[Senate Hearing 113-467]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 113-467
 
         RECENT CHANGES TO THE U.S. MILITARY RETIREMENT SYSTEM

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON ARMED SERVICES
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                            JANUARY 28, 2014

                               __________

         Printed for the use of the Committee on Armed Services




        Available via the World Wide Web: http://www.fdsys.gov/

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                      COMMITTEE ON ARMED SERVICES

                     CARL LEVIN, Michigan, Chairman

JACK REED, Rhode Island              JAMES M. INHOFE, Oklahoma
BILL NELSON, Florida                 JOHN McCAIN, Arizona
CLAIRE McCASKILL, Missouri           JEFF SESSIONS, Alabama
MARK UDALL, Colorado                 SAXBY CHAMBLISS, Georgia
KAY R. HAGAN, North Carolina         ROGER F. WICKER, Mississippi
JOE MANCHIN III, West Virginia       KELLY AYOTTE, New Hampshire
JEANNE SHAHEEN, New Hampshire        DEB FISCHER, Nebraska
KIRSTEN E. GILLIBRAND, New York      LINDSEY GRAHAM, South Carolina
RICHARD BLUMENTHAL, Connecticut      DAVID VITTER, Louisiana
JOE DONNELLY, Indiana                ROY BLUNT, Missouri
MAZIE K. HIRONO, Hawaii              MIKE LEE, Utah
TIM KAINE, Virginia                  TED CRUZ, Texas
ANGUS KING, Maine

                    Peter K. Levine, Staff Director

                John A. Bonsell, Minority Staff Director

                                  (ii)


                            C O N T E N T S

                               __________

                            january 28, 2014

                                                                   Page

Recent Changes to the U.S. Military Retirement System............     1

Fox, Hon. Christine H., Acting Deputy Secretary of Defense.......     3
Winnefeld, ADM James A. Jr., USN, Vice Chairman of the Joint
  Chiefs of Staff................................................    10
Tilelli, GEN John H., Jr., USA [Ret.], Chairman of the Board,
  Military Officers Association of America.......................    68
Sullivan, GEN Gordon R., USA [Ret.], President and Chief
  Executive Officer, Association of the U.S. Army................    81
Delaney, Master Sergeant Richard J., USAF [Ret.], National
  President, The Retired Enlisted Association....................    85
Chu, David S.C., Ph.D., President and Chief Executive Officer,
  Institute for Defense Analyses.................................    91
Questions for the Record.........................................   105

                                 (iii)


         RECENT CHANGES TO THE U.S. MILITARY RETIREMENT SYSTEM

                              ----------


                       TUESDAY, JANUARY 28, 2014

                                       U.S. Senate,
                               Committee on Armed Services,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:36 a.m. in room
SD-G50, Dirksen Senate Office Building, Senator Carl Levin
(chairman) presiding.
    Committee members present: Senators Levin, Reed, Nelson,
Hagan, Manchin, Shaheen, Gillibrand, Blumenthal, Donnelly,
Kaine, King, Inhofe, McCain, Sessions, Wicker, Ayotte, Fischer,
Graham, Vitter, Blunt, and Lee.

       OPENING STATEMENT OF SENATOR CARL LEVIN, CHAIRMAN

    Chairman Levin. Good morning, everybody. The committee
meets this morning to review the reduction in the cost-of-
living adjustments (COLA) for working age military retirees
that was enacted as part of the Bipartisan Budget Act (BBA) of
2013 (Public Law 113-67). We welcome today the Acting Deputy
Secretary of Defense Ms. Christine Fox, and Vice Chairman of
the Joint Chiefs of Staff Admiral Sandy Winnefeld, and I will
introduce the second panel of outside witnesses after we hear
from Secretary Fox and Admiral Winnefeld.
    The Bipartisan Budget Act adopted in December included a
provision that reduced the COLA for working age military
retirees by 1 percent until the retiree reaches the age of 62,
at which time retired pay is adjusted to the level it would
have been had the COLA not been reduced. In a USA Today column
defending the legislation, Congressman Paul Ryan explained the
provision as follows:
    ``Here's what the new law will do. We make no changes for
those currently at or above age 62. This reform affects only
younger military retirees. Right now any person who has served
20 years can retire regardless of age. That means a serviceman
who enlists at 18 becomes eligible for retirement at 38. The
late 30s and early 40s are prime working years and most of
these younger retirees go on to second careers.''
    Now, the Consolidated Appropriations Act adopted a few
weeks ago amended the BBA to exempt disability retirees and
their survivors from the COLA reduction.
    I believe that the COLA reduction is wrong because it
targets a single group, military retirees, to help address the
budget problems of the Federal Government as a whole. While
reforms have been made to the Federal civilian pension system
over the past several years, those changes applied
prospectively to new employees. By contrast, this change to
military pensions will apply upon implementation to current
retirees, their families, and survivors.
    We've established a commission to review the military
compensation and retirement systems. But I believe it is unfair
to single out military retirees in a Federal deficit reduction
effort.
    There have been myriad proposals to repeal this COLA
change, including proposals with different offsets and some
with no offsets. These include proposals from Senators Shaheen,
Ayotte, McConnell, Sanders, Pryor, Hagan, and others. The
differences among these proposals highlight the challenges and
opportunities in endeavoring to repeal this legislation before
it takes effect in 2016. I believe we must find a way to repeal
it and I predict that we will.
    I trust that our first panel will also address the broader
context in which this provision's repeal will be considered,
including both the stress placed on the Department of Defense
(DOD) budget by the combination of congressionally-mandated
budget reductions approaching $1 trillion over the next decade
and also combined with the dramatic growth in the cost of
military pay and benefits.
    The Services have responded to severe budget pressure by
reducing force structure and end strength, deferring repair of
equipment, delaying or canceling modernization programs, and
allowing training levels to seriously decline. DOD has told us
that it will be unable to meet legislatively mandated future
budget levels unless it also begins to curtail growth in the
cost of military pay and benefits.
    Army Chief of Staff Ray Odierno told us in November that
the average cost of a soldier's pay and benefits has doubled
since 2001 and if left unchecked, will double again by 2025.
The Service Chiefs have testified that this rate of growth was
not sustainable even before the steep budget cuts mandated by
law and that a failure to curb this growth will necessarily
result in drastic reductions to military force structure,
readiness, and modernization accounts.
    So we look forward to the testimony of our witnesses on the
impact that the reduction in COLA for military retired pay will
have on the current force and on retirees, its impact on
recruiting and retention, and how these changes fit into the
overall DOD budget picture.
    Thank you.
    Senator Inhofe.

              STATEMENT OF SENATOR JAMES M. INHOFE

    Senator Inhofe. Thank you, Mr. Chairman. Almost everything
that you've said was in my statement too, so I'll just forego
that, except for one thing that wasn't mentioned. That is, the
National Defense Authorization Act (NDAA) for Fiscal Year 2013
established a commission to undertake a comprehensive review of
the military compensation and retirement systems and propose
reforms to Congress by early 2015. Now, when the commission was
created, Congress made a promise in law to retirees and those
currently serving that they would be grandfathered from any
changes to the benefits that they were promised when they
volunteered in service to our country.
    I've often said that people make a career decision, Mr.
Chairman, and it's predicated on what they are told at that
time would be the situation. To change that, I think, becomes a
moral issue.
    That promise of grandfathering was again made by the
President through the presidential principles submitted to
guide the commission. Section 403 of the BBA breaks these
promises. I think we all agree that there needs to be a serious
look back at military pay and compensation. However, the
piecemeal approach taken in the BBA is the wrong way to do it.
    I would add that this is on top of other cuts that aren't
classified as cuts, but such changes to the detriment of our
retirees in TRICARE.
    So I think we're on board here together in trying to come
up with a solution to this problem. Thank you, Mr. Chairman.
    Chairman Levin. Thank you very much, Senator Inhofe.
    Secretary Fox.

STATEMENT OF HON. CHRISTINE H. FOX, ACTING DEPUTY SECRETARY OF
                            DEFENSE

    Ms. Fox. Thank you, Mr. Chairman. Chairman Levin, Senator
Inhofe, and distinguished members of the committee:
    I appreciate the opportunity to appear before you with
Admiral Winnefeld to discuss the state of military compensation
and retirement benefits. On behalf of Secretary Hagel and the
men and women in uniform we serve, I'd like to begin by
offering my appreciation for the support of this committee in
once again enacting the NDAA. Your dedication to passing the
NDAA means DOD has the authorities it needs to accomplish the
incredible array of missions we undertake around the world each
and every day, as well as those that support our number one
asset, our people.
    Allow me to situate today's discussion within the larger
frame of the DOD's fiscal situation. We in DOD are grateful for
the support of Congress in enacting the fiscal year 2014
Appropriations Act and for the BBA of 2013, which provides us
with much-needed certainty over our budget for fiscal years
2014 and 2015 and partially addresses some of the significant
budgetary challenges imposed by the sequester provisions of the
Budget Control Act of 2011 (BCA).
    In response to sequester, last summer Secretary Hagel
directed that DOD be prepared to operate with significantly
fewer resources than those previously requested. The resulting
Strategic Choices and Management Review (SCMR) showed that
savings from increased efficiencies, reduced overhead, and
reduced military and civilian pay and benefits would not come
close to closing the funding gap created by the BCA.
Nonetheless, every dollar saved in these areas could remedy
some of the shortfalls to military readiness, capacity, and
capability caused by sequestration.
    That's in part why last summer Secretary Hagel announced
another round of management reforms, most notably a 20 percent
cut in DOD's major headquarters, staff directorates, and
support agencies.
    While the BBA partially mitigates the worst of DOD's
readiness problems in fiscal year 2014 and to a lesser extent
in fiscal year 2015, beyond those 2 years the BCA remains the
law of the land. If sequestration is allowed to persist, our
analysis shows that it will lead to a force that is too small,
inadequately equipped, and insufficiently trained to fully
defend the Nation's interests. That is why DOD continues to
call for a change in the law, even as we plan responsibly for a
future that could include a return to sequestration.
    It's within this context that I join the rest of DOD's
leadership in stating that we cannot afford to sustain the rate
of growth in military compensation we've experienced over the
last decade. The one-third of the defense budget consumed by
military compensation cannot be exempt as an area of defense
savings. We must find ways to slow the rate of growth.
    I'd like to be clear. We are where we are today with
respect to personnel costs because of good intentions, from a
desire to make up for previous gaps between military and
private sector compensation, to the needs of recruiting and
retaining a top-notch force during a decade-plus of war, to an
expression of the Nation's gratitude for the sacrifices of our
military members and their families. As a result, inflation-
adjusted pay and benefit costs are 40 percent higher than in
2001, even though the Active Force today is only slightly
larger.
    Defense health care costs alone have grown from less than
$20 billion in 2001 to nearly $50 billion in 2013. Payments for
housing costs have also increased faster than inflation.
    This rate of growth occurred, of course, in an era in which
DOD's top line was also growing to meet the needs of a Nation
involved in multiple conflicts. Given today's fiscal realities,
barring unforeseen events, we are unlikely to see defense
budgets rise substantially for some time. So if DOD is going to
maintain a future force that is properly sized, modern, and
ready, we clearly cannot maintain the last decade's rate of
military compensation growth.
    Admiral Winnefeld and I brought with us a simple handout
that details the elements of compensation each of our
servicemembers receive. It is on your table in your packages
just below our written testimony.
    [The information referred to follows:]

    


    Ms. Fox. What we hear unmistakably from our people is that
they feel that the quality of life enabled by the pay and
benefits package listed on this chart is relatively high. But
conversely, what we increasingly hear them saying is lacking,
particularly following sequestration, isn't their level of pay
but their quality of service. Our men and women are the first
to say that they're well-compensated, but DOD doesn't have
money to maintain their equipment or supply them with the
latest technology or send them to get the training they need,
and then they are being done a disservice.
    When they're sent into harm's way, this disservice can
quickly translate into a breach of trust. Here I am referring
to our collective sacred obligation to provide our troops with
the finest training and equipment possible so that they can
deploy to combat, able to accomplish their mission, and return
to their family safely.
    Against this backdrop, DOD has done a significant amount of
work to explore how we slow the rate of compensation growth
responsibly, fairly, and effectively. We have provided Congress
several proposals in recent years, some of which have been
accepted. Most notably, just this year Congress accepted a 1
percent basic pay raise even though the employment cost index
called for an increase of 1.8 percent. We are currently
reviewing all military pays and benefits and may offer further
proposals.
    A few words now on the COLA-Minus-1 or Consumer Price Index
(CPI)-Minus-1 provision included as part of the BBA. To my
knowledge, no DOD officials were consulted on the details of
the BBA, including the CPI-Minus-1 provision. The Department
fully supported the changes made to the provision to exempt
military disability retirement and survivors. Moving forward,
we support a comprehensive review of this provision, including
its effects on retirees not currently exempted.
    If Congress decides to retain the CPI-Minus-1 approach, we
strongly recommend it be modified to include grandfathering.
Because of the complex nature of military retirement benefits,
I would urge that Congress not make any changes in this area
until the Military Compensation and Retirement Modernization
Commission presents its final report in February 2015.
    There are many ways we might change military retirement,
including far more fundamental reforms. Because the CPI-Minus-1
provision does not go into effect until December 2015, there is
ample time for such a careful review, including waiting for the
commission to provide its input.
    I'll conclude by reiterating that pay and benefits are an
area where we must be particularly thoughtful and cognizant of
commitments made and our ability to recruit and retain the
force needed for tomorrow. Yet it has become increasingly clear
that slowing the rate of growth of compensation cannot be
excluded from critical efforts to sustain a force that is
balanced, equipped with the latest technology, and ready to
meet challenges seen and unforeseen. Not to do so in the name
of serving our people or for any other reason would ultimately
risk a future in which our men and women could be sent into
harm's way with less than what they need to accomplish their
mission.
    Secretary Hagel and the rest of the Department's leadership
won't let this happen on their watch. He and I appreciate the
support of this committee and look forward to working with you
to achieve the balance we all seek and our men and women
deserve.
    [The joint prepared statement of Ms. Fox and Admiral
Winnefeld follows:]
  Joint Prepared Statement by Hon. Christine H. Fox and ADM James A.
                          Winnefeld, Jr., USN
    Chairman Levin, Senator Inhofe, and distinguished members of the
committee, we appreciate the opportunity to appear before you to
discuss the state of military compensation and retirement benefits in
the context of the current fiscal environment. Let us begin, on behalf
of Secretary of Defense Chuck Hagel, Chairman of the Joint Chiefs of
Staff General Martin Dempsey, and the men and women in uniform we
serve, by offering our appreciation for the support of this committee
in once again enacting a National Defense Authorization Act (NDAA). As
Acting Deputy Secretary Fox was recently able to discuss with both the
chairman and ranking member, this committee's dedication to getting the
NDAA passed means the Department has the authorities it needs to
accomplish the incredible array of missions we undertake around the
world each and every day, as well as those that support our number one
asset: our people.
                           budget environment
    We in the Department are likewise appreciative of the full year
appropriations bill that Congress recently enacted, which funds the
Department of Defense for the remainder of fiscal year 2014, and also
for the budget agreement reached under the Bipartisan Budget Act (BBA)
of 2013, which provides the Department with much-needed certainty over
our budget for fiscal year 2014 and fiscal year 2015, and partially
addresses some of the significant budgetary challenges imposed by the
Budget Control Act (BCA) of 2011.
    The Department fully supports the goal of deficit reduction in the
context of maintaining adequate funding to preserve a strong national
defense in a rapidly shifting and highly complex global security
environment. The President's budget submission for fiscal year 2014
reflected our commitment to achieving this goal. While fully resourcing
the President's strategy as described in the Defense Strategic
Guidance, the proposed budget for fiscal year 2013 trimmed the
Department's budget by $487 billion over 10 years, as required under
the BCA. This nearly half-trillion-dollar reduction dovetailed with
efforts undertaken by Secretaries Gates and Panetta to improve
departmental efficiencies and eliminate unnecessary or underperforming
acquisition programs. It was followed by additional cuts in proposed
budget 2014 in support of the President's proposal to replace
sequestration.
    Once triggered, the BCA's sequestration mechanism reduced the
Department's fiscal year 2013 budget by $37 billion, and threatened the
Department with an additional $52 billion in cuts in this fiscal year.
In response to these realities, last summer Secretary Hagel directed
that the Department be prepared to operate with significantly fewer
resources than those envisioned in our fiscal year 2014 request. The
resulting Strategic Choices and Management Review (SCMR) responded to
the Secretary's direction, and clearly demonstrated two points worth
noting in the context of today's discussion.
    First, the SCMR showed us that in addition to delivering a force
that could not fully support the Defense Strategic Guidance in the mid-
term, sequester-level cuts under the BCA severely limited the ability
of our fighting forces to be ready in the near-term.
    Second, it showed that while savings from increased efficiencies,
reduced overhead, and reduced military and civilian pay and benefits
would not come close to closing the funding gap created by the BCA,
every dollar saved in these areas could contribute to maintaining the
readiness, capacity, and capability impaired by sequestration-level
cuts. That's in part why last summer Secretary Hagel announced another
round of management reforms, most notably a 20 percent cut in the
Department's major headquarters, staff directorates, and support
agencies.
    The BBA's increased funding for DOD partially mitigates the worst
of the Department's readiness problems in fiscal year 2014, adding
about $21 billion above sequestration-level funding. At only about $9
billion above sequestration-level funding in fiscal year 2015, it will
do less to help next year. In fiscal year 2016 and beyond, the full BCA
sequestration-level cuts remain the law of the land, and will lead to a
force that is too small, and takes on too much risk, to fully defend
the Nation's interests. That is why the Department continues to call
for a change in the law, even as we plan for a future at sequestration
levels.
  requirement for slowing the rate of growth in military compensation
    Mindful of this context, Secretary Hagel, the Joint Chiefs, and the
Service Secretaries agree that we cannot afford to sustain the rate of
growth in military compensation that we've experienced over the last
decade.
    The rate of growth in pay and benefits to our military members
since the early 2000s reflects the convergence of multiple motivations,
all of them well-intentioned. These include making-up for previous
shortfalls between military and private-sector compensation, expressing
the Nation's gratitude for the sacrifices required by many
servicemembers and their families as a result of the wars in Iraq and
Afghanistan, and assisting some services--primarily the Army--in
recruiting and retaining a top-notch force during the height of last
decade's fighting.
    As a result of a series of increases to pay and benefits motivated
by these interests--and sometimes in excess of those requested by the
Department--since 2001, inflation-adjusted pay and benefit costs for
servicemembers have risen by about 40 percent. Defense health-care
costs alone have grown at an unparalleled rate--from less than $20
billion in 2001 to over $48 billion in 2013. Payments for housing costs
have also increased faster than inflation.
    As we have witnessed recently with respect to the consumer price
index (CPI)-Minus-1 provision included in the BBA, which will be
discussed in greater depth below, any discussion of compensation for
our uniformed personnel is both emotional and fraught with tough
decisions about what the Department, and ultimately the American
people, promise our men and women when they put on the uniform.
    Here we would like to reiterate a point made by several members of
the Joint Chiefs. From talking to our sailors, soldiers, airmen, and
marines, the sense of the Department's leadership is that given current
rates of compensation, our military workforce feels, in general, that
their quality of life is quite high. Conversely, the Chiefs and Service
leaders are also told that one effect of sequestration is a marked
decrease in what they term quality of service, defined as the
satisfaction a servicemember feels at knowing they have what they need
to do their job, whether that's well-maintained equipment or adequate
training.
    Our men and women recognize that if they are well paid, but the
Department does not have money to maintain their equipment, or supply
them with the latest technology, or send them to get the training they
need, then we have not done them a service, but rather a disservice.
When we send them into harm's way, this disservice can quickly
transition into a breach of trust. That is because America makes a two-
fold sacred contract with its military. The first aspect of our
obligation is to properly compensate and care for our service personnel
and their families, both during and after their service. But the second
part of the contract is equally important: that we provide our troops
the finest training and equipment possible, so they can deploy to
combat prepared to accomplish their mission and safely return to their
families.
    As the Department's overall budget declines, we must confront the
balance between this two-fold commitment head-on, just as we are
confronting the need to balance force size with readiness and
modernization.
                              work to date
    Against this backdrop, the Department has done a significant amount
of work to explore how we slow the rate of compensation growth
responsibly, fairly, and effectively.
    In so doing, we have followed several key principles.
    First, we have endeavored to ensure that pay and benefits remain at
levels that would permit us to attract and retain a high-quality All-
Volunteer Force.
    Second, all adjustments made would serve simply to slow the rate of
growth. No servicemember would experience a cut in pay.
    Third, we've stated that savings accrued through changes to
compensation should be invested in warfighting capability and personnel
readiness. Since every 1 percent we save in military pay and benefits
equates to almost $2 billion, our ability to reallocate these savings
translates into the potential for substantial additional combat power.
    In line with these principles, the Department has provided several
proposals in recent years seeking to slow the rate of growth in
compensation costs, some of which have been accepted by Congress. For
example, Congress has modestly increased TRICARE enrollment fees and
indexed them to inflation. Congress has also permitted increases in
pharmacy co-pays that are structured to provide incentives to use
generic drugs ordered by mail. In fact, Congress piloted a program to
require the use of mail order for many prescriptions. Just this year,
Congress accepted a 1 percent basic pay raise, even though the
Employment Cost Index called for an increase of 1.8 percent. We are
currently reviewing all military pays and benefits and may offer
further proposals in the future.
                         cpi-minus-1 adjustment
    Recently, Congress enacted and the President signed a change in
military retirement. The so-called ``CPI-minus-1'' provision included
as part of the BBA reduces cost-of-living adjustments to military
retirees to one percentage point below the CPI, until the retiree
reaches age 62. At that point, the retiree's annuity is recomputed
based on full past CPI increases, and all increases after age 62 are
based on the full CPI.
    While no DOD officials, to our knowledge, were consulted on the
details of the BBA, including the CPI-Minus-1 provision, DOD fully
supported the provisions in the fiscal year 2014 Omnibus Appropriation
that modified the CPI-Minus-1 provision to exempt military disability
retirements, payments under Combat-Related Specialty Compensation
(CRSC) and Concurrent Receipt and Disability Pay (CRDP), survivors of
those who died while on active duty, and survivors of disability
retired members. These modifications provide critical financial support
to those members and their families who have given our country the best
years of their lives.
    The CPI-Minus-1 provision does not take effect until December 1,
2015. It would save the Department roughly $500 million a year in
reduced retirement accrual payments. It would not, however,
fundamentally reform or modernize the military compensation system, and
does not provide for ``grandfathering.'' A repeal of the provision
would eliminate approximately $6 billion in mandatory savings that
would need to be offset.
    The Department supports a comprehensive review of the CPI-Minus-1
provision, including its effect on retirees not exempted by the fiscal
year 2014 Omnibus Appropriations Bill. Examples of issues to examine
include whether to repeal the provision entirely, or to include it in
an overarching restructuring of the military retirement system.
    If Congress decides to retain the CPI-Minus-1 approach, we strongly
recommend it be modified to include grandfathering, the approach the
Department supports for any changes affecting military retirement.
While we do not support retention of a non-grandfathered CPI-Minus-1
approach, because the provision does not take effect until December
2015, it appears that Congress could wait to modify or repeal it until
the Military Compensation and Retirement Modernization (MCRM)
Commission presents its final report in February 2015. Because of the
complex nature of military retirement benefits, we in the Department
recommend that Congress not make any additional changes in this area
until the Commission provides its report.
    Let us finish by sharing our views on the Commission.
     military compensation and retirement modernization commission
    The leadership of the Department of Defense share the goals of the
MCRM Commission: to ensure that now and in the future, the military
compensation system recognizes the sacrifices of those who are serving
and have served in uniform and their families; to ensure military
compensation remains competitive with the private sector so we can
attract and retain the quality and large number of personnel needed; to
ensure compensation is structured to sustain the All-Volunteer Force;
to ensure the military compensation system is flexible enough to assist
military personnel managers in shaping the force; and to ensure the
system delivers an All-Volunteer Force at the best value to the
American taxpayer.
    The MCRM commissioners have been given an extraordinarily important
and complex task, and the Department welcomes their report. Acting
Deputy Secretary Fox recently met with Commission Chairman Alphonso
Maldon, and discussed with him the many challenges ahead. The
Department has itself reviewed military pay and benefits thoroughly,
and we believe that we have the necessary information to make judgments
about potential changes in most types of pay and benefits. We have
presented proposals in the past, and, if we make further proposals in
the future, we hope Congress will act on them. However, because of the
complexity of retirement issues, we would respectfully ask that
Congress not make any more changes until the Commission completes its
work. As we noted above, this includes waiting to make any changes in
the CPI-Minus-1 provision.
    From the very outset of the MCRM Commission's work, the Department
has cooperated fully and collaborated closely with the commissioners
and their staff. In addition to meeting with Acting Deputy Secretary
Fox, Chairman Maldon met with Acting Under Secretary of Defense for
Personnel and Readiness Jessica Wright and many members of her staff,
as have many other commissioners and Commission-staff members.
Additionally, the Department has responded to numerous data requests
from the Commission. During their meeting, Acting Deputy Secretary Fox
personally assured Chairman Maldon that such engagements and data
sharing will continue for as long as the Commission requires, and
Chairman Maldon expressed his appreciation for the Department's ongoing
support.
    The law that established the MCRM Commission also required the
Secretary of Defense to transmit his recommendations for modernizing
the military compensation and retirement systems to the Commission and
Congress by November 1, 2013. As that date approached, the Department
was still in the process of arriving at options in these areas, and was
unable to share details beyond those contained in our fiscal year 2014
budget request. Since then, we have done more work, and, once
completed, the details will be fully reflected in the President's
fiscal year 2015 budget. Acting Deputy Secretary Fox assured Chairman
Maldon that the Department's senior leaders will make every effort to
explain our proposals to Commission members as well as to Members of
Congress . We expect that we will be able to discuss a range of reform
options with you and members of the Commission by no later than the end
of February, and that these options will be fully informed by
commitments made to our servicemembers and recent retirees.
    We look forward to continuing the Department's close cooperation
with the MCRM Commission throughout the coming year.
                               conclusion
    Since 2001 and until last year, the Department of Defense
benefitted from increasing budgets as we fielded a necessarily larger
force to answer the Nation's commitments at home and abroad. Today, as
our combat mission in Afghanistan abates, we must responsibly return to
a more routine footing, all the while contending with a rapidly
evolving and dangerous security environment. We must do so while at the
same time facing a changing--and challenging--fiscal environment.
    Slowing the growth rate of compensation must be one element in a
larger approach to preparing a future force that is balanced, and ready
to meet challenges seen and unforeseen. Yet pay and benefits are an
area where we must be particularly thoughtful, as we weigh commitments
made, ensure we are able to recruit and retain the force needed for
tomorrow, and make certain those we send into harm's way have all they
need to accomplish their mission.
    We appreciate the support of this committee, and look forward to
working with you to achieve this balance.

    Chairman Levin. Thank you very much, Secretary Fox.
    Admiral Winnefeld.

STATEMENT OF ADM JAMES A. WINNEFELD, JR., USN, VICE CHAIRMAN OF
                   THE JOINT CHIEFS OF STAFF

    Admiral Winnefeld. Good morning, Chairman Levin, Senator
Inhofe, and distinguished members of the Armed Services
Committee. Thank you for the opportunity to testify today on
the CPI-Minus-1 provision and on military compensation in
general. I'd like to start with the latter, if I may.
    First, I want to make it very clear that our magnificent
volunteer men and women in uniform and their incredible
families deserve the best possible support we can provide,
including competitive pay and other forms of compensation. This
is especially true when they have experienced over a decade of
wartime deployments and stress, coming on top of all the normal
disruptions of military life, including the sacrifices made by
our wonderful spouses and their families.
    However, we must also exercise good stewardship over the
resources that the American taxpayers entrust to DOD to protect
the United States. This means investing prudently to maintain
the highest quality All-Volunteer Force, while simultaneously
getting the best value for the capability, capacity, and
readiness that we need to win decisively in combat.
    In this light, I try not to forget that the American people
have been very supportive over a decade of war to those of us
who wear the uniform. They provided ample funding for our
combat operations. They treat us in person far differently from
our Vietnam war predecessors. Many businesses have offered
generous discounts and other special benefits to the men and
women in uniform. Our Nation, with the support of Congress, has
provided substantial increases over the last decade in
compensation that have more than closed previously existing
gaps with the rest of our Nation's workforce.
    We in uniform are very grateful for all of this. It means a
lot. However, demanding at this point that our compensation not
only remain at its currently high relative level, but that it
continue to rise faster than that for the average American, is
simply not sustainable at a time when our entire budget is
under great pressure. This growth has been substantial and
rightly so. By the 1990s, military compensation had fallen to a
deeply unsatisfactory level relative to the rest of the working
population in America. The quality of our All-Volunteer Force
suffered as a result. To address this, with the help of
Congress we substantially increased the compensation growth
trajectory in the late 1990s and in the post-September 11
period.
    These increases worked. In 2001, U.S. median annual
household income was $42,000. That equated to the direct pay of
an average E-7 in the U.S. military. Today median annual
household income is $52,000, roughly equal to what an average
E-5 makes. So in short, the average enlisted servicemember
surpasses the U.S. median annual household income two pay
grades earlier, or about 8 to 10 years earlier, than his or her
career would have in 2001. None of this includes indirect
compensation, or the special pays and bonuses we use to shape
our force, or very generous changes to the GI Bill.
    To provide additional context, in 2002, the Quadrennial
Review of Military Compensation (QRMC) concluded that in order
to attract and retain the best that America has to offer and
because of the rigors of military service, military pay should
equal around the 70th percentile of civilians with comparable
education and experience. But in 2000, mid-grade enlisted
personnel only placed in the 50th percentile. By 2009, our
higher compensation trajectory enabled us to more than close
this gap. In 2012, QRMC reported that average enlisted
compensation had climbed between the 85th and 90th percentile,
understandably so during a decade of war.
    While these percentile numbers are not a goal, they are an
indicator that we can and should gradually place compensation
on a more sustainable trajectory. As Secretary Fox mentioned,
Congress and the Department have already made some initial
adjustments, but more are probably needed. The Department, with
the support of the Joint Chiefs and our senior enlisted
leaders, is now considering proposals that would meet that
intent. Contrary to what some are reporting, none of these
proposals would reduce the take-home pay of anyone in uniform.
    We believe we should make this adjustment once. We'll still
be able to recruit and retain the best of our Nation into our
All-Volunteer Force, and indeed we are hearing from our people
that they're much more concerned about their quality of life,
their ability to continue serving in a modern and ready force,
than they are about maintaining the trajectory of compensation
that closed previous gaps.
    We realize that we will probably not get this exactly
right. We seldom do. There may be special cases and issues that
require corrective action. If future upward adjustments are
required in order to remain competitive for the best America
has to offer, we will surely recommend them. We'll also do our
best to ensure both active and retired communities have the
most accurate information possible.
    Some will say that savings can and should be found
elsewhere through efficiencies. We agree. We're working hard to
do just that, and we could use additional congressional support
in that area. Yet even with our most ambitious efficiency
efforts, we will still need to address the growth rate of
compensation.
    In the end, we believe the most important way we keep faith
with the fantastic young men and women who volunteer to defend
our Nation is to only send them into combat with the best
possible training and equipment we can provide. Controlling
compensation growth in a tough budget environment will help us
do just that.
    Now, regarding the CPI-Minus-1 provision, we are very
pleased that the BBA prevented a government shutdown and gave
us at least a couple of years of long-needed predictability in
our budget. However, the inclusion of the CPI-Minus-1 provision
has clearly led to considerable and understandable anxiety
among those who are currently retired or who are planning for
retirement.
    I want to make it clear that Chairman Dempsey and I and the
Service Chiefs and senior enlisted leaders support
grandfathering any changes to our retirement structure. The
Chairman has testified several times on this point, and the
current CPI-Minus-1 provision does not fit within that
principle. We believe changes to our retirement plan, if
appropriate, should only be made after the commission takes a
holistic look at the many variables involved in such a plan.
Accounting for changes in the cost of living is only one of
those variables and it's far too soon to reach a conclusion on
whether it should be part of a grandfathered plan.
    I'd also say that however and whenever the specific
provision is addressed should not permanently remove COLAs as a
potential variable in a future grandfathered plan. In other
words, we don't have to rush into this. We just need to make
sure we get it right.
    However, as Secretary Fox said, we're grateful that the
appropriations bill does exempt military disability retirements
and survivors of members who die on Active Duty. We thank
Congress for this correction. It's an important signal to those
in our force who have sacrificed the most.
    Thank you again for the opportunity to speak today and for
your continued strong support for our magnificent men and women
who serve and who have served. I look forward to hearing your
views and your questions. Thank you, sir.
    Chairman Levin. Thank you very much, Admiral.
    You both have made reference to the fact, as did Senator
Inhofe and myself, that we have a Military Compensation and
Retirement Modernization Commission that is at work and their
report is due in about, I think the end of this year or early
next year. We'll have a 7-minute first round here, by the way.
    What I would ask both of you is this. You've made reference
to the possibility or the need for some kind of acceptable
adjustments to benefits, given their growth. You talked about
them being made holistically, Admiral. But that means that
there has to be some kind of a criteria which is utilized to
help draw that line between acceptable adjustments to existing
benefits and changes that would cross the line and undermine
commitments that we have made.
    Now, one of those criteria would be grandfathering. Is
there any other criteria beside that one which either one of
you would suggest that we consider as we find a way to repeal
this provision or the Commission considers as they look at the
broader picture? Do either one of you have suggestions on that?
    Ms. Fox. I can certainly start, I think. I'll bet we'll
both have thoughts on this because we have been thinking very
hard about it. I do believe that the changes to compensation
fall into two buckets. There's changes to pay and copays and
things of existing benefit programs and pay; and then there's
retirement. So the kinds of things DOD has proposed in the past
and is looking at are adjustments to things like pay raises.
You're going to get paid next year. How much your raise is is
something we should talk about. Certainly we believe that those
need to be looked at in a very clear-eyed way to make sure we
can recruit and retain the best people that we need for the
All-Volunteer Force.
    There are standards for that, but frankly we monitor that
very, very closely every year and, as Admiral Winnefeld said,
would certainly come back to you if we saw any kinds of trends
in the negative direction.
    Retirement, however, is a program that the Commission is
looking at and considering fundamental reform. Those reforms
are important for the ways we think about shaping the force,
how long people stay in on the force, for example. That has to
be thought of in a very different way, and that's why we really
do want the Commission to help us think through and look at all
the considerations of how that would affect the shape of the
force in the future.
    So we parse them in that way and have been thinking of them
in that way.
    Admiral Winnefeld?
    Admiral Winnefeld. Senator, I think you were mostly
referring to the retirement side. When I came in the service as
a young aspiring fighter pilot, I didn't think I was very
smart. I didn't really understand what promises were being made
to me. But I did feel like I was going to get 30 days of leave,
I was going to be able to have my own personal health care
covered, and that I was going to be able to retire at 20 years.
I think that's the expectation that currently serving members
and retired members have.
    So a grandfathering piece, I think, is important to us so
that the currently serving and retired members don't sense a
change in what they believe that they were promised. I don't
believe I got many promises when I came in.
    I do think that as we look and as the Commission looks at
future potential changes to the retirement system, they have to
look at all the variables. Those variables include vesting
time--is it 20 years, is it something else--what your retired
base pay is, what the defined benefit multiplier would be, if
there is such--if that would be included--any bonuses that
would take care of that, and matching, and also cost of living.
    But in the end, I think there are three goals that such a
system has to meet. One of those is that we have to take the
best possible care of the people who serve this country.
Another goal is that we have to allow the retirement program to
help us shape our force with the right profile. Third, we have
to get the best value for the American taxpayer. I think as
long as we can meet those three goals with the Commission and
grandfather what we do, then I think we'll be in good shape.
    I hope that helps.
    Chairman Levin. Thank you.
    Do you expect there's going to be any changes in benefits
in the 2015 budget request?
    Admiral Winnefeld. Are you talking about retirement
benefits?
    Chairman Levin. Yes.
    Ms. Fox. We won't propose anything on retirement benefits
in 2015. We are waiting for and working with the Commission to
think through retirement.
    Chairman Levin. Do you agree with that, Admiral?
    Admiral Winnefeld. Absolutely. I think this goes back to
what Secretary Fox said a moment ago, where any adjustments we
might make in existing compensation, those are changes within
an existing structure. We think the Commission is going to look
at the entire structure and that takes a much longer deliberate
look that addresses the variables that I mentioned.
    Chairman Levin. When we find a way to repeal this
provision, some of us are going to want to find an offset. Some
of the bills that have been filed don't require an offset. But
if we're looking for offsets, which is about a $6 billion
number, since I think you have indicated that you support
repealing this provision, do either of you have suggestions on
offsets inside the defense budget?
    Ms. Fox. I can certainly start that. We have looked at
that. It's about $6 billion, as you said, sir, in mandatory
spending. Inside the defense budget, there's really only two
places to go for mandatory, TRICARE for Life or changes to
retirement, and we've already said any changes we believe
should be grandfathered.
    We have proposed changes to TRICARE for Life fees that
would contribute, but not cover a $6 billion bill. So that's
inside the defense budget.
    In our budget there are savings that we would accrue aside
from the mandatory savings that you referred to of about $500
million a year. We understand and are planning that these types
of changes take time. So if you grandfather those savings would
accrue over time, and that's true for all the compensation
changes we've proposed, force structure reductions we've
proposed, efficiencies, we understand it takes time. That's one
of the big challenges a sudden drop like sequestration would
give us, before the BBA, and we may go back to sequestration in
2016. That sudden drop is a real challenge for us because it
does take time. We understand that.
    Chairman Levin. Admiral, do you have anything on that?
    Admiral Winnefeld. I'd just add, I just want to make sure
that the distinction is clear to the members, that there is the
$6 billion in mandatory and then inside DOD, because of the
CPI-Minus-1 provision, there is about $500 million a year that
we're already going to have to contend with in non-mandatory
ways, which will involve reduction, capability, capacity
choices that we will not be able to make because of that.
    But we're prepared to deal with that. We understand it's a
factor among all the many other factors that we have to deal
with when crafting a budget.
    Chairman Levin. Thank you.
    Senator Inhofe.
    Senator Inhofe. Thank you, Mr. Chairman.
    Secretary Fox, as a former Director of Cost Assessment and
Program Evaluation (CAPE), you led the SCMR. In that effort you
spent many hours examining the Department's military personnel
compensation and benefits structure, including retirement pay
and benefits. In your current role as the interim Deputy
Secretary of Defense, you will have been heavily involved in
the Department's fiscal year 2015 budget.
    I have a chart you can see over there on this side. This is
a chart that we have used quite a bit. I've talked to both of
you about this chart in my office. I think that you have
reviewed this.
    [The information referred to follows:]

