"We can no longer put off military compensation reform," Hagel said. "We all know we need to slow the cost of growth. Tough decisions will have to be made on compensation," he said at a Pentagon briefing with Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff.
Hagel noted that the recent budget agreement by the House and Senate eliminated about $31 billion in cuts to defense spending that had been in the works under the sequestration process, but "even with this agreement, the Department of Defense still faces very difficult choices" on readiness, acquisitions and modernization.
On the immediate issue of cuts to military retiree pensions, Hagel said there was room for discussion on whether they should apply to disabled vets.
Hagel referred to the section of the new budget deal under which working-age military retirees would see their pensions increase at a slower pace, with cost-of-living adjustments pegged to the rate of inflation minus 1 percentage point. Once they turned 62, they would go back to receiving adjustments pegged to the full rate of inflation.
The pension change could decrease veterans' retirement benefits by nearly 20 percent in some years, according to Michael Hayden, director of government relations at the Military Officers Association of America, an Alexandria, Va.-based nonprofit representing some 380,000 current and former officers.
For example, an E-7 who retires at age 40 would receive about $35,500 by age 62, down from about $44,000; while an O-5 who retires at age 42 would get about $63,900 by age 62, down from about $77,600, he said.
Hagel said the proposed cuts should "not apply to medically disabled veterans," and he welcomed a "comprehensive look" at the cost-of-living adjustment proposal with both houses of Congress.
On the Senate floor earlier this week, Sen. Patty Murray, D-Wash., who worked out the budget deal with Rep. Paul Ryan, R-Wis., said the proposed pension cut "will allow two years before this change is implemented so that Democrats and Republicans can keep working to either improve this provision or find smarter savings elsewhere."
The Defense Department has projected that the change in the cost-of-living adjustment, which has prompted fierce opposition from veterans groups, would save an estimated $6 billion over 10 years.
The Pentagon faces about $1 trillion in spending cuts over the next decade as part of 2011 deficit-reduction legislation known as the Budget Control Act. That includes almost $500 billion in reductions already planned and another $500 billion in automatic cuts.
The Ryan-Murray bill will undo some of those reductions.
Of the $62 billion in sequestration relief in the pact, $44 billion would be applied in 2014 and another $18 billion in 2015, according to a cost estimate from the Congressional Budget Office. That means the Pentagon would receive an additional $22 billion in 2014 and another $9 billion the following year, according to the office.