Military Retirement: Background and Recent Developments

Military Retirement: Background and
Recent Developments
November 17, 2008
Charles A. Henning
Specialist in Military Manpower Policy
Foreign Affairs, Defense, and Trade Division



Military Retirement: Background and Recent
Developments
Summary
The military retirement system is a non-contributory, defined benefit system that
has historically been viewed as a significant incentive in retaining a career military
force. The system currently includes monthly compensation and benefits after an
active or reserve military career, disability retirement for those physically unfit to
continue to serve, and survivor benefits for the eligible survivors of deceased retirees.
The monthly retirement annuity is adjusted annually by a Cost-of-Living Allowance
(COLA) to ensure that the annuity is protected from the adverse consequences of
inflation. Military retirees are also entitled to non-monetary benefits which include
exchange and commissary privileges, medical care through TRICARE, and access
to Morale, Welfare and Recreation facilities and programs.
The active component retirement system provides a choice between two
retirement options based on career expectations and an individual’s financial
situation. Eligibility is based on years of active duty, generally becoming retirement
eligible after completing 20 years of service. For reserve component personnel, their
retirement system is based on “points” and reservists do not generally begin to
receive retired pay until age 60. There is a third retirement system for those who are
retired with a physical disability regardless of the amount of time they have spent on
active duty. Disability retirement offers a choice between two retirement options; one
based on longevity and one on the severity of the disability.
Congress grapples with constituent concerns as well as budgetary constraints
when considering military retirement issues. While congressionally mandated
changes to the military retirement system have been infrequent, any potential future
changes are closely monitored by current and future retirees, and the veterans’ service
organizations who support them. Today, there are approximately 2.2 million military
retirees and survivor benefit recipients, and roughly 6 million to 8 million family
members, who are an articulate, vigilant, and well-educated constituent group.
It is estimated that approximately $46 billion will be paid to military retirees in
FY2008. With an approved 5.8% COLA for 2009, retirement costs will continue to
increase.
The 10th Quadrennial Review of Military Compensation (QRMC) recently
recommended a revision of both the active and reserve retirement systems. However,
with ongoing military operations in Iraq and Afghanistan, and the recruiting and
retention challenges being faced by the Services, the executive branch and the 111th
Congress may be reluctant to alter the present system.
This report will be updated as necessary.



Contents
Overview ........................................................1
Three Systems, Different Retired Pay Calculations........................3
Active Component Retirement...................................3
Final Basic Pay System.....................................3
“High Three”.............................................4
Redux ...................................................4
Reserve Component Retirement..................................7
Disability Retirement...........................................9
Military Retired Pay and Social Security............................9
Retired Pay and the Cost-of-Living Allowance..........................10
COLAs for Pre-August 1, 1986 Entrants...........................10
COLAs for Personnel Who Entered Service On or After August 1, 1986.10
Non-Redux Recipients.....................................10
Redux/$30,000 Cash Bonus Recipients........................10
Military Retirement Budgeting and Costs..............................11
Accounting for Military Retirement in the Federal Budget.............11
Unfunded Liability............................................12
Military Retirement Cost Trends.................................13
Reforming the Military Retirement System.............................14
List of Tables
Table 1. DOD Retired Military Personnel, Survivorsand Program Costs,
FY2005-FY2008 ..............................................2
Table 2. Comparison of Retirement Methods............................6
Table 3. Retirees by Category and Service..............................7
Table 4. Military Retirement Outlays.................................13



Military Retirement: Background and Recent
Developments
Overview
The military retirement system is a non-contributory, defined benefit system that
has historically been viewed as a significant incentive in retaining a career military
force. The system currently includes monthly compensation and benefits after an
active or reserve military career, disability retirement for those physically unfit to
continue to serve, and survivor benefits for the eligible survivors of deceased retirees.
The monthly retirement annuity is adjusted annually by a Cost-of-Living Allowance
(COLA) to ensure that the annuity is protected from the adverse consequences of
inflation. Military retirees are also entitled to non-monetary benefits which include
exchange and commissary privileges, medical care through TRICARE, and access
to Morale, Welfare and Recreation facilities and programs.
The active component retirement system provides a choice between two
retirement options based on career expectations and an individual’s financial
situation. Eligibility is based on years of active duty, active duty personnel generally
becoming retirement eligible after completing 20 years of service. For reserve
component personnel, their retirement system is based on “points” and reservists do
not generally begin to receive retired pay until age 60. Both the active duty and
reserve component retirement systems “vest”at 20 years of service. Those who
separate voluntarily prior to the 20-year point generally receive no retirement
benefits. However, there is a third retirement system for those who are retired with
a physical disability regardless of the amount of time they have spent on active duty.
Disability retirement also offers a choice between two retirement options; one based
on years of service and one on the severity of the disability.
Congress grapples with constituent concerns as well as budgetary constraints in
considering military retirement issues. While congressionally mandated changes to
the military retirement system have been infrequent, any potential future changes are
closely monitored by current and future retirees, and the veterans’ service
organizations who support them. Today, there are approximately 2.2 million military
retirees and survivor benefit recipients,1 and roughly 6 million to 8 million family
members, who are an articulate, vigilant, and well-educated constituent group.
While the importance of a viable military retirement system is frequently cited
by DOD officials and defense analysts, the reality is that less than 15% of enlisted


