The Existent Retirement System for the Defense Sector - Research Paper Example

PROS AND CONS OF THE NEW MILITARY RETIREMENT SYSTEM IN US The objective of this paper is to study the evolution of the military retirement system from earlier times to the present period. This paper further elaborates on the current schemes under the military retirement schemes, with special focus on the advantages and disadvantages of the present system of compensation, benefits, and rewards for military retirees. Retirement from services is the common end to all professions, whether in financial services, educational services, government jobs, or jobs in the defense sector. However, the provisions and procedure of retirement varies from sector to sector and across time periods. The retirement policies followed in the military system, too, has varied greatly with the passage of time. There are large differences between the retirement policies followed by the military in earlier times and the ones practiced in the 20th century. The greatest attraction of a strenuous military career has always been the benefits and incentives offered on retirement. Since the earlier periods, through the World War II era to the current times, dialogues have been exchanged on the subject of reform of the military retirement schemes. The primary focus of all these meetings and discussions was to reduce the government expenditure on the military system, by reducing the monetary compensation paid to the retirees. However, it is interesting to observe “that of the dozens of study groups, commissions, committees, boards, task forces, and the like that have recommended making major structural cuts, only one such has been enacted into law, in 1986 -- and that was essentially repealed (i.e., its cuts made voluntary) in 1999, seven years before it would become effective”. (Goldich, 2011) This statement itself says a lot about the importance of the defence forces and the trends observed in the reform or more precisely, cutbacks in expenditure accruing to the military retirement system, through ages. There are provisions of monthly compensation, incentives and benefits for all retirees. Apart from the retirees who had had an active military career, the disabled retirees as well as the kin of the deceased retirees receive the same amenities after retirement. The retirement allowance of the active military personell is based on the longevity of their services. Usually, after 20 years of services a person is allowed to retire and enjoy pensions and benefits. The retirement decision of the disabled retirees, on the other hand, may depend on the longevity of service or the degree of disability suffered. The monthly annuity of retirees is calculated on the basis of Cost-Of-Living-Allowances (COLA), which ensures that their income is guaranteed against inflationary trends. These monetary benefits are accompanied by some non-monetary benefits “which include exchange and commissary privileges, medical care through TRICARE, and access to Morale, Welfare and Recreation facilities and programs” (Henning, 2008) The old discussions on the reformation of these provisions have continued in recent times as well and their objectives have remained much the same, i.e. a reduction in government expenditure. This paper will, now, study in detail the advantages and disadvantages of the current military retirement system. Advantages of the new Military Retirement System: Monetary Benefits: The present system of military retirement is divided into three categories of compensation. They can be described as follows. For the people who have entered the services before 8th September, 1980, the monthly annuity will be calculated over the basic pay. This is referred to as the System 1. For the people who have entered the services during the period of 8th September, 1980 to 31st July, 1986, the monthly income will be the average of the highest income in three years. This system is called System 2 or High 3. Lastly, those who entered the services on or after the date of 1st August, 1986, have the right to choose between the High-3 system and the REDUX system (the system followed for people entering services after 1st August, 1986. Apart from these, they are also eligible to receive a sum of $30,000 as Career Status Bonus. The compensation offered in all these schemes is extremely generous and a military person can enjoy an income ranging between 2.5%-75% of basic pay (depending on the longevity of the service term), after retirement. (Belknap and Marty, 2007, p.286) There are also some tax considerations and exemptions that may be enjoyed by the retired employees of the defense sector. Even though income tax is imposed over the compensation of retirees, they are exempted from the payment of social security taxes. In some states, there may also be a provision of exemption from payment of income tax, for military retirees. These tax benefits add to the already hefty amount of military pensions. (Belknap and Marty, 2007, p.296) As mentioned