    


    Chairman Levin. Can I interrupt you?
    Senator Inhofe. Excuse me?
    Chairman Levin. Roy, could you stay? We have a quorum now.
Could we keep you here for 1 minute?
    Senator Blunt. I was just going to step out for a second,
but I can stay.
    Chairman Levin. We want to get to nominations. Forgive the
interruption, but Senator Inhofe has encouraged me to interrupt
anybody to get our nominations voted on, including himself.
Thank you very much. Sorry to do that to you.
    We now have a quorum, so I would ask the committee----
    Senator Blunt. So much for sneaking out. [Laughter.]
    Chairman Levin. I shouldn't have singled you out. You would
never have done that. This was a unique opportunity for me.
    Since a quorum is now present, I ask the committee to
consider 3 civilian nominations and a list of 1,096 pending
military nominations. First, I ask the committee to consider
the nominations of Madelyn Creedon to be Principal Deputy
Administrator, National Nuclear Security Administration; Brad
Carson to be Under Secretary of the Army; and William LaPlante,
Jr., to be Assistant Secretary of the Air Force for
Acquisition. Is there a motion?
    Senator Inhofe. I so move.
    Chairman Levin. Is there a second?
    Senator Nelson. Second.
    Chairman Levin. All in favor say aye. [Chorus of ayes.]
    Opposed, nay. [No response.]
    The ayes have it. The committee now will consider a list of
1,096 pending military nominations. All of these nominations
have been before the committee the required length of time. Is
there a motion to favorably report them?
    Senator Inhofe. So moved.
    Chairman Levin. Second?
    Senator Manchin. Second.
    Chairman Levin. All in favor say aye. [Chorus of ayes.]
    Opposed, nay. [No response.] The motion carries.
    [The list of nominations considered and approved by the
committee follows:]
 Military Nominations Pending with the Senate Armed Services Committee
  Which are Proposed for the Committee's Consideration on January 28,
                                  2014
     1. Col. Donald R. Lindberg, USAFR to be brigadier general
(Reference No. 1299).
     2. BG William D. Cobetto, ANG to be major general (Reference No.
1300).
     3. BG Bart O. Iddins, USAF to be major general (Reference No.
1301).
     4. In the Air Force, there are 30 appointments to the grade of
brigadier general (list begins with Roy-Alan C. Agustin) (Reference No.
1302).
     5. In the Air Force, there is one appointment to the grade of
lieutenant colonel (Teresa G. Paris) (Reference No. 1303).
     6. In the Air Force, there is one appointment to the grade of
lieutenant colonel (Joel K. Warren) (Reference No. 1304).
     7. In the Air Force, there are two appointments to the grade of
lieutenant colonel and below (list begins with Jeffrey P. Tan)
(Reference No. 1305).
     8. In the Air Force, there are 17 appointments to the grade of
colonel and below (list begins with Robert D. Coxwell) (Reference No.
1306).
     9. In the Army, there is one appointment to the grade of major
(David W. Bryant) (Reference No. 1307).
    10. In the Army, there are 14 appointments to the grade of colonel
(list begins with Joseph B. Berger III) (Reference No. 1308).
    11. In the Air Force Reserve, there are three appointments to the
grade of brigadier general (list begins with Dennis J. Gallegos)
(Reference No. 1318).
    12. In the Air Force Reserve, there are three appointments to the
grade of brigadier general (list begins with Paul D. Jacobs) (Reference
No. 1319).
    13. In the Air Force Reserve, there are three appointments to the
grade of major general (list begins with Jon K. Kelk) (Reference No.
1320).
    14. In the Air Force Reserve, there are 12 appointments to the
grade of major general (list begins with Daryl L. Bohac) (Reference No.
1321).
    15. In the Air Force, there are 22 appointments to the grade of
major general (list begins with Christopher J. Bence) (Reference No.
1322).
    16. LTG David D. Halverson, USA to be lieutenant general and
Assistant Chief of Staff for Installation Management/Commanding
General, Installation Management Command (Reference No. 1325).
    17. Col. Stuart W. Risch, USA to be brigadier general (Reference
No. 1326).
    18. In the Air Force, there are 14 appointments to the grade of
colonel (list begins with Therese A. Bohusch) (Reference No. 1328).
    19. In the Air Force, there are 49 appointments to the grade of
lieutenant colonel (list begins with Richard T. Barker) (Reference No.
1331).
    20. In the Air Force, there are 77 appointments to the grade of
major (list begins with Jenara L. Allen) (Reference No. 1333).
    21. In the Air Force, there are 123 appointments to the grade of
major (list begins with Erin E. Artz) (Reference No. 1334).
    22. In the Air Force, there are 276 appointments to the grade of
major (list begins with Adam L. Ackerman) (Reference No. 1336).
    23. In the Army, there are 29 appointments to the grade of major
(list begins with Joseph A. Anderson) (Reference No. 1337).
    24. In the Army, there are 67 appointments to the grade of major
(list begins with Victor M. Anda) (Reference No. 1338).
    25. In the Army, there are 159 appointments to the grade of major
(list begins with Tracy K. Abenoja) (Reference No. 1339).
    26. In the Army, there are 185 appointments to the grade of major
(list begins with Harris A. Abbasi) (Reference No. 1340).
    27. Col. Paul W. Tibbets IV, USAF to be brigadier general
(Reference No. 1359).
    28. In the Army Reserve, there are two appointments to the grade of
colonel (list begins with Stephen E. Forsyth, Jr.) (Reference No.
1360).
    Total: 1,096.

    Chairman Levin. Thank you very much. Sorry to have done
that to you, Roy. Goodbye, Roy. [Laughter.]
    Senator Blunt. I'll be right back now, but now that we've
moved over 1,000 nominations while I was here, I'm glad I was
able to help. [Laughter.]
    Chairman Levin. Thank you. Sorry to have done that to you.
    Senator Inhofe, we will not take that from your time.
    Senator Inhofe. No, that's fine.
    Mr. Chairman, I just wanted to point this out to get the
big picture here. You're both familiar with this. This is the
area of savings prior to the budget that was passed. The black
line cuts down in the area of the balance, which is the
readiness, for the first 2 years. The orange up there is the
readiness area.
    The modernization prior to the budget is the green. You see
that's not very much. Force structure is the big thing, but not
in the first years; it's in the last.
    I think when we talk about the savings from various changes
in compensation that you're looking at the blue line, and
you're really looking only at about half of the blue line
there, because that's titled ``Efficiencies,'' of which changes
in compensation would be a part. So it would be about 50
percent.
    Now, Secretary Fox, do you agree with that analysis of that
chart?
    Ms. Fox. Yes, sir. You briefed my slide extremely well,
sir. I would offer just one point. We did not in the SCMR
consider retirement changes, because of the commission and the
complexity, as I've said before. So those compensation--that is
about half the blue, as you said correctly, are just changes to
pay and fees and things of existing programs.
    Senator Inhofe. I understand that and I appreciate it. The
reason I wanted to bring this up is that this meeting here
today is about compensation. There is this misunderstanding of
where that fits in the overall picture. Most people would think
it would be about the size of perhaps the green and the blue
put together. I think people need to understand that it's a big
deal, it's a lot of money, but relative to the rest of it, it's
not. My concern has always been in the readiness area.
    Secretary Fox, we've already seen that this is going to
have a devastating effect on long-term financial impact for
those who are currently serving. I think that we need to be
sure that we're all on the same page on this. The cut squeezes
military retirements between TRICARE fee increases that apply
at the COLA rate and a compounding decrease in COLA adjustments
to retired pay. Now, as a result the military retired pay will
not keep up with inflation.
    I wanted to bring this out because this is over and above
those issues that are already in play right now. Do you both
agree that, yes, as bad as they are, they're even worse because
of the fact that they already have taken what most people will
consider to be cuts in TRICARE medical services?
    Ms. Fox. Sir, I want to make certain I have your question.
The question is that the CPI-Minus-1 provision not
grandfathered compounds on the changes we've made to TRICARE?
    Senator Inhofe. That's correct, over and above those
changes.
    Ms. Fox. Certainly, again we believe that we should
grandfather any changes to retirement, and we also believe that
for retirement we need to look more holistically. CPI-Minus-1
might be right for the future, it might not. So absolutely the
CPI-Minus-1 is important.
    The TRICARE increase that we've talked about in 2012 was an
increase of $60 a year above, as our chart shows--it's now up
to, after being indexed--$548 a year. That compares for civil
servants to $820 a month. So yes, there is an increase, but in
my view anyway $60 a year as indexed is not as significant as
the CPI-Minus-1 provision that we're talking about. So that was
all we're trying to say.
    Senator Inhofe. It's just over and above it. That's the
point.
    Ms. Fox. It is, yes, sir.
    Senator Inhofe. Again, my concern has always been--when I
was serving in the Army many years ago, probably before you
guys were even born, we were talking to people who were going
to be reenlisting, people what were making career decisions,
and it was always based on what was there promised to them at
this time. I think that's the reason I always bring that up.
    General Dempsey said the other day, and I'm quoting now:
``If anybody here thinks I want to be the Chairman that goes
down in history for having carved up pay and compensation and
health care, I assure you I do not. I don't want to be that
Chairman. The problem is there's going to be a Chairman that
has to do it. So in my view we should get on with it, but we
should do it all at once.''
    Now, what he's referring to here is the Military
Compensation and Retirement Modernization Commission which will
be reporting next year. I think you already answered the
question, Secretary Fox. Admiral Winnefeld, would you agree
with that also, that the commission should be allowed to finish
its report and then do everything all at once, rather than to
do it piecemeal?
    Admiral Winnefeld. We certainly think that on the
retirement side it would be a big mistake to make piecemeal
changes, which is why the CPI-Minus-1 thing was a surprise and
a bit of a disruption. We think, though, that on the generic
compensation side that we have all the information we need to
make--these are fine-tune adjustments on the regular
compensation. But definitely on the retirement piece we should
wait until the commission reports, yes, sir.
    Senator Inhofe. Very good. I appreciate it.
    Thank you, Mr. Chairman.
    Chairman Levin. Thank you very much, Senator Inhofe.
    Senator Hagan is not here. Senator Manchin.
    Senator Manchin. Thank you, Mr. Chairman.
    I want to thank both the witnesses for their testimony
before the committee today. We're here to discuss a very
important issue, as you've been talking about, the critical
impact on today's servicemembers and for those who will join in
the future. After more than a decade of war, our servicemembers
have made tremendous sacrifices and I'm here to say that we
should honor the promises made to the men and women of the
service. I refuse to believe that we cannot find a responsible
and thoughtful solution to these fiscal challenges.
    I really want to thank Chairman Levin for holding the
hearing today. There's a couple of things that I want to ask
both of you. When I was Governor of West Virginia, the first
thing they came to me and said was we had to raise taxes, the
first thing. I said, ``don't you think maybe we can run the
place, let me check this out for about a year and see if we can
do a little better job before we raise taxes?'' As a matter of
fact, we were able to lower taxes, find more efficiencies, and
be more prudent in what we did. Basically, our values were
based around our priorities and vice versa.
    Just over a month ago, the U.S. Marine Corps became the
first Service to complete an unqualified favorable audit
opinion, the gold standard for auditing. Countless claims of
mismanagement and waste have plagued DOD. I think all of you
know that. The current goal is for a clean audit of DOD by
2017. Yet we are discussing cuts to soldiers' pay and benefits
today.
    It doesn't seem prudent to me for you to say the first
thing you have to do is cut soldiers' pay and benefits when you
don't know if you can run the place a little bit better. So if
DOD fails to convince Congress that changes to the soldiers'
retirement benefits are the best option for cost savings, what
other courses of action will you recommend? Because we hear of
the just unbelievable waste and fraud that goes on in DOD.
    Ms. Fox. Sir, first, I don't want to say that we could not
be more efficient. That would be a crazy statement, and of
course we can be more efficient and need to be more efficient.
    The other thing I want to just share with you is that from
my time, as Senator Inhofe said, as Director of CAPE, I spent 4
years, starting with Secretary Gates, running efficiency
initiatives in DOD. We found savings and we found efficiencies.
Secretary Kendall is, of course, running his acquisition
efficiencies review and has exercised better buying power,
started by Dr. Carter, the former Deputy Secretary of Defense.
    So DOD has been seized with efficiencies. We've found $100
billion first, and then another $60 billion, and then $30
billion. This year we'll propose more. We expect to propose
efficiencies every year.
    But as Senator Inhofe's chart shows, those efficiencies,
while important and we must continue them, are not adequate to
pay the bills of the sequestration. That said, we have to do
them.
    Slowing the growth of compensation is another piece of
this, though. We're not cutting compensation. We just need to
slow the growth. It can't continue to grow at 40 percent above
inflation. So we think that's another piece of it. But
fundamentally, at these budget levels everything is on the
table, first and foremost efficiencies.
    Admiral Winnefeld. Mr. Senator, I would also reinforce that
we aren't cutting. We aren't planning. No proposals we make are
going to cut anybody's pay, and that's a really important thing
I think to get out.
    I'd also share in the belief that there's an awful lot more
that DOD can do to become efficient. It would be irresponsible
to say or believe anything else. We are working very hard on
that. We're cutting our staff sizes considerably. We're working
hard on acquisition efficiencies. We have a long way to go on
that, and I think many Senators here would point out examples
where we have a long way to go on that, although we are making
progress. We just saved $4 billion on the Expendable Launch
Vehicle, which I think is a real tribute to Ash Carter and
Frank Kendall's management of that program.
    But no question we need to become more efficient. Even with
our most ambitious efficiency targets, we still have more of
this gap that we have to fill. As Senator Inhofe pointed out,
the compensation slowing is only a very small sliver of that
gap.
    Senator Manchin. Let me say, the other thing I want to talk
to you about is our National Guard. Going through the horrible
chemical spill that we're going through in West Virginia right
now, it was the Guard, the front line of defense for our State,
and always has been. I think every State will echo the same.
    With that being said, I'm concerned with the recent reports
that the Army wants to move Apache helicopters out of the Guard
and cut over 40,000 troops from the Guard. I look at what we're
doing with contractors, private contractors in DOD, and it's
been a real problem for me and really a thorn, to think that
we're going to be maintaining our contractor size while we're
cutting men and women in uniform.
    Also, the Guard just makes sense with declining budgets.
You can use your Guard more effectively and efficiently. But it
seems like the military itself doesn't want to embrace that.
    Maybe, Admiral, you can comment.
    Admiral Winnefeld. We do embrace the Guard. We love the
Guard. It's a fantastic institution that this country has used
for many hundreds of years. Depending on which State you talk
to, they'll give you a different number.
    Senator Manchin. As we're cycling out from Active, going
into our Reserves and our Guard, wouldn't that be a way? You
have all this experience and expertise.
    Admiral Winnefeld. We are in the process of our budget
deliberations that we're doing right now looking at the balance
between the Active Duty and the Reserve component. I would
guess that there would be a difference in proportionality, but
I wouldn't want to get into any details in there about how one
would come down as opposed to the other. But no doubt about the
Guard.
    The other thing you mentioned was contractors, sir. Again,
we completely share your belief. We have to make sure that we
have our contractor----
    Senator Manchin. We've had one heck of a fight on our hands
just getting their salaries from $900,000 going to $700,000. We
thought maybe they shouldn't be paid more than the Vice
President at $233,000, but everybody's pushed back on that.
    Admiral Winnefeld. I will tell you that one thing--and the
staff reductions, that the largest proportion of staff
reductions that we're taking I know on the Joint Staff and I
suspect elsewhere, out of the 20 percent reduction that we have
offered up to do, the largest proportion of that is, in fact,
contractors, because they are costly.
    Senator Manchin. Most of them are military, ex-military,
doing the same jobs. I would hope you'll look into it.
    The Guard, to me, is the most effective, efficient way for
us to go in this country, to have the expertise and keep that
expertise ready at all times. For some reason, I don't see DOD
embracing that. Even though we've elevated that up to the full
Joint Chiefs position--maybe it takes time. I know that Senator
Graham tells me it takes a little bit--it's like Paul Masson's
wine: ``We will sell no wine before its time.'' I hope we're
getting close to that.
    So with that, thank you, sir.
    Chairman Levin. Thank you very much, Senator Manchin.
    Senator McCain.
    Senator McCain. Thank you, Mr. Chairman.
    First, could I say, Secretary Fox, do you believe that the
actions that were taken in context of a budget agreement was
not the way DOD would like to see this issue addressed? Is that
correct?
    Ms. Fox. That's correct, sir.
    Senator McCain. That the best way to do this is an overall
addressing of the issue through the commission that this
committee had written into law and signed by the President?
    Ms. Fox. That would be our preference.
    Senator McCain. Would you agree that one of the principles
we should probably adhere to in addressing this issue--and it
is an issue--would be to make sure that we do not act in a way
that would affect existing servicemembers and retirees? In
other words, it would be prospective in nature and we could
address the issue effectively if we do it prospectively, rather
than creating the impression to the men and women who are
serving and those who have already served that we are reneging
on our promises to them.
    Ms. Fox. Sir, that is exactly DOD's position and has been.
    Senator McCain. So it will be definitely, you believe, a
recommendation from this commission that whatever changes need
to be made will be prospective in nature, rather than affect
existing benefits and retirement parameters?
    Ms. Fox. Yes, Senator McCain. I believe that is even
written in the establishment of the commission, that they be
grandfathered.
    Senator McCain. I know you respect the members of the
Budget Committee, as I do. But they're not renowned for their
expertise on military personnel issues. Would you agree?
    You don't have to answer, Secretary Fox. You don't have to
answer, Senator Fox. I will say that.
    I think you already answered this question, but for the
benefit of the record again: The plan to reduce 1 percent of
military retirees' cost of living was not conceived within DOD,
is that right?
    Ms. Fox. That's correct, sir.
    Senator McCain. To your knowledge, were you ever consulted
on this decision?
    Ms. Fox. Not to my knowledge.
    Senator McCain. To your knowledge, this decision was made
by the Budget Committee without ever consulting DOD as to the
impact of it on readiness, morale, keeping our promise, et
cetera?
    Ms. Fox. To the best of my knowledge, sir, we were not
consulted.
    Senator McCain. Mr. Chairman, I want to thank you
especially for anticipating this issue, because it is an issue
of rising personnel costs, and the fact that under your
leadership we now have a commission established, that I think
we can come up with a recommendation that would take into
consideration the views of the military and civilian leadership
in DOD, and hopefully we can arrive at a consensus.
    Our next panel of witnesses today will be very adamant,
understandably so, about their concern about the effect of this
action taken by the Budget Committee on the morale and
readiness and the ability of us to keep our promise to the men
and women who have served and are serving.
    I thank you, Mr. Chairman, for actually anticipating the
fact that this issue has to be addressed, and I hope we will be
able to convince all of the American people of the need to base
what we do on the recommendations of the most highly qualified
people we can find. I thank you, Mr. Chairman.
    Chairman Levin. Thank you so much, Senator McCain.
    Senator Donnelly.
    Senator Donnelly. Thank you, Mr. Chairman.
    Admiral, as we look at this challenge and in light of our
belief that these should be grandfathered, and we look at this
$6 billion amount that we're looking at, are there things that
you can sit with other folks at DOD and with the Joint Chiefs
and such and say, are there areas where over a year's period in
this budget we can try to find $500 million, putting it in your
best judgment, as opposed to imposing something from top down
here in regards to our retirees?
    Admiral Winnefeld. Senator, we've already accepted the need
to do that with the piece of this that's already inside the DOD
budget, where we pay into the accrual fund. That's a $500
million bill. When the legislation was passed, our accounts
basically were credited that $500 million and we started to
plan prudently to use it. We're going to have to backtrack on
that if this proposal is repealed. But we're prepared to make
those difficult decisions.
    If we are asked to account for the money that's outside the
DOD budget, the $6 billion that was in mandatory spending,
that's a far more difficult problem for us. As Secretary Fox
mentioned, there are really only two pots of money on the
mandatory side that we can address and one is retirement, which
we believe should be grandfathered, and the other is the
TRICARE for Life piece, which is a difficult question as well.
    Senator Donnelly. Secretary Fox, would you like to respond?
    Ms. Fox. Sir, Admiral Winnefeld said it exactly, our
position. We are prepared to find the $500 million a year
because we do believe grandfathering is the right thing for the
people. It is another one of the reductions that DOD would seek
to make that has backloaded savings and that is a challenge, as
was shown in Senator Inhofe's chart. But we are prepared to
address that challenge.
    Senator Donnelly. As we look at the future, and we have a
commission coming up next year and we don't want to step in
front of them or any of the decisions that are going to be
made, what are some of the areas you think that we can take a
real close look at and make a difference, while still saying to
our prospective servicemembers this is a great place to be and
this is a great opportunity to have in your life? Admiral?
    Admiral Winnefeld. I think that's a good question and I
think it gets back to the variables that are inherent in any
retirement plan. I think one that has been discussed the most
is the vesting time, the piece about you have to wait until 20
years before you receive any retirement benefits. That actually
helps us a great deal right now in the profiling of our force.
We want to have a young force that's going to stay to a certain
point and then, frankly, we need a number of them to move on so
that we can bring fresh new faces in.
    So it would be very difficult to design a system that would
give vesting before that, but it's not impossible. That's one
of the things that the commission certainly ought to consider.
    Senator Donnelly. Secretary Fox?
    Ms. Fox. Senator, I'd like to just share some advice I got
from Secretary Gates when I was trying to look at some of these
issues. He warned me, and I'll just share with you what he
said. He said: ``the Department of Defense is like a dinosaur--
little teeny brain and very poor fine motor skills. If we start
fiddling with these retirement benefits, we have a chance of
messing it up.''
    This is why it's so important that the Commission do this
thoughtful work, looking at all the analyses, because as
Admiral Winnefeld has said, it's very important that we
understand changes in vesting, what that does to the shaping of
our force. The needs of our force are changing, though, as we
look into the future. Technology changes, expertise changes. We
need some of our people with important expertise to stay longer
and we need others to move through faster and be young and
bring in new ideas. How do we get that exactly right? It's a
very difficult challenge and we are working with the Commission
and we look forward to continuing to do so.
    Senator Donnelly. Admiral, as we look at the Commission
and, as you indicated, the challenge you have of saying, we
want that mix to also change at the end where some decide on
other career choices and stuff, is it pretty much an art?
You're really going to have to dig deep to try to figure out
how do we set this up so at 6, 7 years we don't lose people we
want to keep for 20 or whatever and the skills that we want? On
the flip side of that, that folks who may choose to move on,
that they have that choice. Is it going to be a major
consideration of the Commission when you look at this as to how
to get the mix right for the future?
    Admiral Winnefeld. Yes, sir, I think it is. We have pretty
good models and the like under our current system for retention
behavior. We understand that fairly well. There are always
unknown variables out there. The number of variables is
dizzying--national employment, the propensity to serve on the
part of the population, whether we're at war or not. Believe it
or not, even family income, as to how quickly a person
graduating from high school needs to get into a job. Number of
recruiters, the amount of pay we give, bonuses, the retirement
program, and the like.
    So it's a big soup of variables in there, and the
Commission's going to have to consider that very, very
carefully. When you open up, release the glue, and introduce a
new framework that could potentially allow people to retire
earlier, those models are going to be upset, and we'll have to
determine how to modify them so we can understand the behavior.
I think that's part of the challenge for the Commission, to
understand whether we have a model that can accurately predict
behavior so we can profile our force correctly.
    Senator Donnelly. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Levin. Thank you, Senator Donnelly.
    Senator Wicker.
    Senator Wicker. Thank you, Mr. Chairman. A real important
hearing and I appreciate your calling it, Mr. Chairman. I
appreciate your starting out at the outset saying that this
CPI-Minus-1 was wrong and it needs to be fixed.
    As a matter of fact, not a single voice has been raised on
either side of the dais today in support of what this Congress
enacted and what was signed into law. I appreciate this. I also
want us to appreciate the seriousness of this hit to the
military retirees that are affected. It hasn't been mentioned
yet today. If either witness wants to challenge me on this,
now's the time to do it.
    But for the typical enlisted military person who retires
below the age of 62, this is going to mean a lifetime hit of
somewhere between $70,000 and $80,000 or more lifetime to that
military member. Correct me if I'm wrong there, but that's been
substantiated over and over. It depends on exactly when the
enlisted person retires and exactly what their rank was at the
time. For officers it's even more. It's over $100,000 out of
their pockets over a lifetime.
    So this is a serious matter. CPI-Minus-1 sometimes can
appear to diminish the profound effect this has.
    Let me ask you, Secretary Fox--and let me acknowledge also
to both of you, I understand the problems that you're facing
and the daunting task that you have in making the numbers come
out. We want to work with you on that. That's why we
established the commission with certain parameters.
    As I understand it, Secretary Fox, you're sorry this was
enacted, you're glad it's been corrected with regard to
disabled military retirees, and you want to fix it, but you
want us to wait 13 months to fix it for everyone else; is that
correct?
    Ms. Fox. Yes, sir. We want it be informed by the results of
the commission.
    Senator Wicker. Now, why was it a good idea to fix it--it
wasn't going to go into effect until December 2015 for the
disabled retirees. Why was it a good idea to go ahead and fix
it for them?
    Ms. Fox. Sir, I think that the disabled retirees' cases is
very clear. I think that whether to do anything with disabled
retirees is just not a part of any----
    Senator Wicker. I think it was clear. I think it's clear on
the rest of them, too. It seems to be clear up and down the
aisle. So if it was clear for them and if we're unanimous in
this room and unanimous at the witness table that this is a
wrong that should be fixed, it seems to me it ought to be made
clear.
    Admiral Winnefeld, you mentioned predictability. We have an
opportunity. We have pay-fors proposed on both sides of the
aisle to do this. It seems to me it doesn't make any sense, if
we're all in agreement on this, to wait, unless you want to
hold out the possibility that we may stick with this. Now, if
you want to send that signal then waiting for a commission
report or waiting 18 months might be a good idea. But if we're
all agreed this is wrong, shouldn't have been done, we can pay
for it elsewhere, it seems to me that it makes no more sense to
postpone this for 13 months than it did for the other clear
case.
    It reminds me of sequestration. Mr. Chairman, we had
witness after witness appear before this committee and other
committees: We're not going to have sequestration in the United
States of America. We had witnesses from agencies tell
committee after committee: We're not even making plans for
sequestration because it is so unthinkable, it is so heinous,
that we know this is not going to happen. The President of the
United States said in a debate: Not going to be any
sequestration.
    We hoped that was true, but it wasn't true. Sequestration
did happen. To me to say we know this should be fixed, we know
it's wrong, we know it was the wrong approach, we regret it,
but let's wait, to me it holds out the potential that it'll be
like sequestration and go into effect despite everyone's
protestations to the contrary.
    We said there's not going to be sequestration. There was
sequestration. We were told in this city repeatedly if you like
your health care plan you get to keep it, period. It turns out
that that wasn't the case. We've told military members: You do
your side of the bargain, you signed up for worldwide duty, you
place yourself in an assignment to regions where you're in
harm's way, and we're going to keep our promise to you. Last
month we broke that promise, and now we're being told, let's
just wait 13 months before we fix that.
    I really, I can't go along with that. I would say to my
colleagues, this is about a promise that everybody says we need
to keep, and it's also about the process. My friend from
Arizona said this came out of the Budget Committee. This didn't
come out of the Budget Committee. It came from behind closed
doors and was authored by two individuals and presented to us
as a package, take it or leave it.
    If we would start following the process in this Congress,
if the budget conference had been allowed to vote on it, to
debate it, to hear amendments, we might have adopted Senator
Ayotte's offsets. We could have come up with these savings
elsewhere. If we had had an amendment process like the rules
call for in the budget bill, we would have had opportunities on
a bipartisan basis to pay for this elsewhere, to have these
savings elsewhere, to keep our promise to the people who
fulfilled their promise to the security of the United States of
America. If we had had this in the omnibus bill.
    We need to get back to following the rules around this
Congress. If this had seen the light of day, the elected
representatives of the American people, the 100 Senators, the
435 Members of Congress, would never have stood for this broken
promise. I think this ought to be a lesson to us. Let's keep
promises, but there's a reason we have rules around here. It's
not to waive and it's not to get around them, because generally
it ends up with bad policy.
    I thank you. I want to work with you, but I have to say we
need to go ahead and act. Everyone acknowledges this was wrong
and if it was wrong we need to go ahead and send the signal
that we're going to make it right.
    Chairman Levin. Thank you, Senator Wicker.
    Senator Kaine.
    Senator Kaine. Thank you, Mr. Chairman.
    I want to maybe take a little different tone than my friend
the Senator from Mississippi on this one. I agree completely
that this is a provision that needs to be changed and I think
we will change it. I agree that we should change it
immediately, because it seems like the thrust of your testimony
is why not return to the status quo pending the 2015 report,
and we need to change this just to return to the status quo so
that we don't send a wrong signal. Whether it's with a pay-for
or not, I think we should return to the status quo.
    But I do want to take on the bigger picture issue of,
instead of kicking ourselves around because we made a mistake,
we haven't done a budget in 4 years. We haven't done a budget
in 4 years. A divided Congress hasn't done a budget conference
since 1986. So we did a budget and the Senate budget did not
include this provision. There are at least four members of this
committee who are on the Senate Budget Committee. This was not
in the Senate budget.
    It did come up during the course of the budget conference
in the negotiations between the two chairs. I don't want to
trash the chairs for coming up with a budget deal that we had
to vote on, because no budget has been hurting our military and
hurting our veterans. Sequester, which is what we did when
there was no budget deal, has been hurting the military and
hurting veterans. Continuing Resolutions (CR) instead of
appropriations bills have been hurting the military and hurting
veterans.
    So we did in December what legislative bodies do all the
time, which is there was a budget deal that was a compromise,
that had things in it that I loved, that had things in it that
I hated, and that didn't have things in it that I wished were
in it. That's what doing a budget deal is.
    This is an example of something that we didn't put in the
Senate budget deal because we didn't like it. We like the
grandfathering notion, I think all of us embrace. But the vote
that we cast on this--I know it's good to put this to a whole
vote, as we were breaking a promise. We were trying to do a
budget for the United States of America in a Congress that
hadn't done a budget for 4 years, and doing it with the
knowledge that there were some pieces that we didn't like and
felt like we could fix.
    So I think that there's a tendency up here to kick each
other around or for one house to kick the other house around or
for the executive branch to kick the legislative branch around
or the legislative branch to kick the executive branch around.
Talking each other down is no way out of any of the challenges
that we have.
    I think the budget deal that we reached in December--I'll
just ask you: Are you glad that we have a 2-year budget? Is
that a good thing for the military?
    Ms. Fox. DOD has been very clear, we needed the stability
and we appreciate the stability.
    Senator Kaine. Are you glad that we were able to get an
omnibus appropriations bill for the full year instead of
gimmicks like a CR?
    Ms. Fox. Yes, sir, of course. An appropriation gives us a
lot of opportunities to do what we need to do without the CR,
which just ties our hands, as you well appreciate.
    Senator Kaine. So to me, a standard feature of this budget
deal--the best part about the deal is that there was a deal,
and a standard feature of a budget compromise is that there are
some pieces that I don't like and I hope to fix. I wish
unemployment insurance extension had been part of this budget
deal. It wasn't. We're trying to figure out a way to fix that.
    But the fact that there are pieces of the deal that we
don't like I don't think should obscure the issue that when we
together passed a budget deal and an omnibus, we did something
really good for veterans, we did something good for the
military. I live in a State that I'm sure has the most direct
military connection in terms of the number of veterans per
capita, Active Duty military, Reserve, DOD civilians, DOD
contractors, military installations. We're the most connected
State to the military, I believe, of any in the country.
Overwhelmingly, even though there are aspects of this deal that
we don't like and want to fix, the fact of the deal is
something that I think House, Senate, Democrats, Republicans,
inside, outside Capitol Hill, should be glad that we've finally
shown we can get it. Not that we can't make improvements, and
this is one that I share with everyone around the table that we
ought to fix this, and I'm actually very confident we will.
    For purposes of those who are watching this who weren't in
on the earlier discussion about the composition of the panel, I
think it's important and I would like to ask you to describe
who it is that's around the table coming up with the
recommendations that you're intending to make back to Congress
in February 2015, because I think it's important to know. Are
all viewpoints, enlisted and officer and active and veteran,
are all viewpoints being represented?
    I'm not talking about the names, but I'm talking about is
it a good collection of stakeholders who are making these
recommendations, who will look at these issues from a variety
of different angles?
    Ms. Fox. Senator, just for clarity, are you asking about
the process we've used inside DOD, not the composition of the
Commission? Is that correct?
    Senator Kaine. I would actually like to know within the DOD
and then composition of the Commission. This is more to explain
for those who are watching this.
    Admiral Winnefeld. Sir, for the Commission, I don't have
the actual composition of the commission memorized or with me,
but I do recall having looked at it and that it was a good
representative commission, panel, that will have a good
opportunity to look fairly and thoroughly at retirement, in
particular. We have confidence in this panel. We've had good
cooperation with them and they're working hard. I think they're
going to come up with some pretty good information for us.
    Inside DOD, we've had a number of meetings of the Joint
Chiefs with the senior enlisted advisers in the room, and we
have talked about this for months on specifically the
compensation pieces. We're still working through it. We haven't
made a budget submission yet, but there's been a thorough
vetting with our senior officer and enlisted leadership of the
proposals that we might present.
    Ms. Fox. Then on top of that, the senior officer, enlisted,
as brought through the Joint Chiefs, has come to DOD's
leadership right up to the Secretary, spent a lot of time with
him, with the military, the civilian, our personnel experts,
our Comptroller, our analysts, all in the room together going
through these proposed options for change, how we might think
about it. That's the process we've done pretty much every year
that we've proposed any changes to Congress for our
compensation.
    Senator Kaine. Thank you, Mr. Chairman.
    Chairman Levin. Thank you, Senator Kaine.
    Senator Ayotte.
    Senator Ayotte. Thank you, Mr. Chairman. Thanks so much for
this hearing. It's a very important topic.
    Let me just ask you, Admiral Winnefeld and Secretary Fox. I
think it's been clear not one DOD official was consulted on
this cost-of-living increase cut, were they?
    Admiral Winnefeld. To my knowledge, there were no DOD
officials consulted. We heard about it in the end game, as
other people did.
    Senator Ayotte. Just to be clear, the way this went down is
that many of us sitting around this table actually also serve
on the Budget Committee, and as a member of the Budget
Committee and a member of the Armed Services Committee we
weren't consulted about this cut to the cost-of-living
increase.
    As far as I know, the chairman of the Armed Services
Committee was not consulted on this cost-of-living increase
cut. In fact, the cut actually violated the principles in our
own law that we passed that said that if there are going to be
any changes to retirement that they would be grandfathered.
Isn't that right?
    Ms. Fox. That's correct.
    Senator Ayotte. Wonderful that we can reach a 2-year budget
agreement. But you know what was astounding to me is once this
became public that people from both sides of the aisle said
this is wrong. Before we even voted on it, people on both sides
of the aisle had ideas on how to fix it, but we couldn't get it
fixed then before we inked this deal. That would have been the
right thing to do.
    Now, the right thing to do is to fix it now, not to leave
this hanging over our men and women's heads in terms of the
unfair cuts here. I hope that we can agree to fix this now, not
to delay it.
    But this is a lesson. To not consult our men and women in
uniform is outrageous. To not include people who serve on the
Armed Services Committee to make cuts to military retirees--
only in Washington. I think that we should commit ourselves
around this table to find a fix for this. We can pay for it.
Many people, including myself, have ideas on how to do it, not
taking further from the military budget, so that we don't have
a further impact on sequestration and the service to our men
and women in uniform, making sure they have the equipment that
they need.
    Let me just ask you, Admiral. A sergeant first class--the
chairman used an example of you enlist at 18, you put 20 years
in, you retire at 38. Someone who has done that in the last 20
years, how likely is it that that individual has done multiple
tours in Iraq and Afghanistan?
    Admiral Winnefeld. Certainly it depends on the branch of
Service, but no question that if you're a soldier or a marine
or someone in the other Services who serves on the ground,
you've probably done more than one tour.
    Senator Ayotte. When you do a tour in Iraq or Afghanistan,
do you have a chance to put roots down in a place, so that when
you do retire that you already have roots there, that you can
establish a career? Is that so easy?
    Admiral Winnefeld. I'd say regardless of whether you're
serving in Afghanistan or Iraq or around the world----
    Senator Ayotte. Or anywhere.
    Admiral Winnefeld.--that one of the facets of our life in
the military that we accept is that we don't have the
opportunity necessarily to set some roots down. As the son of a
naval officer, I don't even know what roots are.
    Senator Ayotte. Right.
    Admiral Winnefeld. But there are a number of people who
come into the service from States all around the country who
might have residual roots there. But you're absolutely right,
for 20 years you're moving around.
    Senator Ayotte. Isn't that different from your average
individual in terms of the ability to establish a career even
post-20 years in the military?
    Admiral Winnefeld. Senator, it's even more than that. It
affects the spouse's employment. Many of them face severe
disruptions as they move from place to place. We've gotten some
help from Congress on that, frankly, but it's still very hard
for a spouse to move from one place to another and jump right
into the same job.
    Senator Ayotte. So often for a family now you need a two-
income household. So when your spouse is moving around all the
time, he or she can't have a situation where they can establish
their career also. So you're losing income there as well,
aren't you?
    Admiral Winnefeld. It's income, and I think there's a
frustration and an anxiety level of, ``next time we move, am I
going to be able to find a job?''
    Senator Ayotte. So let's be clear. A military retirement is
very different in terms of the sacrifices that are made than
your average civilian retirement; do you agree?
    Admiral Winnefeld. Yes.
    Senator Ayotte. In terms of the sacrifices made by your
family, in terms of the opportunities that you lose to earn
income, in terms of the opportunities that you lose to put
roots down because of the sacrifices you have made for our
Nation; is that right?
    Admiral Winnefeld. I absolutely agree, and that's why we
tend to not try to make direct comparisons between civilian and
military retirement.
    Senator Ayotte. In fact, when you retire from the military
you can be recalled, can't you? As far as I know, in a civilian
retirement generally you aren't mandatorily recalled back to
your job, are you?
    Admiral Winnefeld. It's unusual, but in the event of a
crisis, a national emergency, absolutely, you can be recalled.
    Senator Ayotte. In fact, we've been informed since
September 11 about 3,400 retirees were actually recalled back
to Active Duty service. Does that sound about right?
    Admiral Winnefeld. I don't have the numbers, but I wouldn't
be a bit surprised if they were accurate. There are some who
come in voluntarily, but others are recalled, yes, ma'am.
    Senator Ayotte. So that's another huge difference and I
think a disconnect with what happened in this budget agreement.
    I want to ask you about an issue that was brought to our
attention that involves general officer retirement pay, both
you, Admiral and Secretary Fox. As we looked, I saw a report
that said that 2007 legislation provided incentives for senior
officers to continue serving by extending the basic pay table
from a cap of 26 years to provide increase in longevity to pay
out for 40 years of service. According to one press report in
USA Today, using 2011 numbers, this could result in a four-star
officer retiring with 38 years of experience receiving $84,000
more in retirement than previously allowed.
    Now, I understand why these changes were made, because we
were in wartime and I assume the purpose was to encourage
combat-experienced one- and two-star admirals and generals to
continue serving during the war. However, now we're in a
situation where Congress has made cuts to--and I want to say
these cuts, by the way, are a penalty. It's a 1 percent
decrease in your cost-of-living increase. It's a penalty.
    We haven't even looked at issues like do we need to
continue the increases to the generals and admirals that
they've received now that we are winding down in Iraq and
Afghanistan. Could you comment on that? Think about the impact
on a sergeant first class losing $80,000. That is a huge
impact.
    Admiral Winnefeld. Senator, we think the commission should
look at all elements of retirement, all pay grades, and all of
the many variables that I listed earlier. So we look forward to
what the commission has to say on that and other issues.
    Senator Ayotte. Also, looking as well at, obviously,
admirals, generals, and seeing what is fair in terms of their
compensation as well, because it seems to me that the people
that took the biggest hit under this--the officers take a big
hit under this as well and I don't diminish that. But your
average enlisted person, from what they take as a hit,
basically as I understand it their average retirement is about
$25,000 a year and, with moving around and everything like
that, they have to try to find another job just to feed their
family. Do you agree with that?
    Admiral Winnefeld. I do. We are looking at all of the
proposals we are considering under the budget submission that
we'll make this year. Flag and general officer pay is one of
them.
    Senator Ayotte. I appreciate that. I just hope that we can
fix this wrong and right it now and not wait, Secretary Fox. I
don't think we should wait.
    Thank you.
    Chairman Levin. Thank you, Senator Ayotte.
    Senator Reed.
    Senator Reed. Thank you, Mr. Chairman.
    I think there's two clear issues emerging with broad
consensus. One is we have to correct this issue, and my sense
is that has to be done very quickly, immediately, for many
reasons. One is the issue of what signal we're sending to the
forces in the field. I understand--and the chairman may correct
me or respond--that we could move such a bill through this
committee without a pay-for, because we're not responsible for
the pay-for. Is that accurate?
    Chairman Levin. That is accurate. I think that the one bill
which has been referred to the committee--we're doublechecking
this, however--is the bill of Senators Hagan and Pryor, I
believe, that does not have a pay-for. If there's a pay-for, an
offset in other words, then that, I believe, would be referred
to a different committee.
    But this committee, I believe, will have the ability to act
promptly on a bill, and I hope that we will and not wait for
the Commission because there is a clear consensus we should
clear the air on this issue.
    Senator Reed. Thank you, Mr. Chairman. I appreciate that
clarification. Again, I do sense that this is a consensus
across the whole spectrum of the committee.
    That does still leave open the question of the role of this
commission, which is absolutely critical. We can anticipate--
I'll ask you, Admiral Winnefeld, and then Secretary Fox--next
year when the Commission reports that there will be proposals
to us, and we can deliberate upon them thoughtfully and
publicly, that will deal with the spectrum of pensions,
compensation, benefits, et cetera. That's necessary because
you're reaching a situation where maintaining the operational
readiness of the existing force is being squeezed, for want of
a better term, because of the obligations of these costs that
are building up and have been building up because of
congressional action.
    Can you comment on that, Admiral?
    Admiral Winnefeld. The Commission will certainly offer its
recommendations to Congress and certainly to this committee on
how both pay and compensation and retirement should be
structured. So we believe that we should wait until they--I'm
not necessarily saying we should wait until we repeal this
because that's a different question. But we do need to look at
what they come up with, the various variables on retirement.
    On the compensation piece, it's possible that the
Commission could come up with some structural recommendations
to compensation. Any recommendations we would make for the
fiscal year 2015 budget would not be structural. They would be
fine-tuning the existing system to recruit and retain the best
while getting the best value for the taxpayers.
    Senator Reed. Before I ask the Secretary, the presumption I
think within the Commission is not only will their
recommendations allow us to deliberate and make thoughtful
decisions based upon inputs from everywhere, but also in basic
fairness that they will be implemented on a basis so that
people will not be prejudiced. There will be grandfathered
provisions, because without that you have people who served
with distinction and with great courage, who their expectations
could be radically changed. Is that the presumption?
    Admiral Winnefeld. I would have to doublecheck, but I'm
almost certain that the law itself, the legislation that
established the Commission, directs them to not consider
anything other than something that's grandfathered. We support
that.
    Senator Reed. Secretary Fox, your comment?
    Ms. Fox. Yes, sir, Admiral Winnefeld is correct. I actually
brought that section with me. The law specifies that any
changes be grandfathered. That was as guidance to the
Commission. We do want to see the Commission's results and they
would be brought forward and debated and we look forward to
that.
    This point about timing. I hear the consensus. We agree,
CPI-Minus-1 in the provision is not grandfathered and that's
not what we seek. We want any change to retirement, whatever it
ends up being, grandfathered. The only point is that it doesn't
happen until December 2015. We believe that two things must
happen. It needs to change before it's implemented and we need
to give space to this commission to allow it to be effective.
If that space is repeal and then do something, so be it. If
that space is wait and we'll see what the Commission has to say
and then do it one time, a one-time change, so be it.
    But those are the parameters of our consideration.
    Senator Reed. So your point is that at present, because the
effective date is not until December 2015, there is no one who
is actually being denied the full benefits that were promised,
et cetera. The other point I think you make is that it is
entirely possible that the Commission could propose some
retirement arrangement, maybe not this one identically, but
some arrangement, however that would have to be debated by us,
it would have to be grandfathered to protect people, which this
provision isn't. So that would provide a much better approach
to dealing with the issue of retirement. Is that fair?
    Ms. Fox. Yes, sir, that's exactly our position. The
Commission now will report out in February 2015.
    Senator Reed. But it doesn't preclude us and it shouldn't
preclude us from taking the action to correct it and then wait
for the commission's deliberations.
    Just one other point. What is driving this, not entirely,
but is the need not only to keep our promises to the retired
community, which should be considered invulnerable in my view,
but also everyone's commitment to people on Active Duty that
they have the best training, the best equipment, that their
families have the best opportunities while they serve. That's
one of the fundamental tensions we're trying to deal with. Is
that accurate, Admiral?
    Admiral Winnefeld. Yes, sir, it is. I would add if I could,
the only real interest that I have in deliberately doing this
is simply to make sure that if it's repealed it's repealed in a
way that doesn't take it off the table in some form of
accounting for cost-of-living, whatever it is, so that this is
not taken off the table permanently for the commission. The
Commission ought to be able to look at all the variables.
    If it's repealed in a manner that doesn't mess with that,
if you will, the timing is completely up to Congress,
obviously.
    Senator Reed. Thank you, Mr. Chairman. Thank you.
    Chairman Levin. Thank you very much, Senator Reed.
    Senator Fischer.
    Senator Fischer. Thank you, Mr. Chairman.
    Thank you both for being here today. You've presented us
with a lot of interesting information. In discussing the
conclusions of the SCMR, Secretary Hagel said that Chairman
Dempsey would lead an effort to find $50 billion in savings
through changes to compensation. Now, today you've said that
retirement changes won't be part of the coming budget request.
But can you tell me what the status is of General Dempsey's
review on the compensation part?
    Admiral Winnefeld. We were challenged as a stretch goal to
try to find--I don't think it was $50 billion; I thought it was
less than that, something like $40 billion--but a decent sized
number for compensation savings. Other areas of DOD, by the
way, were equally challenged in other ways to find savings.
    We worked very hard to do that. We actually came up with
the set of proposals that would be required to make that mark,
and we found them too severe. So we have been working on a set
of less severe proposals that we will consider submitting as
part of the President's budget request. We're not ready to talk
about those because they're not final, but we're not going to
make the $40 billion or $50 billion or whatever it was. But it
was a very good exercise for us and a stretch goal to try to
see where we could find savings.
    Senator Fischer. Thank you.
    Senator Kaine raised an issue earlier and I'd like to
follow up on it if I could for a minute. Is DOD including
outside groups in its review of the compensation? Have you
reached out to veterans groups?
    Admiral Winnefeld. We are still in the process of
deliberating over these things and we're not ready to show
whatever proposals might be submitted. But we do look forward
to consulting with the veterans groups, because it's important
that they understand them. We'd like to have their support. We
know that will be difficult. Any time you're talking about
slowing a growth rate of compensation--we're not taking
anybody's pay away--and we understand that. That's what
veterans groups are for. We love them. They do a very important
service for our people. But I think in due course we will
definitely consult with them.
    Senator Fischer. So am I understanding you correctly in
that you're coming up with proposals inside DOD, then you're
presenting it to stakeholder groups looking for input? Or are
you including the stakeholders, veterans groups for example, in
providing you with suggestions and input?
    Admiral Winnefeld. We've listened to, certainly listened to
the veterans support organizations. They're very vocal,
understandably, and we appreciate that. We understand what
they're telling us. I think that at various levels there have
been discussions with members of the veterans groups, round
tables, and things. But we have not presented any specific
proposals to them because we can't get out in front of the
Secretary or the President in submitting a budget.
    Senator Fischer. I go back to this. You're presenting your
proposals to these groups. You're not asking them to present
proposals to you with ideas for changes?
    Admiral Winnefeld. No, we have not brought them in and
asked for their proposals on how to change compensation. We're
certainly open to that. We listen to what they say. We read
what they write and we take that into account as we deliberate
over these things. I don't know whether they would come in with
a proposal at all to change the glide slope of compensation,
but I would be interested in that if they did.
    Ms. Fox. May I just add that Secretary Hagel does meet with
the veterans. So certainly there is a dialogue. As Admiral
Winnefeld has said, we have not concluded anything about
specifics of our compensation proposals. But he meets with them
and listens and they have a general dialogue about far-ranging
issues. I have not been privy to them, but if you would like,
I'd be happy to take for the record some report back on the
kinds of topics that they discuss.
    [The information referred to follows:]

