The Defense Business Board, which advises the U.S. Department of Defense, mostly on matters of civilian contracting, will report in October on ways to cut costs and modernize military retirement plans.
A preliminary retirement planning report calling for reform has raised the hackles of a wide swath of military and other types who oppose any cuts, especially while we have soldiers at war. It's true that the timing isn't ideal, but the business board's report makes some good points. In calling for a 401(k)-type plan to replace the pension that military retirees get after 20 years of duty, it pointed out that 83 percent of military personnel don't get a pension at all because they don't make it 20 years.
The report said the current military retirement system is more than 100 years old and was designed when times were different:
- Life spans were shorter.
- Military pay wasn't competitive with civilian pay. (Current enlisted military pay is in the top quartile for high school graduates.)
- Second careers were rare because military skills didn't transition to the private sector.
The board said that because military retirement benefits are received after 20 years, 76 percent of those who do qualify for retirement benefits leave the military at 20 years -- when they are in their 40s -- which makes retaining trained people difficult. The current retirement system also doesn't provide extra compensation for those who serve in combat areas.
Costs for today's plan are skyrocketing. Current liability is $1.3 trillion of which $385 billion is funded. By 2034, the military calculates that its liability will reach $2.7 trillion.
The board suggests substituting a 401(k)-like plan based on the government's Thrift Savings Plan with Department of Defense and military personnel contributing. Military personnel could access their plans without penalty at age 65 and the plans would be part of their estates. Fully disabled participants would qualify for an immediate pension. There would be no impact on existing retirees.
Is this kind of plan fair? I think so. The idea that you can retire in your 40s and receive 50 percent of your salary for the rest of your life isn't feasible in a world where people routinely live to be 85 and increasingly hit 100.