Hagel, Ryan defend retiree COLA caps except for disabled

December 26, 2013

by Tom Philpott

Defense Secretary Chuck Hagel and Rep. Paul Ryan (R-Wis.), chairman of the House Budget Committee, appear to be in sync in defending the controversial cap that Congress has imposed on cost-of-living adjustments for “working age” military retirees starting in January 2016.

They should be, Ryan is suggesting, because the idea for the COLA cap came to him from the Department of Defense. And the budget deal he struck will help to ease automatic defense spending cuts from sequestration that military leaders said were decimating force readiness. 

Hagel and Ryan also agree, however, that it was a mistake for Ryan and his negotiating partner, Sen. Patty Murray (D-Wash.), chairman of the Senate Budget Committee, not to have shielded more than 100,000 service members retired on medical disability from the planned COLA caps.

Therefore, even as Congress forwarded the Bipartisan Budget Act on to President Obama to be signed into law, Ryan said he and Murray will work to amend it so it excludes those medically retired and their survivors from the COLA caps “well before” they are to take effect.

Ryan wrote this in a guest editorial in the newspaper USA Today.

At a Pentagon press conference, Hagel embraced the Ryan-Murray budget deal after it passed both the House and Senate by comfortable margins.  Defense leaders, he said, are “prepared to engage the Congress in achieving compensation reform.  But any changes to cost-of-living adjustments should not apply to medically disabled retirees.  These retirees need to be exempted from the changes in the budget agreement.”

The vast majority of retirees are non-disabled, but the COLA cap provision in the Bipartisan Budget Act makes no distinction. Unless the law is amended, COLAs for all military retirees under age 62 will be capped after 2015 at one percentage point below annual inflation as measured by the government’s Consumer Price Index or CPI.

At age 62, full COLAs would be restored and annuities reset to levels retirees would have seen at that age had full COLAs been in effect since retirement. Impacted retirees, however, would never get back money lost annually before 62 under the CPI-minus-one-percent formula.

The Congressional Budget Office estimates savings to the Department of Defense of $6.3 billion over the first decade the COLA cap is in effect. The impact on individuals will vary based on rate of inflation.

For example, if an enlisted member in pay grade E-7 retirees at age 40 with an initial annuity of $23,000, and if cost of living climbs an average of three percent a year, then by age 62 the COLA capped of two percent would cut $83,000 off the total value of E-7 retired pay.  However, if inflation averages two percent a year, the loss by age 62 falls to $72,000.

An officer who retirees as an O-5 at age 42, with an initial annuity of $43,000, stands to lose more than $124,000 by age 62 with a CPI-minus-1 COLA, assuming average inflation of three percent. If inflation, however, averages two percent, the COLA cap would dampen retired pay for that officer by $109,000 by age 62.

Military Officers Association of America, which prepared these estimates, also produced numbers showing the effect of the COLA cap on some few members forced to retire early on medical disability.

An E-6 who retires at age 32, after 12 years of service, due to injury or illness would lose more than $45,000 in retired pay by age 62 if inflation were to average three percent. An O-3 officer medically retired at 34 after 12 years would lose more than $63,000 in retired pay by age 62.

The Senate followed the House by a week in approving the budget deal, as a dozen Republicans joined every Senate Democrat in voting for the bill despite a rising chorus of criticism from military retirees, careerists nearing retirement and by military association and veterans’ groups.

The intensity of the political heat encouraged a number of lawmakers to introduce bills immediately that would replace the COLA cut with cost-cutting alternatives their constituents might find more palatable.

For instance, Sens. Mark R. Warner (D-VA) and Tim Kaine (D-VA) introduced legislation to replace the COLA cap with language that would block companies from using foreign tax havens to avoid U.S. taxes. That idea isn’t popular with Republicans who oppose any kind of tax increase.

Rep. Mike Fitzpatrick (R-Pa.) instead wants to replace the COLA cuts with a bill to tighten the Refundable Child Tax Credit program so illegal immigrants can’t abuse it and receive fraudulent payments. Fitzpatrick cited recent findings from the Treasury Department’s inspector general of billions of dollar being paid improperly to undocumented workers.

The budget deal Ryan and Murray struck softens the effect of budget sequestration by $63 billion across 2014 and 2015, with half of it bringing budget relief to the Department of Defense. It shelves about one third of across-the-board defense spending cuts expected those years from the sequestration mechanism adopted in the 2011 Budget Control Act.

Hagel said the deal restores some predictability to defense spending near term but DoD still faces “very difficult budget decisions.” With defense budgets still capped $70 billion below requested levels for 2014 and 2015, Hagel said, DoD still must make deep cuts to overhead and infrastructure costs, “tough choices on force structure” and reform military compensation.

Even as Murray moved to distance herself from the COLA cap provision in the deal she negotiated, Ryan defended it. He called current retirement benefits generous and said most retirees to be impacted by the COLA caps will be working in second careers anyway.  He also echoed warnings from Hagel and the Joint Chiefs about the perils of rising personnel costs.

“For me, there's simply no choice between responsible reforms of military compensation and making what our military leadership has called ‘disproportionate cuts to military readiness and modernization,’ ” Ryan explained. “Every time we kick the can down the road, we put our troops' combat readiness at risk.”

Send comments to Military Update, P.O. Box 231111, Centreville, VA, 20120, email milupdate@aol.com or twitter: Tom Philpott @Military_Update