oversight

Military Retirement: Proposed Changes Warrant Careful Analysis

Published by the Government Accountability Office on 1999-02-25.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                              United States General Accounting Office

GAO                           Testimony
                              Before the Subcommittee on Military Personnel,
                              Committee on Armed Services, House of Representatives




For Release on Delivery
Expected at 10:00 a.m., EST
Thursday,
                              MILITARY RETIREMENT
February 25, 1999


                              Proposed Changes Warrant
                              Careful Analysis
                              Statement of Mark E. Gebicke, Director, Military
                              Operations and Capabilities Issues, National Security and
                              International Affairs Division




GAO/T-NSIAD-99-94
                   Mr. Chairman and Members of the Subcommittee:

                   I am here today to discuss military retirement. Concerned about its ability
                   to retain personnel, the Department of Defense (DOD) has proposed pay
                   and retirement changes in its fiscal year 2000 budget. The pay proposal
                   includes a 4.4 percent, across-the-board raise and pay table reform that will
                   target increases to noncommissioned officers and mid-grade
                   commissioned officers. The retirement change proposed by DOD is
                   essentially a partial repeal of the 1986 Military Retirement Reform Act,
                   which is commonly called “Redux.”

                   After providing background on the differences among the various military
                   retirement systems and how those differences came into being, I will
                   address (1) changes being proposed by DOD; (2) areas where we believe
                   more information is needed; and (3) the opportunity to take a long-term,
                   strategic view of the military compensation system. But first, I will
                   summarize our observations regarding DOD’s proposed changes to the
                   military retirement system.



Results in Brief   Overall, we see no clear indication that the proposed change to the
                   retirement system, which would cost an estimated $13 billion in increased
                   costs and unfunded liabilities, will address the retention issue.

                   While the recently reported downturn in retention rates is of concern, the
                   nature of the retention problem is not clear. Is the problem widespread or
                   is it concentrated in certain military occupations or year groups? Is it a
                   transitory problem attributable to such factors as reduced accessions
                   during the drawdown and the strong economy, or is it the beginning of a
                   long-term problem that will affect the military for the foreseeable future?
                   Understanding the nature of the retention problem is critical in choosing
                   solutions—pockets of problems are best treated with targeted rather than
                   across-the-board solutions, and transitory problems are best treated with
                   actions that can be reversed or eliminated once the problem has receded.

                   According to DOD, Redux has become a symbol of eroding benefits to
                   military members. Although surveys of military personnel show an
                   increasing level of dissatisfaction with the retirement system, it is not clear
                   what that really means. Some of the surveys do not differentiate between
                   retirement pay and other retirement benefits. Also, many military
                   personnel appear to lack knowledge about their retirement system. For




                   Page 1                                                        GAO/T-NSIAD-99-94
                       example, a 1998 Navy survey showed that over half the respondents did not
                       know which retirement system they were under.

                       The link between retirement pay and retention is unclear. The decision to
                       stay in or leave the military is a complex, highly individual decision. Many
                       factors (such as the availability of civilian jobs, family considerations, and
                       satisfaction with military life) can influence a servicemember’s decision.
                       The influence of retirement in this decision has not been definitively
                       determined. According to an analysis done by the Congressional Budget
                       Office, retention rates under Redux have not been markedly different than
                       rates under the prior system. Even if the retirement system is found to be
                       related to retention, it may not be the most cost-effective tool for
                       addressing any existing retention problems. For example, when given a
                       choice, military members have tended to prefer up-front compensation to
                       deferred compensation.

                       In addition, DOD’s proposal does not address other military retirement
                       issues and their impact on the structure of the force. For example, DOD’s
                       proposal does not address a key purpose of the Redux system—to
                       encourage personnel to remain on active duty after reaching 20 years of
                       service. Also, since the first potential Redux retirees are still more than
                       7 years away from retirement eligibility, DOD may be missing the
                       opportunity for the kind of comprehensive change to its compensation
                       system suggested by the Eighth Quadrennial Review of Military
                       Compensation. The June 1997 Report of the Quadrennial Review called for
                       DOD to take a broad approach to align its policies with its strategy—rather
                       than take a piecemeal or “one-size-fits-all” approach.