1 1,859,677 military retirees receiving retired pay and 293,193 survivors receiving benefits
as of September 30, 2007. Fiscal Year 2007 DOD Statistical Report on the Military
Retirement System, DOD Office of the Actuary, May 2008.

personnel and 47% of officers will eventually become eligible for the retirement
annuity.2 Military personnel also become eligible for retirement at a relatively young
age. The average enlisted member is 42 years old and has 21 years of service at
retirement while the average officer is 46 years old and has 23 years of service.3
It is estimated that approximately $46 billion will be paid to military retirees in
FY2008. In the past, some have viewed this budget item as a place where substantial
budgetary savings could be made. However, past modifications intended to save
money have had a deleterious effect on military recruiting and retention. With
ongoing military operations in Iraq and Afghanistan, neither the executive branch or
Congress have recently proposed altering the present system.
As shown in Table 1, the number of military retirees and the cost of their
retirement has increased annually over the past several years. These figures differ
somewhat from those in Table 4 due to accrual accounting. The minor differences
between the two are purely technical. The section on Military Retirement Budgeting
and Costs provides a full discussion of the accrual accounting system.
Table 1. DOD Retired Military Personnel, Survivors4
and Program Costs, FY2005-FY2008
Retirees andRetirees from
Totalan ActiveSurvivor
ProgramDuty MilitaryDisabilityReserveBenefit
FY Cos t Career Retirees Retirees Recipients
F Y 2008 2,170,812/ 1,466,706/ 85,499/ 328,664/ 289,943/
$46.19 billion$37.21 billion$1.29 billion$4.31 billion$3.38 billion
FY2007 2,146,403/1,461,724/85,306/312,647/286,726/
$44.44 billion$35.89 billion$1.27 billion$4.00 billion$3.28 billion
FY2006 2,116,690/1,452,505/87,232/293,014/283/939/
$41.71 billion$34.18 billion$1.26 billion$3.60 billion$2.67 billion
FY20052,091,253/1,441,931/ 89,511/280,680/279,131/
$39.28 billion$32.44 billion$1.26 billion$3.32 billion$2.26 billion
Sources: Department of Defense. Office of the Actuary. DOD Statistical Report on the Military
Retirement System, May 2008. Document available at [http://www.defenselink.mil/actuary/].
While some posit that the military retirement system is overly generous, others
argue that it is fair; especially given that repetitive tours of duty in Iraq and
Afghanistan remain a likely prospect for today’s active duty and reserve personnel.


2 Department of Defense, Valuation of the Military Retirement System, September 30, 2006,
Office of the Actuary, November 2007, p. 12.
3 Department of Defense, Fiscal Year 2007 DOD Statistical Report on the Military
Retirement System, Office of the Actuary, May 2008, pp. 85 and 101.
4 Survivors include the spouse, children and others with an insurable interest who are
entitled to death benefits from the DOD Military Retirement Fund.

