United States General Accounting Office

GAO Report to the Honorable

Douglas (Pete) Peterson, House of

Representatives

November 1996 MILITARY

RETIREMENT

Possible Changes Merit

Further Evaluation

G O A

years

1921 - 1996

GAO/NSIAD-97-17

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-275254 

November 15, 1996

The Honorable Douglas (Pete) Peterson

House of Representatives

Dear Mr. Peterson:

This report responds to your request that we review selected aspects of the military retirement

system. Specifically, we addressed (1) military retirement costs, (2) the role of military

retirement in shaping and managing U.S. forces, and (3) proposed changes to modernize the

system and contribute to more efficient force management. As part of our review, we hosted a

roundtable discussion on June 12, 1996, at which several current and former Department of

Defense officials and compensation experts expressed their views on those aspects of the

military retirement system included in our review.

We are sending copies of this report to the Chairmen and Ranking Minority Members, Senate

Committee on Armed Services, House Committee on National Security, and Senate and House

Committees on Appropriations; the Secretary of Defense; and other appropriate parties. We will

also make copies available to others on request.

Please contact me at (202) 512-5140 if you or your staff have any questions concerning this

report. Major contributors to this report are listed in appendix IV.

Sincerely yours,

Mark E. Gebicke

Director, Military Operations

 and Capabilities Issues
Executive Summary

Purpose In recent years, U.S. armed forces have been affected by substantial

changes, including the end of the Cold War, subsequent downsizing, and

significant technological advances and associated increases in skill

requirements for military personnel. Also, considerable changes have been

made to the design of many civilian retirement systems over the past 

2 decades. All of these changes, along with increasing federal budget

pressures, have focused attention on whether the military retirement

system is best designed to efficiently meet the needs of the Department of

Defense (DOD) and members of the military services.

As requested, GAO reviewed the military retirement system. Specifically,

GAO addressed (1) military retirement costs, (2) the role of military

retirement in shaping and managing U.S. forces, and (3) proposed changes

to modernize the system and contribute to more efficient force

management. As part of its review, GAO hosted a roundtable discussion on

June 12, 1996, at which several current and former DOD officials, as well as

compensation experts, expressed their views on those aspects of the

military retirement system included in GAO’s review.

Background The basic structure of the current U.S. military retirement system was

established in legislation over a period of years, ending in the late 1940s.

The system provides benefits to nondisabled service members when they

retire from active or reserve duty and service members who retire on

disability. It also provides for optional survivor coverage. It is a

noncontributory, defined benefit plan that allows retiring active duty

service members with 20 or more years of service to receive an immediate,

lifetime annuity with cost-of-living adjustments, regardless of age.1

In 1980 and 1986, the benefit formulas for new entrants to the military

services were changed to reduce costs, and the 1986 changes provided

incentives for longer careers. Although the basic structure of the

retirement system was left intact, the changes in the benefit formulas

resulted in the three separate versions of the military retirement system

that are currently in effect.2

 Since 1957, military personnel have paid social

security taxes and thus earned credits toward social security benefits.

1

In a defined benefit system, employers promise to pay specific retirement benefits that are generally

based on a formula that considers job tenure and earnings.

2

Service members who entered the military before September 8, 1980, are under one version; those

who entered on or after September 8, 1980, and before August 1, 1986, are under a second version; and

those who entered on or after August 1, 1986, are under a third version.

Page 2 GAO/NSIAD-97-17 Military Retirement
Executive Summary

Results in Brief Payments from the military retirement fund to military retirees and their

survivors totaled $29 billion in fiscal year 1996. These payments have been

rising over several decades as both the number of military retirees and the

average payment to individual retirees have increased. These payments are

expected to peak at slightly more than $30 billion (in fiscal year 1995

dollars) in 2007. Since fiscal year 1985, the “accrual accounting” concept

has been used to reflect the cost of future retirement payments for current

service members in DOD’s military personnel budget. These annual DOD

budgetary costs have declined for several reasons, including lower

benefits for new entrants, changes in economic and actuarial assumptions

to reflect experience, and recent decreases in force size. These

costs—about $11 billion in fiscal year 1996—constitute approximately

4 percent of DOD’s budget.

The military retirement system strongly influences the broad shape of the

force. The retirement system provides an increasing incentive for service

members to stay in the military as they approach 20 years of service and

encourages them to leave thereafter, helping DOD to retain midcareer

personnel and yielding a relatively young force. However, the system can

also impede effective force management. Because military personnel are

not entitled to any retirement benefits unless they have served 20 years,

the services have been reluctant to involuntarily separate personnel with

less than 20 years of service beyond a certain point due to the financial

consequences for service members and their families and the resulting

impact on morale. Moreover, some analysts, including several of GAO’s

roundtable participants, believe the military retirement system is an

obstacle to achieving a force of the right size and composition because the

system provides the same career length incentive for all categories of

personnel. These analysts maintain that 20 years may not be the optimal

career length for all military personnel.

Proposals to change the military retirement system range from

modifications of various features of the current system to complete

alternatives. Those proposals are intended to improve efficiency and

flexibility in managing the force, increase fairness or attractiveness to

service members, and reduce costs. Earlier vesting of at least a portion of

military retirement benefits is a common feature of proposed changes.3

Cost estimates done by the DOD Actuary, at GAO’s request, suggest that

some type of earlier vesting could be offered with little or no increase to

DOD’s retirement costs. The total impact on DOD’s budget of the proposed

3

In this report, the term vesting refers to a service member’s right to receive some retirement benefit,

regardless of whether the benefit is paid immediately or deferred.

Page 3 GAO/NSIAD-97-17 Military Retirement
Executive Summary

changes depends on their effect on retention and force composition. Some

analysts, including several of GAO’s roundtable participants, have called for

more fundamental changes to the retirement system, possibly with other

changes in compensation and personnel policy, to accommodate different

career lengths for different personnel. These changes could increase

effectiveness or reduce costs by yielding a force of a different composition

and size than today’s force.

Principal Findings

Military Retirement Costs Pressures to reduce the federal budget deficit have focused attention on

the level of payments to current military retirees. These payments, which

totaled $29 billion in fiscal year 1996, have been rising for several decades

as the retiree population has grown and as average payments to individual

retirees have increased. They are expected to peak, in fiscal year 1995

dollars, at about $30 billion in 2007.

Since 1985, DOD’s budget has reflected the estimated amount of money that

would have to be set aside in that year to cover the future retirement costs

of current service members.4

 Those costs, $11 billion in fiscal year 1996,

have declined over the past decade due to reduced benefits for new

entrants, changes to the DOD Actuary’s economic and actuarial

assumptions, and reductions in the size of the force.

Even with the reductions to military retirement benefits resulting from the

changes in benefit formulas in 1980 and 1986, some observers question

whether military retirement benefits have the right weight in overall

military compensation. These observers maintain that the appropriate

indicator of the level of retirement benefits is how well they contribute to

the services being able to build and maintain the force they need.

Military Retirement’s Role

in Shaping and Managing

the Force

The retirement system is widely viewed as a substantial influence on the

broad shape of the force. With its combination of 20-year vesting and the

payment of an immediate annuity at any age after 20 years of service, the

4

Funds appropriated in DOD’s budget to cover future retirement costs are recorded as payments to the

Military Retirement Fund. The fund’s assets are nonmarketable, special-issue Treasury securities,

which constitute a promise on the part of the U.S. government to pay based on the government’s

power to collect taxes. Thus, the military retirement system actually continues to be financed on a

pay-as-you-go basis, as do the retirement systems for most federal civilian employees, Social Security,

and the rest of the federal government.

Page 4 GAO/NSIAD-97-17 Military Retirement
Executive Summary

system is designed to foster a relatively young force and ensure a flow of

experienced personnel through encouraging those with 20 or more years

of service to retire. The system generally serves as a very strong retention

tool, pulling personnel after a certain career point to stay at least 20 years.

It has thus been valuable as a force stabilizer. Although recent historical

experience has shown that about 15 percent of entering enlisted personnel

and 48 percent of entering officers become eligible for retirement, the

percentage of personnel with 10 years of service who reach retirement

eligibility has been about 70 percent for enlisted personnel and over

90 percent for officers.

The retirement system contributes to the difficulty of changing the size or

composition of the force. The services are reluctant to involuntarily

separate personnel, with less than 20 years of service, past the midcareer

point because of the financial consequences for service members and their

families and the resulting impact on morale. This situation was highlighted

by the need for temporary measures to induce separations or compensate

involuntarily separated members with less than 20 years of service during

the recent drawdown.

Some analysts maintain that today’s military needs many service members

for less than 20 to 30 years and may want to retain others for longer. By

offering the same career length incentives to all personnel, the retirement

system can impede effective force management. For example, although

some military combat specialties require youth and vigor, experience may

be of greater value in occupations such as systems acquisition or

intelligence analysis. One roundtable participant advocated lengthening

careers for senior officers and shortening them for other officers partly

because of the increased requirements senior officers face for both formal

education and joint operational experience.

Two views were expressed at GAO’s roundtable regarding the information

necessary to justify fundamental retirement system changes. One view was

that designing the right types of management policies, including the

retirement system, required first determining what kind of force DOD is

trying to build for the future. The other view was that such foresight was

unlikely and a retirement system that could accommodate changes in

circumstances was needed.

Options for Modifying the

Military Retirement System

Various proposals to modify the military retirement system have sought to

increase force management efficiency or flexibility, increase fairness or

Page 5 GAO/NSIAD-97-17 Military Retirement
Executive Summary

attractiveness to members, and reduce costs. These proposals include

modifications or additions to the current system as well as complete

alternatives. A common feature of many proposals, generally supported by

GAO’s roundtable participants, is that service members be vested earlier in

some type of retirement benefit. At GAO’s request, the DOD Actuary

estimated the impact on retirement accrual costs of (1) three changes to

the system that provide earlier vesting in a benefit that could be paid

either as a deferred annuity or a lump-sum payment upon separation and

(2) a tax-deferred savings option (with and without government matching)

for military personnel. According to the Actuary’s cost estimates, DOD may

be able to provide some earlier vesting of retirement benefits with little

increase in retirement costs. For example, the cost estimate for a deferred

annuity adjusted for inflation would increase the current military

retirement system cost by less than 1 percent of basic pay. Predicted total

cost impacts depend in part on the extent to which particular changes

result in significantly different retention behavior and yield a more junior

(or senior) force. Some analysts have called for major changes to the

retirement system, often along with other changes in compensation and

personnel policy. One alternative proposed at GAO’s roundtable discussion

was to create a two-part system for military personnel. Service members in

occupations requiring youth and vigor would be under the current system

(modified to vest earlier), and others would be under a system similar to

the Federal Employees Retirement System (FERS).