    Please see the attached documents, which include:
    A.  A list of MSOs/VSOs/Military-Supporting Nonprofits who
participated in the Secretary of Defense roundtables.
    B.  The agenda for three roundtables which took place on March 21,
2013, June 13, 2013, and September 19, 2013.
    C.  OASD(PA) Hosted Conference Calls Outreach to MSOs, VSOs, and
Military-Supporting Nonprofits from April 2013-February 2014.

    


    


    


    


    


    


    


    


    


    


    


    


    

    Senator Fischer. That would be helpful, not just with
veterans groups, but any stakeholders that are out there that
could offer maybe valuable information as DOD moves forward in
looking at compensation. I would think you would want to seek
that.
    Ms. Fox. May I also add, on the commission there has been a
lot of back and forth with the commission sharing data, sharing
analyses, and so forth. So there's been those kinds of
discussions, again not our specific proposals because they're
not done. But there's been a lot of engagement.
    Senator Fischer. Thank you, Dr. Fox. I appreciate that.
    Secretary Hagel has also stated that DOD would begin
implementing the package in the fiscal year 2015 budget. Is
that still the plan? Are you going to include any of those
changes in the budget?
    Ms. Fox. We are still looking at our budget deliberations,
but we are seriously considering proposing additional changes
to compensation, not retirement. Again, let me be clear.
Retirement is the commission and we need all the help because
it's so hard. But some modest proposals on other parts of
compensation, following onto the very large effort that the
Joint Staff and Admiral Winnefeld has been leading over the
past 6 to 9 months.
    Senator Fischer. I would appreciate it. I know that other
members of this committee would too, if we could get that
information. I would think the earlier we could get that
information, the better, so that we can make decisions that
hopefully will be helpful to DOD as well.
    If you could tell me, have either of you seen any impact
that these recent COLA changes have had with regards to
recruiting and retention? Has there been any impact to date on
that?
    Admiral Winnefeld. It's a little soon for us to directly
measure impact. Generally, we find that retirement benefits
play a less than 1 percent accounting in a potential recruit's
deliberation as to whether he or she is going to enlist in the
U.S. military. But it does, of course, impact our retention. In
particular, it doesn't really, we find, affect the retention
for our first and second termers, but it very much affects the
retention for our third and career termers.
    So we haven't seen any behavior changes yet, but we do know
that they're very nervous about this. They don't like it. If
you have 17 or 18 years in the military and you're thinking of
retiring at 20, now if the CPI-Minus-1 provision is
memorialized you may consider having to stay longer in the
military in order to accrue more of the benefit so that your
retirement would not be impacted as much. So I think that's the
calculus that they're doing. I don't think anybody's going to
quit the military because of it, but they are nervous about it
and they're again doing the calculation on how long they have
to wait until they can retire.
    Senator Fischer. You had mentioned that earlier, that it
may not have that big of an effect on recruitment. But I can
certainly see that it would with retention. I would imagine
that the sooner that we can provide certainty to the members of
our military, the better. Would you agree with that?
    Ms. Fox. Certainly I think this is an issue. One thing I
would just throw in here is one of the retention concerns we
are starting to feel is the concern about the quality of
service: Will they have the training, will they have the
equipment, will they have the opportunity to serve in a way
that is as rewarding as they expected when they joined?
    Senator Fischer. Thank you so much.
    Thank you, Mr. Chairman.
    Chairman Levin. Thank you, Senator Fischer.
    Senator Hagan.
    Senator Hagan. Thank you, Mr. Chairman.
    Admiral Winnefeld and Secretary Fox, thank you for your
service and for the jobs that you do. I supported the recent
budget after I heard from top military leadership in North
Carolina's military community about the urgent need to halt
sequestration of our defense budget. We've had a number of
hearings in this committee about the negative effects of
sequestration, and I think we all agree that if allowed to
continue, sequestration will drastically reduce future military
readiness and actually jeopardize the national security of our
country.
    We're still at war in Afghanistan. It is essential that our
servicemembers are fully paid, fully equipped, and receive the
support and training that they need. However, I have strongly
opposed the provision that was included in the Murray-Ryan
agreement that cut the COLA, the COLA that we've been talking
about, for our servicemembers. We've made a strong commitment
to our brave men and women, many of whom in my State have
deployed multiple times to combat overseas. It is my true
belief that we have to keep our promise to our service men and
women after they have sacrificed so much for all of us and our
country.
    While it's true that our country faces difficult fiscal
challenges, we cannot balance the budget on the backs of those
who have answered the call of duty. I know that there is strong
bipartisan support to repeal this provision. Senator Pryor and
I both have a bill that will do just that and I'm looking
forward to bringing that onto the Senate floor.
    My question is that, unlike the private sector, where most
companies can easily recruit mid-level employees, the Armed
Forces have no alternative but to build and develop their mid-
grade officers and noncommissioned officers (NCO) from within.
As servicemembers reach their 8- to 10-year service mark, many
are making that critical decision, are they going to stay in
the military, make it a career, or not.
    My question is, most of these officers and NCOs are battle-
hardened leaders with multiple deployments to Iraq and
Afghanistan. Do you believe that the COLA cuts will cause our
mid-grade officers and NCOs to leave the service prematurely,
and how do you believe they view these recent COLA cuts as well
as the broader debate about military compensation reform? If
both of you would take a minute to answer.
    Admiral Winnefeld. I think that retirement is part of the
calculus of anybody when they're considering a retention
decision, a reenlistment decision. The younger ones tend to
think more in terms of pay. The mid-grade ones tend to think of
the bonus, if they can get one to stay in. The more senior ones
tend to think in terms of what's coming down the line in
retirement.
    So I don't have a metric that we can measure right now that
indicates a change in behavior because of the COLA-Minus-1
provision because it's simply too soon. We do surveys. We can
look at the numbers and the like. But again, we do believe, we
have heard anecdotally, that people who are approaching
retirement are doing the calculation that says, if I retired at
20 I was going to get this, under CPI-Minus-1 I would have to
retire at X, 22, 23, in order to have the same benefit accrue
over the course of my retirement.
    So they're definitely thinking about this. There's a lot of
information banging around out there. So it is a factor for
sure, especially for the more senior members of the force.
    Senator Hagan. When you say senior, how many years are you
talking about there?
    Admiral Winnefeld. We classify our senior folks as, I
think, anywhere from 13, 14 years on. But it's most acute
probably for those that are, I'd say, 16 years and beyond who
are thinking about this.
    Senator Hagan. Thank you. Secretary Fox.
    Ms. Fox. Yes, ma'am. I think that Admiral Winnefeld
articulated nicely all of the factors that's at play. So I'm
getting there; it's going to take me longer if it's CPI-Minus-
1; maybe I should stay longer to get at that level. That's
exactly the kind of thing we need the help with the commission
and the studies that they're looking at--force-shaping tools.
Maybe that's okay. We need expertise to stay longer. In other
cases we don't and we can't have that, and we need to
incentivize people to stay. Maybe they'll say it's not worth it
and they'll want to leave in 10 years instead.
    All of those factors affect the expertise we have in the
force to do the things we're asked to do. Sometimes you can
compensate with bonuses, sometimes with special pays. Of
course, that takes away from savings. So it's a big stew of
calculation and complexity that we need to sort through, and
that's the challenge.
    Senator Hagan. What are the percentage of the bonuses to
salary?
    Admiral Winnefeld. That varies dramatically. I can tell
you, somebody who's a nuclear welder in the United States Navy
probably gets a pretty substantial bonus compared to somebody
who might be in a lesser skilled position in the Navy or
another Service. So it really varies dramatically.
    Senator Hagan. It's interesting. The welding profession is
one that is in high demand all over the country. I'm sure
nuclear welders even more so.
    I feel strongly that the recent COLA cuts need to be
repealed, as I said earlier. But one of the elements that
concerns me most is that current retirees and servicemembers
were not grandfathered. If after careful consideration there
are future changes to the military compensation and retirement,
how important is it to exempt those that have or are currently
serving, and what would be the impact of certainly failing to
do so?
    Admiral Winnefeld. We've been very clear that we believe
that any changes to the structure of the retirement plan should
be grandfathered. Chairman Dempsey has said that in several
different testimonies. I'm saying it now. All of the Joint
Chiefs are unanimous and the senior enlisted leaders. We all
believe that any changes to the retirement system should be
grandfathered.
    Ms. Fox. When Secretary Panetta was with us and was
involved in standing up the Commission, he was very clear on
grandfathering. I've spoken with Secretary Hagel, and he also
supports grandfathering. I think there's unanimous consensus
between the military leadership and the civilian leadership of
DOD that grandfathering has to be a part of anything we do
going forward that changes retirement.
    Senator Hagan. When will the Commission's report come
forward?
    Ms. Fox. In February 2015.
    Senator Hagan. Thank you.
    Thank you, Mr. Chairman.
    Chairman Levin. Thank you very much, Senator Hagan.
    Senator Graham.
    Senator Graham. Thank you, Mr. Chairman. Thank you for
having this hearing and all the things you've done over the
years to keep us focused in Congress about what's the right
thing to do for our military. I really appreciate your
leadership.
    It seems to me, as Senator Reed said, we've all reached a
consensus that we would like to undo what we all consider to be
an unfairness here. As far as timing, I think the sooner, the
better. I'll just make this observation. Senator Wicker
expressed the idea that nobody thought we would engage in
sequestration, but here we are. So I just think the sooner we
can go back to the status quo, the better. There's enough
anxiety among our military personnel now. We don't need to add
any more. That would just be one thing off their plate. So
that's why I would advocate doing it now.
    I'd also like to associate myself with Senator Kaine. It's
good to have a budget. You make mistakes in the budget process,
but, quite frankly, I'm very pleased with my colleagues. We
raised this early on with Senators Wicker and Ayotte and
myself, and the way Congress has responded to looking at this
with an open mind and trying to fix it in a bipartisan way--I
think this is a good thing. Everybody makes mistakes, but you
really judge people by their willingness to right wrongs. It
seems like we're on a good glide path to find $6 billion,
hopefully, to set aside what we've done with the CPI-Minus-1
percent.
    On the idea of reforming compensation, count me in. I just
think the time has come prospectively to look at the
sustainability. Now, there's a difference, Admiral, between
what you're saying about the overall cost of personnel within
the military budget and what some of our veterans'
organizations are saying. What percentage of DOD's budget is
personnel-related?
    Admiral Winnefeld. The military compensation by itself is
about a third, and overall compensation, to include civilians,
is about half of the budget. But I'd hasten to add that the
more I've dug into this and the more we as a body deliberating
this have dug into it, the less sophisticated that metric
sounds, because there are so many variables that go into it.
How big is our top line? How many people do we have? What is
the cost of health care? Do you include overseas contingency
operations (OCO) funding or not?
    It's just a squishy number, and you wouldn't want to pin,
here's the goal, it should be 32.5 percent, because if that
changed it would disrupt things. So we really want to find out
what it takes to recruit and retain the best and pay them
fairly.
    Senator Graham. One thing I would suggest is to get with
some of our veterans groups here that have a different view of
what the personnel costs are. I remember Chairman Dempsey
talked about 54, 50 percent of the current budget is absorbed
in personnel costs. When you look in the out-years, the growth
of TRICARE, where are we headed in terms of personnel costs
inside the budget over a 15- or 20-year period?
    Admiral Winnefeld. I think when Chairman Dempsey was
referring to the 50 percent he was including civilian
compensation.
    Senator Graham. Right.
    Admiral Winnefeld. You also have to ask, do you include
indirect benefits that are provided as well as direct pay.
    Frankly, it's probably going to stay stable. There was some
initial information--and the information's all over the place--
--
    Senator Graham. Even if you don't do reforms, it will stay
stable?
    Admiral Winnefeld. If we do reforms, the percentage would
probably stay stable.
    Senator Graham. Without reform?
    Admiral Winnefeld. Without reform--without reform it might
go up a little bit. With reforms, it's going to go down a
little bit. But again, the more sophisticated, we believe, way
to look at it is what is the best way to recruit and retain the
best America has to offer, take the best possible care we can
of them, and get the best value for the American taxpayer?
That's an isolated look. It's not a ``what's the right share of
the budget?''
    You can imagine, if you picked a budget share and the
budget went down, does that mean we reduce pay? We wouldn't
want to do that.
    Senator Graham. No, I understand what you're saying.
    Secretary Fox, I guess the point I'm trying to make is that
if about half the budget is going to be personnel costs, direct
or indirect, the other half will be spent on readiness,
modernization, being able to actually go to the fight. The
reason we're looking at reforming compensation is because over
time we think it's unsustainable; am I right or wrong?
    Ms. Fox. Yes, sir, you're correct. These statistics--this
budget share includes the number of people we have and the
amount they are compensated. So if compensation costs were
allowed to grow unsustained, we'd just take it out of the
people. We'd have fewer and fewer people.
    Senator Graham. You'd have fewer and fewer people with less
equipment to fight with.
    Ms. Fox. Yes, sir.
    Senator Graham. The goal is to have a well-paid, well-
trained military that can win the war, right?
    Ms. Fox. And come home safely, yes, sir.
    Senator Graham. Come home safely, and not have a fair
fight. We're not looking for a fair fight in the future, right?
We want overwhelming force on the battlefield so the war ends
as quickly as possible, with the least amount of casualties.
That means we have to have the equipment and the training. Is
that right, Admiral?
    Admiral Winnefeld. You're absolutely right, Senator. We
want to win 100 to nothing.
    Senator Graham. One hundred to nothing. We don't want to go
to war because those who go to war have to believe they will
lose, and those dumb enough to go to war will lose. It's just
that simple. But you have to keep the people around to make
sure you win the war.
    Now, gross domestic product (GDP) on defense. Historically,
in a time of peace, what's been the historical average, say
since World War I, GDP spent on defense?
    Ms. Fox. Sir, I don't remember. I'll have to take that for
the record.
    [The information referred to follows:]

    Since 1940, in times of peace the outlays of the Department of
Defense (DOD) averaged 5.1 percent of the Gross Domestic Product (GDP).
The data is referenced from fiscal year 1940 instead of World War I due
to availability of verifiable data. DOD, the Office of Management and
Budget, and the Congressional Budget Office (CBO) did not publish data
on defense outlays prior to 1940.
    When preparing the Future Years Defense Program, DOD only programs
future resources over a 5-year period. To answer what the spending as a
percent of GDP will be at the end of the BCA (fiscal year 2023), DOD is
relying on projections of the CBO for both GDP and national defense
spending. Since 1940, national defense spending, which includes
defense-related activities outside of DOD, averaged 5.5 percent of GDP
in times of peace. The CBO projects national defense spending to be 2.7
percent of GDP by fiscal year 2023. The chart below shows how closely
national defense spending and DOD spending track over the last 40
years.
    Sources:
         - Office of the Under Secretary of Defense (Comptroller),
        ``National Defense Budget Estimates for Fiscal Year 2014''
        (Green Book), May 2013, Table 7-7.
         - Congressional Budget Office, ``The Budget and Economic
        Outlook, 2014 to 2024,'' February 2014, pg 50.

