching TSP contributions for military service members, another alternative would be to tweak the military pension system to provide a basic delayed pension for those leaving with less than 20 years of service while at the same time slightly postponing the age for immediate retirement.

I think certain aspects of the federal pension system could provide the framework for a more equitable military pension system. I would propose a hybrid pension system that would both provide a basic pension for those separating from service, while also incentivizing five-plus years of service in the military to retain some of the basic skills gained in a service member’s initial period of service.

Certain civilian federal employees are eligible for a special type of pension under the “FERS Special” system. Feds in general aren’t eligible for any pension until five years of service, when they are eligible for 1% per year of service multiplied by the average of their 3 highest years of salary. But for those eligible for FERS Special (such as law enforcement and firefighters, or those otherwise serving in positions that are limited to the relatively “young and vigorous”), feds earn a pension equal to 1.7% of their high-3 salary for each year of service. Those with 16 years of service – similar to the Shooter – would earn a pension equal to 25.5% of their high-three salary, for example. After 20 years of FERS Special service, the yearly accrual drops to 1% per year of additional service.

FERS Special participants are eligible for an immediate pension after retiring with 20 years of service after the age of 50, or after 25 years of service at any age. But if they leave service early for other opportunities, they have still accrued a basic pension benefit and can begin to collect a yearly pension between ages 57 and 62, with full benefit eligibility and cost-of-living increases beginning at age 62.

This to me would seem to be the most equitable pension system for military service, taking into account many military personnel want to leave service before they reach 20 years of service. Benefits would begin to accrue after 5 years of service – thus incentivizing at least two enlistment periods for enlisted personnel or some additional years of service for ROTC officers. Benefits would then be equal to 1.7% of a service member’s high-3 average pay for each of the first 20 covered years of service, and 1% of pay per year of service thereafter. Immediate benefits would be provided for those serving 20 years and retiring after age of 50, or 25 years at any time.

With 25 years of service, an enlisted service member joining at the age of 18 would be eligible for immediate retirement at age 43, earning 44% of their high-3 average salary. This slightly raises the effective minimum retirement age of 38, which takes into account the longer lifespans in the U.S. (It is conceivable that with medical advancements, those retiring in their 40s with full benefits would continue to receive them – along with cost-of-living adjustments – well into their 90s.)

While this benefit scheme might seem slightly less generous than the current system of retiring after 20 years of service, it provides greater flexibility for those who wish to retire after 8, 12, or 16 years of service, such as the Shooter.

Those leaving service with more than 5 years but fewer than 20 years of service, or before the age of 50, would be eligible for full pension benefits at age 62. The pension would be based solely on years of service, however, so someone leaving service after 8 years would be eligible for a 13.6% pension at age of 62. This is similar to those retiring with 20 or more years of Reserve or National Guard service, (although Reserve retirees can receive benefits from age 60 and a pension equal to 2.5% of each year of service).

For healthcare for non-injured veterans, I think it would be interesting to create a hybrid Tricare option that is similar to a High Deductible Health Plan (e.g., “High Deductible Tricare”) with an associated Health Savings Account (HSA). For those not retiring with immediate benefits, at the very least this could be a transitional plan of 18 months or two years. The funds in the HSA could then be transferred to the HSA associated with the civilian plan after transitioning to new employment. It could also be associated with educational benefits, so that those attending a four-year higher education program on the GI Bill can continue receiving healthcare benefits.

Hopefully with tweaks to the current system, future “Shooters” and others who risk their lives defending us will have a little more support when they decide to lay down their HK416 for good.

Related topics: longevity military-investing hsa