The G.I. Bill and Retention

John McCain opposes the Webb and Hagel bill to update the G.I bill:

Does McCain Have a Vets Problem?, by Jay Newton-Small, Time: Of all the voting groups John McCain will target this fall, none would seem like more of a sure thing than this country's war veterans. So why is the celebrated Vietnam War hero and POW bracing for a potentially bad week with so many men and women who have served in uniform?

The point of contention between the two seemingly natural allies is a piece of legislation the Senate is expected to vote on this week to update the 1944 G.I. Bill to provide expanded education assistance and opportunities to the armed forces. The bill ... would effectively provide full tuition and housing costs at a four-year public university for veterans who have served at least three years of active duty. ... McCain, concerned about the estimated $4 billion annual price tag and the incentive he worries it might give people to leave an already strapped military, has sponsored his own competing proposal. It increases the existing monthly education benefit from around $1,100 to $1,500 a month while adding more generous benefits for those who've served more than 12 years.

McCain's concerns, however, don't seem to impress the vast majority of veterans' organizations. They are feverishly lobbying him to support the Webb and Hagel bill...

Even with the current dustup, it's hard to imagine John McCain not winning the majority of the veterans vote in November. But the nation's 26 million veterans are by no means a monolithic voting bloc, and any level of disappointment with McCain could sway some undecideds. ...

Supporters of Webb and Hagel's bill dismiss McCain's concerns about the retention issue. While the Congressional Budget Office estimates that the bill would cause a 16% drop in re-enlistment rates across all four branches of the military, the same study also predicts a 16% uptick in new recruits attracted by the benefit. The bill has 58 co-sponsors, including none other than Obama — just two shy of a veto-proof majority. It was passed last week by the House with a comfortable veto-proof majority...

Suppose you run a firm and, subject to minimum qualifications, you will hire anyone willing to accept the wage and retirement plan that you offer. Assume you currently have some number of employees, and suddenly you announce that you are going to double retirement benefits. What would happen to the number of employees? A lot of people at or above the retirement age who are still working would likely decide to retire, but you would also get a lot more people showing up at the door wanting to work for you. It seems to me that after full adjustment, it's likely employment would rise. This problem is just like the military changing education benefits and though the CBO says the bill would not change the number of people in the military, the new recruits would just equal those leaving, I think the number might actually go up here as well. But whatever the case, there's certainly a large offset from new recruits, and reduces any retention concerns. The other concern is the price tag, but the price tag of 4 billion is pretty modest - what did top hedge fund managers make last year? - so that part doesn't concern me much.

Going back to retention, I recently heard a talk where the speaker noted in passing that firms use deferred compensation schemes to create the incentive for their employees to retire at a certain date, the date they want employees to retire. That is, suppose the law says you can't force someone to retire. You can still make it economically unattractive to work past a particular date by altering the size of the deferred compensation (retirement) package. The larger it is, the more likely it is that people will leave rather than working past the retirement date.

But the decision about when to retire is also affected by what you are currently earning, and the more you earn, the longer you are likely to work before retiring (I'm assuming the income effect doesn't dominate the substitution effect). This means that if retention turns out to be a problem for the military, i.e. if people are retiring as soon as they can (at the three year minimum) rather than re-enlisting, a solution would be to provide a positive incentive to stay by promising higher wages for those who re-enlist or make it past a particular benchmark (e.g. McCain's twelve years). This would increase the price tag further, I don't know by how much, but I think the military is underpaid as it is, so again, that doesn't bother me. [And if McCain is so worried about paying for it, couldn't he just cut a few more earmarks? He seems to think that works just fine for tax cuts costing far, far more than this bill.]

So a response to McCain's concerns about retention is to say that, according to the CBO and others, it's unlikely he's correct about numbers falling, but just to be sure maybe we should adopt his proposal about increasing the compensation for people who choose to stay past some number of years. We still do the Webb and Hagel bill, but we add the additional incentive of higher future compensation for those who choose to re-enlist. With this change, it's hard to see how the number of people in the military would fall as a result of the bill.