    


    Admiral Winnefeld. I know you have very good command of
those numbers, sir. I don't have them memorized. But I think it
has changed over time, as you well know.
    Senator Graham. Does 5 percent sound about right? Okay.
    Where will we be at the end of sequestration, even with the
relief we have provided, in terms of GDP spent on defense?
    Ms. Fox. Senator, I think you know the answer to that
question, sir, and I think it is less than 5 percent.
    Senator Graham. Yes, but I'm not in DOD. I need somebody in
DOD to tell me this.
    Ms. Fox. I'll have to take that for the record to get you a
precise number.
    Senator Graham. The reason I want you to find out, because
we need to make an intelligent decision about sustainability of
benefits prospectively, telling people if you sign up in the
future you may not be able to retire at 38 and you may have to
wait a few years. We're going to tell the retired community
we're not going to dump on you, we're going to do this
prospectively. But somebody has to have a vision of where we
will be as a Nation at 10 years from now in terms of budgeting.
    That takes me back to sequestration. It's my belief that
we're going to be dramatically under 3 percent of GDP if we
keep this glide path intact.
    In 15 seconds, what are our allies doing in the North
Atlantic Treaty Organization? Are the people we fight with
spending more or less in the next 10 years on defense?
    Admiral Winnefeld. In 7 seconds, less.
    Senator Graham. So our allies are spending less. If we
leave sequestration intact we could be well below what we spent
in time of peace. What's the likelihood the war on terror will
be over in the next decade, Admiral?
    Admiral Winnefeld. We think that we're going to have to
continue to suppress, contain, and defeat al Qaeda until it
collapses of its own internal contradictions, and that's going
to take some time, absolutely.
    Senator Graham. Likely not to occur in 10 years?
    Admiral Winnefeld. We would love for it to occur within 10
years, but I don't think we can count on that.
    Senator Graham. So, let's plan for the worst, right?
    Admiral Winnefeld. Yes.
    Senator Graham. Thank you.
    Chairman Levin. Thank you, Senator Graham.
    Senator Blumenthal.
    Senator Blumenthal. Thank you, Mr. Chairman.
    Thank you both for being here today. Thank you both for
your extraordinary service to our Nation.
    I would agree with my good friend Senator Graham in his
assessment that we are on a path to repeal the very unfortunate
and unwise COLA cuts in retiree pensions that were a flaw in
the budget agreement. I would disagree with him only on his
reference to ``glide path,'' which implies an ease and
unimpeded track that is rarely found in Congress. I think it
will take some doing to have that path achieved.
    But I think that the debate and the discussion here this
morning and your testimony have been very helpful to reaching
that path, which I think we have an obligation to do. I voted
for the budget agreement. Like so many of my colleagues, I did
so with the understanding that that flaw would be corrected and
that it would be corrected before the next NDAA, as soon as
possible, right away, for all the reasons that you've outlined
so well: the effect on the morale and really the dedication of
our Armed Forces and the brave men and women who serve us. They
deserve better than this kind of cut without any provision for
grandfathering, but the cut itself, in my view, is offensive.
    I want to deal with the broader issue that has been
referenced here this morning as well, which is how we attract,
recruit, and retain not only the new, best, and brightest of
their generation, but also the mid-level officer and
noncommissioned leadership that is battle-hardened and perhaps
battle-weary, but one of our greatest assets in the country,
because at the end of the day--and I would hope that you
agree--they are as important as any weapons systems, any
platform that we have.
    I know that you've outlined well the impact that retirement
and other benefits may have, but if you could please give me,
give the committee, a broader assessment, Admiral Winnefeld, if
you could begin, and then I'd be interested, Secretary Fox, as
well. What are the incentives we need to offer? How do we
change, if we need to change? Because we need to do it before
2015 when this commission reports back. I think we need to do
it now, right away.
    Admiral Winnefeld. A very good question, Senator. I'd
address recruiting and retention separately. On recruiting, we
take surveys of people who have decided to raise their right
hand and put on the cloth of their Nation. Why did you do this?
Why did you come in?
    It's interesting that the number one reason that we are
hearing back right now is pride, self-esteem, and honor. The
number two reason is to better their life. The number three
reason is duty and obligation. The number four through eight
reasons are travel, future education, experience, and they want
to be challenged. Next comes pay, more discipline in their
life, adventure, and helping others.
    So that actually makes me feel pretty good, that our young
men and women are coming into the Services for the right
reasons.
    Senator Blumenthal. Very encouraging.
    Admiral Winnefeld. In terms of retention, particularly for
those mid-grade officers and NCOs that you're talking about,
there really are two variables, I think, that are
fundamentally--they have all kinds of sub-variables, but the
two most important variables are quality of life and quality of
service. Retirement, of course, is something that the senior
folks look forward to.
    But in terms of quality of life, as we adjust the glide
slope of compensation, we're going to tune it very carefully.
We have to be watchful of that. There are so many other things
that go into what quality of life really means: How often do
you move and can your spouse get a job, that sort of thing.
    In terms of quality of service, we're hearing more and more
from our people that they're surprised by all of this. What
really matters to them more than keeping this high rate of
growth is they want to fight in a modern and ready force. They
want to go to work every day and they want to have parts in the
bin where they can repair the thing that they are entrusted
with. They want to be able to drive it or fly it or sail it,
and they want to feel confident that they are on a winning
team.
    That matters. It's an intangible, but it makes a tremendous
difference for our people, and we have to look after that as
well as the quality of life piece.
    Senator Blumenthal. Secretary Fox.
    Ms. Fox. Senator, I would just add that I think Admiral
Winnefeld laid it out beautifully. These intangibles, I think,
are important as we look at any changes to retirement, for
example, going forward. I do believe we have really excellent--
I've dug into them--models of the broad economics. I am pretty
convinced that, whatever we do, we can find ways to tweak it
with pays and incentives and so forth.
    It's very hard for those models to account for the
intangibles and the individuals' views of what they are there
to do and what they're able to do, given the way we support
them in this broad term that's overused, ``readiness.'' But
that means the things that Admiral Winnefeld outlined about
their ability to operate it, their ability to have parts to fix
it, their ability to show up for duty on a ship and have other
people there. They're not trying to do three or four jobs--all
of the things that I think are eroding the morale of our force
right now.
    Senator Blumenthal. Another way of putting it might be the
sense that the country appreciates what they're doing as well,
that they're not only on a winning team, the best team, the
gold medal team, but that the country appreciates the work that
they're doing.
    Admiral Winnefeld. You can't even begin to understand how
important it is to our young soldiers, sailors, airmen,
marines, and coastguardsmen as they walk through airports,
train stations, you name it, when ordinary Americans come up to
them and thank them for their service. It's huge.
    Senator Blumenthal. One other question in the limited time
I have left. I know that you do surveys, that you try to apply
some scientific method to assess the incentives and so forth
that you've just described. Of course, we all have our personal
experiences. Senator Kaine has a son who is serving. I have
two. We know friends and so forth.
    I wonder how well you think those surveys, the scientific
effort, are doing in measuring the kinds of incentives and so
forth that are at play here?
    Admiral Winnefeld. That's a good question. You always have
to take any kind of survey or data with a grain of salt. If
you're not listening to the drumbeat that you're hearing from
people anecdotally, what they're saying to you, what your
senior enlisted leaders, who are terribly important to this
process, are saying to you, then you don't get it.
    So we have to temper anything we hear in the surveys. I
don't have a crisp answer for you on whether there's a
dichotomy there. But I think, in general, it's what we're
hearing, that they're both reflecting the same thing.
    Ms. Fox. I do think we're very aware surveys can lag. I do
think that's why our Service Chiefs and our Secretary spend so
much time out there talking to the force, to the men and women
in uniform.
    Senator Blumenthal. Thank you. Thank you for your excellent
testimony this morning.
    Thank you, Mr. Chairman.
    Chairman Levin. Thank you, Senator Blumenthal.
    Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman.
    Thank you both for your service. Certainly, I want to
express strong support for fixing this problem absolutely as
soon as possible as well. I voted against the budget deal in
December and this issue was the single biggest reason why. So
we need to get it fixed.
    I want to express strong support for fixing it in a way
that doesn't increase the deficit in any way. That would be
doing through two steps what the huge majority of us vowed
absolutely not to do. So that would be a failure as well. So
I'm very hopeful we'll get this done.
    I just have one question for both of you. This provision
essentially treated folks in uniform fundamentally differently
and worse than Federal civilian employees, all other Federal
civilian employees. It penalized them, if you will,
retroactively on this issue, while the changes made for all
other Federal employees was prospectively only. Do you think
there is any justification for that different treatment?
    Admiral Winnefeld. I think it was surprising. I don't think
that the vast majority of our force actually thought that
through. They weren't aware, I think. It was really just the
CPI-Minus-1 piece itself that registered with them. But it is
definitely a difference.
    Ms. Fox. Sir, I think again that's why we support
grandfathering and believe that you have to look forward. Maybe
there's a change; whatever change that is, it's for new people
coming in.
    Senator Vitter. Well, great. I'm glad most of them don't
realize it. But my description, unfortunately, is accurate and
it's the fact of it, and I just want to underscore that I think
that's fundamentally wrong and inappropriate.
    Thank you.
    Chairman Levin. Thank you, Senator Vitter.
    Senator King.
    Senator King. Thank you, Mr. Chairman. In light of the fact
that we have a second panel, I think I'll submit my questions
for the record. I just have one observation in light of Senator
Kaine's comments. I always thought that the passing of the
first budget out of a divided Congress in 28 years was somewhat
miraculous, but I think today we've established that this
provision, this CPI-Minus-1 provision, confirms that, because
we can't find parenthood, it was an immaculate conception, I
think, this provision. Immaculate misconception might be a
better term for it.
    I appreciate your testimony and I'm going to have some
questions for the other panel. I associate myself with everyone
else here. I don't think we should wait until the commission. I
think we should fix this. It's not a huge item. It should be
fixed, and I think our veterans and people that are receiving
pensions for some odd reason may not fully trust us to resolve
this in 2015. So I think we should take care of it as soon as
we can.
    Thank you, Mr. Chairman.
    Chairman Levin. Thank you very much.
    That will complete the questions for our first panel and we
will now call up our second panel. Thank you so much, both of
you, for your testimony. [Pause.]
    We now welcome our second panel of four outside witnesses:
retired Army General John Tilelli, Jr., the Chairman of the
Board of the Military Officers Association of America; retired
Army General Gordon R. Sullivan, President and Chief Executive
Officer of the Association of the United States Army; retired
Air Force Master Sergeant Richard Delaney, National President
of The Retired Enlisted Association; and Dr. David Chu,
President and Chief Executive Officer of the Institute for
Defense Analyses. Dr. Chu served as Under Secretary of Defense
for Personnel and Readiness under President Bush from 2001 to
2009.
    Now, we also want to note in our audience that we have with
us a number of veterans. We welcome veterans from all our
conflicts, and that would obviously include a special group
that are veterans of our wars in Iraq and Afghanistan.
    We also have statements that will be entered into the
reocrd, submitted by the following five groups and one
individual:

         The Fleet Reserve Association;
         Iraq and Afghanistan Veterans of America;
         American Legion;
         Veterans of Foreign Wars;
         National Military Family Association; and
         Lieutenant Colonel Michael Parker, USA
        (Retired) who is a wounded warrior advocate.

    [The prepared statement of the Fleet Reserve Association
follows:]
          Prepared Statement by The Fleet Reserve Association
                              introduction
    Mr. Chairman, The Fleet Reserve Association (FRA) salutes you, the
ranking member and all members of the committee, and your staff for the
strong and unwavering support of programs essential to Active Duty,
Reserve component, and retired members of the uniformed services, their
families, and survivors. The committee's work has significantly
improved military pay, and other benefits. This support is critical in
maintaining readiness and is invaluable to our uniformed services
engaged throughout the world fighting terrorism around the world,
sustaining other operational requirements and fulfilling commitments to
those who've served in the past.
    The current All-Volunteer Force (AVF) has been through a dozen
years of wartime sacrifices never envisioned by those who designed a
voluntary military force. The U.S. military is a stressed force with
many serving multiple deployments in Iraq and Afghanistan. The current
compensation package is the glue that holds the All-Volunteer Force
together, and any budget-driven cuts in pay and benefits could have
adverse impact on recruitment and retention, and ultimately threaten
the very foundation of the AVF.
                      ``modernization'' commission
    The National Defense Authorization Act for Fiscal Year 2013 (H.R.
4310, P.L. 112-239) establishes the Military Compensation and
Retirement Modernization Commission, but limits its recommendations
from being base realignment and closure (BRAC)-like in its review of
the current compensation and military retirement system. FRA believes
it's important that this distinguished committee, its House counterpart
and personnel subcommittees maintain oversight over commission
recommendations. President Obama has charged the commission to review
``the full breadth of the systems,'' including healthcare, military
family support, and any Federal programs that could influence the
decision of current or future servicemembers to stay in uniform or
leave the Service. Before making their final recommendations, the
commission must examine the impacts of proposed recommendations on
currently serving members, retirees, spouses, children and survivors.
The commission has also been instructed not to alter the current
retirement system for those already serving, retired or in the process
of retiring. Along with a review of military compensation, the
president asked that the commission look at the ``interrelationship of
the military's current promotion system.''
    In 1986, Congress passed, over the objection of then Secretary of
Defense Casper Wienberger, major retirement changes, known as
``REDUX,'' that significantly reduced retirement compensation for those
joining the military after 1986. FRA led efforts to repeal the act in
1999 after the military experienced retention and recruitment problems.
The Association continues to monitor the take rate for personnel
choosing between remaining on the High 3 program, or the REDUX program
at 15 years of service.
    Maintaining a highly-motivated, well-trained, and professional All-
Volunteer Career Military Force requires an adequate pay and benefit
package. Military service is unlike any other career or occupation, and
requires adequate compensation and a unique retirement system. Career
senior noncommissioned officers are the backbone of our military and
their leadership and guidance are invaluable and a result of
specialized years of training and experience.
sequestration, the budget agreement, and cost-of-living adjustment cuts
    For past several years, now top military officials have claimed
that personnel costs are out of control and are consuming an ever-
larger percentage of the Pentagon budget. ``In fact military personnel
costs are shrinking in terms as a percentage of the overall Defense
budget. Military personnel costs in 2012 were 24.16 percent of the
Defense budget, in 2001 these costs were 24.13 percent of the Defense
budget, and in 1991 were 30.5 percent of the budget.'' \1\ The recently
enacted budget agreement (H. J. Res. 59, P.L. 113-67) mandates an
annual 1 percent reduction in military retired pay cost-of-living
adjustment (COLA) for those under age 62 who served 20 or more years,
which takes effect December 1, 2015. While portrayed as a minor change
in retired pay, it is actually a substantial cut in benefits over the
long term and an egregious breach of faith.
---------------------------------------------------------------------------
    \1\ Army Times, 11/25/13 ``Top Brass Claims Personnel Costs are
Swamping Department of Defense (DOD), but Budget Figures say
Otherwise'' by Andrew Tilghman
---------------------------------------------------------------------------
    The Association strongly opposes efforts to reduce military retired
pay and wants to ensure equitable COLAs for all military retirees
commensurate with their service and sacrifices. FRA believes that
military service is unlike any other occupation, and the benefits
should reflect that reality. Roughly 1 percent of the population has
volunteered to shoulder 100 percent of the responsibility for our
national security. FRA was thankful that the recently passed fiscal
year 2014 omnibus spending bill (H.R. 3547) excludes disabled retirees
and widows receiving Survivor Benefit Program (SBP) benefits from the 1
percent COLA cut. Although this is a step in the right direction, the
FRA supports an amendment to repeal the COLA cut for all retirees under
age 62. That is why the Association is supporting the ``Comprehensive
Veterans Health and Benefits and Military Retirement Pay Restoration
Act'' (S. 1950), sponsored by Bernie Sanders (VT), that among its many
other provisions would repeal section 403 of the ``Bipartisan Budget
Act'' (H.J. Res 59). The Association believes that retired benefits and
pay have been earned through 20 or more years of arduous military
service.
    The budget agreement goes outside the so-called ``regular order''
and bypassed this distinguished committee, its House counterpart and
subcommittees with jurisdiction and, more importantly, expertise on
military retirement benefits. This agreement decreases the magnitude of
the automatic sequestration cuts in the Defense budget. Sequestration
is a blunt instrument to reduce huge annual budget deficit, which is a
serious problem, but total defense spending as a percentage of Gross
Domestic Product (GDP) is significantly below past wartime periods and
projected to go lower. Reducing the harmful effects of sequestration
cuts should be a top priority to ensure the Nation's security and
military readiness, but to penalize the very men and women who have
sacrificed and served more than others is simply unfair. FRA's February
2013 on-line survey indicated that 90 percent of retirees were ``very
concerned'' about sequestration. Former Secretary of Defense Leon
Panetta stated that sequestration cuts ``would do catastrophic damage
to our military, hollowing out the force and degrading its ability to
protect the country.'' It is significant that defense spending totals
17 percent of the Federal budget, yet 50 percent of the sequestration
cuts are targeted for the Department of Defense (DOD). Operations are
winding down in Afghanistan, however, the Nation is still at war and
slashing DOD's budget further will not reduce the national security
threats.
    FRA also supports the ``Down Payment to Protect National Security
Act'' (S. 263), sponsored by Sen. Kelly Ayotte (NH) and its House
companion bill (H.R. 593) sponsored by House Armed Services Committee
Chairman Rep. Howard ``Buck'' McKeon, (CA) that would amend the Budget
Control Act (BCA) by excluding the DOD budget from the next round of
sequestration cuts mandated by the BCA.
    Additionally, the Association supports a Defense budget of at least
5 percent of GDP that will adequately fund both people and weapons
programs. FRA is concerned that the administration's spending plan is
not enough to sufficiently support both.
    Another serious threat to retirement compensation is to calculate
future COLAs for inflation-adjusted benefits by using the chained
Consumer Price Index (CPI) in lieu of the current CPI, which was
included in the administration's fiscal year 2014 budget request. The
so-called ``chained CPI'' takes into account the effect of
substitutions consumers make in response to changes in prices. FRA
believes that change over time would have a significant cumulative
impact on the annual COLAs for military retirees and personnel
receiving veterans' benefits--particularly if it is implemented with
the 1 percent reduction already enacted.
    Personnel expenditures are directly related to defense readiness
and reneging on past commitments by cutting retirement benefits and
other quality-of-life programs are major concerns within the Active and
Reserve military communities and are viewed as a devaluation of
military service.
                         tricare fee increases
    Many retirees feel financially threatened by the possibility of
budget-driven drastic increases in TRICARE fees and view such threats
as an attack on their earned income. FRA's membership appreciates the
following Sense of Congress provisions in the National Defense
Authorization Act for Fiscal Year 2013: (1) DOD and the Nation have a
committed health benefit obligation to retired military personnel that
exceeds the obligation of corporate employers to civilian employees;
(2) DOD has many additional options to constrain the growth of health
care spending in ways that do not disadvantage beneficiaries; and (3)
DOD should first pursue all options rather than seeking large fee
increases or marginalize the benefit for beneficiaries.
    Health care dominated priorities for military retirees responding
to FRA's 2013 on-line survey, with quality of health care benefits
rated as ``very important'' by over 95 percent of respondents. Access
to the benefit followed in importance as indicated by over 94 percent
of those participating in the survey.
    It should be remembered that TRICARE Prime beneficiaries
experienced a 13-percent fee increase 3 years ago and these fees and
now pharmacy co-pays increase the same percentage as the annual COLA
increases. These limits were established to ensure that TRICARE fee
increases would not erode retirement compensation.
                      military compensation capped
    The Association is troubled by recent efforts by the current
administration to limit annual increases in military compensation to
only 1 percent. FRA strongly supports annual pay increases that are at
least equal to the Employment Cost Index (ECI) to ensure that military
pay keeps pace with civilian compensation.
    The Rand Corporation released a study in 2012 recommending smaller
military pay increases. The study is one of many recent reports echoing
the same tired refrain that military pay and benefits are too generous.
This study and other recent studies have been quoted extensively in
recent news accounts on military pay and benefits. The study indicates
that military pay increased faster than civilian pay since 2000, but
ignores the fact that military pay increases lagged behind civilian pay
increases (ECI) during the 1990s, resulting in a 1999 pay gap of 13.5
percent, which contributed to major recruitment and retention problems.
From fiscal year 1999-fiscal year 2011 Congress provided pay increases
0.5 percent above the ECI (except for fiscal year 2007, when the
increase was equal to the ECI) in an effort to close the pay gap.
    The RAND study counterintuitively suggests that smaller pay
increases will not significantly impact retention and recruitment. The
study claims that relatively high unemployment rates throughout the
economy will stabilize retention and recruitment. FRA disagrees and
believes the current high rate of unemployment will not continue
indefinitely, and that pay for the All-Volunteer military should
accurately reflect service and the sacrifices borne by those who serve
and their families.
    FRA stands foursquare in support of the Nation's reservists and
wants to streamline the complex Reserve duty status system without
reducing compensation. The Association also supports making early
retirement credit retroactive to September 11, 2001, after which the
Reserve component changed from a strategic reserve to an operational
Reserve.
                           concurrent receipt
    FRA continues its advocacy for legislation authorizing the
immediate payment of concurrent receipt of full military retired pay
and veterans' disability compensation for all disabled retirees. The
Association appreciates the progress that has been made on this issue
that includes a recently enacted provision fixing the Combat Related
Special Compensation glitch that caused some beneficiaries to lose
compensation when their disability rating was increased. There are
still many Chapter 61 retirees receiving Concurrent Retirement and
Disability Pay (CRDP) and CRDP retirees with 20 or more years of
service with less than 50 percent disability rating that should receive
full military retired pay and Department of Veterans Affairs (VA)
disability compensation without any offset.
    The Association strongly supports pending legislation to authorize
additional improvements that include Senate Majority Leader Harry
Reid's legislation (S. 234), Rep. Sanford Bishop's ``Disabled Veterans
Tax Termination Act'' (H.R. 333) and Rep. Gus Bilirakis' ``Retired Pay
Restoration Act'' (H.R. 303).
                         sbp/dic offset repeal
    FRA supports the ``Military Surviving Equity Act'' (S. 734),
sponsored by Sen. Bill Nelson (FL) and its House companion bill (H.R.
32), sponsored by Rep. Joe Wilson (SC), to eliminate the Survivor
Benefit Plan (SBP)/Dependency and Indemnity Compensation (DIC) offset
for widows and widowers of servicemembers. These bills would eliminate
the offset, also known as the ``widow's tax,'' on approximately 60,000
widows and widowers of our Armed Forces.
    SBP and DIC payments are paid for different reasons. SBP is
purchased by the retiree and is intended to provide a portion of
retired pay to the survivor. DIC is a special indemnity compensation
paid to the survivor when a member's service causes his or her
premature death. In such cases, the VA indemnity compensation should be
added to the SBP the retiree paid for, not substituted for it. It
should be noted as a matter of equity that surviving spouses of Federal
civilian retirees who are disabled veterans and die of military-
service-connected causes can receive DIC without losing any of their
Federal civilian SBP benefits.
              retention of final full month's retired pay
    FRA urges the committee to authorize the retention of the full
final month's retired pay by the surviving spouse (or other designated
survivor) of a military retiree for the month in which the member was
alive for at least 24 hours. FRA strongly supports ``The Military
Retiree Survivor Comfort Act'' (H.R. 1360) introduced by Rep. Walter
Jones (NC), that achieves this goal.
    Current regulations require survivors of deceased military retirees
to return any retirement payment received in the month the retiree
passes away or any subsequent month thereafter. Upon the demise of a
retired servicemember in receipt of military retired pay, the surviving
spouse is to notify DOD of the death. The Department's financial arm
(DFAS) then stops payment on the retirement account, recalculates the
final payment to cover only the days in the month the retiree was
alive, forwards a check for those days to the surviving spouse
(beneficiary). If the death is not reported in a timely manner, DFAS
recoups any payment(s) made covering periods subsequent to the
retiree's death, without notice or consideration of the survivor's
financial status.
    The measure is related to a similar pay policy enacted by the VA.
Congress passed a law in 1996 that allows a surviving spouse to retain
the veteran's disability and VA pension payments issued for the month
of the veteran's death. FRA believes military retired pay should be no
different.
                    keep base allowance for housing
    An important part of military compensation is the Base Allowance
for Housing (BAH). The Association cannot stress enough the importance
of providing servicemembers and their families the means to live in
suitable, affordable, and safe housing. This critical quality-of-life
benefit is of paramount concern for servicemembers deployed far home
who take comfort knowing that their family is in an appropriate living
environment. That is why FRA is distressed by discussions of
eliminating BAH and Base Allowance for Subsistence (BAS) in lieu of a
combined tax-free stipend without allowances for dependents. In the FRA
February 2013 online survey, 95 percent of active duty survey
respondents rated BAH as ``Very important'' (the highest rating). FRA
is concerned that these proposed changes by the Pentagon are primarily
budget driven.
    Eliminating BAH could have a negative impact on retention for
junior enlisted personnel. BAH for junior enlisted troops can amount to
as much as 50 percent of total monthly compensation. Instead of
eliminating BAH, the program should be reformed to update housing
standards. For example, only 1 percent of the enlisted force (E-9) is
eligible for a BAH sufficient to pay for a three-bedroom, single-family
detached house, even though thousands of enlisted below the rank of E-
9, in fact, reside in detached homes. Enlisted housing standards should
allow for E-7s and above reside in single-family homes. FRA also wants
to ensure that BAH rates are commensurate with actual housing costs,
ensure adequate housing inventory and that housing privatization
programs are beneficial to servicemembers and their families.
    FRA notes that the recently passed budget agreement (H.R. 3547)
provides $27 million less than requested for fiscal year 2014 for
constructing, operating, and maintaining family housing. It is said
that the individual enlists, but it is the family that re-enlists, and
housing is a major consideration in retention decisions.
              protect the commissary and exchange systems
    Military commissaries and exchanges are essential parts of the
military compensation package and FRA's on-line survey, completed in
February 2013, indicates that nearly 61 percent of retirees rated
Commissary/Exchange privileges as ``very important.'' FRA is a member
of the recently established Coalition to Save Our Military Shopping
Benefits. The Coalition now has 13 member organizations representing
1.5 million servicemembers, retirees, veterans, and their families,
many of which are authorized patrons of the resale system.
    A study by the Resale and MWR Center for Research, entitled ``Costs
and Benefits of the DOD Resale System,'' indicates that these programs
provide military members, retirees and their families with shopping
discounts worth $4.5 billion annually. These stores are the biggest
employers of military family members with 50,000 spouses, dependent
children, retirees and veterans on the payrolls, adding $884 million a
year to military household incomes. The Association notes with concern
DOD's plans to soon issue furlough notices to the Defense Commissary
Agency employees and close commissaries on Mondays for the remainder of
the fiscal year due to sequestration-related cuts to operating accounts
of 9.2 percent.
    The report also indicates that approximately $545 million a year
from store operations is reinvested in base infrastructure. This is
from profits of military exchanges and from a 5-percent surcharge
collected at cash registers in commissaries. These facilities and
capital improvements become assets on the balance sheet of the Federal
Government. Exchange profits also fund important base morale, welfare,
and recreation programs that contribute to an enhanced quality of life
for military beneficiaries.
            uniformed services former spouses protection act
    The antiquated Uniform Services Former Spouse Protection Act
(USFSPA) has had a significant impact on some current and former
servicemembers' pay. According to Military.com writer Amy Bushatz,
``The military divorce rate went down slightly in 2012, settling at 3.5
percent from the record high of 3.7 percent in 2011. Military officials
and divorce experts are hopeful that the overall rate, which had crept
slowly up from 2.6 percent in 2001 to 3.7 percent in 2011, is starting
to move downward.'' Female enlisted soldiers and marines, however,
continue to experience the highest rate of divorce--9.4 percent and 9.3
percent respectively. In the Army, the female enlisted divorce rate is
more than triple that of enlisted males.''
    Related to these statistics, FRA urges Congress to review the
USFSPA with the intent to amend the language so that the Federal
Government is required to protect its servicemembers against State
courts that ignore the act.
    The USFSPA was enacted 30 years ago; the result of congressional
maneuvering that denied the opposition an opportunity to express its
position in open public hearings. The last hearing, in 1999, was
conducted by the House Veterans' Affairs Committee rather than the
House Armed Services Committee, which has oversight authority for
USFSPA.
    Few provisions of the USFSPA protect the rights of the
servicemember, and none are enforceable by the Department of Justice or
DOD. If a State court violates the right of the servicemember under the
provisions of USFSPA, the Solicitor General will make no move to
reverse the error. Why? Because the act fails to have the enforceable
language required for Justice or the Defense Department to react. The
only recourse is for the servicemember to appeal to the court, which in
many cases gives that court jurisdiction over the member. Another
infraction is committed by some State courts awarding a percentage of
veterans' compensation to ex-spouses, a clear violation of U.S. law;
yet, the Federal Government does nothing to stop this transgression.
    There are other provisions that weigh heavily in favor of former
spouses. For example, when a divorce is granted and the former spouse
is awarded a percentage of the servicemember's retired pay, the amount
should be based on the member's pay grade at the time of the divorce
and not at a higher grade that may be held upon retirement.
    FRA believes that the Pentagon's USFSPA study recommendations are a
good starting point for reform. This study includes improvements for
both former spouse and the servicemember.
                                 ______

    [The prepared statement of the Iraq and Afghanistan
Veterans of America follows:]
   Prepared Statement by the Iraq and Afghanistan Veterans of America
    Chairman Levin, Ranking Member Inhofe, and distinguished members of
the committee:
    On behalf of Iraq and Afghanistan Veterans of America (IAVA), I
would like to extend our gratitude for being given the opportunity to
share with you our views and regarding this important issue that
affects the lives of thousands of servicemembers and veterans.
    IAVA is the Nation's first and largest nonprofit, nonpartisan
organization for veterans of the wars in Iraq and Afghanistan and their
supporters. Founded in 2004, our mission is critically important but
simple--to improve the lives of Iraq and Afghanistan veterans and their
families. With a steadily growing base of nearly 270,000 members and
supporters, we strive to help create a society that honors and supports
veterans of all generations.
    Last month, Congress overwhelmingly passed the Bipartisan Budget
Act of 2013, a critical step and much-needed effort to move beyond the
unpredictability and lack of fiscal clarity that has been the norm on
Capitol Hill for the past few years. The Act was widely praised by
lawmakers and pundits alike, and was deemed a dramatic improvement over
the status quo.\1\ The architects of the agreement champion that this
bill will save ``$20 billion over the next 10 years and bring much-
needed relief to our already strained defense budget.'' \2\ IAVA is
well aware of the fiscal issues that this nation faces and is
supportive of responsible efforts to provide relief from sequestration,
but cannot stand behind efforts that try to balance the budget on the
backs of those who have sacrificed the most for more than 2 decades.
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    \1\ http://www.murray.senate.gov/public/index.cfm/
newsreleases?ID=d26a049f-8049-45a7-9519-4d6b597dc96c
    \2\ http://paulryan.house.gov/news/
documentsingle.aspx?DocumentID=365156#.Uua5ANlo5dg
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    As much praise as the deal received following its passage in the
House and Senate, the truth of the matter is the budget deal was a
backroom agreement that was presented to Congress right before the
holiday recess, bypassing the committees of jurisdiction and was never
subjected to the rigorous scrutiny and debate that such an important
bill warrants. Once again, Congress had to pass a bill for the American
public, specifically servicemembers and veterans, to find out what was
in it. Even Department of Defense (DOD) leadership remarked in 2011
that they were ``adamantly opposed to changing retirement benefits for
those that are currently on active duty'' and that ``we cannot break
faith with those that have served and deployed time and time again and
were promised the benefits of this retirement program.'' \3\ Even
President Obama has declared that ``We also owe our veterans the care
they were promised and the benefits that they have earned. We have a
sacred trust with those who wear the uniform of the United States of
America. It's a commitment that begins at enlistment, and it must never
end.'' \4\ With one quick glance at the pension cuts, military retirees
and their families are left to wonder when DOD leadership and President
Obama will speak out against these cuts and work to quickly overturn
them.
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    \3\ http://armedservices.house.gov/index.cfm/hearings-
display?ContentRecord--id=D2EB48AD-AC15-4E3A-A7B7-
C5EC2FA0EB73&ContentType--id=14F995B9-DFA5-407A-9D35-56CC
7152A7ED&Group--id=41030bc2-0d05-4138-841f-
90b0fbaa0f88&MonthDisplay=10&Year Display=2011
    \4\ http://www.whitehouse.gov/sites/default/files/docs/veterans--
and--wounded--warriors--record--0.pdf
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    In this particular instance, the budget agreement reduced the
annual cost-of-living adjustment (COLA) for military retirees and
survivors by 1 percent until they reach the age of 62. For some
retirees this could lead to a 20-percent cut to retirement benefits
over the course of their lives. The budget agreement was yet another
example of political abuse of career servicemembers and veteran
retirees. It attempts to balance the budget on the backs of those who
have already sacrificed the most, and it sends a message to those
currently serving and who have served that the promises made to them
and their families when they volunteered to serve are retroactively
renegotiable. In 2012, Congress established the Military Compensation
and Retirement Modernization Commission to examine the entire military-
compensation system. At the time the Commission was established, it was
promised that none of the changes would affect currently serving
members and retirees. It would be a proposal only for future military
members. The new budget deal essentially hamstrings and circumnavigates
the Commission before it finishes its work and makes its
recommendations.
    Those that have attempted to justify COLA reductions continually
highlight so-called exploding personnel growth \5\ which has spurred
some lawmakers to propose significant changes to the military benefits,
compensation, and retirement system in the name of fiscal
responsibility. These initiatives continue to demonstrate the lack of
understanding Congress has when making personnel changes within the
military. The COLA provision that brings us together today was made
without fully understanding the unintended consequences, as well as its
adverse impact on retention and morale.
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    \5\ http://www.usatoday.com/story/opinion/2013/12/22/veterans-
retirement-paul-ryan-budget-deal-column/4164713/
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    Defenders of the COLA provision have argued that military pensions
are ``wildly out of line with most Americans' experience.'' \6\
Sentiments such as this strike at the crux of the issue: military
service is unique and difficult. The hard truth is that spending more
than 20 years in uniform has required servicemembers to endure multiple
deployments to Iraq and Afghanistan, spend countless days away from
loved ones, and move to a new installation every few years with the
full knowledge that your family can never quite settle in. All of these
issues undoubtedly place a massive burden on our military families.
This is a reality that simply does not exist in the civilian sector and
yet, Congress failed to take this into account when drafting and
passing the budget agreement last month. Equating 20-plus years of
military service to 20-plus years in the civilian workforce is woefully
off-target and serves to belittle a career in uniform.
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    \6\ http://www.usatoday.com/story/opinion/2014/01/01/military-
pensions-paul-ryan-budget-deal-cola-editorials-debates/4280837/
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    Congress broke its promise to veterans by agreeing to cuts to
military retirees and is crossing a line in the sand by failing to
fully protect veterans benefits. IAVA is hearing from veterans
nationwide that continue to ask Congress listen to them and repeal cuts
to all military retirees as quickly as possible. Although the
Consolidated Appropriations Act of 2014 restored full pension benefits
for working-age disabled military retirees and survivors of deceased
servicemembers, IAVA continues to call for a full repeal of the cuts to
all military retirees. We simply ask Congress to stand behind the
benefits promised and stand up for those who have served. We again
appreciate the opportunity to offer our views on this important topic,
and we look forward to continuing to work with each of you, your staff,
and this committee to improve the lives of veterans and their families.
Thank you for your time and attention.
                                 ______

    [The prepared statement of the American Legion follows:]
               Prepared Statement by The American Legion

 ``I want to be absolutely clear: we cannot, we must not, and we will
 not balance the budget on the backs of our veterans, and as Commander
                     in Chief, I won't allow it.''

                        President Barack Obama,

                The American Legion National Convention

                              August 2011

    The Congressional Budget Office projects the Department of Defense
to save almost $6 billion over the next 10 years by reducing the cost-
of-living adjustments for all military retirees not medically retired
who are below the age of 62.\1\ According to the most recent Department
of Defense \2\ Actuary, this new law will affect just under 1 million
military retirees who have dedicated 20 years or more defending the
United States while wearing the uniform of this country. In short, each
retiree is expected to return an average of $600 per year of their
retirement dollars to the treasury so that Congress can continue to
wring their hands over sequestration--a provision they promised would
never actually go into effect.
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    \1\ http://budget.house.gov/uploadedfiles/bba2013--cbo.pdf
    \2\ http://actuary.defense.gov/Portals/15/Documents/statbook12.pdf
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    As the largest Veteran Service Organization in the United States,
The American Legion would like to thank this committee for holding this
hearing, and for inviting The American Legion to share its views on the
recent changes to the U.S. military retirement system. At its August
2012 national convention in Indianapolis, The American Legion passed a
resolution that specifically opposes any changes to the current
military retirement system because it would reduce incentives for
enlistment and/or re-enlistment.\3\ The American Legion recognizes, as
does this committee, that without highly qualified, dedicated men and
women, even the most sophisticated weaponry will not provide the
deterrent force necessary for this Nation to remain at peace. We also
understand that preserving an attractive retirement system for the
Active and Reserve components is critical to maintaining an effective
All-Volunteer Force. The Department of Defense has on several occasions
conducted studies to change, modify, and update the military retirement
system, and recommendations from those studies have been repeatedly
found to be unsatisfactory. In July 2011 the Defense Business Board
study \4\ recommended significant changes in the current military
retirement system, and these recommendations were many of the same
recommendations made by the 1978 Presidential Commission on Military
Compensation. The 1978 report from the Congressional Budget Office goes
on to address the significant risk to maintaining a viable volunteer
force if dramatic changes to the current system are made. Further, any
changes to the existing military retirement system may violate
contracts made with military retirees and currently serving military
personnel, and would undermine morale and readiness.
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    \3\ http://archive.legion.org/bitstream/handle/123456789/2219/
2012N058.pdf?sequence=1
    \4\ http://dbb.defense.gov/Portals/35/Documents/Reports/2011/fiscal
year 2011-5--Modernizing--The--Military--Retirement--System--2011-7.pdf
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    In January 2013, Congress established the Military Compensation and
Retirement Modernization Commission.\5\ Specifically, this commission
was established to examine the current compensation and retirement
system, and render to Congress proposals for recommended changes that
could be made to the existing system--for future military members. In
September 2013, members of the commission attended a Benefits Summit
hosted by The American Legion and reinforced to our members that any
recommendations made by the commission were to be targeted at future
enlistees and retirees, and that all current retirees and members would
be grandfathered in their current programs.
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    \5\ http://www.mcrmc.gov/public/docs/statutory/PLAW-112publ239--
1.pdf
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    In December 2013, Congress passed the Bipartisan Budget Agreement
(BBA) of 2013. It was signed by President Obama on December 26 as
Public Law 113-67.
    The BBA, in relevant part states;

 ``Sec. 403. Annual adjustment of retired pay and retainer pay amounts
         for retired members of the Armed Forces under age 62.

          Generally, servicemembers who have completed 20 years of
        service, regardless of age, are eligible for non-disability
        retirement with immediate commencement of retired pay. For most
        retirees, pay is a percentage of the highest 36 months of the
        servicemember's Basic Pay. A servicemember who retires after 20
        years of service receives 50 percent of his or her high 36
        month basic pay with the percentage increasing in 2.5 percent
        increments for each year above 20. Because servicemembers can
        retire well before the normal retirement age in the private
        sector, most servicemembers begin a second career after leaving
        the military. Section 403 would provide for an annual cost-of-
        living adjustment (COLA) of inflation (measured by the Consumer
        Price Index) less one percentage point for adjustments starting
        on December 1, 2015 until the retiree reaches age 62. There
        would be no alteration to the 2014 COLA. At age 62, the retired
        pay would be adjusted as if the COLA had been the full CPI
        adjustment in all previous years. Annual COLAs for
        servicemembers after age 62 would be at the full CPI.''

