Shifting to revised index offers savings

Defense Secretary Robert Gates last week delivered his “last major policy speech” and, in it, suggested that politicians show courage in the fiscal crisis by making the military compensation system more efficient.

Gates has the department preparing such a set of recommendations to be part of a $400 billion defense savings package over the next 12 years.

Specifically he criticized a “one-size-fits-all approach” to basic pay and retirement, suggesting “tiered and targeted” methods could cost less but pay more to service members in “high demand and dangerous specialties.”

He implied pay levels overall are set too high as evidenced by the services’ continuous ability to meet recruiting and retention targets, except for the Army and only “during the worst years of Iraq.”

Gates again asked that TRICARE fees be raised, particularly for working age retirees. And he eyes replacing the all-or-nothing 20-year retirement plan with a more “flexible” system that would allow earlier vesting in benefits but also encourage more members to serve longer careers.

Some of these ideas are decades old. Over the past 40 years other defense secretaries have made similar or even more unpopular proclamations to curb military benefits, from closing discount stores on base to ending tax-free allowances and shifting the military to fully taxable salaries.

The reality is that sharp changes to pay or benefits typically don’t occur as a result of policy speeches or even in-depth studies written over months by commissions created for that task. Dramatic changes usually occur during fiscal emergencies, real or perceived.

The House Armed Services Committee, for example, thought it necessary in 1984-85 to move military retirement to an accrual accounting system to ensure funding of benefits to future members stopped encroaching on money for other defense programs.

Lawmakers then set a target for the accrual account and told Defense officials to design a retirement plan to produce the required result. That turned out to be “Redux,” a plan that cut the value of 20-year retirement by roughly 25 percent for new members. As time passed and retention fell among the Redux generation, Congress repealed the plan.

Redux was fruit of a crisis tied to rising retirement obligations. The current debt crisis is far more threatening.

Gates’ remarks encourage that military compensation be part of planned defense cuts, suggesting excess dollars going today into compensation can be diverted over time to help replace aging fleets of aircraft, ships, submarines and land warfare vehicles.

Benefit cuts that impact current members and families in wartime could be seen as unfair. But lawmakers negotiating with Vice President Joe Biden have plenty of other options from among recommendations made late last year by separate debt reduction panels.

Perhaps the ripest fruit for those arguing federal entitlements are unsustainable is adoption of a modified Consumer Price Index (CPI) that would shave annual cost-of-living adjustments. Both deficit reduction panels endorsed it.

The revised index is a “chain-weighted” CPI. The Bureau of Labor Statistic created it in 2002 to address criticism of “substitution bias” in other CPIs. The idea behind the revised CPI is that, as prices rise, people actually change behavior and buy cheaper items, apples instead of oranges, for example. Yet the CPI used to adjust federal entitlements assumes consumers buy the same items month after month regardless of price.

Shifting to the new CPI would curb entitlement spending, on average, by .25 percentage points a year. Yet by one estimate the savings could total $300 billion over the next decade, at least half from Social Security benefits.

For the Department of Defense, proponents might argue, this change alone is a no-brainer in desperate times, serving to dampen retirement costs without singling out the military alone for fiscal sacrifice.

Tom Philpott can be contacted at Military Update, P.O. Box 231111, Centreville, Va. 20120-1111, or by e-mail at: