The Accrual Method for Funding Military Retirement

Prior to 1984, military personnel force managers had little incentive tocontrol retirement budgets and payments, which equaled $16 billion in 1984, since any decisions made would not be reflected in budgets for 20 or more years. Congress directed the Department of Defense in 1984 to switch to anaccrual method for accounting for military retirement in the budget processthat would replace the current outlays for retirement in the DoD budget withan amount that reflected the present value of the estimated cost of futureretirement benefits earned by each incoming cohort of personnel. The accrual method has helped improve management of retirement benefits and liabilities, but has failed so far to produce either better estimates of retirement costsor effective incentives for better management of the force structure. Theauthors provide recommendations that would improve cost estimation andincrease accountability for force-management decisions.