What Does A 1% Pension Cut Really Mean?
By: Denise Williams
The President has signed the 2014 budget with the controversial 1% cut to military pensions. Let’s take a look at what it really means in hard numbers for our retired military, and more tellingly, for those who have been medically retired due to injuries sustained in service to this country. While we’re at it, let’s also look at who the budget doesn’t negatively impact. And perhaps, address a few of the whys.
The first why to address was answered honestly by Representative Tom Foster (D) of Illinois at a recent Town Hall meeting for veterans. That meeting had been scheduled before the budget was passed, and I was most interested to see how he was going to justify his vote to a room full of retired military, wounded retired and veterans.
In short, he said two people, Representative Paul Ryan (R) of Wisconsin and Senator Patty Murray (D) of Washington, hammered out a budget compromise. This was then presented for a vote, either yay or nay with no opportunity for discussion. The choice was simply approve the budget as it stood and then go back and fix the problems or face another government shutdown.
There are so many things wrong with the way this was done, but I can’t fault his logic. Actually, it does a favor to our retired military in that it allows an opportunity to more fully focus on their needs. When everything is on the table, meaning all the various parts and components that go into a document as complex as our federal budget, it is easy for individual pieces to become lost in the shuffle. So, let’s focus on this individual piece.
By The Numbers
First, a couple definitions are in order. These are the numbers by which we will gauge all the others, sourced from the Congressional Budget Office, or CBO.
Inflation (defined as the overall rise in prices and fall in purchasing power of money) for 2014 is expected to rise 1.8%; for 2015-2018 the rise is expected to be 1.9% each year.
Consumer Price Index (defined as the prices paid for retail goods and other items) for 2014 is expected to rise 2.0%; for 2015-2018 the rise is expected to be 2.3% each year.
Of these two number sets, the more telling is the CPI as it relates directly to the purchasing power of consumers and the cost of goods. But the numbers alone don’t really tell the whole story. I’m not an economist, so I’ve had to do a lot of research to understand what I’m looking at. In short, simplified terms that even a dummy like me who can’t do calculus can get, here are the basics.
Pretend someone filled a grocery cart with all the things the average consumer buys. With the receipt in hand, they go out and again purchase all the same things the following year. The difference in what each item costs from one year, or set of years, to the next is how we arrive (after lots of other input) at the CPI.
Now, take the following items and weight them according to their impact on the individual dollar, or the percent of an individual’s dollar spent. For the sake of this exercise, we’ll use the CPI from 2010 for the following things – (the numbers change very slightly from year to year, according to lots of things that don’t matter for the sake of this exercise)
Clothing and Footwear 3%
Education & Stationary 7%
Health Care 6%
Recreation & Others 16%
Of that list, let’s focus only on those things that are absolute essentials, no matter who you are or where you live: Food, Housing, Health Care and Transport. (Here it has to be noted that all models and predictions for health care costs are little more than guesses because of the changes due to the ACA; at this point estimates are all over the map, and there will be more later on how we are compensating for this uncertainty in this example. It also must be noted that while military retirees are not subject to the ACA as they are covered by the VA, they are still impacted in ancillary ways).
Those four items account for 69% of every dollar the average person will spend. Now, the numbers start to become clear. More than two thirds of what you bought, the most basic necessities, in the past year will cost more this coming year. How much more is answered by the CPI. Still, even that isn’t the whole picture.
But The Economy Is Improving
When interest rates and the CPI are low, as they are now, it appears to be not too big of a deal. This is where the claims that the economy is doing better come from. It’s not that prices are actually declining; it is simply that they aren’t rising by as large a jump as they had when compared to another, previous year or set of years.
Looking at the numbers not rising as fast as they have in other years and calling that an improvement has been compared to a glass half full sort of analogy. A more accurate way to state it is the hole in the bottom of the glass is draining out more or less water when compared to the water being poured in. But make no mistake, the hole in the bottom of the glass is most decidedly getting bigger. When the rate at which it is being poured in is even a mere 1% less than the growth of the hole, eventually, the glass will be empty.
The last thing to keep in mind is that each year, it’s not like the hole is plugged and we get to start with a full glass. Those numbers are cumulative. So a 2.0% rise for 2014 is on top of a 2.0% rise for 2013, which is on top of a 1.9% rise for 2012. Looking forward at the projected numbers, the rate of drain will increase even faster. For 2015 through 2018 the CPI is expected to rise by 2.3% each year. Again, that is on top of the 2% for this coming year for a grand total of 11.2% in five short years. Starting to get the picture?
Now let’s put all this into practice, as it relates to the budget just passed, and those most controversial parts, the pension cuts to our retired military.
