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DoD News Brieifing with Director of the 10th Quadrennial Review of Military Compensation Jan D. Eakle and Principal Director, Deputy Undersecretary of Defense for Military Personnel Policy Shiela Earle

Presenters: Director of the 10th Quadrennial Review of Military Compensation Jan D. Eakle and Principal Director, Deputy Undersecretary of Defense for Military Personnel Policy Shiela Earle
August 05, 2008

Slides used in this briefing are available at: http://www.defenselink.mil/news/briefingslide.aspx?briefingslideid=333

             STAFF: Good morning, and welcome. It's my pleasure to bring to you Denny Eakle, the director of the 10th Quadrennial Review of Military Compensation, and Sheila Earle, who's the principal director, deputy undersecretary of Defense of Defense for Military Personnel Policy.   

 
            As you all know, we're here to talk about the 10th Quadrennial Review. And today Dr. Eakle's committee has completed and finished publishing the 10th Quadrennial Review for Military Compensation, Volume two. If you'll recall, back in March, Mr. Carr was here, and he talked to you about volume one, which was the compensation -- or which was cash compensation, and today volume two contains the analysis of the non-cash and deferred compensation.   
 
            This review's required by law every four years. Dr. Eakle and Ms. Earle are here to talk to you and discuss the recommendations put forward to the department by the 10th QRMC, as it is called. They do have what I would consider a comprehensive presentation. I think it'll take a little bit of time to go through, but I think it's important to give them the opportunity to go all the way through the presentation, and then they'll be happy to take your questions. 
 
            So with that, let me turn it over to them, to get started. 
 
            DR. EAKLE: Good morning. We are here to talk about our second volume of the report, and as was mentioned, our first volume was split along the lines of cash in volume one, and volume two represents all of the non-cash and deferred pieces of compensation. 
 
            The content of volume two could be broken into four areas: retirement, a review of the TRICARE premiums and fees, recruiting and retention incentives for health care professionals, and finally quality of life. 
 
            So we'll begin with retirement. Retirement's something that's been studied several times in the past. And we went back and began our look by looking at what the arguments have been about retirement, why it should be changed. And basically, the arguments about the current retirement system break down into three premium -- three principal areas.   
 
            First is equity. There is a perception that the system we have today is inequitable because only 15 percent of all enlisted personnel and less than half of officers will ever receive anything in the system. And in fact, those rates are much lower in our ground services.   
 
            In addition, recently we have seen some issues being raised about reservists. Reservists, for a long time, have been in a separate retirement system and that seemed to be acceptable to people until we entered a period where we began calling the reservists up frequently. And now, because they serve so often alongside their active-duty counterparts, there is some concern that they are in a dramatically different system where they must wait much longer to access it. That said, I would remind you that these people are civilians and most of them do have their own retirement system as well, but there is concern that we're not treating them equitably with their active-duty counterparts. 
 
            The next area of concern with the current system has to do with flexibility. The services today have a system that they refer to as "the golden handcuffs" because what it does is it pulls people to the 20-year point and then essentially invites them to leave as soon as they've completed 20 years of service. We have evidence that a lot of people reach about the 8th year of service and they have to make a decision: Am I going to stay for a full 20 or should I just get out now? 
 
            What that does is -- has the perverse result of not only pulling people too long in some cases because they'll want to stay to 20 even if they're in a skill that we don't need them till 20 years of service; on the other hand, it causes some skills such as linguists, physicians that we would like to have stay longer actually be essentially pushed out at the 20th year of service. So the system is very inflexible for the services. They cannot use it to shape each individual career field because this is truly a "one size fits all" retirement system. 
 
            The third issue involving the current system has to do with efficiency. It costs the federal government far more to provide the retirement system that we have today than is valued by the military members, because it is such -- it is deferred so far into the future. 
 
            So those are the three things that have been raised as issues concerning this. And we began our study by looking at those and thinking about how we could address each of those issues. 
 
            So the QRMC had a model constructed by the RAND Corporation that enabled us to do some modeling of how members might react to a new retirement system. 
 
            We looked at the Defense Advisory Committee on Military Compensation, the DACMC. We also looked at retirement systems that are available at the federal, state and local areas for the paramilitary: your police, your firefighters, your first responders.   
 
            We looked at a wide range, of different types of retirement systems, and through trial and error have come up with a system that, we believe, will answer the needs both of the individual servicemembers as well as providing flexibility to the services and a best value for the taxpayer.   
 
            The system looks like this. It has two building blocks that are common to all military members -- a defined benefit and a defined contribution.   
 
            The defined benefit uses the formula that is very familiar to you; the 2.5 percent times years of service times their high-three basic pay. But unlike the current system, this would be vested at 10 years of service.   
 
            In addition, it is different from the current system in that those people, who vest at 10 years of service, would be able to draw their annuity at age 60.   
 
            For military members who serve 20 years or more, they could take the full annuity at age 57. Or we've provided an alternative where, much as they can in the federal civilian -- civil service retirement, they would be able to draw it immediately at a penalty.   
 
            So they have two options. Leave it fully in and receive the entire benefit at age 57. Or access it at any time before age 57 following their retirement.   
 
