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entitled 'Financial Management: Implications of Significant Recent and 
Potential Changes for the Actuarial Soundness of the Department of 
Defense Survivor Benefit Program' which was released on July 27, 2006. 

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July 26, 2006: 

The Honorable John Warner: 
Chairman: 
The Honorable Carl Levin: 
Ranking Minority Member: 
Committee on Armed Services: 
United States Senate: 

The Honorable Duncan L. Hunter: 
Chairman: 
The Honorable Ike Skelton: 
Ranking Minority Member: 
Committee on Armed Services: 
House of Representatives: 

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

This report responds to a legislative mandate to report on the effects 
of certain program changes on the actuarial soundness[Footnote 1] 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,[Footnote 2] and has been modified various times by subsequent 
legislation. The fiscal year 2006 National Defense Authorization 
Act[Footnote 3] requires that we report to you 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[Footnote 4] and (b) Department of the Treasury 
(Treasury) payments to amortize the unfunded liability 
amounts,[Footnote 5] 

(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. 

To accomplish the above objectives, we met with the DOD Office of the 
Actuary (OOA) staff to identify legislative changes to the SBP that 
occurred within the last 7 fiscal years and that had a significant 
effect on SBP annual costs, the related long-term liabilities, or both. 
We determined that while the DOD OOA was able to provide us with 
information on SBP changes to DOD normal cost payments by participant 
categories, that same level of detail is not maintained for Treasury 
amortization payments because participant level breakout is not 
required for such payments. We discussed this limitation with your 
offices, and they agreed that, for purposes of this report, Treasury 
payments could be reported in total. 

As we stated in communications with your offices, the SBP is a part of 
the Fund, and it is not practical to report on the actuarial soundness 
of the SBP separately. Therefore, our review had to consider how SBP 
changes affected the actuarial soundness of the Fund as a whole. We 
also brought to your attention the fact that information related to the 
ongoing SBP open season enrollment period[Footnote 6] will not be fully 
estimable for at least 2 years, and therefore, current cost estimates 
may be subject to significant changes once the enrollment period has 
ended on September 30, 2006. As agreed with your offices, for open 
season changes, we reviewed the reasonableness of preliminary estimates 
made by the DOD OOA using current participant and cost information and 
certain assumptions considered likely by actuarial staff. Finally, we 
performed procedures to assess the reliability of the data used by the 
DOD OOA in calculating the cost estimates for the various enacted and 
potential legislative changes. Because the SBP is part of the Fund, the 
systems, data, and assumptions used by the DOD OOA are subject to 
testing as part of the Fund's annual financial statement audit. To 
determine the extent of testing related to the DOD OOA process used to 
estimate SBP benefit program costs as well as the Fund's pension 
liability, we interviewed the Fund's independent auditors and reviewed 
relevant fiscal year 2005 financial statement audit test documentation. 
Although auditors have given the Fund an unqualified opinion on its 
financial statements for the past 10 years because audit tests have 
shown the reported information to be reliable, the SBP program is such 
a small component of the Fund that auditors are unlikely to test many 
specific SBP program data elements.[Footnote 7] Therefore, the 
unqualified opinion that applies to the Military Retirement Fund as a 
whole cannot be separately applied to the SBP as a stand-alone program. 
More details on our scope and methodology and the limitations related 
to this review are presented in enclosure I. 

We requested comments on a draft of this report from the Secretary of 
Defense or his designee. We were provided a number of technical 
suggestions, which we have incorporated as appropriate. Separately, we 
received a written response provided by the Deputy Under Secretary of 
Defense for Program Integration and presented in enclosure II. 

We conducted our work from February 2006 through June 2006 in 
accordance with generally accepted government auditing standards. 

Results in Brief: 

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 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[Footnote 8] we reviewed have resulted in the following: 

 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). 

Periodically, Congress has allowed an open season for SBP enrollment, 
the most current one being during fiscal year 2006. Although the total 
effects of the SBP open season cannot be fully estimable for at least 2 
years, the estimated increase in the SBP liability will likely range 
from $31 million to $86 million. 

 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.[Footnote 9] 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. Of this increase, Treasury would be 
responsible for $2 million and DOD for $231,000. Of DOD's $231,000, 
$211,000 would be for normal costs related to current full-time 
employees and $20,000 for normal costs related to current part-time 
employees. 

