Exit Strategy: Projected Lifetime Returns for Current and Legacy Retirement Schemes in the Australian Defence Force

Abstract

Incentives matter. Retirement savings after a lifetime of service are arguably the single largest windfall that most military members will ever see; yet curiously, estimating their worth as a labor incentive seems distant and obscure. This thesis quantifies Australian military retirement savings in both the legacy-defined benefit scheme (MilitarySuper) and the replacement-defined contribution scheme (ADFSuper). Comparative retirement savings were generated under different financial market conditions and for different rank cohorts. This research finds that over a lifetime of service, even modest market growth is sufficient for ADFSuper to significantly exceed the maximum returns possible in MilitarySuper. However, the range of possible solutions is wide, albeit dependent only on a few variables. Conversely, MilitarySuper’s range of outcomes is narrower, delivering greater certainty to members. However, it is more strongly impacted by factors exogenous to both the employee and the employer. This makes making modeling MilitarySuper more complex and the task of communicating its benefits more difficult. While the benefits of ADFSuper are readily communicable, the scheme does constitute a greater risk exposure for the member but not for the employer. The exact nature of this risk may be poorly understood by members of both schemes. Finally, this thesis postulates the effects that distant and obscure incentives may have on military recruitment and retention.