Risk-adjusted valuation of the current military retirement and the CY2018 retirement system

Abstract

This paper analyzes the U.S. military's choice to transition to the blended retirement system in 2018. All service members will be grandfathered into the current system but those with less than 12 years of service will be able to change from the legacy cliff-vested annuity to a pension that includes a reduced annuity, a 401(k)-type matched investment, and a career continuation bonus. The method used to value the two systems leverages the assumptions made by the Military Compensation and Retirement Modernization Commission and RAND. However, it also incorporates risk into the calculation when valuing the annuity and continuation bonus portions of the retirement systems by using historical Department of Defense retention curves. All military members who do not intend to complete 20 years of service should switch to the blended system to derive at least some retirement value from their time in the military. Of the remaining population intending to complete at least 20 years of service, all service members--save for enlisted members with six or more years of service--benefit from the change to the new blended pension.