Military Personnel: DOD Needs More Data Before It Can Determine if Costly Changes to the Reserve Retirement System Are Warranted
Published: 2004-09-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since September 11, 2001, National Guard and Reserve personnel have served, and will continue to serve, a critical role in the Global War on Terrorism. As a consequence, Congress has focused attention on the fair treatment of reservists and directed GAO to review, among other things, the Department of Defense's (DOD) reserve retirement system. Currently, five legislative proposals exist that would lower the age when eligible reservists can receive their annuities. GAO assessed (1) DOD's reserve retirement system as compared to certain aspects of the active duty retirement system, (2) the extent to which DOD data suggest that changes to the reserve retirement system may be warranted, and (3) the potential costs and effects of the five legislative proposals.
section_title: What GAO Found
paragraphs: The active duty and reserve component retirement systems require 20 years of service for vesting, provide annuities that are based on 2.5 percent of basic pay for every creditable year served, and offer options to participate in the government's Thrift Savings Plan. Active duty members receive an immediate annuity upon retirement based on pay rates in effect on the date of retirement. Eligible reservists must wait until their 60th birthday to receive an annuity. The annuity of retired reservists who remain subject to recall is based on pay rates in effect when they reach their 60th birthday. Current data do not provide DOD with the information it needs to determine what changes, if any, to the reserve retirement system are needed. DOD has not established thresholds for attrition attributable to retirement and, without thresholds, it is not possible to assess the extent to which DOD is retaining the desired numbers of senior reservists or the extent to which retirement benefits influence decisions to leave or stay in the reserves. Nevertheless, GAO's analysis of DOD data for selected periods when reservists were deployed shows that the overall makeup of the reserve force by years of service, age, and pay grade has remained relatively even and that overall reserve retention rates, to date, have remained relatively stable. DOD has, however, identified certain high-demand occupational specialties, such as military police, where retention rates have decreased. While these cases do not necessarily suggest that uniform retirement reform is required, they do suggest that targeted corrective actions of some sort may be needed. The estimated cost of lowering the age of receipt, coupled with an associated increase in retiree health care costs, is significant and considering the fact that military basic pay will continue to grow and health care costs will continue to rise, the longer-term cost will be significant. Importantly, all reservists--not just the minority of reservists who have deployed to recent operations--would be covered under this change. In addition, reservists who are experiencing increased deployments may not be the beneficiaries of a reduction in the age of receipt, given that only one in four reservists currently stays in the reserves long enough to retire. Finally, DOD has not studied changes to the reserve retirement system in the context of the total force. Changes, if not evaluated from a total force perspective, could result in a significant increased cost with little or no benefit and may produce unintended consequences on DOD's active duty forces.

section_title: Letter
paragraphs: Over the past decade, the Department of Defense (DOD) has increasingly  relied on members of the National Guard and Reserve to carry out its  military operations domestically and abroad. At the end of fiscal year 2003,  DOD had 1.2 million reservists. Since September 11, 2001, DOD has called  more than 335,000 reservists to active duty, and reservists will continue to  serve a large critical role in the Global War on Terrorism.
Congress has focused attention on the fair treatment of reserve  component personnel as compared to their active duty counterparts. For  example, in recent years Congress has improved health care benefits not  only for reservists but for their families as well. Currently, several  legislative proposals are under consideration to change the reserve  retirement benefit that would lower the age when eligible reservists can  receive their annuities.
House Report 107-436 accompanying the Fiscal Year 2003 National  Defense Authorization Act directed us to review, among other things,  DOD’s reserve component retirement system. We assessed (1) DOD’s  reserve retirement system as compared with certain aspects of the active  duty retirement system, (2) the extent to which DOD data suggest that  changes to the reserve retirement system may be warranted from a work  force management perspective, and (3) the potential costs and effects of  legislative proposals that address reserve retirement reform.
A number of factors need to be considered when assessing the need for  reserve retirement reform. Among them are the provisions of the active  duty retirement system, the magnitude of any problemsfrom a  workforce management and retention perspectivethat changes to the  reserve retirement system might potentially foster, other factors such as  costs to fund the retirement system and the health care benefits afforded  to retired reservists, and the impact on the active duty forces. Any  proposed changes that would permanently expand benefits should also be  considered in the context of the serious fiscal challenges facing this  country. The long-term fiscal pressure created by the known demographic  trends and rising health care costs, combined with increased homeland  security and defense commitments, and moreover, the gap between the  estimated costs of DOD’s transformation needs and likely budgetary  resources, sharpen the need to carefully scrutinize the longer-term costs  and implications before these changes are enacted into law. For fiscal year  2004, DOD estimates that it will need approximately $15.1 billion to fund  its current reserve component retirement system.
To conduct our review, we reviewed DOD reserve retirement policies and  studies conducted by DOD and others that address reserve retirement  issues. We also collected and analyzed attrition data contained in DOD’s  Reserve Components Common Personnel Data System as well as attrition  and cost data from the Office of the Assistant Secretary of Defense for  Reserve Affairs and the Office of the DOD Actuary. We reviewed  three points in time1991, 1997, and 2003because these three points  represent key periods when reservists were called to active duty to  support military operations. These included Operations Desert Shield/  Desert Storm, military operations in the Balkans and Southwest Asia, and  current operations in Iraq and Afghanistan. In addition, we analyzed the  results of recent DOD web-based career satisfaction surveys that were  administered to reservists in each of the components. Based on our review  of databases we used, we determined that the DOD-provided data were  reliable for our purposes. Finally, we interviewed officials in the Office of  the Assistant Secretary of Defense for Reserve Affairs, the Office of the  DOD Actuary, the DOD Office of the Assistant Secretary for Health Affairs,  and DOD’s six reserve components the Army Reserve, the Army  National Guard, the Naval Reserve, the Air Force Reserve, the Air National  Guard, and the Marine Corps Reserve. We conducted our review from  November 2003 through July 2004 in accordance with generally accepted  government auditing standards. Further information on our scope and  methodology appears in appendix I.
subsections: section_title: Background
paragraphs: DOD has relied on its reserve forces to varying degrees over time. Reserve  personnel are eligible to receive compensation the same as that of active  duty personnel when called to active duty.
subsections: section_title: Dependence on Reserves in Military Operations
paragraphs: Since the end of the Cold War, there has been a shift in the way DOD has  used its reserve forces. Previously, reservists were viewed primarily as an  expansion force that would supplement active forces during a major war.  DOD has since moved occupational specialties that are key to conducting  any military operation into the reserve forces and, therefore, increasingly  relies on reservists not only to supplement but also to replace active forces  in military operations worldwide. Accordingly, DOD has called more than  335,000 reservists to active duty since September 11, 2001. Today’s  increased reliance on the reserve components is a product of a number of  factors: evolving total force policies, effects of force downsizing,  increasing mission demands, and the Abrams Doctrine. In the aftermath of  the Vietnam War, former Chief of Staff of the Army General Creighton  Abrams asserted his belief that U.S. armed forces should not go to war  again without the involvement of the National Guard and Reserve, given  that decisions to employ reservists would reflect the national intent of the  public. This philosophy became known as the Abrams Doctrine, and it has  profoundly influenced DOD’s national defense strategies and plans. In fact,  and as pointed out in the Fiscal Year 2002 Annual Report of the Reserve  Forces Policy Board, DOD entered into the Global War on Terrorism  dependent on the reserve components as the cumulative effect of 30 years  of adherence to the Abrams Doctrine. In the Global War on Terrorism, the  reserve components are considered full partners, providing nearly one-half  of the personnel who currently comprise the total force. The Reserve  Forces Policy Board cautioned that if DOD retains this doctrine, reserve  forces will be committed for the duration of military operations and used  and stressed as never before, adding that appropriate adjustments will be  necessary to spread the burden and provide for the long-term  sustainability of the force.
section_title: Composition of the Reserve Forces
paragraphs: At the end of fiscal year 2003, DOD had approximately 1.2 million Guard  and Reserve members in the Ready Reserve. Within the Ready Reserve,  there are three subcategories, the Selected Reserve, the Individual Ready  Reserve, and the Inactive National Guard. Figure 1 shows how the Ready  Reserve is organized.
