By William L. Holahan
and Charles O. Kroncke
Milwaukee: The recent budget deal hammered out by House Budget Committee Chairman Paul Ryan, R-Wis., and Senate Budget Committee Chairman Patty Murray, D-Wash., has a provision to cut military pensions to ease other cuts in the military budget.
Although their proposal is modest (those who aren’t disabled and retire before age 62 would have their cost-of-living adjustment reduced by 1 percent annually until they reach 62, after which their pension would jump back to the level currently scheduled), it is their justification for this change that reveals a serious misunderstanding of pension economics.
According to Ryan, the basis for this proposal rests on two main points: first, that early retirees can afford the cut because they are able to take other jobs after retirement; and second, that soldiers do not make a “contribution” to their pension through payroll deduction.
Since 1971, we have had an all-volunteer armed force. Before then, the draft allowed military personnel to be underpaid because enough people could be forced into service when too few enlisted voluntarily. In making the enlistment decision, the volunteer must consider both the total compensation as well as the unique working conditions associated with military service.
For example, unlike the private sector, a soldier cannot quit at will; in fact, military enlistments can be extended by the unilateral decision of the government. Moreover, the work is often very dangerous. To induce enough qualified people to enlist, the government offers a compensation package that includes salary, insurance and a pension. That compensation, added to the honor of military service and the acquisition of skills and reputation valuable after leaving the service, must amount to sufficient inducement to outweigh the opportunities in civilian employment.
Although the military labor contract is unique, it is nonetheless a labor contract. A key feature of labor contracts is that a significant amount of time can elapse between the performance of work and the receipt of agreed-upon deferred compensation such as a pension. That time gap provides an opportunity for an employer to attempt to change the terms of that agreement after the worker has delivered on it. Consequently, in the case at hand, it is important to examine the twofold justification for the proposed cut in the military’s promised deferred compensation.
Even though they don’t “contribute” to their pension through payroll deduction, soldiers in the all-volunteer armed forces earned their pension in the same way that they earned their salary: They earned it when they exchanged their service for the agreed compensation. That is, their labor contract is an exchange of their military service for the value of the salary, insurance and pension promised. This is basic supply and demand.
The entire compensation package, including the expectation that deferred compensation will be received in inflation-adjusted payments, was designed to induce them to enlist. They have not only contributed to it, they have earned the entire thing by fulfilling their duties. The fact that there is no explicit payroll deduction is irrelevant.
Retired vets who work in civilian jobs receive two checks: a pension check from the government for completed military service and a paycheck from the civilian employer. The receipt of two checks is a source of confusion.
Often the pejorative “double-dipping” is used to falsely imply an undue advantage. The confusion is lifted by realizing that the pension check is deferred earnings from the previous job, and has nothing to do with the subsequent jobs. The military pension must be paid whether or not the retiree seeks further employment.
The terms of the civilian job — the income, insurances and pension — are not relevant to the earned pension for completed military service. Retired vets are entitled to it regardless of the terms and conditions of any post-retirement employment.
Cutting the earned compensation of military veterans should not be an option for balancing the budget. There is no reason to single them out for special pay cuts, essentially tax increases.
It is the obligation of all American taxpayers to cover the cost of their government’s operations. We are not in some Great Depression; rather, we are a wealthy nation in a sluggish recovery pretending we’re broke and looking around for someone else to pay the bills.
Holahan is emeritus professor of economics at the University of Wisconsin at Milwaukee. Kroncke, retired dean of the College of Business at UW-M, is also retired from USF. They are co-authors of Economics for Voters. They wrote this for the Tampa Bay Times.