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Research Questions

  1. What have past commissions and reviews recommended with regard to reforming military compensation, particularly retirement benefits?
  2. What have past commissions and reviews recommended with regard to reforming military compensation, particularly retirement benefits?
  3. How can the disability retirement benefit be made simpler and fairer?

Pressure to reduce the federal deficit, planned reductions in strength, concerns about cost, and perceptions expressed by military leaders, past commissions, and studies about the lack of fairness of the military compensation system have placed increased attention on military compensation as an area for reform. In September 2011, the Office of the Secretary of Defense convened a working group of senior representatives throughout the Department of Defense (DoD) to conduct a comprehensive review of military compensation, focusing on retirement compensation.

The group's deliberations built on the findings of past reviews and were informed by RAND's analysis over the 18 months that the group met. We used and extended RAND's dynamic retention model to assess many proposals for their effects on active and reserve retention and cost — that culminated in assisting the group to identify two broad design concepts. We also evaluated options for implementing reforms in the transition to the steady state (i.e., when all service members are receiving retirement benefits under the new retirement system), and we evaluated proposals for disability compensation reform.

The two design concepts retain positive aspects of the current system while addressing criticisms of the system related to the fairness and fiscal sustainability. Our analysis shows that both concepts are feasible, provide cost savings, improve equity, potentially add force management flexibility, and simplify the DoD disability compensation system. We find that DoD cost savings begin at once, while Treasury outlays initially increase and later decrease below baseline outlays. Allowing members grandfathered under the old system to participate in the new system hastens both effects. Both concepts give rise to the same willingness to stay in service, and so sustain readiness by maintaining force size and experience.

Key Findings

Deficiencies in the Current System

  • Because service members do not receive retirement benefits unless they have served for 20 years, most members (about 86 percent of enlisted personnel and 66 percent of officers) receive no benefits.
  • The military compensation system emphasizes compensation in the form of deferred payments, despite the fact that the typical service member is young and has a preference for current over deferred compensation. As a result, compensation costs are higher than necessary.
  • The vesting point at 20 years of service and immediately available retirement benefits induces similar career lengths in all occupational specialties, but optimal career length may well differ by occupational specialty.

A Modernization Proposal

  • A hybrid system that combines elements of a defined-benefit plan (the military's current system) and a defined-contribution plan (popular in the civilian sector) could address criticisms of the current system while maintaining key advantages.
  • Earlier vesting (before 20 years of service) in the proposed system can improve equity by increasing the likelihood that a service member will become vested.
  • A hybrid plan can increase efficiency and enable the services to flexibly manage the force via decisions about how the defined-benefit element is computed, how retirement eligibility criteria are defined, and when payouts are made.
  • RAND analysis indicates that a hybrid plan is able to create a steady-state force level and experience mix equivalent to the current force despite changes in the timing and amount of compensation and earlier vesting.
  • The hybrid plan could incorporate a streamlined disability retirement benefit that is both simpler and fairer than the current system's.

Table of Contents

  • Chapter One


  • Chapter Two

    Background on Retirement Reform

  • Chapter Three

    A Brief Description of the Dynamic Retention Model

  • Chapter Four

    Alternatives Considered by the Department of Defense Working Group

  • Chapter Five

    Retirement Reform Design Concepts and Steady-State Results

  • Chapter Six

    Transition Results on Retirement Reform Concepts

  • Chapter Seven

    Reforming DoD Disability Compensation

  • Chapter Eight

    Closing Thoughts

  • Appendix A

    Preliminary Results

  • Appendix B

    Steady-State Retention Results for the Navy, Air Force, and Marine Corps

  • Appendix C

    Additional Results for the Transition Period

  • Appendix D

    Change in Net DoD Disability Retirement Benefit Under Proposed Reform Versus Current System

  • Appendix E

    Estimated Coefficients for Dynamic Retention Model

This research was conducted within the Forces and Resources Policy Center of the RAND National Defense Research Institute, a federally funded research and development center sponsored by the Office of the Secretary of Defense, the Joint Staff, the Unified Combatant Commands, the Navy, the Marine Corps, the defense agencies, and the defense Intelligence Community.

This report is part of the RAND Corporation research report series. RAND reports present research findings and objective analysis that address the challenges facing the public and private sectors. All RAND reports undergo rigorous peer review to ensure high standards for research quality and objectivity.

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