I just read Military retirees: You betrayed us, Congress over at money.com, an article about a provision in the latest budget deal that reduces the annual cost of living adjustment for military pensions. It may not sound like a big deal, and in the big picture, it isn’t, but for an individual who had been promised, lets just say a $30k per year pension in exchange for putting their life on the line defending the country, the net result could be up to a 20% reduction down to $24k per year. So….you can imagine….a 42 year old who joined the military as an officer at 22 and just retired….might be kind of pissed about this….though I think the way it works is a 1% reduction in the COLA per year maybe until they hit 62 or something….(adding up to 20%)so it wouldn’t actually be a $6k hit in year 1…..just a gradual reduction of promised benefits over a 20 year period.
Hmmm…. Now…I’ve been saying since I started this blog over a year ago….that in the future…on and off balance sheet debts would be defaulted on at some point, so I’m not really shocked at this. This is after all a default, even if it’s just a small%. It’s just as if a company sold a 30 year bond for $1M….and then 30 years later when the bond was due…decided to only pay $800k instead of the full $1M….it’s a partial default, but a default nonetheless. So…I must say that while I’m not shocked that it happened, I am shocked that this is where they start. Seriously…military pensions going to men who have served for a minimum of 20 years? These are the guys you are putting first in line? Wow!!I figured for sure that SS and Medicaid, food stamps, foreign aid…..a thousand things would get cut before they started defaulting on military pensions….yet here we are….the vote is today. Go figure…
Now…it just so happens that Military Retirement is one of the ~32 categories of cash outlays I track from the Daily Treasury Statement. Monthly outlays are currently running at about $4.1B per month, and growing at about 3% per year. These changes will likely have no perceptible change in the near term to outlays or the deficit, though one would expect a slight reduction in the long term growth rate….whatever that happens to be….yet for some reason…the Bipartisan budget deal went out of it’s way to put this in the fine print… Perhaps they are testing the waters for cuts elsewhere….after all….if Military pensions are cut first, it’s going to be kind of hard for the rest to whine about it when it’s their turn….but then, that doesn’t make much sense either….that implies our leaders actually have an organized plan to tackle spending…which can’t be true.
So all in all, this is immaterial to the long term deficit picture (but not so much for military retirees), but interesting nonetheless. It does bring up a point I made back in July when I wrote Detroit Vs. America – Ich Ben Ein Detroiters
This in itself is something I find so hard to understand about defined benefit plans. How many people in this world would you personally trust to take care of hundreds of thousands, or millions of dollars of future benefits for you? Maybe your parents, siblings, or children….maybe… Uncle Sam? No!! Congress..with an approval rating of what…15%? No!! The mayor of Detroit? No!! Any CEO of any company? Hell No!! Wake up America. The entire premise of all defined benefit programs is blatant fraud. Rather than pay you now…in cash….companies and governments offer to pay you later…in another quarter, when it will be another CEO’s problem…another Congress’s problem…another Mayor’s problem…another President’s problem. Shall I say it again…wake the hell up!! You will not be paid. You were conned…you were scammed….you bought the lies hook line and sinker, and ultimately…you must own the consequences of your poor decisions. Yes you are a victim here…yes it sucks….unfortunately…nothing can be done about it. The money is gone….spent decades ago by politicians you elected.
Bottom line…nearly all defined benefit or deferred compensation programs are fraudulent in nature….designed to screw over the worker, for the benefit of the employer. The benefit for the employer is clear….they get to underpay you in the short term…claiming they will make up for it in the future when you retire. Think about that for a minute. Say I have a plumber over and his bill comes to $200. But when it comes to pay…I tell him “You know what…I’m going to pay you $150 today in cash….then…when you turn 65…I’ll send you $1 a month for the rest of your life.” How many takers am I going to get? Probably none right.
And yet that is the deal tens of millions…hundreds of millions if you include SS of Americans have agreed to whether through civilian employers, government employers, and of course the granddaddy of them all Social Security. Having deferred the cost out of the current quarter or election cycle…the CEO gets his bonus, and maybe the politician makes it through another election cycle….making promises that may not have to be made whole on for decades or longer….Take an 18 year old Marine fresh out of boot camp….the pension he is earning as I type could last until 2085 if he earns his pension and lived to 90.
The fate of his pension….then is in the hands of the next 18 presidential election cycles covering 36 congresses. Does he like his odds? Instead…what should happen is that the company or government should just pay directly whatever the actuarial annual value of the plan is. If it’s $10k per year…then that $ should be paid either directly to our young Marine, or into some kind of retirement account held outside of the government coffers. That way…the liability to the employer is immediate…and no compensation is deferred for future CEO’s or Presidents to worry about. The company then can’t just sit back and hope you quit (or die) or they go bankrupt before they have to pay you what you “earned”. Just remember…If you have a defined benefit plan…you are essentially loaning (your company, your state, or Uncle Sam) money…to the tune of probably hundreds of thousands of dollars…for something that is likely decades into the future. As noted above…there simply aren’t a whole lot of people in this world that I personally would trust with that much money…over that long of a duration….and you can bet your ass Uncle Sam and my employer are not on that list…just saying….