Toward Meaningful Military Compensation Reform

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.