The Accrual Method For Funding Military Retirement Assessment and Recommended Changes (2001)

by Eisenman, Richard; Grissmer, David; Hosek, James; Taylor, William

• ISBN13: 9780833027078
• ISBN10: 0833027077
• Format: Paperback
• Copyright: 2001-08-01
• Publisher: RAND Corporation

Summary

The authors provide recommendations that would improve cost estimation and increase accountability for force-management decisions.

Table of Contents

Preface	iii
Figures	vii
Tables	ix
Summary	xi
Acknowledgments	xix
Introduction	1	(3)
An Accrual Accounting Method for Funding Military Retirement	2	(1)
Objective of the Report	2	(1)
Organization of This Report	3	(1)
The Objectives and Design of the Military Retirement Accrual Method	4	(17)
Objectives of the Current Accrual Method	4	(1)
Operation of the Military Retirement Fund	5	(14)
The DoD Contribution: The Entry-Age Normal Method	7	(1)
Structure of Retirement Benefits	8	(1)
Economic Assumptions	9	(2)
Percentage of Personnel Retiring (Decrement Rate)	11	(1)
Estimating the Normal Cost Percentage: Solving the Problem of Three Benefit Groups	11	(3)
The Treasury Payment and Amortization of Gains and Losses	14	(3)
Unfunded Liability: The Role of the Treasury	17	(2)
Accumulated Fund Assets	19	(1)
Summary	19	(2)
Management Incentives in the Current System	21	(23)
Necessary Conditions for Creating Management Incentives in an Accrual Method	21	(1)
Empirical Evidence for the Existence of Management Incentives	22	(6)
The Role of the Accrual Method in Changing Levels of Retirement Benefits	22	(1)
The Role of the Accrual Method in Changing Projected Beneficiaries	23	(1)
The Role of the Accrual Method in Managing Policies Affecting Personnel Flows	24	(3)
The Role of the Accrual Method in Managing Policies Affecting Force Size and Mix	27	(1)
Limitations in the Current System for Providing Incentives	28	(14)
Biased Estimation of DoD and Service Retirement Liabilities	29	(1)
Conservative Assumptions	29	(4)
Use of a Single Cohort	33	(4)
Aggregation Bias	37	(1)
Treasury Bias	37	(1)
Slow Responsiveness to Change	38	(1)
Missing Computational Links	39	(1)
Fungibility of Accrual Funds	40	(2)
Summary	42	(2)
Strengthening Management Incentives: Recommendations for Change	44	(13)
The Cohort Specific Entry-Age Normal Method	45	(4)
Methodology	45	(3)
Advantages of the Cohort Approach	48	(1)
Develop Separate Normal Cost Percentages by Service for Officer and Enlisted Personnel	49	(1)
Setting More-Accurate Assumptions	50	(3)
Incorporating the Effect of Policy Actions	52	(1)
Improving Retention Estimates	53	(1)
Improved Economic Models	53	(1)
Changing the Composition of the Board of Actuaries	53	(1)
DoD Participation in Gains and Losses	54	(1)
Separate Normal Cost Percentages by Service and Officer/Enlisted	55	(1)
Ensuring Fungibility at the Service Level	55	(2)
Fiscal Impact of Rand Recommendations	57	(12)
Assumptions	57	(1)
Results with FY9O Economic Assumptions	58	(11)
Results with New FY92 and FY94 Economic Assumptions	64	(2)
Impact on Policy and Discretionary Spending	66	(3)
Conclusions	69	(4)
Appendix: Sample Calculation of Normal Cost Percentage	73	(6)
References	79