Eliciting discount rates in military personnel

Abstract

Several studies have been conducted to address growing concern over the cost of the current military retirement system. Recently, the Center for Naval Analysis (CNA) conducted a comprehensive study of Alternative Navy Retirement Systems. The CNA study modeled the value of the current military retirement system and alternative retirement systems to service members utilizing a net present value (NPV) measurement. The proposed alternatives attempt to offer cost savings to the Department of the Navy (DoN) while maintaining an equivalent NPV to the service member in order to mitigate retention and force structure risk associated with a change in retirement systems. A significant factor in calculating NPV is the discount rate that service members apply towards various types of compensation. Current models have utilized static discount rates which do not account for the observed changes in discount rates individuals apply towards items based on when they expect to receive those items and other biasing factors. This thesis develops a method to measure military service members discounting behaviors across different spans of time. This thesis evaluates the impact that time inconsistent discount rates might have on the NPV of retirement alternatives calculated in the draft CNA report on Navy retirement reform.