earlier, the monthly payment to retirees are calculated on the basis of Cost-of-Living-Allowances. This method of calculation is constructed on the basis of Consumer Price Index (CPI) which is a measure of the level of inflation in the economy. So, discounting for this factor keeps the pension of military men insured against the wanton movements of inflationary forces. As a result, a rising inflation rate has no effect, whatsoever, on the income and consumption levels of retired military individuals. These retired defense employees may also have accumulated some amount of savings for the future schemes and policies under the defense sector. (Belknap and Marty, 2007, p.287) The Thrift Savings Plan is one such plan of savings for the people engaged in the defense sector. (Sullivan, 2006, p.413) In case of disability retirement, the retiree enjoys the benefit of getting both disability compensation as well as the regular compensation guaranteed under any of the three schemes. In addition to this, if the disability incurred is of a temporary nature, within a period of 5 years he/she may be re-absorbed in the defense sector, at his/her previous rank of employment. (Belknap and Marty, 2007, p.287) Non-Monetary Benefits: There are a number of non-monetary benefits enjoyed by the military retirees like the Survivor Benefit Program (SBP), TRICARE and other pharmacy benefits. The SBP is a special insurance policy formulated for the employees in the defense sector. Through this arrangement, the survivors of a deceased military person get a monthly income that has been adjusted against inflation. This income is calculated on the base pay and comprises of 55% of base pay. For an active defense member, the privileges from this scheme may be enjoyed at zero cost. (Belknap and Marty, 2007, p.289) A military retiree may continue enjoying the healthcare services available under the TRICARE Program, at a minimum of extra costs. There are three plans available in this program; the Prime Plan, the Extra Plan and the Standard Plan, among which any one can be chosen. The healthcare services under this program extend to the spouse, children, and other dependents of military retirees. (Belknap and Marty, 2007, p.294) Along with these two programs a number of other pharmacy benefits are enjoyed by ex-military men. They may be provided with some medicines that are available in limited supply at no extra cost or they may be eligible for free treatment and check-ups at certain hospitals and healthcare units, maintained by the military. (Belknap and Marty, 2007, p.294) Disadvantages of the new Military Retirement System: The advantages of the military compensation schemes for retirees are creating counter disadvantages for the civilian population, the society, and the government. These costs are as high as the benefits from these policies. The most obvious disadvantage of all military retirement schemes, in general and of the current military retirement system followed, in particular, is the rise in the income inequality in the society. There is a wide gap between the monetary rewards and benefits guaranteed in the pension schemes of the civilian sectors and the ones under the defense sector. This may be due to the fact that the general level of wages in defense is much higher than the private or other public sector industries. Anybody who completes 20-25 years of services enjoys a pay hike of 50% and for the ones who continue serving for 35 years, this figure is 87.5%. This kind of pay-structure is clearly biased and unfair, as it discriminates against the people who are not employed in the defense sector. This is true in spite of the fact that the people engaged in the civilian sector, may be more skilled and efficient in their respective fields than military recruits. (Team Lally, 2011) The inequality of income caused due to the different policies of pensions followed in the defense and the civilian sector has grave implications for the society as a whole. As income differentials rise, social tensions are aggravated between the affluent classes and the deprived classes. In the long run, it may result in communal riots and attacks. This is a great threat to security and may cause law and order issues. One of the greatest disadvantages of the extravagant military retirement system is the financial pressure it imposes on the government. The huge resources that go into paying pensions and benefits to military retirees could be better allocated for development of infrastructure, education, welfare activities, and other civilian projects. This is all the more troubling because the majority of the military men who receive retirement benefits are relatively young and capable of working. Research showed that only 12.2 percent of people who received military retirement benefits were below the age of 65 years of age. (Rich and Baum, 1984, p.108) Since the goal of a pension policy is to provide economic aid to the old and disabled, this practice cannot be justified. Combined with this, the fact