As a result, they believe that now is not the time to make changes based on cost
savings.
Three Systems, Different Retired Pay Calculations
There are three separate and distinct but related retirement systems within DOD:
one for active duty members, one for the Reserve Components, and one for those
who become disabled and are generally unable to complete a normal 20-year military
career due to their physical disability. Each of these retirement systems includes a
provision for an annual Cost-of-Living Allowance (COLA) that will be discussed
later.
Active Component Retirement5
For active duty military personnel, there are three methods of calculating retired
pay: the Final Basic Pay System,“High Three”and Redux. The applicable retirement
calculation is based on the date when the servicemember first entered active duty and
their basic pay6 at the time of retirement,7 and, in the case of Redux, a voluntary
election regarding a $30,000 bonus. The active and reserve component retirement
systems “vest” after 20 years of service. Vesting for the disability retiree occurs at
their disability retirement date and, in some cases, at the personal choice of the
servicemember.
Final Basic Pay System. For persons who entered military service before
September 8, 1980, the retired pay computation base is final monthly basic pay being
received at the time of retirement multiplied by 2.5% for each full year of service and
prorated by 1/12th for each complete month less than a full year.8 The minimum
amount of retired pay to which a member entitled under this formula is therefore 50%
of the retired pay computation base (20 years of service X 2.5%). A servicemember
who retires at 25 years receives 62.5% of the computation base (25 years of service
X 2.5%). Historically, the maximum, reached at the 30-year mark, has been 75% of
the computation base (30 years of service X 2.5%).


5 Also frequently referred to as regular nondisability retirement.
6 Basic pay is the principal element of Regular Military Compensation (RMC). The
other elements include the Basic Allowance for Housing (BAH), the Basic
Allowance for Subsistence (BAS) and the federal tax advantage that results from
BAH and BAS being non-taxable allowances. Basic pay is between 65% and 75%
of RMC, depending on individual circumstances. Thus, a 20-year retiree may receive
50% of their basic pay upon retirement, but only 33% of RMC. RMC excludes all
special pay and bonuses, reimbursements, educational assistance and any value
associated with non-monetary benefits such as health care, commissaries and post
exchanges.
7 Unlike some civilian retirement plans, there is no provision in any of the military
retirement systems for a lump sum withdrawal upon retirement.
8 Section 1405(b), P.L. 99-348, July 1, 1986.

However, the FY2007 National Defense Authorization Act extended the
previous pay table to 40 years, allowed additional longevity raises,9 and provided
additional retirement credit for service beyond 30 years at the rate of 2.5% per year.10
As a result, a servicemember who retires with 40 years of service will qualify for
100% of their final basic pay in retirement. A servicemember with 41 years of service
will retire with 102.5 % of their final basic pay (41 years of service X the 2.5%
multiplier = 102.5%).
The Final BasicPay cohort that entered the military before September 8, 1980
and will have 29 years of service in 2009. They are quickly aging out of the system,
and it is expected that all will be retired by 201611.
“High Three”. For those who entered service on or after September 8, 1980,
the computation base is the average of the highest three years (36 months) of basic
pay rather than the final basic pay. Otherwise, calculations are the same as under the
Final Basic Pay method.
Redux. Reductions in retired pay for future retirees were enacted in the
Military Retirement Reform Act of 198612 (now referred to frequently as the “Redux”
military retirement system) because it was thought that the pre-Redux system was too
generous. The repeal of compulsory Redux in late 1999 by the FY2000 National
Defense Authorization Act indicated that many in Congress believed the pre-Redux
system was the appropriate way to compensate retirees.
Congress began taking notice of potential recruiting and retention problems
related to Redux13 in 1997, well before the executive branch addressed the issue.
During the fall of 1998, the Administration announced that it supported Redux
repeal. The FY2000 National Defense Authorization Act contained provisions for
repealing compulsory Redux; it allows for post-August 1, 1986 entrants to retire
under the pre-Redux (“High Three”) system or opt for Redux plus an immediate
$30,000 cash payment.
Personnel who first enter service on or after August 1, 1986 are required to
select one of these two options for calculating their retired pay within 180 days of
reaching 15 years of service.
Option 1: Pre-Redux. They can opt to have their retired pay computed in
accordance with the pre-Redux formula, described above as “High Three”.


9 Section 601, P.L. 109-364, October 17, 2006.
10 Section 642, P.L. 109-364, October 17, 2006.
11 Department of Defense, Valuation of the Military Retirement System, September 30, 2006,
DOD Office of the Actuary, November, 2007, p. 12.
12 P.L. 99-348, July 1, 1986.
13 Department of Defense, Military Compensation Background Papers: Compensation
Elements and Related Manpower Cost Items, Their Purposes and Legislative Backgrounds,
April 2005, p. 707/

