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Senator ELLENDER. Last year it was indicated that the total number on the retired rolls by the year 2000 would be about 1,700,000 and that thereafter it would remain constant. Do you care to amend that statement?

Mr. SPENCE. Yes, sir, I would; it is now felt that the number would be closer to about 1,600,000 and thereafter remain fairly constant.

NONCONTRIBUTIONS BY RECIPIENTS: ACCOUNTING OF FACT ARRIVING AT

BASE PAY

Senator ELLENDER. Do retirement benefits accrue contributions of any kind by the recipients?

Mr. SPENCE. There is no specific contribution made, no, sir; but in the fixing of pay scales, the fact that there is no contribution is taken into account when pay scales were established. In our calculation of what the pay scales should be we do take that into account.

Chairman ELLENDER. What do you mean by that? If a general gets $30,000 a year, how much of that $30,000 does he receive when he retires ?

Mr. SPENCE. If his base pay was $30,000, he could receive 75 percent of that amount.

Chairman ELLENDER. And he receives that without paying a contribution to retirement. It is all paid for by the Government.

Mr. SPENCE. Yes, sir; except, as I say, to the extent that in fixing rates of base pay, we are now taking into account and adjusting down ward to some extent the basic pay rates which were recommended because of the fact that there is no such contribution.

Chairman ELLENDER. Assuming that the basic pay is now $30,000, what was it before this philosophy that you speak of went into effect?

Mr. SPENCE. Mr. Chairman, what I am saying is that the $30,000 is depressed by an amount equivalent to approximately 6.5 percent

of what it would

have been had he been contributing to it. Chairman ELLENDER. Could you compute what the comparable retirement benefit would amount to prior to the downward adjustment you spoke of, using $30,000 as the basic pay as of the present time?

Mr. SPENCE. Yes, sir.

Actually the contribution which I have reference to is not a specific amount withheld from this pay as he receives it, but in fixing pay scales and determining what pay scales should be recommended, we do take into account and depress pay by an amount of approximately 6.5 percent.

Chairman ELLENDER. Please provide for the record a few examples .: as to what the difference would be, what difference does that make, juist. an example. Mr. SPENCE. Yes. (The information follows:) The "free" nature of the military retirement system is a common misconception which was addressed by the House Armed Services Committee in its Report on the Uniformed Services Pay Act of 1965. In that report the Committee set in the record the actual amounts by which military pay scales are lowered because of the “noncontributory” retirement system. An extract from that report is provided for your information.

1

"After determination was made of the level of pay (including allowances) considered appropriate for each military grade, account was taken of an imputed 614 percent contribution to retirement on a basic pay (except for enlisted personnel with less than 2 years' service), and the amount of Federal income tax advantage (using 1965 tax rates) on the basic allowance for quarters and subsistence. The importance of this step is that it would et 'in the record' the actual amounts by which military pay scales are lowered because of the military 'noncontributory retirement system and the tax-free status of the basic allowance for quarters and subsistence. In the history of all previous military pay legislation, no documentation of such adjustment has been provided for the record."

The Senate Armed Service Committee while recognizing the above did not take a position on the inclusion of an "imputed retirement contribution" in determining rates of pay for military members, stating:

"This committee is of the opinion that before any final conclusion is reached on this complex matter, additional information, refinement, and resolution of a number of policy issues are needed." ? The Committee, however, did report favorably on the House bill with amendments.

The subject was again addressed by the House Armed Services Committee in its Report of March 25, 1971,3 Recognizing the retirement contribution for Federal employees of the General Schedule had increased from 642% to 7%, the Report stated : "The Congress in Public Law 90–207 defined Regular Military Compensation (RMC) as consisting of the following elements that service members receive in cash or in kind every payday: basic pay, quarters allowances, subsistence allowance and tax advantage (received because the quarters and subsistence allowances are not subject to Federal income tax).

"It is the Regular Military Compensation that is used to establish competitive military pay levels which bear a reasonable relationship to civilian wages for equivalent levels of work. The RMC is based on a military pay standard so constructed that it recognizes that RMC does not include a specific retirement contribution. In other words, the military compensation is depressed by 7 percent to reflect an imputed contribution towards the member's retirement."

