This is a guest contribution from Mr. Z. Mr. Z is the pseudonym for a career strategist at the Department of Defense and an active duty O6.
When General Motors and Chrysler went bankrupt in 2009, it became evident that the United Auto Workers’ (UAW) “chickens had come home to roost.” With the average UAW worker in a Chrysler assembly plant making an astounding $151,720 per year in wages and benefits and their union brethren at General Motors making $146,520 per year, it is no wonder the American auto-industry flat-lined before it was resuscitated with taxpayer dollars. Unfortunately, the military is facing a similar fate.
Take a hypothetical Colonel working at the Pentagon as an example. With 21 years of service Colonel Jane Doe earns $8,796 per month in base salary, which is not too shabby for a 43-year-old American. With a spouse and two kids, Colonel Doe also receives $2,949 per month in untaxed housing allowances. Her Basic Allowance for Subsistence—grocery money—is an additional $223 per month. The military healthcare benefits Colonel Doe and her family receive are worth an estimated $7,681 per person each year according to the Kaiser Family Foundation. For the Doe family, this adds up to $30,724 in annual healthcare benefits. In total, Colonel Doe receives $174,340 in annual pay and benefits. If you include the value of her pension and retiree healthcare, that figure increases by between $55,000 and $70,000—depending on how long Colonel and Mr. Doe live in retirement.
Let’s say Colonel Doe remains on active duty for 30 years. Upon retirement at the age of 52, she will receive a pension for the remainder of her life—about 25 years—that is 75% of her base pay. In 2010, that equals a monthly pension of $7,350. Colonel and Mr. Doe (Ret.) are also likely to sign up for Tricare Prime’s health plan, which has an annual premium of $460. And, if Colonel Doe is smart, she’ll take a job—similar to what she did on active duty—as a civil servant or with a government contractor making close to what she made before retiring. Rather than bringing home a paltry $174,340 per year, Colonel Doe will make “real money” between her government pension and contracting job.
Had Jane Doe enlisted out of high school instead of attending college, Master Sergeant (E7) Doe would receive $4,262 in monthly base pay (22 years of service), $2,337 in a monthly housing allowance, $323 for groceries, and similar healthcare benefits. Upon retirement after 30 years of service, Master Sergeant Doe’s pension would be approximately $4500 per month. She too would sign up for Tricare Prime and pay $460 per year for health insurance.
Admittedly, Jane Doe didn’t start out making well over $100K per year. The Defense Business Board estimates the average cost of a military member at $80,004 per year. Thankfully the military is made up mostly of junior enlisted personnel who leave the service well before they are eligible for a pension. There are, however, 1.9 million military retirees receiving an average of $47,000 per year in pension payments. This does not include their healthcare benefits.
And, just as was true for the pre-bankruptcy auto industry, there are more military retirees than soldiers, sailors, airmen, and marines on active duty. While it may be unpleasant to hear, the system is unsustainable. The military may very well collapse under its own personnel costs. In part, reform has stalled because any voice that questions military pay and benefits is tarred and feathered as unpatriotic.
There is, however, good news. Six reforms will go a long way in slowing the coming collapse.
- First, transform the military retirement system for new service members from a defined benefit pension plan to the nation’s best 403B. With military members already participating in the Thrift Savings Plan replacing the defined benefit pension with a generous government contribution to a member’s 403B is an equitable alternative.
- Second, require retirees pay a fair market rate for health insurance. The average American family spends $13,375 per year in health insurance premiums. The $460 paid by military retirees is too low. A compromise that provides affordable insurance is fair.
- Third, Congress should freeze military base-pay and work toward a compensation system that focuses more money toward those service members who are performing difficult and dangerous duties. Providing the same compensation to a service member who spends a career behind a desk or in the motor pool is patently inequitable. For example, current supplements such as hazardous duty pay should comprise a larger percentage of a potential service member’s compensation package. A one size fits all pay system makes things simpler, but it is costly and does not provide proper compensation to those who take the greatest risks and make the greatest sacrifices.
- Fourth, tax the military’s housing allowance—Basic Allowance for Housing (BAH). It is financial compensation that should be taxed as income. Other Americans do not draw between 25-50% of their monetary compensation in untaxed income—neither should the military.
- Fifth, end cost of living increases for military retirees. The government promised a defined benefit pension that equaled a certain percentage of base pay. That is exactly what each retiree should get. Cost of living allowances are costly and were not part of the original deal.
- Sixth, eliminate remaining subsidies to base commissaries, golf courses, liquor stores, exchanges and other base services or retailers. With military salaries already well above those in the private sector, it is no longer necessary to subsidize these items.
Given the nation’s current fiscal crisis it is time to take a hard look at the pay and benefits of the military and its large cadre of retirees. This article focuses on military pay because it is a sacred cow that draws a visceral reaction when even the faintest hint of circumspection comes to light. Civil servants and contractors, who should also feel the pinch, are much easier targets and have been addressed elsewhere.
While Secretary Gates’ cost cutting efforts are a good start, alone they will not put the Department of Defense on a solid financial footing. Saving the military from the auto industry’s fate will require addressing spiraling personnel costs.