Current Retirement     Military members are presently covered by three separate retirement
                       systems, depending on when they joined the military. All three systems
Systems for Military   require no contribution from the servicemember and allow retirement after
Personnel              20 years of service. Servicemembers have no vesting before 20 years.
                       Military members pay social security taxes and are eligible for social
                       security benefits, as well.

                       Depending on when servicemembers joined, the amount of their military
                       pension is calculated differently. Reforms in 1980 altered the pension
                       calculations, changing the computation base from 50 percent of the final
                       monthly basic pay to 50 percent of an average of the highest 3 years of
                       basic pay (often called the “high-3” system). Under these two systems,
                       retirees are eligible for 75 percent after 30 years.



                       Page 2                                                       GAO/T-NSIAD-99-94
Major reforms followed in 1986. At that time, there were concerns about
the cost of the military retirement system, given the large standing military
force and the budget deficits at the time. Further, some believed that the
retirement system was overly generous. These concerns ultimately led to
the passage of the Military Retirement Reform Act. Redux reduced the
retired pay calculation in such a way that retirees with 20 years of service
would receive 40 percent of their high-3 basic pay—rather than the
50 percent received under the previous two systems. Under all three
systems, however, servicemembers earn 75 percent after 30 years because
Redux increased the amount earned each year toward retirement after
20 years in such a way that retirees receive 3.5 percent for each additional
year of service up to 30.

Another feature of Redux is a reduced cost of living adjustment (COLA).
High-3 retirees receive an annual adjustment equal to the consumer price
index (CPI). However, Redux retirees’ annual adjustment is 1 percentage
point less than the CPI.

When retirees reach age 62, retirement pay is recalculated at 2.5 percent
per year of service at retirement, and COLA is recalculated to restore the
purchasing power lost due to the annual COLA reductions. Thus, at
62, Redux retirees with 20 years of service would receive 50 percent, rather
than 40 percent, of their high-3 basic pay and all COLA decrements would
be made up. After age 62, retirees’ pay remains at 50 percent of their
average high-3 basic pay, but the 1-percent reduction in COLA begins again.
Table 1 describes the features of all three retirement systems.




Page 3                                                      GAO/T-NSIAD-99-94
Table 1: Current Retirement Systems for Military Personnel

                         Final pay                 High-3                    Redux
Applies to               Before September 8, Between                         On or after August 1,
servicemembers           1980                September 8, 1980,              1986
joining:                                     and July 31, 1986
Basis of                 Final basic pay           Average basic pay         Average basic pay
computation:                                       for highest 3 years       for highest 3 years
Multiplier               2.5 percent per year      2.5 percent per year      2 percent per year at
                         of service                of service                20 years; 3.5 percent
                                                                             per year thereafter
                                                                             up to 30 years of
                                                                             service (2.5 percent
                                                                             restored at age 62)a
Cost-of-living           CPI                       CPI                       CPI minus 1 percent
adjustments                                                                  (one-time catch-up
                                                                             at age 62)b
a
 At age 62, the retiree’s pay will be recalculated based upon the number of years of service multiplied
by 2.5 percent up to a maximum of 75 percent.
bA one-time recomputation of the retiree’s annuity to make up for lost purchasing power caused by the
holding of COLAs to the inflation rate minus 1 percent. #R-11 COLAs for Military Retirees: Summary of
Congressional and Executive Branch Action, 1982-1998.pop
Source: DOD.

None of the retirement changes were retroactive. Redux applied only to
servicemembers who joined on or after its effective date of August 1, 1986.
This change was made prospectively so that it would not affect
servicemembers who entered the service under the previous systems.