Based on the above, and the exhaustive study of the elements of compensation be the First Quadrennial Review of Military Compensation conducted pursuant to Section 1008(b) of Title 37, U.S.C., the Department of Defense is of the opinion that consideration of an "imputed retirement contribution" is required when military pay rates are established. The attached table, "Selected Examples of Annual Compensation" illustrates the level of militar

pay which would result if the "imputed retirement contribution" of 7% were added to Regular Military Compensation as defined in Public Law 90-207. This column is titled, “Adjusted Military Compensation".

1. Report of the Committee on Armed Services, House of Representatives on H.R. 9075, Uniformed Services Pay Act of 1965. Report No. 549, June 24, 1965, p. 24.

2 Report of the Committee on Armed Services, U.S. Senate on H.R. 9075, Increase in Rates of Basic Pay for Members of the Uniformed Services, Report

No. 544, August 6, 1965, 3.8.

* Report of the Committee on Armed Services, House of Representatives on H.R. 6531, Amending the

Mllitary Selective Service Act of 1967: To Increase Military Pay. To Authorize Military Active Duty strengths for Fiscal Year 1972; and for Other Purposes. Report No. 92-83, pp. 24-25.

SELECTED EXAMPLES OF ANNUAL COMPENSATION

Regular military compensation (RMC)

Subtotal,
Number

Federal
Years of of de-

quarters and

tax
service ? pendents Basic pay Ji Quarters Subsistence subsistence advantage

Value of

imputed 7
Regular percent re-

military tirement
compensa contribu-

tion tion 34

basic pay

Resultant
changes

to tax
advantage

Adjusted

military
compensa-

tion 5

Percent
expected

to
retire

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$62.18 $25, 036.76
37.56 21, 038. 99
39.88 17, 763. 47
46. 99 14, 349.08

98.6
97.5
91.8
60.9

Colonel/captain
Liaytenant colonel/commander.
Major/lieutenant commander.
Captain/lieutenant.
Ist lieutenant/lieutenant (junior

grade).
2d lieutenant/ensign
Chief warrant/commissioned warrant..

0-1
W-4
W-3
W-2
W-1
E-9

0
-9.51
18. 88
49. 82

0
-6.84

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10, 410.26

7,754.70
16, 546.07
13,789.60
10, 410.26

7,655.52
13, 926.56

24.6
16.2
98.4
96.6
76.8
45.3

3 $19,951, 20 $2,041.20 $574.56 $22, 566.96 $1,011. 01 $23,578.00 $1, 396. 58
3 16, 556. 40 1,890.00 574.56 19, 020.96 821.52 19,842. 48 1, 158.95
3 13,766.40 1.740.60 574.56 16, 081.56 678.33 16, 759.94 963. 65
3 10, 872.00 1, 560.60 574.56 13, 007. 16 533. 89 13,541.05 761,04
17,473.60 1, 440.00 514.56 9, 448.16 398.95 9, 887.11 523. 15
05, 407, 20 1,022.40 574.56 1.004.16 381.55 7,385.71 378.50
3 12,672.00 1.740.60 574.56 14, 987.16 652.99 15, 640.15 887,04

10, 378.80 1,560.60 574.56 12, 513. 96 499. 30 13, 013.26 726.52

7.473.60 1.440.00 574.56 9. 488. 16 398.95 9,887. 11 523. 15
0 5, 302. 80 1, 022.40 574.56 6, 899.76

384. 10 7, 283.86 378.50
3 10,663. 20 1.440.00 554.80 12,658.00 479.66 13, 137.66 746. 42
3 8,881. 20 1, 440.00 554.80 10.876.00 395.04 11, 271.04 621.68
3 7,729. 20 1, 378.80 554.80 9, 662. 80 382.92 10,045.72 541.04
3 6,577.20 1, 321. 20 554.80 8. 453. 20 350.48 8.803. 68 460.40
2 4, 806.00 1, 260, 00 554.80 6.620. 80 365.36 6, 986. 16 336.42
0 3, 754.80 720.00 554.80 5. 029.60 324.03 5,353.63 262. 84

2, 170.80 720.09 554.80 3, 445.60 267.703, 713.30 151.96
0 1,789.20 720.00 554.803,064.00 249.20 3,313.20 125.24
0 1,612.80 720.00 554.80 2.887.60 226.40 3, 114.00 112.90

41.74

98.2

..do.
Warrant officer/warrant officer.
Sergeant major/master chief petty

officer.
Master sergeant/senior chief petty

officer.
Sergeant, 1st class/chief petty officer..
Staff sergeant/petty officer, 1st class.
Sergeant/petty officer, 2d class.
Corporal/petty officer, 3d class.
Private 1st class/seaman.
Private/seaman apprentice.
Recruit/seaman recruit.