The Selected Reserve consists of reservists who serve in Selected Reserve  units, as Individual Mobilization Augmentees, as active Guard and Reserve  members, and as full-time support assets, such as military technicians.  DOD’s selected reservists serve in one of six reserve components: the  Army Reserve, the Army National Guard, the Naval Reserve, the Air Force  Reserve, the Air National Guard, and the Marine Corps Reserve. The Army  National Guard and the Air National Guard comprise what is known as the  National Guard. As of fiscal year 2003, the Selected Reserve had a total  number of 875,072 members. All selected reservists are subject to being  called to active duty before reservists in any of the other reserve  categories. The President has the authority to order up to 200,000 selected  reservists to active duty involuntarily for any operational mission—for not  more than 270 days—without declaring a national emergency. Therefore,  reservists must be prepared to report for active duty within 24 hours.
The purpose of each selected reserve component is to provide trained  units and qualified persons available for active duty in the armed forces in  times of war or national emergency, and at such other times as the  national security may require, to fill the needs of the armed forces  whenever needed. The National Guard is unique in that it has dual  missions, both federal and state; when not in federal service, the Guard is  available for use as provided by the constitution and laws of the state. The  Guard is the only military force immediately available to a governor in  times of emergency, including civil unrest and natural or manmade  disasters. Under state law, the Guard provides protection of life and  property and preserves peace, order, and public safety.
Reliance on Guard and Reserve members varies from service to service.  Figure 2 shows that, in fiscal year 2003, 53 percent of the Army’s soldiers  served in the Army National Guard or the Army Reserve and that  33 percent of Air Force military personnel served in the Air National  Guard and the Air Force Reserve. Figure 2 also shows that the percentage  of personnel serving in the Naval and Marine Corps Reserves was less than  20 percent for both components.
section_title: Pay and Benefits
paragraphs: In 1948, Congress passed the Army and Air Force Vitalization and  Retirement Equalization Act—which established the reserve retirement  system—because it believed that reservists did not receive sufficient  salary as an incentive for a career and that, as reservists approached  mid-career, they would leave reserve service unless an additional incentive  were offered to them. Congress established a retirement annuity,  receivable at age 60 upon completion of at least 20 years of service, to  provide them with this additional incentive. The sole purpose of reserve  retirement is to provide a monetary incentive for qualified reserve  personnel to retain membership in the reserve components and continue  their training. This incentive provides the reserves with a pool of skilled,  trained, and readily available personnel to augment active duty forces in  times of national emergency. The reserve retirement system has remained  essentially unaltered since enactment in 1948. The Assistant Secretary of  Defense for Reserve Affairs, under the Office of the Under Secretary of  Defense for Personnel and Readiness, is responsible for DOD’s reserve  retirement policy, and the reserve retirement system is funded through  DOD’s reserve military personnel appropriations.
Reservists are currently entitled to a range of pay and benefits, depending  on whether they are serving in part-time drilling or activated full-time duty  status. When in normal part-time drilling status, reservists receive basic  pay on a prorated basis and are entitled to such benefits as unlimited  access to commissaries, certain health care benefits, educational benefits,  and life insurance. Reservists activated for contingency operations are  eligible to receive the same compensation and benefits as active duty  personnel. While serving on active duty, reservists are entitled to basic  pay and special pays and allowances at equivalent rates for active duty  personnel and full health care benefits for themselves and their  dependents.
By law, DOD is required to undertake a comprehensive review of military  compensation every 4 years, and DOD compiles the findings and  recommendations of these reviews into a report known as the Quadrennial  Review of Military Compensation. In 1986, DOD was tasked by the  President to perform an evaluation of the benefits and costs of reserve  compensation. The resulting Sixth Quadrennial Review of Military  Compensation was the first comprehensive review of reserve  compensation that employed analytical models to assess the effects of the  existing reserve compensation system and evaluate the costs and benefits  of alternatives. The most recent quadrennial review assessed the  effectiveness of current military compensation policies in recruiting and  retaining a high-quality force. The Ninth Quadrennial Review of Military  Compensation was conducted in 2002.
section_title: The Reserve Component Retirement System Mirrors the Active Duty Retirement System but Has Differences
paragraphs: Both active duty and reserve component retirement systems operate under  the same military compensation principles. Differences exist between  them because the reserve retirement system was not intended to be  comparable to active duty retirement when it was created in 1948.  Similarities between the systems include a minimum of 20 years of  service for vesting and eligibility for retirement benefits, a calculation of  retirement pay at 2.5 percent of basic pay for every creditable year  served, and an opportunity to participate in the federal government’s  Thrift Savings Plan. The primary differences between the two systems are  (1) the age when active duty and reserve personnel receive their annuities  and (2) the effective pay rates that are used to calculate annuities. An  eligible active duty military member receives an immediate annuity upon  retirement that is based on pay rates in effect on the date of retirement. An  eligible reservist must wait until age 60—the age at which federal civilian  employees could retire in 1948—to receive an annuity. Retired reservists  who remain subject to recall receive an annuity that is based on pay rates  in effect when they reach age 60, and, accordingly, the retirement is  calculated at these higher pay rates. Table 1 shows various retirement  provisions that are available to active duty and reserve personnel.
subsections: section_title: The Active Duty and Reserve Component Retirement Systems Were Not Intended to Be the Same
paragraphs: The active duty and reserve component retirement systems contain many  of the same aspects, but they were not intended to be the same.  Similarities between the retirement systems are due to the fact that the  underlying principles for both retirement systems are the same. The  purpose of the military compensation system—of which retirement is one  part—is to attract, retain, and motivate the number of quality personnel  needed to maintain the desired level of national security. DOD has said  that the military retirement systems—both active duty and reserve— should support and complement force management requirements (e.g.,  youth, vigor, and career development opportunities); be integrated into the  military compensation system; and be structured to replace and maintain  income for retirees. Both retirement systems have the shared purpose of  maintaining a pool of skilled, trained, and readily available personnel  subject to recall during time of war or national emergency.
Differences between the retirement systems exist, however, because the  reserve retirement system was originally intended to compensate civilian  reserve retirees differently than active duty retirees. The active duty  retirement system, which was created in the mid-1800s, was originally  intended to provide for the separation of older officers with over 40 years  of service to obtain a youthful and vigorous officer force, and improve  promotion opportunities for younger officers. This active duty retirement  system has been substantially modified over time. For example, the  provision enabling active duty military personnel to retire after 20 years  was first introduced in 1915. More than 30 years later, the 20-year  provision was adopted for all active duty officers and enlisted personnel in  all services. When the reserve component retirement system was created  in 1948, Congress and the War and Navy Departments did not intend that it  should be comparable to the active duty retirement system. In contrast,  the purpose of the reserve retirement system was to improve retention, as  opposed to encouraging attrition, by providing a financial incentive for  qualified personnel to maintain their reserve affiliation and continue  training in the reserves. Establishing age 60—the age at which federal  civilian employees could retire in 1948—as the age at which reservists  would be eligible to receive retirement annuities provided a mechanism to  retain reservists for a longer period of time while compensating civilian  reserve retirees differently than active duty retirees.
section_title: The Active Duty and Reserve Component Retirement Systems Have Similar Features
paragraphs: Both the active duty and the reserve component retirement systems  require 20 years of service for vesting and benefit eligibility. The fact that  neither the active duty nor the reserve component retirement system  provides for reduced annuities if personnel serve less than 20 years  provides a strong incentive for servicemembers to either leave the military  after serving only a few years or stay in the military for 20 years or longer.  For active duty members, each year of service counts as a qualifying year  for retirement purposes. Reservists must earn a minimum of 50 points,  each year, for the year to qualify for retirement purposes. Reservists  typically train one weekend each month and earn 4 points for each  weekend (two drills per day). In addition, they earn 1 point for each day of  annual active duty training (typically 12 points for a 2-week period) and an  additional 15 points annually for being a member of a reserve unit.  Reservists earn an additional point for each day that they are called to  serve on active duty. Between fiscal year 1992 and fiscal year 2001,  reservists earned, on average, 64 retirement points per year. In fiscal year  2003, reservists earned, on average, 138 retirement points. The increase is  likely due to the number of reservists who were called to active duty.  Appendix II provides a more detailed discussion of the reserve retirement  points system.
