Senate Defense Bill: The Good, The Bad and The Ugly

The Fiscal Year (FY) 2016 National Defense Authorization Act (NDAA)?recently passed through the Senate Armed Services Committee but now stalled on the Senate floor by a Democratic filibuster?presents a mixed bag of good ideas, bad omissions and a truly ugly gimmick.

The Good

The NDAA includes several meaningful improvements to military retirement benefits, which closely follow a set of recommendations put forth by the Military Compensation and Retirement Modernization Commission, a congressionally established panel tasked with developing reforms. (We detailed those proposals in a previous blog post, and published an analysis, together with the American Enterprise Institute, on the challenges associated with rising military personnel and retirement costs.)

Currently, just 17 percent of service members leave the military with retirement benefits, as the system is generally restricted to those with at least 20 years of service. This bill would strengthen retirement security by extending access to around 75 percent of active duty service members.

The broad set of reforms in the NDAA includes several provisions that were endorsed by the commission:

• Matching and automatic contributions to the Thrift Savings Plan (TSP)?the military’s (and federal civilian employees’) defined contribution retirement program. For the first time, active duty service members would be auto-enrolled into TSP, with the government providing an automatic contribution equal to 1 percent of basic pay after six months of service, plus dollar-for-dollar matching contributions for up to 5 percent of basic pay contributed by those with between two and 20 years of service. (After 20 years of service, additional service member contributions would no longer be matched.)
• A mid-career bonus for service members with 12 years of service who commit to an additional four years. The bonus would be equal to 2.5 times one’s monthly base salary.
• Increased flexibility through a lump-sum payout option. Currently, individuals with at least 20 years of service immediately begin receiving an annuity upon retirement, which can be as early as age 38. The proposed legislation would change this system by allowing beneficiaries to receive working-age retirement benefits as a lump sum. This means that the present value of any scheduled payments between a beneficiary’s military retirement and their Social Security Full Retirement Age could be collected all at once. Upon reaching Social Security Full Retirement Age, the monthly benefit would resume, which would help to protect beneficiaries against longevity risk. Since most military retirees qualify for benefits at relatively young ages and are likely to continue working in a different capacity for many years, this lump-sum payout option could be attractive for individuals who want to start a business in retirement, purchase or build a home, or pay for their children’s college.
• Small reductions in the defined benefit pension offered to career service members through changes in the defined benefit formula. Individuals with over 20 years of service would see their defined benefit pension accruals slightly reduced, from a 2.5-percent multiplier to a 2-percent multiplier (times years of service times pre-retirement base pay). The impact of this reduction would largely be offset by the increase in TSP matching. In fact, beneficiaries could see their total retirement benefit increase due to the higher potential rate of return on the TSP, which can be invested in a mix of stocks and bonds.

These reforms would apply to new service members beginning January 1, 2018. Service members who join before that date would have the option to remain in the existing system or switch to the new benefit structure.

We hope to see more progress on these reforms in the coming days, as they represent a big step forward in boosting retirement security for military service members. These common sense changes would expand participation in and contributions to a retirement plan for the vast majority of service members who have been chronically boxed out of the system.

The Bad

The commission recommended reforms to other aspects of service member compensation, such as health care and commissary benefits, which unfortunately are not addressed in the Senate version of the NDAA.

The Ugly

Determined to avoid dangerously low defense spending levels, Republicans resorted to a gimmick, utilizing the Overseas Contingency Operation (OCO) fund. Since the FY 2016 sequester caps in current law don’t apply to OCO spending, the Senate Armed Services Committee stuffed $38 billion into that account?funds that would normally be in the base bill. That legerdemain allows the Pentagon to use the money in creative ways, circumventing sequester caps. President Obama has threatened a veto of the bill, but unless Democratic objections dissolve, the bill may not get to him anytime soon.

The NDAA is critical to national security. Thus, despite these troubling shortcomings, Congress should pass the bill, with the significant reforms to military retirement retained and the other issues sorted out expeditiously, either via amendment or in conference.