Redux was adopted for two main reasons. The first was cost. Congress
wanted to reduce the overall cost of the military retirement system but still
provide fair and equitable retirement benefits. Redux is a less costly
system than its predecessors. According to an estimate prepared in 1998,
the DOD actuary estimated that the military would have needed to put
aside an additional $7.5 billion between 1986 and 1999 had Redux not been
passed.

The second reason for Redux was to provide an incentive for personnel to
stay past 20 years of service and thus to increase the size of the senior
career force. For each year of service beyond 20, Redux provided
servicemembers with 3.5 percent toward their retirement pensions.
According to the DOD actuary, about 47 percent of retirees leave within
1 year after reaching 20 years of service; by 3 years, almost 70 percent have
left. Since the first Redux-covered servicemembers will not reach 20 years
of service until 2006, it is unknown whether this incentive will actually



Page 4                                                                          GAO/T-NSIAD-99-94
encourage servicemembers to remain in the military. Table 2 compares the
percent of base pay that retirees would receive under the high-3 and Redux
systems depending upon the years of service they had at the time of
retirement.



Table 2: Percentages of Base Pay Used to Calculate Retirement Pay Under the
High-3 and Redux Retirement Systems by Years of Service.

Years of
service             20       21     22       23      24       25     26       27     28       29     30
High-3              50     52.5     55     57.5      60     62.5     65     67.5     70     72.5     75
Redux               40     43.5     47     50.5     54      57.5     61     64.5     68     71.5     75
Source: GAO.


Figures 1 and 2 compare the projected retirement pay for hypothetical
retirees under the high-3 and Redux systems over a 30-year period.1
Figure 1 shows what an officer at the O-5 pay level would earn after retiring
at 42 years of age with 20 years of service. Figure 2 shows what a
noncommissioned officer at the E-7 pay level would earn after retiring at
 38 years of age with 20 years of service. The figures illustrate the
adjustment that would be made under Redux at age 62 to equalize the
retirement pay with the high-3 system. After age 62, the figures illustrate
the impact of the reduced COLA provision for the Redux retiree.




1
  The charts use the “over 20” column of the January 1998 pay tables as the high-3 average. In addition,
the charts assume a 3.5-percent annual change in the CPI.




Page 5                                                                             GAO/T-NSIAD-99-94
Figure 1: Projected Annual Retirement Pay (42 year old O-5 after 20 years of service)
)




    $90,000
    $80,000
    $70,000
    $60,000
    $50,000                                                              High-3
    $40,000                                                              Redux
    $30,000
    $20,000
    $10,000
         $0




Figure 2: Projected Annual Retirement Pay (38 year old E-7 after 20 years of service)
$45,000
$40,000
$35,000
$30,000
$25,000                                                                 High-3
$20,000                                                                 Redux
$15,000
$10,000
    $5,000
        $0


Without having had to contribute toward retirement, retirees become
eligible to receive an income for life at a relatively young age—in their late
30s to early 40s—allowing them to engage in other, full-time employment.
Military retirees do not usually completely retire from the workforce;
instead, they have a second career. The catch-up provisions in Redux
provide for restored benefits at age 62, when military retirees are more
likely to actually be fully retired and are eligible for social security benefits.

More than two-thirds of the current military force came in after the
effective date of the 1986 Reform Act and would be covered by Redux,




Page 6                                                            GAO/T-NSIAD-99-94
                  should they retire. This includes large numbers of junior enlisted
                  personnel in the force. At the end of fiscal year 1997, the DOD actuary
                  estimated that about 16 percent of the enlisted personnel who entered the
                  service stay to earn a military retirement. A higher proportion of officers,
                  about 46 percent of those who entered the service over that same period,
                  are likely to stay for 20 years or more.