 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).[Footnote 10] 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 this amount, Treasury and DOD would be 
responsible for $12.3 billion and $645 million, respectively. 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. 

In responding to a draft of this report, DOD did not have any 
objections or substantive comments. DOD separately provided some 
technical suggestions, which we incorporated as appropriate. 

Background: 

Under the SBP program, a military retiree can have a portion of his or 
her monthly retired pay withheld in order to provide, after his or her 
death, a monthly survivor benefit to a surviving spouse or other 
eligible recipient(s). The cost of this benefit is shared by the 
retiree (in the form of reductions from monthly military retired pay 
after retirement) and the government. The original intended purpose of 
the SBP was to "insure that the surviving dependents of military 
personnel who die in retirement or after becoming eligible for 
retirement will continue to have a reasonable level of 
income."[Footnote 11] In 2001, coverage was expanded to active duty 
personnel as well.[Footnote 12] 

Six separate types of coverage are available under the SBP for military 
members retired from a military career, characterized according to the 
relationship of the beneficiary or beneficiaries to the military 
retiree: 

 spouse only, 

 spouse and child(ren), 

 child(ren) only, 

 persons with an insurable interest, 

 former spouse, or: 

 former spouse and child(ren). 

Total SBP costs are shared by the federal government and the retiree, 
so the reductions in retired pay, which represent the SBP premiums, are 
only a portion of the total cost of the SBP program.[Footnote 13] The 
type of coverage and the amount of coverage provided are factors used 
in determining the cost to the military retiree. A retiree with an 
eligible spouse is automatically enrolled in the SBP upon retirement at 
the maximum level of coverage for his or her current spouse, unless the 
retiree elects not to participate, elects to participate at a lesser 
level of coverage, elects other than spousal coverage with spousal 
consent, or is ordered by a court to provide such benefits to a former 
spouse. The maximum SBP benefit for most retirees is 55 percent of 
retirement pay. If the retiree chooses less coverage, the SBP benefit 
is calculated as 55 percent of an amount less than full retired pay. 

Although participants must decide whether to enroll in the SBP at the 
time of retirement, Congress may authorize an open enrollment season 
for retirees to make or change their SBP election. The current open 
season, established by the Defense Authorization Act for Fiscal Year 
2005, runs throughout fiscal year 2006, and over 1.3 million retirees 
are eligible to elect or change their SBP participation. If retirees 
elect to participate in or increase coverage under the SBP program, 
they will have to pay a prospective monthly premium and a onetime, buy- 
in premium, which can be paid over a 2-year span. 

The SBP program is part of the Fund, which was established by the 
Department of Defense Authorization Act, 1984.[Footnote 14] This law 
also established an independent three-member DOD Retirement Board of 
Actuaries (Board) appointed by the President. Members of the Board must 
be qualified professional actuaries who are members of the Society of 
Actuaries, and they serve for 15 years. The Board is required to 
approve the actuarial assumptions for and review valuations of the 
military retirement system, to determine the method of amortizing 
unfunded liabilities, to report annually to the Secretary of Defense, 
and to report to the President and Congress on the status of the Fund 
at least every 4 years. The law also states that reports should include 
recommendations for changes that in the Board's judgment, are necessary 
to protect the public interest and maintain the Fund on a sound 
actuarial basis. 

The DOD OOA provides all technical and administrative support to the 
Board. Among other duties, the DOD OOA performs annual valuations of 
the military retirement system, which include (1) projecting personnel, 
pay, and benefits; (2) calculating annual DOD contribution costs; and 
(3) determining program unfunded liabilities and their amortizations. 

In general, the Fund's liabilities are funded by three sources: (1) 
monthly normal cost payments from DOD to pay for the future benefit 
costs of current service members,[Footnote 15] (2) annual payments from 
Treasury to cover the costs related to amortizing the initial unfunded 
liability of the Fund and subsequent actuarial gains and losses, and 
(3) investment income. The Fund receives investment income from a 
variety of Treasury-based instruments, all of which are debt 
obligations of the U.S. government and are backed by the "full faith 
and credit" of the federal government.[Footnote 16] The Fund receives 
management oversight from the DOD Investment Board established in 
September 2003. The members of the Investment Board are the Director, 
Defense Finance and Accounting Service; the Deputy Chief Financial 
Officer, Office of the Under Secretary of Defense (Comptroller); and a 
senior military member, currently the Vice Chief of Naval Operations. 

