Leon Panetta says young people who leave the military after a four-year tour “get nothing” under the current system. “Maybe they’re entitled to some retirement.” (Melina Mara/Washington Post)

Less than two months on the job and Defense Secretary Leon E. Panetta has put his foot on a Pentagon third-rail issue by saying he is willing to look at reform of the 100-year-old military retirement system to save money.

A recent example: The first question to Panetta after a recent general talk at the Naval Postgraduate School in Monterey, Calif., was from an officer in the business school. The officer referred to the threatened $600 billion in national security reductions and then asked, “Many of us have seen the Defense Business Board’s recommendation for retirement, what is your stance on the military’s retirement, sir?”

It first drew laughter, then applause, from the audience, according to the Defense Department transcript.

Panetta, a politician and former budget director, did the normal non-response response: “My approach to it has been to say, let’s look at every area to see whether or not we can make the important reforms, et cetera.”

But he got more specific, using the example of young people who join the military and then leave after a four-year tour.

“Right now,” Panetta said, “under the present system, they get nothing. So there is some thought that maybe they’re entitled to some retirement to be able to move those funds to other systems. I think that’s worth looking at.”

Once into the subject, Panetta showed that he understood where he had stepped and quickly added, “My view is we ought not to break faith with those that serve, that serve now and that if there were any changes that were to be made in the future, it would not . . . happen without grandfathering their benefits.”

Former defense secretary Robert M. Gates, who took a few spears for proposing increased retiree payments for health care, only gave passing reference to the need for retirement pay reform. He left it to the Defense Business Board to study this issue and make final recommendations, which Panetta is to receive shortly.

The board, made up of private-sector corporate officials often involved with defense business, does studies and provides advice to the defense secretary. Its findings after studying the military retirement system got far less publicity July 21 than its initial suggestion that the Pentagon adopt a new 401(k)-type plan based on the existing military personnel thrift savings plan.

The board’s findings are rooted in some startling facts. “Military retirement [plans] exceeds levels in the private sector” because they pay retirees immediately after 20 years of service [not waiting to age 60 or 65] at a higher percentage of their annual pay, which “has no comparison in the private sector.”

It calls the retirement plan “unfair” because “83 percent of those who serve will receive no retirement pay,” meaning those who serve five, 10 or 15 years. Risk or combat roles play no part in determining retirement eligibility, except for those who suffer disabling wounds or injuries.

Those in that minority who go for 20 years or more “are endowed with a lifetime benefit.” Perhaps more damning, “most of the troops engaged in combat serve far less than the required 20 years,” with the result that only “12 percent to 13 percent of enlisted troops earn retirement pay.”

Then there are the growing costs. This year the government contribution to the military retirement plan will be $46 billion, which does not include $64.1 billion in unfunded liability for the plan. According to the board, if the system is not changed, “future liability will grow from $1.3 trillion (of which only $385 billion is funded) to $2.7 trillion by fiscal 2034,” and it could be larger as life expectancy increases.

The board states that this retirement plan “was designed for an era when life spans were shorter,” military pay “was not competitive with civilian pay” and second careers for former service members “were rare since military skills did not transition easily to the private sector.”

Today, according to the board, the Defense Department on average “pays retirees 40 years of retirement benefits for 20 years of service.” Because military skills are in demand in the private sector, “second careers are now common for those retiring in their 40s.” As a result, retention by the services of those with 20 years experience “remains difficult — 76 percent leave between years 20 and 25,” according to the board.

The tentative answer, according to the board’s initial presentation, is to expand “the existing Uniformed Military Personnel Thrift Savings Plan (TSP), [where individuals can put aside retirement funds that grow tax free] but with the government providing annual contributions.” There could be a doubled contribution to those in combat or other bonuses for those undertaking high-risk jobs or serving on hardship tours.

As with many private plans, funds would vest after three or five years, be transferable upon leaving the service and be payable at age 60 or 65.

While Panetta insists he has made no decisions, he has clearly been influenced by the board presentation. As he said to Pentagon reporters eight days ago, “The question that is at least legitimate to ask is, ‘Is there a way for those future volunteers to shape this that might give them better protection to be able to have some retirement and take it with them?’ ”

Andrew J. Bacevich, a retired Army officer and military analyst, wrote in The Washington Post on Aug. 22 that the effect of the board’s proposed solution “would be to transform profession into trade, reducing long-serving officers and noncommissioned officers to the status of employees, valued as long as they are needed, expendable when they are not, forgotten the day they leave.”

Noting that the volunteer force “costs a bundle,” Bacevich concedes: “Trimming retirement outlays appears to offer one way to keep that force fiscally viable.”