            The next piece of it, the system, is a defined contribution. This is very common in the private sector. You see 401(k)s out there as a key thing and sometimes the only thing used in a retirement system. We have injected a government-funded TSP for military members. This, I'll emphasize, is not a matching. This is an outright contribution by the government, and it's a sliding scale.   
 
            The first year, the government would make no contribution. The second year of service, they would put in 2 percent of a member's basic pay. The third and fourth years, they would get 3 percent. The fifth year, they would get 4 percent. And any military member who has five years or more of service, the government would put 5 percent of their annual basic pay into this TSP for them. The military members would own it at 10 years of service. It would be theirs and it would be a portable asset.   
 
            The next two pieces are the variable pieces. Here is where the services get their flexibility.   
 
            The first is a gate pay system. And what that does is, it says to an individual, the service would put out, for you who are in a particular skill, if you are -- stay with us until you achieve a particular year of service, we will give you a gate payment.   
 
            It is not like a reenlistment bonus, where it is, you know, a payment made for future service. This is a payment made for achieving a particular year of service. And within the services, they would have the flexibility to vary this by year of service as well as by skill. That way, they could begin to shape the skills by dragging people further into their career by offering them an incentive.   
 
            The third -- the fourth piece, rather, of this is the services' other flexibility, and that's the separation payment. The separation payments would be made available by the service to members that they wished to entice to leave. It is somewhat akin to our VSI/SSB history, where we've offered incentives for people to leave at particular times. But this would be a permanent thing that the services would have available to them to offer to different skills and different years of service to entice them to leave at particular times.   
 
            Let me give you a couple of examples of how this might work. The examples that I'm going to describe here apply to the U.S. Army active-duty enlisted force. Every portion of the forces would have a different set of numbers if I were to show you all of them, and you'll find some of that documented in the report. But for simplicity, we're going to work on the -- talk about the Army enlisted. 
 
            If the Army wished to replicate its current force structure, it could use this new system by offering a gate payment of 15 percent at the 12th and 18th year of service and offering a whole year of basic pay to any member who wished to separate between years 20 and 26. And this produces a force profile that is nearly identical to today's force. If, on the other hand, the Army was looking to increase the length of service, what they might do is offer a gate payment of 35 percent of basic pay at the 12th year of service, 50 percent at the 18th year of service, and then offer that one year of basic pay for all members who separate between years of service 20 and 30.   
 
            So now what does that do for you? Before we talk about that one, what I want to do is I want to tell you, that first option that's on there when you look at this next chart is what we refer to as QRMC current. That's the -- mimicking the current system. The next one is called QRMC long, something that would cause longer service pictures.   
 
            So on slide eight, what you see is what would happen if we offered QRMC and -- the QRMC current and the QRMC long under -- with our current retention rates for the U.S. Army. The first line tells you what the base case is. What does the current retention rate produce? And what you find is today 10.5 percent, with -- on average, of Army enlisted members would stay to year of service 20 and become eligible for retirement. 
 
            They would serve 7 years. We would need 59,483 accessions to maintain the force. And the cost of the military members in terms of RMC -- regular military compensation -- and retirement costs alone, just those two pieces, would average $46,400 a year. 
 
            Using QRMC current -- the system that you -- was described on the previous slide -- we would achieve about 10.8 percent reaching retirement. They'd serve 7.1 years. But what you can see here is that we've managed to trim about a thousand accessions from the accession pool. But most importantly, what you see is the price per military member drop from 46,346 [dollars] to 43,168 [dollars] for a fairly significant savings while achieving exactly the same force profile. 
 
            If, however, we wish to have people stay longer, using this Army example, we can take that system and we can encourage people to stay with us so that 12.5 percent would actually remain to year of service 20. They would serve an average of 7.6 years. And the number of accessions, because we would have people serving for so much longer, drops remarkably. It drops down to 55,000 in order to maintain the force. And you'll see that the price per military member is only slightly less than it is today. However, there would be large savings due to the fact that we would have so many fewer people to recruit and put through initial skills training. 
 
            The rest of this chart shows you the examples of what happens to the other services. You can see the numbers are very different because they have very different retention patterns today. And the places we pay the gate payments and the separation payments are different in every service. 
 
            But the next chart tells you what this means to the military member. We'll start with the top line of this chart. Under the current system, this is how much money people would perceive the value of their retirements when they completed whatever year of service is on here. So for example, E-5 at 10, today the current system pays them nothing. The far end of the chart, for an O-6 who retires with 30 years of service, his perception of what his retirement would be worth would be a lump sum of $541,000. These numbers rely on a 15 percent personal discount rate. And it's important to understand that that personal discount rate was developed rigorously by two economists. And they have -- they found a range of -- discount ranges that were as high as 30 percent. So by using 15 percent we've taken a fairly conservative view of what the military member would view their pay as being worth. 
 
            Now let's take a look at the E-7 at 20 years of service. Under the QRMC's immediate option -- that's where they say, "I want my retirement the day I walk out the door; I don't want to wait till I'm age 57" -- they would view the defined benefit piece, the annuity section of their retirement, as being worth $23,000, versus the $120,000 they have today.   
 
            But what's different about this system is they would also have a TSP account, which they own, which is worth $40,000 when they leave. That's $40,000 of hard cash in a TSP account.   
 
            The next thing they have -- they would be given a separation payment. They would be given $67,000 as they leave the service. So that is current cash in hand.   
 
