Military Winning War Over Pensions

Bruce Krasting's picture

Military Winning War Over Pensions

Courtesy of Bruce Krasting

America has two classes of debt: Debt Owed to the Public (DP) and Intergovernmental Debt (IG).

The two components of debt as of April 30, 201:

The IG accounts consist of the Trust Funds (TF). The three largest funds are Social Security (SS), the Federal Employee Retirement Fund (FERS) and the Military Retirement Fund (MRF).

The Congressional Budget Office (CBO) provided projections for these retirement programs in its January 31, 2012 report, "The Budget and Economic Outlook" (Link). The numbers that CBO uses are consistent with the projections provided by SS, FERS and MRF individually in their annual reports. The following discussion relies on the CBO's numbers.

The basic TF arithmetic is as follows:

The sum of (a) Tax receipts (cash in) plus (b) Interest (non cash), minus (c) Benefit Payments (cash out), minus (d) Overhead (cash out) equals Net Surplus/Benefit.

This slide looks at the CBO's projected growth of the retirement funds:



The chart above shows that the MRF is expected to grow while SS and FERS remain relatively flat. The following looks at the projected percent change in these funds.



The MRF’s 300% increase jumps out at me, and I ask, “What’s that about”?

The answer is interesting.

MRF uniquely benefits from a special law that obligates the Treasury Department to pay MRF an annual amount equal to a portion of the unfunded obligations of MRF. The law requires the Treasury to make the payment in “Warrants” (decidedly non-cash). The annual amount is calculated using a complex actuarial formula that is designed to eliminate 100% of the unfunded portion at MRS by 2026.

Over the past few years the actuarial assumptions used in the calculation have deteriorated. As a result, the annual cost of making the MRF whole is rising (up 6.5% YoY). In 2010 and 2011 "we" paid MRF $120B, but the amount of future payments we still owe fell by only $100B. The unpaid tab now sits at $1.3 Trillion.

These are the projected total payments to “cure” the unfunded portion from the prior reports produced by MRF:



It gets worse. The folks at MRF are understating the future liability.

MRF invests its interest from Treasury securities. It needs a high return to offset costs. But it can’t get a high return today, thanks to the Fed. The Board at MRF has set a ridiculous projected interest rate on its holdings of Treasury IOUs:


Consider the dog meat portfolio that MRF is sitting on:



There is no way in hell that MRF will get 5.75% in any year over the next five. I doubt it will realize that hurdle rate anytime over the next decade. This means that every year the unfunded portion grows and the annual warrant payment keeps getting larger. It could easily exceed $2 trillion over the next thirteen years.

The 5.75% hurdle rate is a significant flaw in the MRF's assumptions. They don’t agree:



Some observations regarding the projected growth of the MRF and the asymmetrical treatment of the MRF versus FERS and SS:

+This is unfair. Those dependent on SS or FERS do not have the legal protection that MRS has. How can this be? As the annual cost of protecting military pensions skyrockets over the next few years, there will have to be political fallout. This will be an interesting war: the Retired American People versus the US Military. Who will win?

+Turn this around. What if SS and FERS had the same deal that MRS has? The 2012 SS report to Congress established that the unfunded amount over the next 75 years is $8.6 trillion.


Assuming that FERS was in similar financial shape (it is), this would bring the combined unfunded amount to $10 trillion. If this number were resolved according to the MRF deal, the Treasury would need to issue $700B more warrants annually for the next fourteen years (not remotely possible). Total debt would race ahead faster then its current nosebleed trajectory. The USA would pass 150% Debt to GDP before 2020.

+Warrants are easy for Treasury to issue. It doesn't have to find a new bond holder to make these payments. It just writes scrip IOUs. But the scrip comes due just the same as regular Treasury bonds. The IOUs owing to the TFs must be paid in cash. So the back end of the process hurts.

+The Disability Fund is cashing in its IOUs like mad. The Old Age Fund started the process a few years ago, but at a more modest rate. The retirement fund will have very big redemptions for the next twenty years. FERS will be hocking its IOUs at the same pace as SS. In about ten years, FERS and SS will be forcing the Treasury to issue mountains of extra Debt to the Public to meet the redemptions. At about that time, MRF will be sticking its hand out for another few trillion that the Treasury will have to borrow.

This is not about something that might happen in the distant future. It is written in stone, and coming in less than eight years.



