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STRATEGIC

STUDIES

INSTITUTE

The Strategic Studies Institute (SSI) is part of the U.S. Army War 

College and is the strategic-level study agent for issues related 

to national security and military strategy with emphasis on 

geostrategic analysis.

The mission of SSI is to use independent analysis to conduct strategic 

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• Strategy, planning, and policy for joint and combined 

 employment of military forces;

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Strategic Studies Institute

and

U.S. Army War College Press

A FRAMEWORK FOR RESTRUCTURING

THE MILITARY RETIREMENT SYSTEM

Roy A. Wallace

David S. Lyle

John Z. Smith

July 2013

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do not necessarily reflect the official policy or position of the 

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offer new and sometimes controversial perspectives in the interest of furthering debate on key issues. This report is cleared for 

public release; distribution is unlimited.

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Sections 101 and 105. It is in the public domain and may not be 

copyrighted.
ii

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Army War College Press, U.S. Army War College, 47 Ashburn 

Drive, Carlisle, PA 17013-5010. 

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valuable comments and suggestions. The views expressed herein 

are those of the authors and do not purport to reflect the position 

of the U.S. Military Academy, the Department of the Army, or 

the Department of Defense.

ISBN 1-58487-580-1
iii

FOREWORD

In an era of fiscal austerity, the current military 

retirement system has come under intense scrutiny. 

Military retirement costs continue to escalate, in part 

because retirees are living longer, and in part because 

the military must set aside accrual payments as the 

retirement system transitions to a fully-funded system. 

In response to these escalating costs, several pension 

reform proposals have emerged that yield significant 

cost savings. 

The authors argue that many of these reform 

proposals focus too narrowly on cost containment 

and fail to consider how pension reforms could 

significantly lower the well-being of personnel and adversely affect retention. They develop a holistic framework for evaluating pension reform proposals that 

considers not only overall program cost, but also impacts on personnel inventory, service member wellbeing, and public perceptions. Using this framework, 

the authors evaluate: a set of reforms discussed by the 

Department of Defense Business Board; incremental 

changes to the existing pension system; and their own 

pension reform proposal.

 

 DOUGLAS C. LOVELACE, JR.

 Director

 Strategic Studies Institute and

 U.S. Army War College Press

v

ABOUT THE AUTHORS

ROY A. WALLACE, Senior Executive Service, is the 

Assistant Deputy Chief of Staff, Army G1. He was 

the Director of Plans and Resources, Deputy Chief 

of Staff, Army G1 for 8 years prior to serving in his 

current position. Mr. Wallace retired from active 

duty at the rank of colonel in 2004. He has extensive 

experience in Army compensation and resourcing. 

Mr. Wallace holds a B.A. from the University of 

Arkansas and an M.B.A. in comptrollership from 

Syracuse University.

DAVID S. LYLE, a lieutenant colonel in the U.S. Army, 

is the Director of the Office of Economic and Manpower Analysis and an Associate Professor of Economics 

in the Social Sciences Department at West Point where 

he teaches econometrics and labor economics. His 

areas of research interest include labor economics, 

peer effects, human capital, and talent management. 

Lieutenant Colonel Lyle holds a B.S. from West Point 

and a Ph.D. in economics from the Massachussetts 

Institute of Technology.

JOHN Z. SMITH is the Director of Research for the 

Office of Economic and Manpower Analysis and an 

Associate Professor of Economics in the Social Sciences Department at West Point where he teaches 

labor economics, microeconomics, and econometrics. 

His areas of research interest include labor economics, mentoring, compensation, and public finance. Dr. 

Smith holds a B.S. from the University of Iowa and a 

Ph.D. in economics from the Massachussetts Institute 

of Technology.

vii

SUMMARY

For more than a century, the military has provided 

a defined benefit (DB) pension to service members 

who render 20 or more years of active-duty service. 

The U.S. civilian labor force has long since replaced DB 

pension programs with defined contribution pension 

programs where employers and employees contribute 

to a 401(k)-type account. The military, however, has 

continued to provide a DB pension plan worth in excess of a million dollars to veterans who retire as early 

as 38 years of age. With annual military retirement 

system outlays exceeding $50 billion, senior officials 

have begun calling for pension reform on the grounds 

that the current system is fiscally unsustainable. 

In the fall of 2011, the Department of Defense 

Business Board (DBB) proposed several reforms to 

reduce military pension costs. These reforms include: 

establishing a 401(k)-type account with employer contributions, allowing service members to vest in this 

retirement account after 4 years of service; restructuring the DB portion so that individuals could not begin 

receiving benefits until they are 67 years of age; providing pension bonuses for deployments; and, substantial transition pays. While these reforms report 

significant potential cost savings of $3.65 billion (2034 

dollars), service members would lose 39 percent of the 

value of the existing pension program. 

Simply adopting best practice from the civilian 

sector, however, is somewhat naïve. The unique structure of the current military manpower model, which 

has at its basis the All Volunteer Force (AVF), demands a correspondingly unique pension plan. Military service places significant demands on its service 

members. Motivating individuals to volunteer for a 
career of selfless service, personal sacrifice, hardship, 

frequent household relocations, and inherent danger 

requires a compensation program commensurate with 

the demands. Since the inception of the AVF in 1973, 

the military’s pension plan has been instrumental in 

meeting military manpower requirements across the 

ranks. Any future pension reform must consider the 

second and third order impacts to military manpower, 

or more specifically, personnel inventory, service member 

well-being, public perception, and overall program cost.

We begin by providing a framework that addresses 

these four considerations as a benchmark for all future 

pension reform. We adopt some of the ideas presented 

by the DBB study, but tailor them to the framework to 

ensure that the military maintains its personnel inventory, promotes service member well-being, increases 

public perception of the military pension, and reduces 

overall program costs. 

Our proposal is called the 10-15-55 plan. Service 

members and the military contribute to a 401(k) account as soon as they enter service. At any point, a 

service member may leave the military with his or 

her contributions to the 401(k). At 10 years of service, 

the service member controls 50 percent of what the 

military contributed to the 401(k). That percentage increases by 10 percentage points each year for 5 years 

until the service member reaches 15 years of service, 

at which time the service member controls 100 percent 

of employer contributions. In addition to the 401(k) 

account, service members who continue to 20 years of 

service also receive the DB pension plan as it currently 

exists, with the exception that they may not receive 

payments until they turn 55 years of age. While all 

current service members would be grandfathered under the existing pension system, new entrants would 

viii
ix

be covered by the 10-15-55 proposal. The 10-15-55 proposal would likely be more desirable to new entrants 

than the existing pension plan because of the uncertainty that most new recruits face about serving a full 

20-year career. When evaluated against the pension 

framework provided in this monograph, the 10-15-55 

pension proposal has many attractive features. 

1

A FRAMEWORK FOR RESTRUCTURING

THE MILITARY RETIREMENT SYSTEM

ABSTRACT

The current military retirement system has been 

integral to sustaining the All Volunteer Force (AVF). 

