Funding Military Retirement.

For many years, the Defense Department funded military retirement on a pay-as-you-go basis, estimating how much money was needed to write checks for current retirees and adding that amount to the budget. This system worked well as far as paying retirees went, but it did not hold policymakers fiscally responsible for todays decisions affecting the size of the future retirement bill, e.g., increasing the force size. To promote better management, in 1984, Congress directed a switch to an accrual method of funding retirement. Under this procedure, each year the services transfer into a fund the amount necessary to pay for future retirements. The amount transferred is a percentage of the services basic pay. Thus, if a service implements policies that affect the future value of retirement benefits, it sees the budgetary consequences of that decision immediately in the form of an increase in the amount transferred to the retirement fund. Analysis by Arroyo Center researchers William Hix and William Taylor, reported in A Policymakers Guide to Accrual Funding of Military Retirement, suggests that the current procedures do not fully capture the intent of the legislation and that changes could eventually save the Army as much as 5-6 billion annually.