This report presents a theoretical model of the retirement accrual charge, critically reviews reforms suggested by past studies, and provides empirical estimates of the inaccuracy in each service's total and marginal accrual charges under the current system and indicates how this could be fixed by service-specific accrual charges with separate charges for officers and enlisted personnel.
Toward Efficient Military Retirement Accrual Charges
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- How large are the accrual charge inaccuracies by branch of service under the current accrual charge system?
- What approach can be taken to eliminate these inaccuracies?
- If a reformed accrual charge system were implemented, how would the services' personnel budgets be affected?
The retirement accrual charge system introduced in 1984 brought visibility to the military retirement liability resulting from current personnel policy decisions. The system produces inaccurate estimates of each service's accrual charge, however. This is because the accrual charge is based on a combined, forcewide retention profile rather than service-specific profiles.
Accurate accrual charges are relevant for budgeting, decisions regarding personnel versus non-personnel resources, and decisions regarding the experience mix of personnel. In this report, we present a theoretical model explaining why the current system produces inaccurate estimates of each service's total and marginal accrual charges. We review past critiques of the system and consider their proposals and recommendations for change, and we present empirical estimates of the inaccuracy in each service's total and marginal accrual charges under the current system as compared with a service-specific system. This is done for the current military retirement benefit system and the reformed retirement benefit system recommended by the Military Compensation and Retirement Modernization Commission.
The estimates show that the accrual charge is too high for three services and too low for one service. For example, the Army's accrual charge is estimated to be $380 million (in 2015 dollars) per year too high. Implementing service-specific accrual charges with separate charges for officers and enlisted personnel would eliminate these charge inaccuracies.
- The retirement accrual charge system, although producing an accurate accrual charge in aggregate, produces inaccurate accrual charges for each service.
- Both total accrual charges and marginal accrual charges are inaccurate, providing inaccurate signals to policy makes that can hamper efficient resource allocation.
- Estimates show that the accrual charge is too high for the Army, Marine Corps, and Navy, but too low for the Air Force.
- Changing to service-specific accrual charges, with separate accrual charges for officers and enlisted personnel within a service, would provide accurate information about total and marginal accrual costs, unlike the current system.
- A service-specific system should eliminate controversy over whether a service is being overcharged and is cross-subsiding another service.
- Implementing service-specific accrual charges, with enlisted- and officer-specific charges, would eliminate accrual charge inaccuracies.
- Service-specific accrual charges could be implemented in future personnel budgets, without requiring budget adjustments for past over charges or past under charges.
- Service-specific accrual charges would provide accurate signals to the military services, Department of Defense, and Congress for budgeting and resource allocation decisions.
- DoD Officer of the Actuary would require time and resources to shift to a service-specific accrual charge system.
- In addition to service-specific accrual charges, any policy change affecting the retirement liability should include a separate analysis to estimate the change in the retirement liability as part of the cost-benefit analysis of the policy.
Table of Contents
NCP and Cost: A Heuristic Model
Insights from Past Studies
Estimates Using Service-Specific NCPs Versus a Single NCP
Inaccuracy in Cost Changes from an Increase in Basic Pay