Mounting federal budget challenges, however, have 

raised concern that the program may become fiscally 

unsustainable. While several restructuring proposals 

have emerged, none have considered the implications 

of these changes to the broader issue of manning an 

AVF. Changes to the existing system could create 

military personnel shortfalls, adversely affect service 

member and retiree well-being, and reduce public 

confidence in the Armed Forces. With the right analytical framework in place, however, a more holistic 

restructuring of the system is possible, one that avoids 

these negative effects while significantly reducing 

costs. This monograph provides both a comprehensive framework and a proposal that stand to benefit 

both service members in terms of value and the military in terms of overall cost savings.

INTRODUCTION

For the past 40 years, the military retirement system has been integral to sustaining the AVF. Due to 

mounting federal budget challenges, however, the 

costs of the system are increasingly viewed as unsustainable.1

 While several restructuring proposals have 

emerged, some are so focused upon near-term savings that they overlook longer-term costs. Potentially, 

these proposals could create military personnel shortfalls, adversely affect service member and retiree wellbeing, and reduce public confidence in the Armed 
2

Forces. With the right analytical framework in place, 

however, a more holistic restructuring of the system is 

possible, one that avoids these negative effects while 

significantly reducing costs.

The U.S. military has offered vested defined benefit (DB) pensions to eligible service members since the 

end of the Civil War.2

 The current pension program 

is rooted in the Federal Employees Retirement Act of 

1920, which, by the late-1950s, also served as a model 

for many private sector pension plans.3

 DB pension 

plans were designed to provide long-term retirement 

income to an employee, encourage tenure, and compensate for lower short-term wages. By the 1970s, 

however, changes in the tax code caused alternative 

retirement programs to emerge.4 These incentivized 

employees to make contributions to tax-advantaged 

retirement vehicles of their own choosing, such as individual retirement accounts (IRAs) and 401(k) plans. 

On the one hand, this benefitted firms by shifting a 

significant share of retirement planning and costs to 

employees. On the other hand, it increased employee 

mobility (“I can take my retirement portfolio with 

me”), increasing corporate talent leakage costs. 

To recoup some of these costs, private firms responded by placing greater emphasis upon mid-career and senior executive recruiting (increased lateral 

entry or “talent poaching”). As a result of these labor 

market changes, private sector pension plans no longer mirror those of the defense establishment. Instead, 

they acknowledge and even reinforce the trend toward 

greater employee mobility. For example, today’s corporations typically provide a range of 401(k) matching contributions, from Walmart’s 6 percent of salary 

to Lockheed Martin’s 10 percent. They often provide 

stock purchase options as well, with minimal vesting 

periods of as little as 3 years. 
3

Despite the evolution in private sector retirement 

programs, the military has made only minor adjustments to its pension plan in the form of benefit calculation factors, vesting requirements, and annual 

growth rates.5

 It continues to bear full responsibility 

for service member retirement planning, and for good 

reason. The military profession entails significant risk 

to life and limb for its practioners, who manage the 

legal application of lethal force. Consequently, it demands a workforce ethic that takes years to produce, 

which in turn requires higher personnel retention to 

achieve. This precludes large-scale lateral entry, demanding instead a stable and tenured workforce that 

moves smoothly through the talent pipeline across a 

career of service.6

Calls to revamp the military retirement system 

have increased under the country’s current fiscal situation. In the fall of 2011, the Defense Business Board 

(DBB) provided several recommendations based on 

best practices in the private sector that offer significant cost savings to the military’s retirement system.7

While the study helped raise the public debate over 

military retirements, it did not consider the implications of these changes to the broader requirements of 

manning the AVF. This monograph leverages many of 

the ideas from the DBB’s recommendations, but places 

them in a framework that considers a more expansive 

perspective of military manpower.8

RESTRUCTURING MILITARY RETIREMENT—

A FRAMEWORK FOR FUTURE PENSION PLANS 

Given the fundamental differences between uniformed and civilian workforces described above, care 

must be exercised in any military retirement restructuring, or unintended consequences could result. In 
4

particular, benchmarking too directly from civilian 

retirement system practices should be avoided. An 

approach tailored specifically to the unique requirements of the military labor market must guard against 

negative impacts in four areas: personnel inventory, 

service member well-being, public perception, and cost.

9

These four items serve as a framework from which to 

benchmark current and all future pension proposals. 

Personnel Inventory.

Today’s retirement system (no vesting until the 

20-year mark) provides predictable separation rates 

across careers spanning up to 30 years of service. This 

makes it possible to manage manpower to meet force 

structure requirements. Figure 1 shows the pattern 

of enlisted and officer separations over a 5-year period. While most attrition occurs after the initial term 

of service, nearly 70 percent of personnel who serve 

past 10 years end up reaching retirement eligibility. 

The sharp spike in separations as soon as individuals are retirement eligible suggests that providing 

earlier retirement benefits will undoubtedly affect 

continuation behavior. 

In addition to the differences in attrition trends 

that exist between officers and enlisted personnel as 

seen in Figure 1, there are important differences in 

the promotion systems. For example, while the Army 

promotes enlisted personnel to requirements, officers 

follow a standardized promotion timeline, which 

leads to the inventory excesses and shortages seen 

in Figure 2.
5

Figure 1A. Enlisted Average Annual Separations as 

a Percent of Enlisted Personnel Leaving 

Active-Duty Service During the Past 5 Years.

Figure 1B. Officer Average Annual Separations as 

a Percent of Officers Leaving Active-Duty Service 

During the Past 5 Years.
6

Figure 2. Officer Inventory Excess and Shortage.

Beyond sheer numbers, the structure of a retirement program also affects retention of high performing service members. This is because reducing the 

differential between military and corporate benefits 

changes the opportunity cost of military service for 

high performers, who generally have the highest earnings potential outside of the military. As the difference between benefits decreases, these service members are most likely to separate, reducing Department 

of Defense (DoD) performance and productivity. The 

current cliff-vested military retirement pension may 

encourage the military to retain service members who 

are not sufficiently productive simply so that they may 

receive a retirement benefit.10 Conversely, portable retirement benefits can negatively affect retention rates, 

but they also provide invaluable culling flexibility. As 

a general rule, pension programs should not be the 

military’s sole retention tool, but neither should they 

engender increased retention risk. 
7

Service Member Well-Being.

Any reduction to pension benefits must be considered within the larger context of total compensation. 

Providing guaranteed retirement benefits affords the 

military the ability to set current wages lower than 

comparable civilian wages. In effect, the nation must 

decide how much it wants to compensate its military 

personnel for a full career of service, dividing that 

amount between current wages and retirement benefits. Any reduction of military pensions effectively 

reduces overall compensation and must be considered 

in that context. 

The current military pension plan greatly reduces 

economic risk to service members in several ways. 