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rayaway1's picture


My understanding is that military retirements are funded from two sources: Treasury Department for unfunded liabilities for military time before 1984 and from an "tax" on the DOD manpower budget from every service member on every payday.  So my questions concerns the growing unfunded liabilities.  Are the unfunded liabilities continuing to grow because the Treasury Department isn't providing adequate funding for the past liabilities or the current "manpower tax" isn't covering the obligations for military service time post 1984 or because the "manpower tax" exceeds the current obligation and the excess is being transferred to other agencies?   

Don Levit's picture


Looking on page 123 of the report from the CBO, for 2011, the Actaul Total Trust Fund Surplus is $98 billion.

This includes the trust fund balances for Social Security, Medicare, Mil;itary Retirement, Civilian Retirement, Unemployment Insurance, Highway, Airport and Airway and Other Trust Funds.

The Intragovernmental Transfers to Trust Funds in 2011 iwas $722 billion.

So, the Net Budgetary Impact of Trust Fund Programs is -$624billion.

The CBO backs out the intragovernmental transfers from a cash flow perspective, because the funding for these transfers cones from the general funds of the Treasury, increasing the intragovernmental debt.

Footnote d describes Intragovernmental Transfers to Trust Funds as "interest paid to trust funds, payments from the Treasury's general fund to the Supplementary Medical Insurance Trust Fund, the federal government's share  of payments for employees' retirement, lump-sum payments to the Civil Service Retirement and Military Retirement Trust Funds, taxes on Social Securiuity benefits, and smaller, miscellaneous payments.

From a budget, cash flow perspective, it is a -$624billion.

From the Trust Fund Perspective, there is a surplus of $98 billion.

The Trust Fund Perspective is more narrow than the budget perspective, and includes the trust fund principal and interest as "positives," while the Budget Perspective considers them as "negatives."

In my opinion, the budget perspective is more meaningful, for it deals with cash flow, rather than "accounting tricks."

Don Levit


AurorusBorealus's picture

I'm afraid that these numbers do not tell the real story.  The real story is that for years the VA was tight-lipped about Veteran's pension benefits, and very few veterans knew that they were eligible for benefits.  Just as with SSI, VA pension benefits are now the only growth industry in law, and lawyer after lawyer is getting into the get government benefits game.  Expect VA pensions to expand quite rapidly (and SSI) as attorneys line up every client they can find to apply.

essence's picture

Up to now the Military has served as the Bankster goon squad (see Marine General Smithely Bulter remarks for the truth. Still valid today as when he made them back in the '30s).

Only now the elite are phasing out GI Joe in favor of Merks (XE) and automation (drones).

Yes U.S. Military, you're being outsourced, and truth be told ... you're a 'possible' liability.
After all, incredible as it seems, there's always the possibility that you might actually wake up and honor your oath to defend America from enemies "Internal...."

Merks and drones don't question or have retirement issues, hence the shift.

Ultimately, the banksters wish to be able to call strikes against any that oppose them (and do it from their penthouses). Moral humans in the chain of command are a liability & needless expense.

onlooker's picture


“”””I continue to be amazed by the outright rejection by many that a military coup could happen in the states.””””


Maybe a write in on the ballot of U.S. Air Force or Marines  for President is not such a bad idea. --- Seals for President----- has a nice ring.


JeffB's picture

That sounds pretty good on the surface, considering the Bozos in charge at the moment and will probably sound even better as the pain level escalates, but revolutions and military coups often bring more pain, particularly in the short to medium term. The advisability of "regime change" hinges quite a bit on the new regime, and in our case also means the end of democracy, or the republic.

There's no guarantee any military leaders coming about because of a coup would be of the caliber of our founding fathers. In fact, I think the odds are quite low.

Attack on protesters in Egypt leaves 11 dead

But that type of violence is probably inevitable in any economic collapse on the order we seem to be heading towards.

Amish Hacker's picture

Bruce, am I correct in assuming that the MRF covers only pensions, not veterans' medical benefits? It would be nice to think that those costs will also be fully funded somehow (more warrants?), but the Vietnam experience does not inspire confidence.



digalert's picture

Is it any wonder why Janet Nazipolitano and her jackbooted DHS thugs have named 'returning vets' as the new threat to the homeland?

