Retirement—$13 billion a year in the near term, as much as $70 billion per year
within 30 years


The Pentagon also calls for an overhaul of its retirement program in its fiscal year
2013 budget request. In the document, Secretary Panetta calls on Congress to
authorize the creation of a Military Retirement Modernization Commission. The
commission would be designed to help Congress and the Pentagon make the
politically difficult decisions necessary to reform the military’s outdated retirement
system, which has been long criticized for its inequality, inflexibility, and high costs.


The military retirement program, which has not been significantly updated since
the 1940s, adheres to a strict vesting structure—personnel with at least 20 years of
service receive a substantial pension for life; personnel who serve less than 20 years
receive no retirement benefits whatsoever. In addition, those who qualify to receive
benefits can begin collecting their pension immediately upon retiring, allowing
many military retirees to begin receiving retirement pay in their late 30s or early 40s.


This type of vesting system leads to three major problems. First, the vast majority
of veterans—particularly enlisted personnel—leave the service with no retirement
benefits: Only 17 percent of service members remain in the force long enough to
qualify for the military’s retirement program.114 Perhaps most troubling, enlisted
troops in ground-combat units in the Army and the Marines—the men and
women who have borne the brunt of the fighting in Iraq and Afghanistan— are
among the least likely to achieve any retirement benefits.115


Second, the military’s retirement system restricts the ability of the Department
of Defense to manage the size and skillset of the force. Due to the 20-year vesting
requirement, Pentagon managers are reluctant to separate personnel who have
served more than 10 years but less than 20, not wanting to leave service members
without a job and retirement savings. As a result, the Department of Defense is
forced to either separate service members early in their careers or keep them until
they reach 20 years, even if they are underperforming, unhappy, or ill-suited to the
immediate needs of the military.


Lastly, while the military’s retirement program serves only a small minority of the
force, it provides an exceedingly generous benefit, often providing 40 years of pen-
sion payments in return for 20 years of service. As a result, the program now costs
taxpayers more than $100 billion per year, an exceedingly steep price tag for a pro-
gram hampered by serious flaws.116 This number is projected to double by 2034.
49 Center for American Progress | Institute for Policy Studies | Rebalancing Our National Security


Certainly Secretary Panetta is right to draw attention to the military’s troubled retire-
ment system, but a third military retirement commission is unnecessary. In recent
years the Department of Defense has carried out two separate studies of the flaws in
the military retirement system— one by the Defense Business Board and another
by the Quadrennial Review of Military Compensation—and both have already
provided the Pentagon and Congress with answers to its retirement problem.


We urge Secretary Panetta to use his authority to work with Congress to reform
the system by replacing the current retirement system with a 401(k)-style defined
contribution plan. Compensation incentives such as gate-and-separation pays
should also be used to assist with force shaping. Under our 401(k) model—
based on the recommendations of the Pentagon’s Defense Business Board—the
Pentagon would contribute at least 16 percent of each service members’ base pay
annually, about twice the average private-sector contribution.117


Further, gate-pay awards—given to service members when they achieve a speci-
fied year of service—would help Pentagon managers encourage people to stay in
the force, while separation pays—awarded to personnel who choose to leave the
force—could be used to provide an incentive for personnel to leave. Such reforms
would greatly decrease the number of veterans leaving the force without any
retirement benefits, increase the Pentagon’s force management options, and begin
to address the long-term fiscal challenges facing the retirement system.


In making our recommendations we understand that it is imperative changes
to the military retirement system do not negatively affect service members who
have planned their retirement around these benefits. We contend, however, that it
would be wrong to allow so many of the men and women who have fought in Iraq
and Afghanistan to remain on a system that will deny the vast majority of them
any retirement benefits.

Specifically, we recommend a three-part transition to a 401(k)-based retirement
system.


• Military personnel with more than 10 years of service would have the option to
either remain in the current system or switch to the 401(k).
• Personnel with less than 10 years of service would have the option of enroll-
ing in the new 401(k) system or enrolling in a slightly modified version of the
current pension system, which would vest at 10 years but provide slightly less
50 Center for American Progress | Institute for Policy Studies | Rebalancing Our National Security retired pay—40 percent of base pay at 20 years, rather than the 50 percent per-
mitted under the current system. It would begin paying out at age 60.
• All new recruits would automatically enroll in the 401(k) system.
If left unreformed, military retirement costs are projected to grow to $217 billion
by 2034.118 Military pay and health care reform will allow the Pentagon to achieve
substantial savings in the near term. Retirement reform, however, presents the
greatest opportunity for savings. Implementing these recommendations would
allow savings of approximately $13 billion per year in the near term. Even more
importantly these reforms would hold the government’s retirement costs at some-
where between $114 billion and $146 billion in FY 2034, ensuring savings of at
least $70 billion in that year.119