Option 2: Redux. They can opt to have their retired pay computed in
accordance with the Redux formula and receive an immediate $30,000 cash bonus
called a Career Status Bonus (which can actually be paid in several annual
installments if the recipient so wishes, for tax purposes). Those who select the Career
Status Bonus (CSB) must remain on active duty until they complete 20 years of
service or forfeit a portion on the bonus.
The Redux Formula. Redux is different from the “High Three” formula in
two major ways
Under Age 62 Retirees. First, for retirees under age 62, the retired pay
multiplier will be reduced by one percent for each year of creditable service less than
30 years. Under this new formula, therefore, a 20-year retiree will receive 40% of his
or her retired pay computation base upon retirement (20 years of service X 2.5%
minus 10%), and a 25-year retiree will receive 57.5% of the computation base [(20
years of service X 2.5% minus 5% ). A 30-year retiree, however, will receive 75%
of the retired pay computation base [(20 years of service X 2.5% minus 0%), the
same as the “High Three” retiree. The Redux formula, therefore, is “skewed” much
more sharply in favor of the longer-serving military careerist, theoretically providing
an incentive to remain on active duty longer before retiring.
Retirees 62 and Older. Second, when a retiree reaches age 62, his or her
retired pay will be recomputed based on the old formula, a straight 2.5% of the
retired pay computation base for each year of service. Thus, beginning at 62, the
20-year retiree receiving 40% of the computation base for retired pay, according to
the new formula, will begin receiving 50% of his or her original computation base;
the 25-year retiree’s annuity will jump from 57.5% of the original computation base
to 62.5%; and the 30-year retiree’s annuity, already at 75% of the original
computation base under both the old and new formulas, will not change. (Note: this
change is an increase in monthly retired pay, not a lump sum at age 62.)
A summary of these three retirement methods is portrayed in Table 2:



Table 2. Comparison of Retirement Methods
Final Basic Pay“High Three”Redux
Applies toServicemembersServicemembersServicemembers entering
entering beforeentering fromafter July 31, 1986 and
September 8, 1980September 8, 1980accepting 15-year Career
through July 31, 1986Status Bonus with
and persons enteringadditional 5-year service
after July 31, 1986obligation
but opting not to
accept the 15-year
Career Status Bonus
Basis of ComputationFinal rate of monthlyAverage monthlyAverage monthly basic pay
basic paybasic pay for thefor the highest 36 months of
highest 36 months ofbasic pay
basic pay
Multiplier2.5% per year of2.5% per year of2.5% per year of service less
serviceservice 1% for each year of service
less than 30 (restored at age

62)


Cost-of-LivingFull CPIFull CPICPI less 1% with one-time
Adjustmentcatch up at age 62, then
resumption of CPI less 1 %
Additional Benefit$30,000 Career Status
Bonus payable at the 15-
year anniversary with
assumption of 5-year
obligation to remain on
active duty
Source: Military Compensation Background Papers, Department of Defense, Sixth Edition, April, 2005.
Table 3 reflects retirees by service and by retired pay system. Those retiring under the Final Pay
system will soon begin to decrease significantly since the junior member of that cohort who is still
on active duty will have 29 years of service in 2009. While the numbers for High Three and Redux
should continue to increase, these figures suggest that Redux is the least popular retirement system.



Table 3. Retirees by Category and Service14
(As of September 2008)
ArmyAir ForceNavy Marine CorpsTotal
Final Pay587,677584,452408,50286,5461,667,177
High Three56,54660,90258,28411,818187,550
Redux 1,666 2,176 4,375 558 8,775
T otal 645,889 647,530 471,161 98,922 1,863,502
Source: Department of Defense.
Reserve Component Retirement15
There are many similarities among the active and reserve retirement systems.
First, Reserve Component members16 must also complete 20 “qualifying’ years of
service to become eligible for retirement. Second, the reserve retirement system also
accrues at the rate of 2.5% per “equivalent year” of qualifying service (explained
below) at retirement eligibility. Third, the reserve retirement system uses either Final
Basic Pay or the “High Three” to calculate retired pay; Redux is not an option for
reservists. The primary differences between the two systems is the point system used
to calculate “qualifying years”, equivalent years of service, and the age at which the
retirement annuity is paid.
For retirement purposes, a year of “qualifying” service is a year in which a
Reserve servicemember earns at least 50 retirement “points”. Points are awarded for
a variety of reserve activities:
!One point for each day of active duty or annual training.17
!Fifteen points a year for membership in the Selected Reserve.
!One point for each inactive duty training (IDT) period.18


14 Includes Active, Reserve and Disability retirees.
15 Also referred to as nonregular retirement. For additional information on reserve pay and
benefits, see CRS Report RL30802, Reserve Component Personnel Issues: Questions and
Answers by Lawrence Kapp, March 14, 2008.
16 Reserve Component generally describes the six reserve components of the Department
of Defense: the Army National Guard, the Army Reserve, the Navy Reserve, the Marine
Corps Reserve, the Air National Guard and the Air Force Reserve.
17 Annual training is a two-week period of active duty that usually results in 14 retirement
points.
18 A day of active duty for training represents one Unit Training Assembly (UTA). The
(continued...)