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E-6
E-5
E-4

27. 15 11, 919. 87

0 10.58.75
28. 14 9, 292.22
2.17 7.320.41
4.57 5, 621.04
8.61 3,873.87
6. 36 3, 444.80
19.47 3, 246.37

97,9
96.1
86.3
45.9
16.6
12.8
10.5
7.8

E-2
E-1

1 Regular military compensation equals basic pay plus cash quarters and subsistence allowances plus tax advantage (at 1971 tax rates) that accrues because the allowances are not taxable. Basic pay and allowances are based on Jan. 1, 1971, pay scales.

2 Years of service for pay purposes.

3 in the Report of the Committee on Armed Services, House of Representatives, H.R. 6531, Amend-
ing the Military Selective Service Act of 1967; To increase military pay: To authorize military active
duty strength for fiscal year 1972; and for other purposes, Report No. 92-82, Mar, 25, 1971, pp. 24-25,
the committee reaffirmed that military pay is depressed by 7 percent to pay or retirement costs.
This constitutes an imputed retirement contribution. Because it is not vested, it is of no value to the
majority of service personnel because they do not reach retirement. For example, while personnel in
pay grades 0-1, 0-2, E-1, E-2, E-3, E-4, and E-5 comprise approximately 72 percent of the total

force, experience indicates that less than 18 percent of these individuals will qualify for military re-
tirement. Therefore, when the imputed retirement contribution is used in comparing military income
with civilian income, considerable caution is required to insure that the comparison is valid,

Unlike the Federal classified employee who contributes a total of 7 percent to retirement, the mili-
tary member, in addition to the imputed 7 percent shown here, is required by FICA to contribute 5.2
percent of the first $7,800 in basic pay to Social Security

. This adjusted military compensation only applies to those members who will actually qualify for
military retirement benefits.

• These are estimated percentages of personnel on active duty in each pay grade who can be ex-
pected to continue on active duty to retirement.

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ADMINISTRATIVE COSTS

Senator ELLENDER. Please provide for the record a summary tabulation showing the number of military and civilian personnel engaged in the administration of this program together with the cost. Mr. SPENCE. I shall provide it. (The information follows:)

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Senator ELLENDER. If it is not elsewhere included in your testimony, please provide for the record a breakdown of gains and losses for fiscal years 1970, 1971, and 1972 for each category of retired pay.

Mr. SPENCE. I will provide it. (The information follows:)

NUMBER OF GAINS AND LOSSES TO THOSE PERSONNEL ON THE MILITARY RETIRED ROLLS FOR FISCAL YEARS

1970, 1971 AND 1972, BY CATEGORY

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Chairman ELLENDER. Also provide for the record a tabulation showing the number of gains and losses of retired personnel during the last several

years.
(The information follows:)

NUMBER OF GAINS AND LOSSES AND NET CHANGE TO THOSE PERSONNEL ON THE MILITARY RETIRED ROLLS

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Chairman ELLENDER. Please provide for the record the amount of the retirement increases in the past 5 years attributable to cost-of-living increases, together with the percentage of each increase.

Mr. SPENCE. Yes, sir.
(The information follows:)

RETIREMENT INCREASES IN THE PAST 5 YEARS ATTRIBUTABLE TO COST-OF-LIVING INCREASES

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Senator YOUNG. According to the justifications, for fiscal year 1972 nondisability retirement will increase 20 percent over those for fiscal year 1970, temporary disability retirements will increase by 24 percent over the same period, and permanent disability retirements will increase 12 percent. These are very marked increases over so short a span of time. Please comment on each of them.

Mr. SPENCE. The continued increase in the number of persons in the nondisability and permanent disability categories results from the fact that attrition through death is considerably less than the number of additions to the retired rolls. This in turn is the result of the fact that most persons now on the retired rolls are relatively young, having initially entered active service in World War II and did not begin to retire in large numbers until 1960. Since the attrition through death is as yet relatively small, and the additions to the retired rolls is relatively large as the result of the standing forces we have maintained for the past 30 years, it is inevitable that the size of the retired rolls will continue to increase relatively rapidly in the next few years. Only when substantial numbers of those on the retired rolls attain the ages at which considerable attrition through death occurs will the retired rolls level off.

Turning to the temporary disability category the situation is different. The maximum period a member may be carried on this retired roll is 5 years. The large increase in the number in this category re

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