Generally speaking, both retirement systems apply a rate of 2.5 percent  to the number of creditable years served and then apply this rate to  servicemembers’ basic pay to determine retirement annuities. In the case  of reserve personnel, the number of creditable years served is, essentially,  a prorated number of calendar years of service. (Specifically, reserve years  of creditable service are calculated by dividing a reservist’s accumulated  retirement points by 360—roughly, the number of days in a year.)  Typically, current active duty servicemembers who retire after serving  20 years on active duty receive retirement annuities that are equivalent to  50 percent of average basic pay over their last 3 years of service. Current  active duty servicemembers who retire after serving 30 years on active  duty receive retirement annuities that are equivalent to 75 percent of their  final basic pay. In contrast, current reserve members who retire after  serving all 20 years in the reserves, and who earn only the minimum  50 required points in each of those years, would receive annuities that will  be equivalent to approximately 7 percent of basic pay. Most reservists,  however, earn more than 50 points each year. Reservists can apply a  maximum of 90 points each year toward their retirement calculation— earned from their weekend drills and annual 2-week period of active duty  training—but can apply up to 365 points each year if they are called to  active duty. Reservists who are called to active duty will earn more points,  which will translate into a higher retirement annuity, if they serve their full  20 years. In addition, many reservists previously served some time on  active duty before affiliating with one of the reserve components.  Therefore, while their retirement annuities will be significantly less than  the annuities of their active duty counterparts, the annuities of retired  reservists who served on active duty at points during their careers will be  greater than 7 percent of basic pay.
Beginning in fiscal year 2001, both active duty and reserve personnel  became eligible to participate in the federal government’s Thrift Savings  Plan on a voluntary basis. The Thrift Savings Plan is a tax-deferred savings  and investment plan only available to currently employed federal  government employees and provides active duty and reserve  servicemembers the opportunity to contribute additional funds to their  retirement. Service secretaries have the legislative authority, if they  choose, to provide matching funds for active duty personnel in critical  military occupational specialties, but not for reservists. Agency officials  frequently cite monetary recruitment and retention incentives as effective  for hard-to-fill positions. To date, the service secretaries have not used  this human capital flexibility for any active duty military personnel.
section_title: The Main Differences between the Two Systems Are the Age of Receipt of Annuity and the Effective Pay Rates Used to Calculate Annuities
paragraphs: One significant difference between the active duty and reserve retirement  systems is the age at which retirees receive their annuities. Active duty  personnel immediately qualify for receipt of an annuity after 20 years of  service, should they decide to retire, that compensates them for lost  income potential. The Defense Science Board Task Force on Human  Resources Strategy stated in a 2000 report that many, if not most, active  duty retirees suffer a “second-career” earnings loss when transitioning to  the civilian sector in their 40s or 50s and that immediate receipt of  retirement pay reduces the financial penalty associated with the transition  to a second career. As a result, the immediate annuity provides a strong  incentive for active duty personnel to retire when eligible. Reservists  similarly become eligible for retirement upon completing 20 years of  service, but they are not eligible to receive an annuity until their  60th birthdaythe age at which federal civilian employees could retire  when the reserve retirement system was enacted. The incentive for  reservists to separate once retirement eligibility is achieved is not as  strong, given that their retirement annuity is delayed until they reach  age 60.
A second significant difference between the two retirement systems is the  basic pay rate that is used to calculate retirement annuities. Active duty  retirement pay is based on basic pay rates that are in effect when active  duty servicemembers retire. Reserve retirement pay is calculated  differently, depending on retirement options that reservists select.  Reservists who attain 20 years of qualifying service for retirement  purposes and who elect to retire can, if otherwise eligible, (1) continue  their affiliation in the reserves in a nondrilling status, (2) transfer to retired  reserve status in which they retain their reserve affiliation but are not  required to train, or (3) request a discharge. Reservists who continue their  reserve affiliation in a nondrilling status do not drill or receive basic pay,  but they can acquire additional retirement points. In addition, they  remain subject to being involuntarily called back to active duty. Reservists  who transfer to retired reserve status do not earn basic pay or additional  retirement points. They are, however, also subject to being involuntarily  called back to active duty. Retirement pay for reservists who retain some  form of affiliation with the reserves, and who are subject to involuntary  recall to active duty until they reach age 60, is based on pay rates that are  in effect on the reservists’ 60th birthday. Accordingly, this provision  creates an incentive for reservists to retain their affiliation with the  reserves until age 60 in order to benefit from the calculation of their  annuity at the higher pay rate. Reservists who request a discharge from the  reserves once they become retirement eligible are not subject to being  called back to active duty. They also do not receive their annuities until  their 60th birthday, but their retirement annuities are derived from basic  pay rates in effect at the date of discharge.
section_title: The Extent to Which Changes Are Warranted to the Reserve Retirement System Is Unknown
paragraphs: Current available data do not provide DOD with the information it needs  to determine what changes, if any, to the reserve retirement system are  warranted. While DOD has established enlisted personnel attrition ceilings  as a performance metric for each of its six reserve components, it has not  established attrition ceilings for its reserve officers. In addition, it has not  established thresholds or targets for attrition attributable to retirement. In  fiscal year 2003, for example, 2.1 percent of DOD’s selected reservists  retired from reserve duty. Without thresholds or targets, it is not possible  to assess the extent to which DOD is retaining the desired numbers of  senior military members or the extent to which retirement provisions  influence decisions to leave or stay in the reserves. Furthermore, some  retention rates may be artificially high because, at various times since  September 11, 2001, DOD has implemented “stop loss” policies that have  precluded servicemembers—both active and reserve—from separating  from military service. Of all the services, the Army has made the greatest  use of this policy. Nevertheless, our analysis of various DOD data for  selected periods of time when reservists were called to active duty to  support military operations reveals that the overall composition of the  reserve force by years of service, age, and pay grade has remained  relatively even and that DOD has not experienced significant declines in  any of these variables. Similarly, departmentwide reserve retention rates  for fiscal years 1991 through 2003 remained relatively stable, fluctuating  between 76.5 and 82.9 percent and the reserve components generally met  their retention thresholds for enlisted personnel in recent years. In fiscal  year 2003, for example, all components met their thresholds, with the  exception of the Army National Guard and the Air National Guard who  missed their thresholds by less than 1 percent. DOD has, however,  identified certain high-demand occupational specialties where retention  rates have decreased. While these cases do not necessarily suggest that  uniform retirement reform is required, they do suggest that targeted  corrective actions of some sort may be needed. For example, the retention  rate for the military police within the Army Reserve dropped from  approximately 67 percent in fiscal year 2000 to 49 percent in fiscal year  2003. Similarly, the retention rate decreased for Army National Guard  members in aviation, dropping from 80 percent to approximately  30 percent in fiscal year 2002. Finally, recent responses by reservists to  surveys administered DOD-wide reflect these retention statistics.  Responses to questions about career intent indicated that most reservists  intended to continue their service in the reserves. For example, in the  most recent survey available—September 2003—67.3 percent of all  reservists who responded indicated that they would continue in the  reserves and noted that reserve retirement was a reason for joining the  reserves.
subsections: section_title: Current Available Data Do Not Provide DOD with Complete Information
paragraphs: DOD does not have complete data to properly identify whether changes to  the reserve retirement system are needed. Our prior work has shown that  one of the critical success factors for strategic human capital management  is the use of reliable data to make human capital decisions. A fact based  performance-oriented approach to human capital management is crucial  for maximizing the value of human capital as well as managing relative  risks. Accordingly, DOD has established enlisted personnel attrition  ceilings as a performance metric, for each of its six reserve components,  which vary by component. For example, for fiscal years 2003 through  2005, the attrition ceilings range from a low of 12 percent in the Air  National Guard to a high of 36 percent in the Naval Reserve. According to  DOD, these ceilings represent the maximum number of losses deemed  acceptable in a given fiscal year that are not to be exceeded. However,  DOD has not established attrition ceilings for its reserve officers. An  official within the Office of the Assistant Secretary of Defense for Reserve  Affairs stated that DOD historical data indicate that military officers tend  to be more career-focused than enlisted personnel. While on occasion  there are some officer retention issues, DOD has generally found that  long-term officer retention is more stable and higher than enlisted  personnel retention. Consequently, DOD has not identified a need for  establishing officer attrition ceilings.
Furthermore, DOD has not established similar ceilings for the subset of  reserve attrition that can be attributed to retirement for officers or enlisted  personnel. For example, 17,959 reservists, representing 2.1 percent of the  Selected Reserve, retired from selected reserve duty in fiscal year 2003.  Without ceilings or targets against which to measure attrition attributable  to retirement, however, it is not possible to assess the extent to which  DOD is retaining the desired number of senior reserve officer and enlisted  personnel or to determine whether changes to the reserve retirement  system are needed to manage the force. In other words, without targets,  DOD cannot determine if 2.1 percent attrition due to retirement is  desirable.
