Obama's Deficit-Reduction Plan Takes Aim at Military Retirement System

While President Obama's newly unveiled deficit-reduction plan has drawn much attention -- and criticism -- for targeting the wealthiest Americans with new taxes, it also aims to overhaul the retirement benefits for U.S. military members.

Just weeks after the Pentagon proposed scrapping the military's traditional pension program, Obama released a plan Monday that calls for reexamining the retirement system that "provides generous benefits to the relatively few members who stay at least 20 years and no benefits for the roughly 80 percent of servicemembers who stay less than 20 years."

The document says the system "was designed for a different era of work, and is now out of line with most other government or private retirement plans."

Under Obama’s proposal, a commission would be established to review the system in similar fashion to the 2005 Base Realignment and Closure Commissions (BRAC). The Pentagon would make recommendations to the commission, which could then make changes to them. The commission would then send the proposals to the president, who would decide whether to forward them to Congress. Congress would get to decide whether to approve or reject the recommendations but may not offer any changes.

"The administration believes that any major military retirement reforms should include grandfathering provisions that ensure that the country does not break faith with military personnel now serving, including those serving in Afghanistan and Iraq," the document reads.

The proposal is part of Obama's plan to slash federal deficits by more than $3 trillion. The plan calls for raising $1.5 trillion in new revenue -- half of which comes from the expiration of the Bush tax cuts on the wealthiest Americans. The other half would come from new taxes on upper-income households and ending tax breaks for larger corporations. The plan would also cut Medicare and Medicaid by $580 billion.

Last month, the Pentagon proposed replacing the military's pension system with a 401(k)-style contribution program. Under the Defense Business Board plan, all troops would receive yearly retirement contributions if they served at least 20 years -- a stipulation of the existing system. The money, however, would not vest until service reached at least three to five years and would then be payable at retirement age. If personnel left before that three-to five-year mark, the time served would be rolled over into Social Security.

The central feature of the new DBB proposal would be a mandatory "Uniformed Military Personnel Thrift Savings Plan (TSP)" in which the contributions by the Department of Defense and the individual service member would be deposited. There is already a TSP program in operation, established by Congress in 1986 for both federal employees and service personnel. But those TSPs are voluntary and only include employee contributions.

The new TSPs -- functioning as a 401(k)-style account -- could include a government contribution amounting to as much as 16.5 percent of the member's annual pay, as well as a maximum annual tax-deferred contribution limit of $16,500 by members. In addition, there is a $5,500 annual tax-deferred "Catch-up Contribution" for service people age 50 or older, and adjustments for those serving in a combat zone. The proposed DBB retirement program would not impact disabled veterans or current retirees.

Under the existing Defense Department pension system, personnel with at least 20 years of active service can retire with a lifetime annuity of 50 percent of their highest average salary from their last 36 months of employment. According to the DBB, the new TSPs would function much like the current voluntary TSPs for federal employees.

The Pentagon made the proposal as it searches for $400 billion in cuts. But critics of the plan say it will hurt military recruiting as the best candidates will be less likely to launch a military career.

Defense Secretary Leon Panetta has said that if the retirement benefits are changed, "you have to do it in a way that doesn't break faith with the military." He also said that the Pentagon would have to grandfather in current benefits.

The president's proposal doesn't go into details of what kind of reform or retirement savings program would be created. But it does propose greater contributions from military members and veterans into the federal health care program called TRICARE for Life.

"The administration is proposing to introduce modest annual fees for the TFL program, beginning with a $200 annual fee in 2013. The fee then would increase to align with the modest increase in the fees under the regular TRICARE program for individuals under age 65 that was proposed in
the president's 2012 budget. This proposal is estimated to save approximately $6.7 billion
in mandatory spending over 10 years," the president's deficit reduction proposal reads.

Likewise, the proposal calls for retirees and active duty family members to contribute more to their prescription drug coverage, generating $20 billion in savings over 10 years, the administration says.

Rep. Buck McKeon, chairman of the House Armed Services Committee, told Fox News that U.S. troops are expressing concern to him about possible changes in the retirement system.

"Our troops that go outside the line over in Afghanistan every day should not be having to think about what their retirement is going to be, what their pension is going to be," said McKeon, R-Calif. "Are they going to be able to stay in the military, the problems they're having and effect this is having on their families? That is not fair."