            In addition, they will have been paid $9,000 in gate payments, for a total of $138,000.   
 
            If you look across that line that's just above that second blue bar and compare it to the line that the -- on the top, what you can see is that in every case, this system provides a benefit which will be viewed as richer by military members than the current retirement system.   
 
            The line on the bottom is how much they would perceive the thing as being worth if they waited until they turned age 57 or, in the case of those who have not served 20 years, until they've turned age 60.   
 
            All right. So this is what the system is that we have devised. However, we are dependent on a model which has been constructed specifically for this purpose. We have no way of verifying its outcome. Therefore, the recommendation of this QRMC is that the Department of Defense conduct a multi-year test of this system.   
 
            The way the test would work is this. All four services would be asked to identify some skills that have different types of retention patterns -- some that stay not very long, some that stay longer periods of time -- and ones they wish to influence.   
 
            We would offer those skills an opportunity -- people in those skills an opportunity to volunteer to take on this new retirement system for people who are in the first eight years of service. If someone was selected for the test, they would be paid all of the TSP that they should have earned up until that point, and it will be put in their TSP accounts for them. The program's vesting rules would in fact apply to all those individuals. So should they achieve 10 years of service while they are in the test, they would fully own it. And at the end of the test period, people who are in the new system who wish to revert to the original retirement system would be allowed to do so.   
 
            So what we are recommending is a test of the system that would allow the department to find out does it work for them from a flexibility standpoint, and does it work for the members in terms of their being able to make choices about their employment with the Department of Defense. 
 
            The next study area we have here is TRICARE fees. 
 
            Before we began this, one of the things we said is, we needed to establish some principles, for judging how we would want to view the TRICARE system.   
 
            The first principle is pretty obvious, that the key to having a medical system is that they need to keep its priority on the active duty members and their dependents. We also believe that retiree fees ought to relate to how much the plan is worth. The value – higher-value plans should have higher premiums associated with them.   
 
            We believe that the fees need to be fair to all retired military members. They ought to reflect how much income an individual has, so that if they make more money and are therefore better able to pay for a system, they should do so. And lastly we believe that TRICARE needs to shift from focus on treatment to rather focus on prevention.   
 
            First, I'd like to give you a little bit of history about retiree TRICARE fees. When TRICARE started out in 1995, military members, retirees were charged $230 per individual, $460 per family. Today in 2008, they're charged $230 per individual, $460 per family. They have not changed.   
 
            When TRICARE started, members were paying 27 percent of their health care cost. Today because we have not changed the premiums, that share is less than 12 percent.   
 
            Conversely our over-65 retirees have been paying Medicare Part B during this entire period, if they were going to have any kind of health care. For those people who were trying to use military hospitals, they would take out wraparound policies.   
 
            They had to do something, in order to make sure they had some form of health care. And the military health care system, because it has had so much pressure on it, with the increase in the number of reservists and their families, we have been essentially pushing out many of our military retirees due to capacity.    
 
            So they've been taking, since the start of TRICARE for Life, they've all been paying for Medicare Part B. And they've been required to pay 25 percent of the program fee.   
 
            Well, that was true until 2007, when the Congress changed the criteria for how fees would be set for Medicare Part B. And they began a three-year transition, which ends next year.   
 
            At the end of that transition, some people who are taking Medicare Part B, and that would apply to all of our over-65 retirees, are going to be paying as much as 80 percent of the program cost.   
 
            Essentially what this says to you is that we are asking our older retirees, who are in fact the least likely to hold jobs and therefore have the lowest incomes, to pay the most for their system.   
 
            They do make -- they do get Social Security payments; however, those do not look anything like how much money you would make if you were in a job.   
 
            TRICARE For Life, though, is a much more generous program than TRICARE Prime, and you need to keep that in mind. It is a better program than TRICARE Prime is. But we believe we need to get some parity between our older and our younger retirees.   
 
            Chart 15 shows you what we are asking our older and younger retirees to pay from '95 through 2008. And what you can see is, in 1995, our younger retirees paid 41.6 percent of the amount of money that our older military retirees were paying to receive their Medicare Part B. That number has remained flat for the under-65 retirees, while our oldest retirees have faced increasing costs for their health care. And today, it is less than 22 percent of the -- the under-65 retirees pay less than 22 percent of what our oldest retirees pay, and these are only the oldest retirees who are in the bottom income range. Some of the -- some of the people will be paying far more than this, and so that ratio of 22 percent would be even -- that number would be even smaller.   
 
            So this is the chart that led us to begin thinking about what is fair to the older retirees when comparing them to the younger retirees. So here are our recommendations: We believe that the under-65 retirees should begin paying 40 percent of the Medicare Part B premium using the same fee structure that is laid on by the Medicare system. What this will do is bring us back to a level of parity. From that previous chart, it was 41.6 percent, something like that. We're talking about setting it basically at 40 percent to return the parity to the system that existed at the time the system was -- that Medicare -- or that TRICARE came into existence.   
 
            Why would you not make it more than that? Because in fact, TRICARE For Life is a much more generous program. So we believe that the younger retirees shouldn't pay as much for a system that is not as generous.   
 