    In support of this act, Members of Congress have pointed to
military retirees younger than 62 who said that they can still work,
yet according to the U.S. Census Bureau the average military retirement
check would place most military retiree families at or below the
national poverty level.\6\ Also, The American Legion has found that
military members who spend a career in the U.S. military and are able
to retire young enough to begin a second career, often transition with
no civilian equivalent skillset, making the average transition take
between 2 and 5 years before the retired military member is able to
find comparable second career to begin.
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    \6\ http://www.census.gov/how/infographics/poverty--measure-
how.html
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    Since most of the affected retirees are 1980s-era enlisted, their
retirement pay was based on pre-2005 military pay and benefits
increase, and as a result are already thousands of dollars less than
their current day equivalents. For example, an E-8 with 22 years of
service in 2002 made $3,573 per month. At 50 percent of pay, that E-8
today receives a retirement, with all COLA included of $2,407 per month
before taxes. Monthly pay for an E-8 today is $5,115.30 which puts
their retirement compensation at $2,558--more than $1,800 a year
greater than retirees who will be asked to forfeit another $600 per
year.
    The American Legion adamantly opposes the COLA reduction in section
403 of the 2013 BBA and formally supports bills to repeal this
provision. Further, we cannot understand why Congress would seek to
offset the effects of sequestration by targeting less than one quarter
of 1 percent of the American population--that same one quarter of 1
percent who chose to dedicate nearly a quarter of a century of their
lives to the rigors of military service which involved: moving their
families every 3 to 5 years, enduring multiple deployments, living on
an income that was far less than their civilian peers, enduring
physical and emotional stressors unlike any in the civilian sector, and
swearing an oath to uphold and defend the Constitution of The United
States, against all enemies--without any question or mental
reservation--even if it meant, their life. Really?
    The American Legion appreciates the opportunity to submit this
written testimony for the record and looks forward to working with the
committee to find cost saving measures that both benefit our economic
recovery, our national defense, and our military and veteran
population.
    Questions concerning this testimony can be directed to Mr. Louis J.
Celli Jr., National Legislative Director, The American Legion,
[email protected] (202) 263-2981.
                                 ______

                                                   January 28, 2014
The Honorable Senator Carl Levin,
The Honorable James Inhofe,
Senate Committee on Armed Services,
228 Russell Senate Building,
Washington, DC.
    Dear Chairman Levin and Ranking Member Inhofe: The American Legion
has not received any Federal grants or contracts, during this year or
in the last 2 years, from any agency or program relevant to the January
28, 2014, Senate Committee on Armed Services hearing on ``Recent
Changes to the U.S. Military Retirement System.''
            Sincerely,
                                         Louis J. Celli Jr.
                                 ______

    [The prepared statement of the Veterans of Foreign Wars
follows:]
           Prepared Statement by the Veterans of Foreign Wars
    Chairman Levin, Ranking Member Inhofe, and members of this
committee:
    On behalf of nearly 2 million members of the Veterans of Foreign
Wars (VFW) of the United States and our Auxiliaries, thank you for the
opportunity to present our views regarding recent changes to the
Military Retirement System.
    The VFW is against any changes to the current military retirement
system, to include the backroom decision to penalize working-age
military retirees with reduced cost-of-living adjustments. The penalty
violates the intent of President Obama's promise that all retirees and
those currently serving would be grandfathered under the existing
system, and the penalty undercuts the mission of the Military
Compensation and Retirement Modernization Commission.
    It is not the VFW's place to suggest where the government could
save money, but penalizing military retirees for serving too well and
for too long is not a solution. It sends a clear signal to the troops
and their families that the budget is more important than the people
who execute the mission.
    A secure America requires a strong military, and whether someone
serves for 4 years or 40, changing military pay and benefits could
jeopardize the integrity and viability of the All-Volunteer Force,
which is a cost this Nation cannot afford.
                                 ______

    [The prepared statement of the National Military Family
Association follows:]
     Prepared Statement by the National Military Family Association
    The National Military Family Association thanks you for the
opportunity to present this statement regarding recent changes to the
U.S. military retirement system. Our Association strenuously opposes
the provisions in the Bipartisan Budget Act capping the cost-of-living
allowances (COLAs) for military retirees under age 62. While it may be
necessary to find savings in this time of fiscal austerity, it is
unconscionable to balance the budget on the backs of those who have
already sacrificed so much. We appreciate that Congress has acted to
repeal this provision for medically retired servicemembers and
surviving family members who receive survivor benefit plan annuity
payments. We ask you to act to restore COLA for all military retirees.
    The pension received by military retirees is an essential part of
the military compensation package. It is a mistake to view retirement
pay as a benefit or an entitlement; rather, it is deferred
compensation. It is a key consideration for servicemembers and families
when they are deciding whether they will make the military a career.
Reducing the purchasing power of retiree pay will significantly impact
the financial well-being of retiree families and make it harder for
families to justify the sacrifices a military career entails.
    The National Defense Authorization Act (NDAA) for Fiscal Year 2013
called for the creation of a Military Compensation and Retirement
Modernization Commission (MCRMC). The MCRMC was tasked with reviewing
all aspects of military compensation, with the caveat that none of its
recommendations would affect currently serving military members or
retirees. The COLA caps contained in the Bipartisan Budget Act undercut
the mandate of the MCRMC and betray the promise that compensation for
current military members and retirees would be protected.
    The COLA cuts are just one of a host of threats to military
compensation that have come forward in recent months. The NDAA for
Fiscal Year 2014 authorized only a 1 percent pay increase for
servicemembers--the lowest pay raise since the creation of the All-
Volunteer Force and lower than the 1.8 percent it should have been
under the law. This lower pay scale will further reduce the pensions
military families can expect to receive upon retirement, since
retirement pay is based on base pay.
    Another looming threat to military compensation is the proposed
closure of stateside commissaries. Recent reports indicate that the
Pentagon has drafted a budget plan that would reduce the commissary
budget of $1.4 billion by 1 billion by the year 2017, essentially
eliminating stateside commissaries in all but rural, isolated areas.
This is yet another blow to compensation and benefits for the currently
serving and those who have earned the right to shop at the commissary
as deferred compensation. The loss of the 30 percent savings military
families receive by shopping at the commissary would be a severe blow
to many families.
    Retirement pay is especially important to military families because
the military lifestyle forces families to make significant financial
sacrifices. Most civilian families rely on two incomes in order to make
ends meet. However, the frequent moves and other disruptions associated
with life in the military often compromise the military spouse's
ability find a job or pursue a rewarding career. In fact, 1 in every 4
military spouses is unemployed and looking for work. A military move
often forces a spouse to shift to a more portable career or begin again
at the bottom of the ladder. Thanks to these challenges, studies show
that on average military spouses earn 25 percent less than their
civilian counterparts--when they are able to find a job at all.
    These obstacles to military spouse employment present both short-
and long-term financial challenges to military families. In the short
term, families face the loss of income that a spouse might have
received if he or she could pursue a career without frequent moves and
disruptions. Over the long term, frequent unemployment and reduced
earnings lower the military spouse's Social Security and other
retirement benefits. Because the average military spouse can expect to
receive little in the way of retirement benefits, the servicemember's
retirement pay takes on even greater importance.
    Another source of wealth for most Americans is home ownership, and
here too military families are at a disadvantage. Because military
families move on average every 2 to 3 years, they do not have the
opportunity to build equity in a home as their civilian counterparts
do. One spouse of a Navy officer has this to say:

          ``Every 5 years, my husband has to update his security
        clearance. This involves providing contact information for
        friends and family members who can vouch for him. When we
        completed the process 4 years ago, we noticed that all four of
        his siblings--all civilians--were at the same addresses where
        they were living the last time we updated his clearance. None
        of them have moved in the 4 years since then. In fact, all of
        them have lived in the same houses for at least 15 years.
        Meanwhile, my address book is filled with scratched out
        addresses and multiple entries for our military friends.''

    Many military families never purchase a home, choosing instead to
rent or live on the installation. Others buy a home and are faced with
having to sell it--often at a loss--when they receive orders to a new
location. Regardless, military families have little opportunity over a
20 year career to build wealth through equity in a home. Once again,
this loss serves to increase the importance of the servicemember's
retirement compensation.
    Military families have sacrificed greatly over the past 12 years of
war. Although the war in Afghanistan may be coming to a close, there is
no doubt that military families will continue to be called on to serve
and sacrifice. Our servicemembers and families never fail to answer the
call, and in return our government has promised to provide them with
resources to keep them ready. Now it seems those promises are falling
by the wayside. We urge Congress to honor the Nation's commitments,
restore the damaging COLA cuts, and protect the compensation package
military families rely on. The compensation provided to servicemembers
must reflect the service they provide to our Nation.
                                 ______

    [The prepared statement of Colonel Parker follows:]
       Prepared Statement by LTC Michael A. Parker, USA (Retired)
    Congress recently passed legislation exempting Chapter 61
disability retirees from military retirement cost-of-living adjustment
(COLA) reductions. Some Chapter 61 retirees are indeed our Nation's
most disabled veterans but this is not always the case. It is my
position that there should not be any COLA reductions for military
retirees. However, if there is to be an exemption for disabled
retirees, such an exemption needs to be based on the actual degree of
disability rather than Chapter 61 retirement status. Chapter 61
disability retirement is not designed to compensate for disability.
Rather it compensates for a career lost due to disability. This is an
important distinction Congress needs to understand. The Department of
Veterans Affairs (VA) rating (or Social Security Disability Insurance
(SSDI) eligibility) is a better barometer for current disability as
opposed to Chapter 61 retirement status. A COLA reduction exemption
that only protects Chapter 61 disability retirees is nonsensical for
the following reasons:

         A fully employable Chapter 61 disability retiree,
        rated at 0 percent by DOD and the VA, is not be subject to the
        COLA reduction. (Per 10 U.S.C. 1201, a military member with 20+
        years of service, deemed unfit and rated 20 percent or less,
        becomes a disability retiree.)
         An unemployable length of service retiree rated 100
        percent P&T by the VA, effective the date of retirement, is
        still be subject to the COLA reduction.
         An unemployable length of service retiree who sustains
        a non service connected disability post retirement (e.g.
        paralyzed from the neck down in a car accident) will still be
        subject to the COLA reduction.
         Once a Chapter 61 retiree is placed on the Permanent
        Disability Retirement List, they are a Chapter 61 retiree for
        life, even if they are completely cured of their disability. If
        a member is permanently retired for cancer and that cancer is
        cured, the member remains a chapter 61 retiree for life and is
        exempt from the COLA reduction. However, a length of service
        retiree who develops service connected cancer post retirement
        (e.g. from Agent Orange) is subject to the COLA reduction.
         Many servicemembers found unfit by a Physical
        Evaluation Board (PEB) and rated less than 30 percent disabled
        were given the option of receiving a Temporary Early Retirement
        Authority (TERA) retirement in lieu of disability severance
        pay. A TERA retirement is a length of service retirement. These
        disabled retirees, whom a PEB deemed too disabled to continue
        military service became length of service retirees and will be
        subject to the COLA reduction.
         An unfit member who is eligible for disability
        retirement under the Disability Evaluation System (DES) can
        waive DES processing because they are already eligible for
        length of service retirement. Many unfit wounded warriors have
        waived DES processing because they wanted to move on with life
        and did not want to clog the already stressed DES timeline
        given they receive the same level of benefits by becoming a
        length of service retiree. These disabled retirees will not be
        protected from COLA reduction.
         Military members are not medically retired (Chapter
        61) unless they are deemed unfit by a PEB. Fitness is
        individualized based on the member's rank and duties. A PEB can
        deem an infantryman unfit for a relatively low impact knee
        injury (that makes him unfit to be an infantryman) and yet the
        injury has minimal impact on civilian employment. Conversely, a
        PEB can deem an admin clerk fit who has a very serious
        condition that has huge impacts on civilian employment. This
        disabled retiree, who does not meet military retention
        standards but nonetheless a PEB deemed fit, will not be
        protected from the COLA reductions even ifrated 100 percent P&T
        by the VA and granted SSDI.
         Consider the scenario of two servicemembers. one with
        14 years of service and one with 20 years of service. Both have
        the exact same level of service connected disability and impact
        to their fitness. The member with 14 years of service receives
        a chapter 61 disability retirement and is protected from the
        COLA reduction. The member with 20 years of service is deemed
        fit by presumption, reverts to a length of service retirement,
        and is subject to the COLA reduction. (See the presumption of
        fitness rules in DODI 1332.38.)

    History has shown there are huge inequities with the military's
DES. Chapter 61 retiree status simply cannot be the barometer of the
level of disability worthy of protection from COLA reduction. The DES
timeline is unacceptable long. As a wounded warrior advocate, I (and
other advocates) often advise wounded warriors eligible for length of
service retirement to forego DES (MEB/PEB) processing because they
would receive the same level of DOD/VA compensation as a length of
service retiree. Now, because only Chapter 61 retirees are protected
from COLA reductions, the truth has changed. I will now be advising
such members to insist on DES processing to gain disability retiree
status to protect their retirement from COLA reduction. This will put
an additional burden on the already overburdened DES.

    Chairman Levin. We are now going to start with General
Tilelli, and by the way, this is a reunion of a sort. We want
to tell you that we're delighted to see you all here and we of
course very much treasure the relationships which have been
established between this committee and all of you and treasure
the service which you have performed for our country. We thank
you.
    General Tilelli.

      STATEMENT OF GEN JOHN H. TILELLI, JR., USA [RET.],
CHAIRMAN OF THE BOARD, MILITARY OFFICERS ASSOCIATION OF AMERICA

    General Tilelli. Chairman Levin, Senator Inhofe, members of
the Senate Armed Services Committee: Thank you for the
opportunity to appear before you today. I've also submitted a
statement for the record. It's an honor for me to speak today
to you on behalf of those who serve and have served and their
families. On behalf of the 380,000 members of the Military
Officers Association of America, I have the honor and privilege
of serving as the Chairman for the rest of this year.
    We thank the Senate Armed Services Committee for holding
this hearing on the military retirement program. The purpose of
our retirement program is to offset the extraordinary demands
and sacrifices inherent in a service career. Retirement
benefits are a powerful incentive, as we've heard today, for
those who serve 20 or 30 years in uniform, despite the
sacrifices that they and their families have to endure over the
period.
    The critical element to sustaining a high-quality career
military force lies with establishing a strong reciprocal
commitment between the servicemember and the government and the
people that they serve. If that reciprocity is not fulfilled,
if we break faith with those that serve, retention and
readiness will inevitably suffer.
    The COLA cut to servicemembers' retirement pay in the BBA
is a clear breach of that reciprocal commitment. Although the
recently passed omnibus exempted chapter 61 retirees and
survivors from the COLA cut, we believe that the partial deal
breaks the sacred trust with the rest of the entire retiree
community and their families. We believe it should be repealed
now.
    The financial impact has been called in various quarters as
``teensy-weensy'' and ``small.'' For example--and we've heard
it today--a NCO in the grade of E-7 retiring this year with 20
years of service would see a cumulative loss of $83,000 by the
time he or she reaches the age of 62, more than 3 years of his
original retirement pay of $23,000 a year annually.
    The ongoing rhetoric about spiraling out-of-control
personnel costs has emboldened some to propose drastic changes
to military benefits and compensation in the name of fiscal
responsibility, without fully understanding the unintended
consequences of their action. Suggested cost-cutting proposals
are gaining traction because critics continue to cite personnel
cost growth since 2000 as a motive to gut pay and benefits.
When we think about that, we need to think about it in the
context of people, soldiers, sailors, airmen, and marines, who
are serving in harm's way every day, rather than look at it in
a budget context.
    We believe it's important to put the growth since 2000 in
context. Have costs grown since 2000? Yes. But using the 2000
baseline without an historical context is grossly misleading.
First, it implies that 2000 was an appropriate benchmark for
estimating what reasonable personnel and health care spending
should be. We don't believe that's correct. At that time, years
of budget cutbacks had depressed military pay, cut retirement
value by 25 percent for post-1986 entrants, and booted other
beneficiaries out of the military health care system. Retention
was on the ropes, if we recall, and at the urging of the Joint
Chiefs of Staff, Congress fixed the problems to prevent a
readiness crisis.
    Congress worked diligently over the next decade to restore
military pay comparability, repeal the retirement cuts, and
restore promised health care coverage for older retirees. In
other words, the cost growth was essential to keep the previous
cutbacks from breaking the career force. Now many express shock
that these fixes actually cost money. They forgot that Congress
deemed that these changes were less costly than continued
erosion of our defense capability.
    Moreover, military compensation studies have erroneously
concluded that the cost trends of the last decade will continue
indefinitely. We do not believe that's correct. Now that pay
comparability has been restored, there won't be any further
need for extra pay plus-ups above private sector pay growth,
which is in the law. Similarly, Congress won't have to approve
another TRICARE for Life program or repeal REDUX, which we had
to do in order to maintain the readiness, accession, and
retention of the current force. Those were one-time fixes that
won't be repeated, hopefully, and won't need to be repeated.
    Yet, we continue to focus on recent growth trajectory and
have adopted a new budget-cutting phrase, which is ``Slow the
Growth.'' We believe the math doesn't add up. Military
personnel costs which have been derived from the Office of
Management and Budget data, which include military personnel
and the defense health program, continue to consume the same
amount of DOD's budget for the past 30 years, about one-third.
That's hardly spiraling out of control. Even so, we're asking
for deeper cuts.
    Leveraging our people program versus readiness is simply a
false choice of what this Nation should be able to afford for
its defense. The key to a ready force is and has been
sustaining a top-notch servicemember, mid-level NCOs, and
officers for another 10 years. Without existing military career
incentives over the past 10 years of this protracted warfare,
the All-Volunteer Force would have been placed at serious risk.
    So in conclusion, first, we believe that the COLA cut needs
to be fully repealed now and not wait until the retirement
commission. Second, we believe that any changes to today's
retirement program need to be grandfathered to existing
retirees in the current force. Third, any further changes
recommended by the commission must be fully vetted through this
committee to determine what impact it will have on our world-
class All-Volunteer Force.
    Our obligation is clear and that's protecting national
security, and as it always has been, the most key element to
our national security are the men and women who serve and the
family members who serve also.
    Thank you again for the opportunity to appear before the
committee. I look forward to your questions. Thank you very
much.
    [The prepared statement of General Tilelli follows:]
   Prepared Statement by The Military Officers Association of America
    Mr. Chairman and Ranking Member Inhofe. On behalf of over 380,000
members of the Military Officers Association of America (MOAA), we are
grateful for this opportunity to express our views and appreciate the
full Senate Armed Services Committee hosting this hearing on the
uniformed retirement system and the recent cost-of-living adjustment
cut for working age retirees included in the Bipartisan Budget Act or
BBA of 2013.
    MOAA does not receive any grants or contracts from the Federal
Government.
                the uniformed services retirement system
    The entire military compensation system, to include the retirement
benefit, is based on principles outlined in the DOD's Military
Compensation Background Papers and ``should be designed to foster and
maintain the concept of the profession of arms as a dignified,
respected, sought after, and honorable career.''
    The whole purpose of the unique military retirement package is to
offset the extraordinary demands and sacrifices inherent in a service
career. Benefits provide a powerful incentive for top-quality people to
serve 20-30 years in uniform, despite the cumulative burden of
sacrifices over that extended period, as eloquently articulated by the
Secretary of the Air Force during his January 18, 1978, testimony
before the President's Commission on Military Compensation:

          ``The military services are unique callings. The demands we
        place on our military men and women are unlike those of any
        other country. Our worldwide interests and commitments place
        heavy burdens and responsibilities on their shoulders. They
        must be prepared to live anywhere, fight anywhere, and maintain
        high morale and combat efficiency under frequently adverse and
        uncomfortable conditions. They are asked to undergo frequent
        exposure to risk, long hours, periodic relocation and family
        separation. They accept abridgement of freedom of speech,
        political and organizational activity, and control over living
        and working conditions. They are all part of the very personal
        price our military people pay.
          ``Yet all of this must be done in the light of--and in
        comparison to--a civilian sector that is considerably
        different. We ask military people to be highly disciplined when
        society places a heavy premium on individual freedom, to
        maintain a steady and acute sense of purpose when some in
        society question the value of our institutions and debate our
        national goals. In short, we ask them to surrender elements of
        their freedom in order to serve and defend a society that has
        the highest degree of liberty and independence in the world. I
        might add, a society with the highest standard of living and an
        unmatched quality of life.
          ``Implicit in this concept of military service must be long-
        term security and a system of institutional supports for the
        serviceman and his family which are beyond the level of
        compensation commonly offered in the private, industrial
        sector.''

    There is no better illustration of that reality than the experience
of the past 12 years of war. Absent the career drawing power of the
current 20-year retirement system and its promised benefits, MOAA
asserts that sustaining anything approaching needed retention rates
over such an extended period of constant combat deployments would have
been impossible.
    The crucial element to sustaining a high-quality, career military
force is establishing a strong bond of reciprocal commitment between
the servicemember and the government. If that reciprocity is not
fulfilled, if we ``break faith'' with those that serve, retention and
readiness will inevitably suffer.
    We believe the government has a unique responsibility to the small
segment of Americans it actively induces to subordinate their interests
for 20 to 30 years that goes far beyond any civilian employer's
obligation to its employees.
    The uniformed services retirement system has had its critics since
the 1970s and even earlier.
    In the 1980s, budget pressures led to amending retirement rules
twice for new service entrants with the implementation of the high 36
month average system and subsequently the REDUX system.
    At the time the REDUX plan was being considered, then-Secretary of
Defense Caspar Weinberger strongly (but unsuccessfully) opposed it (see
attached letter), arguing the change would harm retention and degrade
readiness. ``It says in absolute terms,'' said Weinberger, ``that the
unique, dangerous, and vital sacrifices they routinely make are not
worth the taxpayer dollars they receive. I do not believe the majority
of the American people support this view and ask that you consider this
in your deliberations on this very critical issue to our national
security.''
    When his prediction of adverse retention consequences proved all
too accurate in the 1990s, Congress had to repeal REDUX in 1999 at the
urging of the Joint Chiefs of Staff.
    Subsequently, innumerable studies and task forces have recommended
further dramatic changes, usually either to save money, to make the
system more like those offered under civilian programs, or both.
    Most recently, groups such as the 10th Quadrennial Review of
Military Compensation, National Commission on Fiscal Responsibility and
Reform, the Debt Reduction Task Force, the Sustainable Defense Task
Force, and the Defense Business Board's ``Modernizing the Military
Retirement'' Task Group have all recommended dramatically revamping the
system more on civilian lines, with significantly reduced and delayed
military retirement compensation.
    All too aware of the lessons of REDUX, Congress has wisely ignored
and dismissed these unwise recommendations, which propose far greater
retirement cuts than REDUX entailed.
          military retirement: ``inflexible and unaffordable''
    The existing retirement system is often characterized as
``inflexible,'' limiting the ability of Service personnel managers to
more precisely and effectively manage the force. We strongly disagree.
    The Services already have substantial authority to adjust high-
year-of-tenure limits to enforce the unique military ``up-or-out''
promotion system. Other authorities exist, and the Services are
currently exercising them, to incentivize voluntary separations and
voluntary or mandatory early retirements.
    The Services routinely tighten retention and reenlistment
incentives and other restrictions when budget or other considerations
create a need for additional separations and retirements. When
necessary, Congress has provided additional special drawdown
authorities.
    But the practical reality is that precisely planned force
management initiatives are regularly tossed aside in the wake of world
events which force dramatic reversals of those planned actions.
    Plans which envision delaying retirement eligibility until age 57
or 60 contradict the reality that the Services don't want the vast
majority of members to stay in uniform that long.
    Service desires for unlimited flexibility to shape the force may be
appropriate for management of hardware and other non-sentient
resources.
    However, the Services are dependent upon attracting and retaining
smart people who understand all too well when their leaders put no
limits on the sacrifices that may be demanded of them, but also wish to
reserve the right to kick them out at will . . . even while building a
system that assumes they will be willing to serve under these
conditions until age 60.
    Servicemembers from whom we demand so much deserve some stability
of career expectations in return.
    We believe that ``civilianizing'' the military benefit package
would dramatically undermine the primary military career retention
incentive particularly during wartime and would be disastrous for
retention and readiness, as they increase the incentives to leave and
reduce the incentives for career service.
    Moreover, we believe it is irresponsible to focus on budget and
``civilian equity'' concerns while ignoring the primary purpose of the
retirement system--to ensure a strong and top-quality career force in
spite of arduous service conditions that no civilians experience and
few are willing to accept.
    Military retirement critics have claimed for decades that this
unique plan is unaffordable and unsustainable.
    Over 35 years ago, the 1978 report of the President's Commission on
Military Compensation included this extract from the minority report of
Commissioner Lt Gen Benjamin O. Davis (USAF, Retired):

          ``Unfortunately, the Commission has embraced the myth that
        retirement costs will soon rise so high--from $10 billion this
        year to $30 billion in the year 2000--as to become an
        unacceptable and unfair burden on the American taxpayer.
          ``Such assertions fail to point out that by using the same
        assumptions, today's average family income of $10,000 will be
        $36,000 in the year 2000. The average cost of a home will be
        $171,000; a compact automobile will cost $17,000; and the
        overall U.S. budget will have increased from $500 billion to
        some amount in the trillions.''

    Such numbers seem quaint in retrospect, but they make two telling
points.
    First, long-term projections that appear dire today often prove far
less so as years pass.
    Second, after budget-driven retirement cuts actually were imposed
in 1986, Congress deemed restoring the current system as more
affordable than continued retention and readiness shortfalls.
    During 2012 testimony before Congress, Defense witness Dr. Jo Ann
Rooney, Principal Deputy Under Secretary of Defense for Personnel and
Readiness, testified the current military retirement system is
``neither unaffordable, nor spiraling out of control,'' noting
retirement costs as a percentage of pay have remained reasonably
constant.
    The chart below demonstrates that fact. Extracted from the DOD
Actuary Valuation report and the Office of Management and Budget
historical table 5.1, the retirement deposits into the retirement
accrual account have remained relatively steady over the past 12 years.

    


                       the bipartisan budget act
    The recent passage of the Bipartisan Budget Act (BBA) was trumpeted
as a bipartisan, 2-year sequestration alleviating, budget deal. But in
reality, the budget deal was a backroom, 11th hour pact that was rushed
through both the House and Senate before the holidays, bypassing the
committees of jurisdiction.
    Even though the budget deal will help ease the harmful effects of
sequestration for 2 years for the Department of Defense--something MOAA
supports--doing so by breaking longstanding commitments to
servicemembers who serve our Nation for over 20 years is incredibly
short-sided and shameful.
    MOAA recognizes the magnitude of the Nation's debt problem and
agrees that solving this will require sacrifice from all sectors of the
Federal Government--including the Pentagon.
    However, the defense budget didn't cause this problem and it
shouldn't carry the brunt of the solution--especially the one weapon
system that has consistently answered the call regardless of the
demands we have asked of them--those who serve and have served our
Nation in uniform.
    Hidden in the deal is a provision that the press has characterized
as ``modest,'' ``tiny,'' or ``teensy weensy.''
    The provision reduces the annual cost-of-living adjustment by 1
percent starting in December 2015 for working age retirees (under age
62).
    This ``teensy weensy'' provision affects over 700,000 retirees,
400,000 with post-9/11 service, and 73 percent enlisted.
    The servicemembers who retire at the 20 year point will feel the
full negative financial effects of the provision as it will reduce
their retired pay by nearly 20 percent by the time they reach age 61.
At age 62, a ``catch-up'' clause recalculates the retiree's annual pay
base for the following year but the financial loss between retirement
and age 62 is lost forever.
    The recently passed fiscal year 2014 appropriations omnibus bill
took the first step towards full repeal by exempting Chapter 61
retirees and survivors. However, this still breaks the retirement
contract and it breaks faith with the currently serving and MOAA won't
be satisfied with a partial deal.
    Co-author of the BBA and Chairman of the House Budget Committee
Representative Paul Ryan (R-WI) defended the cost-of-living adjustment
(COLA) cut for working age retirees in a December 22, 2013, USA Today
editorial stating, ''All this reform does is make a small adjustment
for those younger retirees.''
    The financial impact is anything but a ``small'' adjustment. For
example, an E-7 retiring this year with 20 years of service would see
an average loss of over $3,700 per year. By the time he/she reaches age
62, the cumulative loss is $83,000; more than 3 years' of his or hers
original retired pay of $23,000 annually.

    


    Chairman Ryan further stated, ``To be clear, the money we save from
this reform will go right back to the military. Veterans aren't
Washington's piggy bank. They deserve fair compensation. We owe them a
benefit structure they can count on.''
    What's appalling is that this change accomplishes the complete
opposite . . . it creates an environment where those that serve or plan
to serve over 20 years in uniform cannot count on their promised career
benefits. This backroom deal broke faith with our currently serving and
our working age retirees in order to fund other military spending
priorities.
    The 1 percent COLA reduction is a prime example of a hastily thrown
together, short-sighted deal that completely bypassed the committees of
jurisdiction and the appropriate due process.
    It shifts funding obligations that are rightfully the government's
onto the backs of those who already have sacrificed more for our
country than any other Americans.
    Had this provision been reviewed by the HASC and SASC, there would
have been an educated, informed dialogue on its merits and the
unintended consequences as well as the financial impact to uniformed
members.
    We recently surveyed our membership on this issue, and of the more
than 15,000 respondents, nearly 95 percent of respondents indicated
that they opposed the cut. They have voiced their concern with nearly
250,000 messages sent to their legislators urging repeal.
    Fortunately, it's not just military and veteran associations that
are upset about the BBA COLA provision, but also Members of Congress.
Approximately 17 bills have been introduced and nearly half of
Representatives and Senators have signed on. The hurdle, of course, is
garnering a bipartisan offset to replace the revenue.
    We've heard from the currently serving and their families and the
negative impact to the morale of those in uniform is already surfacing.
    MOAA's bottom line: A full repeal is needed immediately to keep
from breaking faith with those currently serving and for those that
have served over two decades in uniform.
                           the perfect storm
    The question to ask is, ``How did a proposal like this ever see the
light of day?'' The answer is depressingly simple. The Pentagon's
uniformed and civilian leadership have created a perfect storm
providing political top cover to slash pay and benefits with their
repeated and alarming--and demonstrably false--statements on personnel
cost growth.
    The Pentagon's ongoing rhetoric about ``spiraling out of control''
personnel growth has emboldened some in Congress to not only consider,
but to propose drastic changes to the military benefits, compensation,
and the retirement system in the name of fiscal responsibility without
fully understanding the unintended consequences of their actions nor
the impact to morale and retention.
    Many suggested cost cutting proposals are gaining traction simply
because critics and the Pentagon continue to cite ``personnel cost
growth since 2000'' as a motive to gut pay and benefits.
    What concerns MOAA and should concern Members of Congress is that
critics (and the Pentagon) narrowly use 2000 as a baseline for future
growth, insisting compensation and health care costs are growing at
rates that, as Chairman of the Joint Chiefs (CJCS) General Martin
Dempsey said, `` . . . are unsustainable to the All-Volunteer Force.''
    MOAA believes it is important to put the ``growth since 2000
argument'' in the proper context to understand why military pay has
risen faster than that of the average Americans from 2000 to 2010.
    Have costs grown since then? Yes, certainly, but using the ``2000''
baseline without appropriate context is grossly misleading.
    First, it implies the turn of the century was an appropriate
benchmark for estimating what reasonable personnel and healthcare
spending should be. Nothing could be further from the truth.
    At that time, years of budget cutbacks had depressed military pay,
cut retirement value by 25 percent for post-1986 entrants, and booted
beneficiaries over 65 completely out of the military health care
system.
    As a result, retention was on the ropes, and the Joint Chiefs of
Staff urged Congress to fix the problems to prevent a readiness crisis.
    Congress worked diligently over the next decade to restore military
pay comparability, repeal the retirement cuts and restore promised
health coverage for older retirees. In other words, the cost growth was
essential to keep the previous cutbacks from breaking the career force.
    Now, more than a decade later, many of those same officials and
their successors express shock that these fixes cost money. They find
it convenient to forget that Congress deemed those changes less costly
than the continued erosion of our defense capability.
    Recent military compensation studies have leaped to the erroneous
conclusion that the cost trends of the last decade will continue
indefinitely.
    Not so. Now that pay comparability has been restored, there won't
be any further need for extra pay plus-ups above private sector pay
growth. Similarly, Congress won't have to approve another TRICARE for
Life program or repeal REDUX. Those were one-time fixes that won't be
repeated.
    Yet, Pentagon leadership continues to focus on ``recent growth
trajectory'' and have adopted a new budget-cutting catch phrase: ``Slow
the growth.''

    


    For example, the military personnel account, according to Office of
Management and Budget's historical table 3.2, has doubled between 2000
and 2012--from $76 billion to $152 billion.
    What the Pentagon doesn't advertise is that the overall defense
budget grew over the same period from $281 billion to $651 billion--a
131 percent increase. This alone shows personnel costs are consuming a
smaller share of the budget. So if any costs are ``spiraling out of
control'', they're not personnel costs.
    Additionally, hardware cost overruns have been left unchecked. A
recent Government Accountability Office report issued in October 2013
highlighted that the Pentagon's 85 major acquisition programs were a
collective $411 billion over their initial cost estimates in 2012--a
sum that could wipe out the remaining years of the DOD sequestration
budget cuts alone.
    Some Members of Congress, think tanks, and many in the press have
simply accepted the Pentagon's rhetoric without subjecting it to
scrutiny.
    MOAA believes that Congress, think tanks, the press, and the
American people should be critical of the rhetoric and ask the hard
question--have DOD show how they are forecasting future personnel
growth instead of simply agreeing with the Pentagon.
    The Pentagon's math simply does not add up.
    Military personnel costs have continued to consume the same share
of the Pentagon's budget for the past 30 years--about one third (hardly
spiraling out of control).

    


    Fortunately, we are not the only ones asking the Pentagon why and
how. A recent Andrew Tilghman article, ``Top brass claim personnel
costs are swamping DOD, but budget figures say otherwise,'' in the
November 24, 2013, Military Times, directly addresses the grossly
exaggerated public statements being made by senior Pentagon leadership
regarding military pay and benefits.
    However, this one article will not preclude the Pentagon or the
administration from asking for deeper cuts to personnel compensation
and benefits in order to secure more funding for pet weapon programs.
    Just this month in a National Public Radio interview, General
Dempsey reemphasized this point by stating, ``I have one sacred
obligation to the young men and women who serve. And only one. If I ask
them on behalf of the president to go to places like Afghanistan or
some other conflict, they must be the best trained, best equipped and
best led force on the planet. I don't want to win 5 to 4; I want to win
50 to nothing. To do that we have to make the appropriate investments
in training, readiness, leader development, modernization and manpower.
But I can't have the manpower account so out of proportion that it
precludes me from making sure that if they go into harm's way they're
ready to go.''
    Leveraging people programs vs. readiness is simply a false choice.
The key to a ready force is sustaining the top-notch, 10-year, mid-
level noncommissioned officer and officer for another 10 years. Without
existing military career incentives over the past 12 years of
protracted wartime conditions the sustainment of the All-Volunteer
Force would have been placed at serious risk.
    But because of the rhetoric, pay and benefit dominoes have already
begun to fall--all of which have started to bend the curve on personnel
costs.
Domino one
    TRICARE Prime changes: Beneficiaries have already seen increases to
TRICARE enrollment fees over the past several years and they will
continue to rise at the rate of a retiree's cost-of-living adjustment.
TRICARE Prime Service Area restrictions will shift nearly 200,000
beneficiaries to the less-expensive TRICARE Standard. TRICARE Service
Center closures and the standup of the Defense Health Agency also will
contribute to the large projected savings in this area.

    


    We've already started to see slowing in the rate of growth in
health care costs. The chart to the right shows the average annual
growth rate has been declining steadily since enactment of TRICARE for
Life (TFL) in 2003.
Domino two
    Major changes have been enacted to double and triple pharmacy
copays for military beneficiaries, and these will continue to increase
in future years at the rate of inflation. TFL beneficiaries are being
required to use the far-less-expensive mail-order system for refills of
maintenance medications, which will dramatically reduce pharmacy costs.
Domino three
    End strength: Cuts to the tune of 124,000 servicemembers over 5
years are planned for the Active and Reserve Forces. These cuts will
definitely bend the personnel cost growth curve.
Domino four
    Pay: This year military members will see the lowest pay raise in
over 50 years with their pay capped below private sector pay growth,
and this may not be a one-time cap. In the fiscal year 2013 budget
submission, the administration and the Pentagon rolled out a plan to
cap pay raises for 3 years.
    The chart to the right shows that after years of pay raises in
excess of the Employment Cost Index (ECI), the pay gap was basically
closed in 2010. To profess pay raises from 2000 through 2010 would be
repeated in the next coming decade is a flawed assumption for
predicting military personnel cost growth.