Son of Loki's picture

"When Money Dies" the author says (if my memory is right) during Germany's hyperinflation (1920's) several groups did quite well:

1. industrialists (of course);

2. public employees ( who para;lyzed the empire if they did not get daily raise in benefits);

3. people who were able to invest overseas in a hard currency and

4. people had held hard assets (like silver, gold and even things like a piano!?).


The groups who did poorly were:

1. anyone on a fixed income (such a military pensions);

2. professionals like doctors and lawyers (no one needed their services unless it was dire);

3. and savers who lost big due to th eloss of purchasing power and who literally died in the streets.

Anyone remember otherwise or comments?

BTW, excellent article Bruce! You're an excellent financial journalist.

Stuck on Zero's picture

Gawl dern.  This is bad news for the 99%.  Fortunately the 0.1% have been smart enough to move all their money into hard assets in Switzerland, South America, and the South of France.

q99x2's picture

They've already started to lay off the military. Got a feeling the empire is collapsing. And, probably not without a fight.

three chord sloth's picture

"Those dependent on SS or FERS do not have the legal protection that MRS has."

I think you are incorrect about FERS. Their pensions are designed like state/local public employee pensions -- as a debt obligation. They were specifically created that way so they would fall under the jurisdiction of the 14th amendment, and as such be constitutionally protected from default.

In short, everybody in the public sector has a constitutional property right to their full pensions, while nobody in the private sector does.

So... who works for whom?

sessinpo's picture

three chord sloth              2392424

legal protection



In a corrupt government when desparation sets in, "legal protection" may be a joke for anyone.



SilverFocker's picture

Bruce, You left an important piece of info out of the equation.

Concurrent Receipt - The military used to be able to hock allot of it's future debt in the form of military retirement on the back of the VA due to injury occurred in service. What ever the VA funds were, it was taken off the military pension which greatly, in allot of cases reduced the MR value, since this VA was non taxable, it was a no brain'r for Vets who chose the VA.

Concurrent Receipt has greatly increased the MR as there is no more offset in most cases, and as time goes on the offset will disappear entirely which is having a greater impact on the MR than many will admit.

Whether one differs on the effects of CCR or not, it is increasing the bottom line on MR's.

Add in, that this new law is applied to all who receive MR past and present, it's not hard to see why the increase has risen as high as it now stands

ebworthen's picture

When the vets get older the government will have many more young foolish one's in their place, indoctrinated, and ready to deny the vet's their benefits.

We've seen this movie before (Bonus Army, 1932).

Government promises are hollow, but shiny.

max2205's picture

Another Obummer slush fund?

Don Levit's picture


Tremendous investigative work.  Folks, this information is not widely advertised.

After reading the report, I may have a few comments.

I have been waiting for more information about the federal employees' retirement plans.

Thanks a lot.

Don Levit

OpenThePodBayDoorHAL's picture

Superb reporting as always Bruce. Real investiagtive stuff, just like back in the day. Murrow, Woodward, Bernstein, Sy Hersh would be proud. Keep it up, best on ZH.

Rainman's picture

This looks eerily like the CalPers scam !!

tbd108's picture

I find it interesting that Zero Hedgers think that anyone is going to get pensions from the current regime. In the short term it is unlikely that dollars will buy anything (one or two years at best). Gold will be have value but good luck getting that out of them. Anchors away shipmates (I got out after four years)!

worbsid's picture

WOW  Glad to hear it.  I am retired military (AF pilot) and I thought all along we would be in neck deep when TSHTF.  Of course this plan was made up by politicians, figured by economists, run by the DOD. What could possibly go wrong? 

I'll probably be recalled to some sort of shit job.  Maybe they will need some FACs to patrol the FEMA camps.  We can take off and land in the FEMA camps kinda like the job we did in VN. I wonder if TPTB have mortars.   

Grinder74's picture

At first blush, I would say, hooray for service members, and screw the old folks.  The military definitely deserves better retirement funding since that's an actual, specific duty of the federal government. 

However, the bigger picture is still one of concern, that the feds are basically doing everything accounting-wise that mean instant jail time for you or me. 

Long live the midget-porn capital of the west: the SEC!

Hedgetard55's picture

Don't fuck with my military pension. My regular one is being made worthless by Ben. At least my military one is inflation indexed.