            In addition, we believe that the under-65 retirees should -- who elect to use TRICARE Standard and Extra need to pay a small fee for that. And we would suggest to the department that that fee be set at 15 percent of the Medicare Part B. We think the family rate should be set at double the individual rate and that the premium increase needs to be phased in over four years. That is in contrast to what was done with Medicare, where it was only phased in over three years, and in fact the increases were much larger.   
 
            In addition, we look at other fees associated with TRICARE. We believe that the deductible should be used -- should be set at the Medicare deductible rate, at $135 per person in 2008. That number represents less than the current deductible in TRICARE. We have suggested to the department that all copays and coinsurance for any preventative service be provided at no cost to all members and retirees who have access to TRICARE. 
 
            And finally, we believe that DOD needs to establish an open enrollment period, much as you would find with any employer health care system. We envision that once a year there would be an enrollment period where people would come in. They would declare, "I want TRICARE Prime this year." "I want TRICARE Standard this year." And they would then have their premiums set for the following year based on that. 
 
            But we have a provision here that is somewhat different than you would find in employer health care. In employer health care, normally what you see is they allow people to come in if there is a birth or a death in the family, something that causes their health care -- their situation to change in terms of family size. We are recommending an addition to that, which is that -- we believe many retirees probably are using their employer health care. In order to protect all of our military members, we are recommending that those individuals be allowed to come back in outside the open enrollment period if they've lost their health care because we do not want any military member to have any -- or retiree to have any period in which they are not fully covered. 
 
            The next chart shows you what these recommended premiums would translate to for your under-65 TRICARE – under-65 retiree who elects to take TRICARE Prime. Let me start out by talking about the income criteria. What you see there is income for individuals who have less than an MAGI of $82,000 or less. Let me tell you what an MAGI is. This is a system that is used by Social Security today. It is your adjusted gross income from your income tax return -- so this is the -- your tax after all your deductions have been taken, but the modified part is the system adds back any interest you had from tax- free bonds or other tax-free interest sources. Essentially, though, this is -- you can think of this as being your -- you know, what's on your income -- what part of your salary you would pay income tax on. 
 
            So for members who make -- individual members who make less than 82,000 (dollars) or couples who make less than $164,000, they would be paying these first two rates you see here: $462.70 for an individual and double that for a family. If you think about the rates as they exist today, essentially in round numbers we are suggesting that the rates be approximately doubled for the lowest income group, again, phased in over a four-year period. 
 
            You can see that for people who make a lot more money, the rates, in fact, do go up and they go up fairly substantially. Who we've envisioned this would mostly affect would be your senior officers are the people who would be most likely to be affected by these higher rates. 
 
            We have one final recommendation, and that has to do with the premium or -- I'm sorry. It has to do with the reimbursement rates that are currently given to physicians and other health care providers in the private sector. The department has the authority to pay different rates than Medicare, but we believe they have not pursued it as aggressively. And as a result, we see some areas where both active and Reserve military members as well as retirees are finding it difficult to find a provider who will accept TRICARE.   
 
            So we believe that the department needs to more aggressively use its authority in terms of looking at reimbursement rates and adjusting for changes. 
 
            The next area that's on here has to do with health care, or health care professionals. The Congress, in its conference report for the 2007 NDAA, tasked this QRMC to specifically look at recruiting and retentions incentives provided to our health care community. We have broken up our recommendations into essentially three areas. One is the Health Professions Scholarship Program, one is nurses, and the last is all health care professionals in general. 
 
            So we'll start with the health care -- with the Health Professions Scholarship Program. We have found over the past few years that the Army and the Navy have struggled to entice enough people to take all of the scholarships they have. The Air Force has been able to fully put -- to fill their HPSP program while the other two have not been able to.    
 
            And we asked what it -- what is it that does not appeal to people when we're trying to get them to take the HPSP scholarship. First and foremost, we find that people are really concerned about the fact that they have no health care coverage for their family. Usually if these people are going to some form of medical school, the individual is taken care of, but their family is not. And so they are looking for care for their families. So we are recommending that TRICARE coverage be provided to all HPSP students. 
 
            Secondly, those who live in high-cost areas, places where housing is very expensive, they are struggling to be able to put themselves into decent living conditions. So we are recommending a BAH [basic allowance for housing] be paid to people who are in HPSP. Today they receive 75 percent -- a stipend of 75 percent of O-1 pay. We are recommending they get a BAH of 75 percent of the O-1 rate.   
 
            The next item on here is, we have a system today that allows us to buy microscopes for our people who are in HPSP, but programs require a lot more equipment than simply microscopes. And we are recommending that the department seek legislative changes to enable the department to buy all required equipment for people who are in HPSP.  
 
            And lastly, we think we need to expand training opportunities. Many U.S. citizens go offshore to get a -- to attend medical school, and they come back, they need some upgrade training in order to become licensed in the United States. We would like to see HPSP be used to help provide that training for them. 
 
            In the area of nurse recruiting, we all know we have a national nurse shortage. We believe that one thing that the department should be doing is looking at RNs in lieu of just hiring BSNs. Today, if you look in the private sector, RNs are paid nearly the identical amount of money as a BSN, and therefore more and more people who are wanting to go into nursing get a two-year degree and begin practicing. And the number of BSNs is declining. We think the department needs to tap that RN market.   
 
