The effectiveness of our national defense depends not only on the total resources devoted to defense, but also on how those resources are allocated. An efficient allocation of resources is a function of the relative prices of the factors of production. We argue that the current accrual accounting method for military retirement distorts the price of manpower. Although the current system, which charges all services identical retirement rates, may be actuarially fair across the Department of Defense, services with high turnover exhibit manpower prices that exceed actual costs, while services with low turnover are perceived to have relatively lower costs. Because manpower costs generally comprise a large portion of the cost of operating and maintaining hardware systems over their life cycle, distortions in the price of manpower may influence what hardware systems are purchased, the relative expenditures on manpower and hardware systems, and the relative size of the services, thus leading to an inefficient choice of resources and a reduction in national defense. (kr).