- Tom Philpott
- Posted On
Military Update: Services stung by surprise pop in retirement costs
The Department of Defense’s Board of Actuaries in late July overhauled the assumptions used to calculate what the services must budget for annually to cover future retirement obligations to the current force.
It acted on analyses from the DoD Office of the Actuary which, for the first time, weighed the effects on retirement costs of Post-9/11 developments including nine years of sustained operations, a deep economic recession and growth in military entitlements of retirees and survivors.
The result is an $800 million jump in accrual retirement costs the Army, Navy, Air Force and Marine Corps have to pay starting 2012 because more service members are staying until retirement.
Some of that cost too is a projected 40 percent increase in disability retirements, the result of a crackdown on the low-balling of disability awards by service through stricter compliance with rating practices of the Department of Veterans Affairs.
Another $200 million in added yearly retirement costs is attributed to retirees living longer. Death rates are falling – and sharply.
“The improvement that military retirees are seeing in their own mortality is just phenomenal,” said Peter Rossi, one of DoD actuaries that worked on revising projected retirement costs.
Retiree deaths are “decreasing at such a rapid rate – faster than the American public, faster than anyone else – we are seeing a 2-plus percent a year change for active, reserve. It’s everybody.”
Deaths for non-disabled retirees in 2008-09 were 8 percent lower than found for non-disabled retirees in 2004-2005. For retired reservists, data showed a 4 percent drop.
No cause has been identified, Rossi added. “Maybe military folks are just in better shape.”
The changes in actuarial assumptions reportedly surprised Under Secretary of Defense Robert Hale, the DoD comptroller, who already was under considerable pressure to curb the services’ soaring personnel costs.
“The comptroller was not pleased,” said one official. “He now had to go out and find [$1 billion] when Defense Secretary [Robert] Gates is telling him he needs to save money. That was a contentious issue for a while.”
The retention rate of careerist is so high that in the 2012 budget to be delivered to Congress next February, the services will assume that 19 percent of all new entrants serve for 20 years, long enough to qualify for retirement. That’s a “huge” change from the 17 percent previously assumed, said Rossi.
Specifically, the probability of newly commissioned officers reaching retirement will climb to 49 percent from 47. For new enlistees, the assumed retirement rate will be raised to 17 percent from 15.
It forces the services overall to set aside $20 billion in their 2012 budgets to cover active duty retirement costs, an unplanned for 5 percent jump. Another $2.8 billion will have to be set aside for Guard and Reserve retirement but that’s unchanged. Rossi said the Office of the Actuary has not reconsidered assumptions for Guard and Reserve retirement but it soon will.
Another way to look at the effect of the new assumptions on retirement costs is by individual member costs. For fiscal 2011 the services will set aside $32.70 for future retired pay for every $100 paid in basic pay. That proportion will climb to $34.30 for every $100 in basis pay in fiscal 2012. So if a service member draws $50,000 in basic pay, his or her service will have to pony up $17,150 that year for future retired pay, or $800 more than was needed a year earlier.
For many years, the military ignored future retirement obligations, budgeting only to cover payments due each year to current retirees and survivors. That pay-as-you-go method created a huge unfunded liability. Critics also said the services had no incentive to control retirement costs.
In 1984 Congress ordered DoD to switch to “accrual accounting” for retirement accounts. The Treasury Department was given responsibility for the unfunded liability and established a military retirement trust fund. The services began to pay into that fund whatever amount was needed to cover retirement costs for the current active, Guard and Reserve forces.
So retirement obligations today are paid from two pots. Treasury pays roughly $50 billion a year to cover annuities of current retirees and survivors. The services pay more than $20 billion a year in accrual payments.
Once again, no COLA
The board of actuaries assumed at its July meeting that military retirees, social security recipients, federal civilian retirees, disabled veterans and survivors will have to wait until at least January 2012 before they see their next cost-of-living adjustment or COLA.
That prediction looks even more solid now, to the regret of retirees.
No COLA was paid last year because there was no inflation. The cost of goods and services, in fact, fell by 2.1 percent from the third quarter of 2008 through the third quarter of 2009, the periods used to track CPI.
To trigger a COLA for next January, inflation as measured by the Consumer Price Index (CPI-U) for July through September this year would have to climb by more than 2.1 percent above the third-quarter base period of 2008. For that to happen, prices would have to surge 2 percent in September alone. There are no signs that is happening.
No COLA last year eased the unfunded liability of the military retirement system by $22.3 billion. But it gave no relief to service budgets because Treasury’s pays COLAs of current retirees. Rossi said that over time retirees can expect COLAs to deliver an annual average boost of 3 percent.
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