            We also believe that because RNs -- you know, they -- the nurse corps prefer BSNs, we think what they should do is offer an opportunity for all of those RNs that we would look to hire to then achieve the BSN that the nurse corps desires. 
 
            Lastly, we think we should change recruiting and retention on health care professionals by making some fairly significant changes in a number of areas. 
 
            First of all, we think we should raise the mandatory retirement age from 62 to 68. That will enable us to both increase the recruiting market and to retain people longer. The enlisted PA training program today is very robust in the services, but we believe they should be looking for other places to do the same kind of thing, other health care areas. 
 
            Next, we have a number of people who are noncitizens who are practicing in the U.S. They have -- many of them have U.S. medical degrees. Today we cannot recruit them because they are not U.S. citizens and you must be a U.S. citizen to be commissioned. We are recommending that we leverage a wartime authority that allows us to bring people on active duty for a single day and fast-track them to citizenship. We would be able to bring these people in, offer them some initial training, fill out the paperwork, place them in a reserve status, and then when they became U.S. citizens, they would be brought in as physicians, nurses, dentists, to the active force. 
 
            And lastly, we would like to see a leveraging of the interservice transfer bonus program to look at physicians. Today, if one service has an overage in a kind of -- a type of physician specialty, they may allow them to separate and fill out the rest of their obligation in a reserve component while a sister service may have a shortage in that same skill. And we believe that we need to do something to better coordinate when a service is having physicians be permitted to not fulfill their commitment, and instead look to other services and find a way to entice a member to serve out the rest of their commitment on active duty in another color uniform. 
 
            The last items on here have to do with quality of life, and we have a number of recommendations in that area. Our first recommendation is that we believe we need to adopt flexible spending accounts in the dependent and health care areas for military members. We do think, though, there will be modifications of the law required, because today you have 14-1/2 months to use the money that you put into the account. We don't believe that that works for military people, because they get PCSed and deployed beyond their control, and that will change their situation. So our recommendation is not only to give them the authority to use these, but to allow them to have one year following any PCS or the return from a deployment to use the money. 
 
            The next thing has to do with dependent education. We would like to see education vouchers created from Impact Aid and given to the parents, where they could control the money in terms of where their child goes to school. If they want their child to go to the local public school, the Impact Aid would stay right there. If, however, they wish to put their child in a different public school or a private school, they could take their Impact Aid dollars and use them to either offset private school tuition or to get them into a different public school. 
 
            Third in the area of quality of life, we believe that we need to have military charter schools. You know, here in the district, we have a lot of people who are -- a lot of charter schools have been started up, and we have many, many children who are in these charter schools. Many military people would like to be able to form a military charter school on an installation. 
 
            Unfortunately, under today's rules, they might be able to form it but anyone can put their name on the waiting list to get in. So as the military members would begin to PCS away from that installation and take their children out of that charter school, they might be replaced by civilian children from off-base so that eventually, over time, you would have what started as a military charter school become just another charter school. So we would like some rules put in place where military students would have first right of refusal in entering these charter schools. 
 
            The next couple of items have to do with child care. Today we have a child development center system that does not have enough space to handle all children. And it would be very difficult for us to build such a system. So as long as it's a constrained resource, what we would like to see the services do is use this as an element of compensation, where first priority would be given to children of family members who are deployed. In a peacetime situation, you might use -- give it to family members -- children of family members who are -- who have very high TDY requirements, so they're gone from home a lot. We think the time has come for us to think about how we should best target that very valuable asset. 
 
            Our next recommendation has to do with implementing a child care voucher system instead of the brick-and-mortar CDC system that we operate today. It would work something like this: We would take the money that is applied today to child development centers and we would create vouchers. If a parent wished to have their child in the base child development center, they would take their voucher there and then they would be paying whatever the rest of the fee would be in order to keep the child development center operating. Alternatively, they could take that voucher and use it in their own -- in their own local communities. We believe that this would appeal a great deal to many parents who do not live on an installation. And today, less than half of military members do, in fact, reside on military installations. 
 
            The last child care recommendation has to do with family child care. This is day-care provided in homes of -- on base by usually, dependent wives. We believe that because it is so much less expensive to operate this system that we should do more to provide financial support to those systems because it would take some of the pressure off of the CDCs, particularly in the areas of infants and toddlers, where the ratio of children to providers is very, very small. A provider may only be able to take care, under the rules, of two or three children. So it would be far less expensive to do this in family day-care. 
 
            Our next recommendation has to do with commissaries. What we believe would be advantageous to military members would be if DoD would seek to form relationships with national and regional grocery chains to provide a discount to DoD identification card holders. What that would enable a military member to do is instead of driving potentially a great distance to get to a commissary they could go down to their local grocery store and receive a discount. We do not believe the discount would be nearly as steep as what they find in the commissary. 
 
            However if they didn't have to spend so much on gas to get there, they actually might benefit by this.   
 
            People that, we believe, this would really appeal to would be individuals who live in areas where there are no commissaries, such as your recruiters and your ROTC instructors, as well as many military retirees, who also do not live near military installations.   
 
            So we think there's some opportunity here. In addition, reservists who don't live near bases, who today basically have a benefit that they can't really do anything with, this would enable them to have the opportunity to achieve some savings in their food bills.   
 
