Military pay raises drove uptick in Pentagon’s personnel spending

Generous pay raises for the military, in some years exceeding the growth rate of private sector wages and salaries, are largely responsible for the Pentagon’s ballooning personnel costs, according to a new report.

Since 2000, changes in basic military pay have been linked to the Employment Cost Index, which historically has increased faster than prices. Congress added to Pentagon spending on pay, too, by enacting large military pay raises to boost recruitment of an all-volunteer force and to adjust for a significant pay gap at the time between the military and the private sector. That gap closed in 2010 and subsequent pay increases have been set equal to the Employment Cost Index.

“In 2008, 2009 and 2010, lawmakers authorized military pay raises that were 0.5 percentage points above the increase in the ECI,” the Congressional Budget Office analysis stated. “The upward trend in the military personnel account -- which has increased at an average annual rate of 3.2 percent since 2000 (adjusting for inflation) -- is attributable primarily to a series of pay raises that exceeded the general rate of inflation and, in some years, the growth of private sector wages and salaries,” the report said.

Service members will receive a 1.7 percent pay raise in 2013, the figure the Obama administration recommended and one that is in line with the ECI.

Enhanced pension and health benefits for retirees also drove up the cost of compensation, according to CBO. There are three major components to military compensation: pay, health care and retirement benefits. Military compensation now eats up more than one-quarter of the Pentagon’s total base budget.

The bulk of the $150 billion the Pentagon requested for pay and benefits in fiscal 2013 would go toward pay: more than $90 billion would cover salaries, allowances and special pay. Another $16 billion would fund retirement benefits and the remaining $40 billion would pay for health care for service members, retirees and dependents. While health care and retirement benefits together cost the Pentagon less than pay in actual dollars, they’re more expensive in political capital and good will among troops, retirees and their families. The House this past spring shot down the Obama administration’s recommendations to raise health care premiums for military retirees based on their retirement pay, in addition to other fee hikes.

CBO’s analysis comes at a time when the government faces the possibility of fiscal chaos in 2013 and beyond, if the White House and lawmakers cannot agree on a deficit reduction plan. The looming threat of sequestration -- if it occurs, the Defense Department will have to slash another $500 billion from its budget during the next decade -- adds new urgency to a thorny problem for the department and policymakers. How do they rein in skyrocketing personnel costs without breaking faith with millions of active-duty service members and retirees on pay and benefits?

The nonpartisan CBO outlined in its report various options for controlling spending on military pay and benefits; Defense has offered some ideas and proposals that so far have received a lukewarm reception from lawmakers and the military community, particularly retirees. Possibilities under consideration include capping pay raises for service members starting in fiscal 2015, raising TRICARE enrollment and other fees for military retirees to keep pace with increases in health care costs, creating a 401(k)-based retirement system to replace the current vesting system, and increasing the age at which service members can receive their pensions.

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