In general, the greater the change to the military retirement system, the

greater the uncertainty surrounding predicted impacts. Predicting cost and

other impacts of retirement system changes is difficult partly because of

uncertainty about retention impacts. For example, a recent RAND analysis

of placing military personnel under a FERS-type system concluded that the

change would reduce retirement costs but that maintaining the current

size and quality force would require a pay increase and a system of

separation payments. The analysis predicted the change would result in

net cost savings to DOD. If changes in retirement and other aspects of

personnel policy allow military objectives to be achieved with a smaller,

more efficient force, cost savings could be greater. The most sophisticated

analysis may be a poor predictor of substantial retirement system changes,

according to several of GAO’s roundtable participants. They noted that

impacts of the 1980 and 1986 changes to the retirement system are not yet

known. Characteristics of the desired future force are important in

evaluating the risks and benefits of retirement system changes.

Page 6 GAO/NSIAD-97-17 Military Retirement
Executive Summary

Recommendations GAO is not making any recommendations in this report.

Agency Comments DOD provided written comments on a draft of this report. DOD stated that it

did not object to the overall thrust of the report but did, however, express

concern that the report’s discussion of potential changes to the retirement

system could be taken to suggest a consensus on specific shortcomings of

the system. DOD emphasized the overall effectiveness of the retirement

system in providing the military with needed personnel and stated that the

impact of 1980 and 1986 changes to the system should be fully assessed

before further changes are made. DOD’s specific comments appear in

appendix III.

Page 7 GAO/NSIAD-97-17 Military Retirement
Contents

Executive Summary 2

Chapter 1 

Introduction

10

The Three Versions of the Retirement System 10

Accounting for Military Retirement Costs 11

Objectives, Scope, and Methodology 12

Chapter 2 

Military Retirement

Costs

14

Federal Outlays for Military Retirees 14

Military Retirement Cost as a Defense Budget Item 17

Chapter 3 

Military Retirement’s

Role in Shaping and

Managing the Force

21

Force Management Objectives of the Military Retirement System 21

The Retirement System Affects Force Composition 22

The Retirement System Can Hamper Effective Force

Management

24

Retirement System Assessment Depends on Characteristics of

the Desired Force

26

Chapter 4 

Options for Modifying

the Military

Retirement System

29

Several Features Targeted for Change 29

Analysis of Selected Modifications to the Current System 30

Proposals for Fundamental Retirement System Changes 36

Conclusions 37

Agency Comments 38

Appendixes Appendix I: Summary of GAO’s Military Retirement Roundtable

Discussion

40

Appendix II: Selected Retirement System Options 46

Appendix III: Comments From the Department of Defense 51

Appendix IV: Major Contributors to This Report 53

Tables Table 1.1: Military Retirement System Benefit Formulas 11

Table 2.1: Costs of Selected Retirement Systems as a Percent of

Pay

20

Table 4.1: Accrual Cost Measured as Normal Cost Percentages of

Current Military Retirement System and 

Options 1 Through 3

31

Page 8 GAO/NSIAD-97-17 Military Retirement
Contents

Figures Figure 2.1: Military Retirement Outlays, Historical and Projected 15

Figure 2.2: Military Retirement Normal Costs as a Percent of

Current Service Members’ Basic Pay

17

Figure 2.3: Military Retirement Normal Costs Compared With

Personnel Costs and Other DOD Budget Categories

18

Figure 3.1: Retention Patterns for Active Duty Personnel 23

Figure 4.1: Value of Officer Future Retirement Benefits According

to Years of Service Under the Current System and Options 1 and

3

33

Figure 4.2: Value of Officer Future Retirement Benefits According

to Years of Service Under the Current System and

Option 4

34

Abbreviations

CSRS Civil Service Retirement System

DOD Department of Defense

FERS Federal Employees Retirement System

QRMC Quadrennial Review of Military Compensation

RDT&E research, development, test, and evaluation

SSB Special Separation Benefits

TERA Temporary Early Retirement Authority

TSP Thrift Savings Plan

VSI Voluntary Separation Incentives

Page 9 GAO/NSIAD-97-17 Military Retirement
Chapter 1 

Introduction

The basic structure of the U.S. military retirement system was established

in legislation over a period of years, ending in the late 1940s. The system

provides benefits to nondisabled service members when they retire from

active or reserve duty and service members who retire on disability. It also

provides for optional survivor coverage.1

 It is a noncontributory, defined

benefit plan that allows retiring active duty service members with 20 or

more years of service to receive an immediate lifetime annuity with

cost-of-living adjustments, regardless of age.2

 In 1980 and 1986, benefit

formulas for new entrants were changed to reduce costs and, in 1986,

provide incentives for longer careers, but the basic structure of the system

was left intact.

In recent years, U.S. armed forces have been affected by substantial

changes, including the end of the Cold War, subsequent downsizing of U.S.

forces, and significant technological advances and associated increases in

skill requirements for military personnel. These changes, along with

increasing federal budget pressures, have focused attention on whether

the military retirement system is best designed to efficiently meet the

needs of the Department of Defense (DOD) and service members.

The Three Versions of

the Retirement

System

Currently, members are covered by three separate versions of the

nondisability retirement system based on when they entered military

service.3

 Retired active duty personnel who entered the service before

September 8, 1980 (known as pre-1980), receive a benefit equal to a

percentage of their final basic pay,4

 calculated by multiplying their years of

service by 2.5 percent. The benefit is 50 percent of basic pay for 20 years

of service and reaches a maximum of 75 percent of basic pay for 30 years

of service. For members who entered military service on or after

September 8, 1980, and before August 1, 1986 (known as 1980-86), the

accrual percentage is the same, but an average of the highest 3 years of

basic pay, rather than the final level of basic pay, is used in the calculation.

For members who entered the service on or after August 1, 1986 (known

as post-1986), the accrual percentage for benefits before age 62 is lower

1

Since 1953, military personnel have had the option to receive reduced retired pay to provide survivor

benefits for spouses and children.

2

In a defined benefit plan, employers promise to pay specific retirement benefits that are generally

based on a formula that considers job tenure and earnings.

3

Since 1957, military personnel have paid social security taxes and thus earned credits toward social

security benefits.

4

Basic pay averages about 72 percent of regular military compensation, which also includes housing

and subsistence allowances.

Page 10 GAO/NSIAD-97-17 Military Retirement
Chapter 1 

Introduction

for members with less than 30 years of service. Retirement pay is

40 percent of the average of the highest 3 years of basic pay for 20 years of

service, gradually increasing to 75 percent for 30 years of service. Benefits

for this last group are not fully protected against inflation, whereas

benefits for the first two groups are fully protected. Table 1.1 shows

details of the benefits for the three military retirement systems.

Table 1.1: Military Retirement System

Benefit Formulas Plan Description

Pre-1980 2.5 percent for each year of service up to a maximum of

75 percent of final basic pay. Retired pay is adjusted annually

by the increase in the consumer price index.

1980-86 2.5 percent for each year of service up to a maximum of

75 percent of the average of the highest 3 years of annual basic

pay (known as the high three). Retired pay is adjusted annually

by the increase in the consumer price index.

Post-1986 Same as the 1980-86 benefit formula, except benefit is reduced

by 1 percentage point for each year of service less than 30. At

age 62, the retired pay is recomputed with the penalty

removed. Retired pay is adjusted annually by 1 percentage

point less than the increase in the consumer price index, with a

one-time restoral in purchasing power at age 62.

Source: DOD Actuary.

Accounting for

Military Retirement

Costs

The DOD Authorization Act of 1984 established the Military Retirement

Fund, which became effective on October 1, l984. With the establishment

of the fund, the military retirement system went from pay-as-you-go

accounting and budgeting to accrual-based accounting and budgeting. At

that time, payments to individuals who had already retired began to show

up in the federal budget as disbursements from the Military Retirement

Fund and not as payments from DOD’s military budget.

Under accrual-based accounting, the Secretary of Defense is required to

allocate a percentage of annual military basic pay costs to the fund to meet

future retirement obligations for current service members. This amount is

paid from DOD’s military personnel account and is based on actuarial and

economic assumptions. This payment is called the “normal cost” payment,

or the retirement accrual charge.

When the fund was established, the unfunded costs of retirement benefits

already accrued became apparent. The initial unfunded liability as of

September 30, 1984, was $528.7 billion ($751.8 billion in fiscal year 1995

Page 11 GAO/NSIAD-97-17 Military Retirement
Chapter 1 

Introduction

dollars). The unfunded liability is being amortized over a period of 

50 years with payments to be made to the Military Retirement Fund from

the Treasury Department. Changes in the amount of the unfunded liability

“owed” to the fund can occur due to changes in economic assumptions,

changes in the benefit formula for retired pay, or differences between

anticipated accounting gains or losses in the fund and actual experience.

The value of the unfunded liability as of September 30, 1995, was

$500.8 billion.

In addition to normal cost payments from DOD’s military personnel account

and unfunded liability amortization payments from the Treasury, the

Military Retirement Fund receives income from interest earnings on

investments in nonmarketable, special-issue Treasury securities. All three

of these payments are intragovernmental transfers consisting of debits

from one government account and credits to another. In addition to

making payments to military retirees and their survivors, the fund

purchases the special-issue Treasury securities, another intragovernmental

transfer. The adoption of accrual-based accounting caused future

retirement outlays to be recognized as a future liability and thus made the

total cost of current personnel decisions evident. However, the military

retirement system continues to be financed on a pay-as-you-go basis, as

are the federal retirement systems for most civilian workers and Social

Security, in that benefits paid each year are financed by federal revenues

received that year.

