The Accrual Method for Funding Military Retirement: Assessment and Recommended Changes

The Accrual Method for Funding Military Retirement: Assessment and Recommended Changes

The Accrual Method for Funding Military Retirement: Assessment and Recommended Changes

The Accrual Method for Funding Military Retirement: Assessment and Recommended Changes

Excerpt

This study examines the operation of the accrual method for funding the military retirement system initiated by Congress in 1984. It replaced the pay-asyou-go method in order to confront Department of Defense (DoD) decisionmakers with the full future costs of their personnel decisions at the time the decisions are made.

The problem with the pay-as-you-go method was that today's decisions affecting future retirement costs would influence DoD budgets only in the distant future; thus, little motivation existed to manage retirement costs efficiently. The accrual method was created to reflect accurately the changing long-term costs of military retirement by changing annual accrual contributions. DoD resource managers would therefore be able to make improved tradeoffs between different types of personnel and between personnel and other categories of expenditures, such as capital equipment and readiness expenditures, because accurate future retirement costs would now be included in the near-term budgets.

This report examines the accrual method from 1985 to 1995 and determines whether the congressional objectives of improved management are being met; identifies those features of the retirement system that inhibit achieving those objectives; makes recommendations for specific changes that will help meet Congress's intent; and assesses the fiscal consequences of such changes. We carried out the research in conjunction with the drawdown of military personnel to aid in projecting the timing and amount of savings in retirement accrual contributions arising from the drawdown. The report contains projections of the military accrual contributions under different drawdown assumptions from 1992 through 1997.

This research was conducted for the Under Secretary for Personnel and Readiness and his predecessors within the Forces and Resources Policy Center of RAND's National Defense Research Institute, a federally funded research and development center sponsored by the Office of the Secretary of Defense, the Joint Staff, the unified commands, and the defense agencies.

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