Identifying or establishing retirement goals would be beneficial to DOD for  several reasons. First, retirement is a force-shaping tool. As we previously  stated, the purpose of DOD’s retirement systems—both active and  reserve—should support force management requirements (e.g., youth,  vigor, and career development opportunities) in addition to replacing or  maintaining income for retirees. Second, retirement policies provide the  primary financial incentive available to those senior personnel most likely  to be affected by retirement policies. According to DOD’s Sixth  Quadrennial Review of Military Compensation, reserve retirement  provisions begin to shape the retention decisions of military personnel  with as little as 5 to 7 years of service, and the effect of these provisions   on retention decisions gradually increases as servicemembers approach  20 years of service. This can be attributed, in part, to the fact that DOD’s  retirement systems do not provide reduced annuities to members who  serve less than 20 years. DOD officials have observed that the retirement  incentive has a noticeable retention effect that begins at the 12th to 14th  year of service. DOD assumes that most personnel who have more than  14 years of service have decided to make a career out of the military and  will stay until they are eligible for retirement, and DOD data show that  attrition rates decline as servicemembers approach 20 years of service.  Accordingly, DOD does not offer retention bonuses to military members  who have served 14 years or longer. Third, retirement is a very expensive  force-shaping tool. As noted earlier, for fiscal year 2004, DOD estimates  that it will need about $15.1 billion to fund its current reserve retirement  system.
Finally, DOD does not have the best data available to determine if changes  are needed because it has implemented “stop loss” policies in recent years  that have precluded servicemembers—both active and reserve—from  separating from military service. As a result, retention rates may be  artificially high. At various times since September 11, 2001, all of the  services have employed stop loss policies for both active duty personnel  and reservists at different times and in different ways. Stop loss policies  include, but are not limited to, the following examples. The Air Force was  the first service to use “stop loss” and invoked it for the entire Air Force  between September 2001 and January 2002. The Navy soon followed by  implementing stop loss for certain specialties between September 2001  and February 2002. The Marine Corps instituted stop loss for certain  specialties beginning in December 20, 2001, and terminated all stop loss in  May 2003. The Army began using stop loss in November 2001 and, as of the  issuance of this report, the Army is the only service operating a stop loss  policy. Many within and outside of DOD are concerned about the impact  that lifting stop loss in the Army will have on attrition. While some fear  that servicemembers will leave the military in great numbers, others  encourage caution, suggesting that while a spike in attrition might occur, it  would be prudent to wait to see if the spike is temporary or long lasting. It  is important to note that a number of Army personnel affected by the stop  loss policy had already planned to leave the service upon completion of  their military obligation. Thus, some service members’ departure is simply  delayed.
DOD should not only be able to measure the degree to which its  retirement system is meeting its goals but also assess how well the  retirement system helps the organization achieve its goals and pursue its  mission. This assessment would then enable DOD to determine if changes  to its reserve retirement system are needed from a workforce management  perspective. The fact that DOD has established attrition goals for its  reserve enlisted personnel is helpful. However, establishing goals for the  subset of attrition that is attributable to retirement would provide DOD  with even more meaningful data. For example, if overall attrition remained  constant but retirement attrition decreased, this trend could suggest that  the attrition was occurring at earlier career points and that fewer  servicemembers were deciding to make the military reserves a career. We  have previously reported that high-performing organizations identify their  current and future human capital needs and then create strategies for  identifying and filling gaps. The types of data that can inform workforce  planning efforts include, but are not limited to, the size and shape of the  workforce, skills inventory, attrition rates, and projected retirement rates  and eligibility. We previously testified that it is important to consider the  impact of retirement on the age and experience distribution of the force,  but that DOD lacked critical data needed to assess alternatives to the  existing retirement system. DOD also testified that retirement benefits  help shape the force by creating a reserve force with certain  characteristics and a specific distribution of personnel by rank and years  of service. However, officials in DOD’s Office of the Assistant Secretary of  Defense for Reserve Affairs told us that they currently do not have any  way to empirically measure the retention effects of the reserve retirement  system. According to a 2001 study conducted for the 9th Quadrennial  Review of Military Compensation, DOD should (1) assess whether the  current skill, experience, and age composition of the reserves are  desirable and, if not, what they should look like now and in the future and  (2) develop an accession and retention model to evaluate how successful  varying combinations of compensation and personnel management  reforms would be in moving the reserves toward that preferred  composition.
section_title: Analysis of DOD Workforce Data Does Not Suggest That Changes to the Reserve Retirement System Are Warranted
paragraphs: Our analysis of DOD workforce profile data over three points in time— 1991, 1997, and 2003—for enlisted and officer reservists, by years of  service, age, and pay grade, does not demonstrate that significant gaps  have occurred in the reserve component workforce that might suggest that  changes to the reserve component retirement system are warranted from a  workforce management perspective. In fact, our analysis revealed that, on  average, reserve enlisted personnel had more years of service and were  slightly older in 2003 than in 1991. For example, the average years of  service of reserve enlisted personnel was 1 to 3 years higher, for all  components, in calendar year 1997 than it was in calendar year 1991 and,  with the exception of the Marine Corps Reserve (which dropped by  1 year), the average years of service was the same at the end of calendar  year 2003 as it was at the end of calendar year 1997. Correspondingly, the  average age for all enlisted reservists was 1 to 3 years older in calendar  year 1997 than in calendar year 1991. For the most part, average pay  grades remained constant over the three points in time. Similarly, our  analysis of reserve officers revealed that, on average, they also had  more years of service and were slightly older in 2003 than in 1991. Their  average pay grades remained constant across all components and points in  time. More detailed force profile data are presented in appendix III.
section_title: Reservists Compared to Active Duty Counterparts
paragraphs: In general, reservists had more years of service and were older than their  active duty counterparts. In calendar year 2003, for example, reserve  officer and enlisted personnel served an average of 17 and 11 years,  respectively, compared to active duty officers and enlisted personnel, who  served an average of 11 and 8 years, respectively. The average age of  reserve officers was 40 in calendar year 2003, and the average age of active  duty officers was 35. The average age of reserve enlisted personnel was 33  in calendar year 2003, and the average age of active duty enlisted  personnel was 28. The average pay grade of reserve officers was O-3 in  calendar year 1991 and O-4 in 1997 and 2003, while the average pay grade  for active duty officers was O-3 in all three calendar years. The average  reserve enlisted pay grade was E-5 in all three calendar years. The average  active duty enlisted pay grade was E-4 in calendar year 1991 and E-5 in  calendar years 1997 and 2003.
section_title: Retention Rates Have Remained Fairly Constant Overall
paragraphs: An analysis of retention rates also did not indicate problems to suggest  that changes to the reserve retirement system are needed. Retention of  reservists between fiscal year 1991 and fiscal year 2003 remained relatively  stable, fluctuating between 76.5 and 82.9 percent. Retention rates for  reserve enlisted personnel were just slightly lower, fluctuating between  75.1 and 82.3 percent, and retention rates for officers were somewhat  higher, ranging between 83.7 and 87.4 percent. Figure 3 shows reserve  retention rates for officers, enlisted personnel, and all reservists from  fiscal year 1991 through fiscal year 2003.
In general, the reserve components met DOD-established thresholds for  enlisted personnel attrition in recent years. In fiscal year 2003, all  components met their goals, with the exception of the Army National  Guard and the Air National Guard, which missed their targeted thresholds  by less than 1 percent. In fiscal years 2001 and 2002, all components met  their goals, except for the Army National Guard, which missed its targeted  thresholds by approximately 2 percent each year. Finally, in fiscal year  2000, all components met their targeted thresholds except for the Army  Reserve, which missed its threshold by less than 1 percent.