Effect of Recent Changes to the SBP Program on Actuarial Soundness of 
the Fund: 

When changes are made to the SBP program that result in more people 
being eligible for benefits or higher benefit payments to survivors, 
the DOD OOA is responsible for determining the amounts, which are to be 
approved by the Board, that must be contributed annually to the Fund to 
maintain the Fund on an actuarially sound basis. According to the DOD 
OOA, this means that there must be sufficient funds contributed to make 
all benefit payments to eligible recipients each year, including 
survivors, and that the Fund balance is projected to eventually equal 
the actuarial liability, that is, all unfunded liabilities will be 
liquidated. In order to accomplish this, DOD normal cost payments are 
calculated to fully fund the current year projected liability for 
active duty members and reservists. In addition, Treasury amortization 
payments are calculated to fund liabilities that were present at the 
inception of the plan (the initial unfunded liability) and any 
actuarial gains or losses that arise because of such things as 
experience that deviates from what was assumed, changes in plan 
benefits, or changes in actuarial assumptions. Treasury payments to 
cover the costs related to amortizing the initial unfunded liability 
are being made over a 50-year period and should be completed in 2033, 
while payments to amortize all subsequent gains and losses will be made 
over a 30-year period from the date of the change that caused a gain or 
loss. 

According to the DOD OOA, it is not practical to separate the assets 
and liabilities of the SBP program from the whole of the Fund and it is 
not necessary to do so. The DOD OOA stated that all of the Fund's 
assets are available to pay any and all of the Fund's liabilities, 
including those of the SBP. 

Effect of Significant Recent SBP Program Changes on SBP Liabilities: 

The three recent SBP program changes have increased the liabilities of 
the Fund and will therefore require increases in DOD and Treasury 
payments to the Fund. As shown in table 1, for the significant SBP 
program changes that have been implemented during the past 7 fiscal 
years, the DOD OOA estimated that the SBP liability would increase by 
about $27.8 billion. Of this increased liability, Treasury and DOD 
would be responsible for approximately $26.1 billion and $1.7 billion, 
respectively. 

Table 1: Summary of Significant Recent Changes to the SBP Program: 

Dollars in millions. 

Significant SBP change: Elimination of the age 62 benefit reduction; 
Estimated total increase in SBP liability: $25,205; 
Estimated unfunded liability increase[A]: $23,677; 
Estimated normal cost increase[B]: $1,528. 

Significant SBP change: Enactment of the paid-up provision;  
Estimated total increase in SBP liability: 2,506;  
Estimated unfunded liability increase[A]:  2,374;  
Estimated normal cost increase[B]: 132.  

Significant SBP change: Extension of benefits for spouses and children 
of personnel killed while on active duty;  
Estimated total increase in SBP liability: 72;  
Estimated unfunded liability increase[A]: 28;  
Estimated normal cost increase[B]: 44. 

Significant SBP change: Total effect of significant recent changes to 
the SBP;  
Estimated total increase in SBP liability: $27,783;   
Estimated unfunded liability increase[A]: $26,079;  
Estimated normal cost increase[B]: $1,704.  

Source: GAO analysis of DOD Office of Actuary information. 

[A] Treasury is responsible for the annual amortization of the unfunded 
liability. 

[B] DOD is responsible for the normal cost. Amounts shown reflect the 
increased normal cost payments on behalf of current employees and do 
not include the increases on behalf of future entrants. 

[End of table] 

Elimination of the Age 62 Benefit Reduction: 

Elimination of the reduction in surviving spouses' SBP benefits when 
such spouses are also eligible for Social Security benefits at age 62 
and thereafter[Footnote 17] has increased SBP liabilities by an 
estimated $25.2 billion. Of this amount, Treasury and DOD will be 
responsible for an estimated $23.7 billion and $1.5 billion, 
respectively. Of DOD's increased funding responsibility, $1.3 billion 
is for normal costs related to full-time employees and $0.2 billion is 
for normal costs related to part-time employees. 