LawsofPhysics's picture

You mean like TIPS (-0.35% while real inflation is closer to 6%)?  I'd ask for payments in gold if I were you.

johansen's picture

I for one, told my XO i'd re-enlist if payment was indexed to gold going back 2 years. (this would have nearly doubled my paycheck at the time)

he said "but inflation is a good thing"

NotApplicable's picture


I told them they'd see Jesus Christ in full Dress Blues swearing in before I'd ever re-up. Made for a very quick exit interview.

Thisson's picture

Bruce, it *is* fair and it's exactly what you'd expect.  The military is the ultimate collections enforcer for the rest of the system, and they are 1st in line of all creditors.  They have a superpriority guaranteed in the event of US bankruptcy.  A necessary expense to ensure their service. 

Look at Zimbabwe - that nation made SURE that its police and armed forces got raises as inflation occurred, even if that meant accelerating the printing presses.

Forgive my French but: "plus ce change, plus le meme chose."

NotApplicable's picture

While I agree with your ideas, they're only true in the short term. Pensions, OTOH, are long-term realities.

As evidenced time and time again, vets are always screwed over, as TPTB know they can get away with it due to "patriotism."

They may be protected today, but come tomorrow...

Sleepless Knight's picture

The military backs the dollar - the dollar backs the military. Cant have one without the other! Really sucks to be in the never ending circle jerk.

RopeADope's picture

Seems to me that the MRF expects an inflation explosion and has positioned itself well. Not quite the dog meat portfolio you are claiming it is.

Bruce Krasting's picture

10 year TIPS have a negative yield of .035.

Inflation would have to average north of 6% for MRF to gets a cash on cash yield of 5.75%.

Not happening.

LawsofPhysics's picture

There you go.  TIPS=Here take my money, I will pay you to lose it.

JeffB's picture

To an extent, what does it matter to them? If they don't make their projected 5.75% the Treasury will make up the difference. If ("official") inflation shoots into double digits again they take the higher amount.

It's sorta like the deal the banksters get... roll the dice and if they hit the payoff they get to keep all of the profits, if they roll craps the taxpayers take the loss.


LawsofPhysics's picture

That would depend on who or what entity gets to decide what that inflation number is.  You seem to be inferring that it will be an honest number.

bank guy in Brussels's picture

Bruce, you write:

« Retired American People versus the US Military. Who will win? ... »

It strikes me that with the way the US government is letting almost everything go to hell internally, the US is really a country like North Korea, with their 'songun' or 'military first' policy.

Not that the oligarchs care about the soldiers more than anyone else ...

But the military is their intended weapon of the near future, while the infrastructure of North America crumbles into ruin, just like that water-reservoir you are trying to maintiain near you. ...

So they at least want to give the soldiers the impression their future cheques are secure.

The US oligarchs are willing to let common Americans rot and die, and end up like the 2.3 million people already in the US gulag prisons ... with apparently a million or so already doing slave labour, just like in Hitler's Reich.

The military is the one thing that gets fully funded ... the military infrastructure and weapons are the one expenditure with which they are obsessed ... World War III does beckon perhaps.

And yet, ironically, many Americans are hoping for a rebellion by perhaps younger military officers, who might end the tyranny in America and seek to bring back the rights of the trampled US Constitution.

A new America run by 'Colonels', ha! ... And yet it might be much better than what you have there now.

LawsofPhysics's picture

Like many others who have served but then found their own professional paths, I continue to be amazed by the outright rejection by many that a military coup could happen in the states.  Time will tell, but when I compare the military benefits my father or grandfather recieved next to those of my brothers in arms today (especially in light of dollar destruction), I see a major problem for the ruling class.

In a nutshell, the ruling class has gotten soft, and has engaged in "polite" wars that have allowed far too many to survive.  Many of these survivors now work for contractors and see the profiteering that is going on.  They see a relative few get very wealthy while their own neighborhoods go to shit.   This was not the case with my father's service (Vietnam) or that of my grandfather (WWII) where most did not return.  I have a slightly older friend in his early fortys that has been taken out of the F16 cockpit.  in large part due to the growing role of drone aircraft.  If I were a conspiracy theorist I might look at all this a a planned weakening of the military in the U.S. (at least from the perspective of personell).  I mean, with still enough nukes to destroy us all several times over, what is the point.  Okay, now I am rambling.

jonjon831983's picture

Figure it goes something like this:

Old wisened soldiers and young eager soldiers twiddling their thumbs probably not good for the ruling class.  Appease and whittle them down gently.