Reforming Military Retirement

Analysis in Support of the Military Compensation and Retirement Modernization Commission

by Beth J. Asch, Michael G. Mattock, James Hosek

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Research Questions

  1. What effects will MCRMC's proposed reforms have on the military compensation and retirement systems, by service, for officers and enlisted personnel in both the active and reserve components?
  2. Will the proposed reforms be able to sustain the current force size and shape through the transition period from reform implementation to the future steady state?
  3. What cost savings, if any, might the proposed reforms generate?

The National Defense Authorization Act of 2013 mandated an independent commission — the Military Compensation and Retirement Modernization Commission (MCRMC) — to review the military compensation and retirement systems and make recommendations to modernize them. The MCRMC proposed a blended system consisting of a defined benefit (DB) plan, a defined contribution (DC) plan with matching, and a continuation pay in the 12th year of service, to replace the current DB-only system.

MCRMC engaged the RAND National Defense Research Institute for analytical support during its internal deliberations regarding the form and details of its retirement plan. We based our analysis on the RAND Dynamic Retention Model, a dynamic programming model of individual choice regarding active-component (AC) retention and reserve-component (RC) participation that has been estimated based on longitudinal data and with significant capability to simulate alternative compensation policies. An important criterion of the analysis was whether a reform could sustain the current force size and shape. We found that the MCRMC plan could do so; this was the case by service, for officer and enlisted, for AC and RC.

Further, the MCRMC plan would decrease cost. We estimated cost savings in the steady state ranging from $2.3 billion to $7.7 billion per year, depending on the DC plan contribution match rate and the lump sum versus second-career annuity choice, with an intermediate example showing cost savings of $4.3 billion a year. The report also discusses how our estimated savings figures compare with those reported by the MCRMC.

Key Finding

The MCRMC's proposed reforms can sustain the current force size and shape while decreasing the overall cost of the military compensation and retirement systems.

  • The MCRMC plan was effective in meeting manning requirements, cost-effective in being able to generate the same force size and shape at lower cost, valuable to the service member because of the early vesting defined contribution plan and lump-sum choice, and valuable to the military services by offering the potential for greater flexibility in force management while still retaining a large portion of compensation in the defined benefit plan.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Elements of the MCRMC Retirement Reform Options

  • Chapter Three

    Brief Overview of the Dynamic Retention Model

  • Chapter Four

    Steady-State Retention Results

  • Chapter Five

    Transition Results

  • Chapter Six

    Concluding Thoughts

  • Appendix A

    Steady-State Retention

  • Appendix B

    Lump-Sum Formula

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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