Mitigating the inequity of the military retirement system by changing the rules governing individual retirement accounts for service members

Abstract

This thesis provides a summary of the military retirement system's history, structure, and purpose, demonstrating that its all-or-nothing structure is unfair to the majority of service members. It reviews the structure of Individual Retirement Accounts and the Employee Retirement Income Security Act, which governs private-sector retirement plans and their treatment by the Internal Revenue Code. It demonstrates that the inequity of the military retirement system is compounded by the fact that although the system does not comply with the minimum standards required of private-sector retirement plans, it is treated identically in determining whether the employee is eligible to deduct his IRA contributions from taxes. The thesis reviews the extensive economic literature on the IRAs' effectiveness in increasing private saving and concludes that IRAs do lead to additional saving. The thesis proposes allowing all service members to deduct their IRA contributions from taxes regardless of income, and estimates the effect of doing so on government debt and national savings. It concludes that the cost is so small - at most $30 million annually - that cost is no obstacle to the proposal