Pensions and intemporal choice: evidence from the U.S. military
Cunha, Jesse M.
Menichini, Amilcar A.
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We study a choice made by over 20,000 U.S. military personnel annually between the High-3 and Redux retirement plans. Compared to High-3, Redux offers a $30,000 current lump sum payment in exchange for lower future annuity payments. Despite break-even discount rates between 10% and 25%, about 40% of individuals chose Redux. The likelihood of choosing Redux is decreasing with the break-even discount rate and is related to individual demographics. The implied personal discount rates from this choice are around 9.2%, much lower than found previously. Offering this choice has already saved the government over $2 billion in future retirement payments.
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NPS Report NumberNPS-GSBPP-14-001
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