First, it limits exposure to market volatility. Consider, 

for example, the way stock market downturns can 

diminish the value of retirement accounts invested 

in equities. Second, it addresses the tendency for individuals to overconsume in the present at the risk 

of undersaving for the future. Third, by providing a 

monthly retirement benefit for life, it ensures against 

the risk that an individual will live long enough to 

deplete all retirement savings. Finally, it mitigates the 

long-term deleterious effects of military service. Consider those veterans who, in service to their country, 

have experienced physical and emotional traumas 

that may reduce their later wage earnings and savings potential. While many of these traumas may not 

meet the threshold for service-connected disability 

compensation, they nonetheless degrade a veteran’s 

quality of life. By providing a level of automatic savings or benefits, the current retirement system fulfills its centerpiece intent. It provides a guaranteed 
8

retirement income to veterans. In sum, mitigating 

economic risk is an important feature to any military 

pension program.

Public Perceptions.

As described earlier, growing concern over soaring national debt has placed considerable budgetary 

pressure on the DoD. Concerns over national security, 

unemployment, and election campaigns will likely 

limit the military’s ability to realize savings through 

significant cuts in the number of military personnel. 

Instead, the DoD will have to find other budget economies, to include all personnel benefits (retirement or 

otherwise). Public perception will shape the approach 

taken for several reasons. First, less than 1 percent of 

Americans serve in the military, which increases national appreciation for those who serve in uniform.11

Second, the military has just endured more than a 

decade of persistent conflict with over 57,000 casualties.12 Third (as previously discussed), military service 

can increase financial and emotional stress for service 

members and their families. These facts are not lost on 

the public, Congress, and the media, all of whom are 

unlikely to countenance any benefit reductions aimed 

at service members or veterans. 

Any restructuring of the military pension system 

can potentially affect service member morale and retention. In fact, without a grandfathering provision, 

it is hard to conceive of a plan that does not create 

significant negative perceptions. The notion of transparency is also critical. Yet some pension restructuring proposals attempt to obfuscate deep cuts with 

special pays such as combat and lump sum amounts 

to ease transition from the military. This is both disingenuous and counterproductive. Compensation 
9

must be tied to its intended purpose. Wages should be 

paid for current production, hostile fire pay should be 

tied to deployments, and pensions should be aligned 

with retirement programs. Efforts to combine these in 

complicated compensation schemes make it difficult 

for service members to understand and evaluate their 

value. Such an approach increases skepticism and 

breeds mistrust.

Another issue with perception implications is the 

length of service required for retirement benefit eligibility. The notion of offering a “portable” retirement 

benefit to service members who serve 10 years or 

more, but are uncertain whether they wish to serve a 

full 20-year career, may improve perceptions of military service. This portability is commensurate with 

most corporate retirement programs and would afford service members comparable benefits, should 

they leave the military between 10 and 20 years of 

service. It is safe to assume that at initial service entry, most military members do not know how many 

years they will serve and therefore would be willing 

to pay a premium for a portable retirement component. Additionally, offering new personnel the option to choose the current DB plan or a hybrid plan 

(portable individual retirement account plus reduced DB pension) would likely reduce traditional 

pension plan participation without adversely 

affecting perceptions. 

Costs.

Any restructuring of the current pension plan 

must provide significant cost savings. The key is to 

find the margins that offer such savings without negatively affecting personnel inventories, individual wellbeing, or public perceptions. The first area to consider 
10

is the age at which service members become benefit 

eligible. Current eligibility is at retirement (as early as 

38 years of age). Increasing the age at which retirees 

become benefit eligible offers significant cost savings 

with minimal negative impact. For example, keeping 

retirement benefits at current levels while increasing 

eligibility age by just 1 year saves $551 million (in 2034 

dollars) per retirement cohort.13 Other areas to consider are: the pension benefits multiplier, which is currently 2.5 percent times years of service; adjustments 

to retirement cost of living adjustments (COLA); the 

growth rate of base pay; implementing a “High-5” 

instead of “High-3” formula for retirement benefits; 

and, the medical benefits component.14

Assuming that there is a grandfathering provision 

to any pension restructuring, the primary source of 

short-run savings will be lower accrual costs. The military currently pays slightly more than $0.34 into the 

pension fund for every dollar it pays in wages, based 

upon the estimated cost of retirement for current members of the military.15 If estimated retirement costs are 

reduced beginning with this year’s new recruits, the 

amount paid into the retirement accrual accounts will 

be reduced almost immediately, even if those service 

members will not draw retirement benefits for 20 

years or more. Since this is a DoD program, a majority 

of the current costs are borne by the Army, the most 

manpower intensive branch, which will therefore enjoy commensurately larger savings. As years pass and 

a larger share of the force requires the lower accrual 

amount, the military will realize increased retirement 

savings as entrants under the new program matriculate through their careers. 

As we have argued above, the unique nature of 

military manpower suggests that these four areas,
11

personnel inventory, servicemember well-being public 

perception, and cost provide a reasonable framework 

from which all future pension proposals should 

be evaluated. 

A RETIREMENT PROPOSAL—

THE “10-15-55” PLAN

Restructuring retirement benefits to reduce costs 

without diluting their positive effects upon the military and its people must be informed by the framework areas discussed previously. In accordance 

with that framework, we propose a plan with the 

following features. 

First, there is a 401(k) account established upon 

entry. With the service member’s first military paycheck, the military automatically contributes 5 percent 

of base pay and will contribute up to an additional 5 

percent of pay, dollar for dollar, matched to employee 

contributions.16 Service member contributions to the 

401(k) account are always controlled by the service 

member. Second, there is partial 401(k) vesting at 10 

years of service (YOS). The service member controls 

50 percent of military contributions and 100 percent 

of personal contributions in a portable 401(k) plan. 

Between 11 and 15 YOS, vesting in employer 401(k) 

contributions increases 10 percentage points per year, 

to 100 percent at 15 years. This means that the service 

member will control 100 percent of both military and 

personal contributions in a 401(k) account at 15 YOS. 

Third, the DB plan vests at 20 YOS. At this point, service members will control 100 percent of the 401(K) 

and are also eligible to receive a DB pension of 50 

percent of High-3 pay when they reach the pension 

receipt age. However, DB pension payments and full 
12

medical health insurance coverage will not begin until 

age 55. Between retirement and age 55, military health 

care coverage is available only as a second provider. 

Retirees may begin drawing from their 401(k) at 59.5 

years of age. Note, military health care coverage as a 

second provider both compensates for the portability 

component and motivates gainful employment from 

the point of retirement through 55 years of age. This 

restructuring would not apply to current service members or retirees and would be implemented at initial 

entry for new service members at some future point. 

Figure 3 provides a timeline of key features of the 10-

15-15 proposal.

Figure 3. The “10-15-55” Proposal.

