A Reformation: Reforming DoD’s Active Component Compensation System

On May 6, 2014, the Service Chiefs, Chief of the National Guard Bureau, and both the Chairman and Vice Chairman of the Joint Chiefs of Staff testified to the Senate Armed Services Committee on the need for compensation reform. The central argument made was that to preserve readiness and modernization, the rate of growth within DoD’s personnel accounts needed adjustments to create balance. However, both committees in Congress rejected the ideas put forth by DoD, to include reducing the annual pay increase, cutting housing pay by 5%, and reducing other benefits such as CONUS-based commissaries and Tricare. Many of the veterans organizations that are natural allies of DoD to include the VFW have opposed such proposals and made their voices heard with members of Congress. So, how can DoD seek the changes needed while making such reforms palatable to Congress and veterans organizations? DoD needs a set of proposals that will create savings while creating second and third order benefits for the individual service members and their families, their communities, and the nation as a whole.

DoD is paying personnel costs for a pool of veterans that exceeds the pool of active duty members in uniform.

The current system ensures that someone who serves at least 20 years of active service earns a retirement package that includes up to 50% of their last pay check for life. While only a small portion of the entire force reaches this pinnacle, it creates long-term costs on DoD’s personnel accounts to pay for individuals exceeding the total amount of time they spent in uniform. Based on today’s life expectancy, a senior enlisted Soldier serving on active duty can retire at the age of 38-42 and receive payment for an additional 30, 40, or even 50 years. Over time, this becomes a burden on the system. Already, DoD is paying personnel costs for a pool of veterans that exceeds the pool of active duty members in uniform; a mathematical formula that already played out badly for the U.S. auto-industry. At the same time, active duty service members who serve less than 20 years receive no compensation at all. Most who retire prior to 20 years do so as a conscious decision to pursue other opportunities, but many argue that zero post-employment compensation for those who don’t retire with 20 years doesn’t properly honor their service and sacrifice. For compensation reform to be successful, proposals need to provide positive options for active duty service members while reducing DoD’s overall personnel cost to allow DoD to properly manage its personnel, readiness, and modernization portfolios.

Provide Incentive Options

DoD needs to provide an incentive structure that rewards based on levels of service and provides someone the means to effectively transition into the private sector. One proposal made by several boards for DoD is the creation or expansion of a 401K/Thift Savings Plan (TSP) where DoD will match to a certain level an active service member’s contribution. Current contribution matches occur for specialty MOS’s only. Upon leaving active duty, service members could then transfer their 401Ks to their civilian employers. We recommend the 401K option be broken down into 4 categories that will determine the level DoD will match. For example, if active duty service members serve 5 years, DoD will match their 401K at 5%. Each 5 year increment will be matched by the years of service (10 yrs is 10%, 15 yrs is 15%, and 20 yrs is 20%).

However, this proposal is insufficient to address the concerns that if the market value of the 401K drops, veterans in the long run will lose out. So, we propose adding a service bonus tax-free check that will allow veterans the opportunities to buy a home, attend a trade school, invest in a small business, or save for college. Tied with the 401K option, the tax-free bonus checks will be tiered so 5 years of active service earns $50,000, 10 years earns $100,000, 15 years earns $250,000, and 20 years earns $500,000. For active service less than 20 years, service members would agree to serve an additional 3-5 years in the Reserves or National Guard as a condition for the bonus check. This will ensure the military retains a core population of skilled service members within the ranks when the nation needs them.

Tied to already existing VA programs for home and small business loans, and the post-9/11 GI bill, this gives veterans options they current do not have. For example, if a veteran purchases a McDonald’s franchise, s/he is required to have several hundred thousand dollars in liquid assets to purchase the franchise. Even with today’s 20 year retirement check, unless an active duty service member remained unmarried and spent next to no money during his/her service, s/he would likely be unable to come up with that kind of liquidity. However, with the new system, they would have the money needed or have enough liquid assets plus collateral to obtain a VA sponsored small business loan. The upside to this is that it will help encourage more small business entrepreneurs who are the engine of our economy.

While this proposal represents a significant upfront cost to DoD, in the long run, DoD will shed its burden of decade’s long retirement checks while providing greater financial security and options to service members.

Additionally, even if an active duty service member decided not to immediately use his/her tax-free bonus check, s/he could add it to his/her 401K plan and create a comfortable retirement nest egg for his/her use at a later point or for a down payment or outright purchase of a retirement home. This will help provide families a sense of financial security that many today still do not have.

While this proposal represents a significant upfront cost to DoD, in the long run, DoD will shed its burden of decade’s long retirement checks while providing greater financial security and options to service members.

Healthcare Coverage

“The willingness with which our young people are likely to serve in any war, no matter how justified, shall be directly proportional as to how they perceive the veterans of earlier wars were treated and appreciated by their nation.”

The quote, often attributed to George Washington, though never verified by scholars, highlights the issue the nation faces today regarding reforms to the current DoD compensation structure, especially with respect to continued healthcare support to veterans. The recent scandal with the VA hospitals clearly demonstrates this sensitivity. Our proposal for reform doesn’t call for eliminating or increasing fees on veterans; rather it calls for expanding options to veterans utilizing the newly created healthcare exchanges and options for choosing physicians.

As the VA hospital incident and other incidents with military treatment facilities show, there is not enough capacity to handle the amount of veterans and families using their services. For some veterans who lose their TRICARE Prime benefits and must use TRICARE Standard, they have to travel many miles to be seen at a military treatment facility rather than use local private medical facilities. This is a burden on the veterans who must wait long periods for appointments, travel significant distances to be seen, and are usually rushed through since their doctors have too many patients. Not to mention, the doctors themselves are never permanent and therefore no single doctor tracks and manages the care of any individual veteran.

Our proposal is to have veterans enroll in the federal healthcare exchange with minimal co-pays equivalent to those under TRICARE Standard, where veterans are provided the option to either go to a VA hospital, a DoD Military treatment facility, or a local healthcare provider. If a veteran chooses a civilian healthcare provider, the benefits to the veteran would be the same as if s/he went to a government facility. The goal for DoD and the Department of Veterans Affairs is to ensure all veterans receive quality healthcare. To ensure this, the best option is to allow veterans the flexibility to choose for themselves and their families how they go about getting their healthcare.


To make meaningful reforms to current personnel compensation programs, DoD needs to offer attractive options that provide active duty service members incentives and flexibility to chart their post-service careers. This will benefit DoD in the long run and, more importantly, it will energize the economy with new entrepreneurs backed by a healthcare package that provides peace of mind.

Chad Pillai and Brian Platt are U.S. Army strategists with multiple tours in planning and policy positions. The views expressed belong to the authors' alone and do not represent theofficial position of the U.S. Army, the Department of Defense, or the U.S. Government.

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Header Image: Marines & sailors aboard USS Pearl Harbor at a 70th anniversary commemoration ceremony of the attack on Pearl Harbor, Dec. 7. (Cpl. Tommy Huynh/DoD Photo)