We also examined the career points at which attrition occurred.  Our analysis of retention data shows that relatively little attrition  occurred among reservists with more than 14 but less than 20 years of  service—those reservists most likely to be affected by retirement policies.  (See appendix IV for more information on attrition of reserve personnel,  by years of service, for fiscal years 1991, 1997, and 2003.)
section_title: Retention Problems Have Surfaced in Some High-Demand Occupational Specialties
paragraphs: DOD has, nonetheless, identified certain high-demand occupational  specialties where retention rates have decreased. These cases do not  necessarily suggest that uniform retirement reform is required. However,  they do suggest that DOD may need to take targeted corrective action,  using any number of human capital management tools available to DOD, to  address those specialties that are experiencing significant attrition.  Personnel in the fields of aviation, special forces, security, intelligence,  psychological operations, and civil affairs, for example, have experienced  a pace of operation two to seven times higher than those of the average  reservist. Retention rates for military police in the Army Reserve, for  example, decreased from approximately 67 percent in fiscal year 2000 to  49 percent in fiscal year 2003. Similarly, retention decreased for Army  National Guard members in aviation, dropping from 80 percent in fiscal  year 2000 to approximately 30 percent in fiscal year 2002. Additionally,  from fiscal year 2000 to 2002, the retention rates of Marine Corps Reserve  members in civil affairs were consistently lower than the overall retention  rates for the entire Marine Corps Reserve.
section_title: Recent DOD-wide Survey Responses Reflect Retention Data
paragraphs: Responses by reservists to questions about career intention in recent  surveys administered by DOD indicate that, if given a choice, most  reservists intended to continue their service in the reserves. These surveys  were conducted during 2000 and in May and September of 2003.
Responses by reservists in the 2000 survey indicated that 71.8 percent of  respondents intended to stay in the reserves. This percentage remained  relatively stable at 71.4 percent in May 2003, but it dropped to 67.3 percent  in September 2003. Responses from reservists in each of the components,  who had been or were deployed overseas, however, showed greater  variation. For example, in the most recent survey available—September  2003—67.3 percent of the reservists who responded to the survey  indicated that they would continue in the reserves, and a majority of  reservists noted that reserve retirement was a reason for joining the  reserves. However, only 52.6 percent of respondents in the Army National  Guard and 53.5 percent of respondents in the Army Reserve, who were or  had been called to active duty, responded that they would stay in the  Guard or Reserves. In the September 2003 survey, more than one-half of  the respondents cited the opportunity to earn a retirement pension as a  factor that influenced their decision to join the Guard or Reserves. About  68.8 percent of higher graded officers (O-4 to O-6) and 66.5 percent of  higher graded enlisted personnel (E-5 to E-9) cited the reserve retirement  system as a reason to join the Reserves, compared with 50.5 percent of  lower graded officers (O-1 to O-3) and 37.5 percent of lower graded  enlisted personnel (E-1 to E-4).
section_title: Proposed Changes to Retirement System Are Costly and Need to Be Made in Context of the Total Force
paragraphs: The estimated cost of current legislative proposals to change the reserve  retirement system is significant and will have a number of associated  effects. First, the estimated cost of lowering the age of receipt, from age 60  to as low as 53 with limitations—or, in some cases, lower—will be  significant, given that all reservists who qualify for retirement—and not  simply the minority of reservists who have deployed to recent contingency  operations—would be covered under this change. Based on DOD data, our  cost estimates of the five current legislative proposals are substantial,  indicating that the cost of reserve retirement will increase by a range of  almost $3 billion to over $20 billion, depending on the proposal, over the  next 10 years. The Congressional Budget Office had not estimated the cost  of the retirement benefit for all five legislative proposals at the time of  our review. When associated health care costs are factored in, the total  projected increase ranges from more than $3 billion to nearly $35 billion  over the same period. Considering the fact that military basic pay  will continue to grow and health care costs will continue to rise, the  longer-term cost will continue to be significant. Second, lowering the  age of receipt will align the reserve retirement system more closely with  the active duty retirement system, but may not affect reservists who are  experiencing increased deployments and associated hardships. Many of  these reservists are not likely to be the beneficiaries of a reduction in the  age of receipt of annuity, given that only one in four reservists currently  stays in the reserves long enough to become eligible for retirement. Third,  retirement is only one human capital management tool available to DOD’s  workforce managers to compensate servicemembers for hardships  experienced during their careers. DOD’s workforce managers can consider  making targeted investments in specific human capital approaches. In  addition to changes to the retirement system that would have a broad  effect, DOD also has more targeted approaches available to it. For  example, DOD has several special pays and allowances it can use to  compensate servicemembers, such as hazardous duty pay and family  separation allowances. In addition, Congress has approved, but DOD has  yet to implement, a special allowance for servicemembers who experience  excessive deployments. Fourth, DOD has recently identified a need to  rebalance the reserve and active duty forces to reduce the stress on  certain high-demand occupations. Better use of these human capital  management tools can help DOD address the issues of equity and the  increased use of reservists in military operations. Finally, DOD has not yet  studied changes to the reserve retirement system in the context of the  total force, even though these changes could have unintended  consequences on DOD’s active duty forces. For example, if the reserve  retirement system were changed to offer an immediate annuity after  20 years of creditable service, some personnel who have made career  decisions to remain on active duty until retirement might be inclined to  leave active duty and apply to serve their remaining time in a reserve  component.
subsections: section_title: Legislative Proposals Are Designed to Lower the Age of Receipt
paragraphs: Members of the 108th Congress introduced five legislative proposals that  would reduce the age at which retired reservists can receive their  annuities from age 60 to something lower. The rationale often given for  these proposals is that reserve benefits, such as retirement, should be  enhanced in light of the frequency and duration of deployments that many  reservists are experiencing. One of these proposals would allow reservists  who served 20 years to retire and receive their annuities, immediately, at  any age. A second proposal would allow reservists who served 20 years to  leave the service and receive their annuities beginning at age 55. A third  proposal would reduce the age of receipt from 60 to as low as age 53—on  a sliding scale—by 1 year for every 2 additional years served beyond  20 years of service. For example, reservists who served 22 years would be  eligible to receive their annuities at age 59, and reservists who served  24 years would be eligible to receive their annuities at age 58. Under this  proposal, reservists would have to serve 34 years to be eligible to receive  annuities at age 53. A fourth proposal follows the same model but  establishes 55 as the minimum age at which reservists could begin to  receive annuities. Finally, a fifth proposal would retain eligibility of receipt  at age 60 but allow reservists to apply for receipt of reduced annuities at  younger ages. For example, the annuities of reservists who applied to  receive their annuities at age 55 would be reduced by 12.5 percent.
section_title: Estimated Cost Increases Will Be Substantial and May Not Target Reservists Most Affected
paragraphs: The estimated cost of lowering the age of receipt of retirement annuities  will be substantial and has long-term budgetary implications. Based on  data provided by DOD’s Office of the Actuary, we estimate that lowering  the age would cost DOD an additional $2.88 billion to $20.45 billion in  appropriated dollars, depending on the proposal, over the next 10 years.  Reserve retirees would also be eligible, under four of the legislative  proposals, for DOD-provided health care benefits for each year that the  age of receipt is lowered. Using estimates of projected numbers of retirees  and assumptions regarding the demographic characteristics of military  personnel and their families provided by DOD’s Office of the Actuary, and  average health costs for personnel and their dependents provided by  DOD’s Office of Health Affairs, we calculated that DOD would incur  additional health care costs ranging from $2.39 billion to $14.24 billion.
Table 2 presents estimates of increased appropriations that would need to  be paid into the Military Retirement Fund to finance the increased  retirement benefits. The increased costs of even the most modest  reduction in the age of receipt can be expected to be largenearly  $3 billion between fiscal year 2005 and 2014. More generous proposals,  such as allowing reservists who have fulfilled 20 satisfactory years of  service to begin receiving retirement annuities immediately, could  increase appropriations by over $20 billion during fiscal years 2005 and  2014. Table 2 also presents estimated associated increases in health care  appropriations.
It should be noted that the numbers reported in table 2 underestimate the  costs of any of these proposals because they do not include the past  service liability created by the proposals. In addition, these estimates  assume that retention among personnel not yet eligible for retirement  would remain unchanged from recent experience. Officials in DOD’s  Office of the Actuary suggested that improvements in retirement benefits  could lead to increases in retention and, therefore, produce a greater  number of retirees and higher costs than projected in this report.