BENCHMARKING AGAINST THE PENSION 

FRAMEWORK

We have made the case that the unique nature of 

military manpower requires a pension framework 

that addresses four key areas: personnel inventory, servicemember well-being, public perception, and cost. The 

rest of this monograph evaluates how the 10-15-55 

proposal holds up against the pension framework 

provided in this monograph, particularly as it relates 

to the current pension plan and the DBB proposals. 
13

Since the DBB pension study did not advocate a particular pension plan, we compiled many of their recommendations into a single proposal as a basis for 

comparison. As a first step toward understanding the 

differences in these proposals, Table 1 contains present value comparisons and cost savings of the current 

pension with the DBB proposal and the 10-15-55 proposal for both officers and personnel who retire at 20 

years of service (YOS).17

Table 1. Comparison of Current Pension

with Restructuring Proposals.18

Officer with 20 Years of Service (YOS): 

Retires at Rank of LTC*

Enlisted with 20 YOS; 

Retires at Rank of SFC*

Retirement Benefits Current

Defense 

Business 

Board (DBB)

10-15-55 Current DBB 10-15-55

Age of Receipt of Benefit Retirement 67 55 Retirement 67 55

Net Present Value (NPV) 

Benefit (DB) Pension at 

Retirement

$1,750,095 $287,103 $909,135 $962,462 $130,591 $411,217

NPV of Employer-Provided

Thrift Savings Plan (TSP) 

Contributions

$514,452 $428,710 $273,650 $228,041

NPV of Employee TSP

Contributions $214,355** $114,021**

Transition Pay at Retirement $317,756 $95,327 $167,568 $50,270

Total NPV of EmployerProvided Retirement Benefits $1,750,095 $1,119,311 $1,433,172 $962,462 $571,809 $689,528

Percent of Current Pension 100% 64% 82% 100% 59% 72%

Aggregate Cost Savings for 

2033 Retirement Cohort $1.62 Billion $1.15 Billion $2.03 Billion $2.71 Billion

*Note: LTC-Lieutenant Colonel (Paygrade O5); SFC-Sergeant First Class (Paygrade E7); YOS-Years of Service

1. Current retirement system: 50% of High-3 pay: vest at 20 YOS; eligible for pension receipt at retirement

2. Defense Business Board proposal: 40% of High-5 pay at age 67; 12% of base pay employer TSP contribution; one month 

transition pay for each YOS; full vesting in TSP and transition pay at 4 YOS

3. 10-15-55 Proposal: 50% of High-3 pay at age 55; 5% of base pay employer TSP contribution with 1:1 match on employee 

contributuions (up to 5% of base pay); 50% vesting in employer TSP contributions at 10 YOS, increasing linearly to 100% 

vesting at 15 YOS; transition pay equal to highest 6 months pay at 20+ YOS

**Not included in retirement benefit value calculations.
14

Several key issues explain the differences between 

the three pension plans. Both the DBB and 10-15-55 

proposals delay the receipt of pension benefits, thus 

reducing the present value of the military pension. 

The DBB proposal delays receipt until age 67, a value 

reduction of roughly 85 percent. It also changes the 

benefits formula by using a High-5 rather than High-3 

pay computation (reducing the value of the pension 

by roughly 5.5 percent) and lowers the benefits multiplier from 2.5 percent of base pay per year of service to 2 percent (reducing the value of the pension by 

slightly more than 20 percent). By comparison, the 10-

15-55 proposal delays receipt of pension benefits only 

until age 55 and leaves the pension benefits formula 

unchanged. To compensate for the reduction in the 

present value of the traditional military pension, both 

proposals provide 401(k)-style retirement accounts.

The DBB proposal assumes an annual contribution 

of 12 percent of base pay, with the service member 

fully vesting in the account at 4 years of service. The 

10-15-55 proposal, however, is similar to the 401(k) 

plan offered to Federal Government employees in 

the Federal Employees Retirement System (FERS): it 

incorporates a mandatory employer contribution of 5 

percent of base pay and provides a further incentive 

to employees by matching their contributions at a 100 

percent rate up to an additional employer contribution of 5 percent. The 10-15-55 proposal assumes that 

personnel will maximize the employer match, for a 

total employer contribution of 10 percent of base pay. 

It does not vest service members until 10 years of service, and then only at a 50 percent rate. Under 10-15-

55, full vesting of the 401(k) component does not occur 

until 15 years of service. 

Finally, both proposals include a severance (transition) pay component. The DBB proposal provides 
15

transition pay equal to the highest month’s salary 

multiplied by years of service. For this analysis, service members are assumed to vest in this benefit at 

4 years of service. For an O5 retiring with 20 years of 

service in 2034, the value of the transition payment is 

almost 18 percent of the current retirement benefit. In 

essence, the severance pay provides a lump sum payment at separation, and these funds are immediately 

available. The 10-15-55 proposal provides more modest transition pay equaling 6 months of pay for service 

members who serve 20 or more years. 

Since both pension reform proposals reduce the 

value of the current military pension and supplement 

it with portable 401(k) retirement accounts, the present value of all benefits provided under the restructuring proposals must be compared to the present value 

of the current pension system. The DBB proposal 

reduces the value of retirement benefits received by 

36-40 percent, largely by delaying receipt of pension 

benefits to age 67. In contrast, the 10-15-55 proposal 

reduces the value of retirement benefits by just 18 to 

28 percent.19 In the aggregate, the DBB proposal generates cohort cost savings of approximately $3.65 billion (2034 dollars) compared to the $3.84 billion (2034 

dollars) of cohort cost savings under the 10-15-55 proposal.20 Because the DBB proposal provides generous 

transition pay and portable retirement benefits to all 

service members who serve 4 or more years, the cost 

savings from the reduced pension provided to career 

service members are nullified. This structure promotes 

equity but actually raises aggregate costs of the future 

retirement benefit.

Looking beyond aggregate cost savings, the DBB 

and 10-15-55 pension reform proposals create mark-
16

edly different outcomes across the four pillars of 

the pension framework outlined in this monograph.

Personnel Inventory. 

A portable retirement benefit, common to both 

pension reform proposals, can provide valuable flexibility to the military in managing its personnel inventory. Under the current retirement system, personnel 

with significant time in service whose talents are not 

needed are nonetheless retained so that they can continue to the 20-year mark and receive retirement benefits. By providing a portable retirement benefit for 

those with 10 or more years of service, both proposals 

allow the military to cull unneeded talent, while providing a portable retirement benefit on par with 401(k) 

accounts offered in the private sector.

DBB Proposal. First, the DBB proposal does not 

contain a grandfathering provision. If placed into 

effect as written, it would have an immediate and 

negative effect upon the military’s personnel inventory. Second, the DBB proposal provides payments to 

all separating personnel with 4 or more years of service. Coupled with generous transition pay, this will 

engender talent flight from the military, positioning 

it as a stepping stone to other professions. While this 

could increase the attractiveness of first-term military 

service, any benefit would be more than offset by 

lowered longer-term retention. Consider that under 

the DBB proposal, an officer with 8 years of service 

faces the choice of serving an additional 12 years to 

qualify for a pension worth less than one-sixth of the 

current military pension at retirement, or leaving with 

a 401(k) that is significantly larger than the average 

comparable 401(k) account in the civilian sector.21 In 
17

addition, the transition payment to enlisted ($44,350) 

and officers ($84,770) leaving the Army at the 10-year 

mark would be nearly an entire year’s pay. By reducing deferred compensation and providing significant 

separation compensation, the DBB proposal will substantially reduce retention rates for personnel with 

5-10 years of service and encourage the flight of highpotential talent. 