Objectives, Scope,

and Methodology

As requested, we reviewed selected aspects of the military retirement

system. Specifically, we addressed (1) military retirement costs, (2) the

role of military retirement in shaping and managing U.S. forces, and

(3) proposed changes to modernize the system and contribute to more

efficient force management. As part of our review, we hosted a roundtable

discussion on June 12, 1996, at which several current and former DOD

officials, as well as compensation experts, expressed their views on those

aspects of the military retirement system included in our review. A

summary of the discussion and a list of roundtable participants appear in

appendix I.

We focused our review on the nondisability active duty military retirement

system. We identified and reviewed studies and data concerning the

military retirement system and proposed changes. We interviewed military

personnel, compensation, and force management officials from the Army,

the Navy, and the Air Force. We also spoke with officials from the Office

Page 12 GAO/NSIAD-97-17 Military Retirement
Chapter 1 

Introduction

of the Secretary of Defense; Retired Officers Association; Retired Enlisted

Association; Congressional Research Service; Congressional Budget

Office; Office of Management and Budget; Office of Personnel

Management; Brookings Institution; Employee Benefits Research Institute;

Hay-Huggins Management Consultants; ICF Kaiser International, Inc.;

KPMG Peat Marwick; and RAND.

We reviewed historical data and the current projections of future

retirement costs from the DOD Actuary. At our request, the Actuary also

provided retirement cost estimates for selected proposals for change. We

did not validate or verify the Actuary’s results, and the estimates only

reflected retirement costs, not the total cost impacts to DOD. The four

proposals we selected represent past proposals and suggestions from

roundtable participants. Each proposal retains the basic feature of

allowing retirement with an immediate annuity after 20 years. In addition,

we collected and analyzed data on costs of civilian retirement systems and

compared these costs with those of the military retirement system.

We conducted our review from December 1995 to September 1996 in

accordance with generally accepted government auditing standards.

Page 13 GAO/NSIAD-97-17 Military Retirement
Chapter 2 

Military Retirement Costs

The cost of military retirement can be measured in a number of ways. For

understanding military retirement cost as a portion of total federal

government outlays and its impact on the current budget deficit, outlays to

existing retirees are the appropriate measure. However, these outlays

represent obligations already incurred. For evaluating military retirement

as an aspect of current government and DOD policy, the accrual costs in

DOD’s budget, which reflect future retirement outlays for individuals now

serving in the military, are the relevant measure.

Federal Outlays for

Military Retirees

In fiscal year 1996, the United States paid $29 billion to military retirees

and their survivors.1

 Figure 2.1 shows historical and projected federal

government outlays for military retirement. The outlays are projected to

increase to slightly more than $30 billion (in fiscal year 1995 dollars) by

the year 2007, after which they will decline, in inflation-adjusted terms.

1

This amount represents payments from the Military Retirement Fund and does not include social

security payments to military retirees.

Page 14 GAO/NSIAD-97-17 Military Retirement
Chapter 2 

Military Retirement Costs

Figure 2.1: Military Retirement Outlays,

Historical (1950-95) and Projected

(1996-2030)

1950 1960 1970 1980 1990 2000 2010 2020 2030

0

5

10

15

20

25

30

35

Fiscal year 1995 dollars in billions

Source: DOD Actuary.

Military retirement outlays have increased in constant dollars since 1960

due to the increase in the number of retirees, average retired pay, and

survivor benefits. For example, from 1960 to 1995, the number of retirees

grew sixfold—from 254,000 to 1,603,000—due primarily to the rise in the

proportion of service members reaching retirement and somewhat to

higher life expectancy. Over the same period, average annual

inflation-adjusted pay per retiree rose by about 11 percent as military basic

pay, on which retired pay is based, grew faster than inflation. Also, the

percentage of retirees electing survivor benefits increased from 15 to 60,

and the population of survivors receiving payments went from a few

thousand in 1960 to 213,000 in 1995.

Page 15 GAO/NSIAD-97-17 Military Retirement
Chapter 2 

Military Retirement Costs

Federal budget pressures have heightened interest in opportunities to

reduce spending both in the near and long term. Efforts to reduce

near-term spending have resulted in several initiatives to achieve savings

through trimming payments to existing retirees.2

 One initiative was a fiscal

year 1996 budget resolution proposal to reduce outlays for those who

entered the military before September 1980 by computing benefits on an

average of the final year of basic pay instead of the final basic pay. (This

initiative was removed from both the House and Senate versions of the

reconciliation bill.) Other initiatives included a proposal to reduce

inflation adjustments for all nondisabled retirees and a bipartisan plan to

reduce inflation adjustments and the retired pay computation formula for

retirees under age 50.

Reactions to these initiatives demonstrated that proposals to change

retirement benefits for service members already retired are likely to meet

strong opposition. For example, in expressing DOD’s view of the fiscal year

1996 budget proposal, the Secretary of Defense said he would do

everything he could to “. . . drive a stake through the heart of this idea.”

One reason cited for the defense community’s opposition to this proposal

is that retroactive changes constitute a breach of promise to service

members, which could undermine DOD’s credibility. This position is

consistent with the views of DOD officials and some analysts that changes

to the military retirement system should apply only to new entrants so that

the changes do not affect the terms under which a service member began

his or her career.

There is, however, tension regarding the disparity between benefits to

current retirees and service members under the more generous systems,

on one hand, and those members covered by a less generous system, on

the other. Moreover, one of our roundtable participants observed that

lifetime benefits to personnel currently retired will generally exceed

expectations due to longer lifetimes. Participants also noted that all of

society will have to make adjustments as the country’s budgetary strains

continue to grow.

2

One of our roundtable participants put the magnitude of military retirement current and projected

outlays in context by comparing them with those under the broadest federal entitlement programs,

such as Medicare and Social Security. Medicare spending in fiscal year 2000 is projected to be about

$200 billion, and outlays for Social Security are projected to be about $369 billion (both in fiscal year

1995 dollars). Even though those programs, which apply to huge proportions of the population, can

make almost any category of federal spending appear small, they are provided as examples to illustrate

that the deficit will not be dramatically affected by adjustments in payments to current military

retirees.

Page 16 GAO/NSIAD-97-17 Military Retirement
Chapter 2 

Military Retirement Costs

Military Retirement

Cost as a Defense

Budget Item

Military retirement accrual cost for active duty personnel was an

$11 billion DOD budget item in fiscal year 1996. DOD paid this amount into

the Military Retirement Fund to reflect the future retirement obligations

being generated by current personnel. Trends in DOD budget costs, called

retirement accruals or normal costs, are shown as a percent of basic pay in

figure 2.2. Normal cost payments, expressed in dollar amounts instead of

as a percent of basic pay, show a similar pattern over the period.

Figure 2.2: Military Retirement Normal

Costs as a Percent of Current Service

Members’ Basic Pay (1985-2030)

1985 1995 2005 2015 2025

0

10

20

30

40

50

60

Percent

Source: DOD Actuary.

Military retirement normal cost percentages have declined sharply since

the inception of accrual accounting in fiscal year 1985. This decline is due

to more service members being under less generous retirement plans and

changes made in actuarial assumptions to reflect experience. However, as

Page 17 GAO/NSIAD-97-17 Military Retirement
Chapter 2 

Military Retirement Costs

shown in figure 2.3, military retirement normal costs remain a significant

DOD budgetary item. They comprised nearly 16 percent of DOD’s

$70.7 billion personnel costs in fiscal year 1995 and 4.3 percent of DOD’s

fiscal year 1995 $257.8 billion budget.

Figure 2.3: Military Retirement Normal Costs Compared With Personnel Costs and Other DOD Budget Categories

Operation and maintenance

RDT&E 

Procurement 

Military personnel 

Other 

13.3%

35%

21.1%

27.4%

3.1%

 military pers

Retired pay accrual

Other

69.9%

15.7%

14.4%

Active military personnel 69.9%

Note: RDT&E, research, development, test, and evaluation.

Source: DOD.

Analysts, including some of our roundtable participants, have advocated

that the DOD Actuary be instructed to calculate separate normal cost

percentages for each service and for officers and enlisted personnel to

improve the use of the information for force management purposes.

Although they are not reported separately, actual normal cost percentages

are significantly different for each service and for officers and enlisted

personnel. These differences exist because the services have varying

percentages of personnel staying to retirement and a greater proportion of

officers stay to retirement than enlisted personnel. The DOD Retirement

Board of Actuaries is directed under law (10 U.S.C. 1465 and 1466) to

Page 18 GAO/NSIAD-97-17 Military Retirement
Chapter 2 

Military Retirement Costs

calculate a single normal cost percentage for active duty service members,3

which is used in figuring retirement costs into each service’s personnel

budget.

Military retirement has historically been considered more generous and

costly than most other retirement systems, including federal civilian

retirement systems. However, comparisons are complicated by the need to

consider total compensation packages and conditions and risks that are

unique to military life. Even with the 1980s reductions, some observers

question whether military retirement benefits have the right weight in

overall military compensation. The Federal Employees Retirement System

(FERS) covers most federal civilian employees who entered service after

December 31, 1983. FERS is a three-part pension program that includes

social security benefits, an additional defined benefit, and a tax-deferred

savings plan with government matching of contributions.4

 It differs

significantly from the Civil Service Retirement System (CSRS), a

stand-alone defined benefit system that covers most federal employees

hired before 1984. Both the FERS and the CSRS systems have distinct

provisions for law enforcement officers and firefighters (referred to in this

report as protective service employees). Table 2.1 shows the normal cost

percentage incurred by the government and the percentage contribution of

the individual for the three military retirement systems in effect and for

the different plans under FERS.

3

This category includes about 65,000 active National Guard and Reserve members.