When the SBP was enacted in 1972, survivor benefits for those spouse 
annuitants 62 and over were reduced through use of a formula to reflect 
the availability of Social Security to the survivor. In 1985, the 
reduction formula was changed so that all annuitants 62 and over 
received 35 percent, rather than 55 percent, of the retiree's base 
amount.[Footnote 18] Those whose annuities had been reduced by the 
original Social Security offset formula were grandfathered under the 
new law and allowed to choose whichever of the formulas was most 
advantageous. The National Defense Authorization Act for Fiscal Year 
2005[Footnote 19] phased out by April 1, 2008, the reduction in the 
survivor benefit that occurs at age 62 for all current and future 
survivors. Specifically, on October 1, 2005, the minimum SBP benefit 
for those surviving spouses age 62 and older was increased from 35 
percent to 40 percent, and on April 1, 2006, the minimum benefit was 
increased to 45 percent. The benefit amount will increase to 50 percent 
on April 1, 2007, and to 55 percent on April 1, 2008. 

For fiscal year 2006, Congress included an open season for SBP 
enrollment in the fiscal year 2005 National Defense Authorization 
Act.[Footnote 20] Retirees can begin participation or increase their 
current level of coverage during the period beginning October 1, 2005, 
through September 30, 2006. Those retirees electing to begin or change 
coverage will have to pay all applicable back premiums, interest, and 
an additional amount calculated by the DOD OOA to help protect the 
actuarial soundness of the Fund either in a lump sum or in 24 equal 
installments. To remain eligible, retirees must also pay monthly 
premiums for at least 2 years. From October 2005 through May 2006, the 
Defense Finance and Accounting Service - Cleveland Site (DFAS- 
Cleveland) reported that fewer than 1,600 of the over 1.3 million 
retirees who were eligible to make an SBP election during the open 
season have chosen to do so. DFAS-Cleveland has estimated an average 
buy-in cost of almost $23,000 for those electing SBP participation 
earlier during this open enrollment season, which may have contributed 
to the small percentage of retirees changing their SBP election. 
Although the results of the SBP open season cannot be fully known for 
at least 2 years, the DOD OOA estimates that the increase in the SBP 
liability will likely range from $31 million to $86 million, depending 
on the number of elections made from June 2006 through the end of 
September 2006 and the health of the retirees and their beneficiaries. 

Enactment of the Paid-Up Provision: 

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 SBP 
liabilities by an estimated $2.5 billion. Of this amount, Treasury will 
be responsible for an estimated $2.4 billion. DOD will need to fund 
$0.1 billion for normal costs related to current full-time employees. 

On October 1, 2008, the SBP "paid-up" provision will become 
effective.[Footnote 21] This provision requires that SBP premiums stop 
when two conditions are met: (1) the retiree is at least 70 years of 
age and (2) the retiree has participated in the SBP for 360 months or 
more. 

Extension of Benefits for Spouses and Children of Personnel Killed 
While on Active Duty: 

Extending SBP surviving spouse or child benefits for all personnel who 
are killed on active duty and are not eligible for retirement at the 
time of their deaths increased SBP liabilities by an estimated $72 
million. Of this amount, Treasury will be responsible for an estimated 
$28 million. DOD will be responsible for funding $44 million in normal 
costs related to current full-time employees. 

Under the original SBP, a benefit was paid following the death of an 
active duty military member only if the deceased, at the time of death, 
(1) was eligible to receive retired pay or (2) was a commissioned 
officer and had completed 20 years of service but was not yet eligible 
to retire as a commissioned officer. Legislation effective September 
10, 2001,[Footnote 22] expanded the coverage to the survivors of 
individuals who die while on active duty and who are not eligible for 
retirement. Members who die on active duty are assumed to have retired 
with full disability on the day they died and to have elected full SBP 
coverage for the combination of spouse, former spouse, and children 
that yields the most advantageous survivor benefit. 

Effect of Potential SBP Benefit Changes on Payments to the Fund: 

If legislation allowing for a second insurable interest and eliminating 
the current DIC offset were enacted, DOD normal cost payments and the 
annual Treasury amortization payments would likely increase in order to 
offset these extended benefits and maintain the actuarial soundness of 
the Fund. Since specific details for implementation have not yet been 
legislated, the DOD OOA used assumptions based on knowledge of other 
SBP benefit legislation and on professional judgment in order to 
develop the required cost estimates. Consequently, if implementation 
requirements change or election behaviors differ from the assumptions 
used in the estimates, actual increases in funding needs will also 
differ from the following estimates. For the two proposed changes, the 
DOD OOA estimated that the SBP liability would have to increase by 
$12.9 billion, of which Treasury would be responsible for about $12.3 
billion and DOD for approximately $645 million. 