!One point for each period of funeral honors duty.
!One point for every three satisfactorily completed credit hours of
certain military correspondence courses.
With multiple opportunities to earn points, it is relatively easy for a reserve
component member to accrue the requisite 50 points per year and thus earn a
qualifying year for retirement. The maximum number of points per year, exclusive
of active duty, has varied over time but is currently capped at 130 points.19 When
active duty points are added to this total, the reservist cannot earn more than 365
points a year. The number of points is critical in determining both the number of
years of qualifying service and the number of “equivalent years of service” for retired
pay calculation purposes.
A reservist may retire after completing 20 years of qualifying service; there is
no minimum age. Upon retirement, the individual is normally transferred to the
Retired Reserve and is entitled to a number of military benefits to include
commissary and exchange privileges, access to Morale, Welfare and Recreation
programs and facilities, and limited space available travel on military aircraft.
Reservists in the Retired Reserve and not yet retired pay eligible (generally age 60)
are referred to as a “Gray Area” retirees since they are in the Retired Reserve but not
yet eligible for retired pay or retiree medical benefits. Time spent in the Retired
Reserve counts for longevity purposes and ultimately results in higher retired pay.
For example, a lieutenant colonel (LTC) who transitions to the Retired Reserve at age
45 will have their retired pay at age 60 calculated on the basic pay of a lieutenant
colonel with an additional 15 years of longevity. The reservist will usually become
eligible for retired pay at age 6020 and also then becomes eligible for military medical
care.
The date the reservist became a member of the armed forces determines whether
their retired pay is calculated based on the Final Basic Pay or “High Three” system.
Those entering before September 8, 1980 will retire under the Final Basic Pay system
while those entering after September 8, 1980 will retire under the “High Three”
system.
The actual calculation parallels the active duty system but requires a separate
calculation for each individual. For example, a reserve component lieutenant colonel
with 5000 points reverted to the Retired Reserve in 1993 after completing 20


18 (...continued)
normal drill weekend consists of 4 UTAs and therefore results in four retirement points. A
year of weekend drills earns 48 UTAs/retirement points.
19 Section 648, P.L. 110-181, January 28, 2008.
20 Section 648 of the FY2008 National Defense Authorization Act reduced the age for
receipt of retired pay by three months for each aggregate of 90 days of specified duty
performed after January 28, 2008 (the date of enactment of the FY2008 NDAA). This
authority was not made retroactive to September 11, 2001. The retired pay eligibility age
cannot be reduced below 50 and eligibility for medical benefits remains at age 60.

qualifying years of service. In 2008, he turned 60 years of age and became eligible
for retired pay. To calculate his retired pay, divide the total points by 360 to convert
the points to years of equivalent service (5000 / 360 = 13.89). Then multiply the
years of service by the 2.5% multiplier (13.89 x .025 = .3472). Using the Final Basic
Pay option, the 2008 base pay for a lieutenant colonel with 20 years of service is
$7,372.80 per month. Multiply earlier sum by the base pay (.3472 x $7,372.80) to
determine that the monthly retirement annuity will be $2560 per month.
Disability Retirement
Servicemembers determined to be unfit for continued service and who have a
permanent and stable disqualifying physical condition may qualify for disability
retirement, commonly referred to as a Chapter 61 retirement. Eligibility is based on
having a DOD disability rating of 30% or greater and at least 6 months or more on
active duty and the disability was not noted at the time of entrance on active duty.21
As a result, some disability retirees are retired before becoming eligible for longevity
retirement while others have completed 20 or more years of service.
A servicemember retired for disability may select one of two available options
for calculating their monthly retired pay:22
1. Longevity Formula. Retired pay is computed by multiplying the years of
service times 2.5% and then times the pay base (either final pay or “high three”, as
appropriate).
2. Disability Formula. Retired pay is computed by multiplying the DOD
disability percentage by the pay base.
The maximum retired pay calculation under either formula cannot exceed 75%
of basic pay.23 Retired pay computed under the disability formula is fully taxed unless
the disability is the result of a combat-related injury. Retired pay under the longevity
formula is taxable only to the extent that it exceeds what the individual would receive
for a combat related injury under the disability formula.
Military Retired Pay and Social Security
Military personnel do not contribute a portion of their salary to help pay for
retirement benefits. However, they have paid taxes into the social security trust fund
since January 1, 1957, and are entitled to full social security benefits based on their
military service. Military retired pay and social security are not offset against each
other; military retirees receive full social security benefits in addition to their military
retired pay.


