Incorporating private sector ideas into military retirement reform: a cash balance plan approach

Abstract

Since 1948, a number of commissions have attempted to reform the military retirement system. Today’s military retirement system, however, still remains largely the same as then. Previous reform proposals attempted to alleviate the four primary criticisms of the retirement system: growing cost, inequity to those with fewer than 20 years of service, hindered force manning, and a lack of civilian comparability. Hybrid defined benefit plans called cash balance plans are increasing in popularity in the private sector and contain defined contribution aspects. These cash balance plans provide a more conservative approach to retirement by placing more of the risk on the employer. This thesis presents an alternative approach to retirement system modernization that addresses the four primary criticisms. By incorporating a cash balance system in lieu of a defined contribution component and maintaining an old age annuity, a plan is proposed that still provides comparable retirement income to today’s system. The proposed system provides a higher present value than the current system and a system that the Department of Defense proposed in March 2014 for any discount rate above 4.85 percent. The proposed alternative system requires lower outlays than the current system and provides higher undiscounted lifetime earnings than the current system. The alternative system proposed in this thesis offers a viable modernization alternative for military retirement.