 Currently, an unmarried DOD retiree without dependent children may 
elect to have another person with an insurable interest as the SBP 
beneficiary. Such a person could be a business partner or family 
member, with a valid interest in the retiree's life. Currently, the 
retiree cannot designate another insurable interest beneficiary even if 
the insurable interest beneficiary dies. To calculate the effect to SBP 
of allowing a second insurable interest beneficiary option, the DOD OOA 
assumed that the retirees electing this option would have below-average 
health and would select individuals with above-average health to be 
insurable interests. Further, the DOD OOA assumed that retirees 
electing this option would be those for whom, on a present value basis, 
expected SBP benefits would most exceed expected SBP premiums paid. In 
other words, the retirees who would benefit most and create the highest 
liability to the Fund would be the retirees who would elect the second 
insurable interest option. Further, implementation requirements 
currently in effect for electing a first insurable interest were 
assumed to also be in effect for electing a second insurable interest. 
Using such assumptions, the DOD OOA calculated that SBP liabilities 
related to adding an option for a second insurable interest would 
increase by an estimated $2.2 million. Of this amount, Treasury would 
be responsible for an estimated $2 million and DOD for $231,000 
($211,000 for normal costs related to full-time employees and $20,000 
for normal costs related to part-time employees). 

 DIC is paid to survivors of veterans who die from (1) injuries or 
disease incurred or aggravated in the line of duty while on active 
duty, active duty training, or inactive duty training or (2) 
disabilities compensable under laws administered by VA. The survivors 
of veterans who die because of complications resulting from service- 
connected diseases or injuries are entitled to DIC payments from VA; 
however, the survivor of a retired veteran is currently not entitled to 
receive the combined total of full SBP and DIC benefits. Instead, the 
SBP benefit is offset by the amount of DIC payments received, with 
certain limitations. 

To calculate the effect of eliminating the current offset of surviving 
spouses' SBP benefits for the DIC benefits, the DOD OOA had to make an 
assumption about the amount of refunded SBP premiums to be repaid for 
the expanded SBP benefits.[Footnote 23] Using this assumption, the DOD 
OOA calculated that the SBP liability would increase by an estimated 
$12.9 billion. Of this amount, Treasury and DOD would be responsible 
for an estimated $12.3 billion and $645 million, respectively. Of DOD's 
$645 million increased responsibility, $617 million would be for normal 
costs related to full-time employees and $28 million for normal costs 
related to part-time employees. 

Effect of Potential Changes to the SBP Program on Actuarial Soundness 
of the Fund: 

Benefit and coverage changes to the SBP program usually require changes 
to DOD and Treasury payments in order to maintain the actuarial 
soundness of the Fund. If the proposed legislative changes are enacted, 
the DOD OOA would be required by law to reflect the increased benefits 
in its calculation of the required DOD and Treasury contributions to 
ensure that additional appropriations are requested to cover 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. The Board would have to approve these 
calculations. 

Agency Comments: 

In responding to a draft of the report, DOD did not have any objections 
or substantive comments. DOD separately provided some technical 
suggestions, which we incorporated as appropriate. 

We are sending copies of this report to the Secretary of Defense; the 
Under Secretary of Defense (Comptroller); the Deputy Under Secretary of 
Defense for Program Integration; the Director, Defense Finance and 
Accounting Service; and the Chief Actuary, Department of Defense Office 
of the Actuary. Copies will be made available to others upon request. 
In addition, this report is available at no charge on the GAO Web site 
at [Hyperlink, http://www.gao.gov]. 

Please contact me at (202) 512-3406 or at engelg@gao.gov if you or your 
staffs have any questions about this report. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Key contributors to the report were 
Joseph Applebaum, Chief Actuary; Molly Boyle, Assistant Director; Linda 
Garrison, Assistant Director; Danielle Free; and Vera Seekins. 