21 10 U.S.C. 1201 (b)(3)(B). Prior to the FY2008 NDAA (Section 1641), disability
retirement required at least 8 years of service or a disability that resulted from active duty
or was incurred in the line of duty during war or national emergency.
22 10 U.S.C. 1401.
23 10 U.S.C. 1401.

Retired Pay and the Cost-of-Living Allowance
Military retired pay is protected against inflation by statute (10 U.S.C. 1401a).
The Military Retirement Reform Act of 1986, in conjunction with recent changes
contained in the FY2000 National Defense Authorization Act, provide for COLAs24
as indicated below. Congress has not modified the COLA formula since 1995,
although virtually every year since 1982 some COLA modifications, always with the
aim of reducing costs and hence the payments to retirees, have been at least
discussed.
The most recent military retirement COLA was 2.3%, first applied to the retired
pay disbursed on January 1, 2008. The next COLA has been announced at 5.8% and
will to be applied to the retired pay disbursed on January 1, 2009. For a discussion
of proposed and actual COLA changes from FY1983 to FY2005, see CRS Report 98-

223.


COLAs for Pre-August 1, 1986 Entrants
For military personnel who first entered military service before August 1, 1986,
each December a COLA equal to the percentage increase in the Consumer Price
Index (CPI) between the third quarters of successive years will be applied to military
retired pay for the annuities paid beginning each January 1. For example, assume
that the CPI rises from 400.0 in the period July through September 2008 to 412.0 in
the period July through September 2009, an increase of 12.0 points or 3.0% of 400.0.
The monthly retired pay that accrues beginning December 2009, that will actually be
paid to retirees on January 1, 2010, would be increased by 3.0% above that amount
paid the previous month.
COLAs for Personnel Who Entered Service On or
After August 1, 1986
For those personnel who first entered military service on or after August 1,
1986, their COLAs will be calculated in accordance with either of two methods, as
noted below.
Non-Redux Recipients. Those personnel who opt to have their retired pay
computed in accordance with the pre-Redux (“High Three”) formula will have their
COLAs computed as described above for pre-August 1, 1986 entrants.
Redux/$30,000 Cash Bonus Recipients. Those personnel who opt to
have their retired pay computed in accordance with the Redux formula, and receive
the $30,000 cash bonus, will have their COLAs computed using a different formula.
Annual COLAs will be held one percentage point below the actual inflation rate.


24 The actual index used to adjust COLA is the CPI-W; the index for urban wage earners and
clerical workers. It represents the buying habits of approximately 32% of the
noninstitutional population of the U.S. Department of Defense, Military Compensation
Background Papers, Sixth Edition, April, 2005.

Retirees covered by this COLA formula would thus receive a 2.0% increase (rather
than 3.0%) in their military retired pay under the hypothetical example described in
the preceding example for Pre-August 1, 1986 entrants. When a retiree reaches age
62, there will be a one-time recomputation of his or her annuity to make up for the
lost purchasing power caused by the holding of COLAs to the inflation rate minus
one percentage point. This recomputation of COLA, in combination with the
recomputation of the retired pay multiplier, restores the member’s retired pay to that
of a similarly retired member who did not take the Bonus/REDUX option. After the
recomputation at 62, however, future COLAs will continue to be computed annually
on the basis of the inflation rate minus one percentage point.
Costs and Benefits of the Two Retirement Alternatives
An analysis of the economic effects for hypothetical retirees indicates that in
almost all cases opting for the pre-Redux formula will pay the individual much more
over time. A report of the Center for Naval Analyses states that the more liberal
retired pay computation formula and COLA formula of pre-Redux far outweighs the
short-term benefits of a $30,000 pre-tax cash bonus. The report did say that it might
be possible for an individual investor to “beat” these negative aspects of the bonus
by wise investment decisions but that it would be difficult.25 Naturally, no study can
know what an individual’s financial situation is. At first, only a fairly small
percentage of personnel opted for the $30,000 lump sum.26 However, the number
appears to have been rising. Since the bonus option first became available in 2001,
50% of eligible Marine Corps enlisted retirees, 40% of warrant officers, but only
13% of commissioned officers have taken it,27 suggesting the attractiveness of the
immediate cash payment to the lower-paid members of the career force.
Military Retirement Budgeting and Costs
Accounting for Military Retirement in the Federal Budget
All DOD budgets through FY1984 reflected the costs of retired pay actually
being paid out to personnel who had already retired. Congress simply appropriated
the amount of money required to pay current retirees each year as part of each annual
defense appropriations bill. Since FY1985, the “accrual accounting” concept has
been used to budget for the costs of military retired pay. Under this system, the DOD
budget for each fiscal year includes, not the amount of retired pay actually paid to
retirees, but rather, a contribution to the military retirement fund sufficient to finance
future retirement payouts to current uniformed personnel when they retire. These
annual “accrual” contributions accumulate in the military retirement fund, along with


