IF EVER THERE was a case that demonstrated conclusively the paralysis that prevents our politicians from dealing sensibly with budget deficits, it is the case of military pensions. America has a misguided, extravagant scheme for enriching its retired military men and women, one that this year will cost $17.2 billion and confer 60 percent of its benefits on individuals who are comfortably ensconsed in the wealthiest one- fifth of our society.
This is hardly a new phenomenon. Since 1935, no fewer than 12 advisory panels or commissions, including several in the Pentagon itself, have recommended fundamental changes in the military pension system. The Grace Commission, appointed by President Reagan to pinpoint waste in government, recently called for a major overhaul. And Budget Director David Stockman, in a much- publiized moment of candor, described the system as a "scandal."
To what end? None whatsoever. There has been no serious reform despite a mountain of evidence that the program is too costly and, in fact, counterproductive in one of its main objectives: retaining top flight military personnel.
The Grace Commission recommendations have been pigeonholed by the Defense Department. Stockman has been rebuked from one end of Washington to the other. And, on Thursday, the Senate Budget Committee at least temporarily declined to make any changes in military pensions during its deliberations on how to reduce the federal deficit.
After Medicaid (which serves nearly 23 million people), the military retirement program (which benefits 1.4 million) is the second most expensive of all federal entitlement programs financed exclusively from general revenues. It costs the federal government 50 percent more than food stamps, twice as much as Aid to Families withDependent Children (the basic welfare program), and four times as much as the school lunch program and all other federal child nutrition programs combined. While food stamps, AFDC, and the child nutrition programs have all been subject to major budget reductions over the past several years, military retirement has faced only minor changes.
The military pension system has many unique features. Unlike programs such as Social Security or civil service retirement, it requires no financial contribution from beneficiaries while they are employed. The entire cost of these large pensions is borne by the U.S. taxpayer. In addition, military "retirees" are unusually young. The median age at which persons begin collecting benefits is 41, and fewer than one in six military pensioners is 65 or older.
As chairman Les Aspin (D-Wis.) of the House Armed Services committee has said: "Military retirement is paid neither to the indigent nor, in most cases, to the retired."
Even with these unusual characteristics, the system might still be defended if it were necessary to maintain the strengh of our nation's armed forces. Yet the most striking fact about military retirement is that its retirement incentives work counter to armed services manpower needs and military readiness goals. It encourages our most skilled officers to retire just when they are reaching the peak of their careers rather than to continue serving the country.
The military retirement system is unlike any other pension system, public or private. Military personnel can retire from the armed forces and immediately begin drawing generous pension benefits after only 20 years of service. There is no requirement that a retiree reach a minimum age (such as 55, 60 or 65) before benefits begin -- and no reduction for retiring at an early age. The sole requirement is at least 20 years of service.
That is why the median age at which military personnel leave the armed forces and begin collecting retirement benefits is 41. For enlisted personnel, it is 40. Only 7.3 percent of all non-disabled military pensioners retire after the age of 50.
Over 25 percent of all retirees are in their 40s. Over 40 percent are in their fifties. Two-thirds are still working. And only 15 percent are 65 or older.
That stands in sharp contrast to other pension systems. In the private sector, retirement normally begins at 65. Under Social Security, no benefits are paid until 62. For persons retiring between 62 and 65, monthly benefits are reduced to reflect the fact that they draw the benefits longer.
Civil Service retirees cannot draw pensions until 55, and then only if they have served 30 years. Those with 20-30 years service cannot draw their Civil Service benefits until 60.
Lifetime military pension payments to retired military personnel consequently far outstrip lifetime pension payments to virtually any other category of retiree.
The average lifetime cost to the military of a pension for an army colonel or a navy captain retiring after 20 years exceeds $590,000. This increases to $800,000 if the captain or colonel retires after 30 years of service, since benefits are larger.
In addition to receiving generous pensions, armed service personnel are also covered by Social Security. Moreover, many who leave the military at 40, or even later, can take a job in private industry, work for as much as 25 years, and receive a pension from that employment and Social Security.
When the retired military man takes a civilian government job, he or she can receive a federal pension benefit, a federal salary -- and then two federal pensions after retirement from the second job.
Military benefit levels are also higher than other pensions. In 1984, the average pension benefit paid to the 1.1 million non-disabled military retirees from regular service was $13,200 a year; for officers, the benefit averaged $23,900. These benefits are three times larger than average private pensions, and are also more generous than those given to retired federal employes.
Individuals retiring from the military after 20 years receive a pension equal to half their final basic pay. Those retiring after 30 years draw three-fourths of their final pay. (Eventually, pensions will be calculated on the highest three years of pay -- but that won't start until the year 2000.)