Importantly, these costs are even more substantial, given the fact that all  reservists who qualify for retirement—and not just the minority of  reservists who have been called to active duty for recent contingency  operations—would be covered under any change to the reserve  component retirement system. Since 1991 and Operations Desert  Shield/Desert Storm, about one-fourth of all reservists who have served  in the reserves were called to active duty. Data, as of March 2004, show  that about 28 percent of the Ready Reserve have been called to active  duty—either domestically or abroad, for both short and long durations—in  support of current military operations since September 11, 2001. While all  the services have been affected, certain components and specialties  have been affected more than others. Furthermore, DOD’s actuary has  calculated that about only one person in four who enters the reserves— whether directly from civilian life or from active service—will retire from  the reserves. While lowering the age of receipt would align the reserve  retirement system more closely with the active duty retirement system, it  might not, as a result, affect those reservists who are experiencing  increased deployment and associated hardships.
section_title: Retirement Is Only One Tool Available to DOD’s Workforce Managers
paragraphs: Retirement is only one human capital management tool available to shape  the workforce, and it is not clear how influential it is on a servicemember’s  decision to leave or stay. That decision is a complex, highly individual  decision. Many factors, such as the availability of civilian jobs, family  considerations, and satisfaction with military life, can influence a  servicemember’s decision. We previously found that, when given a choice,  servicemembers have tended to prefer immediate compensation to  compensation that is deferred. The Congressional Budget Office found  that new recruits would place a value of 4 cents on every dollar to be paid  to them in 20 years. Consequently, compensation such as bonuses may be  more effective at increasing overall retention than changes to the reserve  retirement system.
DOD has several special pays and allowances to further compensate  servicemembers who are experiencing excessive deployments. For  example, servicemembers who are away from their permanent duty  station for more than 30 consecutive days receive a family separation  allowance to help offset the additional expenses that may be incurred by  their dependents. In addition, servicemembers deployed for less than  30 days may be eligible to receive regular per diem, which ranges from  $20 to $533 per day, depending upon the location. Furthermore, Congress  has approved, but DOD has yet to implement, a high-deployment  allowance designed to compensate certain servicemembers for lengthy as  well as frequent shorter deployments. There are also a number of special  pays and allowances intended to compensate servicemembers for  hardships associated with deployments and incentive pays to induce  members to acquire a particular skill or volunteer for certain career fields  experiencing staffing shortages.
Another way to address possible retention problems in high-demand  occupations is to alleviate the stress placed on reservists by transferring  functions between active duty and reserve components. DOD recently  published a report identifying the need to rebalance the forces—reserve  and active duty—to ease stress on units and individuals serving in  occupational specialties that are in high demand, such as military police,  civil affairs and intelligence. DOD has undertaken studies to balance its  military forces by (1) moving skills and functions that are found almost  exclusively or predominately in the reserve components, such as civil  affairs, into the active force and (2) reassigning personnel within the active  and reserve components out of low-demand specialties, such as heavy  artillery, into high-demand capabilities, such as military police and civil  affairs. It should be noted, however, that these efforts are in the early  planning stages and may take several more years to complete.
section_title: DOD Has Not Studied Changes to Reserve Retirement from a Total Force Perspective
paragraphs: DOD has not yet studied changes to the reserve retirement system from a  total force perspective, even though it relies on the total force—both  active duty and reserve component personnel and units—to conduct its  military operations. Today, DOD cannot conduct operations without  contributions from both active duty and reserve personnel, given that  missions no longer reside solely within the active duty forces. DOD has  transferred primary missions to the reserve components and, accordingly,  reservists no longer simply augment active duty forces in times of conflict.  DOD has identified a need to rebalance functions between the active duty  and reserve forces to meet its mission. Similarly, DOD must also balance  the needs of both segments of its uniformed personnel when it considers  changes to manage its force.
Changes to the reserve component retirement system will have a number  of ramifications, some more difficult than others to foresee and potentially  unintended. Most importantly, not all of these ramifications will appear in  the retention experience of the reservists. While reducing the age of  receipt in the reserve retirement system may more closely align this  system with the active duty retirement system, this change could adversely  affect active duty retention rates. For example, if the reserve retirement  system were changed to offer an immediate annuity after 20 years of  creditable service, personnel who have made career decisions to remain  on active duty until retirement might be inclined to leave active duty and  apply to serve their remaining time in a reserve component or transfer to  the Inactive Ready Reserve and obtain retirement eligibility by  participating in and completing voluntary training programs. Although  DOD has not studied changes to the reserve retirement system from a total  force perspective, it has contracted RAND to prepare a study, due in  September 2004, on how changes to the reserve retirement system might  affect reserve retention and force management.
section_title: Conclusions
paragraphs: DOD is not in the best position to make a business case for endorsing or  dissuading efforts to adopt any of the legislative proposals that are under  consideration because it has not established expectations and associated  metrics that would help determine if changes to the reserve retirement  system are needed. In the absence of identified weaknesses in the reserve  component profiles or overall retention rates, it is difficult to determine if  problems exist that would be best served by changing the reserve  retirement system. Furthermore, changes to the retirement system are  expected to be costly, and retirement—a one-size-fits-all compensation  tool—does not necessarily target those reservists who are experiencing  frequent and lengthy deployments and associated hardships. This is  especially significant, given the fact that less than one-third of all  reservists have been called to active duty in recent years and that only one  in four reservists currently remains in the reserves long enough to become  retirement eligible. In other words, changes to the reserve retirement  system, at a substantial cost, would be extended to many reservists who  have not deployed and might only reach a minority of those reservists who  have deployed. Finally, DOD has not studied the impact of proposed  changes to the reserve component retirement system on the active duty  forces. DOD has transferred primary missions to the reserve components  and, accordingly, reservists no longer simply augment active duty forces in  times of conflict. DOD has already identified a need to rebalance functions  between the active duty and reserve forces to meet its mission. Similarly,  DOD must also balance the needs of both segments of its uniformed  personnel when it considers changes to manage its force.
Proposals, such as those that have been introduced and that would  permanently expand benefits, should be considered in the context of the  serious fiscal challenges facing this country. The longer-term costs and  implications of legislative proposals must be given adequate consideration  before they are enacted into law. The deficit is now so large that the  United States will not be able to grow its way out of it. Difficult choices  are inevitable. Congress and DOD have already implemented a number of  changes to improve the pay and benefits for reservists over the past  few years. Furthermore, DOD is exploring other human capital  management options. If changes are still warranted, opportunities may  exist to apply other workforce management tools and target corrective  actions to those reservists who are in military occupational specialties  experiencing the highest attrition rates.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of Defense direct the Under Secretary  of Defense for Personnel and Readiness, in concert with the Assistant  Secretary of Defense for Reserve Affairs, to take the following four  actions:  1.  specify desired metrics for measuring the retention or attrition rates of  senior officer and enlisted reserve component personnel who are  approaching retirement eligibility and, therefore, are most likely to be  affected by changes to DOD’s reserve component retirement system;  2.  determine if gaps exist between the desired and actual rates of  3. identify changes, if any, to the current reserve component retirement  system that would address these gaps, to the extent that they exist;  and  4.  evaluate any changes to the reserve component retirement system and  their associated long-term costs in the context of the total force.
section_title: Agency Comments
paragraphs: In commenting on a draft of this report, DOD concurred with each of our  four recommendations. DOD also cited its ongoing contract with RAND to  conduct a detailed study of the reserve retirement system. DOD stated that  the contract calls for RAND to develop dynamic retention models that  DOD will be able to apply to evaluate the effect of any changes to the  reserve retirement system. DOD added that RAND is near completion of  this study. While the work that RAND is doing may provide DOD with  tools it needs to evaluate the effects of changes to the reserve retirement  system, we continue to emphasize that these evaluations should be  conducted in the context of the total force--both reserve and active duty  personnel.  DOD’s comments are reprinted in their entirety in appendix V.
We are sending copies of this report to interested congressional  committees, the Secretary of Defense, and the Director of the Office of  Management and Budget. We will make copies available to others upon  request. In addition, the report will be available at no charge on the  GAO Web site at http://www.gao.gov.
