Pentagon faces a rebel yell over pensions

All along the Florida coast, there is a sense of foreboding among retirees about what the country’s fiscal problems might mean for their finances, but at the Fleet Landing retirement community in Jacksonville, that resentment is focused squarely on the Pentagon.

Founded by officers from the nearby Mayport naval station and only a few blocks from the beach, Fleet Landing houses a large number of retired veterans who have watched with increasing anxiety as the Pentagon has warned about runaway military entitlement spending.

“I earned it,” says Mickey Miefert, a 79-year-old who knew John McCain well in the early 1960s when they were both young navy pilots and who served four tours in Vietnam. “I did not have to go to combat, that was something I volunteered for, but whatever pension I get now, I sure earned it.”

For Chuck Hagel, the controversial nominee to be the next secretary of defence, getting confirmed by the Senate will be only the first stage in a series of bruising political battles in the years ahead.

As President Barack Obama begins his second term in office, the US fiscal budget remains in crisis. Efforts to rebalance finances could have a profound effect on the defence budget. The Pentagon has already agreed to take $485bn from its planned spending over the next decade and more cuts could be in the pipeline – especially if Congress cannot agree a long-term budget deal.

Of all the politically difficult budget issues that Mr Hagel will face, few are more charged than the question of military entitlements which have risen sharply over the past decade. A report last year by the Center for Strategic and Budgetary Assessments concluded that at current rates, “military personnel costs will consume the entire defence budget by 2039”. Robert Gates, Mr Obama’s first defence secretary, once warned that these expenses were “eating us alive”.

“It is a perfect storm of rising pensions, salaries and healthcare costs,” says Lawrence Korb, a former assistant secretary of defence during Ronald Reagan’s administration. “At some point we will be faced with making choices between new weapon systems or entitlements.”

Yet any politician wanting to address the problem faces the fundamental irony of today’s war-weary America. While the conflicts in Iraq and Afghanistan remain deeply unpopular, the uniformed services are held in almost reverential esteem by the public. Most of the entitlement reforms proposed by the Obama administration over the past three years have not made it through Congress.

Despite all the talk about the end of an era in American military power, it is hard to make the case that the Pentagon is facing a funding crisis. In constant dollar terms, the basic defence budget, excluding war costs, is almost equal to the peak of the Cold War arms race in the early 1980s. According to Sipri, the Sweden-based research group, the US accounts for 41 per cent of global military spending, while the US and its key allies make up 71 per cent of the total – a level of superiority that has rarely been matched in history.

However, even with these resources, Mr Hagel will still face some difficult trade-offs. The Pentagon’s ability to invest in new weapons has been compromised by dramatic cost-overruns on high-profile projects, including the F-35, the new generation fighter jet that now costs $130m-$160m per aircraft.

At the same time, salary costs have risen rapidly after Congress voted every year from 2004 to 2011 to award an increase above the cost of living – the result, as Mr Korb puts it, of “guilt that the wars were going on much longer than expected”. With healthcare premiums frozen for more than a decade, the cost of military healthcare increased by nearly 300 per cent from 2001 to 2012. According to the Rand Corporation, military compensation is higher than the average for civilians with a similar level of education.

Just as worrying to many Pentagon officials is the pension system. The Treasury already picks up a large chunk of the annual outlay on military pensions, separate from the main defence budget. The system currently has an unfunded liability of $1,270bn which is expected to rise to $2,720bn by 2034.

Service members are entitled to half salary after 20 years, which was reduced to 40 per cent in the Reagan administration, but returned to 50 per cent under President Bill Clinton. As well as the overall financial burden, the system is controversial because only 17 per cent of personnel actually serve the required 20 years needed to qualify. Most of the people who fought in Iraq and Afghanistan will end up with no pension at all. The system is “unfair, unaffordable and inflexible”, the Defense Business Board, which advises the secretary of defence, said last year.

There is growing frustration among retired veterans that the Pentagon top brass has not done more to defend them. “My pension was well-earned,” says retired rear admiral Gerald Thompson, another Fleet Landing resident. “When I look at other people I know who went into different fields, I do not think that it is overly-generous.”

Cuts in military entitlements will be opposed not just by veterans’ groups but also by cities such as Jacksonville, whose economy receives about $12bn a year as a result of the military bases in its corner of northeast Florida.

About 15 per cent of the city’s population are military veterans. Vic Guillory, another retired admiral who now runs the city’s military affairs department, says the pension is essential for retaining good people. “It is the price we pay to have confidence that our forces are able to do the things we need them to do,” he says.

Tomorrow: Creating an ideal tax system, James Politi reports for the analysis section