Retirement Pay and Officer Retention
We use data from a natural experiment in which retirement benefits were reduced by congressional legislation and later restored to estimate the effect of future retirement benefit eligibility upon the decision of whether to remain in the U.S. military. We find that the generosity of retirement benefits is significantly correlated with the decision to remain in service until members qualify for benefits. The estimated effect of a 20 percent reduction in the generosity of retirement benefits upon the probability of remaining on active duty is equivalent to the effect of a 0.27 percentage point reduction in the unemployment rate, or approximately a 2 percent increase in the GDP growth rate.
The views expressed in this paper reflect those of the authors and do not necessarily reflect the official policy or position of the U.S. Air Force, Department of Defense, the U.S. Government, or the National Bureau of Economic Research.. This article was completed under a Cooperative Research and Development Agreement with the US Air Force Academy. We would like to thank Scott Seggerman, Andrew Smith and Vanessa Johnson from the Defense Manpower Data Center. We could not have conducted this research without their support providing us with the data. Thanks to D. Bruce, A. Gustman, A. Samwick, and participants in the NBER Conference on State and Local Pensions.