            The next item on here has to do with overseas COLAs [cost of living adjustments]. To date, what happens overseas is, as prices go up off base, whether it's because of weakening dollars or because of prices just escalating in terms of normal inflation, military members then begin to shop more and more on base.   
 
            What happens with the COLA is, as members shop more on base, it has the confusing effect of driving their COLA down. So as things become more expensive off base, and they would anticipate their COLA would go up, in fact, their COLA goes down, because they begin shopping on base. And we attribute commissary prices as a greater part of the market basket.   
 
            Our recommendation is that we fix those proportions, so that military members are no longer penalized for making wise financial choices. This is the same way it works today in CONUS [continental U.S.] COLA.   
 
            The last two recommendations are programmatic in nature. One is that we believe we need education programs, to explain to our military members exactly how COLA is calculated, because it is clear that there is a great deal of misunderstanding about it, as well as to educate members on what their quality of life looks like, the quality of life benefits look like.   
 
            And finally we believe that we need periodic evaluations of the quality of life programs, to determine which ones truly work from a perspective of recruiting, retention and readiness.   
 
            If a program is not working, we would suggest that those dollars be redistributed, to quality of life programs that are more effective and where we can see true benefits to the military members.   
 
            At this point in time, I'd invite Ms. Earle to join me. And we will take your questions.   
 
            Yes.   
 
            Q     You are Dr. Eakle.   
 
            DR. EAKLE: I am.   
 
            Q     Okay.   
 
            Regarding COLA, all of my audience is overseas, so we have an interest in this. How do you propose fixing COLA, so that when prices are expensive off base and people shop in the commissary, that COLA doesn't go down?   
 
            DR. EAKLE: What we would do is, if someone has -- is living in an area where there is a large commissary, we would assume that they are shopping perhaps, and I'm just -- these are not actual numbers but numbers that would have to be worked out. But we would anticipate that perhaps you would assume that they do 60 percent of their shopping on base, 40 percent off base. If there's some place that has a small commissary, we'd assume perhaps just the opposite, that they only shop 40 percent on base and 60 percent off base.   
 
            What that would do is, we'd say, even as members change their shopping patterns, they would not be penalized by saying, oh, you've now come onto the commissary, into the commissary, where it's cheaper because of the prices going up off-base.   
 
            The prices off-base would still continue to influence the COLA exactly as they anticipate they should. So as those prices go up, that part of their market basket would continue to go up and they would continue to be paid COLA at higher rates. 
 
            Q     So what needs to be done formally in order to do that? 
 
            MS. EARLE:  That would be where -- we would come in from the department's point of view. What will happen with this report -- we will take it into advisement. We'll take it under consideration. There are many things and certain parts of the report that might require legislation. So we would work with Congress if the department chooses to implement those. 
 
            On the COLA one, for example, if the department accepts that recommendation then we would go about making sure we had all the implementation steps available. We'd have to look to see if there's any implications from the law on a different methodology, and we would consider how it would be implemented at an effective time. 
 
            Q     When you're talking about the education vouchers, that's for primary and secondary education, not for university level. 
 
            DR. EAKLE: True. 
 
            Q     I have just three real quick technical questions.  The COLA -- cost of living adjustment for military retirees, how is that set up under your plan? Did you look at that? Right now, if someone retires at 20 they get COLA adjustments every year. 
 
            DR. EAKLE: We would anticipate that the COLA adjustment program for retired pay would continue exactly as it is today, which means that on the defined benefit portion, the annuity, they would receive COLAs just as they are calculated today. 
 
            Q     And if they don't begin receiving it -- rather than at age 37, they get it at age 57, would there be any kind of recognition of what happened -- 
 
            DR. EAKLE: Absolutely. It would be -- it would be calculated based on the CPIs that -- the cumulative CPI through that period. So they would begin getting it at the higher rate. 
 
            Q     Assuming -- you know, I see --  that would be -- take that in consideration. The separation pays, for your sample with E-7s on slide number nine, for $67,000 in separation pay, you said that's variable and optional. So why -- I mean, how common might that be if you set up a plan like that to give that high of a separation pay? Because that's an awful lot of that $138,000. 
 
            DR. EAKLE: We believe that that would be very common in this thing, that for people who have more than 20 years of service, a separation pay would actually be the norm. Let me tell you who I would anticipate it might not be the norm for at the 20-year end. Those skills, such as physicians and linguists, that we were trying to entice to remain longer, we would not want to put a separation payment out there to encourage them to leave. I mean, that's what this is about. The separation payment is to encourage people to leave. So I would anticipate that for some skills there might not be a separation payment available until, say, 26 years of service. 
 
            Q     But if -- it sort of twists the mind-set of what currently -- right now, someone reaches 20 years and they're sort of anxious to leave because they begin to draw immediate annuities. If you don't want any more clerks beyond the 20-year point, this would be a way to entice them to leave.  
 
            But how about high-year tenure rules and those kinds of things that just force someone out without giving them additional money in their pocket? 
 
            DR. EAKLE: Well, that's one of the things the services would have to take a look at, at paying a separation pay, because you are going to be forcing them out. I would anticipate this -- if you think that a clerk, for example, as you -- the example you raised -- if you wanted a clerk to leave at 20, what you might do is dangle a separation pay at 20 and not have one for more than 20. That would encourage them to leave at 20, because they know they would be foregoing that separation payment if they stayed longer. 
 
