DOD Budget

Budget Impact of Proposed Reduced Retirement Fund Payments Gao ID: NSIAD-92-80 June 5, 1992

Until 1984, the Defense Department's (DOD) military retirement system was funded on a "pay-as-you-go" basis; appropriations were provided annually to cover the cost of retirees' pensions being paid out that year. Since then, DOD has made monthly payments to a U.S. Treasury interest-bearing fund to cover future retirement benefits earned for military service. This report discusses a DOD proposal to reduce its contributions to the fund by $11 billion by changing the way annual payments to the fund are calculated. GAO notes that the reduction in DOD retirement fund payments will not yield federal budgetary savings because such reductions will eventually require offsetting increases in Treasury payments to the unfunded liability account.

GAO found that: (1) in February 1991, DOD proposed to change the method for calculating its annual payments to the retirement fund, which would reduce its submissions by $10.7 billion annually for fiscal years 1994 through 1997; (2) subsequently, DOD decided not to enact this change, which generally lacked merit; (3) the second DOD proposal was to reduce payments to the retirement fund based on anticipated assumption changes for long-term interest rates and salaries, which would reduce its January 1992 FYDP submissions by $11 billion, but the actuarial estimate changes have yet to be approved by the Military Retirement Board of Actuaries; (4) the President's 1993 budget proposed a $82.78-billion reduction in defense spending, which would include the $11 billion in reduced payments to the Military Retirement fund; (5) the DOD proposal to reduce retirement fund payments would not reduce total federal spending because the reduced payments would require offsetting increases in Treasury payments to the unfunded liability account; (6) adjustments in DOD retirement fund payment calculations account for a significant part of total reductions in the defense budget; and (7) retirement fund reductions resulting from actuarial assumption changes cannot be considered as reductions in defense programs or in long-term federal retirement obligations.

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