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Findings

The following information is part of a presentation by the Defense Business Board about Modernizing the Military Retirement System dated July 21, 2011.  You can find the first slide in the presentation here.

 

DoD has maintained the structure of its retirement benefits, which were created prior to the All Volunteer Force

  • Retirement plans are an important component of both private and public sector compensation systems
  • Over the last few decades, private sector plans have shifted from defined benefit to defined contribution to address longer life spans and unaffordable costs
  • The military retirement system has not materially changed for over 100 years
    • The current military retirement system was designed for an era when life spans were shorter,
    • Pay was not competitive with civilian pay, and
    • Second careers were rare since military skills did not transition easily to the private sector
  • Military retirement funds are not able to be invested in higher yielding equities and bonds

Military retirement is more generous and expensive compared to the private sector

  • DoD pays retirees 40 years of retirement benefits for 20 years of service
    • Military skills are transferrable to the private sector
    • Second careers are now common for those retiring in their 40s
    • Payout after 20 years makes retention difficult –76% leave between years 20 and 25
    • 20 years of service earns a lifetime of payments of 50%, ramping up to 87.5% for 35 years of service
  • Retirement funds accrued for personnel serving less than 20 years are effectively applied to the benefits of those serving more than 20 years
  • For those serving more than 20 years, the retirement contribution is 10 times greater than the private sector
    • Average private sector pension contributions range from 4-12% per year; military retirement benefit equates to 75% of annual pay per year for those who retire
    • Immediate payout after 20 years has no comparison in the private sector

“One Size Fits All” has structural disadvantages

  • Surveys consistently report that military retirement has little value in recruitment or retention for at least the first 10 years of service
  • The current plan is highly inflexible and especially poorly suited for periods of significant change (e.g., when downsizing the force)
    • It will be very difficult to release personnel with 15 or more years of service, yet these age groups are a likely target for downsizing
    • As a result, DoDwill likely require special pay to ease transitioning out of the military (as was done in the 1990s), therefore, increasing costs
  • The current system does not compensate for those in high risk situations or extenuating circumstances (e.g., combat duty, hardship tour, and separation from family)

 

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