Personal discount rates and retirement decisions: evidence from the U.S. military

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Authors
Francavilla, Lucas A.
Subjects
Personal discount rate
military retirement
probit
retirement reform
High-3
REDUX
Advisors
Menichini, Amilcar
Date of Issue
2013-06
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Monterey, CA; Naval Postgraduate School
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Abstract
Upon reaching 15 years of service (YOS), service members must choose between the High-3 year average retirement plan and the REDUX retirement plan. This research analyzed retirement decisions of 89,884 retired U.S. military personal to investigate personal discount rates applied by individuals faced with this decision. The method of analysis was similar to previous studies of military populations by Warner and Pleeter’s 2001article in the American Economic Review and Hensel and Deichert’s 2008 article in the Review of Financial Economics. This study found significant variation between the discounting behaviors of the officer and enlisted sample populations. Additionally, the likelihood of selecting REDUX—and therefore the personal discount rates—was found to increase with lower ranks, with lower education, with the presence of a race variable other than “white,” and with the presence of the marital status variable “divorced.” Eliminating High-3 in favor of REDUX would result in substantial cost savings for the Department of Defense. However, such actions are not likely to be enthusiastically accepted by the officer population, the more senior ranks, or the more educated personnel within the military. The large disparity between officer and enlisted financial behaviors complicates the implementation of a one-size-fits-all retirement policy.
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https://hdl.handle.net/10945/49609
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Approved for public release; distribution is unlimited.
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This publication is a work of the U.S. Government as defined in Title 17, United States Code, Section 101. Copyright protection is not available for this work in the United States.
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