25 Crawley, Vince. “Report: Taking Redux Bonus Is ‘Loan’ Against Retirement.” Marine
Corps Times, May 21, 2001, p. 10.
26 Crawley, Vince. “Which Pays Best ... The Bonus or the Egg?” Army Times, April 22,

2002, p. 14; “How the Choices Compare.” Army Times, April 22, 2002, p. 15.


27 Brinkley, C. Mark. “Skip ‘Redux’ Bonus, Former Top Enlisted Marine Warns: Retired-
pay Cut Not Worth It, Sergeant Major Says.” Marine Corps Times, August 2, 2004, p. 25.

interest earned on them. The amount that the Defense Department must contribute
each year to cover future retirement costs is determined by an independent,
Presidentially appointed, Department of Defense Retirement Board of Actuaries,
which decides how much is needed to cover future retirement costs as a percentage
of military basic pay. Once military personnel retire, payments to them are made, not
from the annual Department of Defense budget, but from the accumulated amounts
in the military retirement fund. Estimated future retirement costs are arrived at by
making projections based on the past rates at which active duty military personnel
stayed in the service until retirement, and on assumptions regarding the overall U.S.
economy, including interest rates, inflation rates, and military pay levels.
Approximately 30% of military basic pay costs must be added to the DOD personnel
budget each fiscal year to cover the future retirement costs of those personnel who
ultimately retire from the military.
DOD budget authority and outlays in each fiscal year that pay for the estimated
cost of future retirees are transferred in a paper transaction to a Military Retirement
Fund, located in the Income Security Function of the federal budget. The Military
Retirement Fund also receives [paper] transfers from the General Fund of the
Treasury to fund the initial unfunded liability of the military retirement system. This
is the total future cost of military retired pay that will result from military service
performed prior to the implementation of accrual accounting in FY1985. Money is
disbursed from this Military Retirement Fund to current retirees. Individual retirees
receive their retired pay from the Defense Finance and Accounting Service (DFAS).
Technically, however, because this money paid to individuals comes not from the
DOD budget, but from the Fund, it is paid out of the Income Security function of the
federal budget function. Actual payments to current retirees thus show up in the
federal budget as outlays from the federal budget as a whole, not from DOD. Under
accrual accounting, therefore, total federal outlays for each fiscal year continue to
reflect only costs of payments to military members who have already retired, as was
the case before accrual accounting began. Accrual accounting only changes the
manner in which the federal government accounts for military retired pay; it does not
affect actual payments to individuals in any way.
Unfunded Liability
Current debates over both federal civilian and military retirement have included
some discussion of the “unfunded liability” of both. As noted above, the military
retirement system’s unfunded liability consists of future retired pay costs incurred
before the creation of the Military Retirement Fund in FY1985. These obligations
are being liquidated by the payment to the Fund each year of an amount from the
General Fund of the Treasury and will be fully paid, based on current calculations,
by FY2033. The unfunded liability at the end of FY2003 was $628.3 billion; the
estimated liability for FY2004 was $648.3 billion; for FY2005, $666.1 billion; and
for FY2006, $684.2 billion.28 These figures are between $83 and $92 billion higher
than the estimated unfunded liability for the same years at the end of FY2003. This


28 Valuation of the Military Retirement System ,September 30, 2006. Department of Defense
Office of the Actuary, November, 2007, pp. ii, 9, 15, 25. Available online at
[http://www.dod.mil/actuary/].

