Objectives, Scope, and Methodology

As requested, we reviewed selected aspects of the military retirement system. Specifically, we addressed (1) military retirement costs, (2) the role of military retirement in shaping and managing U.S. forces, and (3) proposed changes to modernize the system and contribute to more efficient force management. We reviewed historical data and the current projections of future retirement costs from the DOD Actuary. Federal Outlays for Military Retirees

In fiscal year 1996, the United States paid $29 billion to military retirees and their survivors. This decline is due to more service members being under less generous retirement plans and changes made in actuarial assumptions to reflect experience. Military Retirement’s Role in Shaping and Managing the Force

The military retirement system strongly influences the broad shape of the force. The retirement system 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. 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, the services have been reluctant to involuntarily separate personnel with less than 20 years of service beyond a certain point. Moreover, some analysts, including several roundtable participants, believe the military retirement system is an obstacle to achieving a force of the right size and composition because it provides the same strong career length incentive to all categories of personnel. Analysis suggests that some types of earlier vesting could be offered with little or no increase to DOD’s retirement costs, although the ultimate cost impacts to DOD depend on retention and force composition effects. Some analysts, including several roundtable participants, have called for more far-reaching structural changes to the retirement system, possibly with other changes in compensation and personnel policy, to accommodate different career lengths for different personnel. These changes could increase effectiveness or reduce costs through yielding a force of a different composition and size than today’s force. A common feature of several proposals is that members would be vested earlier in a portion of their retirement benefits so that the sharp rise in the value of military retirement benefits at 20 years of service would be somewhat leveled. These issues included DOD’s beliefs that (1) the current system has been effective in retaining experienced personnel while simultaneously avoiding stagnation among senior personnel; (2) the existing retirement system, augmented by temporary authorities established for the ongoing force drawdown, has provided adequate flexibility in managing force levels; (3) the 1986 changes to the retirement system increase the incentive for service beyond 20 years; (4) changes to the retirement system, such as those discussed in our report, could result in increased cost of other programs; and (5) changes in the retirement system are not needed to allow DOD to adequately vary career lengths according to specialty, given other available compensation and management tools.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed selected aspects of the military retirement system, focusing on: (1) military retirement costs; (2) the role of military retirement in shaping and managing U.S. forces; and (3) proposed changes to modernize the system and contribute to more efficient force management.

What GAO Found

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.