A lot like a civilian 401(k), some analysts say.
And that's what a Pentagon advisory group this year has urged defense officials to consider.
The Defense Business Board suggested in May that officials look at a system based on the Thrift Savings Plan — a government version of a 401(k) that is currently available to military and federal employees.
Made up of corporate analysts, the board researches military spending issues and reports findings to the secretary of defense. While it makes recommendations, it has no authority to implement them.
In a nutshell, here's what the board suggests:
» The government would pay into the plan during the military member's career, rather than making pension payments after retirement. Contributions would be based on annual base pay and would be larger than offered in the private sector.
» Retirement benefits would become payable at 60 or 65 years old, rather than immediately upon retirement.
» Money paid into the plan would be placed into a variety of investment accounts, with military members choosing from differing levels of risk and reward.
» Military members would all receive retirement contributions, regardless of the amount of time served. The money in the plan would be transportable to the private sector if the member left the military.
» The military member could contribute additional money to the plan if desired.
The Pentagon has repeatedly said any overhaul of the retirement system would not affect the benefits of current military retirees.
Pros and cons
The switch would represent a fundamental change in the way military retirement benefits are funded and paid.
The TSP or 401(k)-type systems are defined contribution plans, where the employer pays into the plan during employment. The pension system is a defined benefit plan in which the government pays lifelong benefits after retirement.
Santa Rosa Beach financial planner Buz Livingston said a defined contribution plan would result in dramatically lower long-term costs for the military. Once the service member leaves, the military wouldn't have to pay into his or her retirement.
But from the retiree's perspective, the current pension plan results in a more immediate payoff with almost no long-term risk.
"Defined benefit plans are far superior to defined contribution plans. They just are," Livingston said.
In addition to lifelong payments, pension plans also include annual cost-of-living increases, which over 20 years will effectively double the pension payment, Livingston said.
The switch to a 401(k)-type system would be of most benefit to those who leave the military before reaching the 20 years of service — a group which receives no retirement benefits under the current system.
"If an enlisted guy serves five or 10 years, sets that money aside and forgets about it, they would wake up when they were 60 years old and have a significant amount of money for their retirement," Livingston said.
A negative aspect, however, is that TSP or 401(k) plans are "at the whims of the market," Livingston said. The value of the account varies as the market rises and falls, adding a degree of uncertainty to retirement planning.
Rocky transition
The Defense Business Board said a key difficulty would be orchestrating the transition to a new retirement system.
The board did not make any recommendations on how that should be done but outlined two possible scenarios.
The simplest option would grandfather current military personnel into the existing system and put new military members under the new plan. But that wouldn't result in needed short-term cost savings for the military.
Another option would involve a more rapid but complex transition of current military members into a new system while maintaining a portion of their pension benefits.
The board did not rule out other options, and it said a combination of transition measures likely would be necessary.
Pensions vs. defense
The current pension system is more beneficial to retirees, but because of lengthening life spans and a growing number of military retirees, the long-term costs to the military can't be sustained, analysts said.
"It's not a matter of how long it can last. It's a matter of how much of the defense budget it is going to consume," said Baker Spring, a national security policy expert at the Heritage Foundation, a Washington, D.C., think tank.
Baker said increasing retirement costs will soon force the military to make cuts to war-fighting abilities — chiefly weapons development and the size of the standing force.
"You're talking about truly intolerable reductions in manpower and force structure," he said.
Baker said that in the current economic climate, some cuts to military benefits are unavoidable. The question is whether the cuts will come immediately, as reform, or eventually, as a whittling away of benefits, he said.
"You can take the existing system and shave it, increase fees, reduce benefits. I call it 'less of the same,' " Baker said. "But I think military personnel will ultimately get a better deal if you take a systemic approach to reform ... so they get some gain as well as pain."
Military lifestyle
Critics of military retirement reform say switching to a civilian-style system misses a key issue — the military isn't the private sector.
"It completely ignores the fundamental difference between military conditions and a civilian career," said retired Col. Steve Strobridge, director of government relations for the Military Officers Association of America.
The current pension system is one of the best incentives to keep experienced military members from leaving the service mid-career, Strobridge said.
"There's a reason why military people are willing to put up with having to go to Iraq or Afghanistan every other year and to have their families move around," Strobridge said.
"We feel very strongly that if this type of system had been in place for the last 10 years while we were at war, this would have absolutely devastated our standing force."
Source: http://www.pnj.com/article/20111110/NEWS12/111100324/Military-Panel-urges-401-k-like-retirement-plan?odyssey=nav|head
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