    


    After the December 2013 roll-out of the budget deal Secretary of
Defense Chuck Hagel stated, ``The Department of Defense will need more
flexibility, and we will continue to look to Congress as a vital
partner in our efforts to realign priorities and address needed reforms
in areas like military compensation in order to maximize our military's
fighting strength.''
    Stating ``everything is on the table,'' several options to cut pay
and benefits have surfaced. The next salvo will be launched in February
in the defense budget submission in February. Already being discussed:

         Capping pay raises or even freezing pay
         Additional end strength cuts
         Changing Basic Allowance for Housing to make members
        assume more of the costs
         Curtailing or eliminating the commissary benefit
         Limiting tuition assistance
         Means-testing TRICARE fees and establishing TFL/
        TRICARE Standard enrollment fees
         Restructuring the retirement benefit to resemble
        civilian-like plans (401K)

    A deafening silence has come from DOD leadership regarding the
COLA-cutting provision. Fortunately, not all the Joint Chiefs have
remained silent.
    Shortly after the BBA release, Army Chief of Staff General Ray
Odierno expressed complete surprise and voiced his trepidation over the
process stating, ``It's concerning to us that they made a decision
without actually consulting the Pentagon or anyone else. What's next?
We wanted a total package that we'd be able to look at and agree to.''
                         the grandfather clause
    For several years, the administration, the Pentagon, the Chairman
of the Joint Chiefs of Staff (CJCS), and Members of Congress have
stipulated that any change to the current retirement system should
grandfather current retirees and currently serving members.
    In October 2011, then Secretary of Defense Leon Panetta and CJCS
General Dempsey reiterated in a hearing before the House Armed Services
Committee that any changes to the military retirement program should
not impact the current force in order to ``keep faith'' with them and
their families, and that any changes should affect only future service
entrants.
    The administration made that same promise in its guiding principles
to the Military Compensation and Retirement Modernization Commission
(MCRMC), specifically including a grandfather clause to protect current
retirees and currently serving members from any changes to their
retirement.
    This COLA--1 percent provision flies in the face of those promises
and is a breach of faith with retirees under age 62 as well as those
currently serving--many who have experienced over 12 years of combat.
    Make no mistake; even grandfathering the current force is no
protection against the adverse effects of military retirement cuts.
    The last two major changes to military retirement, High-36 in 1980
and REDUX in 1986, grandfathered the existing force.
    The REDUX experience taught that grandfathering the current force
against significant changes does not avoid the negative retention and
readiness consequences of those changes.
    Grandfathering is designed simply to quell dissent and fear among
the currently serving, as there is no constituency for future entrants.
    In the end, troops and families affected by such decisions have
little or no say in what Congress and the administration decide about
their future compensation package.
    Their only recourse is to ``vote with their feet''--as they did in
the 1970s and 1990s--when they believe erosion of their career
compensation package has left it insufficient to offset the sacrifices
of continued service.
    At the urging of the Joint Chiefs of Staff at the time, Congress
repealed REDUX in 2000 due to the harmful impact to retention and
readiness.
    It is imperative Congress repeal the BBA COLA cut that will impact
the promised retirement benefit for those in uniform today.
                      the military-civilian divide
    As this BBA provision surfaced, members of the press called the cut
exceedingly modest to ``a [military] pension plan that is already far
more generous than private-sector equivalents.''
    Congress and the American people should not take the sacrifice and
service (and retention) of our All-Volunteer Force (AVF) for granted by
equating it to civilian careers. Sustaining the AVF cannot be done ``on
the cheap'' and comparing the benefit package to those in the civilian
workplace fails to understand the very nature of a career of service in
uniform.
    The men and women in uniform cannot just say ``no'' when presented
with orders they don't like. They are subject to the Uniformed Code of
Military Justice, a reality civilians don't face. In order to earn the
retirement benefit, servicemembers must make it through an up or out
personnel system or face being separated or discharged.
    The entire military family makes tremendous sacrifices on the road
to retirement. Military spouses seldom establish their own careers
because of frequent and involuntary separations and relocations. Due to
frequent moves, military couples rarely spend enough time in one place
to build equity in a home.
    Military children, on average, attend 6-8 schools during grades K-
12. Their young lives are also peppered with extended separations from
their military parent. Along the road to retirement, many will decide
the personal sacrifice is simply too great.
    Critics are quick to point out that retirees who leave military
service in their 40s or 50s find gainful civilian employment. But not
all military skills translate well into civilian jobs regardless of
what pundits say. The reality is that two incomes are necessary to
maintain a standard of living and send their kids to college.
    Most disconcerting, is equating military service to the civilian
sector. The decades of sacrifices that career servicemembers and
families endure (as particularly evidenced over the past 12 years) are
far from civilian-like.
    In a hearing before the House Armed Services Committee in October
2011, the Chairman of the Joint Chiefs General Martin Dempsey stated
that the military retirement program ``needs to be fundamentally
different than anything you can find in the civilian sector.''
    MOAA wholeheartedly agrees. Until you can adjust the conditions of
service for those in uniform to be more ``civilian-like'' (which can't
and won't happen), we suggest the press, think tanks, and budget
cutters stop trying to compare the two in order to garner support for
enormous changes to pay and benefits.
    Similarly, MOAA finds it extraordinarily perplexing when critics
rationalize the COLA cut by noting that large numbers of veterans don't
qualify for any retirement benefits and are thus unaffected by the
budget bill's COLA reductions.
    This kind of rationalization is particularly aggravating to career
servicemembers.
    The circumstances of people who didn't serve a career are
irrelevant to the question of whether the government should keep its
longstanding promises to those who did.
               keeping faith with the all-volunteer force
    The most important element of national security is sustainment of a
dedicated, top-quality career military force. That reality is
underscored by consistent surveys showing our Armed Forces are
America's most-respected public institution.
    Yet, budget critics persist in asserting military pay, retirement,
and health care benefits are unsustainable and should be slashed to
more closely resemble civilian benefit packages.
    But decades of such dire predictions have proved to be consistently
wrong. On the contrary, these crucial career incentives have sustained
a strong national defense through more severe and protracted wartime
conditions then even the strongest proponents of the All-Volunteer
Force thought it could survive.
    In fact, the only times it has been jeopardized were when budget
concerns imposed significant cutbacks in the military compensation
package.
    Congress' consistent corrective actions in those cases recognized
that the cost of sustaining the current career incentive package is far
more acceptable and affordable than the alternative.
    The hard fact is that military service conditions are far more
arduous and career servicemembers' and their families' sacrifices are
far greater today than at any time since the current pay, retirement
and health care systems were created.
    How ironic that, even while acknowledging this reality with every
other breath, their own leaders simultaneously devalue their
extraordinary service and sacrifice with a drumbeat of assertions that
they aren't worth what we're paying them.
    Any change to the retirement system should be vetted through the
normal legislative process and be prospective in nature rather than
violate the fundamental career promise made when men and women raised
their hand to protect our Nation.
    Those in uniform who are contemplating a career serving around the
world to include Afghanistan should not be burdened with this broken
promise.

    

    Chairman Levin. Thank you so much, General.
    General Sullivan.

       STATEMENT OF GEN GORDON R. SULLIVAN, USA [RET.],
PRESIDENT AND CHIEF EXECUTIVE OFFICER, ASSOCIATION OF THE U.S.
                              ARMY

    General Sullivan. Mr. Chairman, Senator Inhofe,
distinguished members of the panel: Thank you for the
opportunity to speak with you today as the President of the
Association of the U.S. Army and as a former Chief of Staff of
the U.S. Army.
    The Association of the U.S. Army represents hundreds of
thousands of members of the Active Army, Army National Guard,
Army Reserve, the retired community, civilians, and the Army
families. We have 121 chapters worldwide. Our members and I are
very well aware of the fact that much of the good done for
soldiers over the last few years would have been impossible
without the commitment of this committee. We are indebted to
each and every one of you and your predecessors. Your tireless
and selfless personal staffs and professional staffs, we
appreciate their efforts. We understand that in these fiscal
times, these are very challenging times for our Nation, and
certain things need to be done.
    Now, before I continue, I want to acknowledge the
bipartisan bill. I've never been sure what it was called, so
let's say the Murray-Ryan bill or the Ryan-Murray bill. But
whatever it was, the chips in the sequestration have been very
important for all of the Services, and I just want to add my
voice to the thanks for everybody who made that bipartisan bill
and the budgets and the return to somewhat normal order which
is taking place here. I remain hopeful that these chips into
the walls that surround money known as sequestration will end
permanently.
    Now, in many ways, as has been stated by countless people
and here this morning, the budget deal was good news.
Unfortunately, included in it was a broken promise, and the
broken promise has been talked about repeatedly. In spite of
the fact that the President, the chairman of this committee,
several Secretaries of Defense, the Chiefs of the Services, and
the senior civilians in DOD--and you heard it here this morning
on the first panel--have stated repeatedly that any changes to
the military compensation and benefits package would be
grandfathered for the currently serving force and for current
retirees would be grandfathered, yet it was changed.
    Now, this one line in the budget act has created doubt in
the minds of the very people who do not need doubt created in
their minds about the commitment of the American people for
their well-being and their ability to fight and win the
Nation's wars, where ever those wars may be. Frankly, we now
have them worried about things I never worried about in my 36
years of Active Duty. I cannot imagine that at this point in
our history we need to cause them to be worried about their
well-being.
    The congressionally-created Military Compensation and
Retirement Modernization Commission that was tasked with
reviewing potential changes to the military retirement system
was directed to follow guidelines set by this committee and the
President that included grandfathering the currently serving
force and current retirees. In my view, the Commission should
be allowed to do its job, and I recommend strongly that this
provision, which gets into the retired pay of those between
retirement age and age 62, be taken off the table now and not
passed to the Commission based on some hope that someone else
some time down the road is going to change it. I don't think
it's ever worked in the past and I doubt it would work now.
    By the way, the longer it continues the more uncertainty
will be created in the minds of the people. I think this will
be a pay-now/ pay-later. I don't think we understand the full
impact of what we're doing here.
    As the economy rights itself, this blow to an earned
deferred compensation benefit will be an enormous disincentive
for qualified, battle-tested military personnel to remain on
Active Duty. Recruitment will also suffer because any decision
to serve could be influenced by how the current force is
treated. Today's soldiers are tomorrow's retirees, and they are
watching and they will speak. The current retirees, may of whom
are combat veterans themselves, will influence in some way
recruits or potential recruits.
    In the case of the Army, the Army is a family business and
you will find a very high percentage of those serving on Active
Duty today were influenced by either parents, grandparents,
aunts, or uncles.
    This cut in pay and benefits must be balanced against the
long-term viability of the All-Volunteer Force. Recent history,
which has been pointed out, from the 1980s and 1990s shows that
precipitous pay cuts and benefit cuts have unintended
detrimental consequences. The prime example is the ill-fated
REDUX retirement adjustments. Actually, in just a few years we
faced a recruiting challenge, which Congress wisely reinstated
the old system.
    The current COLA cut provision, which some say will help
tame the ``wildly out of line'' military pensions, will hit
hardest on the enlisted force. In most cases, I would point out
that these people, grade staff sergeant E-6 or sergeant first
class E-7, are not fully employed in lucrative retirement
positions in today's economy. For many, their now-to-be-
deflated retirement check is their main source of income. After
decades of service, which I hasten to add could have involved
repeated tours of duty in conflict areas, this puts them in a
bad position employment-wise and so forth and so on, which I
won't go into today.
    The fact of the matter is, the compensation package in
place today recognizes compensation which has been earned by
over 20 years of arduous service. By the way, this compensation
was designed to encourage careers of service in the All-
Volunteer Force based on personal qualifications, and this
force has performed magnificently over the last several decades
and certainly the last 12 to 13 years in active combat.
    Also, without the support of their families, the thing
would have fallen like a deck of cards. I think we need to pay
particular attention to their families and their role, in all
of this and the children, who have seen their mothers and
fathers come and go to serve this country, they need to be
taken care of going forward.
    In addition to patriotism, what has kept professional
soldiers in the Army and professional sailors, airmen, or
whatever the case may be in their Service, has been the
assurance that the benefits which they understood they received
would be forthcoming. I will tell you, I never worried about
retirement. It was just there, and somehow we have created
doubt in their minds. The last people in the world you want
worried about that kind of stuff are those who are out there
climbing into helicopters and airplanes and ships and jumping
out of airplanes in the middle of the night, and whether they
and their families are going to be taken care of.
    I am troubled when I hear we are paying the troops too much
and that this is the reason we have to cut back on training,
readiness, and modernization of the force. At the end of the
day, the force is people. It is people. We're talking about
high quality men and women, dedicated to their Nation, and they
are not the problem. The message they hear, though, is that
they are contributing to their own unreadiness by their mere
presence. We must change this narrative.
    America can afford the defense it needs. It is simply a
question of priorities. Shifting the burden of the Nation's
fiscal problems onto the backs of the troops is unnecessary and
in my opinion, is wrong.
    The instability caused by this cut will reverberate for
years unless it's taken off the table. We're going to feel it,
pay-now/pay-later.
    I understand very clearly the concept of shared
responsibility, but the Federal Government and all Americans
must remain true to the promises made to her military
personnel. We understand that military programs are not above
review. I understand all of that. But always remember the
Nation must be there for them, those who answered the Nation's
call. There's only a handful, less than 1 percent, of the
American people.
    This committee, this committee right here, safeguards the
welfare of America's military personnel on behalf of the
Nation. I want each of you to know that we appreciate what this
committee does. We also appreciate the fact that, as has been
stated earlier--I think General Tilelli said it--you are the
ones who will look at what the commission comes up with to
ensure that it meets your goals of protecting the All-Volunteer
Force.
    I urge you to find a bipartisan solution that will remove
the under-62 military retiree COLA provision and do it now. My
recommendation is you take the issue off the table and send a
signal out there to the force now, so that people sitting
around a stove, in the middle of Afghanistan, in the middle of
the night, will not be talking about this issue. This is not
the kind of issue they need to be worried about.
    This system was really created in the 1940s. It probably
deserves to be looked at, there's no doubt about it. But they
don't need to worry about it, and their well-being at this
point--I think it has a hugely destabilizing effect on the
force and I urge you to take it off the table now. I'll do
whatever I can, and I'm sure these other people will too, to
testify to that effect.
    Thank you very much.
    [The prepared statement of General Sullivan follows:]
      Prepared Statement by GEN Gordon R. Sullivan, USA (Retired)
    Mr. Chairman and members of the committee: Thank you for the
opportunity to present my views as president of the Association of the
U.S. Army (AUSA) and as a former Chief of Staff of the Army concerning
the provision in the Bipartisan Budget Act of 2013 that will require a
1 percent annual reduction to the uniformed service retired pay cost-
of-living adjustment (COLA) until the retiree reaches age 62.
    The Association of the United States Army is a non-profit
educational association with a diverse membership--Active Duty, Army
National Guard, Army Reserve, Department of the Army civilians,
retirees, and family members in 121 chapters worldwide. This is not a
faceless group. They are people and that's where our focus should be.
People.
    Our members and I are very aware that much of the good done for
soldiers in the past would have been impossible without the commitment
of those who serve on this committee and the tireless efforts of their
professional and personal staff. Thank you. We also understand that
these are fiscally challenging times for our Nation.
    Before I continue I want to note that AUSA has been fighting for 2
years to get the yolk of sequestration off of the Defense Department
and, specifically, the Army's, back. The new budget deal finally
removes much of the burden of sequestration from the military for the
next 2 years and I thank you and all those who worked together to make
that happen. The agreement means there will be more money for training
soldiers who will go into harm's way, more money for maintenance and
for procurement and modernization. It also ends funding by continuing
resolution for 2 years. That is hugely important for the Army because
it allows the Army to move money among accounts, it allows new contract
starts and it provides a way for appropriators to give the Army a real
funding number to plan around for the next 2 years. We are hopeful that
sequestration will end permanently.
    In many ways the budget deal was very good news. Unfortunately,
included in that good news was a broken promise. The President, several
Secretaries of Defense, the Chiefs of the Military Services, and
Congress have stated repeatedly that any changes to the military
compensation and benefits package would be grandfathered for the
currently-serving force and for current retirees. The under-62 retiree
COLA cap embedded in the budget legislation flies in the face of that
pledge and breaks faith with those who have served their nation for 20
years and with those who will retire in the future, who until now had
the expectation that their retirement would keep pace with current
economic conditions.
    This one line in the Budget Act has created doubt in the minds of
the people. They are worried about things I never worried about in my
36 years on active duty. There was a trust that if I worked hard and
did my job, at the end of the day, I knew what my compensation would
be.
    The congressionally-created Military Compensation and Retirement
Modernization Commission that was tasked with reviewing potential
changes to the military retirement system was directed to follow
guidelines set by this committee and the president that include
grandfathering the currently-serving force and current retirees. In my
view, the commission should be allowed to do its job and not be
preempted by legislation that affects the current force and current
retirees. Since the commission results will be reviewed by appropriate
congressional committees such as this one, there are fail-safe
mechanisms in place that will assess the impact of any recommendations
on retention and readiness.
    As the economy rights itself, this blow to an earned deferred
compensation benefit will be an enormous disincentive for qualified,
battle-tested military personnel to remain on active duty. Recruitment
will also suffer because any decision to serve could be influenced by
how the current force is treated. Today's soldiers are tomorrow's
retirees, and they are watching.
    This cut in pay and benefits must be balanced against the long-term
viability of the All-Volunteer Force. Recent history from the 1980s and
1990s shows that precipitous cuts in pay and benefits can have
unintended, detrimental, and lasting effects on the force. The prime
example is the ill-fated REDUX retirement pension plan in which made no
structural changes, but merely imposed a straight line reduction to
retirees' pay. In just a few years the military faced a recruitment and
retention crisis, so Congress wisely reinstated the previous system.
    The current COLA-cut provision, which some say will help ``tame''
the ``wildly out of line'' military pensions, will hit hardest on
retired enlisted soldiers who in most cases are not fully employed in
lucrative post-retirement jobs. For many, their now-to-be deflated
retirement check is their main source of income after decades of
service and I hasten to add, that the average Army retiree is an
enlisted soldier at the grade of Staff Sergeant or E-6 whose retired
pay (which is based only on pay grade, and does not include allowance
and special pays) is about $1,800 per month before taxes. This does not
include dollars taken out for health care or for survivor benefit
plans.
    Finally, the COLA-cut provision affects the less than 1 percent of
the Nation's population that is currently serving, and I note for the
record, many of this cohort could have served multiple tours of duty in
combat from the late 1990s and into the early years of this century.
The retirement compensation that comes from this service has been
earned by 20 years or more of arduous service.
    The fact of the matter is that the compensation package in place
today was designed to encourage a career of service in the All-
Volunteer Force--the force that has performed so magnificently over the
past several decades. In addition to patriotism, what has kept
professional soldiers in the Army during a period of repeated combat
deployments, family separation, and frequent relocation has been the
stability of a reassuring compensation package that, until now,
Soldiers knew would not be changed. The grandfathering principle equals
stability--a certainty that, like the Army's pledge to leave no one
behind on the battlefield, what was agreed to upon enlistment will not
be changed mid-career.
    Finally, I am troubled when I hear arguments that ``we are paying
the troops too much'' and that this is the reason we have to cut back
on the training, readiness, and modernization of the force. At the end
of the day ``the force'' is people--high quality, dedicated, and smart
people. They are not the problem, but the message they hear is that
they are somehow contributing to unreadiness just by their mere
presence. We must change this narrative.
    America can afford the defense it needs; it is simply a question of
priorities. Shifting the burden of the Nation's fiscal troubles onto
the backs those sworn to defend all of us--and their families--is
unnecessary and, in my opinion, wrong. The instability caused by this
cut will reverberate for years to come and will, in my view, cause
unintended consequences.
    I understand very clearly the concept of shared responsibility.
But, the Federal Government and all Americans must remain true to the
promises made to her military personnel. We understand that military
programs are not above review, but always remember that the Nation must
be there for the country's military personnel who answered the Nation's
call.
    This committee safeguards the welfare of America's military
personnel on behalf of the Nation. Although your tenure is temporary,
the impact of your actions lasts as long as this country survives and
affects directly the lives of a precious American resource--her
military. As you make your decisions, please do not forget the
commitment made to America's military personnel when they accepted the
challenges and answered the Nation's call to serve.
    I urge you to find a bipartisan solution that will remove the
under-62 military retiree COLA cut provision from the Bipartisan Budget
Act of 2013. Thank you for the opportunity to submit testimony on
behalf of the members of the Association of the U.S. Army, their
families, and today's soldiers and retirees.

    Chairman Levin. Thank you so much, General.
    Next, we have Sergeant Delaney.

 STATEMENT OF MASTER SERGEANT RICHARD J. DELANEY, USAF [RET.],
      NATIONAL PRESIDENT, THE RETIRED ENLISTED ASSOCIATION

    Sergeant Delaney. Chairman Levin, Ranking Member Inhofe,
and members of the committee: Good morning. I'm the National
President of The Retired Enlisted Association (TREA). TREA is
the largest association that was created exclusively for
enlisted personnel from all branches and components of the U.S.
Armed Forces. I appreciate the opportunity today to address you
concerning the issue of military compensation, specifically the
COLA reduction for military careerists.
    I am greatly concerned about the recent action this
Congress has taken. ``When you freeze salaries, eliminate
bonuses, and change their health care benefits, it's folly to
think that it's not going to have an impact on the workforce.''
That's a quote from Bradford Fitch, President and CEO of the
Congressional Management Foundation, not 2 weeks ago in
Politico. He was not talking about military retirees, of
course. He was speaking about the congressional staff and the
effect that eliminating traditional health care is going to
have on members of congressional staffs leaving and pursuing
other opportunities.
    According to a recent survey, 90 percent of staffers said
they are concerned about the benefits changes under the new
health care law. In that same survey, if asked if they would
look for another job in the next 12 months, 4 in 10, 40
percent, of Chiefs of Staff and State and District Directors
said yes. Quoting Mr. Fitch again, ``If these predictions come
to pass, it would likely be the largest brain drain of talent
that Congress has ever seen.''
    What makes anyone think that reducing benefits for military
careerists will not have the same effect on their decisions
about whether to remain in the Service? Congressional staffers
are dedicated, conscientious, hardworking professionals who
care about this Nation and the institution they serve. The same
is true of military careerists.
    But unlike congressional staffers, military personnel sign
an employment agreement that obligates them to serve for a
specific amount of time. What's more, a military careerist can
be sent to prison if he or she fails to go to work.
    I believe the multitude of cuts in benefits for military
careerists that are being urged by DOD, as well as the current
COLA cut, will have a seriously negative impact on our Nation's
defense posture. The senior staffers in your offices and the
committees are critical to your being able to fulfill your
duties and responsibilities as Members of Congress. Together,
they hold the institutional memory as well as the subject
matter expertise that are indispensable to the functioning of
Congress. The same is true of military career personnel who the
COLA cut has been aimed at. The largest single segment of
retired personnel is E-7s, who make up 29 percent of all
military retirees. The top enlisted grades, the senior NCOs, E-
7 through E-9, make up 47 percent of all retired personnel. If
you add in E-5s and E-6s, you have reached 73 percent of all
military retirees made up of NCOs.
    An E-7 receives retired pay of about $23,000 a year. The
fact is there's no way to retire from the military and have the
same standard of living that existed while on Active Duty
without getting another full-time job, and to be hit with a
COLA cut that works out to about $83,000, that equates to a
loss of nearly 4 years of retirement pay.
    The COLA cut will degrade the living standard of military
retirees affected by it. Without the COLA, inflation would eat
away nearly half of the retired pay value for a 20-year retiree
at age 62.
    Why, after doing a job that less than 1 percent of the
entire population is willing to do, is Congress now going to
punish military careerists? Why under this law were they
singled out for immediate cuts? Why were they not grandfathered
in, as Federal civilian employees were? What have they done to
earn this slap in the face?
    According to former Command Sergeant Major of the Army's
Communications and Electronics Command, Miguel Buddle, ``It is
the NCOs who are the ones keeping up with the changing
technology, then using their leadership capabilities to bring
that technology to the soldier in the field.'' He also
continues: ``It is true, NCOs are the backbone of the Army. The
NCO is the one who will either teach you how to do it right or
teach you how to do it wrong.''
    For over a decade, we have heard American service men and
women described by elected officials and others as the best-
trained, best-led, and best-equipped force that our Nation has
ever had. Who do you think trained and led those service men
and women? It was the NCOs, the very people who are suffering
the hardest blow because of the actions of Congress.
    I confess, I'm beginning to think that much of the praise
from some Members of Congress was self-serving and nothing more
than lip service. So I ask those members who believe these COLA
cuts are nothing more than a small adjustment and therefore
refuse to rescind them: Please stop talking about how great you
think our Armed Forces are. To the members who agree the COLA
cuts should be stopped, I ask you to put aside partisan and
ideological differences and agree on a way to pay for the
COLAs. I know many ideas have been put forth by many members
and the task now is to agree on one.
    DOD is the only Federal department that is unable to be
audited. We urge Congress, at a minimum, to suspend cuts in
personnel benefits until DOD can audit its books and see where
it's really spending its money.
    The men and women who have served in our Armed Forces
voluntarily agreed to shoulder the sacrifices they were asked
to endure. Is it too much to ask our citizens and our
government to now repay that debt? I pray it is not.
    President Calvin Coolidge said: ``The nation that forgets
its defenders will be forgotten.'' Please, Members of Congress,
don't forget our Nation's defenders.
    Thank you.
    [The prepared statement of Sergeant Delaney follows:]
         Prepared Statement by The Retired Enlisted Association
    Chairman Levin, Ranking Member Inhofe, and members of the
committee.
    Good morning. My name is Rick Delaney. I am national president of
The Retired Enlisted Association, known as TREA. TREA is the largest
association in the Nation that was created exclusively for enlisted
personnel from all branches of the U.S. Armed Forces. Last year, we
celebrated our 50th anniversary.
    I appreciate the opportunity today to address you concerning the
issue of military compensation, specifically the cost-of-living
adjustment (COLA) reduction, for military careerists--those who spend
20 years or more in uniform and who earn a retirement from the Armed
Forces.
    I am greatly concerned about recent actions this Congress has
taken.
    ``When you freeze salaries, eliminate bonuses and change their
health care benefits, it's folly to think that it's not going to have
an impact on the workforce.''
    Now, that last sentence is a quote from Bradford Fitch, President
and Chief Executive Officer of Congressional Management Foundation that
was in the January 14 issue of Politico. He was not talking about
military retirees, of course, he was speaking about congressional staff
and the effect that eliminating traditional health care is going to
have on members of congressional staffs leaving and pursuing other
opportunities.
    According to a survey conducted by the Congressional Management
Foundation, 90 percent of staffers said they are concerned about
benefit changes under the new health care law. In that same survey,
when asked if they would look for another job in the next 12 months, 4
in 10 Chiefs of Staff and State/district directors said yes.
    Quoting Mr. Fitch again in an opinion piece in the January 15 issue
of Roll Call, ``If these predictions come to pass, it would likely be
the largest brain drain of talent Congress has ever seen.''
    I have no doubt the members of this committee are familiar with
this survey and Mr. Fitch's comments.
    But I ask you, what makes anyone think that reducing benefits that
military careerists thought they had earned will not have the same
effect on their decisions about whether to remain in the Service?
    Congressional staffers are dedicated, conscientious, hard-working
professionals who care about this nation and the institution they
serve. The same is true of military careerists.
    But unlike congressional staffers, military personnel sign an
employment contract that obligates them to serve for a specific length
of time.
    What's more, a military careerist can be sent to prison if he or
she fails to show up for work.
    There is no other occupation in the country that I am aware of
where that is the case.
    But once their contractual obligation has been fulfilled, they face
the decision about whether to stay in or leave and pursue a different
career.
    In his quote above, Mr. Fitch expressed his concern about the
effect on Congress if there is a massive defection by congressional
staffers. In the same way, I believe the multitude of cuts in benefits
for military careerists that are being urged by the Department of
Defense (DOD), including the current COLA cut, will have a seriously
negative impact on our Nation's defense posture.
    I believe you'll agree that senior staffers in your offices and in
the committees are critical to your being able to fulfill your
responsibilities as Members of Congress. Together they hold the
institutional memory as well as the subject matter expertise that are
indispensible to the functioning of Congress.
    The same is true of the career military personnel who the COLA cut
has been aimed at. Unbelievably, this COLA is the third penalty that
has been levied on military careerists in the last 2 years and is only
the start if the Pentagon gets its way. In fact, nearly every benefit
that military careerists have earned is being considered for cuts by
DOD.
    We believe that, without a doubt, cutting promised and earned
benefits and compensation will have a seriously negative effect on the
Armed Services and the Nation's military readiness.
    The fact is, the largest single segment of military retirees is E-
7s who make up 29 percent of all military retirees. The top enlisted
grades--the senior noncommissioned officers--E-7 through E-9 make up 47
percent of all military retirees. If you add in E6 noncommissioned
officers you are talking about more than two-thirds of military
retirees, and if you add in E-5 noncommissioned officers you have
reached 73 percent of all military retirees.
    Why is this important? Because so often in hearings and discussions
of military retired pay the example used is of an O-5 or 6, as if
somehow they are the average military retiree. As a result, the
discussion is terribly skewed and we end up with a situation such as
the one recently where the Chairman of the House Budget Committee
described the COLA cut enacted by Congress as a ``small adjustment for
those younger retirees.''
    I'm sure an O-6 doesn't believe the COLA cut is just a ``small
adjustment,'' but I have no doubt an E-7 views it as having a major
impact on the retirement pay she feels she was promised, she earned,
and she is counting on.
    An E-7 receives retired pay of about $23,000 per year. The fact is,
there is no way to retire from the military and have the same living
standards as existed while on active duty without getting another full-
time job. To be hit with a COLA that will equate to about $83,000
results in the loss of over 3 years of retired pay.
    The purpose of the COLA is to maintain the purchasing power of
benefits already earned. The fact is, the COLA cut will degrade the
living standard of the military retirees affected by it. Without the
COLA, inflation would eat away nearly half of real retired pay value
for a 20-year retiree by age 62.
    Why, after doing a job that less than 1 percent of the entire
population is willing to do, is Congress now going to punish military
careerists?
    Although we oppose any COLA cut for military retirees, why, under
this law, were they singled out for immediate cuts? Why were they not
grandfathered in, as Federal civilian employees were? What have they
done to earn this slap in the face from Congress?
    As I stated before, senior noncommissioned officers (NCOs) make up
nearly half of all military retirees. It is widely recognized within
the Armed Services that NCOs are the back-bone of the military.
    According to the former Command Sergeant Major of the Army's
Communication-Electronics Command, Miguel Buddle, ``it is the non-
commissioned officers who are the ones keeping up with changing
technology and then using their leadership capabilities to bring that
new technology to the soldier in the field.'' He continues, ``It is
true, NCOs are the backbone of the Army. The NCO is the one who will
either teach you the right way or wrong way to do something.''
    The same thing is true for the Marine Corps, the Navy, the Coast
Guard and my Service, the Air Force.
    For over a decade we have heard American service men and women
describe by elected officials and others as the best-trained, the best-
led, and the best-equipped force our Nation has ever had.
    Well who do you think trained and led those service men and women?
    It was the NCOs--the very people who are suffering the hardest blow
because of the actions of Congress.
    Can we really afford to disrespect these leaders and tell them our
government is going to take back some of the compensation they were
promised if they would stay for a career in the military?
    What incentive are military personnel going to have to stay in for
a career if the COLA cut remains and the other cuts being discussed are
enacted?
    The reality is that most of the turn-over in the Active-Duty Forces
occurs when people leave at the end of their contracts. A significant
minority re-enlist for at least one more tour and a much smaller
minority serve for a full career of 20 years or more.
    The military encourages this high turnover with its up or out
policy. If servicemembers fail to get promoted within a specified
timeframe they usually must leave active duty. This policy is meant to
maintain a young force and prevent a top-heavy rank structure.
    Since the advent of the All-Volunteer Force the military has placed
an increased emphasis on reducing turnover and retaining trained and
experienced personnel. One way to do this is to provide an acceptable
lifestyle and support for families to help compensate for the demands
on servicemembers and their families. That's why there has been an
increase in compensation and benefits.
    When the All-Volunteer Force was instituted, the need for increased
compensation and comprehensive improvements in the conditions of
military service was recognized as necessary in order for the All-
Volunteer Force to succeed by the President's Commission on an All-
Volunteer Armed Force, otherwise known as the Gates Commission.
    When Congress was faced with the problem of fixing the Hollow Force
of the 1980s the Congressional Research Service reports that ``To the
extent concerns about the `hollow force' at the end of the 1970s had to
do with the quality of enlistments, however, revisions in military pay
and benefits appear to have entailed dramatic improvements over a very
short period of time.''
    In the 1990s, the Armed Forces experienced a looming crisis in the
retention of personnel because of cuts that had been made in pay and
benefits. Because of that the Pentagon urged Congress to fix retention
before it mushroomed into a full-blown crisis by restoring military pay
and promised health care coverage for older retirees, as well as
repealing retirement cuts then in effect.
    Again, it worked. It was not just the proverbial ``throwing money
at a problem.'' The additional expenditures solved the problem. As our
forces fought two wars for over a decade, with many enduring two,
three, or even four deployments, Congress showed its support by
increasing benefits for those troops and resisting DOD's renewed calls
for cutting benefits.
    That brings us to today.
    We are faced with an onslaught of proposals to slash the pay and
benefits of military career personnel. I urge you to resist those siren
calls and remember what history has demonstrated time and again when it
comes to sustaining the All-Volunteer Force.
    TREA believes this COLA cut is a breach of faith with the currently
serving force. I can tell you that military retirees are watching this
closely because they firmly and angrily believe it is a breach of
faith. Congress would do well to remember that veterans are the best
recruiters the Armed Forces have and if veterans believe they were
cheated or that faith was broken with them they will stop urging their
children and grandchildren to follow their footsteps into the military.
    We believe this COLA cut breaks the promise made by the
administration and leaders of the Defense Department that any changes
in compensation and retirement would be grandfathered in.
    We believe that, as our colleagues at the Military Officers
Association of America have so ably shown, the real facts about
spiraling costs are being misrepresented by Pentagon leaders.
    We believe this is only the beginning of a sustained assault on the
military compensation and benefits that have enabled our Nation to, in
an unprecedented way, field and sustain an All-Volunteer Force in
defense of our Nation.
    I can tell you that our members are very alarmed and fearful that
this is only the first shoe to drop and they already feel betrayed.
    I have discussed the impact of the COLA cuts on enlisted military
careerists. I do not want that to be construed in any way as an attempt
to separate us from career officers. We are proud to stand shoulder-to-
shoulder with our officer colleagues in this battle, just as we were
proud to stand with them when we all wore the uniform of our Nation.
    My only point has been to show that enlisted personnel make up the
overwhelming majority of military retirees, and these COLA cuts are a
major blow in the income they thought they had been promised and that
they earned.
    Only 4.7 percent of enlisted personnel have a college degree so
they face a much greater challenge when they leave the military and try
to start over in a new career. This compares with 82.5 percent of
officers who have a bachelor's degree or more.
    Enlisted retirees lack the seniority that their peers in the
private sector have gained and their decades of military service often
do not translate into the civilian workforce.
    They have not been able to build equity in a home because of their
constant moves. Their families have reached the point where it is time
for their children to go to college and they have to find a way to pay
for it.
    Former Senator James Webb said, ``I start from the presumption that
lifetime health care for career military personnel is part of a moral
contract between our government and those who have stepped forward to
serve.'' This was when military health care was under sustained assault
during his term of office. We agreed with him then, and we think it
applies equally to the COLA that is designed to protect the earned
retirement pay of military careerists.
    Members of Congress, I must tell you that I have felt tremendous
proud during the past decade when elected officials and others paid
tribute to our servicemembers, spoke of them as ``our heroes,'' and
honored their service and sacrifice.
    Yet today, I confess I'm beginning to think that much of that
praise from some members was self-serving and nothing more than lip-
service.
    So I ask those members who believe these COLA cuts are nothing more
than ``small adjustments'' and therefore refuse to rescind them to
please stop talking about how great you think our Armed Forces are. Do
you seriously believe our government cannot afford to keep its promise
to those who have voluntarily served.
    To members who agree that the COLA cuts should be stopped, I ask
you to put aside partisan and ideological differences and agree on a
way to pay for the COLAs. I know that many ideas have been put forth by
many members and the task now is to agree upon one.
    Please also remember that the only department of the Federal
Government that is unable to be audited is the Department of Defense.
DOD has consistently ignored Congress' instructions to get its books in
order and it appears to us the department is not much closer to
accomplishing that than it ever has been.
    We must ask why, in a department that spends billions of dollars
and in which cost overruns are scandalously frequent, it is the
personnel who dedicate their careers in service to our Nation that DOD
turns to for budget cuts when it gets into fiscal problems.
    We urge Congress to, at a minimum, suspend personnel cuts until DOD
can audit its books and see where it really spends its money.
    The men and women who have served in our Armed Forces voluntarily
agreed to shoulder the sacrifices they were asked to endure. Is it too
much to ask our citizens and our government to now repay the debt that
is owed them? I pray it is not.
    President Calvin Coolidge said, ``The nation that forgets its
defenders will itself be forgotten.''
    Please, Members of Congress, don't forget our Nation's defenders.
    TREA does not receive any grants or contracts from the Federal
Government.