If you or your staff have any questions regarding this report, please  contact me at (202) 512-5559 or stewartd@gao.gov or Brenda S. Farrell at  (202) 512-3604 or farrellb@gao.gov. Key contributors to this report were  Joseph Applebaum, William J. Doherty, Mark B. Dowling, Ann M. Dubois,  Kenya R. Jones, Karen L. Kemper, Kristy L. Kennedy, Stephen P. Marrin,  William McNaught, David E. Moser, Charles W. Perdue, Jennifer R.  Popovic, Jay Willer, and Gregory H. Wilmoth.
section_title: Appendix I: Scope and Methodology
paragraphs: To assess the Department of Defense’s (DOD) reserve component  retirement system as compared with certain aspects of the active duty  retirement system, we reviewed the legislative history and purpose of  DOD’s retirement systems—both active and reserve—and DOD reserve  retirement policies and studies conducted by DOD and others that  addressed reserve retirement issues. Specifically, we reviewed DOD’s  Military Compensation Background Papers and the results of the Sixth  Quadrennial Review of Military Compensation, conducted in 1988, that  specifically addressed retirement issues. We also interviewed officials in  the Office of the Assistant Secretary of Defense for Reserve Affairs and  officials in each of DOD’s six reserve components—the Army Reserve, the  Army National Guard, the Naval Reserve, the Air Force Reserve, the Air  National Guard, and the Marine Corps Reserve.
To assess the extent to which data available to DOD suggest that changes  to the reserve component retirement system might be warranted, we  analyzed recent trends in overall workforce profiles and retention. For  example, we collected and analyzed data contained in DOD’s Reserve  Components Common Personnel Data System and DOD’s Active Duty  Military Personnel Master File and developed overall workforce profiles  by years of service, age, and pay grade. We did this for both officer and  enlisted personnel on active duty in each of the services and for officer  and enlisted personnel reservists serving in each of DOD’s six reserve  components. We also used year-end data for three points in time—1991,  1997, and 2003—because these points in time represent key periods when  reservists were called to active duty to support military operations. These  included Operations Desert Shield/Desert Storm, military operations in the  Balkans and Southwest Asia, and current operations in Iraq and  Afghanistan. We then compared average years of service, age, and pay  grade over the three points in time to identify the extent to which DOD  may have experienced declines in any of the variables we analyzed. In  addition, we analyzed data provided by the Office of the Assistant  Secretary of Defense for Reserve Affairs and generated from the Reserve  Components Common Personnel Data System to identify the retention and  attrition patterns of reservists from fiscal year 1991 through fiscal 2003.  These data also included information on certain high-demand military  occupational specialties that experienced higher than normal attrition  between fiscal year 1991 and 2003. DOD calculated the attrition rates by  dividing total losses in a given year by the number of reservists present at  the end of each year, and then compared retention rates over the years  that we selected. We developed retention rates for reserve officers, reserve  enlisted personnel, and for reservists as a whole, and then compared rates  over time. We also analyzed attrition by the years of service in which the  attrition occurred, for the three points in time, to determine if attrition was  occurring at different stages in reservists’ careers. We interviewed officials  in the Office of the Assistant Secretary of Defense for Reserve Affairs and  in each of DOD’s reserve components to discuss issues surrounding  workforce profiles and retention.
We also reviewed DOD attitudinal surveys that were administered to  reservists in calendar years 2000 and 2003 and analyzed responses to  questions that addressed the intent of reservists to stay in or leave the  reserves. Response rates for the 2000 Survey of Reserve Component  Personnel, the May 2003 Status of Forces Survey of Reserve Component  Members, and the September 2003 Status of Forces Survey of Reserve  Component Members were 47.3 percent, 35.6 percent, and 31.9 percent,  respectively. There is a potential for bias in the estimates to the extent that  respondents and nonrespondents had different opinions on the questions  asked. Each survey was a random probability sample, so each was only  one of a number of large samples that could have been drawn.  All percentage estimates cited from each of the surveys have sampling  errors of plus or less than 5.6 percentage points. We used the weighting  factors and the sampling error methodology provided by the Defense  Manpower Data Center to develop estimates and sampling error estimates  for each survey.
We assessed the accuracy and reliability of the Active Duty Military  Personnel Master File and the Reserve Components Common Personnel  Data Systems, from which all workforce profile, retention, and attrition  data were generated. Through written responses provided from the  Defense Manpower Data Center, which maintains these databases, we  reviewed (1) existing information about the data and the systems that  produce them, (2) the completeness of the electronic data, (3) DOD’s  methods of data collection verification and quality control practices,  (4) previous quality reviews of the data and the frequency of these  reviews, (5) any limitations to the data, and (6) practices and controls over  data entry accuracy. We also interviewed agency officials knowledgeable  about these data systems. We determined that the data were sufficiently  reliable for purposes of this report. We also assessed the reliability of  survey responses for reporting purposes. The surveys we analyzed were  based on stratified, random samples of reserve component members, and  the results were weighted to achieve statistical validity. Again, the results  of the surveys were sufficiently reliable for purposes of this report.
To evaluate the potential effects and costs of legislative proposals that  address reserve retirement reform, we reviewed legislative proposals  submitted in the 108th Congress and met with and obtained data on cost  projections—and the assumptions behind those projections—from the  Office of the DOD Actuary, the Office of the Assistant Secretary of  Defense for Health Affairs, and the Office of the Assistant Secretary of  Defense for Reserve Affairs. The Congressional Budget Office had not  estimated the cost of the retirement benefit for all five legislative  proposals at the time of our review. In addition, we reviewed reports  developed by RAND and others that analyze the potential effects of  provisions in the legislative proposals on the retention of reservists. We  also acquired reports that allowed us to assess alternative compensation  and workforce management methods for maintaining or increasing  retention. Finally, we interviewed officials in the Offices of the Assistant  Secretary of Defense for Reserve Affairs and Under Secretary of Defense  for Personnel and Readiness to analyze the extent to which DOD has  studied reserve retirement reform from a total force perspective.
We developed our own estimates of the increased costs that would be  incurred under each retirement proposal using projections made by DOD’s  Office of the Actuary and data received from DOD’s Office of Health  Affairs. We obtained estimates from the DOD actuary on the number of  personnel that would be affected by each retirement proposal and then  multiplied this population estimate by the estimated costs of providing  retirement and health care benefits.
To estimate the retirement benefit costs, we asked DOD’s Office of the  Actuary to estimate the number of new persons who would be eligible to  retire under each retirement proposal. The DOD actuary also estimated  the normal cost of each proposal. To develop estimates of the normal cost  of each alternative, the DOD actuary projected future personnel levels  based upon the number of persons participating in the selected reserve  forces on September 30, 2003. The DOD actuary generally assumed that  future retention rates in the reserve forces would be the same rates that  were observed from 1997 to 2000 and also assumed that personnel, newly  eligible under the different proposals, would retire at the same rates as  personnel who are currently eligible. The DOD actuary assumed that  retirement benefit increases would vary from 1.3 to 3.0 percent between  fiscal year 2005 and 2014, that future pay raises for the uniformed services  would range from 3.4 to 3.75 percent, that the real rate of return on  retirement investments would be 3.25 percent, and that the rate of  discount would be 6.25 percent. For each proposal, we applied the DOD  actuary’s estimate of the increase in the normal cost percentage to the  projected level of basic pay that would be paid to reservists from fiscal  year 2005 through fiscal year 2014 to estimate the amount of additional  funds that would need to be appropriated to the Military Retirement Fund.
To estimate the increased costs of providing health care benefits to newly  eligible retirees under each proposal, we again used the DOD actuary’s  estimate of the number of new retirees under each proposal. We also used  assumptions, provided by DOD’s Office of Health Affairs, that one-half of  these retirees would be single and that one-half would have dependents.  DOD’s Office of Health Affairs assumed that the average number of  dependents in this latter group of retirees would be 2.94. The Office of  Health Affairs also assumed that the costs to provide health care would be  $2,242 for each retiree and $1,910 for each dependent in fiscal year 2005.  Based on these data, we calculated that the costs of providing health care  through DOD’s health care system would increase 10 percent annually  from fiscal year 2006 through fiscal year 2014.
We conducted our review from November 2003 through July 2004 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: Key Provisions of the Reserve Retirement Points System
paragraphs: The reserve retirement system, which has remained largely unchanged  since its enactment in 1948, is built upon a points system that provides  DOD with a means to convert the total number of years served by  reservists on a part-time basis into the equivalent number of full-time years  served. Essentially, DOD divides the total number of points that a reservist  earned in each qualifying year by 360—roughly, the number of days in a  year. This prorated adjustment provides DOD with the ability to calculate  retirement annuities for both active duty and reserve retirees on a  comparable basis.
Reservists must accumulate 20 years of creditable service to become  retirement eligible and, as of October 1, 2002, reservists must also serve  the last 6 years in a reserve component. A creditable year of service is a  year in which a reservist earns a minimum of 50 points. Retirement points  can be classified as inactive duty points and active duty points.