4

The tax-deferred savings plan is a type of defined contribution plan. In these plans, an individual

account is established for each participating employee, and benefits are based on contributions to and

investment earnings for that account. No exact benefit is promised at retirement. Over the past 

2 decades, defined contribution retirement systems have become more prevalent in the private sector,

often as supplemental plans to established defined benefit systems. The Thrift Savings Plan (TSP) is

the supplementary defined contribution portion of federal employee retirement plans. Such plans are

known as 403(B) plans in the state and local government and nonprofit sectors and 401(K) plans in the

private sector.

Page 19 GAO/NSIAD-97-17 Military Retirement
Chapter 2 

Military Retirement Costs

Table 2.1: Costs of Selected

Retirement Systems as a Percent of

Pay (1995) 

Percent of paya

Retirement plan

From

employer

From

employee Total

Average military 33.3 0 33.3

Pre-1980 39.3 0 39.3

1980-86 35.0 0 35.0

Post-1986 29.7 0 29.7

FERS without TSP 11.4 0.8 12.2

FERS protective service without TSP 24.3 1.3 25.6

FERS with TSP 15.3 6.8 22.1

FERS protective service with TSPb 28.2 7.3 35.5

Note: All employees pay social security taxes of 6.2 percent on the first $62,700 of earnings, and

their employers make matching contributions.

aNormal costs for the military systems are shown as a percent of basic pay. Since basic pay

averages about 72 percent of regular military compensation, normal cost as a percent of regular

military compensation is lower than the percentage shown, averaging, for example, about

24 percent for the three military retirement systems.

bThese figures assume the same TSP participation rate as the average for all FERS employees.

Source: DOD and Office of Personnel Management Actuaries.

Page 20 GAO/NSIAD-97-17 Military Retirement
Chapter 3 

Military Retirement’s Role in Shaping and

Managing the Force

The military retirement system strongly influences the broad shape of the

force. The retirement system provides an increasing incentive for service

members to stay in the military as they approach 20 years of service and

encourages them to leave thereafter, helping DOD to retain midcareer

personnel and yielding a relatively young force. However, the system can

also impede effective force management. Because military personnel are

not entitled to any retirement benefits unless they have served 20 years,

the services have been reluctant to involuntarily separate personnel with

less than 20 years of service beyond a certain point. Moreover, some

analysts, including several roundtable participants, believe the military

retirement system is an obstacle to achieving a force of the right size and

composition because it provides the same strong career length incentive to

all categories of personnel. These analysts maintain that 20 years may not

be the optimal career length for all military personnel.

Force Management

Objectives of the

Military Retirement

System

The present practice of allowing normal nondisability retirement on an

immediate annuity after 20 years of service evolved from a program

designed to aid retention of naval enlisted members to a program covering

all of the armed services. Officers and enlisted members of each service

were brought under the 20-year retirement umbrella by separate pieces of

legislation between 1915 and 1948. The legislative history of these actions

shows that Congress established the 20-year retirement to encourage more

enlisted personnel to remain in the service longer and eliminate older

officers from the service to lessen promotion stagnation problems.

The 5th Quadrennial Review of Military Compensation (QRMC)1

 in 1984

specified the following military personnel management needs that the

retirement system promotes:

• a young and vigorous force, with a continuing flow of officers and enlisted

personnel through the system;

• military careers that are reasonably competitive with other alternatives;

and

• a mobilization base to be called up during a war or an emergency.

This QRMC also identified several principles of military compensation with

relevance for evaluating the retirement system, including economic and

1

Mandated by 37 U.S.C. 1008(b), the QRMC is a complete review, every 4 years, of the principles and

concepts of the compensation system for members of the uniformed services. The 5th QRMC in 1984

focused attention on the retirement system. The 8th QRMC is evaluating human resource management

systems for future military needs.

Page 21 GAO/NSIAD-97-17 Military Retirement
Chapter 3 

Military Retirement’s Role in Shaping and

Managing the Force

military efficiency, equity, flexibility, and integration with force

management.

The Retirement

System Affects Force

Composition

The retirement system, as one aspect of military compensation and force

management policy, influences the composition of the force primarily

through its impact on a service member’s desire to continue military

service. Other influences on retention include the general level of pay and

allowances; up-or-out nature of the officer personnel management system;2

reenlistment policies; special and incentive pays; and satisfaction with

conditions of military life, ranging from ship rotation policy to family

housing.

The military’s unusual personnel structure of a closed hierarchical

system—with essentially no lateral entry at upper ranks—provides unique

challenges. Because of the lack of lateral entry, shortfalls in numbers of

midlength careerists cannot be easily rectified; thus, the compensation

system needs to ensure a continual flow of personnel through the ranks.

Each year the military recruits and trains many new entrants, most of

whom will not make the military a career. The DOD Actuary reports that

about 48 percent of new officers and 15 percent of new enlisted personnel

attain 20 years of active duty service. Figure 3.1 illustrates average

retention patterns across all the services for all personnel categories.

2

For officers, the basic elements of personnel management policy are contained in the 1980 Defense

Officer Personnel Management Act, which consolidated regulations concerning officer careers and

specified the numbers of officers each service can have in the higher grades.

Page 22 GAO/NSIAD-97-17 Military Retirement
Chapter 3 

Military Retirement’s Role in Shaping and

Managing the Force

Figure 3.1: Retention Patterns for

Active Duty Personnel

0 5 10 15 20 25 30

0

20,000

40,000

60,000

80,000

100,000

Year of service

Active duty personnel for 100,000 new entrants

Regular 

officers

Regular

enlisted

Source: DOD Actuary.

The retirement system exerts an increasing “pull” effect on personnel as

they approach the 20-year point but a substantial “push” effect thereafter.

That is, retention rates for enlisted personnel have historically increased

with each successive reenlistment. Similarly, after the initial term of

obligated service, officer retention rates tend to increase with each year of

service. The retention pull is generally believed to be strong by the 8th to

12th year of service. After 20 years of service, however, the retention rate

drops significantly. For example, approximately 36 percent of personnel

who attain 20 years of service retire within 1 year of reaching that

threshold. In addition to its impact on overall retention, the retirement

Page 23 GAO/NSIAD-97-17 Military Retirement
Chapter 3 

Military Retirement’s Role in Shaping and

Managing the Force

system likely affects force characteristics by providing a stronger

incentive for some service members to stay than others. For example,

because retirement pay is a form of compensation that is of greater value

at the higher ranks, some analysts maintain that it particularly encourages

the most able to stay in service because they view their promotion chances

most favorably.

The “lock-in” effect of the 20-year vested retirement system lessens the

impact on retention rates that fluctuations in the private sector

employment market would otherwise have. As personnel get closer to the

20-year point, it takes a greater private sector lure to offset the value of the

military retirement benefits that would have to be foregone. For example,

the percentage of personnel with 10 years of service who reach retirement

eligibility has been about 70 percent for enlisted personnel and over

90 percent for officers. Thus, the retirement system has been valuable as a

force stabilizer. Highly predictable retention rates beyond the 10th year of

service make personnel planning and management considerably easier

than if retention rates were influenced more by external labor market

forces.

Another way in which the retirement system fosters midlength careerist

retention comes from the “push” effect after 20 years. The availability of

an immediate annuity means that military personnel are effectively

working for reduced compensation after 20 years of service, which

prompts many personnel to retire at that point to begin a second career

while they are still relatively young. The 20-year retirement option

therefore enables more rapid promotion opportunities in the midcareer

years, which prevents grade stagnation and increases the attractiveness of

remaining in the military.

The Retirement

System Can Hamper

Effective Force

Management

Across DOD, the force has been growing more senior since the early 1970s.3

Some growth in seniority was to be expected after the change to an

all-volunteer force because those who entered military service after that

time did so by choice. Many defense analysts maintain, however, that the

current grade structure and seniority has come about more by

happenstance than design. According to our 1991 report, the structure

came about as retention improved and the services allowed more

3

The percentage of enlisted personnel in the top six grades increased from about 59 to about

72 percent between 1973 and 1994 (and occurred over periods of growth as well as drawdown). Also,

officers, as a percentage of the total force, grew from about 11 percent in 1966 to about 16 percent in

1995.

Page 24 GAO/NSIAD-97-17 Military Retirement
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Military Retirement’s Role in Shaping and

Managing the Force

personnel to reenlist than they needed to meet force profile goals.4 As

RAND’s recent study noted, the services’ desired force structures reflect

the actual retention patterns that emerge as a result of the current

compensation system, particularly the retirement system; without the

current retirement system, the desired force may differ significantly.5

Moreover, since the retirement system operates equally for all categories

of personnel, it cannot be used to increase or decrease retention of

personnel in particular occupations.

A negative aspect of the military retirement system with respect to force

management is that the lack of earlier vesting makes it difficult to separate

some personnel. Because of the great financial loss to personnel nearing

20 years of service if they are separated earlier, the services have been

reluctant to separate without any retirement benefits all but the worst

performers after they have reached the midcareer point.6

 This difficulty

has consequences both for dealing with performance problems and

adjusting force size or composition as requirements change. Two of our

roundtable participants indicated that, even in the case of a serious breach

of conduct, the decision to separate personnel not eligible for retirement is

extremely difficult. They also said that many personnel with significant

problems are kept until the 20-year point partly because of the

implications of preretirement separation for their families.

The recent drawdown required DOD to use a variety of tools, primarily

temporary voluntary separation programs, to separate personnel with less

than 20 years of service. To reduce the active duty force of 2,174,100

military personnel in 1987 to 1,485,500 in 1996, DOD employed voluntary

separation tools, such as Voluntary Separation Incentives (VSI),7

 Special

Separation Benefits (SSB),8

 and the Temporary Early Retirement Authority

4

Enlisted Force Management: Past Practices and Future Challenges (GAO/NSIAD-91-48, Jan. 22, 1991).

5

A Policy Analysis of Alternative Military Retirement Systems, RAND, National Defense Research

Institute, 1994.

6

Title 10 U.S.C. 638a(b)(2)(c) contains a provision that permits officers who have not been promoted

and have 18 years of service to remain in the service until they can retire after 20 years.

