Financial Management:

Implications of Significant Recent and Potential Changes for the Actuarial Soundness of the Department of Defense Survivor Benefit Plan Program

GAO-06-837R: Published: Jul 26, 2006. Publicly Released: Jul 26, 2006.

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This report responds to a legislative mandate to report on the effects of certain program changes on the actuarial soundness of the Survivor Benefit Plan (SBP) program, which is part of the Department of Defense's (DOD) Military Retirement Fund (Fund). The primary purpose of the SBP is to provide benefits to the surviving dependents of deceased members or retirees of the armed forces. In certain cases, individuals other than dependents can be designated recipients of survivor benefits. The Fund accumulates financing resources in order to fund, on an actuarially sound basis, the liabilities of the military retirement and SBP programs. The SBP was created by legislation enacted on September 21, 1972, and has been modified various times by subsequent legislation. The fiscal year 2006 National Defense Authorization Act requires that we report to Congress on (1) the effect of recent significant SBP program changes on the actuarial soundness of the program, (2) the effect of these significant SBP program changes by the various categories of participants and in total on (a) DOD normal cost payments for the program and (b) Department of the Treasury (Treasury) payments to amortize the unfunded liability amounts, (3) the potential effects to Treasury and DOD payments that would result from the following two legislative changes: (a) the enactment of a law permitting participants in the program to designate an insurable interest if a previously designated beneficiary dies and (b) the enactment of a law repealing the Dependency and Indemnity Compensation (DIC) offset (10 U.S.C. 1450(c), 1451(c)(2)) for beneficiaries, and (4) the effect that each of the two potential legislative changes would have on the actuarial soundness of the SBP.

The significant statutory SBP program changes implemented within the past 7 fiscal years that we reviewed have resulted in increased DOD normal cost payments and annual Treasury amortization payments to the Fund in order to maintain the actuarial soundness of the Fund. When changes are made to SBP coverage or benefits, the DOD Office of the Actuary (OOA) calculates the necessary DOD and Treasury contributions to ensure that sufficient moneys are available to make all benefit payments to eligible recipients each year, and that sufficient Fund assets will be available in the future to liquidate all current unfunded liabilities. According to the DOD OOA estimates, the significant SBP program changes we reviewed have produced varied results. Eliminating the reduction in surviving spouses' SBP benefits when such spouses are also eligible for Social Security benefits at age 62 and thereafter increased the SBP liability by an estimated $25.2 billion as of September 30, 2004. Of this amount, Treasury and DOD will be responsible for an estimated $23.7 billion and $1.5 billion, respectively. DOD's $1.5 billion liability includes $1.3 billion in normal costs for current active duty and full-time reservists (full- time employees) and $0.2 billion in normal costs for current part-time reservists (part-time employees). Eliminating further SBP premiums to be paid by retirees who are aged 70 or older and who have paid such premiums for 30 years increased the SBP liability by an estimated $2.5 billion. Of this amount, Treasury will be responsible for an estimated $2.4 billion, and DOD will be responsible for $0.1 billion in normal costs related to current full-time employees. Extending SBP surviving spouse or child benefits for all personnel who are killed in the line of duty and are not eligible for retirement at the time of their deaths increased the SBP liability by an estimated $72 million as of September 30, 2001. Of this amount, Treasury will be responsible for an estimated $28 million, and DOD will be responsible for $44 million in normal costs related to current full-time employees. The two potential changes to SBP benefits mentioned in Section 666 of the National Defense Authorization Act for Fiscal Year 2006 would likely also result in increases to the DOD normal cost payments and the annual Treasury amortization payments to the Fund as follows. Currently, an unmarried DOD retiree without dependent children may elect to have another person with an insurable interest as the SBP beneficiary; however, if that beneficiary dies, designation of another insurable interest is not allowed. Using conservative assumptions, the DOD OOA calculated that the SBP liability would increase by an estimated $2.2 million if retirees were allowed the option of choosing a second insurable interest. The survivors of veterans who die because of complications resulting from a service-connected disease or injury are entitled to DIC benefits from the Department of Veterans Affairs (VA). Under current law, SBP benefits for survivors of retired veterans are offset by any DIC payments received. The DOD OOA calculated that eliminating the current offset requirement would increase the SBP liability by an estimated $12.9 billion. Of DOD's $645 million, $617 million would be for normal costs related to current full-time employees and $28 million for normal costs related to current part-time employees. Enactment of these legislative changes would require the Board of Actuaries and the DOD OOA to adjust DOD and Treasury payments, subject to future appropriations, by amounts necessary to offset any increased costs related to expanded benefits; for this reason, enactment of these changes should not negatively affect the actuarial soundness of the Fund.

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