Pentagon Considering Scrapping Traditional Pensions in its Proposed Retirement Program Overhaul

Just weeks after the Pentagon proposed scrapping the military's traditional pension program, President Obama released a plan Monday that calls for reexamining the military retirement system

A Pentagon task force is proposing the largest overhaul of the military retirement system in 50 years that will do away with a traditional pension system, opting instead for a 401(k)-style contribution program.

Under the newly proposed 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.

Members would get to choose once a year how they wanted their money invested. The choice of investments could range from bonds or equities, which would involve mutual funds or a life cycles program for the older military person, and involve the safest and most conservative investments.

There could also be a hybrid program, which would include a combination of cash payouts and equity investments, melding the old system with the new one.

But the TSPs would function as a typical, civilian 401(k), so there would be no extra protection against market fluctuations like we’ve recently seen. And one thing is clear from the DBB’s figures: The returns from the new TSPs would mean less money on the average for service members who currently retire at 20 years, with a 50 percent annuity.

Critics of the plan say it won't attract those who see the benefits of a military career as a safe bet.

“The whole issue here with this plan is about saving money, not maintaining the viability of the force,” Joe Davis, director of public affairs for the Veterans of Foreign Wars, told FoxNews.com.

While Davis acknowledged the DBB plan had its good points -- such as giving people something who don’t stay in for 20 years, and additional compensation for combat and hardship tours – he said the DBB proposal will actually provide a “disincentive” to stay in the service for 20 years unless people get grandfathered into the old system.

“And where will our future military leaders come from if people leave the service early because they’re losing retirement money,” said Davis. “We rely on the veteran service people to train the next generation in the military, so who’s going to do that job?”

Scrapping pensions, something that corporate America has been moving toward for decades, would save the Pentagon money -- at a time when it's being asked to cut at least $400 billion.

Military pay is now higher than the average pay of civilians, with enlisted pay ranking in the top quarter of what high school graduates make and officer pay ranking in the top quarter of what’s paid to college graduates, according to the DBB.

All of this has led to the spiraling Department of Defense retirement costs, which the DBB reports are now 10 times greater for those serving at least 20 years than pensions paid in the private sector. Jack Borsting, dean emeritus of the University of Southern California’s Marshall School of Business, said he likes the new pension plan.

“I like the fact that service personnel get something even if they don’t stay in for 20 years,” Borsting told FoxNews.com.

“And it’s much fairer that people serving in combat zones and on hardship tours are compensated something extra for what they and their families are going through, especially with multiple combat deployments,” he continued.

Borsting also said he likes that the new TSPs will function like 401(k) accounts. “It will give members some say so on how their retirement funds are invested,” he said. However, new participants will mean more long-term costs to the Department of Defense and Borsting said those costs will have to be made up elsewhere. And he thinks it will come from service members who stay in for 20-plus years. “Those folks will lose some money,” Borsting said.

“So the bottom line is the DBB program, as it’s currently outlined, will be good for those serving less than 20 years and not so good for those serving more than 20 years.” And that is where the issue hits home for veterans groups.

Meanwhile, AMVETS Communications Director Joe Agg said his group was adamantly opposed to the DBB plan. “We’re opposed because the DBB plan changes the game on active-duty service people who are relying on the 20-year retirement plan and the promise about retirement they got when they joined up,” said Agg. “Anything that would not protect the current level of benefits, we will fight,” continued Agg.

In recent years, the DBB has offered a number of cost-savings initiatives adopted by the Department of Defense. Whether this proposal for a new military retirement system joins that list remains to be seen.

A source with knowledge of the proposed plan emphasized to FoxNews.com that the plan is only a proposed framework and not a finished program.

“It will be up to the DOD, government leaders and the people,” the source continued, “to determine what level of resources the country wants to allocate to defense and that includes retirement pay.”

Any revisions in the Defense Department retirement program must first pass muster with Congress. Critics say winning them over to the proposed plan would mean clearing up a key issue: whether there would be an immediate changeover for all military personnel or whether it would apply only to new recruits with existing members being grandfathered into the old system.

“Now if they were willing to grandfather all current service people into the old system, we would be willing to look at this matter with fresh eyes,” said Agg.