Backtracking on Military Retirement Bodes Poorly for the Budget

Earlier this week, Congress moved quickly on a bill to repeal the military cost-of-living adjustment (COLA) reduction for working age retirees that was included in the Ryan-Murray budget deal. The bill repeals the reduction for all service members who started before 2014, effectively delaying any part of the reform for 20 years and delaying its full phase in until 2058. The new spending from repeal is offset by extending the mandatory spending sequester an additional year to 2024, and it also designates $2.3 billion (the savings from the sequester extension in excess of the 10-year cost of repealing the COLA reform) to help pay for the next needed "doc fix," whether temporary or permanent. The bill passed with dissent from only 90 members of the House and 3 Senators.

Although the bill is technically offset over ten years, it is a step backward for fiscal responsibility. It partially repeals one of the few entitlement reforms in the budget deal and offsets it with an extension of a policy that cuts spending across the board in a ham-handed manner. Moreover, the modest COLA reduction repeal has costs over the longer term whereas the sequester extension only produces savings in two years. Also, the higher accrual payments the Department of Defense (DoD) must put away to pay the higher COLAs will put a squeeze on other defense priorities, given the tight spending caps already in place.

This last fact is why the bill would make a good candidate for a longer-term scoring technique, even if it has a relatively small budgetary impact. For one, repealing the COLA for current service members means that the policy does not apply to anyone for 20 years (because military pensions do not vest for 20 years). However, the cost of repeal will phase out over time, eventually reaching zero once all retirees face the COLA reduction. The extension of the sequester, alternatively, produces savings in the tenth year and the year immediately following, but it does not produce any savings in subsequent years. Thus, both the cost and the offset have different effects over time.

For the first decade, the primary effect (not including interest costs) of the bill is almost exactly deficit-neutral. However, accounting for interest costs, the bill increases the debt by about $2 billion. Looking over the next twenty years, the bill with interest could cost about $15 billion. Another thing to account for, however, is accrual payments by the federal government. When retirement benefits are increased, agency pre-funding contributions (which are effectively monies paid to ourselves on paper to highlight future costs) also increase. With discretionary caps in place, because those pre-funding contributions count toward the caps, that additional spending is ultimately taken out of other programs, so the net effect is to reduce deficits. After accounting for the effect of accrual payments and related interest savings, the bill is actually roughly deficit-neutral over twenty years.1

Note that since there are no official CBO numbers beyond the first ten years, the two-decade estimates are rough.

Budgetary Impact of the Military COLA Bill (Billions of Dollars)

Source: CBO, CRFB calculations
Note: Second decade estimates are very rough and rounded calculations.

Regardless of the fiscal impact, though, the bill is a step backward for responsible budgeting in that it shows a lack of commitment to entitlement reform, and feeds the notion that similar reforms may not take effect. As House Budget Committee chairman Paul Ryan (R-WI), who voted against the bill, said, "Rather than making the tough choices, it sidesteps them. I’m open to replacing this reform with a better alternative. But I cannot support kicking the can down the road." Sen. Jeff Flake (R-AZ) asked, "How do we convey to the nation the seriousness about solving the debt crisis when at the first sign of political pressure, we repeal one of the deficit reduction measures?" House Armed Services Committee ranking member Adam Smith (D-WA) noted, "By repealing the COLA provision that was just agreed to a month ago in this very body, we are forcing the Department of Defense to focus on personnel costs...forcing cuts to readiness and procurement."

Granted, military retiree pensions are a particularly politically sensitive topic, but if lawmakers are unwilling to stick with a modest reform, it speaks poorly to their ability to agree to the reforms that will be needed for health care programs, Social Security, and the tax code. The bill's impact is deficit-neutral on paper over the next twenty years, but its portent is much worse.

1 Although CBO notes the size of changes to accrual payments, they do not include these in their estimate of the bill's effect on direct spending because the final amount of discretionary appropriations are still subject to annual appropriations bills not yet enacted.