Signed by: 

Gary T. Engel: 
Director: 
Financial Management and Assurance: 

Enclosure I: Scope and Methodology: 

In conducting this work, we identified prior year audit and actuarial 
reports related to the Military Retirement Fund (Fund) and other 
background information to obtain a better understanding of the Survivor 
Benefit Plan (SBP) program and the nature and extent of related audit 
work performed. We visited the Department of Defense (DOD) Office of 
the Actuary (OOA), the DOD Office of the Inspector General (OIG), and 
the office of the Fund's independent public accountant (IPA). We also 
contacted contract personnel at the Defense Finance and Accounting 
Service - Cleveland Site (DFAS-Cleveland). We performed the following 
procedures: 

* Interviewed DOD OOA, OIG, and IPA officials to obtain a general 
understanding of the SBP and its relationship to the Fund. 

* Reviewed DOD OOA documentation related to its estimates of Department 
of the Treasury (Treasury) and DOD payments for certain recent and 
potential SBP program changes. 

* Reviewed selected OIG and IPA audit documentation supporting the 
fiscal year 2005 financial statements audit of the Fund. 

* Gathered data from DFAS-Cleveland on the numbers and status of SBP 
open season applications through April 19, 2006. 

To determine the effect that recent significant SBP program changes 
have had on the actuarial soundness of the program, we met with DOD OOA 
staff to identify significant legislative changes that occurred within 
the last 7 fiscal years that have had a significant effect on SBP 
annual costs, the related Fund liabilities, or both. We determined that 
the Fund liabilities were required by law to be funded on an 
actuarially sound basis,[Footnote 24] and that the financial statements 
of the Fund, which included the annual changes in funding requirements, 
were subjected to audit for each of the last 10 fiscal years and were 
determined to be reliable. We determined that it was not practical to 
determine the actuarial soundness of the SBP separately from the Fund 
since the assets of the SBP cannot be readily identified and segregated 
from the rest of the Fund. We obtained an understanding of the DOD 
OOA's process for calculating the change in the annual normal cost and 
Treasury payments needed to ensure actuarial soundness of the Fund and 
the role of the DOD Board of Actuaries in approving key economic 
assumptions used in estimating these payment changes and reviewing DOD 
OOA's resulting payment change amounts. We determined that under the 
fiscal year 2005 Defense Authorization Act, the current open enrollment 
season for the SBP ends on September 30, 2006, and that the impact of 
this ongoing SBP open season enrollment on the increased cost to the 
SBP will not be fully estimable for at least 2 years. Therefore, 
current cost estimates may be subject to significant changes once the 
enrollment period has ended. We reviewed the reasonableness of 
preliminary estimates made by the DOD OOA using current participant and 
cost information and certain assumptions considered likely by actuarial 
staff. 

To determine the effects that significant SBP program changes have had 
by (1) the various categories of participants and in total on DOD 
normal cost payments for the program and (2) in total on Treasury 
payments to amortize the unfunded liability amounts, we gained an 
understanding of the DOD OOA's process for calculating the cost of the 
SBP changes. We compared this process and inputs to those tested by the 
IPA as part of its audit of the Fund's fiscal year 2005 financial 
statements. In September 1997,[Footnote 25] we reviewed the process and 
model used by DOD to estimate the Fund liability and concluded that 
they were reasonable. The same process and model continue to be used 
for the estimated Fund liability and are subject to audit annually. 
Since the same process and model were also used to calculate the cost 
estimates of the significant SBP changes, we used the work of other 
auditors performed for the fiscal year 2005 financial statements audit 
where possible to gain assurance over the cost estimate calculations. 
For the three significant SBP program changes in the last 7 fiscal 
years, we reviewed key assumptions, limited supporting documentation, 
and the processes used to calculate changes in the normal cost payments 
and to calculate and amortize the unfunded liability amounts, which 
affect the amount of Treasury's annual payments into the Fund. 

To determine the potential increase to Treasury and DOD payments that 
would be necessary if a law were enacted repealing the Dependency and 
Indemnity Compensation offset (provisions now codified at 10 U.S.C.  
1450(c), 1451(c)(2) for beneficiaries), we obtained supporting 
documentation for the calculation of the potential increase and 
determined that it was prepared using the same process and model as the 
long-term pension liability of the Fund. Again, since the process and 
model used to calculate the cost estimates were the same as those 
previously reviewed by GAO and are subject to audit by the IPA in 
connection with its annual audit of the Fund's financial statements, we 
used the work of other auditors where possible. We reviewed selected 
key assumptions and parameters that the DOD OOA considered likely and 
therefore used to estimate the cost changes. 

