Military Retirement Plan changes (proposed)...

Lot of talk, lot of fear about changing the military retirement system. Here are a few useful links, my thoughts below.

The proposed Defense Business Board plan is here. It is packaged into 24 very readable slides with assumptions laid out.

A few articles and comments on the proposed plan: predictably the military community is adamantly against reform of the status quo.
Pensions and Investment's website: "Pentagon panel backs change to DC plan for military retirement fund"
NTYs "A Veteran Questions a Proposed Overhaul of Military Pensions"
Loren Thompson of the Lexington Institute's take here and a previous article for the Armed Forces Journal talking about rising personnel costs here.

Quick remarks:
Cheers to the SecDef and leadership for calming fears. They've vocalized that changes would not affect current military members or retirees. Good to know that the rug won't be pulled out from people who have made important and irreversible financial decisions based on the assumption of our current retirement system.

Next, I know that we, military members, consider ourselves the most important people who ever walked the planet, and we are. However one could justify and rationalize just about any compensation and retirement plan when starting from that assumption. Why not pay double what we do now? Don't we deserve it? What about vesting retirement at 100% of base-pay? We make sacrifices for the country, don't we deserve more? At some point, regardless of merit, our defense force could become unaffordable. That would be awful for lots of reasons.

But I start from another point. Our taxpayers are chipping in for a public good that is non-excludable and they have every right to expect our political leaders to negotiate the most effective-least costly defense force possible. Particularly when our military is an all-volunteer force subject to labor market constraints it doesn't make sense to talk of benefits as entitlements. If our soldier and airmen were draftees, forced to do this because of necessity then I'd be more sympathetic to making sure they were more than generously taken care of. But when we left behind the draft we opened ourselves to the free-market. Pay and benefits had to rise greatly in order to recruit new members and military members are much better off today than in 1970. As the DBB points out, both our officer and enlisted corps are very well compensated in comparison to their similarly educated peers, we get free health care, an enhanced GI Bill that nearly completely pays for three years of college, as well as active duty educational benefits, plus a retirement package of at least 50% of base pay and health care for member and family starting at the day of retirement. In short it is expensive to employ one of us and that cost becomes astronomical when one completes 20 years of service. Its not immoral for taxpayers to evaluate what and how we are paid or dial our compensation and benefits down in the future while keeping in mind the sacrifices the military will make in the future.

Some smaller but interesting concerns that the DBB plan addresses.

Why pay out at 20 years when a guy/girl will likely live another 40 years? Why not begin paying the pension at 55 or 60? A man's highest paying years are in the 35-55 range. We are paying retirees on top of what will be their peak earning years. Our system doesn't make sense in any context. And it leads to another problem.

Paying out after 20 years of service creates a powerful incentive to leave at 20. The old saying of "you're only working for half-pay" is true. There are a lot of forces pulling a guy away from military service once he hits 20 years and he takes his human capital with him at his peak earning years. Yes the pension becomes sweeter as a service member accumulates more time in service but it is unclear which is the stronger incentive.

Current retirement system is unfair to those who serve then are forced out. We are going through a reduction in forces phase in the Air Force. Those who get the boot will receive no pension, nothing towards their retirement. Say what you want about those who do one tour and leave with nothing accumulated towards retirement but when we go through troop-reduction phases and people are forced out with no pension and nothing contributed by the military towards retirement our system strikes me as unfair.

Our system is unbalanced against those who take on more dangerous/risky work. The guy who hands out towels in the gym gets paid on the same retirement scale as the Delta Force operator who has fast-roped out of countless helicopters in the middle of the night to assault terrorist compounds. How is that justifiable? Besides the Delta guy is probably leaving the service with multiple injuries. Obviously we could tinker with the current system and change the pension scales to favor those closer to combat/danger. Maybe Congress could vest retirement at 15 years for combat troops or when they hit 20 years they could get 65% base pay.

To be fair, a large change in retirement benefits and/or compensation could hurt recruitment of quality people. There is some merit to that argument but it is really an empirical question. We won't know until the die is cast. However in a no tooth-fairy financially doomed US economy, this might be a trade-off our citizens are willing to accept.

Why I almost tore up my diplomas and went to work for Frito-Lay....

Shortest De Todo blog ever, EVER! I've recently been downloading and listening to Econ Talk by Russ Roberts. There are some fascinating interviews of about one hour in length with some of the most important economists alive. The most recent interview was with a true economist, that is to say someone who actually practices economics instead of studies it. Russ Roberts interviews Brendan O'Donohoe(http://www.econtalk.org/archives/2011/08/odonohoe_on_pot.html), a Frito-Lay mid-upper level manager about supply chain, marketing, competition, theory of the firm, innovation, and on and on. The entire conversation was impressive. Brendan knew everything about his market and basically everything I know about economics. At one point I felt like tearing up my two degrees in economics. Next time I think about needing an MBA, I'm just going to listen to this podcast again and save 100K.

One of the most poignant couple of minutes comes towards the end of the interview. Brendan talks about the tremendous pressure and culture to improve and innovate, despite being the top chip producer in the USA and the World. Competitive economic market pressure leaves Frito-Lay constantly fighting to stay on top by producing more with less, satisfying their customers in new ways, and finding new ways to process information...even though Frito-Lay is the best it never rests on its laurels. Amazing testimony to how capitalism improves our lives seen through a small example of something like chips/snacks.

The contrasts with the military, and really all government actions is so clear. Because we have no internal competitor, no pressure to slash costs, no pressure to do more with less, we are constantly seeking more resources. There is always something more we could buy, more people we could use, more expensive technology we want....in order to do the mission. While Frito-Lay is figuring out how to maximize production and minimize costs, the military and the rest of the government do not have that later restraint. Instead we are only seeking to do the mission, maximize mission effectiveness, maximize security. We will take and ask for any and all resources available, regardless if the marginal benefit exceeds the marginal cost.