    Chairman Levin. Thank you so much, Master Sergeant. We very
much heed your testimony.
    Next is Dr. David Chu. Welcome back.

    STATEMENT OF DAVID S.C. CHU, PH.D., PRESIDENT AND CHIEF
       EXECUTIVE OFFICER, INSTITUTE FOR DEFENSE ANALYSES

    Dr. Chu. Thank you, sir. Mr. Chairman, Senator Inhofe,
members of the committee: It is indeed a privilege to appear
before you again this morning. I should emphasize the views I
offer are entirely my own. They do not necessarily reflect the
research by the Institute for Defense Analyses nor the
perspective of DOD.
    I do have a formal statement which I hope might be made
part of the record.
    Your letter of invitation asked that I focus on the
evolution, especially the recent evolution, of military
compensation. Put differently, how did we get to where we now
are? I would argue that three important forces have created the
compensation system that is the subject of discussion this
morning.
    First, of course, is the longer history of military pay and
benefits, that especially explains the fact that so much of
military compensation is deferred and a substantial part of
military compensation is offered in kind as opposed to in cash.
    Second, there is the desire by the country to recognize and
reward those who have served in the military. That explains the
very substantial growth in a series of benefits in the last 15
years or so--the repeal of REDUX, the advent of TRICARE for
Life, the expansion of the GI Bill and the decision to make
some of its benefits transferable, and the substantial
relaxation of the century-old ban on concurrent receipt of
Federal annuities.
    The third force, of course, as has been emphasized this
morning, is the need to ensure that we have a high quality All-
Volunteer Force. That was the source, as other witnesses have
emphasized, of the targeted pay raises that Congress enacted at
the end of the 20th and the beginning of the 21st century. It's
also the source of expanded authority to pay bonus special
incentive pays DOD used to ensure the All-Volunteer Force's
success during the current conflicts. Those payments, of
course, have been reduced as those conflicts have waned in
importance.
    The issue going forward, as we all know, is the question of
change. I agree wholeheartedly with those who argue that we
ought to use the commission and the Commission process to take
a holistic view of change as opposed to piecemeal changes such
as the one being discussed this morning. I do argue that a
prior question in that debate over change ought to be, as some
of the questions this morning have emphasized, what force does
the country want in the future? What shape of experience, what
level of quality, what differences in skill, background are
essential to secure our national security in the years ahead?
    You could obviously have different compensation systems
than the present one. It might well be argued some of those
would be more efficient than the present one. That is to say,
they could sustain the same force at less total cost to the
taxpayers. I do think two of the important issues in that
regard are whether so much of the compensation should be
deferred, particularly because from a fairness perspective for
several benefits most military personnel never actually collect
those payments; and also the issue of whether so much of the
compensation should be offered in kind.
    As those changes are contemplated, I do think, as Senator
Ayotte's question and General Sullivan's testimony emphasized,
it is critical to keep in mind that the circumstances of the
military family are different from the circumstances of most
American families. While we cannot change the reality of the
burdens of deployment, I do think we have to be sensitive to
the fact that the family circumstances will importantly affect
the military person's decision to stay with the military over
time.
    Above all, as the various testimonies today have stressed,
I do think it is critical to pay attention to the transition
mechanism and to the question of the expectations of those who
have served in the past and those who are serving now, and
whether the changes that are proposed are consistent with our
expectations or whether, put differently, those who are
affected by them can accept the changes that we wish to make.
    I look forward to your questions.
    [The prepared statement of Dr. Chu follows:]
                Prepared Statement by Dr. David S.C. Chu
    Note: The ideas advanced in this statement reflect solely the
conclusions of the author, and should not be seen as representing the
views of the Institute for Defense Analyses, nor those of its research
sponsors.
    Mr. Chairman and members of the committee: It is a privilege to
participate in your panel on military compensation. I should stress
that the views I express are entirely my own, based on my previous
experience, and do not necessarily reflect research by the Institute
for Defense Analyses, nor the views of the Department of Defense.
    You asked that I especially address the evolution of military
compensation since 2001. In my judgment, three important forces explain
its present level and composition: the longer history of military pay
and benefits, with its significant utilization of payments in kind,
often deferred, and sometimes a function of family status; the Nation's
desire to recognize and reward those who have already served; and the
need to sustain the All-Volunteer Force that has served us so well,
competing against others for the best talent in our society.
Compensation decisions that respond to one of these forces will not
necessarily serve the others.
    Let me begin with the last: Sustaining the All-Volunteer Force.
Based on concern with the quality of military recruits in the 1970s,
Congress raised military ``base pay'' substantially and mandated
minimum quality standards. In the 1990s, relying on a review by the
National Academy of Sciences of the experience with varying quality
levels, the Department of Defense adopted the higher quality goals that
endure to this day: 90 percent of non-prior service enlistees should be
High School Diploma Graduates, and 60 percent should score above
average on the Armed Forces Qualification Test, with no more than 4
percent coming from the 10th to 30th percentile of that distribution
(Mental Category IV). To meet that standard, and to sustain preferred
retention patterns, the Ninth Quadrennial Review of Military
Compensation recommended that ``Regular Military Compensation'' (base
pay plus the taxable equivalent value of housing and subsistence
allowances) be set at the 70th percentile of civilian earnings for
those with comparable education and experience levels. Thanks to
Congress adopting a series of targeted pay increases at the beginning
of the last decade, and decisions on the housing allowance, Regular
Military Compensation reached and now exceeds that level.
    Ultimately, of course, the appropriate level of military
compensation is determined by results in recruiting and retention.
During the course of the conflicts in Iraq and Afghanistan, the
Department expanded use of the authority Congress gave it much earlier
to pay recruiting and retention bonuses, and Congress provided the
Department with additional flexibility through Assignment Incentive Pay
and the opportunity to revamp special pays and allowances. As the
burden of those conflicts declined, the Department reduced the extent
to which it uses these authorities, illustrating the value of their
flexibility.
    Taken collectively, the measures I've described allowed the United
States to pursue its operations overseas for almost 15 years with an
All-Volunteer Force of high quality, whose performance the country as a
whole deeply admires, whatever the differing views of its citizens
about the conflicts themselves. Quality standards for those joining the
military were largely met, and retention both active and Reserve
paralleled peacetime outcomes. The professional performance of the
American military sets an international standard--and even earlier its
excellence convinced a number of nations that had traditionally relied
on conscription to adopt the all-volunteer model. There are clearly
elements of the current compensation system that have worked well, or
that have been adapted effectively.
    You asked in your letter of invitation, however, about the need for
reform of that system. I believe the country has a special opportunity
to consider reform, in the appropriate holistic manner, with the
Military Compensation and Retirement Modernization Commission you
created. Permit me to reiterate and expand briefly upon the testimony I
offered the Commission, and in so doing to comment implicitly on the
other two forces shaping the level and composition of military
compensation: That is, the history of military pay and benefits, and
the desire to recognize and reward those who have already served.
    Perhaps most important, I believe that any changes to the military
compensation system should derive from the desired shape and
characteristics of the future military force. That force may share some
of the characteristics of today's military, but it may also differ in
important respects. It may place more emphasis on what some like to
call ``Phase 0'' (shaping) and ``Phase 4'' (post-major conflict), with
their attendant needs for greater linguistic and cultural knowledge. It
may have more communities that overlap with skills best developed in
the civil sector--think cyber. It may want a different experience
profile from that created by the current retirement system's
incentives, and the ``norm'' of a 20-year active duty career. It may be
a force with very different needs for entering credentials and
experience profiles, across skill and warfare communities: Today we
implicitly assume that all will be the same, and thus all should have,
in broad terms, approximately the same compensation. It may even be a
force in which some individuals move back and forth between active
military service and civil life--what would compensation need to look
like to achieve that objective?
    The society from which military personnel are drawn is also
changing. Expectations about, interest in, and attitudes toward
military service are different from those of earlier periods. (That is
true, I expect, for parents and other ``influencers'', too.) Likewise,
the outlook on career choices--even the notion of a career--clearly
differs from an earlier generation. Our society now offers much
improved opportunity for women and minorities than pertained in the
mid-20th century, when so many of our military personnel policies were
formed. There will likely be further important social changes in the
years ahead, to which the military compensation system must be prepared
to respond.
    Perhaps the most important success of the current system was
recognizing that in an All-Volunteer Force (presumptively still our
national goal) the military compensation ``package'' must remain
competitive for talent with what the civil sector offers. Since we
anticipate real compensation in the civil sector will grow over time,
so will military compensation. Those joining the military need to know
that the political system will act consistently with that reality (for
example, sustaining the competitive standard set out by the Ninth
Quadrennial Review of Military Compensation), and forbear from making
what appear to be arbitrary changes to the trajectory of military
compensation as a source of near-term budget savings. Instead,
``bending the cost curve'' needs to look to the efficient use of
personnel, and to how we best use our several personnel communities
(Active, Reserve, Federal civilians, contractors) to keep military
operating costs affordable. Managing the ``demand side'' well is just
as important to compensation success, I would argue, as attending to
issues on the ``supply side''.
    It is nonetheless fair to ask whether the currently constituted
military compensation package is best suited to the needs of the 21st
century force at which we're aiming, particularly because its structure
is so much shaped by the longer history of military pay and benefits,
and because much of the total expense is driven by the desire to
recognize and reward those who have already served (vice recruit and
retain for today's force). There are at least seven major practices
that might be re-examined:

         Should so much of the package be in deferred
        compensation--i.e., pay and benefits provided after military
        service concludes, whether after a relatively brief period (VA
        benefits, etc.) or after a career (retirement, et cetera)? As
        the Congressional Budget Office has pointed out, this is a very
        different balance from that in the civil sector. The behavior
        of the force would argue it is not optimal--and, as others have
        pointed out, there are distinct elements of unfairness in the
        way some parts of the package are conferred (e.g., the cliff
        vesting of retirement at 20 years of active service).
         Should so much of the package be in kind versus in
        cash or allowances? A well-established economic principle
        argues that you're usually better off providing cash that the
        individual can use at his or her discretion rather than trying
        to ``guess'' at what might be preferred. As one of my
        colleagues some years ago gibed about military compensation:
        ``It's a system composed of what 40-year-olds believe 20-year-
        olds should want.''
         To the extent that benefits are provided in kind,
        should the government be the provider? The Department has
        already moved away from this traditional model for residential
        construction, empowered and encouraged by Congress.
         Should so much of the package be determined by one's
        family status rather than one's contribution to the mission?
        This is particularly an issue for junior personnel.
         Should we move even further away from the theory that
        ``one-size-fits-all'' (i.e., that pay and allowances are
        importantly determined by grade and years of service)? Bonuses,
        special and incentive pays, gate pay and Assignment Incentive
        Pay already acknowledge that the package must differ by skill
        area and assignment.
         Should our approach to compensation take greater
        cognizance of individual preferences, capitalizing on self-
        selection? Implicit in the current approach, I fear, is still
        much of the directive management philosophy from the draft era.
        Could we channel the desires of individual military personnel
        in ways that better satisfy them, while meeting--perhaps in
        improved fashion--the needs of the institution? The Navy's use
        of Assignment Incentive Pay, the Army's pilot effort with
        ``Green Pages'', the Reserve components' use of volunteers for
        deployment, as well as earlier initiatives, point to how ``all
        volunteer'' might be even more ambitious than present policy.
         Should the mechanisms to compensate for risk be
        reconsidered, given that they may not be accomplishing their
        objectives well (e.g., the heavy reliance on the tax code to
        recognize those exposed to combat situations)?

    Permit me to offer seven observations that may affect deliberations
about these practices:
    First, as my reference to VA already implies, parts of military
compensation are paid by agencies other than DOD. The VA contribution,
in particular, is very significant; it is also worth noting that
military personnel have been part of the Social Security System since
1957. Further, military service may be counted toward Federal civil
service retirement. Decisions about the use of military personnel and
the compensation package should recognize its full range, not just
those elements provided explicitly by DOD. Present practices do not
meet this visibility standard. This contributes further to the repeated
finding that military personnel underestimate, sometimes significantly,
the full value of their compensation. It obscures the full cost from
decisionmakers.
    Second, while much of the public discussion of military
compensation focuses on the Active-Duty Force, I believe it is equally
important to consider whether Reserve component compensation meets the
country's force needs efficiently, especially if the Reserve components
are to play as significant a role in the years ahead as they played in
the first decade of the 21st century. Again, it is important to keep in
mind that part of Reserve component compensation comes from sources
outside DOD--e.g., for the National Guard especially, from the States.
    Third, since a military career imposes burdens on family members
that are often quite different from those borne by other Americans,
some attention to the family income situation is appropriate,
especially the ``tax'' on spouses that is levied by frequent moves,
resulting in lower lifetime earnings for those spouses who pursue work
and careers. Nor should the disruption to the children's education be
neglected.
    Fourth, as I know you and your staff are aware, there is
considerable empirical material with which to analyze some of the
personnel supply issues any reform debate will want to consider,
resident in the surveys conducted by the Department. Those data have
been extensively used to answer some questions, but less so for others.
    Fifth, important insights on the needs for personnel--the demand
side--may also come from the combatant commands. My hazard is that
their views will be much more variegated than those of the Service
headquarters, and will underscore the value of flexibility in
compensation mechanisms, to meet needs efficiently.
    Sixth, as I suggested earlier, setting and honoring the
expectations of those contemplating military service will be key to
successful change. There is considerable evidence that unfulfilled
expectations--which would result if the guideposts are set improperly
or changed capriciously--can doom both policies and institutions.
    Seventh, to the extent change is contemplated, consistent with the
importance of expectations, attention to the transition mechanisms may
be just as important as crafting the optimal course ahead. As I'm
confident you'll recall, the change to the retirement program Congress
enacted in the 1980s foundered on just this challenge.
    I do hope that any debate of change can begin by outlining what the
issues are, and what the Nation can gain if it deals well with those
issues--and the price it will pay if it does not. This hearing
certainly contributes to that objective. For me, apart from the
specific points I've raised, the most important issue is the ability of
the compensation system to provide the military force American needs--a
force that may be importantly different in its shape and variety from
the force we've needed in the past, or the magnificent force that we
enjoy today.

    Chairman Levin. Thank you so much, Dr. Chu.
    We're going to have to have a short first round of
questions here if we're going to be able to get to all of our
Senators.
    Let me ask about the commission which is going to be
reporting to us and the connection of our service groups and
our veterans groups to that commission. I think it's the intent
of everybody that has spoken, all the Senators that have
spoken, that in terms of this CPI-Minus-1 language, that it is
our intention and belief that it should be immediately
repealed, as soon as humanly possible, in a legislative body.
    I don't think that, from anyone I've heard here today at
least, that there's any intention to wait until the Military
Compensation and Retirement Modernization Commission reports to
clear the air on that or to remove that item at this time.
    But my question then turns to the commission, as to whether
or not your organizations feel that you will be contacted, that
your advice will be solicited, whether, for instance, you've
looked at the members of the commission and feel that it's a
representative group. Why don't we start with you, General
Tilelli.
    General Tilelli. Mr. Chairman, first, the Military Officers
Association of America has had one meeting with the commission.
We think it's relatively representative of the force as
determined by this committee. Whether or not we will be asked
to go back again and discuss with them some of their final
recommendations, I can't answer that. We have not yet been
informed of any such opportunity.
    Chairman Levin. If you feel--this goes for any of the
organizations, the ones represented here today, but the others
that are out there--that their advice is not being sought, that
they're not having an opportunity to express their views, we
would welcome hearing about that, because the commission should
be soliciting the views of those organizations that represent
our troops, our retirees, and our veterans.
    Let me now ask you as well, General Sullivan.
    General Sullivan. Senator, we've already been before the
commission once at the national level. I believe some of my
people out in the field have been doing some field interviews
and some of our members have participated in those. So I think
our views are well-represented with them, and I'm comfortable
with the representation on the board.
    Chairman Levin. Thank you.
    Master Sergeant?
    Sergeant Delaney. Yes, sir. Our organization, The Retired
Enlisted Association, has spoken twice to the commission and
we're comfortable with the way it's operating and we're hopeful
about an outcome. Obviously, it's too early to tell yet what
that outcome will be, but we'll just have to wait and see. But
we're happy with the commission.
    Chairman Levin. Thank you.
    We are facing a real budget crunch, although it's been
deferred for a year and a half or so. Nonetheless, the law
requires that basically the sequestered approach be back in
full blast starting in 2016 unless we act. We've acted the best
we could in terms of 2015, but we're going to face the same
kind of horrific problem through 2021 starting in 2016, unless
we take steps to avoid it.
    That means that we will have in place, if we don't act,
roughly $1 trillion in cuts to the defense budget that were
enacted as a part of the BCA 2 years ago. Half of those cuts
have already been implemented. The other half are what we would
face, basically.
    So, I'm wondering if you have thoughts, not just about that
subject--I think we can infer what your thoughts would be about
trying to avoid sequestration and that approach in those
years--but if these budget caps that are currently mandated by
Congress continue, do you have any thoughts on any approach to
how do we deal with the balance between pay and benefits, as
well as the need to train and equip and so forth? Any of you
have any thoughts on that?
    Dr. Chu, let me start with you on this one, and then we'll
quickly go to the others, if they have a comment.
    Dr. Chu. Yes, sir. I think the key question in that regard
is the mix of personnel that you believe are best-suited to the
Nation's security needs, that is to say the balance among
Active Duty personnel and Reserve component personnel, Federal
civilians and contractor personnel. There may be more mileage
long-term in getting that balance right than any of the other
kinds of changes that might otherwise be discussed in terms of
the compensation system. That's not to put the commission's
work aside. It's very important and very significant, I would
argue, in terms of looking at operating costs of military
personnel, Active Duty, and also Reserve are considered, too.
But I think this question of the demand side, so to speak, in
other words what mix of personnel is best-suited to the
security needs--could you, for example, make greater use of the
Federal civilians than is true today--I think there's a number
of pieces of evidence that suggest that that is the case--and
Reserve military personnel billets for the truly military
functions of DOD?
    Chairman Levin. Do any of you want to add a comment to that
before we turn it over to Senator Inhofe?
    General Sullivan. Senator, I think it's a profound
question, for which I'm not sure I have a profound answer. But
it depends on how much risk you want to take, but until
somebody comes up with a defense strategy and a national
security strategy, I don't think you can weigh the equation. I
think then you have to ask yourself, what kind of a prediction
can we make about the distant future?
    Right now I think we're out there, because in my view, it's
always been hard to predict the future, but I think we're
taking risks without understanding the future. I'll just leave
it at that.
    Chairman Levin. Let me turn to Senator Inhofe now. I won't
call on the others because of the time limits. Thanks.
    Senator Inhofe. I'm just going to ask one question, a
hypothetical question, because I want to offset some of the
accusations that you hear from people in service organizations.
My feeling is that those of you heading up service
organizations would fall down if you had to choose between an
adequately strong national defense and a maintenance of the
current military retirement compensation levels. Which would
you choose if you had to, real quickly? That's an easy
question.
    General Tilelli. I would always vote on the side of a
strong national defense.
    Senator Inhofe. The other two of you would agree with that,
I would assume?
    General Sullivan. Yes. Look, we all took an oath to protect
and defend the United States of America.
    Senator Inhofe. Very good.
    You too?
    Sergeant Delaney. That's what we do.
    Senator Inhofe. The reason I say that--and I think you hit
the nail on the head, General Sullivan, when you said America
can afford the defense it needs; it's a matter of priorities.
That's my whole position in a nutshell. That's something that
we have--a lot of people don't believe that. There are people
serving right now who think that we really don't believe in the
strong national defense that all of us agree with.
    Let me make sure that everyone understands there are 15
members who asked questions and made statements in this
hearing, primarily on the first panel. You guys have won. You
came here because you want the 1 percent corrected. We all
agree. In fact, I made the statement that it is a moral issue,
because during the years when I was in the Army and people
would talk about reenlisting or something like that,
commitments were made to them, and you can't come along later
and change those.
    Now, yes, we want comprehensive reform. We want to get into
all of these things. But first, we want to make sure we correct
it. As you said, General Sullivan, we want to correct it now.
So do all of us want to correct it now. I just want to make
sure that anyone, the three of you or anyone else who might be
here from the military or representing or participating in one
of the Services, understand that we agree with you. That's it.
    General Sullivan. I do.
    Chairman Levin. Thank you so much, Senator Inhofe.
    Who will be next? I don't have much choice. Senator Kaine.
    Senator Kaine. Thank you, Mr. Chairman.
    Thank you all for your testimony. I believe we will fix
this and fix it promptly. I really want to ask you a question
about the next issue down the road, which is as we start to
think about what we might hear back from the commission in
early 2015, from conversations with primarily new people in the
military--I have a youngster and his colleagues--the way they
talk about compensation and benefits is that they have a
feeling that some are promised, almost contracted--retirement
after if you serve a full career, that's in the promise zone--
some are reasonable expectations. If I'm in the military and I
have an injury, there's going to be a Department of Veterans
Affairs (VA) system there that will be functional and I have a
reasonable expectation, without knowing what the budgetary top
line is, there's going to be a functioning VA system. Some are
less than a promise or even a particular expectation, that
there may be a hope or a desire. So, for example, what would
the premium level be for a retirement health insurance policy
that I would pay if I get to that. Most are not thinking about
those issues. They're not really contracted for at a particular
premium level.
    So, obviously, the commission is going to come back with
recommendations about all these kinds of things, about things
that are in the promise zone--that might be prospective, not
retroactive--things that are in the reasonable expectation
zone, and things that frankly newcomers probably don't think
about that much.
    I just would be curious and the only question I have is,
talk to us about how we ought to be thinking about these issues
in preparation for getting that report and having to make some
decisions a year or so from now.
    General Tilelli. If I might, thank you for that question.
First, I think what the commission proposes, I think we have to
review every aspect of it in full and open review and vetting
it. Second, as General Sullivan said, I think we have to look
at it in the context of what we want the force to be in the
future. We do want an All-Volunteer Force.
    You've focused on an issue which is critical in the surveys
that we do to military and military families, and that's health
care. Military families and servicemembers believe that
military health care or health care is a promise. They don't
see that as optional. Certainly, when you're young and you
believe that you're immortal, military health care is not as
important as when you get to be older and you're looking at it
from the family aspects.
    So, in that context, I think we have to be very careful
because it is a slippery slope. We have already cut military
health care. We have already increased the co-pay. We have
already increased the pharmacy fees. We've already done things
that are detracting, if you will, from what servicemembers and
their families perceive to be an earned benefit.
    Senator Kaine. General, could I just follow up on that,
because that really gets at the nub of my question. If there is
a belief that health care is a promise--and I believe that it
is, it is a promise--and those coming in believe, is there also
an expectation from your surveys that that promise extends to a
particular premium a month or a particular premium that's an
annual one that wouldn't change over the course of retirement?
    General Tilelli. I don't think we've ever gotten to that
point. I do think that reasonableness is a variable that must
be considered, and that variable must be considered in the
context of retirement and what that individual is going to get
in retirement. Think about the context that you've heard today:
A sergeant first class, an E-7 who's getting a retirement of
$23,000 a year and has a family of three or four, he's at the
poverty level to start with. So to require him to pay an
exorbitant health care fee, I think, is very problematic.
    Senator Kaine. Other comments on my question?
    General Sullivan. Thanks for the question, Senator. I think
if you just take that last business about the medical, the
young person who comes into service today, the concept of
retirement might be different than the concept that we had,
which was developed in the 1940s, after all. Life expectancy
now is 77, I think, for males anyway.
    So there is a model for retirement. Then there's a model
for medical. Whatever the model is in my view--if there are
increases, it should be stated right upfront. Those increases
will be within the COLA--ahhh, the world-famous COLA--the CPI
such that whatever increase you pay might be withinside that,
as opposed to this wildly fluctuating medical inflation. Very
quickly you could take an E-7 off the table if you go to
medical inflation.
    I think there has to be a model and a concept when they
bring their system forward. As General Tilelli said, we didn't
worry about that because it was retire at 50 percent at 20
plus, then after 20 years then it was tapped at 30. Medical, we
just went and got an aspirin or whatever, a Tylenol. A couple
of Tylenols and a cup of black coffee and you were golden.
    Chairman Levin. That's making us all hungry for lunch.
[Laughter.]
    Thank you.
    Senator Ayotte is next.
    Senator Ayotte. Thank you, Mr. Chairman.
    I want to thank all of you for your leadership and for
being here today on this incredibly important issue.
    Here's what worries me as I think about how we ended up
where we are. You have a budget agreement that the only group
that really takes a hit right now are men and women in uniform.
What worries me is that we grandfathered the Federal employees,
meaning only new hires would get impacted by it. But our men
and women in uniform, who have taken the bullets for us, they
got the cuts right now to their cost-of-living increase.
    Is it because only less than 1 percent of the population
defends the rest of us? Is it because the Federal employees and
other groups around here just have stronger lobbyists and
voices: we're going to protect our people?
    What worries me about this is that it was a huge disconnect
from Washington in terms of those who have sacrificed the most,
that they would be the one group targeted in all of this. I
just wanted to get your thoughts on all of this as leaders of
our military organizations, because as I think about the big
picture on this, what is the lesson we need to learn from this?
That just really worries me as I think about the big picture of
the message that we are sending to our men and women in uniform
when we have been at war--Iraq, Afghanistan. It's been a tough
time for them.
    Sergeant Delaney. I think the problem we face is that a lot
of people view the military as an easy target. We're a small
group and they say, ``okay, we'll take some money from them.''
It's over a 5- or 10-year period, rather than say, ``okay,
let's adjust this. If we're going to do it, let's grandfather
it and wait a little longer to get a return on our money.''
    But when I reenlisted in 1972, which would take me over the
halfway point, I believed, yes, I'm going to get medical care
when I retire. When I retired they said, ``now, you may not be
able to get into the base hospital here; they're there for the
Active Duty.'' I said: ``Fine, I can deal with that, but I
still have my medical care off base.'' Now they're looking at
ways to change all that.
    There's a bunch of targets on our backs--commissaries,
they're talking about closing those. They're looking at putting
enrollment fees on TRICARE for Life. I have to pay for Medicare
Part B to get TRICARE for Life. Now I have to pay for TRICARE
for Life, too? Increasing co-pays on medical costs, co-pay
raises, or even freezing the pay.
    There's a lot of things. It just seems to me that we're an
easy target, and that's what really bothers me.
    Senator Ayotte. General Sullivan, General Tilelli, what
kind of message do we send with this? What do we need to learn
from this?
    General Sullivan. As I said in my remarks, we're causing
our people in uniform to think about an issue which they don't
understand. By the way, I don't want to ascribe any motives to
anyone on whatever happens.
    Senator Ayotte. But did we forget? I'm worried. What are
our priorities?
    General Sullivan. I think that's it. You have to decide,
how will we spend the national budget? Where will we spend it?
Will we spend it on our security or on other things? I think
that's a decision that has to be made. Right now it appears,
I'm sure it appears to some of the troops and their families,
that all of this is being placed on their backs. Go out here
and fight for the last 25 years beginning in Panama, right
through to this day when we're fighting in Afghanistan. By the
way, now we change the formula. I don't get it.
    General Tilelli. Senator, I think you make a great point.
First of all, I think we all have to understand that our
service men and women and their families are getting a message
and the message is being sent every day. You can read it every
day in any number of periodicals, starting with the COLA-Minus-
1, the co-pays, the commissaries, the TRICARE. They see that
there is a devolution, if you will, of support for them.
    The other issue is the service men and women and their
families, their contract is with the United States of America
and they count on Congress to take care of them. They don't
have a union. They depend on us to take care of them. When we
look at it, they are willing to do extraordinary things for
this Nation and for each other and put themselves in harm's
way, be without a family, not have equity in a house, change
addresses six or eight times, kids out of school, and do all
those things, and count on the Congress of the United States of
America to take care of them.
    They are getting a serious message now. I can tell you from
the amount of emails that we get from family members on all of
this, it would choke a horse, that they are very concerned
about all of this.
    General Sullivan. I'd like to clear the air here on one
point. I don't think they're asking more than they deserve. I
don't get that feeling at all. I think all they want is a fair
shake. They want to know that people like you--and you are, by
the way, to your credit--paying attention to what's going on. I
thank you for it.
    Senator Ayotte. I thank you all for being here. I will also
add that when people call things like an $80,000 cut to a
sergeant first class whose average retirement is $23,000
``teensie-weensie,'' like the Washington Post did, or
``minuscule,'' it's offensive. We should fix this, and we are
sending the wrong message.
    Thank you.
    Chairman Levin. Thank you very much, Senator Ayotte.
    Senator King.
    Senator King. I'd like to follow up a bit. There's been a
lot of discussion about keeping faith, about contract, about
all of those kinds of things. Cast your mind back, if you
would, to when you signed up. What do people who sign up sign?
What are they told? Is there something that says, ``if you sign
here you will get health care, if you sign here you will get a
certain level of retirement benefits?''
    I'm just asking you, what are people told when they sign up
that the government is committing to them?
    General Tilelli. Sir, I think there's no contract signed.
What you sign is your oath of office, which is to support and
defend the Constitution of the United States and do whatever
you're told to do. The fact is, it's the nuanced business of
all of those things that are told that are not in a contract--
retirement pay, for example; medical care for life, for
example; commissary, for example. All those things that are
never put down on a piece of paper, because folks who serve are
not serving to become rich. They're serving to serve the
country. The fact of the matter is, maybe General Sullivan's
memories are better than mine, but I remember signing my oath
of office, to be quite frank with you, and that was it.
    Senator King. Any others?
    General Sullivan. I may look younger than him, but I'm a
little bit older. My memory is not better than his. Over time I
learned, since all my buddies retired, they retired at 2.5
percent a year, 50 percent. I didn't sign a piece of paper. I
signed up to serve and I took my oath.
    Senator King. But even if it wasn't on a piece of paper,
what were the expectations?
    General Sullivan. The implicit contract was that I would
have a retired pay if I stayed for 20, it would be 50 percent
of what my last pay slip said, and that I would have medical
care or they'd pick me up off the battlefield, either myself or
my remains, and bring them home.
    Senator King. I think it's clear from this hearing this
morning--and I'm sure you were here for the first panel--that
everybody on this committee, one, didn't agree with this piece
that was in the budget deal; two, wants to fix it; three, wants
to fix it now; and four, as we go forward wants to work off a
principle of grandfathering of what's in the law. I think
that's where this committee is.
    Now, Dr. Chu, I'd like to follow up on one of those points.
There's been a lot of talk about grandfathering. If everything
is grandfathered and nothing changes except prospectively, what
does that mean in terms of budgetary effect? Because we operate
around here on a 10-year budget window, but in my simple-minded
way, if everything's grandfathered, that means there's going to
be no savings for 20 years. The first savings will be 20 years
plus 1 day if something is changed at the beginning.
    By the way, I think there should be something at the time
of enlistment that says this is what the expectations are and
this is what the benefits will be, so there is some clarity on
that.
    Dr. Chu, how do we grandfather and yet at the same time do
anything at all with regard to personnel costs?
    Dr. Chu. I should begin by reminding all of us that
grandfathering does not necessarily even preserve the change.
So REDUX, the retirement change made in the 1980s by Congress,
at congressional initiative, grandfathered everyone, including
the cadets and midshipmen at the military academies. That did
not preclude Congress from reversing course when the first
savings actually were going to take effect, the first cohort
that would have a slightly smaller annuity, came up to that
point.
    I think it's this issue of expectations, the issue of buy-
in, so to speak, from the affected parties that's crucial to a
successful transition in the regime.
    To your immediate question, how do we save if everything is
grandfathered, I would point out the grandfathering we discuss
is mostly one-sided. Any reduction raises the issue of
grandfathering, but a new benefit is not generally awarded only
to those who want to serve prospectively. That's not been the
way new benefits have been awarded, they've been awarded to
everyone regardless of the period of service, in general.
    I think one issue on grandfathering is when new initiatives
are taken, more thought might be given to whom do they really
apply, what's the purpose of the new benefit, and what kind of
effect do we wish to achieve.
    From a purely technical perspective, TRICARE for Life
changes and annuity changes would show up in the DOD budget as
a savings immediately, if there were a reduction, that is to
say, because those are both funded by set-asides.
    Senator King. Even though the savings might not be----
    Dr. Chu. Even though the cash savings are not for 20 years
or whatever, you would get an immediate DOD budget savings. The
Treasury would not see a savings because the Treasury would
have a smaller receipt from DOD for the payments, but a
constant factual witness correction outlay.
    So, yes, from a technical perspective you would see DOD
budget savings for those things that are subject to prefunding,
which is in the military just the TRICARE for Life program and
the annuity payments for longevity of service. But you would
not see the same for other things.
    Senator King. Thank you. Thank you, gentlemen. Thank you
very much. This is important testimony. As I say, I think it's
safe to say, as you can see from the hearing today, that this
committee is very firmly committed to fixing this problem.
    Thank you.
    Chairman Levin. Thank you very much, Senator King.
    Senator Graham.
    Senator Graham. Thank you.
    I think we are firmly committed to fixing this problem.
Without those emails, I'm not so sure we would be as firmly
committed as we are. I just want your membership to know it
matters that you weigh in, that you go visit people. Congress
is very friendly to our military. Sometimes we make decisions
that upon a second look maybe were not that smart. The fact
that we're responding appropriately, I think, is a good thing.
But do not underestimate how urging helps.
    Now, isn't there a social contract, even though it's not in
writing? Your kids, your sons, your daughters, individuals,
will not have to be drafted because others will come forward
and do the job voluntarily. Isn't that the deal? I don't know
what that's worth to somebody out there, knowing that your son
or daughter doesn't have to be drafted. I don't know how you
put a number on that. But think about it in terms of the family
budget. What would you pay, if you had to, to avoid your family
from being drafted?
    That's kind of an odd way, I guess, to look at it. But
you're trying to put a value on something that's hard to
actually put a value on.
    So when we talk about retirement--you're a master sergeant,
is that right? What was your retirement when you first retired?
    Sergeant Delaney. Right at $21,000 a year.
    Senator Graham. Here's the deal. $21,000 after 20 years of
service, multiple deployments, whatever risk comes your way.
That is a good retirement, but by no means an exorbitant
retirement, given the value to the country. Given the fact that
your son, your daughter, your loved one, doesn't have to go,
would you be willing to pay somebody $21,000 or contribute your
part to it? I think most Americans would say yes.
    Now, having said that, now that we're going to right this
wrong--and we will--who is advocating for the defense budget?
You're out there talking about the troops and their quality of
life and what we should be doing in terms of TRICARE in the
future and how we should be sensitive to any changes we make to
the benefit package, because that's who you represent. Who is
representing the equipment? Who's representing the number of
people? If it's not Congress, who?
    General Sullivan. At the risk of breaking in----
    Senator Graham. Please.
    General Sullivan.--I'll tell you, the Association of the
United States Army is advocating for that. We're advocating for
mission accomplishment, and that is a very finely tuned
relationship between young men and women who are developed as
leaders and trained to fight and their equipment and the
doctrine and so forth and so on.
    Senator Graham. Is that true of everybody else at the
table?
    General Sullivan. I don't know.
    Senator Graham. No, I'm asking them.
    General Tilelli. Yes, sir. Yes, sir, I think it's true of
all of us, because when you look at readiness for the country,
it's not only people; it's the modernization, the equipment,
it's also the training. So it's the triad. I think we all
support that, I think the reason we're not talking about that
today is because of the subject of the panel.
    Senator Graham. Can I make a proposal to you, that if you
believe, as I do, that at the end of the sequestration period
of time we're going to have a greatly reduced military
capability at a time when we may need it the most, is it
unreasonable for a Member of Congress to say over the next
decade the GDP we spend on defense should be at least
consistent with peacetime spending? Is that an unreasonable
position?
    General Sullivan. No, I don't think it's unreasonable. I
think it's also not unreasonable to ask all of the people who
are suggesting otherwise or that we continue with this
sequestration, to state could you please tell me what you think
you're getting for a defense establishment at the end of this
journey?
    Senator Graham. What kind of capability?
    General Sullivan. What kind of capability are we going to
have in 10 years or 15 years if we just have this mindless
approach to budgeting and programming?
    Senator Graham. As my time is about to expire, I guess what
I'm trying to suggest is that historically we've been spending
around 5 percent of GDP on defense in time of peace, more in
war. I would like some organization out there to start
advocating for a 10-year number consistent with the threats we
face.
    I know you're here to ask about the COLA changes and they
need to be changed. But I'm asking you to think even bigger, to
come back up on Capitol Hill and remind us all, many haven't
served but who are great people, what kind of defense
capability will you have if you keep invoking sequestration?
Look where the average has been and see how far away. Would you
be willing to help us in that endeavor? I feel incredibly
lonely in this exercise.
    General Sullivan. Sir, I'll be up soon.
    General Tilelli. Absolutely.
    Senator Graham. Thank you. God bless.
    Chairman Levin. Thank you so much, Senator Graham.
    Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman, and thanks to all
of you for your testimony, for your service, and for the work
of your organizations that is very important.
    Certainly, I'm committed with the others to fixing this
absolutely as soon as possible, in a responsible way, which
certainly includes finding other real and not fake savings.
    I wanted to just use my time briefly to highlight another
smaller issue, but an important issue, that hopefully can be
fixed at the same time. At the urging of me and others, it is
already in some of the bills to fix this COLA issue. That is a
problem created when the Congressional Budget Office (CBO)
changed their scoring rules with regard to VA clinics and how
they were scored and worked into the budget.
    Not to get into the weeds, but out of the blue CBO changed
the rules. It made it far more ``expensive,'' to get these
important community-based clinics built, because it scored much
more upfront. I've been working for well over a year to try to
get the VA to respond to this and to put solutions up.
Unfortunately, they have not been responsive in a positive way.
But many of us on Capitol Hill have been, and the House passed
a bill that would appropriately deal with this scoring issue so
that these clinics are built. Twenty-seven clinics immediately
slowed down and impacted nationwide, including two in
Louisiana, which should have been already built but for a
separate screw-up and delay by the VA.
    This House bill has passed 346 to 1. It's very fiscally
responsible. It deals with the issue. At the urging of me and
others, this provision is already included in some of the bills
dealing with this COLA issue, including the Sanders bill.
    I just urge you all to also put that near the middle of
your radar. I urge my colleagues to get this pretty simple,
should be noncontroversial, fix done so we move forward as we
had been planning to with these VA community-based clinics. I
believe it can and should be done at the same time, which is
immediately, as this COLA issue.
    Thank you. If you have any response to that, I'd love to
hear it. I just wanted to put that on the record.
    Thank you, Mr. Chairman.
    Chairman Levin. Thank you, Senator Vitter.
    I think we've had a really good hearing. We appreciate your
contribution to it. We thank you all for your service. We thank
all the veterans for their service, whether they're here within
earshot or out there somewhere else. We will now stand
adjourned.
    [Whereupon, at 12:52 p.m., the committee adjourned.]