increase is due almost entirely to the enactment of concurrent receipt-related
retirement benefits, since both Combat Related Special Compensation (CSRC) and
Concurrent Retirement and Disability Payments (CRDP) are paid from the Military
Retirement Fund but fully funded by the Treasury contribution.
Some concerns have been voiced about the amount of unfunded liability.
However, (1) the hundreds of billions of dollars of unfunded liability is a cumulative
amount to be paid to retirees over the next 50 years, not all at once; (2) by the time
some persons first become eligible for retired pay under the pre-accrual accounting
system, many others will have died; and (3) unlike the private sector, there is no way
for employees to claim immediate payment of their future benefits. An analogy
would be that most homeowners cannot afford to pay cash for a house, so they get
a mortgage. If the mortgage had to be paid in full, almost no homeowners could
afford to do so. However, spread out over 30 years, the payments are affordable.
Similarly, the unfunded liability of federal retirement programs is deemed affordable
when federal retirement outlays are spread over many decades.
Military Retirement Cost Trends
Because military retirement is an entitlement, rather than a discretionary
program, its costs to the total federal budget (payments to current retirees and
survivors) have been rising modestly each year, due to a predictable slow rise in the
number of retirees and survivors and cost of living increases. The cost to DOD
(estimated future retirement costs of current personnel) declined after FY1989 (the
beginning of the post-Cold War drawdown), as the size of the force, and therefore the
number of people who will retire from it in the future, declined. As the drawdown
stabilized, so did the DOD budget costs of retirement. Table 4 indicates the costs of
military retired pay in federal budget outlays (payments to current retirees) and
Department of Defense accrual outlays (money set aside to fund future retirees). (As
noted above, these figures differ slightly from the figures for the same fiscal years
cited in Table 1 for purely technical reasons.)
Table 4. Military Retirement Outlays
(billions of current dollars)
Military RetirementDOD Accrual Payments to
Fund Payments tothe Military Retirement
Military RetireesFund
Estimated FY2008a$45.5$14.9
Actual FY2007a43.514.4
Actual FY2006a41.113.7
Actual FY2005b39.015.0
Actual FY2004b37.214.1
Actual FY2003c35.613.7
Actual FY2002c35.112.9
a. FY2008 Budget of the United States Government. Appendix, p. 937
b. FY2006 Budget of the United States Government. Appendix, pp. 953-954.
c. FY2005 Budget of the United States Government. Appendix, p. 927.



Reforming the Military Retirement System
Every four years, the President is required by law29 to initiate a comprehensive
review of the military compensation system and to forward the review, along with his
recommendations, to Congress. The most recent effort, the 10th Quadrennial Review30
of Military Compensation (QRMC), was convened in August 2005 and submitted
the final portion of its report in July 2008. One of the directed areas of assessment
was “the implications of changing expectations of present and potential members of
the uniformed services relating to retirement.”31
A number of previous studies have noted that the military retirement system
should be more flexible, equitable and efficient. To accomplish this, the QRMC
suggested a major revision of both the active and reserve retirement systems
highlighted by:
1. A defined benefit plan similar to the current “High Three” system but that
would “vest” at 10 years of service and not be payable until age 60 for those who
retired with less than 20 years of service or at age 57 for those with 20 or more years
of service. Retirees could opt to receive the retirement annuity immediately upon
retirement but the annuity would be reduced by 5% for each year under age 57.
2.Combined with the above defined benefit plan would be a defined
contribution plan that would require the services to contribute up to 5% of annual
base pay into a retirement account for each servicemember. The contribution would
start at 2% for those with two years of service and increase incrementally until it
reached 5% for those with five or more years of service. This plan would also vest
at 10 years of service but withdrawals could not begin until age 60.
3. A system of “gate” pays would be established at specified career points to
retain selected personnel in specified skill areas.
4. Separation pay would be used to encourage personnel in over manned skills
to separate prior to qualifying for a normal 10 to 30 year retirement.
A somewhat unique aspect of this retirement proposal is that it would apply
equally to active and reserve component members, apparently recognizing that the
Reserves have transitioned from a strategic reserve to an operational force.To test
the feasibility of this retirement option, the QRMC recommends a five or more year
demonstration project that would use volunteers who would ultimately have the
option of remaining in the demonstration or reverting to the current retirement
system.


29 Section 1008(b), Title 37.
30 The QRMC report on retirement can be viewed at [http://www.defenselink
.mil/news/QRMCreport.pdf]
31 Presidential memorandum, Subject: Tenth Quadrennial Review of Military Compensation,
August 2, 2005.

While not stipulated, it is assumed that personnel currently in the active and
reserve components would be “grandfathered” and remain eligible to retire under the
current system or until the new system is thoroughly tested and evaluated for
implementation.
The QRMC did not address the disability retirement system in their review.