10-15-55 Proposal. In contrast, the 10-15-55 plan 

does not provide benefits until service members have 

served for at least 10 years, so it is attractive to individuals who are considering a career of service. The 

portable nature of the 401(k) component will also appeal to new entrants, while the modest delay in the DB 

component will likely have a neutral effect on accessions. By requiring 10 years of service to partially vest 

in the portable retirement benefit, the 10-15-55 plan 

should improve retention rates to 10 years of service. 

Each year the initial vesting time is reduced (from 10 

to 9 or 8 years of service) reduces both cost savings 

and retention benefit. The incremental increase in 

vesting to 100 percent at 15 years of service further 

mitigates mid-career retention risk. Those who choose 

to depart military service at mid-career will have a 

401(k) plan comparable to that of the civilian sector 

yet not excessive as in the DBB plan. There is also no 

transition pay offered in the 10-15-55 plan until 20 

years of service. In sum, talent flight is much less of 

an issue in this proposal because there are still generous DB components encouraging service through 

20 years.
18

Service Member Well-Being. 

To generate cost savings, both proposals introduce 

reforms to the current military pension that lower its 

present value to those choosing military service as a 

career. To partially offset reductions in the value of 

the military pension, both proposals also provide a 

portable retirement savings account, similar to 401(k) 

plans owned by nearly 50 million civilian workers.22

These retirement accounts represent a replacement of 

25 to 30 percent of the value of the current military 

pension. Replacing DB pension dollars with defined 

contribution 401(k) dollars is far from a neutral trade, 

however. As discussed earlier, these plans shift several types of risk onto the service member: investment 

risk from market volatility, employment risk from inability to stay gainfully employed with aging, longevity risk from outliving retirement savings, and time 

inconsistent behavior that drives individuals to consume more now with lower regard for the future. The 

two plans approach these risks differently.

DBB Proposal. Viewing the pension component in 

isolation, the DBB proposal reduces the present value 

of the pension for those serving to 20 years by nearly 

85 percent. Additionally, individuals under the DBB 

plan have slightly less than half of their retirement 

benefit in the riskier defined contribution component.23 Lastly, in terms of personal value, the DBB plan 

reduces an individual’s total retirement benefit by 35 

to 40 percent. 

10-15-55 Proposal. For those serving to 20 years, 

the 10-15-55 proposal reduces the value of the traditional pension by approximately 50 percent. It also has 

slightly less than one-third of the retirement benefit 

in the riskier defined contribution component. Lastly, 
19

the 10-15-55 plan only reduces individual total retirement benefits by 18 to 28 percent. 

Perception. 

Any change to the existing plan must be handled 

carefully, so strategic communications for both internal and external audiences are critical to unveiling a 

new pension plan. See Appendix 2 for an example of 

strategic communications that use our 10-15-55 proposal as an example. One potential approach is to 

allow incoming service members to decide whether 

they want to enter into the existing pension system 

or a new one that offers some form of portable pension component that they can obtain without serving 

20 years. 

DBB Proposal. The DBB proposal is likely to be 

negatively perceived by most stakeholders, particularly service members and the public. Contemplating an immediate transition to a new retirement 

system—particularly for those with substantial time 

in service—is a breach of the implicit social contract 

between the Nation and its service members. The DBB 

proposal radically modifies every facet of military retirement, from retirement eligibility age to the pension 

benefit multiplier, making it more difficult to explain 

or understand. Reducing the value of the pension and 

including transition pay for service members with 4 

or more years of service illustrates this complexity. It 

is unclear why payment that is received immediately 

upon separating from the military, even before pension 

eligibility, belongs in a military retirement policy. This 

confounding mix could cause key stakeholders, particularly service members, to reject the proposal outright. If they do not understand the personal financial 
20

risks inherent in the proposal, they may fail to plan 

adequately for their own financial future, deepening 

service member pessimism and alienation. 

10-15-55 Proposal. The 10-15-55 proposal represents 

evolutionary rather than radical reform. Other than 

pension eligibility age (shifted to age 55), all elements 

of the existing pension are preserved. Because it maintains benefits for current military personnel and retirees while leaving the retirement system largely intact 

for new entrants, the proposal conforms to the existing 

social contract with the Nation’s service members. The 

10-15-55 plan is also transparent and understandable, 

in large part because of its close relationship to the 

current retirement system. 

Cost. 

Both proposals achieve savings in pension costs by 

reducing the value of retirement benefits for personnel who serve 20 or more years. The primary differences in cost savings between the two proposals are 

the result of the age difference (67 versus 55) at which 

retirees receive pension benefits and the years of service at which service members vest for retirement accounts and are eligible to receive transition pay.24

DBB Proposal. The DBB proposal lowers the value 

of retirement benefits by nearly 40 percent. In the 

aggregate, the DBB proposal yields cohort retirement savings of approximately $3.65 billion in 

2034 dollars.25

10-15-55 Proposal. The 10-15-55 proposal lowers the 

value of retirement benefits by approximately 25 percent. Against smaller reductions in pension value at 

retirement, the 10-15-55 proposal yields cohort retirement savings of $3.84 billion, also in 2034 dollars. 
21

Cost savings in the short run will result from the 

military’s ability to lower the accrual amount that it 

contributes to the pension fund. The short-run savings will be partly offset by the 401(k) contributions. 

Although we are unable to provide an accurate accrual estimate for both the DBB and 10-15-55 proposals, the accrual rate will be significantly lower for the 

DBB program. Both the substantial transition pay and 

401(k) contributions, however, will entail significant 

short-run costs for the DBB proposal. In contrast, the 

10-15-55 proposal has lower 401(k) contributions, and 

there is no transition pay until new program entrants 

“matriculate” at 20 years of service. In both proposals, long-run accrual savings will rise as the number 

of new program participants comprises an increasing 

share of active service members. 

Any cost savings effort necessarily entails changes 

to the existing pension program. We have highlighted how the differences between the DBB proposals and the 10-15-55 proposal fit within the pension 

framework outlined in this monograph to a lesser or 

greater extent. However, both proposals target the 

same basic levers. Although we believe the 10-15-55 

proposal brings the potential pension policy levers 

in line with the pension framework, there may be 

interest in adjusting it along relevant margins. Accordingly, we provide sensitivity analysis to the existing pension plan so that policymakers can see the 

cost savings with minor adjustments to each of the 

potential pension policy mechanisms: 

1. Delaying receipt of pension benefits by one additional year saves 3.77 percent. Therefore, adjusting the 

pension benefit eligibility age from 55 to 67 (12 years) 

represents a cost savings of nearly 45 pecent versus 

the current program.
22

2. Reducing the pension benefit multiplier from 2.5 

percent times years of service to 2 percent times years 

of service (for all pension benefit calculations) saves 

20.4 percent.

3. Permanently lowering the annual increase in 

military pay by 1 percentage point saves 16.1 percent.

4. Reducing the COLA downward by 0.25 percentage points saves 3.5 percent.

5. Shifting from a High-3 to High-5 pay calculation 

yields a cost savings of 5.2 percent.

The discount rate—the Federal Government’s cost 

of raising funds—also impacts cost savings from any 

pension reform. Savings are particularly sensitive to 

the discount rate, since pension reforms that reduce 

the value of the traditional DB component reduce future outlays, whereas government contributions to 

individual retirement accounts generate current outlays. The higher the discount rate, the lower the present value of reduced future pension outlays.