But a civil servant with 30 years service who was the same age and had the same salary would get only 56 percent of the average of his highest three years' salary. And, while federal civil servants contribute 7 percent of their salary to the retirement system, U.S. taxpayers pay the whole cost of military pensions.
Contrary to the impression some may have that the pension system benefits a broad segment of the armed forces, military pensions actually go to a relatively small and elite group. The Department of Defense estimates that only 13 percent of entering officers and enlisted personnel will serve long enough to qualify for non-disability pension benefits. A mid-level army officer who is passed over for promotion and leaves the service after, say, 12 years is not eligible for pension benefits.
The vast majority of those who do stay long enough to receive them become quite well off. When National Journal magazine analyzed Census Bureau data in 1982, it found that the wealthiest fifth of all U.S. households receives more than 60 percent of all military retirement benefits. And 83 percent of all benefits are paid to the wealthiest 40 percent. Further, the National Journal data showed that the bottom fifth of households received only 2 percent of the military pension benefits.
The data also show that persons in the wealthiest fifth of the population receive more than twice as many federal dollars in military retirement benefits as those in the poorest fifth receive in either Supplemental Security Income benefits or food stamps.
One way of judging the costliness of the military pension system is to ask the question frequently posed by pensions analysts: How much of the payroll is set aside for future pension benefits? Big private companies traditionally set aside 8-10 percent of their payrolls for this purpose. This rises to 15 percent in especially generous plans.
Now look at what happens in the military field. By the Defense Department's own calculations, an amount equal to 51 percent of the basic pay of every new member of the armed forces on active service (or 36 percent of all compensation when housing and other allowances are included) is set aside to cover his or her future pension costs.
The most serious charge against the system, however, is that it runs counter to the manpower needs of a modern, technologically-sophisticated military system that depends on highly-skilled personnel. The system encourages early and premature retirements, thereby stripping the armed forces of some of their most highly trained and experienced personnel. There is already incentive for skilled technical personnel to take high-paying jobs outside the military. The demand for nuclear engineers, computer specialists, and aviation personnel is strong in private industry and will remain so for some time. With indexed military retirement benefits available after 20 years without any actuarial reduction for retirement at a young age, skilled persons are almost always financially better off leaving the military.
As the United States continues to modernize its military forces, skilled personnel will be at a premium. An armed services that spends considerable resources training its employees to operate and service complicated hardware cannot afford a retirement system that provides strong incentives for personnel to leave just when peak performance is being attained.
As the Ford administration's Defense Manpower Commission observed: " . . . . the high cost of specialized training and the importance of skills and insights developed only through experience have made forced turnover through early retirement an expensive and disruptive practice for many military occupations."
The "revolving door" of top military officers entering defense industries after retirement provides a dramatic example of the retirement system at work.
According to Defense Department data, approximately 1,960 officers retiring in 1983 with the rank of major/lieutenant commander or above began working for companies contracting with the Department of Defense. This figure represents 29 percent of all officers of equivalent rank who retired that year.
Thus, in many cases, the government indirectly pays the salaries of former military men and women (through defense contracts), while simultaneously providing them with substantial military pensions.
As Sylvester Schieber, an economist who has worked extensively on pension matters, has noted: "(These retired officers) go to work for firms that take advantage of a pool of highly-trained workers at the peak of their career productivity. You don't see Boeing, McDonnell Douglas, TRW or similar firms retiring their 40-year-old workers."
The present military pension system is a legacy of a bygone era.
It was first enacted by Congress in 1861, when it became evident that the armed forces had too many older officers who were ill-equipped to lead troops to battle, and Congress wanted to make space for new blood.
After the war, pensions were useful in reducing the armed forces to peacetime levels.
In 1885, military pensions were extended for the first time to Army and Marine enlistees, but Congress limited the number of officers who could receive pensions to 7 percent of active strength.
Pensions were used by the Navy in the middle of World War I to replace older and less able officers with younger, more able- bodied men. In 1916, Congress established a system of selection boards to promote Naval officers into the senior ranks, while also providing for pensioned retirement for those officers not selected for promotion. At this point, the retirement system for the Navy already bore a strong resemblance to the military retirement system that exists today.
By 1938, because of the large increase in the number of naval officers as a result of World War I, promotion stagnation was once again a problem, and Congress passed a new law authorizing retirement with a pension after 20 years of service, at the discretion of the President. The Officer Personnel Act of 1947 and the Army and Air Force Vitalization Act of 1948 extended these provisions to all of the armed services. This helped thin officer ranks swollen during World War II.
In 1963, Congress voted to index benefits to the cost of living. This was a decade before Social Security was so indexed.
Thus, the steady liberalization of the pension system grew out of the need to replace older officers with younger, more physically- able ones, and to thin out senior ranks to make way for the promotion of younger officers.