This budget states that military retirees – including those medically retired, a sanitized euphemism for those who have been wounded in service to our nation – are to have their pensions paid out at a rate of 1% less than the rise in the cost of living. That 1% doesn’t sound like so very much, until you add it to the CPI. So, for 2014 that measly 1% translates to 3%.
The numbers for future years, even for 2014 are just projections and can be either much higher or lower. No one knows any of it for certain. Except for the part that regardless of the actual number, retirees will be 1% lower. And that the numbers-and the effect- are cumulative.
For a service member who retires after twenty years of active duty, assuming enlistment at 18, when they reach the civilian retirement age of 62 they will be getting 24% less than the cost of living. If there are large jumps in inflation at any time in the next twenty four years, that 24% will represent a much bigger divide when compared to the then actual cost of living.
For the sake of this discussion, let’s be optimistic and say the CPI will continue to rise at the relatively moderate rate of just 2.3% for each of the next twenty four years. That means for all of us, the cost of food, shelter and the basic necessities for living in this modern world will be 55.2% higher than they are today. For military retirees, their income will have risen to cover just 31.2% of that increase.
This illustrates how a mere 1 % represents a much larger whole number when it is a percentage of a larger amount. A hole that is just 1% of the surface area of say, your roof will be much smaller than a 1% hole in the roof of the Superdome. The first requires a patch or repair most anyone can fix; the second is not a project the typical homeowner, even with mad DIY skills would be able to attempt.
To put it in even more stark terms, let’s go back and look at the percentage of your dollar spent on the basic necessities according to the CBO. Assigning health care just 6% is by most estimates a gross undervaluation with the new ACA. Just as allotting 16% for transportation for a retiree is probably an overvaluation, since they are retired and will no longer be required to drive or take alternate transportation to work every day. But, to keep things simple, factual and verifiable, we will use these numbers and hope the two compensate for each other and call it the best case scenario.
According to the Congressional Budget Office numbers listed above, 69% of each of your dollars will be spent keeping you housed, fed, medically cared for and get you back and forth to work, or in the case of the retired, to the doctor, grocery store, etc. Add in the minimum 24% gap achieved over time in the cost of living. That brings us to 93% of every dollar you have being spent on the most simple and basic necessities. And that is before you pay for anything else. Add in a year, or two or three of higher inflation and that hole in the bottom of the glass has drained out exponentially faster than the pension has poured in. Your glass will be empty before you’ve been able to pay for even these necessities of life.
The theory behind why this is an acceptable sacrifice, as explained by the architects of this idea, is that when a military member is retired from active duty, they go on to another, second career. So, the pension is simply a supplement, not their main source of income. As unacceptable as this, as much as it violates the contract the government signed with those who have faithfully served, it isn’t even the worst part. Where this thinking falls off the rails in spectacular fashion is when it is applied to those who are medically retired. The wounded.
To be medically retired means there is something wrong with you, leaving you unable to continue to serve your country as a fully functioning member of the armed forces. It also means you will be less able to perform many civilian jobs. So, you are given a rating based on the severity of and lifelong effects of those wounds. It is meant to compensate for the fact that in your future civilian life, you will be able to make only a percentage of what an able-bodied veteran would. So, a 30% disability rating acknowledges that you will be able to work, and earn, just 70% of what your contemporaries can expect in a salary.
In practice, those disability pensions already fall woefully short of need. Because you have some form of health problem, health care costs are much higher, even under the best case scenario of the ACA. In theory, you should be able to get all health care concerns addressed by the VA as a military retiree, but the hundreds of thousands of cases in backlog paint a grim picture of how well that is working out. With more and more Viet Nam-era vets needing higher levels of care and more veterans living with injuries that in past wars would have been fatal, the problems faced by the VA have only just begun.
The realities of how the VA system works, or rather, doesn’t work for retired military and all our veterans is a long and tangled topic for another day.
Another reality that was not factored when this pension cut was considered is the estimated 47% of medically retired military that are unemployed. This group represents the largest demographic of those whose prospects for employment in this economy are the most bleak. In a great economy, the challenges they face are huge. When there are fewer jobs to be had, in a society that looks at all combat veterans as PTS ticking time bombs, even that 47% is optimistic. And this doesn’t even begin to take into consideration the underemployment, or employment at minimum wage and menial jobs that is the most too many can hope for.
For someone with a mere 30% disability rating, which translates to a pension payment of 29% of the cost of living for 2014, a minimum wage or near minimum wage job almost guarantees by year’s end, many will be unable to even house themselves much less feed their families. I wonder if Rep. Ryan or Senator Murray gave a thought to how this mere 1% cut would contribute to and compound all the other issues faced by our wounded heroes. I’m guessing not. They were too busy protecting other special interest groups. Add another ten or fifteen years over and above the assumed twenty or so before our medically retired veteran reaches 62 and that mere 1% shortage each year, and the problems it will exacerbate, become absolutely staggering.