1. A 1 percentage point reduction in the discount 

rate increases cohort cost savings arising from the 10-

15-55 proposal by more than 3.8 percent.

Pension reforms that introduce defined contribution plans with individual retirement accounts expose 

service members to asset market risk; the value of 

one’s retirement account depends on market returns 

for the investments selected.

2. A permanent 1 percentage point decline in asset 

returns lowers the value of the employer’s contributions to the TSP retirement account by roughly 8.25 

percent for service members who take full advantage 

of the 100 percent employer match rate over a 20-year 

service career under the 10-15-55 plan.
23

Table 2 contains a summary of pension proposals 

evaluated against the pension framework.

Table 2. Evaluation of Proposals by Criteria.

Criteria Current Military Pension 

Program

Defense Business Board 

(DBB) plans (combines all 

DBB proposals)

10-15-55 Plan (Defined 

Benefit [DB] at age 55 for 

20 years of service, 401[k] 

with 5% match)

Inventory:

Accessions

Attractive only to career 

minded candidates

Attractive to individuals using Army as stepping stoneAttractive to mid-career and 

career minded individuals

Inventory: Retention Known effects Unknown effects in critical 

areas

Predictable effects

Inventory: Quality High opportunity cost for exiting helps attract and retain 

highest quality personnel

Reduced pension value and 

portable 401(k) allow highpotential personnel to exit

Tiered vesting in portable 

401(k) increases opportunity cost of exit at critical 

retention points, retaining 

higher quality personnel

Well-being: Total 

Compensation

Provides significant compensation for full military career; 

no compensation for partial 

career

Provides modest compensation for full military career 

and generous compensation 

for partial career

Provides comparable 

compensation with current 

plan for full military career 

and modest compensation 

for partial career

Well-being:

Economic Risk

Full protection from economic risk; insured against 

employment risk; protection 

from time inconsistent 

behavior

No protection from economic risk; retiree bears all 

employment risk until age 

60; little protection from 

time inconsistent behavior

Partial protection from 

economic risk; retiree bears 

employment risk to age 55; 

basic protection from time 

inconsistent behavior 

Well-being: Value Highest value (100% of 

current plan)

Lowest value (60-65% of 

current plan); value decline 

difficult to overcome with 

individual savings

Competitive with the top 

public and private retirement plans

Perceptions: Public Continued commitment to 

veterans

Military service valued 

equivalent to private sector 

employment; does not 

value conditions unique to 

military career

Military service valued at 

levels comparable to public 

and private professions with 

similar risk and hardship 

profiles

Perceptions: Military 

Transparency

Easy to understand benefits 

and plan for retirement

Complex; multiple changes 

to existing pension

Moderate; only alteration to 

existing pension is age at 

benefits receipt

Perceptions: Length 

of Service

No benefit until 20 years of 

service

Benefits received after 4+ 

years of service; pension 

eligibility at 20 years of 

service (receipt delayed to 

age 67)

Partial benefits received at 

10 years of service; pension 

eligibility at 20 years of 

service (receipt delayed to 

age 55)

Savings: Potency None Large impact with significant effect on personnel 

inventory, individual wellbeing, and perceptions

Modest impact with marginal effects on personnel 

inventory, individual wellbeing, and perceptions

Short-Run Cost 

Savings

No change Large reduction in accrual 

costs

Modestly lower accrual 

costs

Long-Run Cost 

Savings

No change Large Modest
24

CONCLUSIONS

Fiscal austerity may have created the need to consider alternative pension proposals, but if done correctly, it may end up being a blessing in disguise. Crafting 

pension reform in line with the pension framework 

provided in this monograph stands to provide greater 

flexibility in how the military manages its manpower. 

Adding a portability component stands to reduce accessions costs and allows the Army to remove low performing talent earlier than the current system, which 

tends to hold service members through 20 years of service, despite their performance levels. While the DBB 

proposals have been invaluable for providing a straw 

man to get the discussion going, they did not fully 

consider the unique aspects of the military’s labor construct. Collectively, the pension reforms advanced by 

DBB entail very high personnel inventory risk, drastically reduce service member well-being, and create 

substantial perception issues. In contrast, the 10-15-55 

proposal improves personnel inventory predictability and quality, provides a sufficiently transparent 

and robust benefit to engender service member wellbeing, and is far more likely to be perceived by all 

stakeholders as consistent with both individual and 

military requirements. 

If the military wants to get pension costs under 

control, it must consider making reforms. Such reforms must be made within the context of the broader military manpower paradigm. This monograph 

provides a reasonable framework for consideration. 

The 10-15-55 proposal is just one example of how 

policymakers should go about meeting the tenets 

of the pension framework provided in this monograph. There may be others worth considering, but 

each should be carefully benchmarked against our 

proposed framework.
25

ENDNOTES

1. Office of the Actuary, Statistical Report on the Military Retirement System: Fiscal Year 2011, Washington, DC: Department 

of Defense, May 2012. Fiscal Year (FY) 2011 military retirement 

outlays were roughly $50.6 billion and include retirement benefits paid to nondisabled active duty and reservist retirees, temporary and permanent disability payments to retirees, and survivors’ benefits. Annual military retirement system costs quoted 

in the media frequently report on inflows into the Military Retirement Fund. For FY 2011, inflows totaled $107.4 billion, including: the $19.8 billion service payment from Department of 

Defense (DoD) (34.3 percent of base pay); $61.4 billion from the 

Treasury for amortizing the unfunded liability in the Fund; a $4.8 

billion Treasury contribution for concurrent receipt of disability and retirement benefits; and, investment income of $21.4 billion from the Fund’s holdings of Treasury securities. See Costs of 

Military Pay and Benefits in the the Defense Budget, Washington, DC: 

Congressional Budget Office, November 2012, p. 40.

2. Lee Craig, “Public Sector Pensions in the United States,” 

Robert Whaples, ed., Economic History.Net Encyclopedia, 2003, 

available from eh.net/encyclopedia/article/craig.pensions.public.us. 

These pensions were available to officers who served a career 

(originally 40 years) in the Army. Veteran pensions, offered to soldiers who served in periods of conflict, have been implemented 

by Congress dating back to the Revolutionary War. See also Hugh 

Rockoff, “The Changing Role of America’s Veterans,” Cambridge, 

MA: National Bureau of Economic Research Working Paper No. 

8595, November 2001; and Sung Won Kang and Hugh Rockoff, 

“After Johnny Came Marching Home: The Political Economy 

of Veterans’ Benefits in the Nineteenth Century,” Working Paper No. 13223, Cambridge, MA: National Bureau of Economic 

Research, July 2007.

3. Samuel H. Williamson, The Development of Industrial 

Pensions in the United States During the Twentieth Century, Washington, DC: World Bank Policy Research Department, 1995, pp. 

4-8. Employer-provided pensions were uncommon throughout 

much of the 19th century; instead workers used private savings 

(including voluntary contributions to relief/benefits societies), 

transfers from children, and the purchase of tontine insurance 
26

to finance retirement. Railroads were the first to offer employerprovided pensions broadly, and the Pennsylvania Railroad’s pension, created in 1900, served as the standard bearer for many subsequent company pension plans. The pension provided universal 

coverage, was entirely financed by employer contributions (on a 

pay-as-you-go basis), and set mandatory retirement at 70 years of 

age. Although the original plan did not set a minimum years of 

service requirement, the firm subsequently imposed a maximum 

hiring age of 35.

4. The first tax-deferred retirement accounts available to individuals were Keough plans (for the self-employed) in 1962. The 

1974 Employment Retirement Income Security Act provided taxdeductible IRAs to individuals not covered by a private pension, 

and the 1978 Revenue Act allowed for tax breaks on employees’ 

deferred income, creating the 401(k) plan. In 1981, IRA eligibility 

was extended to all individuals.

5. Stephen Blakely, “Pension Plan Participation,” Washington, DC: Employment Benefit Research Institute Fast Facts #225, 

March 28, 2013. In 2011, only 3 percent of private sector workers 

participated exclusively in a defined benefit (DB) pension plan, 

with an additional 11 percent of workers participating in both defined contribution and DB plans.

6. This is similar to the workforce requirements of other public protection sectors, which also provide DB pension programs. 

For example, the New York Police Department and Pennsylvania State Police provide retirement pensions of 50 percent base 

salary at 20 years of service (including 401[k] contributions and 

full medical coverage). By comparison, federal civilian employees 

enjoy more mobility in exchange for reduced long-term benefits. 

The Federal Employees Retirement System (FERS) provides a DB 

pension (1 percent of High-3 average pay times years of creditable service) at a minimum retirement age of 57, complemented 

by a defined contribution benefit Thrift Savings Plan (TSP) with a 

maximum employer contribution of 5 percent of basic pay.

7. The Defense Business Board (DBB) evaluated a number of 

reforms, from a substantial reduction in the value of the DB pension (achieved mainly through the delay in benefits receipt until 

age 67) to complete replacement of the DB pension, with individ-
27

ual defined contribution retirement accounts managed within the 

Federal Government’s TSP. Employer contributions to defined 

contribution accounts are designed to offset the reduction in the 

DB pension. Nonetheless, the military’s wage structure and extensive use of nonwage compensation render it difficult for most 

service members to make sizable contributions to these individual 

accounts while young, limiting their ability to take full advantage 

of the power of compound interest over time.

8. Modernizing the Military Retirement System, Report FY11-05, 

Washington, DC: Defense Business Board, October 2011. While 

very useful, the DBB report insufficiently accounts for the unique 

nature of a military labor force. The report outlines the impact 

of increases in life expectancy and reforms to military compensation on the value of military retirement benefits; highlights the 

inefficiencies and inequities arising from today’s DB military pension; evaluates cost savings of incremental reforms to the current 

military retirement benefit (delaying retirement age, adjusting 

benefits multiplier, and calculating “High” pay over a longer averaging period); and suggests shifting from a DB plan to a defined 

contribution plan. With such a shift, the services would make contributions to individual accounts held in the government’s TSP, 

with employee contributions governed by federal laws concerning tax-advantaged retirement saving. The DBB report also proposes calibrating employer contributions to the TSP to compensate for risk and undesirability of military jobs (e.g., deployments, 

overseas posting separating the service member from spouse and 

family). While we are not in complete agreement with all of the 

DBB’s recommendations, our pension restructuring proposals incorporate several of them.

9. Although each branch of service is different, our analysis 

uses U.S. Army data, as it is the most manpower intensive branch.

10. Department of Defense, Tenth Quadrennial Review of 

Military Compensation, Vol. II: Deferred and Noncash Compensation, 

Washington, DC: U.S. Government Printing Office, July 2008, 

pp. 10-11.

11. Gallup Poll, “Confidence in Institutions Survey, June 

7-10, 2012,” available from www.gallup.com/poll/1597/confidenceinstitutions.aspx#1, accessed on February 25, 2013. In 2012, Gal-
28

lup’s “Confidence in Institutions” poll showed the military as the 

top rated American institution, with 75 percent of respondents 

expressing a “great deal” or “quite a lot” of confidence in the military and Congress polling lowest at 13 percent. 

12. Defense Manpower Data Center, “Defense Casualty Analysis System: U.S. Military Casualties—GWOT Casualty Summary 

by Casualty Type,” available from www.dmdc.osd.mil/dcas/pages/

report_sum_reason.xhtml. 

13. Cohort cost savings depend on the timing of retirement for 

service members who remain in the military 20 years or longer.

14. Although we provide a recommendation for potential 

changes to health care benefits, we do not provide cost savings 

estimates or conduct any sensitivity analysis on this portion of the 

retirement program.

15. Congressional Budget Office, pp. 25-26. The normal cost 

percentage for active-duty personnel in 2012 is 34.3 percent.

16. Recognizing that many junior enlisted soldiers may be liquidity constrained and to incentivize individual contributions to 

the portable retirement account, the military could increase the 

match rate for soldiers in their first 5 years of service.

17. A detailed accounting of all modeling assumptions is contained in Appendix 1.

18. All calculations use 2006-10 average annual separations by 

Years of Service (YOS) to forecast cohort savings from retirement 

benefits reform proposals. Assumptions: Personnel with greater 

than 20 YOS at separation are “loaded onto” the 20 YOS category 

for these calculations, as proposed pension reform is assumed to 

take effect in FY 2014. Under the DBB composite proposal, transition pay benefit is paid only to those fully vested (4+ YOS), and 

transition pay formula is YOS multiplied by highest monthly base 

pay. Under 10-15-55 proposal, transition pay is equal to the highest 6 months of base pay for service members serving 20 or more 

years. A 401(k) would provide the following benefits: government contributes 5 percent of base pay to TSP and provides a 100 

percent match on service member contributions up to a maximum 
29

of 5 percent of a service member’s base pay. A service member 

who contributes 5 percent of base pay in a year would see a total TSP contribution (government and employer) of 15 percent of 

base pay.

Discount rate = 6.5 percent, Inflation rate = 2.5 percent

Retirement contributions in TSP account earn an annual 

return of 8.5 percent.

Conditional Mortality = 80 years

Survivor Benefit Plan replaced with 401(k) transferability. 

19. The greater reduction in present value of retirement benefits for enlisted personnel under the 10-15-55 proposal occurs 

because enlisted personnel face longer average delay to age 55. 

Lowering the age of benefits receipt for enlisted personnel to age 

51 or raising maximum government contributions to 14.5 percent 

of base pay will equalize the reduction in benefits.

20. These figures do not include savings from reduced accrual 

contributions. The DBB proposal to replace today’s DB pension 

with a defined contribution retirement account (with 16 percent 

of base pay employer contribution and 1 month of transition assistance for each year of service to all personnel serving 4+ years) 

would generate a retirement benefit worth $0.533 million (2034 

dollars) for an E7 with 20 YOS and a retirement benefit worth 

$1.004 million (2034 dollars) for an O5 with 20 YOS. Under this 

retirement reform, total cohort cost savings in 2034 dollars would 

be $4.35 billion, generating a 12.69 percent saving over the 10-15-

55 proposal.

21. Jack VanDerhei, Sarah Holden, and Luis Alfonso, 401(k) 

Plan Asset Allocation, Account Balances, and Loan Activity in 2009, 

Issue Brief No. 350, Washington, DC: Employee Benefits Research 

Institute, November 2010, pp. 12, 21.

22. Ibid., p. 5. In 2009, 49 million workers (slightly less than 

one-third of the work force) were active participants in 401(k) 

plans. These plans are the most widespread employer-sponsored 

retirement plan in the private sector.

23. Service members contributing to the TSP retirement account can choose their asset allocation based on their tolerance for 

risk, to include a 100 percent allocation in Treasury securities (the 

TSP government securities [G] fund).
30

24. Relaxing the assumption that all personnel separate at 20 

years of service, we also estimate cost savings using average annual separations from 2006-10 for enlisted personnel and officers 

with 20 or more years of service. Due to delay in age at pension 

receipt and lower benefits multipliers, cohort cost savings for the 

DBB proposal ($3.07 billion 2034 dollars) are greater than cohort 

cost savings under the 10-15-55 proposal ($2.34 billion 2034 dollars). Replacing the DB pension with an employer funded TSP account (16 percent of base pay) would generate future cohort cost 

savings of $4.47 billion (2034 dollars).

25. Recall that a shift to a pure defined contribution account 

with the military contributing 16 percent of base pay to individual 

TSP accounts will generate 13 percent more savings than the 10-

15-55 proposal, but at the cost of entirely removing the DB pension. A retirement cohort includes all personnel who separate in 

a single fiscal year. Estimates in this monograph are from average 

annual separations from 2006-10.
31

APPENDIX I

MODELING ASSUMPTIONS

Discount Rate In determining the cost of future outlays on retirement benefits, the relevant discount rate is the government’s cost of 

borrowing. From 1983 to 2012, the annual yield on 10-year 

Treasury bonds averaged 6.21 percent, and the annual yield 

on 30-year Treasury bonds (when they were traded) averaged 

6.86 percent. We selected a discount rate of 6.5 percent, 

which lies in between these two measures of government 

borrowing costs in the long run.

Return on 

Retirement 

Accounts

All pension reform proposals that include a defined contribution account feature individual retirement accounts invested 

through the Thrift Savings Program (TSP). Annual historical 

return information on the TSP government securities fund 

(G Fund), fixed income securities fund (F Fund), and common stock fund (C fund) is available for 1988 to 2012. Average annual returns over this time period were 5.62 percent 

for the G Fund, 7.11 percent for the F Fund and 11.12 percent 

for the C fund. Using these annual returns, we constructed a 

TSP portfolio containing 20 percent government securities, 

30 percent fixed income, and 50 percent common stock. The 

compound annual return on this portfolio was 8.39 percent 

per year from 1988 to 2012. We selected a rate of return on 

TSP contributions of 8.5 percent for our analysis.

Annual Base 

Pay Increases

From 2000 to 2012, military base pay grew on average by 

3.74 percent, more than 1.25 percentage points higher than 

the average annual increase in the Employment Cost Index 

for private industry workers of 2.47 percent. We selected an 

annual base pay increase of 3.5 percent for our analysis.

Annual 

Inflation Rate

From 1983 to 2012, average annual personal consumption 

expenditures (PCE) inflation was 2.6 percent, while the average annual increase of the gross domestic product (GDP) 

implicit price deflator was 2.5 percent. We selected an annual 

inflation rate of 2.5 percent for our analysis.

33

APPENDIX II

STRATEGIC COMMUNICATIONS

Regardless of the changes made to the military 

retirement program, strategic communications are essential. Backlash to the Defense Business Board (DBB) 

proposal from multiple stakeholder segments demonstrates the degree to which clumsy messaging can 

compound resistance to any proposal. We provide 

the following strategic talking points by critical stakeholder segments for the 10-15-55 plan as an example:

a. For service members:

• Current service members and retirees retain

current retirement benefit eligibility.

• The new retirement system applies to all personnel entering service after October 1, 2014.

• The military will automatically contribute

5 percent of base salary each month into a 

401(k) plan managed within the Thrift Savings Program (TSP). This is a tax-deferred account that will grow at a rate commensurate 

with market conditions. Service members 

may contribute up to the annual amount for 

a 401(k) (currently $17,500 for those less than 

age 50 and $23,000 for those age 50 and older), and the military will continue to match 

dollar for dollar up to an additional 5 percent 

of base pay.

• Service members leaving the service at any

point will own and control their own 401(k) 

contributions.

• At 10 years of service, service members will

become partially vested in the government 
34

contributions and can separate with 50 percent of government contributions. This percentage increases by 10 percentage points 

each year through 15 years of service, at 

which time service members can separate 

with the full 401(k) value to date.

• Service members who serve through 20 years

of service receive their 401(k) and modest 

transition pay, as well as a DB component.

• The DB portion is identical to the existing program with one exception. You still can retire 

with 50 percent of base pay, and that amount 

still increases 2.5 percentage points each additional year of service beyond 20. However, 

retirees do not begin to receive payments or 

full Tricare coverage until they are 55 years 

of age. They may receive Tricare coverage as 

a second provider from retirement through 

55 years of age. Limiting Tricare coverage to 

second provider status both compensates for 

the portability of the 401(k) and incentivizes 

gainful employment following military service through 55 years of age.

b. For the public:

• The new retirement system has three main

components: an altered DB, a portable 401(k), 

and medical coverage.

• These changes were necessary to improve

the quality of life provided to all veterans, 

while still providing one of the most dependable and robust retirement programs in 

the world.

• The social contract with our service members is maintained—they will receive ample 
35

retirement benefits to protect them from economic risk and ameliorate the financial disadvantages incurred by their selfless service.

c. For the Federal Government:

• 83 percent of all service members will depart

military service before reaching retirement 

eligibility. The new retirement system addresses this by providing a portable 401(k) 

component.

• The 10-15-55 proposal realizes substantial savings in retirement costs (roughly 33 percent 

compared to the current retirement benefit) 

without jeopardizing the well-being of our 

service members in the long run. Simultaneously, it ensures that the military will continue to enjoy a stable population of talented, 

career-minded professionals who believe the 

government is appropriately compensating 

them for the personal and financial risks inherent in the profession of arms.
U.S. ARMY WAR COLLEGE

Major General Anthony A. Cucolo III

Commandant

*****

STRATEGIC STUDIES INSTITUTE

and

U.S. ARMY WAR COLLEGE PRESS

Director

Professor Douglas C. Lovelace, Jr.

Director of Research

Dr. Steven K. Metz

Authors

Mr. Roy A. Wallace

Lieutenant Colonel David S. Lyle

Dr. John Z. Smith

Editor for Production

Dr. James G. Pierce

Publications Assistant

Ms. Rita A. Rummel

*****

Composition

Mrs. Jennifer E. Nevil