that the military contributes nothing to the revenues of the government, adds to the existing financial burden of the government. Proposed military retirement plan A new military retirement plan is being made by a task force of Pentagon so as to bring about a change in the traditional pension plan. Unambiguously it can be said that the main objective of the new proposed plan is to bring cost effectiveness to the government. Under the new plan, benefits would accrue to all troops and it would “phase out the 20 year cliff vesting system” which was there all these years to define careers in the US military. The new plan’s benefits are of the style which is found in the corporates. The crux of the new proposed plan lies in the fact that money would be contributed in the savings account of the retiring troops instead of the pensions which were given earlier. This change would certainly have an effect on the current troops. Yearly contributions would be distributed to all troops. This is applicable for the troops irrespective of the duration of their stay (that is for 20 years). The money that would be given to the troops can amount to around 16.5 percent of the person’s “annual pay”. This money in turn would be deposited in the “Thrift Savings Plan”. It is a compulsory version of the “401(k) style account” which still exists in the army. The proposed plan intends to vary the amount of the contributions to those troops, who accept difficult assignments, yields to high demanding jobs or deploys frequently in the form of higher monetary payment. Just like the corporate sector the military plans to introduce increased monetary payment as an incentive to get services from their troops. This proposed cost saving technique by the Defense Business Board was released on July 21st. This proposed plan would certainly be one of the biggest military changes if approved by the Congress. According to Richard Spencer, previous finance executive and Marine Corps pilot, the present system is “unfair, unaffordable, and inflexible”. He feels that the alternate system would enable the member to have better planned out retirement. He build his assets in such a way so as to have a flexible “lifestyle or desires”. However there is a doubt about the fact that whether the troops can access the money deposited in the account with immediate effect or will it be withheld either partially or completely till retirement time. Under the current system troops were not allowed withdrawal of money until they reach the age of 59 1/2. If money is withdrawn there is penalty except under special provisions. Spencer supports the proposed plan on grounds of it being not only cost saving for the Pentagon but also on grounds of fairness. He argues that benefits would accrue to almost 83% of the troops even if they leave services before reaching 20 years. Spencer had further pointed out that such a policy has been proposed as cost of military has increased over the years and if not checked it would “undermine future war-fighting capabilities”. However the proposed plan will not affect the existing retirees or the immobilized veterans (Tilghman, 2011). The proposed plan would save a lot of US government’s money over a span of 20 years but the soldiers are indeed skeptical about the benefits of the plan. Conclusion: A brief study of the existent retirement system for the defense sector reveals its differences with the civilian sector, in terms of provision of monetary and non-monetary benefits. Plus, the increasing economic pressure on the government due to the payment of pensions to ex-military personnel cannot be ignored. However, it is also true that the forces that provide security and defense to countries and states by risking their lives deserve to be rewarded more handsomely than the rest. On those lines, the current extravagancy in the military retirement system is fair and justified. References: 1. Belknap, M.H. and Marty, F.M. (2007). Armed Forces Guide to Personal Financial Planning. USA: Stackpole Books. 2. Goldich, R.L. (2011), Military Retirement Reform and Social Class in America, Foreign Policy, retrieved on September 14, 2011 from: http://ricks.foreignpolicy.com/posts/2011/09/06/a_few_words_about_military_retirement_reform_and_social_class_in_america 3. Henning, C.A. (2008). Military Retirement: Background and Recent Developments. USA: Congressional Research Service. 4. Rich, B.M. and Baum, M. (1984). The Aging, a Guide to Public Policy. London: Feffers and Simons Inc. 5. Sullivan, M.E. (2006). The Military Divorce Handbook. USA: ABA Publishing. 6. Team Lally (2011), Modernizing the Military Retirement System, Hawaii at Home, retrieved on September 14, 2011 from: http://www.hawaiiathome.com/uncategorized/modernizing-the-military-retirement-system/ 7. Tilghman, A. (2011), DoD panel calls for radical retirement overhaul. Airforcetimes, retrieved on September 20, 2011, from: http://www.airforcetimes.com/news/2011/07/military-dod-panel-calls-for-radical-retirement-overhaul-072511/ Read More