            Q     But aren't you putting a lot of trust in the service to treat these people fairly late in their career? Do you know what I mean? Because if a service is pinched for hand grenades, and it comes up, and a bunch of clerks reach the 20-year point, they just say, "Hey, there are no more promotion opportunities for you beyond this. You're gone. You've served your 20 years, and like heck we're going to give you $67,000 as you go out the door." You know what I mean? 
 
            DR. EAKLE: I understand what you're saying. But having spent as much time as -- in the personnel community as I have, I really do not anticipate that would happen.   
 
            Q     But you would concede it's a lot of trust to put into some -- to the system for the military person. They would have to have a lot of trust, because these things are not guaranteed for them, except for the first two, the defined benefit and the defined contribution. 
 
            DR. EAKLE: There is that -- yes, they would have to trust it. However, you know, the service will build that trust by treating members fairly, and we have no reason to suspect that the services wouldn't do that.   
 
            Q     At what point, though, would that be promised to them? I mean, when would they set up a point in your analysis -- 
 
            DR. EAKLE: As they do today with reenlistment bonuses, it would be an annually established program.   
 
            Okay. Anyone else? 
 
            Q     Regarding the retirement, the changes to retirement benefits, if I understand your presentation correctly, you are recommending a 10-year trial period to see how it -- 
 
            DR. EAKLE: We're recommending an eight-year test. 
 
            Q     Eight-year test. So if DOD does accept these recommendations, we're still looking at about eight years before DOD determines whether this should be applied to all service members. 
 
            DR. EAKLE: Absolutely. And that's what -- and oh, by the way, all service members need to make sure you understand that in no case would this be done retroactively, that all current members would be grandfathered under the system. They would be grandfathered to retain the system they have today. 
 
            Much of the change was done when they made -- changed our civilian personnel from CSRS to FERS. People who were already employed by the federal government retained the retirement system that was in existence when they entered. The same thing would happen here. But those people were also offered the opportunity to switch, and we would envision the department might want to offer some people the opportunity to change, because we believe the 10-year vesting might appeal to enough people that some will actually want to leave the current retirement system and enter this. 
 
            Q     And if I could ask about co-pays, when it says in the presentation co-pay -- certain co-pays will be abolished, I usually don't cover benefits, so forgive me if this is off-base, but it sounds like you're saying if you need something for a non-life-threatening condition, that you'd pay the full amount, not a co-pay. Is that right? 
 
            DR. EAKLE: No. They would pay -- the co-payment structure as it exists today would continue the way it is today. 
 
            The difference is, if that were for a preventative service, for example, and this is not my area, as to what constitutes a preventative service. But I can envision that for example, an annual pap smear or prostate exam would be provided with no co-pay, because it's a preventative service. It's a service looking at, you know, what you can do to prevent an advancing disease.   
 
            Q     Does that mean the servicemember would pay the full amount or wouldn't pay anything at all?   
 
            DR. EAKLE: They would pay nothing for all preventative services.   
 
            Q     I have a question on the defined benefit, for someone who receives 2.5 percent of high-three basic pay after 10 years – if they vested at 10 years, they would receive 25 percent essentially of their high-three basic pay; 10 times 2.5.   
 
            DR. EAKLE: Yes.   
 
            Q     Would that be minus? Would that be -- (off mike) -- minus- 5 percent penalty, the 5 percent penalty per year?   
 
            DR. EAKLE: No. The people who only stay, who stay less than, at least 10 but less than 20, would have no option. They must remain -- they must wait until they turn age 60 to get it. And once again it would be advanced by whatever the applicable COLA rates are. But they don't have -- they will not have access to it until they turn age 60.   
 
            Q     (Off mike.)   
 
            DR. EAKLE: Correct.   
 
            Yes.   
 
            Q     (Off mike.)   
 
            Were there any other barriers, in the way of the Army and the Navy not being able to fill their scholarships? I know you guys mostly studied, you know, what compensation enticements there were. But are there any other qualifications that maybe set the bar too high?   
 
            DR. EAKLE: No. There are other issues certainly such as, if you look at medical schools today, an increasing proportion are women. And women's inclination to join to join the military is clearly less than men's.   
 
            So there are other things that are going on in the marketplace. But these are the areas that we felt we could do something about using a compensation tool.   
 
            Yes.   
 
            Q     I have a question about the gate pays, and how they would work.   
 
            These are determined by the services to retain skills. Is that correct?   
 
            DR. EAKLE: Yes.   
 
            Q     And they would be issues as a lump sum payment, like a bonus.   
 
            DR. EAKLE: Yes.   
 
            It would be a lump sum payment. But unlike our current bonus program, they don't -- they wouldn't be signing a contract to remain for a future amount of time. It is a lump sum payment made to the individual, for remaining in the service to that point.   
 
            Q     So what's the incentive to continue in the service, would it be getting another gate pay?   
 
            DR. EAKLE: Another gate payment.   
 
            Another thing that's in here is that you do not receive your medical, your lifetime medical program. You would not receive TRICARE eligibility for the rest of your life until you stayed 20 years. So there's a series of inducements to remain in the service longer.   
 
            Yes.   
 
