The Blended Retirement System

Retention Effects and Continuation Pay Cost Estimates for the Armed Services

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

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Research Questions

  1. How will the new BRS system affect members currently in service versus new members who will be automatically enrolled in the new system?
  2. Can the BRS adequately support a steady-state force and experience mix for all five armed services?
  3. How well does the BRS achieve the baseline force-retention level?
  4. Does the BRS help lower or increase military retirement costs?
  5. What is the level at which services should set CP multipliers?

For decades, the services had a defined-benefit system that vested after 20 years of service in an immediate annuity computed based on years of service and basic pay using a 2.5-percent multiplier. The 2016 National Defense Authorization Act created a new system called the Blended Retirement System (BRS) that changes the defined-benefit multiplier to 2.0 percent and adds two new components: a defined-contribution plan known as the Thrift Savings Plan and continuation pay (CP).

This research uses RAND's Dynamic Retention Model to simulate the steady-state effects of the BRS on active component retention, reserve component participation, and CP costs for both officers and enlisted personnel for each of the armed services.

The report finds that the BRS can sustain the same force size and mix as the legacy system for enlisted personnel and officers in each service. The CP multipliers that sustain long-run retention are similar across the services but differ for enlisted personnel and officers. Enlisted multipliers are close to the floor established by Congress, while officer multipliers are substantially higher. Simulations show that virtually all junior enlisted personnel would elect the BRS over the legacy system, although the election rate drops off with years of service. The officer pattern is similar when CP multipliers are set high enough to sustain long-run retention, but relatively few officers elect the BRS when CP multipliers are lower. The report finds that election rates affect the time pattern of cost and cost savings to the government.

Key Findings

Effects on Retention

  • The BRS can support a steady-state force and experience mix for all five armed services — the Air Force, Army, Coast Guard, Marine Corps, and Navy — that are quite close to the force size and mix under the legacy system for enlisted personnel and officers in each service.

Effects on Costs

  • Costs are initially higher under the BRS because of service expenditures for CP and Thrift Savings Plan matching contributions, but costs will eventually lower because of the decrease in defined-benefit retirement costs.

CP Multipliers

  • The CP multipliers that sustain force size and mix under the legacy system are similar across the services but differ between enlisted personnel and officers.
  • The baseline enlisted force is achievable when the CP multiplier is set at or near the floor mandated by Congress. For officers, the floor-level CP multipliers do not maintain baseline retention for any service; CP multipliers close to one year of basic pay for active component personnel are required.
  • Setting a common CP multiplier for enlisted and officer personnel could address concerns about inequitable CP multipliers but would be inefficient relative to using optimized and different CP multipliers for officers and enlisted personnel.

BRS Election Rates

  • Virtually all junior enlisted personnel who are currently serving would elect the BRS over the legacy system, as would many more senior personnel, although the election rate drops off with years of service. A similar pattern is found for officers when CP multipliers are set high enough to sustain long-run retention. But if CP multipliers are set lower, such as at the floor mandated by Congress, relatively few officers would elect the BRS.

Recommendations

  • The development of a new Dynamic Retention Model capability for the Coast Guard offers the opportunity to apply the capability to Coast Guard compensation policy questions in the future.
  • The DRM capability can be used to assess the retention and cost effects of additional legislative changes to the BRS, including such aspects of its implementation as the retention effects of the BRS for members who make a given lump-sum choice.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Elements of the Blended Retirement System

  • Chapter Three

    Brief Overview of the Dynamic Retention Model, Its Limitations, and Its Optimization Approach

  • Chapter Four

    Steady-State Retention and Cost Results

  • Chapter Five

    Transition Results

  • Chapter Six

    Concluding Thoughts

  • Appendix

    The Dynamic Retention Model

The research described in this report was conducted by the Forces and Resources Policy Center within the RAND National Defense Research Institute and the RAND Homeland Security and Defense Center.

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