By Ben Atkins, HSG volunteer
Is the U.S. military a social trampoline? “Yes, but . . .” Our servicemembers personify Opportunity Economics: they embrace risk and sacrifice in the pursuit of new challenges and responsibilities. A recent Pentagon survey, for example, found that 76% of its enlisted joined because of education, training and personal growth opportunities. The military, however, could support Opportunity Economics by overhauling its pension system: a modern defined contribution system would improve military readiness and the bounce in individuals’ social trampolines.
Despite extraordinary changes in warfare, technology, and private sector pension plans, the current system remains founded on a framework established in 1916. In the simplest terms: retirees with 20 years of service earn half-pay. (The formula uses “base pay”; retirees effectively receive 34% of compensation, using broader measures to include housing, occupational bonuses, and tax advantages.) Earlier departures forfeit all retirement benefits. In contrast, the 1974 ERISA Act outlaws corporate vesting schemes beyond 7 years. Subsequent legislation created 401(k) programs to protect workers and to promote economic efficiency. Pension portability is central in Opportunity Economics, offering a vehicle for accumulating savings and promoting flexibility to pursue the most attractive careers. Importantly, the latter point does not conflict with the military force management goals; portability and flexibility would dramatically improve recruiting and retention in the military.
Any proposals must be judged through their effect on the services’ force management capabilities. Uniquely, the military cannot hire senior personnel from the outside—today’s lieutenants represent tomorrow’s generals. Defenders of the current system highlight several crucial strengths. First, 20-year “cliff-vesting” stabilizes the force, insulating it from the effects of changes in the broader labor market. Second, it ensures a core of motivated, experienced, professional warriors. Last, deferred compensation elicits superior performance from servicemembers committed to reaching the 20-year milestone. As numerous commissions and studies have found, however, an alternative system based on Opportunity Economics (earlier vesting, personal control of assets, and government contributions) excels on precisely these criteria.
Today’s retirement system falls short from private to general. Although the government allocates 30% of compensation outlays to meet retirement liabilities, prospective recruits and young servicemembers profoundly undervalue these contributions. How many of these young people expect to realize the benefits? Only 15-20% will serve for 20 years. Additionally, they strongly prefer cash today over future payments. (The government borrows at a rate of 4-5%, yet evidence suggests that young people require returns of 10-15% to forego immediate consumption.) Last, future payments are exposed to the vagaries of congressional action. A DC system would revolutionize recruiting and junior-level retention through explicit, immediate retirement benefits and the replacement of political risk with market risk.
The current system succeeds in maintaining a core of mid-career expertise, but not without costs. The crude 20-year mechanism forces an early decision to “exit or go for 20.” In turn, at about the 12-year point, the services act as if involuntary separation represents betrayal. This “implicit contract” creates severe inefficiencies. Fundamentally, it vitiates force planning based on mission needs—instead, the size and shape of the force become supply-driven. Additionally, this arrangement limits advancement opportunities for younger cohorts, and it reduces morale by eroding an uncompromising meritocracy. How many organizations agree not to fire underperformers?
The worst inefficiency occurs in the senior ranks. The reformers of 1916 sought to promote “youth and vigor” in the service. Changes in technology, though, make the 20-year trigger suboptimal. Today, the services encourage top performers of all specialties—e.g., aviators, doctors, linguists, electronics technicians—to take their talents elsewhere at an average age of 42. This occurs through the enormous opportunity cost created after the 20-year point: continued service receives (incrementally) half-pay. Surely a system consistent with Opportunity Economics would reject such a significant distortion in an individual’s decision-making.
A corporation with this system wouldn’t survive. Would a CEO accept a compensation system that lacked incentives for critical leaders and skills? In contrast, a military system founded on a DC plan would, at lower cost, empower services to align resources with requirements through tailored vesting, contributions, and matching. In the 1990s the RAND Corporation completed an extensive analysis for the Office of the Secretary of Defense; they concluded that a transition to a DC plan was both feasible and superior. In 2000 Congress expanded the federal DC plan to servicemembers, but the services opted not to provide government contributions.
In 2001 the Army introduced a new marketing theme, the “Army of One.” This campaign reflects how servicemembers thrive on principles central to an opportunity economy—autonomy, accountability, and informed risk-taking. Extolling the virtues of self-reliance, Ralph Waldo Emerson writes, “We have not chosen, but society has chosen for us. We are parlour soldiers. We have shunned the rugged battle of fate, where strength is born.” Young people embrace the tenets of Opportunity Economics; the U.S. military should respond.
Ben Atkins was the Naval Academy valedictorian in 1992. He served as a submariner from1994-2000. An detailed proposal for reform of the military retirement system won second place in a 2006 Department of the Navy essay contest; it can be read in full here.