To determine the potential increase to Treasury and DOD payments that 
would be necessary if legislation were enacted permitting participants 
in the program to designate an insurable interest if a previous 
designated beneficiary dies, we obtained an understanding of the 
payment estimation process, which differed from the process referred to 
above; reviewed the assumptions considered likely by the DOD OOA; 
obtained supporting documentation; and recalculated selected formulas 
used in the calculation of the estimated potential increase in payments 
prepared by the DOD OOA. 

To determine the effect that each potential legislative change would 
have on the actuarial soundness of the Fund, we obtained an 
understanding of the process for calculating the change in the normal 
cost and Treasury payments from the DOD OOA to ensure actuarial 
soundness and the role of the Board of Actuaries in reviewing and 
approving key economic assumptions used in DOD OOA's estimation of 
payment changes. 

We requested comments on a draft of this report from the Secretary of 
Defense or his designated representative. DOD's response provided by 
the Deputy Under Secretary of Defense for Program Integration is 
reprinted in enclosure II. DOD also provided us with technical 
suggestions, which we incorporated as appropriate. 

We conducted our work from February 2006 through June 2006 in 
accordance with generally accepted government auditing standards. 

Enclosure II: Comments from the Department of Defense: 

Office Of The Under Secretary Of Defense: 
4000 Defense Pentagon: 
Washington, D.C. 20301-4000: 

Jul 21 2006: 

Gary T. Engel: 
Director, Financial Management and Assurance: 
U.S. Government Accountability Office: 
441 G Street, N. W. 
Washington, D.C. 20548: 

Dear Mr. Engel, 

This is the Department of Defense (DoD) response to the GAO draft 
report 06-8378, 'Implications of Significant Recent and Potential 
Changes for the Actuarial Soundness of the Department of Defense 
Survivor Benefit Plan Program,' dated June 29, 2006 (GAO Code 191038). 

We do not have any objections or substantive comments about the report. 
We have already communicated technical suggestions which GAO has 
incorporated in the final report. 

Signed by: 

Jeanne B. Fites: 
Deputy Under Secretary of Defense: 
Program Integration: 

(191038): 

FOOTNOTES 

[1] The term actuarial soundness is widely used but not clearly defined 
for public retirement systems. For purposes of this report, we used the 
following definition: A retirement system is considered actuarially 
determined if a professionally qualified actuary (1) calculates the 
present value of the liabilities for future benefits for current 
participants and their beneficiaries, (2) determines the normal cost 
and amortization payments for the unfunded actuarial accrued liability 
over a reasonable period, and (3) has established a method for 
determining and amortizing experience gains and losses. If, in 
addition, the plan sponsor has indicated that it has the willingness 
and sufficient fiscal capacity to pay those ongoing costs, the plan may 
be considered actuarially sound. 

[2] Pub. L. No. 92-425, 86 Stat. 706 (Sept. 21, 1972) (codified, as 
amended, at 10 U.S.C.  1447-1455). 

[3] Pub. L. No. 109-163, div. A, tit. VI,  666, 119 Stat. 3136, 3318- 
19 (Jan. 6, 2006). 

[4] Normal cost payments reflect the percentage of basic pay that must 
be contributed over the entire active career of a typical group of new 
entrants to pay for all the future retirement benefits of that group. 

[5] Unfunded liability amounts include liabilities that were present at 
the inception of the plan for prior service and any actuarial gains or 
losses that arise because of such things as experience that deviates 
from what was assumed, changes in plan benefits, or changes in 
actuarial assumptions. 

[6] Ronald W. Reagan National Defense Authorization Act for Fiscal Year 
2005, Pub. L. No. 108-375,  645, 118 Stat. 1811, 1962 (Oct. 28, 2004). 

[7] For fiscal year 2004, only 13 percent of total Fund participants 
were part of the SBP program and only 6 percent of Fund expenditures 
and obligations related to the SBP. 

