Government would save billions by capping pay, CBO says

Reducing annual pay increases for federal civilian workers and military personnel would save the government billions of dollars during the next decade, according to the latest figures from the Congressional Budget Office in a report on trimming the burgeoning deficit.

CBO estimates the deficit will rise to $7 trillion during the next 10 years if mandatory and discretionary spending is not reined in across government. Capping military pay increases and reducing the annual across-the-board adjustment for civilian raises are two available areas, among several others, for cuts, the March 2011 report said.

The nonpartisan CBO said if the government capped the basic pay increase for service members from 2012 to 2015 and set raises at a rate 0.5 percentage points below the increase in the employment cost index, it would save about $6 billion between 2012 and 2016, and $17 billion between 2012 and 2021. Since 2001, lawmakers have approved military pay raises for the average service member that exceeded the ECI by 0.5 percentage point.

President Obama's fiscal 2012 budget request proposes a 1.6 percent pay raise for military personnel and allocates an overall $8.3 billion for education, housing and other quality of life programs for service members.

"Between 2001 and 2009, per capita spending on three major components of cash compensation for active military personnel rose by 37 percent in inflation-adjusted dollars," the report said, citing basic pay, and allowances for housing and subsistence, as the primary compensation categories. Overall, the Defense Department accounts for more than half of all annual discretionary funding, and any significant deficit reduction needs to take into account Defense appropriations, CBO said. Nearly 40 percent of all spending is discretionary, totaling more than $1.3 trillion in 2010.

As for civilian compensation, CBO says the government could save about $10 billion during five years and $50 billion during 10 years by reducing by 0.5 percent the annual across-the-board pay raise expected under the 1990 Federal Employees Pay Comparability Act from 2013 to 2021. Obama has called for a federal civilian pay freeze in 2011 and 2012. Compensation costs for civilian personnel make up about 15 percent of federal discretionary spending, according to CBO.

But the report said the bigger savings would come from capping military pay. According to CBO's analysis, "median cash compensation for military personnel -- including the tax-free cash allowances for food and housing -- exceeds the salaries of most civilians who have comparable education and work experience."

CBO acknowledged that reducing pay for service members and civilians could hinder recruitment and retention. "That effect might be more pronounced for federal agencies that require workers with advanced degrees and professional skills." To offset some of the pain associated with lowered base pay for service members in particular, CBO suggested expanding reenlistment bonuses.

The report highlighted other areas for spending savings that would affect the health care benefits of Defense personnel, among them:

  • An increase in cost-sharing in TRICARE for military retirees who are not yet eligible for Medicare;
  • A limit on the TRICARE benefit for military retirees and their dependents (many enrollees who already have employer-sponsored insurance through a civilian job opt for enrollment in TRICARE Prime, which has the lowest out-of-pocket costs within the TRICARE system);
  • An increase in cost-sharing for prescription drugs under TRICARE.
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