Today, circumstances have changed. With the senior officer ranks increasingly in need of highly-skilled and experienced personnel -- and less in need of youthful officers who can lead troops in battle -- the military retirement system is in need of major alteration.
Since taking office, the Reagan administration has proposed deep reductions in most entitlement programs. But aside from some minor steps that have reduced the cost of the military pension system by less than four percent from what it would have been without any changes, the basic structure of that program remains unchanged.
The military pension "cuts" compare, for example, with cuts of 29 percent in child nutrition programs, even though those programs cost less than one-fourth of military pensions.
Most striking in the administration's fiscal 1986 budget is the contrast between the relatively mild treatment proposed for military retirement and the harsher treatment proposed for Civil Service retirement. As part of a government-wide freeze on most cost-of-living adjustments, the budget proposes a one-year freeze on military and Civil Service retirement benefits. But while this is the sole change in military retirement, Civil Service retirement would be subject to deep additional cuts.
The budget proposes to limit future cost- of-living adjustments for all Civil Service retirees, beyond 1986. And retirees receiving pensions of more than $10,000 a year would receive only 55 percent of the cost-of- living adjustment.
In addition, there would be substantial reductions for those retiring early. Eventually, civil servants retiring at age 55 would have their pensions cut in half for the rest of their lives. The administration says this will discourage early retirement by still useful government workers. Yet the median Civil Service retirement age is 58 -- 17 years above the military median.
The Grace Commission recommendations called for reduced federal military retirement benefits for those who have less than 30 years of service or who are under 62 and working at a civilian job. But Defense Secretary Caspar Weinberger rejected the Grace proposals.
Since the commission published its findings, the Pentagon's own Quadrennial Review of Military Compensation has also called for reforms and cost reductions in the military retirement system, though these suggestions are less sweeping.
The Quadrennial Review's report aroused bitter opposition in the Pentagon. Every member of the Joint Chiefs of Staff declined to concur in the report.
This shows how difficult it is to achieve even modest changes in military retirement.
Opponents of change rely heavily on two arguments. One is that the quality of America's military depends on youthful leadership and ample promotion opportunities, both of which depend on a pension system encouraging early retirement. Second, military personnel should be compensated and rewarded for the sacrifices they are called on to make.
Neither argument is persuasive. The need for youthful officers at the peak of their physical prowess has become increasingly less important as the military has grown technologically more sophisticated. In 1978, the General Accounting Office found that 92 percent of the service careers of the enlistees and 66 percent of the service careers of the officers had been spent in non-combatant duties. GAO also noted that 81 percent of the enlistees had never been assigned to combat-related duties during their entire careers.
While some non-combat tasks may also be physically demanding, the GAO figures strongly indicate that the military retirement structure is now out of touch with the realities of service in the modern military. Indeed, in a November 1982 article in the Air Force Times, Gen. John W. Vessey Jr., Chairman of the Joint Chiefs of Staff, stated that the "changing nature of warfare may justify changes in military retirement . . . I guess the problem is not so much forcing people out at 20 as it is finding a way to keep those people who should stay beyond 20 years."
Only a minority of military men and women undergo the hardships of combat-related activities. Those who expose themselves to these risks receive hazardous duty pay. If greater compensation is needed for hardships experienced in the armed forces, then personnel who engage in onerous duties could be provided with further pay incentives and benefits during their time of service.
Supporters of the current military retirement program also contend that the system is needed to attract personnel into the armed services. Surveys of first time enlistees, however, indicate that the military retirement system is low on the list of reasons cited by recruits for joining. Moreover, if the retirement system were truly a strong enlistment incentive, then more than the current 13 percent of those recruited would remain in service long enough to qualify for the benefits. If nearly seven of every eight recruits never receive any retirement pay, the pension system cannot be a major recruitment tool.
Also, while active duty pay may have been low compared with that in the private sector when the military retirement system was being developed, it is no longer the case. The military has now achieved an active duty pay level comparable to that of the private sector, according to the Grace report.
The need to reform the military retirement system thus seems clear. If Congress and the administration summoned the will to take on this task, there is no shortage of ways in which this could be done.
* The military retirement system should be a retirement system that provides a measure of economic security primarily for members of the armed services who are no longer gainfully employed.
* Its benefit structure should be modified so that it is not so far out of line with good private sector pensions.
* Modifications in the retirement system should remove the incentives for skilled personnel in their late 30's or early 40's to leave the military just when they are reaching their peak levels of performance.
* Finally, the increasing current and future costs of the military retirement system need to be restrained.
Efforts in the past several years to reduce the cost of federal entitlement programs have focused largely on ones that are not nearly as expensive as military retirement, and that assist a much needier part of the population. Reform of the military retirement program can reduce the inequities of recent budgetary policies, contribute to trimming the federal deficit, and strengthen our military readiness at the same time.