    [Questions for the record with answers supplied follow:]
             Questions Submitted by Senator James M. Inhofe
                               readiness
    1. Senator Inhofe. Ms. Fox, what is the Department of Defense's
(DOD) plan to use the $6.2 billion that the Bipartisan Budget Act (BBA)
cut from military retirement to support the warfighter and current
readiness through reductions in monthly accrual payments?
    Ms. Fox. Based on estimates from the DOD Office of the Actuaries,
section 403 of the BBA, as amended by section 1001 of the Consolidated
Appropriations Act, 2014, reduces DOD's accrual payments to the
Military Retirement Fund by $505 million in fiscal year 2015 and
approximately $5.4 billion over a 10-year period. These funds will be
reallocated to various readiness and modernization efforts and help
fill the holes generated by the roughly $45 billion reduction to DOD's
fiscal year 2015 budget still required under the BBA from the
previously planned fiscal year 2015 levels assumed in the fiscal year
2014 President's budget request.

                       cost savings alternatives
    2. Senator Inhofe. Ms. Fox, what areas of potential savings exist
within DOD discretionary spending to pay for restoring the cost-of-
living adjustment (COLA) cut in section 403 of the BBA and to
grandfather those who are currently serving as well as current
retirees?
    Ms. Fox. While the specific reductions will depend on the final
allocation of resources in the upcoming budget request, finding the
roughly $500 million annual savings requires the review and rethinking
of a number of difficult decisions. That said, DOD is prepared to
revisit those decisions and find the funds because the Secretary and I
believe grandfathering is the right thing to do.

                general and flag officer retirement pay
    3. Senator Inhofe. Admiral Winnefeld, in your view, is it
appropriate that the general and flag officer community should support
restoring the longevity caps on retired officer pay as part of total
military compensation reform?
    Admiral Winnefeld. The 2007 National Defense Authorization Act
(NDAA) changed the criteria used to compute military retirement pay,
providing greater pensions for those senior leaders who serve longer.
These longevity caps provide greater incentive and more appropriate
compensation for individuals who DOD retains beyond 30 years of
service, and increases the flexibility of the President and Secretary
of Defense in managing the most senior levels of the officer corps.
    The Military Compensation and Retirement Modernization Commission
should look at all elements of military compensation reform; however, I
do not believe longevity caps should rise above 100 percent.

    4. Senator Inhofe. Admiral Winnefeld, in your opinion, is there a
continuing need to incentivize general and flag officer yearly
retirement pay greater than their Active Duty pay?
    Admiral Winnefeld. General and flag officer basic pay is limited by
Level II of the Executive Schedule. Once a general or flag officer
retires, the cap is removed and they receive the appropriate percentage
of their uncapped basic pay. In some rare cases, this results in pay
that is greater than their pay while on Active Duty.
    The Military Compensation and Retirement Modernization Commission
should look at all elements of military compensation reform, including
general and flag officer retirement.
                                 ______

            Questions Submitted by Senator Claire McCaskill
              impact of redux on retention and recruitment
    5. Senator McCaskill. Ms. Fox, the Military Retirement Reform Act
of 1986 reduced retirement benefits for those entering Active Duty
after enactment and retiring before the age of 62 by altering the
formula used to calculate retirement pay. Congress subsequently raised
concerns about how REDUX had negatively impacted military retention and
recruiting efforts in the late 1990s. To assist in bolstering military
retention and recruiting, the DOD supported Congress's repeal of
mandatory REDUX in the NDAA for Fiscal Year 2000. What is the DOD's
current assessment of the impact mandatory REDUX had on military
retention and recruitment while in effect?
    Ms. Fox. A number of studies attempted to understand the effects of
changes in military retired pay on the retention decisions of military
members. Overall, these studies tended to find that decreases in
military retired pay, such as when mandatory REDUX reduced the retired
pay multiplier from 2.5 percent to 2.0 percent, result in decreased
retention rates for members between the 10th and 20th year of service.
    Studies attempting to identify those factors that influence a
prospective recruit's decision to join the military found that the
military retirement system is not a strong factor in the decision
process. Because so few members tend to stay until retirement, and
because military retirement does not vest until a member generally
serves 20 years, prospective recruits tend to discount its value
relative to other, more immediate factors such as enlistment bonuses.
    The decision process of a prospective recruit is also affected by
parents, former military members, and others. These influencers are
more likely to consider the long-term benefits of military retirement
when encouraging a prospective recruit to enlist. While the impact of
mandatory REDUX may have had a minimal impact on the prospective
recruit's decision to enlist, it likely had a greater effect on the
willingness of the influencers to encourage enlistment.

    6. Senator McCaskill. Ms. Fox, did the repeal of mandatory REDUX
improve military retention and recruitment?
    Ms. Fox. At the time Congress repealed mandatory REDUX, it also
committed to restoring military compensation to more competitive levels
through targeted raises in the military basic pay table as well as
through increased, across-the-board military basic pay raises through
2006. As a result, isolating the specific impact any one of these three
changes had on recruiting and retention is difficult. However,
cumulatively these three changes significantly improved both recruiting
and retention.
    A number of studies examined how changes in retired pay a member
expects to receive upon retirement affect the member's retention
behavior. Generally, these studies found that changes to military
retired pay tend to affect significantly the projected retention
decisions of members between the 10th and 20th year of service. When
Congress repealed mandatory REDUX, this increased the amount of retired
pay a member who joined on or after August 1, 1986, would receive
immediately upon retirement. Therefore, based upon earlier studies, DOD
concludes that it is likely that the repeal of mandatory REDUX improved
military retention rates for these members. It also appears likely that
the other improvements in military basic pay contributed to improved
retention.
    Whereas decisions by members between the 10th and 20th year of
service are sensitive to changes in retirement, studies found that
decisions of new recruits tend to be less sensitive to changes in
retirement and more sensitive to other, more immediate factors, such as
enlistment bonuses. Therefore, while repealing mandatory REDUX may have
had some impact on the decisions of new recruits, it is likely that new
recruits' decisions were influenced more by the targeted pay raises and
the commitment to improvements in military basic pay than the repeal of
mandatory REDUX.
                                 ______

              Questions Submitted by Senator Kelly Ayotte
                           recalled retirees
    7. Senator Ayotte. Ms. Fox, DOD has informed me that 3,456 retirees
were recalled to Active Duty service since September 11, 2001. How many
of those were involuntarily recalled?
    Ms. Fox. The data required to conduct the analysis is found in
numerous repositories throughout the Services. The Services queried
these repositories and reported that 2,957 involuntary retiree recall
events were conducted since 2001. Additionally, the Services reported
3,152 voluntary retiree recall events. The total retiree recall events
reported by the Services totaled 6,109.
                               readiness
    8. Senator Ayotte. Admiral Winnefeld, in your prepared statement,
you write that ``savings accrued through changes to compensation should
be invested in warfighting capability and personnel readiness.'' Why do
you believe that any savings accrued from future compensation reform
should be invested in warfighting capability and personnel readiness?
    Admiral Winnefeld. It is important that we provide adequate
compensation to recruit and retain the best young men and women this
Nation has to offer, while at the same time gaining best value for the
American taxpayers in terms of warfighting capability, capacity, and
readiness. Thus, savings we accrue through adjustments to compensation
growth rates would best be applied to warfighting capability and
readiness. Moreover, serving in a ready and modern force is a vital
element of quality of service for our people. As DOD's overall budget
declines, we must continue to balance compensation, readiness, and
modernization.

                          enlisted perspective
    9. Senator Ayotte. Master Sergeant Delaney, based on your knowledge
of the noncommissioned officers who are the solid foundation of our
force, what is the likely impact of the COLA change for retention of
current enlisted servicemembers and their plans for their future
retirement and goals for their families?
    Sergeant Delaney. This change will be, indeed is already seen, as a
failure by the government to keep its word to those serving it. I
firmly believe that it will hurt retention for at least two reasons.
The first is the change itself can only be seen as based upon our
government's belief that younger retirees are receiving too many
retirement benefits. This has never been true. But it should be noted
that the younger retirees of today have been serving in our last 13
years of war. They stayed and served through these dangerous times and
through tour after tour after tour. Then they returned home to a very
sluggish economy to try to start a new career. After all of that the
Federal government then cuts a promised benefit! How can future
servicemembers really believe that all their promised earned benefits
will be there if they choose to serve a full career? They won't and
retention will be damaged.
    This is simply unfair and is seen as unfair and ungrateful.
    Dramatic changes to the retirement package, REDUX, was seen to
cause serious retention problems and was therefore rolled back.
    Second, this looks like just the first of many cuts being
considered by DOD. When they need to consider should I sign up again
they will think--will the package be the same when I finish my 20+
years as it is now? How can I be sure? This is the sort of doubt that
is supremely damaging to retention.

                             cost controls
    10. Senator Ayotte. Dr. Chu, we all understand that the cost of
military personnel has risen in the last 20 years. In your opening
statement, you said that reform to military compensation must be made
in a holistic manner in a way that derives from the desired shape and
characteristics of the future military force. What benefits do you
believe are essential to attract and retain a top quality military
force?
    Dr. Chu. As your question implies, decisions on benefits should key
on results--as you state, the ability to attract and retain a top
quality military force. In turn, that requires focusing on the
expectations of those whom we seek to attract to the military, and
providing a reasonable way for them to deal with the special burdens of
military service.
    Going forward, a results-oriented approach should recognize the
differences in burdens across warfare communities and skill areas, both
those that exist now and those that may well arise in the immediate
future, as well as those that depend on the nature and tempo of
contemporary operations. A benefit program keyed to only one set of
burdens may work poorly in alleviating those that others may bear, or
may bear at a different time. Likewise, what appeals to one skill
community may not be at all interesting from the perspective of
another--think special operations versus cyber warfare.
    It is also the case that burdens--and preferences--may differ based
on the personal circumstances of the military member. One of the most
important personal differences is that between single personnel and
those with families. Approximately half the force is single, and the
manner in which some benefits are offered now can disadvantage the
single servicemember. This is particularly true of the way the housing
benefit is currently structured.
    Accepting that a thoughtful benefit program would take these
considerations into account, from the extensive survey data available
to DOD, and from the opportunities I've had to meet and talk with
military personnel, I would offer the following observations that I
believe are germane on a general basis.
    First, there is normally a preference for cash. Put differently, it
may be better to offer cash allowances to all, with a menu of choices
from which military personnel can select, vice offering benefits in
kind, typically with only one choice available. That military personnel
often under-estimate the cost to the government of providing benefits
only strengthens the case for cash.
    Second, cash now is preferred to cash in the future, typically
strongly so. The current package defers important benefit elements,
which makes them less effective as compensation elements.
    Third, two of the most important issues for those with families are
the quality of education for the children and the career opportunities
available to the spouse. The current benefit package does not always
address these issues well.
    In short, a simpler system of cash benefits, provided now not
later, coupled with thoughtful attention to spousal careers and
children's education for those with families, would likely be more
highly valued by current and prospective military personnel and cost
the taxpayers less than the current system. Inevitably, change will
leave some less satisfied with the revised system; providing a
significant degree of choice as changes are implemented might help
alleviate their concerns.
                                 ______

             Questions Submitted by Senator Jeanne Shaheen
                          retention and morale
    11. Senator Shaheen. Ms. Fox, historically, DOD has supported
grandfathering any potential changes to pay or compensation, so that we
keep the faith with those that have served and are currently serving.
Can you talk about why that is important in terms of retention and
morale?
    Ms. Fox. Individuals join the military for a variety of reasons,
but all understand that their service entitles them to certain pays and
other benefits. Members also understand that if they continue serving
for a full career they may become entitled to retired pay, and to the
continuation of other benefits they enjoyed during their careers.
    Enlistment contracts and other agreements to serve explicitly state
that there are no guarantees these pays and benefits will remain.
Instead, members who serve accept as a matter of faith that the U.S.
Government will care for them and their families while they put the
country's interests ahead of their own.
    The U.S. Government may make changes to any aspect of military
compensation and benefits at any time; and, depending on the nature or
extent of the change(s), may be seen as perfectly acceptable by the
All-Volunteer Force. For example, slowing the growth of military pay
through the most recent 1 percent annual basic pay raise has, by and
large, been accepted without rancor. However, if changes are perceived
as cuts that are too large, or beyond what is considered normal, the
U.S. Government jeopardizes the continuing goodwill of those who serve.
Such reductions made to longstanding pays and benefits, especially if
they are abrupt and unexpected, can result in disappointment,
frustration, and anger, which in turn can lead to reduced productivity
or even discontinued service. For those too near retirement to let
their feelings dictate leaving service, the view that the U.S.
Government broke faith with them may result in poorer performance,
antagonistic feelings, and even negative influences on prospective
recruits. For these reasons, the DOD remains concerned about how
changes to military compensation and benefits are considered and
implemented, and it focuses on maintaining the All-Volunteer Force.
    As DOD considers changes to compensation, it recognizes that pay
and benefits are an area where it must be particularly thoughtful,
weigh commitments made, ensure the ability to recruit and retain the
forces needed for tomorrow, and make certain those sent into harm's way
have all they need to accomplish the mission. When all is said and
done, DOD believes it must keep the faith with those who serve and that
grandfathering is the right approach to any changes affecting military
retirement.

                            personnel costs
    12. Senator Shaheen. Admiral Winnefeld, there is some disagreement
as to whether or not personnel costs have actually increased as a
percentage of the overall DOD budget. Can you explain DOD's
understanding of that issue and how it differs from others' analyses?
    Admiral Winnefeld. Military and civilian personnel costs combined
account for nearly half of the defense budget, whereas military
personnel costs alone consume roughly one third of DOD's budget. These
percentages have remained relatively constant over the years as
personnel costs have always consumed a significant portion of the
defense budget. Disagreements on these numbers can surface due to
differing assumptions regarding what is included in compensation costs,
as well as with different timelines used in the analyses. However, pay
and compensation percentages of the overall DOD budget is not the main
point in the debate. The more important point is that if military and
civilian personnel costs do not take a reduction when the overall
defense budget decreases, these unadjusted costs will eat into our
readiness and modernization efforts.
    Many members of our Active-Duty Forces tell us they are more
concerned about maintaining their ability to serve and their quality of
work, than they are about continuing the same trajectory of
compensation growth we have experienced over the last decade.
                                 ______

                Questions Submitted by Senator Mike Lee
                 reform of military retirement programs
    13. Senator Lee. Secretary Fox and Admiral Winnefeld, what are your
concerns about future funding issues within DOD if there is no reform
of military retirement programs?
    Ms. Fox. While the bipartisan Budget Control Act (BCA) partially
mitigates the worst of DOD's readiness problems in fiscal year 2014,
and to a lesser extent in fiscal year 2015, beyond those 2 years the
BCA remains the law of the land. If sequestration is allowed to
persist, our analysis shows that it will lead to a force that is too
small, inadequately equipped, and insufficiently trained to fully
defend the Nation's interests.
    It is within this context that I join the rest of DOD's leadership
in stating that DOD cannot afford to sustain the rate of growth in
military compensation experienced over the last decade. The one-third
of the defense budget consumed by military compensation cannot be
exempt as an area of defense savings. So if DOD is going to maintain a
future force that is properly sized, modern, and ready, it clearly
cannot maintain the last decade's rate of military compensation growth.
    Admiral Winnefeld. We need to look after future generations of
Americans who expect their military will be capable of defending the
Nation. In the near-term, military retirement reform will have less of
an impact on DOD funding because of our intent to grandfather current
servicemembers, so any savings will accrue slowly. Eventually, savings
from a future retirement program could be significant, depending on how
it is configured. Thus, these reforms are essential to the long-term
balance of DOD and the sustainability of the retirement benefit.

    14. Senator Lee. Secretary Fox and Admiral Winnefeld, do you
believe that a failure to reform military retirement will endanger
funding to operations and maintenance, procurement, and research and
development funding?
    Ms. Fox. Pay and benefits are areas where DOD must be particularly
thoughtful and cognizant of commitments made in order to ensure the
ability to recruit and retain the force needed for tomorrow. Even so,
it is increasingly clear that slowing the rate of growth of
compensation cannot be excluded from critical efforts to sustain a
force that is balanced, equipped with the latest technology, and ready
to meet challenges seen and unforeseen.
    Avoiding difficult choices, in the name of serving our people or
for any other reason, would ultimately risk a future in which our men
and women could be sent in to harm's way with less than what they need
to accomplish the mission.
    Admiral Winnefeld. In the near-term, military retirement reform has
less of an impact on DOD funding because of our intent to grandfather
current servicemembers. However, these reforms could grow significantly
over time; and are essential to the long-term balance of DOD and the
sustainability of the retirement benefit.

    15. Senator Lee. Secretary Fox and Admiral Winnefeld, Congress and
DOD are in agreement that any changes to military retirement should not
apply to current servicemembers and retirees. If reform legislation is
passed and these members are grandfathered into the current retirement
system, how long do you anticipate it will take to see a change in the
rate of cost-growth in the military retirement program?
    Ms. Fox and Admiral Winnefeld. Changes to military retirement to
reduce the rate of cost-growth will affect DOD budgetary savings (i.e.,
the amount DOD contributes to the Military Retirement Fund annually to
pay for future retirement benefits) and outlays (i.e., actual current
retired pay distributions to retirees).
    A change, such as the recently enacted COLA-minus-1 calculation for
military retirement pay, could result in immediate DOD budgetary
savings--even if current servicemembers and retirees were to be
grandfathered--because of the accrual method of funding military
retirement. Accrual rates would adjust upon enactment of such a
proposal. DOD budgetary savings, relative to the status quo, would be
relatively small at first but increase steadily as an increasing number
of servicemembers entered into service subject to the new retirement
pay calculation. The rate of growth in outlays would not generally
decrease relative to the status quo for approximately 20 years until
these new servicemembers begin to retire.

                       achieving audit readiness
    16. Senator Lee. Secretary Fox and Admiral Winnefeld, the
military's budget and spending issues will not be solved by reforming
retirement and healthcare programs alone. Changes must be made to make
acquisitions and contracting more efficient and cost effective, and
unnecessary overhead needs to be eliminated. Do you believe that any
reform efforts, including military retirement and healthcare, would
benefit by having DOD audit ready by 2017?
    Ms. Fox. With DOD audit ready by 2017, it will have more accurate
and timely information on compensation, retirement, operations,
healthcare, and costs, with which it can make better-informed decisions
about future reforms to programs and policies. Better cost data should
lead to better decisions regarding the efficiency and effectiveness of
operations and major programs.
    DOD remains committed to improving its financial information and
achieving audit readiness. However, given the long-term fiscal
realities of defense budget funding levels under the BCA of 2011 and
the BBA of 2013, DOD must also take steps to slow the growth in pay and
benefit costs.
    Admiral Winnefeld. Yes, DOD is working hard to improve its overall
financial processes, controls, and information. We have established a
Financial Improvement and Audit Readiness (FIAR) Plan to outline the
strategy, priorities, and methodology to achieve these objectives. The
strategy focuses efforts on improving processes, controls, related
documentation, and systems supporting information most often used to
manage DOD--budgetary information and mission critical asset
information. By improving the DOD's financial controls and increasing
emphasis on asset accountability, tighter controls of military budget
and spending issues will be in place to monitor retirement and
healthcare reform efforts. DOD-wide financial improvement efforts
continue to mature and are integrated with transformation activities
across DOD.

     retirement system effect on recruitment and retention efforts
    17. Senator Lee. Secretary Fox and Admiral Winnefeld, how important
are retirement pensions for recruitment efforts and for retention
efforts separately, and is there one area where they are more
important?
    Ms. Fox and Admiral Winnefeld. The military retirement system has a
strong effect on retention rates for members between the 10th and 20th
year of service and a weak effect on the enlistment decisions of new
recruits.
    Studies attempting to identify those factors influencing a
prospective recruit's decision to join the military found that the
military retirement system is not a strong factor in the decision
process. Because so few members tend to stay until retirement, and
because military retirement does not vest until a member generally
serves 20 years, prospective recruits tend to discount its value
relative to other, more immediate factors, such as enlistment bonuses.
    The decision process of a prospective recruit is also affected by
parents, former military members, and others. These influencers are
more likely to consider the long-term benefits of military retirement
when encouraging a prospective recruit to enlist. For example, while
the repeal of mandatory REDUX may have had a minimal impact on the
prospective recruit's decision to enlist, it likely had a greater
effect on the willingness of the influencers to encourage enlistment.
    Typically, a military member makes the decision whether to separate
from the military or to stay for a career at around the 10th year of
service. The expectation of receiving military retirement after serving
a full 20 years is one of the more significant factors in that decision
process. A number of studies attempting to understand the effects of
changes in military retired pay on the retention decisions of military
members found that changes in military retired pay strongly affect the
retention rates for these members between the 10th and 20th year of
service.

    18. Senator Lee. General Tilelli, General Sullivan, Master Sergeant
Delaney, and Dr. Chu, in an opinion piece in ``The Hill'' on January
17, Retired General James Jones, Retired Admiral Gregory Johnson,
Retired General Arnold Punaro, and Retired General Charles Ward stated
that:
    ``We can either properly train and equip our future warriors or
maintain overly generous benefits for your military retirees who have
many years in the workforce ahead. We cannot do both.''
    Do you believe that the growth of military retirement and
healthcare benefits, unreformed, will lead to a reduction of funding
for operations and maintenance, procurement, and research and
development accounts in DOD?
    General Tilelli. No. The growth of pay and benefits will not
continue at the same rate that DOD experienced over the past 12 years.
Have costs grown since then? Yes, certainly, but using the 2000
baseline without placing it in an appropriate context is grossly
misleading.
    First, it implies the turn of the century was an appropriate
benchmark for estimating what reasonable personnel and healthcare
spending should be. Nothing could be further from the truth.
    At that time, years of budget cutbacks had depressed military pay,
cut retirement value by 25 percent for post-1986 entrants, and booted
beneficiaries over age 65 completely out of the military health care
system.
    As a result, retention was on the ropes, and the Joint Chiefs of
Staff urged Congress to fix the problems to prevent a readiness crisis.
    Congress worked diligently over the next decade to restore military
pay comparability, repeal the retirement cuts, and restore promised
health coverage for older retirees. In other words, the cost growth was
essential to keep the previous cutbacks from breaking the career force.
    Recent military compensation studies have leaped to the erroneous
conclusion that the cost trends of the last decade will continue
indefinitely.
    Not so. Now that pay comparability has been restored, there won't
be any further need for extra pay plus-ups above private sector pay
growth. Similarly, Congress won't have to approve another TRICARE for
Life program or repeal REDUX. Those were one-time fixes that won't be
repeated. Military personnel costs have continued to consume the same
share of DOD's budget for the past 30 years--about one third--and
slowing the growth of personnel costs has already started:

         Since 2010, pay raises have either kept pace with or
        have been below private sector growth with the fiscal year 2014
        pay raise being the lowest in 50 years.
         Military personnel end strength is being cut by
        124,000 members over 5 years.
         Since 2012, TRICARE Prime fees for retirees have
        experienced a 16 percent increase and future annual increases
        tied to cost of living adjustments.
         Pharmacy co-pays increased with future annual
        increases tied to cost-of-living adjustments.

    General Sullivan. The growth in military retirement benefits was
directly correlated to the need to close the 13 percent pay gap that
had grown in the 1990s and to a congressional desire to incentivize
longer service by senior military personnel. The pay gap was closed by
Congress in the 2000s and now if Congress maintains pay raises at ECI,
retirement pay (based on Active-Duty pay) will stabilize, not grow
exponentially. Health care benefits are not growing exponentially and
in fact, represent only about 10 percent of the DOD base budget
(compared to 16 percent in the United States overall). Further, DOD has
under-spent on TRICARE benefits for 3 straight years by nearly $3
billion. The TRICARE fee increases already put in place by Congress
over the past 3 years mean the system can be sustained in its current
cost structure. The force is people. Without people, there is no need
for operations and maintenance, procurement, and research and
development--you must take care of your people first.
    Sergeant Delaney. We strongly disagree with this analysis and
statement analysis. Obviously all these functions--operations and
maintenance, procurement, and research and development accounts as well
as personnel costs must be properly funded. But we must always remember
that we depend on dedicated skilled people to run the weapon systems,
the operations and all the personnel projects that make our military
the finest on earth. Without the right people all our critical missions
will fail.
    It is clear that DoD does not and will never pay them what they are
worth (imagine what the private sector would need to pay them for
taking the risks and life style that we require the military to
assume.) But after serving 20 or more years this country should provide
them enough so they can start again, a generation behind their age
group in a new career.
    Dr. Chu. I would not draw the list so narrowly. The challenge lies
in the full range of benefits provided, including those financed and
managed by other Federal agencies. Moreover, my concern is less with
the pay and benefits offered to those serving today, but with the
extensive set of benefits we employ to honor the service of those who
have already left the military, particularly if they're still of
working age. While that recognition is heartwarming and deserved, from
a financial perspective it is making it difficult to afford the
security investments we need, with the consequences outlined in your
question. A better tailored and targeted set of benefits might both
recognize earlier service and provide the resources needed to secure
the country's future.

    19. Senator Lee. General Tilelli, General Sullivan, Master Sergeant
Delaney, and Dr. Chu, according to the Congressional Research Service,
only 15 percent of enlisted military personnel and 47 percent of
officers will reach the 20 years of service needed to receive
retirement annuity. Though well less than half of all military
servicemembers will be eligible for this benefit, it is still an
important tool for recruitment and retention efforts. How will the
changes in the Murray-Ryan budget deal effect recruitment and retention
efforts?
    General Tilelli. Fortunately, Congress acted on the COLA penalty
for current retirees and currently servingmembers with the passage of
S. 25 that provided partial relief. Unfortunately it still impacts new
service entrants since January 1, 2014.
    Therefore, because the retirement benefit is much more of a
retention versus a recruiting tool, we believe that this change could
hurt future retention and recruiting.
    In the 1980s, budget pressures led to amending retirement rules
twice for new service entrants with the implementation of the high-36-
month average system and subsequently the REDUX system. At the time the
REDUX plan was being considered, then-Secretary of Defense Caspar
Weinberger strongly, but unsuccessfully, opposed it, arguing the change
would harm retention and degrade readiness. When his prediction of
adverse retention consequences proved all too accurate in the 1990s,
Congress had to repeal REDUX in 1999 at the urging of the Joint Chiefs
of Staff.
    Because this COLA change has a similar element found in REDUX, it
could negatively impact retention just as it did in the late 1990s.
However, because it is not as financially devastating as REDUX was, the
negative impact may not be as severe. Only time will tell.
    General Sullivan. Had the Murray-Ryan changes to the under-62
retiree COLA been maintained, they would surely have had a negative
impact on recruiting and retention. Many military personnel are
children of military personnel. If the concept of grandfathering the
current force and current retirees is ignored, the military influencers
of young people will urge them not to enter service because promises
made upon enlistment will likely be broken before retirement. Decisions
to serve are influenced by how the current force is treated. Congress
wisely repealed the legislation that would have broken faith with
currently serving and retired military personnel.
    Sergeant Delaney. In my answer to Senator Ayotte I said: This
change will be, indeed is already seen, as a failure by the government
to keep its word to those serving it. I firmly believe that it will
hurt retention for at least two reasons. The first is the change itself
can only be seen as based upon our government's belief that younger
retirees are receiving too many retirement benefits. This has never
been true. But it should be noted that the younger retirees of today
have been serving in our last 13 years of war. They stayed and served
through these dangerous times and through tour after tour after tour.
Then they returned home to a very sluggish economy to try to start a
new career. After all of that the Federal Government then cuts a
promised benefit! How can future servicemembers really believe that all
their promised earned benefits will be there if they choose to serve a
full career? They won't and retention will be damaged.
    This is simply unfair and is seen as unfair and ungrateful.
    Dramatic changes to the retirement package, REDUX, was seen to
cause serious retention problems and was therefore rolled back.
    Second, this looks like just the first of many cuts being
considered by DOD. When they need to consider should I sign up again
they will think--will the package be the same when I finish my 20+
years as it is now? How can I be sure? This is the sort of doubt that
is supremely damaging to retention.
    Surveys showed that the active duty, retirees, and veterans all
reacted negatively to this change. It was seen as unfair by both those
who were thinking or planning on a career in the military and those
were not. After all these are their fellows; their comrades and they
want them to get what they were promised.
    Dr. Chu. From a quantitative perspective, the changes represent a
modest fraction of the value of the current compensation package, with
commensurate likely effect on retention, even less on recruitment. But
from a qualitative perspective, they could be more damaging, because
they do not proceed from a clearly articulated view of the future
nature of the military compensation package, and may therefore undercut
confidence in the steadiness of the Nation's commitment to the value of
military service. Future changes should start with a clear statement of
the objectives we seek to achieve, explain how the changes affect the
achievement of those objectives, and acknowledge frankly that some may
find the revised package less satisfactory, offering them a modicum of
choice, given that they entered service with a different set of
expectations about how their commitment would be rewarded.

    20. Senator Lee. General Tilelli, General Sullivan, Master Sergeant
Delaney, and Dr. Chu, how can future changes to the military
entitlement and benefits system need to be made to lessen the negative
effect on these efforts?
    General Tilelli. The current retirement system, with relatively
modest changes, has been in effect for roughly 60 years. Through
decades of hot and cold wars it has been the primary incentive to
successfully induce top-quality people to endure extraordinary demands
and sacrifices inherent with a career in uniform for 2 decades or more.
    The Military Officers Association of America (MOAA) accepts that
there will always be proposals to change the retirement system, but we
believe any change must be able to stand up to intense scrutiny and
should not short-circuit the legislative process, such as this COLA cut
did, in order to achieve retirement savings without adequate time to
assess and adjust for retention and readiness impacts.
    The real question one needs to ask before accepting significant
retirement system changes is what is the objective? Changes should not
be measured on how much money they save, but instead, the true measure
of any change should be whether it improves the way we recruit and/or
retain a world-class uniformed force.
    When members sign up to serve there is no written contract that
outlines their future retirement benefits. However, the advertised
benefits clearly reflect that someone who serves for 2 decades or more
would receive a retirement package that consists of retired pay and
health care for themselves and their family.
    Military members do not have a union. It is Congress who continues
to look after their best interests and protect them from fast-tracking,
budget-cutting proposals that would gut career force retention.
    It is this reason MOAA thanks the committee for stripping the
Military Compensation and Retirement Modernization Commission's
provision that would have fast-tracked their recommendations. Changes
need to be transparent. We believe it is imperative that any suggested
modifications to the retirement system go through the deliberative
process with the committees of jurisdiction (Senate and House Armed
Services Committees) that provide normal oversight and fully understand
the potential impacts such changes would have to retention and
readiness.
    Finally, any changes to the retirement system should keep faith
with those currently serving by grandfathering the existing force. We
thank Congress for doing just that with the COLA relief.
    General Sullivan. Any changes must be clearly explained and must be
based on empirical data that shows what benefits military personnel
value most.
    Sergeant Delaney. If by changes you mean cuts, they should only be
prospective. If men and women enter and remain in the military relying
on a certain package of earned benefits, those benefits should be there
when they retire. The COLA cut that was the basis for this hearing is
in effect for all those who entered the military after the first of
this year. I am sure it did not make people happy but it does not feel
like a bait and switch. It is clear and upfront and it won't make them
feel foolish to believe what they were told. This is crucial.
    Of course the Military Compensation and Retirement Modernization
Commission has assured the VSOs and MSOs that they are not simply
looking for cuts but efficiencies and coordination. They have clearly
been working diligently and are aware of the worries concerning
recruitment and retention. When we see the recommendations in February
of next year, we will be able comment on their recommendations.
    Dr. Chu. See response to previous question.