The Retirement and Social Security Benefit Claiming of U.S. Military Retirees

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Abstract

After serving 20 years in the active component of the U.S. military, service members can retire from the military, as young as age 38, and begin collecting a monthly pension benefit for the remainder of their life. In this paper, we ask: do active duty military retirees exit the labor force earlier or later because of their access to military retirement benefits? Do they alter their Social Security claiming decisions? We theorize that access to a consistent source of income may encourage earlier retirement through a standard income effect, but the military pension may also increase a retiree’s post-military job search, allowing for a greater wage and improved job satisfaction due to a better employer-employee match. Access to a steady source of pension income may also reduce short-term liquidity constraints, encouraging military retirees to delay claiming their Social Security benefit in order to benefit from delayed retirement. We estimate the impact of military retiree pension income on retirement empirically using the 1992 Health and Retirement Study cohort. We identify the military pension effect in a difference-in-difference model by exploiting a surprise change in military-retiree benefits in 2001 that extended Tricare health benefits to Medicare eligible military retirees and their spouses through the end of their lives. TFL eliminated the need to purchase Medigap coverage, thereby eliminating a cost that could cut into disposable income from their military annuity. A key limitation of the analysis is that the HRS includes relatively few military retirees.

Key Findings

  • Theoretically, under alternative exploratory assumptions, the income effect will tend to dominate at higher levels of the military pension, implying that the military retirement benefit increases retirement.
  • Empirically, the income effect is also the dominant effect; a higher military retirement benefit increases the likelihood of retiring from the labor force among Medicare-eligible military retirees, conditional on still working full time at age 64.
  • The difference-in-difference estimate is statistically significant and large, implying a 1% increase in the monthly benefit would result in a 5.9% greater likelihood of retirement at ages 65 and older.
  • Expansion of the military pension is also associated with delayed claiming of Social Security benefits, though our estimates are not statistically significant.
  • Additional research is needed, preferably using administrative military personnel data merged with Social Security data, permitting larger sample sizes for analysis.

The preliminary policy implications of the findings are:

  • Military retirees are a distinct population in terms of their retirement and claiming behavior.
  • Consequently, their welfare during retirement as well as the cost of Social Security benefits are likely to differ from that of the general population.

Citation

Knapp, David, Beth Asch, Jim Hosek, and Michael Mattock. 2015. "The Retirement and Social Security Benefit Claiming of U.S. Military Retirees." Ann Arbor, MI. University of Michigan Retirement Research Center (MRRC) Working Paper, WP 2015-336. http://mrdrc.isr.umich.edu/publications/papers/pdf/wp336.pdf

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Project

Paper ID

WP 2016-336

Publication Type

Working Paper

Publication Year

2016