[8] The DOD OOA estimates the cost of each significant SBP program 
change as of a specific valuation date. Subsequent to that date, the 
costs of each SBP program change become part of the baseline actuarial 
model and are not separately identified. According to the DOD OOA, 
there have been no significant cost reestimates after the valuation 
date for the three program changes we reviewed. 

[9] The liability estimate for this legislative change was determined 
as of September 30, 2001, and will be effective on October 1, 2008. 

[10] VA's DIC was established in 1956 by the Servicemen's and Veterans' 
Survivor Benefits Act, Pub. L. No. 84-881, 70 Stat. 857, 862 (Aug. 1, 
1956) (codified, as amended, at 38 U.S.C. ch. 13). 

[11] Department of Defense, Office of the Secretary of Defense, 
Military Compensation Background Papers, Compensation Elements and 
Related Manpower Cost Items: Their Purposes and Legislative 
Backgrounds, 6th edition (Washington, D.C.: April 2005), 902. 

[12] National Defense Authorization Act for Fiscal Year 2002, Pub. L. 
No. 107-107,  642, 115 Stat. 1012, 1151 (Dec. 28, 2001). 

[13] In most cases, the SBP premiums are fixed by law or regulation and 
do not cover the total cost of the SBP program. 

[14] Pub. L. No. 98-94, tit. IX,  925, 97 Stat. 614, 634, 644 (Sept. 
24, 1983) (codified, as amended, at 10 U.S.C.  1461-1467). 

[15] Normal cost amounts are transferred from the DOD military pay 
appropriations. 

[16] The Treasury-based instruments are not cash; they are a claim on 
the general fund of the Treasury for future spending. Federal trust 
funds, such as the Fund, typically invest their excess annual receipts 
over disbursements in federal securities. These securities constitute 
future obligations of the Treasury since the Treasury must provide cash 
to redeem these securities in order for the Fund to pay benefits as 
they come due. When this occurs, if sufficient cash surpluses are not 
available to redeem the securities, the federal government would need 
to obtain cash through increased taxes, spending cuts, increased 
borrowing from the public, retiring less debt (if the unified budget is 
in surplus), or some combination thereof. 

[17] Floyd D. Spence National Defense Authorization Act for Fiscal Year 
2001, Pub. L. No. 106-398, tit. VI,  656, 114 Stat. 1654, 1654A-166 
(Oct. 30, 2000); Ronald W. Reagon National Defense Authorization Act 
for Fiscal Year 2005, Pub. L. No. 108-375,  644, 118 Stat. 1811, 1960 
(Oct. 28, 2004). 

[18] Department of Defense Authorization Act, 1986, Pub. L. No. 99-145, 
 711, 99 Stat. 583, 666 (Nov. 8, 1985). 

[19] Pub. L. No. 108-375,  644, 118 Stat. 1811, 1960 (Oct. 28, 2004). 

[20] Pub. L. No. 108-375,  645, 118 Stat. 1811, 1962 (Oct. 28, 2004). 

[21] Strom Thurmond National Defense Authorization Act for Fiscal Year 
1999, Pub. L. No. 105-261,  641, 112 Stat. 1920, 2045 (Oct. 17, 1998). 

[22] Pub. L. No. 107-107  642, 115 Stat. 1012, 1151 (Dec. 28, 2001); 
National Defense Authorization Act for Fiscal Year 2004, Pub. L. No. 
108-136,  644, 117 Stat. 1392, 1517 (Nov. 24, 2003). 

[23] Currently, surviving spouses who become eligible for DIC benefits 
are refunded SBP premiums because of the reduction in SBP benefits by 
the amount of the DIC benefits. With the elimination of the DIC offset, 
the SBP benefits would be expanded, and the related SBP premiums that 
were previously refunded would likely be recollected. Without 
legislation to clarify whether such refunded SBP premiums would be 100 
percent repayable, the DOD OOA estimated that one-third of such 
previously refunded SBP premiums would be recollected. 

[24] 10 U.S.C.  1461 (a). "The Fund shall be used for the accumulation 
of funds in order to finance on an actuarially sound basis liabilities 
of the Department of Defense under military retirement and survivor 
benefit programs." 

[25] GAO, Financial Management: Review of the Military Retirement Trust 
Fund's Actuarial Model and Related Computer Controls, GAO/AIMD-97-128 
(Washington, D.C.: Sept. 9, 1997). 

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