                  It is important to note that no one has yet taken a nondisability retirement
                  under Redux. The first Redux retirees will reach retirement eligibility in
                  2006, 20 years after the effective date of the legislation. The most senior
                  military members covered by Redux—those who entered the military just
                  after the effective date of August 1, 1986—now have approximately
                  12-½ years of military service. Thus, the first potential Redux retirees are
                  still more than 7 years from retirement.



DOD Proposal to   DOD has proposed pay and retirement changes in its fiscal year 2000
                  budget as a means of addressing declines in retention. The pay portion of
Change Military   the proposal contains two parts: a 4.4-percent, across-the-board pay raise
Retirement        and pay table reform that will provide targeted pay increases to
                  noncommissioned officers and mid-grade commissioned officers. The
                  retirement change proposed by DOD would essentially be a partial repeal
                  of Redux. DOD’s proposal would restore the multiplier provision to allow
                  servicemembers to earn 50 percent of their high-3 salary at 20 years of
                  service. DOD proposes to alter the way the COLA is calculated, as well.
                  When the CPI is more than 3 percent, the formula would still be CPI minus
                  1 percent. However, the proposal provides some low-inflation protection
                  when the CPI drops below 3 percent. If the CPI is between 2 and 3 percent,
                  the cost-of-living adjustment would be 2 percent. If the CPI is below
                  2 percent, retirees would receive a full cost-of-living adjustment.

                  DOD estimates that the retirement changes it proposes will cost about
                  $6 billion over the next 6 fiscal years (2000-2005). This is about 24 percent
                  of the $24.7 billion total cost of the DOD military pay and retirement
                  proposal.2 This $6 billion represents the additional amount that DOD
                  projects it will need to pay into the retirement trust fund to provide
                  increased benefits. The year-by-year accrual projections are shown in
                  table 3.


                  2
                    The total estimate does not include the cost of giving DOD civilians a commensurate 4.4-percent pay
                  raise. According to DOD, the cost of the DOD civilian pay raise would be about $10 billion.




                  Page 7                                                                          GAO/T-NSIAD-99-94
                        Table 3: DOD Projections of the Additional Accrual Costs to Fund Its Proposed
                        Retirement Changes in the Fiscal Year 2000 President’s Budget

                        Dollars in millions
                                                                                                                Total accrual
                        Fiscal year                    Multiplier repeal            COLA reform                   projection
                        2000                                         $601                      $195                        $796
                        2001                                           656                      232                         888
                        2002                                           713                      270                         983
                        2003                                           773                      276                       1,049
                        2004                                           797                      285                       1,082
                        2005                                           862                      291                       1,153
                        Total                                      $4,402                    $1,549                     $5,951
                        Source: DOD.


                        DOD’s cost figures do not include an estimated $7 billion3 increase in the
                        unfunded liability for the military retirement trust fund if Redux were
                        repealed. This liability would increase because DOD has been setting aside
                        money for the less-costly Redux retirement plan since its adoption in 1986.
                        At the end of fiscal year 1997, the total existing unfunded liability in the
                        military retirement trust fund was almost $500 billion. The trust fund has a
                        large unfunded liability because, prior to 1984, DOD did not set aside funds
                        to pay for retirement liabilities. The $500 billion is what remains of the
                        unfunded liability identified when DOD switched to accrual accounting
                        practices. The unfunded liability is assigned to the Treasury to pay off over
                        a very long period of time; the DOD actuary estimates that the initial
                        unfunded liability will be fully amortized in 2033.



Personnel Surveys       In support of proposed retirement changes, the military leadership has
                        cited growing dissatisfaction among military members about their
Provide Mixed Results   retirement benefits. Reports of dissatisfaction have often been
                        anecdotal—arising when military leaders visit the troops. In addition,
                        various DOD and service surveys show that military members have
                        increasingly cited dissatisfaction with military retirement. For example,


                        3
                          The difference between the estimated $7 billion increase in the unfunded liability and the estimated
                        $7.5 billion in reduced accrual payments under Redux is due to the fact that the DOD proposal
                        represents only a partial repeal of Redux. As discussed, DOD’s proposal does not call for totally
                        repealing the reduced COLA.