7

The VSI program, authorized in 1991, allows the services to pay annuities to eligible service members

volunteering to leave the military. The VSI annuity is calculated as 2.5 percent of the member’s final

month of basic pay multiplied first by 12 and then by the number of years of service. The VSI annuity is

paid annually for twice the number of years of service. For example, a staff sergeant, technical

sergeant, or petty officer first class with 12 years of service would get an annuity of $6,249 for 24 years,

or a total of $150,696.

8

The SSB program, also authorized in 1991, allows the services to make a one-time payment to eligible

service members volunteering to leave the military. The SSB payment is calculated as 15 percent of the

member’s final month of basic pay multiplied first by 12 and then by the number of years of service.

For example, a staff sergeant, technical sergeant, or petty officer first class with 12 years of service

would get a lump-sum payment of $37,675.

Page 25 GAO/NSIAD-97-17 Military Retirement
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Military Retirement’s Role in Shaping and

Managing the Force

(TERA) to separate 148,700 personnel. All of these temporary programs are

scheduled to expire in 1999. VSI and SSB are targeted programs for

overstrength or oversubscribed fields, careers, and military occupational

specialties. Individuals with 6 to 20 years of service are eligible for VSI and

SSB. The TERA program allows voluntary retirement of members with 

15 years of service in personnel categories subject to the discretion of the

services.

Some senior DOD officials indicated they would like to have these

temporary authorities made permanent because they provide benefits for

separating personnel and control over potential losses of critical

personnel. Some officials indicated that they did not want TERA after the

drawdown because they believed it would result in a constant stream of

requests and undermine the concept of the 20-year commitment. The

Selective Early Retirement Boards permit the services to exercise

authority to select retirement-eligible officers to retire earlier than normal.

This program was used to separate 10,420 officers from 1992 to 1995.

Retirement System

Assessment Depends

on Characteristics of

the Desired Force

Assessments of the value of the military retirement system in force

management depend on the characteristics of the desired force. One key

aspect of desired force characteristics is the optimal length of military

careers. The military retirement system implicitly assumes that the optimal

career length is the same for all military occupations and that career

length should be relatively short due to the high physical demands of

military duties. However, some analysts contend that, although some

military occupations undoubtedly call for young and vigorous personnel

because they entail physically demanding work under harsh conditions,

many other occupations do not require exceptionally vigorous duties.

Furthermore, in today’s more technologically and politically complex

military environment, capabilities that peak later in life than physical

capabilities, such as experience, knowledge, and judgment, may be more

important in many military occupations than vigor. Therefore, the optimal

career length is likely to vary by military occupation category, with some

that are longer than 20 or 30 years (e.g., acquisition) and some that are

shorter (e.g., infantry).

One of the strongest arguments for longer careers for senior military

leaders is the increased education and joint operational experience

requirements of the modern career.9

 One of our roundtable participants

9

The Goldwater-Nichols DOD Reorganization Act of 1986 made service in a joint (multiservice)

position a prerequisite for promotion to general or flag officer rank.

Page 26 GAO/NSIAD-97-17 Military Retirement
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Military Retirement’s Role in Shaping and

Managing the Force

strongly advocated lengthening military careers for senior officers and

shortening careers for other officers. Under such a proposal, each service

would establish a general career length for officers that would be shorter

than the current length, possibly ranging from about 12 years for the Army

to about 17 years for the Navy. Beyond that point, only a small percentage

of officers would be promoted to the next rank, and the career length

expectation for those personnel could be greater than 35 years.

Considerable uncertainty exists in the defense community about the size

of the future force and its composition. The particular characteristics of

the desired force need to be determined to design a retirement system that

supports that force, according to several of the roundtable participants. In

its 1993 Bottom-Up Review, DOD concluded that by fiscal year 1999 an

active force of about 1.4 million personnel, down from about 2.2 million in

1987, would meet national security needs. Current personnel levels for all

of the services are based on that assessment. However, future changes in

personnel levels are possible. For example, DOD, in response to the 1997

DOD Authorization Act, is planning a review of defense strategy and force

structure through 2005.

Several recent studies have examined the mix of skills the future military

will need. Joint Vision 2010, for example, prepared by the Chairman of the

Joint Chiefs of Staff, describes a future force that relies on smaller, mobile

units with more precise weapons and high-technology intelligence

gathering, information warfare, and advance training simulators. Also, a

recent Army Science Board report concluded that the Army’s development

of technologically sophisticated officers was lagging behind its needs for

the future.

The types of management systems that will support the military’s

personnel requirements in the post-Cold War environment have been the

focus of (1) several studies being carried out by RAND for the Under

Secretary of Defense for Personnel and Readiness and (2) the 8th QRMC.

RAND’s study of alternative career management systems for officers

examined several alternative officer career flows and their potential for

meeting DOD’s objectives.10 The study generally concluded that the benefits

of uniformity need to be balanced by a capacity for flexibility in the

management of officer careers. The types of officers the services need may

be increasingly varied. One example of a proposal the study described is

an officer management system that would substantially increase the

10Future Career Management Systems for U.S. Military Officers, RAND, National Defense Research

Institute, 1994.

Page 27 GAO/NSIAD-97-17 Military Retirement
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Military Retirement’s Role in Shaping and

Managing the Force

number of officers forced to leave at the 5- and 10-year service points but

would encourage longer careers for those who remained. A preliminary

conclusion of the 8th QRMC review of the principles of military

management and compensation is that uniformity of human resource

management systems among all DOD organizations is not desirable because

the various DOD communities have different strategies and therefore

should also have their own human resource management systems.

Page 28 GAO/NSIAD-97-17 Military Retirement
Chapter 4 

Options for Modifying the Military

Retirement System

Many changes to the military retirement system have been previously

suggested and analyzed, including several proposed at the roundtable

discussion we hosted. Some of these changes would modify or add to the

current system, whereas others would completely replace the current

defined benefit system. A common feature of suggestions for modifying

the current system, which was generally supported by our roundtable

participants, is earlier vesting.1

 Analysis suggests that some types of earlier

vesting could be offered with little or no increase to DOD’s retirement

costs, although the ultimate cost impacts to DOD depend on retention and

force composition effects. Some analysts, including several roundtable

participants, have called for more far-reaching structural changes to the

retirement system, possibly with other changes in compensation and

personnel policy, to accommodate different career lengths for different

personnel. These changes could increase effectiveness or reduce costs

through yielding a force of a different composition and size than today’s

force.

Several Features

Targeted for Change

Several features of any retirement system that could be considered for

change include the following:

• the specific type of system—defined benefit, defined contribution, or both;

• the benefit accrual formula;

• the formula for inflation adjustments;

• the amount employees can contribute, the level (if any) of matching

contributions, and investment options for a defined contribution system;

• the point at which benefits are paid; and

• the amount of time until employees are vested in benefits.

One or more of these features can be modified to adjust the current

system or create a complete alternative. The features to be changed, of

course, depend on the objectives to be fulfilled. For example, the 1980 and

1986 changes to the military retirement system were designed primarily to

reduce the system’s cost and thus affected the benefit accrual formula,

calculation base, and adjustments for inflation. The 1986 changes had the

additional objective of increasing the incentives to continue in service for

30 years. Neither legislative change affected the system’s other features,

such as the time benefits are paid, the amount of time until service

members are vested, or the nature of the system as a defined benefit

system exclusively.

1

In this report, the term vesting refers to a service member’s right to receive some retirement benefit,

whether the benefit is paid immediately or deferred.

Page 29 GAO/NSIAD-97-17 Military Retirement
Chapter 4 

Options for Modifying the Military

Retirement System

Recent suggestions for changing the military retirement system, including

those put forth during our roundtable discussion, have generally focused

on improving force management and making the system more attractive or

fairer to service members. Analysis of these changes focuses on two types

of management impacts. The first is the potential for DOD to reduce cost or

enhance effectiveness by increasing its ability to manage a given force

through separating poor performers and adjusting force size or

composition as needs change. The second concerns whether DOD could

design policies and incentives, including those for retirement, that better

yield the force needed, including one with career types and lengths that

differ across military occupations. Most roundtable participants believed

that the 1980 and 1986 reforms made reducing retirement accrual costs a

less compelling motivation than it had been, although several stated that

pressures on the defense budget would cause continued examination of all

personnel costs.

Analysis of Selected

Modifications to the

Current System

Most of our roundtable participants supported changing the military

retirement system to provide some benefits to personnel who serve less

than 20 years. A common feature of several proposals is that members

would be vested earlier in a portion of their retirement benefits so that the

sharp rise in the value of military retirement benefits at 20 years of service

would be somewhat leveled. One proposal for vesting benefits earlier was

adding a deferred annuity for those retiring with less than 20 years of

service. This change would reduce costs by deferring receipt of the benefit

until, for example, age 62 and maintain most of the current incentive for

personnel to remain for 20 years.

Several roundtable participants proposed adding a tax-deferred savings

plan, similar to the 401(K) plans commonly available to workers in the

private sector, to the current defined benefit system. This change could

also include some government matching of service member contributions.

Although a tax-deferred savings plan without government matching might

not be considered to constitute earlier vesting, it does provide a way for

personnel to acquire some additional long-term savings. Some participants

noted that this option could offset the limited opportunity service

members have to build equity in a home, although others commented that

most enlisted personnel would have little extra income for a tax-deferred

savings plan.

The DOD Actuary, at our request, estimated the impact on retirement

accrual costs as measured by the normal cost percentage of several

Page 30 GAO/NSIAD-97-17 Military Retirement
Chapter 4 

Options for Modifying the Military

Retirement System

options, all of which retain the basic feature of allowing retirement with an

immediate annuity after 20 years. The options selected for analysis reflect

previous proposals and suggestions from roundtable participants. The

options, which are fully detailed in appendix II, are

• adding a deferred annuity (or equivalent lump-sum separation payment) to

the current system for service members separating with between 10 and 

20 years of service, either not adjusted for inflation (option 1A) or adjusted

for inflation (option 1B); 2

• adding a tax-deferred savings feature, with no government matching, to

the current system (option 2);

• adding a tax-deferred savings feature, with government matching, to the

current system (option 3); and

• vesting members at 10 years of service in a retirement annuity that is

based on years of service and gradually shifts from being deferred to being

received as an immediate annuity with 20 years of service (option 4).

