Military Retirement

Payments to military retirees and their survivors totaled $29 billion in fiscal year 1996. Various factors, including the end of the Cold War, defense downsizing, changes in civilian retirement systems, and increasing federal budgetary constraints, have raised questions about whether the military retirement system today best meets the needs of the Pentagon and members of the armed forces. A number of analysts, including several who participated in a roundtable discussion convened by GAO, believe that fundamental changes to the military retirement system could increase its effectiveness or reduce costs by yielding a force of different composition and size than exists today. The suggestions of the GAO panel, which included Defense Department experts and compensation analysts, ranged from earlier vesting of retirement benefits to more sweeping reforms, such as placing military personnel under a system similar to the Federal Employees Retirement System.

GAO found that: (1) payments from the military retirement fund to military retirees and their survivors totaled $29 billion in fiscal year (FY) 1996; (2) these payments have been rising over several decades as both the number of military retirees and the average payment to individual retirees have increased and are expected to peak at slightly more than $30 billion (in FY 1995 dollars) in 2007; (3) since FY 1985, the accrual accounting concept has been used to reflect the cost of future retirement payments for current service members in the Department of Defense's (DOD) military personnel budget; (4) these annual DOD budgetary costs have declined for several reasons, including lower benefits for new entrants, changes in economic and actuarial assumptions to reflect experience, and recent decreases in force size; (5) the military retirement system strongly influences the broad shape of the force, since it provides an increasing incentive for service members to stay in the military as they approach 20 years of service and encourages them to leave thereafter, helping DOD to retain midcareer personnel and yielding a relatively young force; (6) however, the system can also impede effective force management because military personnel are not entitled to any retirement benefits unless they have served 20 years, and the services have been reluctant to involuntarily separate personnel with less than 20 years of service beyond a certain point due to the financial consequences for service members and the impact on morale; (7) some analysts, including several of GAO's roundtable participants, believe the military retirement system is an obstacle to achieving the right force size and composition because the system provides the same career length incentive for all categories of personnel; (8) proposals to change the military retirement system are intended to improve efficiency and flexibility in force management, increase fairness or attractiveness to service members, and reduce costs; (9) earlier vesting of at least a portion of military retirement benefits is a common feature of proposed changes; (10) cost estimates done by the DOD Actuary, at GAO's request, suggest that some type of earlier vesting could be offered with little or no increase to DOD's retirement costs; (11) the total impact on DOD's budget of the proposed changes depends on their effect on retention and force composition; (12) some analysts have called for more fundamental changes to the retirement system, possibly with other changes in compensation and personnel policy, to accommodate different career lengths for different personnel; and (13) these changes could increase effectiveness or reduce costs by yielding a force of a different composition and size than today's force.