                        Page 8                                                                           GAO/T-NSIAD-99-94
                    the Army conducts a semi-annual personnel survey that addresses
                    satisfaction with 56 aspects of military life, one of which is retirement
                    “benefits.” Since 1992, satisfaction with retirement benefits has declined
                    steadily. However, the results may not be directly attributable to
                    retirement pay because the survey lumps all retirement benefits together,
                    including pay, health care, commissary privileges, access to recreation
                    facilities, and others.

                    Another example is a late-1998 Air Force survey of 633 departing
                    personnel. Retirement pay was cited as an important reason for separating
                    from the Air Force by 58 percent of the enlisted respondents and 42 percent
                    of the officers. Other reasons cited were the availability of civilian jobs,
                    pay, frequent moves, and compatibility of the military with family life.
                    Approximately 86 percent indicated that retirement was not a good
                    incentive to serve 20 years or more. However, when asked if there was one
                    single thing that the Air Force could do to keep them in the service, only
                    35 percent of enlisted personnel and 48 percent of officers said that there
                    was. Of those who indicated that there was one single change that could be
                    made, the most frequently cited changes were more choice in assignments
                    and a decrease in the amount of time spent away from their home station.
                    Retirement was not among the single changes that were cited as being
                    sufficient to keep them in the service. Officers wanted more say/choice in
                    assignments and a decrease in OPSTEMPO; Enlisted Personnel wanted
                    more pay, more control over assignments and to decrease OPSTEMPO.

                    These and other survey results also reveal that many military members do
                    not understand their retirement systems. The Army’s fall 1996 Sample
                    Survey of Military Personnel showed that, of those who planned to stay in
                    the Army until retirement, more than one-half of the officer respondents
                    and two-thirds of the enlisted respondents did not know which retirement
                    plan they were under. Even with the recent publicity surrounding
                    retirement issues, approximately 58 percent of the enlisted personnel
                    responding to a Navy survey in late 1998 indicated that they did not know
                    what retirement system they were under. Such lack of knowledge makes
                    the basis for their dissatisfaction unclear.



Issues Warranting   Before proceeding with changes to the military retirement system,
                    Congress may want to seek the answers to several questions: (1) What is
Further Analysis    the nature of the retention problem? Is it widespread or limited primarily
                    to relatively small pockets? Is it a transitory problem or is it expected to
                    continue for the foreseeable future? (2) What is the link between



                    Page 9                                                      GAO/T-NSIAD-99-94
                           retirement pay and retention? (3) Should other aspects of retirement or the
                           military compensation system be addressed in a more comprehensive way?
                           Only with further examination of these questions can Congress be
                           confident that changing the retirement system will solve DOD’s reported
                           retention problems and be cost-effective. I do not have the answers to
                           these questions today—but believe that they are important enough to
                           warrant further analysis.


Extent of Retention        According to DOD officials, aggregate historical retention patterns are
Problems Not Yet Known     relatively stable, but recent downturns in retention are indicators of an
                           impending problem. The Air Force and Navy have recently fallen short of
                           their retention goals. Some of the most critical shortfalls are in the Air
                           Force, where overall retention rates are below target and second-term
                           retention rates are at 68 percent, below the target rate of 75 percent.

                           Retention problems have reportedly been severe in certain jobs, such as
                           pilots and computer specialists, among others. We are now reviewing the
                           retention of pilots and other specialties where retention has been
                           problematic. The results are expected to be available this summer.

