Tuesday, December 06, 2005

What's bad for GM is bad for the Pentagon

Brendan Miniter makes a forceful point that a further extension of Tricare - the health benefit system of the military - to include all reservists now being proposed in the Senate version of a bill arguing that the Pentagon is in serious danger of traveling down the massive, unsupportable benefits route traversed by General Motors.

But then, Tricare is only nine years old and it has already seen two large expansions. The first was "Tricare for Life" in 2001, which allows retired soldiers to stay in the program even after qualifying for Medicare. The second was "Tricare Reserve Select," which came online this year and allows reservists called up for full-time service (e.g., to go Iraq) to buy into the program 90 days before reporting for duty and for extended periods after returning. Thanks to these expansions, today Tricare covers some nine million people, and its burgeoning costs threaten to put the Pentagon on the same path as General Motors--only for the military, it could lead to trading away airplanes and other war necessities for new entitlements. And this for a program created to provide health care for "free" to full-time soldiers and for modest fees to retired soldiers with decades of service.

No one in this forum begrudges benefits to soldiers and their families who risk life and limb in service of their country but,

But in this case, it's hard to justify a hefty price tag for part-time soldiers, many of whom already have health insurance at work and all of whom are covered by Tricare while on duty. Tricare isn't insurance, the government pays for every doctor visit and prescription and collects no premiums, only a small annual enrollment fee. Thus enlarging the program also enlarges the claim on taxpayers' wallets.

Check out the expansion of this program in this chart.

Here's the GM analogue:

One problem is an incentive to overuse or abuse the system. Congress hasn't raised annual fees ($230 for an individual and $460 for a family) since the program began in 1996. With each passing year Tricare becomes a cheaper alternative to health insurance. Some employers even pay eligible employees to enroll because that's less expensive than putting them on the company plan. By 2011, an estimated 87% of military retirees under 65 will be enrolled in Tricare, up from 64% today. At about that time 75% of Tricare's budget will be eaten up by retirees.

The growing entitlement obligations crowd out spending for other items like hardware and ammunition:

Over the past four years, Congress has added about $90 billion in personnel benefits to what the President has asked for in military spending. So in the budget now being debated on Capitol Hill the Pentagon will spend almost as much on personnel costs ($129 billion) as it will to buy and design the goods it needs to fight a war ($148 billion).

This year alone the military will spend about $28 billion on benefits Congress has added just in recent years, which is more than it will spend to buy aircraft and ammunition. Some of the new spending is defensible and goes to beef up survivor benefits, special compensation for combat disabilities, active-duty pay and more. But the vast majority goes to retirees to fund benefits not promised to them when they enlisted (see this chart from the House Armed Services Committee). And this is in addition to more than $20 billion the Veterans Administration spends each year.

One cost of an all-volunteer military is you have to properly incent good, smart folks to join. And excellent benefits ought to be part of that. But we also have to do it in a smart, sustainable way. In this the Congress should learn from the experience of U.S. steel and carmakers.

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