An odd thread has slipped out of the final report of the Military Compensation and Retirement Modernization Commission.
As befits its name, a main target for the commission was the 20-year "cliff vesting" military retirement model, unchanged for generations. The commission wants to move to a system featuring smaller, deferred payouts, expanded 401(k)-style savings plans, and a large, lump-sum, cash "continuation bonus" at 12 years of service.
No question, the plan would require troops to be much more attentive to, and proactive about, managing their nest eggs. For example, assumptions about the payout down the line rest heavily on the expectation that troops will invest that entire lump-sum bonus back into their 401(k) accounts, rather than blowing it on the latest BMW 3 Series.
In its analysis, the commission estimated the total dollar value of the current retirement benefit and its alternative, both subject to a long list of assumptions.
The oddity is that the commission's estimates are lower — by a large margin — than those used by the Pentagon in a similar analysis just last year.
Only an actuary or an economist could fully appreciate the nuances. So we talked to some, including a pension expert with no stake in the military compensation debate. What we were told raises questions about how this plan may be sold to those who do have a stake in this debate.
To start: The commission's report pegs the total value of the military retirement benefits package for a typical E-7 at about $201,000. But in its report last year, the Defense Department put "lifetime retirement income" for the same hypothetical E-7 retiree at about $1.1 million.
The gap derives from the way the commission estimated the value of military retirement, using a "discount rate," a form of reverse interest used by financial professionals to estimate depreciation in the current value of a future benefit.
The commission used a discount rate of 12.7 percent in its calculations. But discount rates typically track interest rates, so in the private sector, a rate of 4 percent to 5 percent is fairly normal. And some experts suggest an even lower rate should be used for the military — 2 percent or 3 percent — because the U.S government is considered the safest lender in the world.
Applying different discount rates to a long-term income stream yields vastly different far-end results: Higher rates lower present-day value, lower rates expand present-day value.
By applying an atypically high discount rate, experts say the commission lowballs the value of the current benefit — thus making today's system seem less robust than the proposed alternative. This calculation is central to the commission's conclusion that its plan ultimately could pay out more to retirees than today's system.
Another issue: The calculations are based in part on the perceived value the commission believes troops place on retirement benefits — rather than the kind of hard, tangible financial analysis a bank would require.
The nuances of perceived versus actual value in these scenarios are deep in the weeds, so we won't go there.
But taken together, these issues are a worrisome sign that this grand new vision expects the average GI Joe to possess a measure of financial savvy that is unreasonable to expect of the average consumer.
And the commission knows it, which is why a small suggestion is tucked into the report calling for DoD to set up a new, forcewide "financial literacy" program — to the tune of $85 million a year.
Clearly, this plan holds plenty of nooks and crannies to be explored. And every one should be — thoroughly. When it comes to socking away enough money for a comfortable retirement, the nitty-gritty of this plan may hold life-altering impact for retirees a few decades down the road.