                           Some shortfalls may be a relatively short-run problem. For example, the
                           shortfalls may be related to how the services approached reducing the size
                           of the force in the early 1990s. To meet reduced personnel ceilings and yet
                           maintain readiness, the services generally opted to reduce accessions
                           rather than separate experienced personnel. Those lowered accessions
                           during the drawdown may be contributing to shortfalls, as the pipeline now
                           has fewer junior personnel. With fewer junior personnel in the pipeline,
                           DOD needs to retain a higher percentage to fill its now relatively constant
                           personnel slots. This task is made more difficult because of the low
                           unemployment rate and strong economy.


Unclear Link Between       The empirical link between retirement and retention has not been
Retention and Retirement   convincingly drawn. When asked about the effect of Redux on retention,
                           the Marine Corps was blunt, saying that it is “difficult to quantify the impact
                           of the Redux retirement system” and that it cannot “definitively
                           substantiate” direct impacts on retention. Army leadership has said that
                           retirement is less effective as a retention tool than it used to be. The
                           service chiefs are united in their belief that Redux is hurting retention. This
                           appears to be based on a combination of anecdotal reports, survey data,
                           and professional military judgment.



                           Page 10                                                       GAO/T-NSIAD-99-94
This lack of hard evidence concerns us and concerns some in Congress. In
October 1998, two members of the Senate Armed Services Committee sent
a letter to the Secretary of Defense asking for an analysis of the likely
impact of DOD’s pay and retirement proposals. During January 1999
testimony, the Chairman of the Joint Chiefs of Staff was asked about this
analysis. He cited the concerns evidenced in the surveys and said that
taking time to perform detailed studies might lead to the “demise of the
force.” Similarly, the House National Security Committee has twice
requested that DOD report on the effects of Redux on retention, among
other items. The first of these reports, requested in the House
subcommittee report on the fiscal year 1998 Defense authorization act, was
never received. The second report, requested in the House report on the
fiscal year 1999 Defense authorization act, is due June 30, 1999.

Several factors blur the link between retention and retirement. It has not
been shown that retention among personnel that entered the service under
Redux is lower than it is for those that entered under the previous systems.
Also, the decision to stay in or leave the military is complex and based on a
number of factors. Finally, deferred compensation such as retirement pay
is typically less of an incentive than up-front compensation for retaining
personnel. I will expand on each of these points.

Historical data shows no conclusive evidence of a lower retention rate for
Redux personnel. The Congressional Budget Office (CBO) analyzed
retention decisions of personnel who entered the military around the time
Redux was implemented. CBO has stated that its analysis generally shows
no significant difference in retention under Redux. Had Redux been a
major influence in the retention decision, fewer Redux personnel would be
staying in the military.

The decision of whether to stay in or leave the military is complicated.
DOD and the services contend that Redux is simply not attractive enough
to keep people in like the previous systems did. In addition to retirement,
several other factors—civilian employment opportunities, quality of life,
and general satisfaction with military life ranging from military housing to
rotation policies—influence retention. These influences are difficult to
isolate.

Finally, increasing retirement pay may not be the most cost-effective way to
increase retention. Rand believes that targeted pay increases—of the type
that DOD is proposing—are the most effective way to address pockets of
retention problems. Increasing retirement pay is generally seen as a less



Page 11                                                     GAO/T-NSIAD-99-94
                           effective incentive compared to increasing current pay because of the
                           tendency of military personnel to deeply discount the value of future
                           dollars. For example, personnel who were offered early separations during
                           the drawdown showed a strong preference for the cash incentives rather
                           than an annuity—even though the annuity was worth more from a present
                           value perspective. According to an analysis performed by DOD,
                           approximately 50 percent of officers and around 90 percent of enlisted
                           people took the up-front payment, even though the present value of the
                           annuity was, in many cases, worth more than twice as much. In addition,
                           since retirement pay is computed on basic pay, an increase in pay also
                           results in an increase in retirement pay.


