The potential effects of the Defense Business Board military compensation task groups 2011 recommendations on active-duty service member retirement

Abstract

In July 2011, the Defense Business Board (DBB) made recommendations to the Secretary of Defense for modernizing the military retirement system. If implemented, the plan would significantly modify military retirement as it has existed since its inception, shifting it from a defined benefit plan to a defined contribution plan. In this study, we compared the current defined benefit retirement plan to a hypothetical, retrospective defined contribution plan using the constraints proposed by the Defense Business Board Military Compensation Task Group. We also gathered service members sentiments about the current military retirement system and proposed changes. This is an important topic because it revealed the potential financial effects on service members retirement savings, and government and departmental challenges should a new retirement system be implemented. In this study, we created a mathematical model to simulate accumulated savings under the proposed defined contribution (DC) plan, and then compared it to the lump-sum equivalent of the existing defined benefit (DB) plan. Our model considered three investment strategies for asset allocation for active-duty personnel (i.e., officer and enlisted) spanning a 20-year career beginning in January 1, 1991, and ending in December 31, 2010. Additionally, our study surveyed active-duty service members assigned to the Naval Postgraduate School and personnel assigned to the II Marines Expeditionary Force. Through the survey, we gathered feedback on service members attitudes toward military retirement, in general, and proposed changes to the military retirement system. For an officer, the model showed that under a DC plan, accumulated savings were only 37.5% of the lump-sum equivalent of total annuities received under the current DB plan. Likewise, for an enlisted service member, this value was 31.9%. The survey showed that an overwhelming majority of service members are in favor of retaining the current DB retirement system, or, if the retirement system must be replaced, doing so gradually.