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Gates tosses military pay, benefits into risk pool

Defense Secretary Robert Gates last week delivered his "last major policy speech" and, in it, suggested politicians show courage in the fiscal crisis by making the military compensation system more efficient.

Gates has the department preparing such a set of recommendations to be part of a $400 billion defense savings package over the next 12 years.

Specifically he criticized a "one-size-fits-all approach" to basic pay and retirement, suggesting "tiered and targeted" methods could cost less but pay more to service members in "high demand and dangerous specialties."

He implied pay levels overall are set too high as evidenced by the services' continuous ability to meet recruiting and retention targets, except for the Army and only "during the worst years of Iraq."

Gates again asked that Tricare fees be raised, particularly for working-age retirees. And he eyes replacing the all-or-nothing 20-year retirement plan with a more flexible system that would allow earlier vesting in benefits but also encourage more members to serve longer careers.

Some of these ideas are decades old. Over the past 40 years other defense secretaries have made similar or even more unpopular proclamations to curb military benefits, from closing discount stores on base to ending tax-free allowances and shifting the military to fully taxable salaries.

Gates had softened some of the impact of his remarks to the conservative think-tank American Enterprise Institute on May 24 by reassuring Marines at Camp Lejeune just weeks earlier that any change to retirement should not affect the current force.

The reality is that sharp changes to pay or benefits typically don't occur as a result of policy speeches or even in-depth studies written over months by commissions created for that task. Dramatic changes usually occur during fiscal emergencies, real or perceived.

The House Armed Services Committee, for example, thought it necessary in 1984-85 to move military retirement to an accrual accounting system to ensure funding of benefits to future members stopped encroaching on money for other defense programs. The plan, called Redux, was eventually repealed.

Redux was fruit of a crisis tied to rising retirement obligations. The current debt crisis is far more threatening. Total national debt is nearing $15 trillion. Unless the debt ceiling is raised by Aug. 2, the U.S. Treasury said it will default on some obligations, likely triggering a worldwide financial crisis.

Republicans vow not to raise the ceiling unless an agreement is reached with the White House to cut federal spending deeply, to include Medicare and other prized entitlements. Vice President Joe Biden is hosting closed-door meetings with Republicans and Democrats. He promises to bring forth at least $1 trillion in spending cuts over the next 10 years.

It's during such closed-door deals that popular programs, even military benefits, can become tempting targets. Gates' remarks suggest that military compensation be part of planned defense cuts, saying excess dollars going today into compensation can be diverted over time to help replace aging fleets of aircraft, ships, submarines and land warfare vehicles.

Benefit cuts that impact current members and families in wartime could be seen as unfair. But lawmakers negotiating with Biden have plenty of other options from among recommendations made late last year by separate debt-reduction panels.

A task force co-chaired by former Sen. Pete Domenici and economist Alice Rivlin proposed a cheaper military retirement plan, which could be targeted to future members only. It would provide some retired pay at age 60 for those with as few as 10 years' service. But it would end the tradition of paying an immediate annuity after only 20 years.

The National Commission on Fiscal Responsibility and Reform, co-chaired by Alan Simpson and Erskine Bowles, recommended a study of structural changes to federal retirement plans. One idea floated is to defer cost-of-living adjustments until age 62, when a one-time catch-up raise would restore lost inflation protection.

Perhaps the ripest fruit for those arguing federal entitlements are unsustainable is adoption of a modified Consumer Price Index that would shave annual cost-of-living adjustments. Both deficit reduction panels endorsed it.

The revised index is a "chain-weighted" CPI. The Bureau of Labor Statistic created it in 2002 to address criticism of "substitution bias" in other price indexes. The idea behind the revised CPI is that, as prices rise, people actually change behavior and buy cheaper items. Yet the CPI used to adjust federal entitlements assumes consumers buy the same items month after month regardless of price.

Shifting to the new CPI would curb entitlement spending, on average, by .25 percentage points a year. Yet by one estimate the savings could total $300 billion over the next decade, at least half from Social Security benefits.

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