Other Issues to Consider   DOD may be missing an opportunity to take a more comprehensive
                           approach to its compensation system. The purpose of the military
                           compensation system is to attract, retain, and motivate the number of
                           quality personnel needed to maintain the desired level of national security.
                           The military compensation system is a complex accretion of over
                           40 different pays and allowances, many of which came into being to
                           address a specific problem at the time. Over the past 50 years, at least
                           15 presidentially or congressionally commissioned study groups have
                           recommended improvements to the system. While the level of
                           compensation has changed dramatically over that period, the features of
                           the military compensation system have changed relatively little.

                           The most recent broad review of military compensation, the Eighth
                           Quadrennial Review of Military Compensation, sought to design a
                           compensation system that would attract, retain, and motivate the diverse
                           workforce of the 21st century. Its June 1997 executive report encouraged a
                           broad, strategic approach to human resource management systems
                           through which DOD would align its personnel practices with the strategic
                           direction of the organization. The report says that a comprehensive review
                           of the compensation system requires the military to include everything that
                           servicemembers value, and it concludes that “one size does not fit all.”

                           In 1996, GAO hosted a roundtable of military experts to discuss possible
                           changes to the military retirement system.4 The consensus of the panel
                           members was that the military retirement system—while exerting a strong
                           pull toward retirement after members reach 10 to 12 years of service—can


                           4
                               Military Retirement: Possible Changes Merit Further Evaluation (GAO/NSIAD-97-17, Nov. 15, 1996).




                           Page 12                                                                          GAO/T-NSIAD-99-94
actually impede effective force management. Many of the participants
indicated that the 20-year vesting provision of the retirement system is a
hindrance to effectively managing the force. Because military personnel
are not entitled to any retirement benefits unless they have served 20 years,
the services have been reluctant to involuntarily separate personnel as they
approached 20 years of service. And although some military combat
specialties (like infantry) require youth and vigor, experience may be of
greater value in occupations such as intelligence analysis or systems
acquisition.

Once a member reaches 20 years, the previous retirement systems tend to
exert a considerable “push” effect. As I noted earlier, about 47 percent of
retirees leave within one year after reaching 20 years of service; by the end
of 22 years of service, almost 70 percent have left. Part of the rationale for
the Redux reform was to increase the size of the career force by reducing
this push effect. If Redux is repealed, we will not know whether it would
have achieved the objective of stemming the loss of senior career
personnel—and repeal may have an unintended consequence of reducing
the incentive for people to stay in the military after they become eligible for
retirement.

In summary, I believe that changes to the military retirement system must
be carefully analyzed. Such changes would apply across the board and
would likely have a long-term effect. Overall, DOD has not demonstrated
that the proposed change to the retirement system, estimated to cost
$13 billion in higher accrual payments to the retirement trust fund and an
increase in Treasury’s unfunded liabilities, is a cost-effective way to
improve retention.

A number of questions should be explored before making changes to a
system that has been changed only twice in over 50 years. First, we need to
understand what kind of a retention problem exists. Are retention
problems focused in certain subpopulations or do they apply across the
force? Are current retention problems a transitory result of such factors as
restricted accessions during the recent military downsizing and a good
economy, or do they signal a long-term decline in the attractiveness of
military careers? Second, we need to understand the relationship between
the retirement system and retention, particularly its relative importance to
servicemembers compared to other changes that might be made in
compensation or quality of life in the military. Would spending scarce
resources to increase retirement benefits have a greater impact on DOD’s
current and long-term manning than spending those resources in other



Page 13                                                       GAO/T-NSIAD-99-94
                   areas? Finally, given that the first retirees under Redux will not reach
                   retirement eligibility until 2006, an opportunity exists to take a longer term,
                   strategic perspective. Is the current military compensation system, which
                   is the result of an historical accretion of elements, best suited for meeting
                   our national defense manning needs into the 21st century?


                   Mr. Chairman, this concludes my prepared statement. We are prepared to
                   respond to any questions that you or other Members of the Subcommittee
                   may have.




(703271)   Leter   Page 14                                                       GAO/T-NSIAD-99-94
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