Reservists typically earn inactive duty points in a number of different  ways:    Weekend drills. Reservists attend weekend drills each month. Each day  is divided into two drill periods, of 4 hours in duration, and reservists  earn 1 point for each drill. This equates to 4 points for each weekend,  or 48 points annually.
Annual training. Reservists participate in 2 weeks of training annually  and typically earn 12 points for this training time.
Affiliation with a reserve unit. Reservists earn 15 points annually for  being a member of a reserve unit.
Additional points. Reservists can earn additional points for such things  as completion of accredited correspondence courses or participation in  funeral honors duty. Reservists, however, cannot apply more than 90  inactive duty points toward retirement in any given year.
In addition, reservists receive 1 point for any day served on active duty  prior to separating from active duty and affiliating with a reserve  component. When called to active duty, reservists also earn active  duty points—1 point for each day served. Reservists can earn a maximum  of 365 active duty points in any calendar year and a career maximum of  10,950 points or 30 years of creditable service. Reservists who are called to  active duty will accumulate more points and, therefore, will receive larger  retirement annuities, should they stay until retirement, than their reserve  counterparts who are not called to active duty.
section_title: Appendix III: Reserve Workforce Profile Data
paragraphs: We analyzed data contained in DOD’s Reserve Components Common  Personnel Data System and developed overall workforce profiles— by years of service, age, and pay grade—for each reserve component, and  for officer and enlisted personnel, to identify trends that might suggest  that changes to DOD’s reserve retirement system are warranted from a  workforce management perspective. We selected three points in time— calendar years 1991, 1997, and 2003—because they represent key periods  when reservists were called to active duty. These included Operations  Desert Shield/Desert Storm, military operations in the Balkans and in  Southwest Asia, and current operations in Iraq and Afghanistan. We did  not find significant variations in overall years of service, age, or pay grade  that would suggest that changes to DOD’s reserve retirement system are  currently needed from a workforce management perspective.
subsections: section_title: Reserve Enlisted Personnel Average Years of Service
paragraphs: The average years of service of reserve enlisted personnel was 1 to 3 years  higher, for all components, in calendar year 1997 than it was in calendar  year 1991. With the exception of the Marine Corps Reserve, the  average years of service was the same at the end of calendar year 2003 as  it was at the end of calendar year 1997. In the Marine Corps Reserve, the  average years of service was 1 year lower at the end of calendar year 2003  than it was at the end of calendar year 1997, but the same as it was at the  end of calendar year 1991. Figure 4 shows the average years of service by  reserve enlisted personnel for all components for calendar years 1991,  1993, and 2003.
section_title: Reserve Enlisted Personnel Average Age
paragraphs: Similarly, reserve enlisted personnel were, on average, 1 to 3 years older,  across all components, in calendar year 1997 than they were in calendar  year 1991. Reserve enlisted personnel in four of the components were, on  average, the same age or 1 year older in calendar year 2003 as they were in  calendar year 1997. In the Army National Guard, enlisted reservists were,  on average, 1 year younger in calendar year 2003 than they were in  calendar year 1997, but 1 year older than they were in calendar year 1991.  In the Marine Corps Reserve, enlisted reservists were, on average, 1 year  younger in calendar year 2003 than they were in calendar year 1997, and  the same age as they were in calendar year 1991. Figure 5 shows the  average age of reserve enlisted personnel for all components for calendar  years 1991, 1997, and 2003.
section_title: Reserve Enlisted Personnel Average Pay Grade
paragraphs: Figure 6 shows the average pay grade for reserve enlisted personnel for all  components for calendar years 1991, 1997, and 2003. Average pay grades  remained constant in four of the six components. The average enlisted pay  grade was one pay grade higher in the Air National Guard in calendar year  2003 than it was in calendar years 1991 and 1997. The average pay grade in  the Air Force Reserve was one pay grade higher in calendar years 1997 and  2003 than it was in calendar year 1991.
section_title: Reserve Officer Average Years of Service
paragraphs: The average years of service by reserve officers in the Air Force Reserve  remained constant in calendar years 1991, 1997, and 2003. In the remaining  five components, the average years of service was 1 to 3 years greater in  2003 than it was in calendar year 1991. None of the components  experienced a decline in the average number of years served for the  three points of time that we analyzed. Figure 7 shows the average years of  service by reserve officer personnel for all components for calendar years  1991, 1997, and 2003.
section_title: Reserve Officer Average Age
paragraphs: Reserve officers were, on average, 1 to 2 years older in calendar year 1997  than they were in calendar year 1991, with the exception of the Air Force  Reserve where officers were, on average, the same age in both calendar  years. Similarly, reserve officers were, on average, 1 to 2 years older in  calendar year 2003 than they were in calendar year 1997, with the  exception of reserve officers in the Air National Guard, who were, on  average, the same age in both of those calendar years. Figure 8 shows the  average age of reserve officer personnel for all components for calendar  years 1991, 1997, and 2003.
section_title: Reserve Officer Average Pay Grade
paragraphs: Figure 9 shows the average pay grade of reserve officers for all  components for calendar years 1991, 1997, and 2003. Average pay grades  remained constant within each component.
section_title: Appendix IV: Attrition Rates for Reservists
paragraphs: We analyzed data contained in DOD’s Reserve Components Common  Personnel Data System, for reserve officers, enlisted personnel, and all  reservists, to determine the career points at which attrition occurs and the  extent to which the current reserve retirement system influences the  decisions of reservists to stay in or leave reserve duty. Again, we selected  three points in time—1991, 1997, and 2003—because they represent key  periods when reservists were called to active duty to support military  operations. These included Operations Desert Shield/Desert Storm,  military operations in the Balkans and Southwest Asia, and current  operations in Iraq and Afghanistan. In each of the years we selected, we  found little attrition among those reservists with more than 14 years of  service but less than 20 years of service—those servicemembers most  likely to be affected by changes to the reserve retirement system.  Figures 10, 11, and 12 show reserve attrition by years of service for  fiscal years 1991, 1997, and 2003, respectively.
section_title: Appendix V: Comments from the Department of Defense
section_title: Appendix VI: Related GAO Products
paragraphs: Military Pay:  Army Reserve Soldiers Mobilized to Active Duty  Experienced Significant Pay Problems. GAO-04-911. Washington, D.C.:  August 20, 2004.
Military Personnel: DOD Has Not Implemented the High Deployment  Allowance That Could Compensate Servicemembers Deployed Frequently  for Short Periods. GAO-04-805. Washington, D.C.: June 25, 2004.
Military Personnel: Active Duty Compensation and Its Tax Treatment.  GAO-04-721R. Washington, D.C.: May 7, 2004.
Military Personnel: Observations Related to Reserve Compensation,  Selective Reenlistment Bonuses, and Mail Delivery to Deployed Troops.  GAO-04-582T. Washington, D.C.: March 24, 2004.
Budget Process: Long-Term Focus is Critical. GAO-04-585T.  Washington, D.C.: March 23, 2004.
Military Pay: Army National Guard Personnel Mobilized to Active Duty  Experienced Significant Pay Problems. GAO-04-89. Washington, D.C.:  November 13, 2003.
Military Personnel: DOD Needs More Data to Address Financial and  Health Care Issues Affecting Reservists. GAO-03-1004. Washington, D.C.:  September 10, 2003.
Military Personnel: DOD Actions Needed to Improve the Efficiency of  Mobilizations for Reserve Forces. GAO-03-921. Washington, D.C.:  August 21, 2003.
Military Personnel: DOD Needs to Assess Certain Factors in  Determining Whether Hazardous Duty Pay is Warranted for Duty in the  Polar Regions. GAO-03-554. Washington, D.C.: April 29, 2003.
Military Personnel: Preliminary Observations Related to Income,  Benefits, and Employer Support for Reservists During Mobilizations.  GAO-03-573T. Washington, D.C.: March 19, 2003.
Military Personnel: Oversight Process Needed to Help Maintain  Momentum of DOD’s Strategic Human Capital Planning. GAO-03-237.  Washington, D.C.: December 5, 2002.
Military Personnel: Active Duty Benefits Reflect Changing  Demographics, but Opportunities Exist to Improve. GAO-03-935.  Washington, D.C.: September 18, 2002.
Exposure Draft: A Model of Strategic Human Capital Management,   GAO-02-373SP. Washington, D.C.: March 15, 2002.
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