Gretchen Morgensen has what should be a blockbuster in today’s NY Times on the use of taxpayer funds to subsidize contractor pensions and other benefits. Her article prompted me to dust off some material that never made it into a post on pensions and the military.
Morgenson details some incredible obligations that the US government has assumed, all of which boil down to an ongoing commitment (as part of procurement contracts) to fund benefits for the employees of their contractors.
Among the large companies receiving taxpayer reimbursements for pensions and in some cases retirement health care are Boeing, General Dynamics, Lockheed Martin and Raytheon. To the degree that these companies work both for the government and private industry, their reimbursable pension costs are limited to their federal contracts.
Company financial reports detail the amounts recorded as recoveries from the government each year. Lockheed Martin’s, for example, shows reimbursements of $3.45 billion over the last five years: $3.1 billion came from United States taxpayers. During that period, the company generated $21.8 billion in operating profits. As a percentage of these profits, Lockheed Martin’s reimbursements have averaged 16 percent over these years.
She also points out that it’s not just defense companies that benefit from this largesse:
Defense contractors are not the only companies that get such reimbursements.
According to a recent report by the Government Accountability Office, the Department of Energy had 46 contracts with private companies and nonprofit organizations as of September 2010. These contracts covered nearly 200,000 current and former employees and their beneficiaries, the report said, for such expenses as pensions, dental care and life insurance.
In the 2009 fiscal year, the G.A.O. said, the Department of Energy reimbursed $750 million in contractor pension costs, “more than double the amount it had reimbursed the previous year and significantly more than it had budgeted for.” The G.A.O. has not issued a report on the Department of Defense’s pension obligations recently. But some members of Congress have asked the office to look into them and the G.A.O. has just begun its work.
What makes this especially revolting is that the military is in the process – based on the guidance of current and former employees of these same industries – of stripping servicemembers of access to a similar benefit. This new policy is the recommendation of the members of the Defense Business Board, a group I described in a prior post:
Then-Defense Secretary Rumsfeld created the DBB in 2001 as part of his drive to streamline the military services. The members of the Board are private sector executives and are largely a combination of defense contractors and management consultants, many of whom have
cashed inmoved into the private sector after government service (some with repeated round-trips, as I mentioned in a prior post) and are now applying their combined knowledge of the private sector and the government to advise the Department of Defense (DoD) on how to operate more efficiently. In practice, this appears to mean that they seem often to advise the federal government on how best to give money to their collective industries through a combination of reductions in spending on full-time government employees and ramped up spending on consultant studies and “efficient” outsourced services.
The DBB produced a set of recommendations last summer on “Modernizing the Military Retirement System” that largely flew under the radar screen (though not in the military, as evidenced by the comments to this article). Their “analysis” is a perfect example of the hypocrisy that infects policy discussions of social contract issues like retirement, especially where the alleged efficiency of the private sector is involved.
The report begins well, describing the unfairness of the military pension, which provides nothing until an individual has been employed for 20 years. That is indeed grossly unfair – a retirement program that only reaches 17% of the military is hardly equitable.
But their analysis of the finances of the plan is the tell. According to p. 9 of the report, the plan’s current liabilities are $1.3 billion, of which only $385 million are funded. Take it from a former pension consultant – there is no mystery here. The only way you get a gap like that is by the sponsor welching on their funding commitments over an extended period of time. It is also classic private-sector behavior (and increasingly public sector) to point to the resulting underfunding as the primary reason the plan is “unaffordable” and an impossible luxury.
And that is, naturally, what they conclude. Unlike the ongoing, contractual obligation to fund private sector defense industry pensions Morgenson documents, these representatives of that same industry insist that the military must replace its pension with a modest defined contribution plan. Best of all – their argument rests on “private sector best practices” of offering far less generous plans, never mind that “best practice” in the defense industry does not appear to be subject to the same cost pressures.
It’s an excellent reminder that large-scale looting does not begin and end with Wall Street.