            Q     Are you proposing offering both gate pays and reenlistment and retention bonuses or one or the other?   
 
            DR. EAKLE: At this point in time, we would say, you would leave the current system, other bonus programs intact as they are. It would be, you know, it's conceivable that over time, that might change. But our baseline assumption is that the rest of the compensation incentives remain as they are today.   
 
            Q     So this is not meant to replace.   
 
            DR. EAKLE: It is not.   
 
            Q     Just to understand the FERS methodology, if you were to accept an immediate annuity, let's take an example of somebody who's 38 years old.   
 
            Right now, if he entered at 18, he would get an immediate annuity. Here, the FERS methodology is 5 percent penalty per year. That would be walking that back from age 57, right? 
 
            DR. EAKLE: Yes. 
 
            Q     So, 19 times 5 percent, he would get 10 percent of what he would under the current program if he accepted an immediate annuity. 
 
            DR. EAKLE: Yes. But remember it's only -- it's 10 percent, but only of the annuity piece. He still has 100 percent of the rest of it. 
 
            Q     Of the defined contribution and -- okay. 
 
            DR. EAKLE: Any other questions? We'll take one more.   
 
            Q     Okay. The Thrift Savings Plan. How is that different from the current Thrift Savings Plan?   
 
            DR. EAKLE: The current Thrift Savings Plan, military members can make deposits in a pre-tax -- you know, pre-tax from their own income. The government does not make a contribution to it, except in a couple of very rare circumstances that are being tested. But military members by and large do not get any government-funded TSP.  This would be the government putting in money in addition to their salaries. 
 
            Q     But you said this is not a match. 
 
            DR. EAKLE: This is not a match. This is an outright contribution by the government. So, unlike the federal Civil Service System, where you have to put in money in -- they put 1 percent away for federal civilians, and then to get any greater amounts of money, they have to put in money, which is matched by the government. This would not apply for military members. This would be an outright contribution by the government. 
 
            Okay, we'll take one more, but this is it. (Laughter.) 
 
            Q     Well, I wanted to get just at the philosophy of this whole thing, because we had a military that at one time was paternalistic and it gave you your best advice of where you should put your money safely. "Keep staying in the service and you'll get this." This whole system seems to be developed on taking advantage of the philosophy that I'd rather have a dollar today than two dollars in the future. It's not good investment advice, necessarily, to take this system over the current system when that option is presented.   
 
            So, how does the military in good conscience say, "Yeah, well, go ahead and take that money, buy the Corvette versus save for your house"? Do you know what I mean? There's a whole philosophy here of taking advantage of people wanting money today versus in the future. I mean, is that the way to build a military retirement system? 
 
            DR. EAKLE: Let me answer that by talking to you about what the services do today in terms of trying to educate members. Today we have a $15,000 bonus that an individual may take in lieu of -- and stay in the REDUX retirement system, or they can forego the $15,000 and revert to the current High-3 system. The services go out of their way to provide education to members to make them understand those choices. I would anticipate that the services would do the exact same thing here. They would go out of their way to educate people.   
 
            And I will also point out that -- do you remember the last recommendation -- next to last -- the next-to-last recommendation on here was a better education program for military members. 
 
            We believe that there needs to be an ongoing process of educating people about what their compensation looks like, from -- everything from quality of life to COLAs to simply, you know, what is RMC? Most people don't even know that. So we believe that there needs to be a more comprehensive program of training and educating people about all of their compensation. And that training and education would in fact subsume this as well. 
 
            Q     And what does DOD expect to decide on these recommendations? 
 
            MS. EARLE: What normally happens is we will take these -- as you can tell by the questions, this is a pretty innovative, thought- provoking report. We were very fortunate to have Dr. Eakle lead this effort and to provide that public service to the department. So we will have to evaluate those.   
 
            There are many -- many of these aspects require -- the recommendations require legislative changes. We have to work with the Congress. Again, there -- it is a very thought-provoking report. We will take it into consideration, and then we will -- you know, again, as we reach consensus on these recommendations throughout the department, then implement them where they've been accepted. 
 
            Q     Yeah, but when do you make your decision? When does the department decide what they're going to ask Congress for? 
 
            MS. EARLE: There's not a hard and fast time for us to move out on all of these, because, again, you have, just for example, the retirement one as a good example. You'd have to set up your program. You'd have to think about how you were going to implement that. So I would expect -- as you all are well aware, we are also in the midst of a transition. And so I think that these would be things that would all be taken under consideration by the next administration, as well as with the -- this current administration's advice. So we will be looking forward to working these in the next six months to a year. 
 
            Q     Along the same lines, as I recall, with the first half of this report back in March, there were things that DOD wanted to pursue immediately, if I remember that correctly. Are there any things in the second half of the report that DOD knows right now it wants to pursue? 
 
            MS. EARLE: I think, on the second half, we've actually just taken delivery of the report, and so that right now, I wouldn't tell that there's a hundred percent confidence and to giving you an item that we're going to step out tomorrow that you can read about. So what I would tell you is, on this particular volume two, we're going to very carefully study it.  I would tell you there's some great interest in the flexible spending accounts, and so I know that we will be looking at those. 
 
            STAFF: Thank you much, folks. 
 
            DR. EAKLE: Thank you.
 
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