A Veto to Veterans' Wallets

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When President Obama vetoed this year's defense policy bill, he put at risk a historic bipartisan effort to reform the military retirement system. The proposed reforms emerged from the work of a bipartisan committee of experts appointed by Congress. The reforms will both increase the fairness of the retirement system and yield significant savings – the sooner they are implemented, the better.

The Armed Services committees in the House and Senate have a consistent record of setting a bipartisan example for the rest of Congress. For 53 years in a row, the committees have produced a defense policy bill – formally known as a National Defense Authorization Act – that the president eventually signed into law. On four occasions, the first version of the defense authorization bill was met with a veto. Yet each of those four times, the committees amended the bill and won the president's signature.

This year, Obama vetoed the defense authorization bill in order to improve his leverage in the upcoming fight over the federal budget. In the Senate, the bill passed with enough votes to override a veto, yet in the House the bill fell 20 votes short of a two-thirds majority.

There has been almost no opposition to the plans for reforming the military retirement system. Three years ago, the National Defense Authorization Act for 2013 established a commission to review all forms of military compensation. A distinctive feature of the system is that it provides benefits only to those personnel who stay in the armed forces for 20 years or longer. As the review commission noted in its final report, this means that 83 percent of enlisted personnel and 51 percent of officers receive no retirement benefits at all. The commission set out to address this inequity while preserving the value of pensions given to those who remain in uniform for 20 years or longer.

The critical reform proposed by the commission is a plan for the government to encourage the use of IRA-style tax-free retirement accounts by offering to match, dollar-for-dollar, the contributions that troops make from their own salaries. While troops already have the option of opening up such accounts, the commission recommended that enrollment be automatic. In addition, the government would automatically contribute an amount equal to 1 percent of an individual's salary and match contributions up to 5 percent. As long as an individual serves for at least two years, he or she would be able to keep the matching funds.

To balance the cost of this new benefit, the commission proposed a slight reduction of the benefits for 20-year retirees. Currently, they receive an annual benefit equal to 2.5 percent of their terminal salary for each year of service. For example, a soldier who earned $50,000 and served for 20 years would receive $25,000, i.e., 20 x 2.5 = 50 percent of his salary. Under the new system, the multiplier would be 2.0 percent for each year of service.

For those who serve less than 20 years, the new system is obviously beneficial. Yet a financial model developed by the commission shows that even 20-year retirees come out ahead, because the reduced value of military pensions is outweighed by the value of matching contributions plus additional incentives for remaining in uniform up the 20-year mark. 

While the House and Senate tinkered at the margins with the commission's proposal, the plan included in the 2016 National Defense Authorization Act is basically the one the commission proposed. Without the commission, it is unlikely that any proposal for reform would have survived the legislative process, because there would have been too much temptation for congressmen to oppose any reduction in benefits, even if its purpose were to offset the cost of new ones.

When Congress pares back any benefit for the troops, organizations that advocate on behalf of military officers almost always respond negatively. For example, a recent press release from the Military Officers Association of America said, "Slashing military retirement pay by 20 percent may erode career retention and only provide a greater incentive for members to leave service early." While the advocacy organization endorsed matching contributions for retirement accounts, it did not propose any reductions to offset the cost.

If not for the individual and collective prestige of the reform commission, congressmen might have hesitated to take any steps opposed by the officers association and similar organizations, lest they be accused of harming the troops and their families. Antagonizing a critical constituency such as veterans or military families creates a vulnerability easily exploited by opponents in a primary or general election.

The Armed Services committees understood this dynamic when they crafted the legislation that chartered the reform commission. They correctly discerned that they would need the political cover provided by a bipartisan commission of experts in order mitigate the political cost of supporting reforms. Yet the commission was far more than a fig leaf. By appointing highly qualified commissioners, Congress created a body capable of doing the heavy intellectual lifting required to generate a strong proposal.

In the short run, reforming the retirement system won't save much money, because those who currently serve will be grandfathered into the old system (unless they actively choose to participate in the new one). Yet once the new system is fully implemented, it will save $10-$15 billion per year in outlays, according to a pair of studies by the Congressional Budget Office.

It is regrettable that Obama's veto will jeopardize these reforms. Nonetheless, if Democrats and Republicans can reach a compromise on the budget, Congress may pass the defense authorization bill again, at which point the president would probably sign it. However, if budget talks collapse and the government has to shut down in December, the future will become very uncertain.

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The Foreign Policy Initiative seeks to promote an active U.S. foreign policy committed to robust support for democratic allies, human rights, a strong American military equipped to meet the challenges of the 21st century, and strengthening America’s global economic competitiveness.
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