The Actuary’s estimates of the impact of options 1, 2, and 3 on DOD’s

budgetary cost for military retirement are shown in table 4.1. These

estimates assume the modifications do not change retention patterns and

do not reflect any potential changes in other DOD costs.

Table 4.1: Accrual Cost Measured as

Normal Cost Percentages of Current

Military Retirement System and 

Options 1 Through 3 Retirement system

Normal cost as

a percentage 

of basic pay

Post-1986 28.0

Option 1A—deferred annuity without inflation adjustment 28.3

Option 1B—deferred annuity with inflation adjustment 28.7

Option 2—deferred savings plan without government matching 28.0

Option 3—deferred savings plan with government matching 31.5

Source: DOD Actuary.

Adding a deferred annuity (options 1A and 1B) for those who separate

early increases retirement accrual costs by less than 1 percent of basic

pay. Cost increases are small because relatively few service members

2

Rather than deferring benefits for service members leaving the military with less than 20 years, the

government might choose instead to offer a lump-sum separation payment of equivalent value. In fact,

the strong preference service members indicated for a lump-sum separation payment when choosing

SSB over VSI during the drawdown period indicates that DOD would likely find the present value of

lump-sum separation payments to be less costly than annuities. Our analysis assumes the lump-sum

and deferred annuity are of equal value and is not affected by the differences between these two types

of benefits.

Page 31 GAO/NSIAD-97-17 Military Retirement
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Options for Modifying the Military

Retirement System

separate between 10 and 20 years of service and the value of the benefit

for an individual service member is low. Adding a tax-deferred savings

feature (option 2) to the current retirement system does not increase DOD’s

retirement accrual costs if there is no government matching of

contributions. Option 3 increases accrual costs because of the

government’s matching contributions to the tax-deferred savings plan. The

Actuary also calculated that, for DOD to match service members’

contributions under option 3 without an increase in the normal cost

percentage, the value of the defined benefit portion of the plan would need

to be reduced by about 11 percent.

Service members’ contributions to a tax-deferred savings account that do

not increase DOD’s retirement accrual costs would, however, have a

near-term cost to the government in terms of a reduction in tax revenues.

However, contributing members will eventually owe taxes on their

contributions and earnings. These deferred taxes offset much of the

near-term cost to the government.

Our analysis suggests that DOD could offer some earlier vesting of a portion

of retirement benefits without significantly raising retirement costs.

However, the previous options are unlikely to substantially increase force

management flexibility. Figure 4.1 illustrates the pattern of the value of

future retirement benefits, under the post-1986 system and options 1 and 3,

for an officer leaving the military after different years of service. The

present value of option 3 as illustrated reflects the government’s matching

contributions to a tax-deferred savings plan and not the service member’s

contributions or tax benefits. Since option 2 has no additional government

contribution, it is not illustrated.

Page 32 GAO/NSIAD-97-17 Military Retirement
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Options for Modifying the Military

Retirement System

Figure 4.1: Value of Officer Future Retirement Benefits According to Years of Service Under the Current System and

Options 1 and 3

10 15 20 25

0

200

400

600

800

Year of service

1995 dollars in thousands

Post-1986 Option 1A Option 1B Option 3

Note: The values reflect the average pay history of a representative officer at different years of

service. The values represented are present values, that is, the value of the future income stream

discounted to reflect the time value of money. A real personal discount rate of 5 percent is used in

the calculations. The real personal discount rate is the rate at which individuals trade current for

future dollars after inflation adjustments. Using a higher discount rate in the analysis, based on

evidence that service personnel strongly discount the value of future compensation, would lower

the present values illustrated but would not substantially affect the patterns observed.

These modifications to the post-1986 system do not substantially alter the

sharp increase in the value of retirement benefits at 20 years of service,

although members who serve less than 20 years can receive some

retirement (or tax-deferred savings) benefits under the options. Some

analysts have thus questioned the desirability of earlier vesting options

such as options 1A and 1B because they involve some additional cost to

DOD and may not significantly increase DOD’s management flexibility. Other

analysts, including some roundtable participants, have maintained that

Page 33 GAO/NSIAD-97-17 Military Retirement
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Options for Modifying the Military

Retirement System

limited earlier vesting options are in fact desirable because they offer

some benefit to members separating with less than 20 years at very low

cost.

The DOD Actuary estimated cost impacts of an additional earlier vesting

option that, unlike options 1 through 3, would lessen the sharp increase in

the value of benefits at 20 years of service and thus decrease the

difficulties associated with separations for individuals with less than 

20 years of service. Figure 4.2 illustrates the impact of this modification on

the present value of retirement benefits at different years of service

compared with the post-1986 system.

Figure 4.2: Value of Officer Future Retirement Benefits According to Years of Service Under the Current System And

Option 4

10 15 20 25

0

200

400

600

800

Year of service

1995 dollars in thousands

Post-1986 Graduated vesting

(Option 4)

Note: See note in figure 4.1 for information on the values illustrated. The graduated vesting option

specified here does not completely smooth the pattern of the value of benefits at the 20-year

service point.

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Options for Modifying the Military

Retirement System

Instituting the change as specified in option 4 would increase retirement

accrual costs from 28 to approximately 29.9 percent if retention behavior

were unchanged, according to the DOD Actuary’s analysis. The increased

cost represents payment of partial retirement benefits to some personnel

who are presently leaving before 20 years of service without benefits.

However, because the incentive for service members to stay to 20 years is

substantially reduced under this option, it is unlikely that current retention

patterns would continue. Thus, we asked the DOD Actuary to estimate

retirement accrual costs with changes in retention patterns. The Actuary

found that a 25-percent reduction in the probability that a service member

would stay 20 years (with increased exits spread evenly between 10 and 

20 years of service) would reduce the normal cost percentage to

24.7 percent and a 10-percent reduction would reduce normal cost to

26.7 percent.

This estimated decline in normal costs under graduated vesting results

from the lower value of retirement benefits received by those service

members who would normally be expected to stay in service at least 20

years but are assumed to leave with between 10 and 20 years of service.

Thus, our analysis shows that the reduced value of retirement benefits to

service members who leave earlier because of graduated vesting more

than offsets the increase in benefits paid to service members who would

normally have left with between 10 and 20 years of service under the

post-1986 system.

Our analysis of a graduated vesting option illustrates that the impact on

retirement costs largely depends on the impact on retention patterns.

Since retention patterns affect force seniority, significant changes in

retention patterns would result in a more junior force.3

 There could also

be changes in personnel quality or work effort, according to some

analysts. If DOD wanted to maintain a certain level of seniority or personnel

quality with a substantially smoother vesting pattern of retirement

benefits, changes in other aspects of compensation or personnel policy

might be required, and these changes would have their own cost

implications. Pay raises or other incentives could, for example, offset to

some extent reductions in retirement costs. Even if a more junior force

were desired, some adjustments in pay or incentives might be required to

retain certain individuals.

3

Changing the seniority profile of the force would have implications for other aspects of personnel

costs. For example, training costs would likely be higher due to more accessions.

Page 35 GAO/NSIAD-97-17 Military Retirement
Chapter 4 

Options for Modifying the Military

Retirement System

Proposals for

Fundamental

Retirement System

Changes

Some analysts have called for major structural changes to the military

retirement system, possibly along with other changes in compensation and

personnel policy, in part to better accommodate different career lengths

for different categories of personnel. Such changes include placing

military personnel under a system similar to FERS and having retirement

systems that vary, for example, by service, officer and enlisted status, or

occupation and optimal career length. One suggestion offered at the

roundtable was to maintain the current system for occupations requiring

youth and vigor, except for a modification to provide earlier vesting of

benefits, and place other military personnel under a system similar to FERS.

Among the roundtable participants who advocated major retirement

system changes, two views prevailed. One view was that designing the

right retirement system required determining the kind of force DOD was

trying to build toward. The other view was that such foresight was unlikely

and that a retirement system was needed that could accommodate

changes in circumstances and needs.

Predicting the cost and other impacts of more substantial changes to the

military retirement system is difficult. The DOD Actuary did not estimate

the cost of any military retirement alternatives that completely eliminated

the payment of an immediate annuity after 20 years of service because of

the complexities of predicting the behavioral impacts of such a substantial

change. One concern voiced by several of the roundtable participants was

that even the most sophisticated analysis may be a poor predictor of the

effects of such changes.

These complexities are illustrated in recent analyses of alternatives to the

current military retirement system. The RAND Corporation designed a

computer simulation model of retention behavior with data on Army

personnel to predict the impacts of substantial retirement system changes.

In addition to modeling retention effects, RAND also predicted impacts on

how hard individuals work and the likelihood that the most capable

personnel would stay and seek advancement. RAND used this computer

simulation model in its 1994 evaluation of a military retirement system

with the following features: (1) service members with at least 10 years of

service would be vested in a deferred annuity based on years of service

and high three basic pay that would be available at age 60 and

(2) members separating after 10 years of service could receive a

separation payment based on years of service and final basic pay. Also,

under this system the services could vary eligibility for the separation

payments to control career lengths in different skills. RAND found that

maintaining a force of the current size and quality under that system would

Page 36 GAO/NSIAD-97-17 Military Retirement
Chapter 4 

Options for Modifying the Military

Retirement System

require an active duty pay raise and overall compensation costs, including

retirement, would be higher by about $800 million per year compared with

the post-1986 system.

Placing military personnel under a retirement system similar to FERS could

save DOD $2.4 billion per year and maintain a given size and quality force,

according to a 1996 RAND study that used a similar modeling approach.4

 If

improved efficiencies allowed some reduction in force size for a given

level of effectiveness, savings could be greater. The system RAND

analyzed includes a defined benefit plan, a defined contribution plan, and

social security benefits. The defined benefit annuity formula and the

provisions for government matching of TSP contributions would be the

same as that for FERS general employees. Because retirement benefits

would be considerably less generous than under the current system for

those who separate with 20 or more years of service, the RAND analysis

provided for an active duty pay raise that was sharply skewed toward the

upper grades. The system also included separation payments. The increase

in basic pay costs and the costs of separation payments were more than

offset by retirement cost savings, according to the study.

Conclusions Modifications to the military retirement system could make the system

more attractive to many service members and increase management

efficiencies at little additional cost to DOD. Certain changes, such as

offering some type of retirement benefit to members serving less than 

20 years, may be worth careful analysis for implementation in the short

term.

Evaluation of the costs and benefits of more substantial restructuring of

the military retirement system must be done in the context of overall force

needs. As U.S. forces adapt to new challenges and budgetary pressures

continue to require increased efficiencies in all federal spending, the role

of the military retirement system as one tool in managing and shaping the

force is likely to come under increased scrutiny. Although retirement

budgetary costs have declined, the rigidities of the system may be

inconsistent with fostering the most effective force possible. As DOD

evaluates the size and type of military it wants to build, the retirement

system is an important personnel policy to be considered.

4

Reforming the Military Retirement System, RAND, January 1996 draft report.

Page 37 GAO/NSIAD-97-17 Military Retirement
Chapter 4 

Options for Modifying the Military

Retirement System

Agency Comments DOD provided written comments on a draft of this report, which appear in

appendix III. DOD stated that it did not object to the overall thrust of the

report but did, however, express concern that the report’s discussion of

potential changes to the retirement system could be taken to suggest a

consensus on specific shortcomings of the system.

DOD emphasized the overall effectiveness of the retirement system in

providing the military with needed personnel and stated that the impact of

1980 and 1986 changes to the system should be fully assessed before

further changes are made. DOD also believes that any changes eventually

made to the retirement system must apply only to new entrants to avoid

breaking faith with service members. In addition, DOD believes that an

immediate annuity for members completing at least 20 years of active

military service is an essential feature of the system that must be

maintained.

DOD identified several issues it believes merit great weight in considering

whether and how the military retirement system should be changed. These

issues included DOD’s beliefs that (1) the current system has been effective

in retaining experienced personnel while simultaneously avoiding

stagnation among senior personnel; (2) the existing retirement system,

augmented by temporary authorities established for the ongoing force

drawdown, has provided adequate flexibility in managing force levels;

(3) the 1986 changes to the retirement system increase the incentive for

service beyond 20 years; (4) changes to the retirement system, such as

those discussed in our report, could result in increased cost of other

programs; and (5) changes in the retirement system are not needed to

allow DOD to adequately vary career lengths according to specialty, given

other available compensation and management tools. We agree that these

are important factors and perspectives in evaluating the military

retirement system and possible changes and believe they are appropriately

discussed in the report.

DOD also expressed concern about the report’s discussion of proposals to

(1) gradually vest service members in retirement benefits and (2) place

military personnel under a retirement system similar to FERS. We presented

those options to include the full range of views and suggestions reflected

in our roundtable discussion. We also pointed out that substantial changes

to the retirement system would involve significant uncertainties and

require thorough evaluation.

Page 38 GAO/NSIAD-97-17 Military Retirement
Page 39 GAO/NSIAD-97-17 Military Retirement
Appendix I 

Summary of GAO’s Military Retirement

Roundtable Discussion

Our June 12, 1996, roundtable discussion was structured around three

questions that reflected those aspects of the military retirement system

included in our review:

• How does the military retirement system shape the force and does it

provide enough flexibility for managing the force?

• Could changes in the retirement system result in cost savings for the

Department of Defense (DOD)?

• What types of changes to the military retirement system most merit further

analysis?

A summary of the discussion and a list of the roundtable participants

follow. The comments presented are the opinions of the individuals but

not necessarily the agencies or organizations they represent.

Force Composition

and Management

Flexibility

The participants generally agreed that the military retirement system plays

a strong role in shaping today’s force, although some noted that the system

cannot shape the force very precisely. One participant stated that the

important question was whether retirement shapes the force in a way that

is desirable. DOD’s rules and regulations for compensation, including the

retirement system, are not producing the kind of personnel structure that

is wanted for the 21st century, according to several participants. An

example of a need, cited by several participants, that is not met by the

current system is longer careers.

The participants acknowledged that the military retirement system is not

the sole compensation factor or driver that shapes the force. Military

retirement has a tremendous influence on people beyond a certain

point—perhaps the first enlistment or 5 to 10 years of service—by pulling

them toward 20 years of service, which enables the military to retain

sufficient people. The participants reiterated throughout the discussion

that the military retirement system cannot be evaluated without

considering total military compensation or the prevailing conditions in the

rest of society. One participant said that private sector employment is a

relevant consideration because the military must compete with that sector

to retain people.

Some participants disagreed about whether the military retirement system

was sufficiently flexible. Several said that the retirement system was not

suited to the services’ needs for different career lengths among

occupations. One noted that optimal career lengths may differ

Page 40 GAO/NSIAD-97-17 Military Retirement
Appendix I 

Summary of GAO’s Military Retirement

Roundtable Discussion

considerably for officers and enlisted personnel. One participant proposed

lengthening military careers for senior officers and shortening careers for

other officers. One participant noted that personnel under the current

system could be required to serve 30 years before receiving retirement

benefits, although DOD has not used that option. Other participants pointed

to the use of temporary separation authorities to facilitate the recent

drawdown as evidence of flexibility within the current system.

Many participants considered the system’s 20-year vesting unfair and an

impediment to the effective management of personnel. For example, the

current system creates difficult management decisions in specific

individual situations because of its rigidity. The participants disagreed

about whether the treatment of individual cases, such as the discharge of

an officer with about 19 years of service convicted of a serious offense in a

civilian court, provided a strong argument for changes in the military

retirement system. One participant suggested as stronger evidence of a

problem with the system the financial implications of discharging a service

member who had 18 years of service but had not been promoted.

Cost A range of views were expressed by the participants regarding the cost of

the military retirement system. Participants remarked that the cost of the

system (measured by its normal cost percentage) has decreased

substantially over the past 10 years. Participants pointed out that

retirement accrual costs have fallen not only because of reduced

retirement benefits but also because the DOD Actuary updated actuarial

and economic assumptions. Some participants were surprised that the

move to accrual accounting, under which the services’ budgets reflect the

retirement costs of current personnel, had not resulted in the services

focusing more on the cost of military retirement.

Several participants said the services might not have increased their focus

on retirement costs partly because an aggregate retirement accrual cost is

calculated for personnel across all services. They said that, because the

underlying determinants of retirement accrual costs vary, the aggregate

accrual charge does not reflect in the services’ budgets the true retirement

costs of their own personnel. Several participants expressed support for

having accrual costs calculated separately for each service and for officers

and enlisted personnel. One participant expressed the view that this

change would require legislation.

Page 41 GAO/NSIAD-97-17 Military Retirement
Appendix I 

Summary of GAO’s Military Retirement

Roundtable Discussion

Several participants cautioned against comparing military and civilian

retirement costs because military service differs significantly from civilian

occupations and personnel management. Some panelists noted that the

true indicator of the adequacy of retirement benefits, along with other

aspects of compensation, is whether the services can attract and retain the

personnel they need.

Several participants said that federal budget pressures will continue to

focus attention on DOD’s struggle to control all types of spending, including

personnel compensation costs. Participants referred to tensions within

DOD between military personnel costs and other resource needs. One

participant said that lifting the legislation that restricts the services’

control over separate categories of funding would enable the services to

better balance their compensation needs with their operational, training,

and procurement priorities and needs.

Some participants commented that earlier vesting would raise costs.

Others stated that the impact on costs depended on the specific details of

the retirement vesting scheme. According to some participants, earlier

vesting might aid the services in separating nonproductive personnel

before 20 years of service. That could save costs, according to one

participant. A participant noted that earlier vesting options had been

proposed for years and not come about because the services did not

believe the options proposed would give them additional flexibility in

managing the force.

The participants addressed the issue of grandfathering retirement system

changes, that is, applying changes only to new entrants. Several panelists

asked whether DOD could end grandfathering as a way to achieve greater

cost reductions. Others stated that grandfathering was essential to avoid

breaking faith with service members.

Modifications for

Consideration

Participants offered specific suggestions for changes to the retirement

system. Most believed that some modification to the current system, such

as earlier vesting, was a good idea. However, three participants voiced

specific concerns about force management impacts, particularly the

impact of earlier vesting on retention. Participants also expressed

reservations about making modifications before DOD knows the impact of

the 1980 and 1986 changes.

Page 42 GAO/NSIAD-97-17 Military Retirement
Appendix I 

Summary of GAO’s Military Retirement

Roundtable Discussion

Several participants proposed or expressed support for adding a defined

contribution component—a 401(K)-type plan—to the current defined

benefit system, and one observed that the option of a tax-deferred savings

plan is available to most federal civilian employees. However, some

participants noted that most enlisted personnel have little extra income for

savings. Other specific suggestions were

• adding provisions for earlier vesting in an annuity that would begin at age

62 or 65;

• making temporary early separation authorities permanent;

• vesting personnel in a small benefit, such as a deferred annuity, starting

between 5 and 10 years of service and increasing the size of the benefit

until it matches the value of the immediate annuity after 20 years of

service; and

• providing a choice between receiving full credit for each year of service

toward the current retirement benefit or receiving government

contributions to a 401(K)-type plan.

Some participants questioned whether the basic objective of providing

incentives for 20- to 30-year careers for all personnel remained valid and

suggested that fundamental and broader changes to the system might be

needed. Most participants agreed that these changes must be viewed in the

long term. Suggestions included placing military personnel under a system

similar to the Federal Employees Retirement System (FERS) or having

different retirement systems with varying career lengths for different

categories of personnel. Participants pointed out that uniformity only

exists now in terms of the benefit formula. Individuals can depart from

service with vastly different pensions. One participant suggested

(1) maintaining the current system for occupations requiring youth and

vigor but modifying it to provide some earlier vesting of benefits and

(2) placing all other military personnel under a FERS-type system.

Two views were expressed regarding the information necessary to justify

fundamental and broader changes to the retirement system. One view was

that designing the right retirement system required first determining what

kind of force DOD is trying to build. The other view was that such foresight

was unlikely and that a retirement system was needed that could

accommodate changes in circumstances and needs. Several participants

noted that past changes in the retirement system have been forced on DOD,

even if they have eventually been viewed favorably. One participant stated

that any change has to be forced on an institution from outside. A

participant said that DOD could take some risks now in making substantial

Page 43 GAO/NSIAD-97-17 Military Retirement
Appendix I 

Summary of GAO’s Military Retirement

Roundtable Discussion

changes to the military retirement system (without knowing the impact of

the 1980 and 1986 changes) because of the potential for future downsizing.

Participants

Paul Arcari Colonel, U.S. Air Force (Retired) and Director, Government Relations, The

Retired Officers Association. Formerly a member of the Air Force’s

Directorate of Personnel Plans (1973-85) and Assistant Director for

Compensation Studies in the Office of the Secretary of Defense (1968-73).

David Chu Director of the RAND Corporation’s Washington Office and Associate

Chairman of RAND’s Research Staff. Formerly Assistant Secretary of

Defense for Program Analysis and Evaluation (1988-93) and Director of

Program Analysis and Evaluation in the Office of the Secretary of Defense

(1981-88).

Robert Goldich Specialist in National Defense, Foreign Affairs and National Defense

Division, Congressional Research Service. Formerly Head of the

Manpower and Budgets Section, Congressional Research Service.

Toni Hustead Chief, Veterans Affairs Branch, Office of Management and Budget.

Formerly Chief Actuary in the Office of the Secretary of Defense (1979-89).

Christopher Jehn,

Moderator

Senior Vice President, ICF Kaiser International, Inc. Formerly Assistant

Secretary of Defense for Force Management and Personnel (1989-93), Vice

President of the Center for Naval Analyses (1981-89), Director of the

Marine Corps Operations Analysis Group (1979-81), and Director of the

Institute of Naval Studies (1977-79).

Lawrence Korb Director of the Center for Public Policy Education and Senior Fellow in

the Foreign Policy Studies Program at the Brookings Institution. Formerly

Assistant Secretary of Defense for Manpower, Reserve Affairs,

Installations, and Logistics (1981-85).

Page 44 GAO/NSIAD-97-17 Military Retirement
Appendix I 

Summary of GAO’s Military Retirement

Roundtable Discussion

Frederick Pang Assistant Secretary of Defense for Force Management Policy.

Martha Patterson Director of Employee Benefits Policy and Analysis for KPMG Peat

Marwick.

Bernard Rostker Assistant Secretary of the Navy for Manpower and Reserve Affairs.

Formerly Director of the Defense Manpower Research Center, RAND

National Defense Research Center (1990-94); Director of the Force

Development and Employment Program, RAND Arroyo Center (1984-90);

and Director of the RAND Manpower Personnel and Training Program

(1972-77).

Francis Rush, Jr. Principal Deputy Assistant Secretary of Defense for Force Management

Policy.

Theodore Stroup, Jr. Lieutenant General and Deputy Chief of Staff for Personnel, U.S. Army.

Formerly Director of Program Analysis and Evaluation (1992-94) and

Director for Military Personnel Management, Office of the Chief of Staff

(1989-92).

Page 45 GAO/NSIAD-97-17 Military Retirement
Appendix II 

Selected Retirement System Options

The DOD Actuary, at our request, estimated the impact on retirement

accrual costs, as measured by the normal cost percentage, of several

options. All of the options retain the basic feature of allowing retirement

with an immediate annuity after 20 years. They also reflect previous

proposals and suggestions from roundtable participants. The options are

adding a

• deferred annuity for persons leaving with less than 20 years of service

(options 1A and 1B),

• tax-deferred saving plan without government matching (option 2),

• tax-deferred savings plan with government matching (option 3), and

• graduated vesting schedule for persons leaving with less than 20 years of

service (option 4).

Page 46 GAO/NSIAD-97-17 Military Retirement
Appendix II 

Selected Retirement System Options

Options 1A and 1B

Deferred Annuity for

Persons Leaving With Less

Than 20 Years of Service

This option includes two possible types of benefits in the form of a

deferred annuity for members who leave the military with at least 10 years

of service. One proposal (1A) does not adjust for inflation before age 62;

the other proposal (1B) adjusts for inflation. Benefits for members serving

20 years or more would be the same as under the current system—paid as

an immediate annuity.

Benefit formula: Same as the post-1986 military retirement benefit

formula.

Calculation base: Average of the highest 3 years of basic pay.

Timing of benefit receipt: Payable at age 62.

Eligibility: All persons separating with 10 or more years of service.

Other considerations: 1A—The benefit is not indexed for inflation between

the time of separation and age 62, but annual increases based on the

consumer price index minus 1 point (2.5 percent) are included after 

age 62.

1B—The indexed benefit assumes the consumer price index minus 1 point

(2.5 percent) cost-of-living adjustments during the deferral period as well

as after age 62.

Actuary output: The Actuary provided the changes in the normal cost

percentages for this alternative under the assumption that only new

entrants to the military would be eligible. The normal cost percentages for

the post-1986 system, the non-indexed alternative, and the indexed

alternative were 28, 28.3, and 28.7 percent, respectively.

Page 47 GAO/NSIAD-97-17 Military Retirement
Appendix II 

Selected Retirement System Options

Option 2

Tax-Deferred Saving Plan

Without Government

Matching

All personnel who serve a minimum of 20 years would receive benefits as

specified by the current military retirement system. In addition, individuals

would be allowed to participate in a Thrift Savings Plan-type benefit,

contributing up to 5 percent of their pay, but the government would not

provide matching contributions. The income tax on the money set aside

would be deferred.

Contribution level: Up to 5 percent of basic pay at the initiative of the

individual.

Timing of benefit receipt: Available at age 62.

Eligibility: Immediately, or with 1, 5, or 10 years of service.

Other considerations: Federal government experience shows a 4.1-percent

deferral rate and a 50-percent participation rate.

Actuary output: The Actuary projected contributions to a Thrift Savings

Plan-type benefit for service members that meet a minimum service

requirement. With service members eligible to contribute immediately

contributions are projected to reach about $3.1 billion. The projected

contributions for a 10-year minimum service requirement reach about

$1.5 billion. These amounts are not adjusted for inflation.

Page 48 GAO/NSIAD-97-17 Military Retirement
Appendix II 

Selected Retirement System Options

Option 3

Tax-Deferred Savings Plan

With Government

Matching

This option is a combination of both a defined benefit and defined

contribution plan. All personnel who serve a minimum of 20 years would

receive benefits as specified by the current system. In addition, individuals

would be allowed to participate in a Thrift Savings Plan-type benefit, with

government matching. Matching rules are identical to those of the Thrift

Savings Plan under FERS.

Timing of benefit receipt: Defined contribution with government matching

benefit payable at age 62.

Eligibility: Personnel are immediately eligible to contribute.

Other considerations: The contribution rate is 5 percent with under 1 year

of service to 7 percent at 20 years of service. The participation rate is

50 percent with under 1 year of service to 90 percent at 20 years of service.

Actuary output: The Actuary estimated that this option would increase

normal cost to 31.5 percent, if the current defined benefit formula were

not changed. The Actuary also estimated that, to maintain normal costs of

28 percent, a reduction in the defined benefit formula multiplier of about

11 percent would be required.

Page 49 GAO/NSIAD-97-17 Military Retirement
Appendix II 

Selected Retirement System Options

Option 4

Graduated Vesting

Schedule for Persons

Leaving With Less Than 

20 Years of Service

All personnel who serve a minimum of 20 years would receive benefits as

specified by the current system. Personnel who serve between 10 and 20

years are vested in an annuity based on the current military retirement

formula. The benefit is a deferred annuity at 10 years of service and

becomes a combination of an immediate annuity and deferred annuity

until the entire benefit is an immediate annuity at 20 years of service.

Benefit formula: 2 percent of basic pay times years of service times

calculation base. (As specified here, the annuity for those with 10 to 

20 years of service does not include the restoral of value at age 62 that is a

part of the post-1986 system.)

Calculation base: Average of the highest 3 years of basic pay.

Timing of benefit receipt: Combination of deferred and immediate annuity.

The deferred benefit is payable at age 62. The mix of the immediate and

deferred benefit changes with years of service. After 10 years of service,

the benefit is entirely deferred. The immediate annuity percent increases

gradually to 100 percent at 20 years of service.

Eligibility: All persons with 10 to 20 years of service.

Other considerations: The benefit is not indexed for inflation between the

time of separation and age 62, but annual increases based on the consumer

price index minus 1 point (2.5 percent) are included after age 62.

Adjust decrement rates by reducing the number of members exiting at 

20 years of service by 25 percent. Distribute exit among 10 to 19 years of

service.

Actuary output: The Actuary provided an estimate of the cost of adding a

mixed immediate and deferred annuity for members who separate with

between 10 and 20 years of service. The normal cost percentage for this

option, with the adjusted decrement rate, is 24.7 percent. If retention

behavior were unchanged, normal cost would be 29.9 percent.

Page 50 GAO/NSIAD-97-17 Military Retirement
Appendix III 

Comments From the Department of Defense

Page 51 GAO/NSIAD-97-17 Military Retirement
Appendix III 

Comments From the Department of Defense

Page 52 GAO/NSIAD-97-17 Military Retirement
Appendix IV 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Sharon Cekala

Celia Thomas

Penny Berrier

William Beusse

Karen Blum

Charles Perdue

Laura Talbott

Office of the Chief

Economist

William McNaught

Office of the General

Counsel

Ernie Jackson

(703128) Page 53 GAO/NSIAD-97-17 Military Retirement
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