The Real Budget Problem

By Maren Leed and Ariel Robinson

November 15, 2013

While military members continued to get paid through the recent government shutdown, questions about the affordability of military compensation over the long term gained greater attention. There is a growing recognition that the long-term fiscal health of the Defense Department requires finding common ground on overall budget levels. This will not, however, be enough. More must be done to slow the rates of internal cost growth, which are eating away at the Pentagon’s purchasing power. 

One of the most serious areas of concern is the cost of military personnel. Since 2001, military personnel costs have risen at rates that outstrip inflation by 30 percent. The two main components of service members’ compensation package—military health care, and pay and allowances—now account for about one-third of DoD’s budget. Long considered a third rail, the need to address military compensation as part of a broader effort to put the defense budget on sound footing is finally more broadly acknowledged.

Congress recognized this challenge in 2012 when it created the Military Compensation and Retirement Modernization Commission. More recently, Rep. Rob Wittman, R-Va., chairman of the House Armed Services Readiness Subcommittee, acknowledged that more discussion is necessary. His support will be critical to implementing any recommendations that might emerge from the MCRMC’s work, potentially next year. In the interim, the challenges could get worse as the Pentagon seeks to meet short-term budget targets by cutting benefits and shaving pay where it perceives the least risk.

The problem with these cuts is that they are largely based on subjective judgments rather than actual data. As the compensation conversation evolves, it’s imperative to keep in mind the vast variability in needs and values represented by the nearly 2.2 million members of the military and their families. The approach to modifying military compensation that has the best possibility for fully supporting all service members is one that is based on choice—choice that would allow compensation packages to be tailored so they align with what matters most to those who serve, while also costing less.

Calculating Costs

Military compensation is often cited as a primary driver for recruitment and retention. Regular military compensation includes basic pay, but also housing and food allowances, along with the tax advantages associated with these benefits. In addition to RMC, service members receive bonuses or incentive pay, as well as benefits such as subsidized child care, education and health care. Finally, Social Security is paid for all who serve, and those who reach at least 20 years of service earn significant retirement pensions.

Almost all elements of the total military compensation package have become more costly over the last decade.

Going forward, some compensation costs are expected to fall, including incentive pay for dangerous assignments as troops leave Afghanistan. But there are other areas where cost growth remains a serious issue. Recent changes in recruitment goals will affect other benefits, such as family care. Retirement costs, which have grown 21 percent since 2000, are rising because of demographic changes and shifting career patterns. And in 2012, the Congressional Budget Office estimated that military health care costs will continue to rise more than 4 percent annually over the next decade. As the fiscal 2014 Defense budget request overview notes, “If we do not slow the growth in military compensation, the DoD will have to make additional force structure reductions . . . or make further cuts to funds for training and equipping our forces,” which directly undermines readiness.

These numbers seem to cry out for change. But there are legitimate concerns that have impeded reform. Primary among them is the need to keep faith with those who serve; they entered into a pact with their nation that must be honored. Further, military compensation is designed in part to recognize the unique sacrifices of service members and their families, including the loss of life. 

What Matters Most

The challenge comes in balancing those obligations—along with the need to retain and continue to recruit a high quality force—with the fiscal realities. 

One way to achieve this balance has yet to be meaningfully explored. Some of the cost in the current system is driven by inefficiency. The homogeneity in the compensation system means it pays service members, directly or through in-kind benefits, for things they do not really value, and fails to provide them with things that may be more meaningful to them than money. Preferences for different combinations of pay and benefits change over time as people get older, get married, have kids, get divorced or take care of aging parents. But the current system has no knowledge of how those preferences evolve, let alone the flexibility to align with those changes. Further, it is not just whether service members care about benefits like access to gyms or the opportunity to shop at a subsidized on-base grocery store, but how much they value them.

Because Defense leaders lack this information, they make short-term decisions to cut back gym hours, for example, or eliminate commissaries. Alternatively, they may pay for a cash bonus when something that matters more to a service member, like another year in a location so a child can finish high school, would be worth much more. And convenient and affordable child care may be so important to some that its elimination could mean they are forced to separate. 

Knowing these three things—the who, what and how much—service members and their families value certain elements of compensation would prove invaluable as policymakers take steps to save money on compensation while attempting to avoid unintended effects elsewhere. Defense Secretary Chuck Hagel should immediately direct the collection of data on service member preferences, data that could be used to inform the painful decisions ahead.

The cost of military compensation has reached a point where it threatens the ability to train and equip those who serve—another violation of the pact between the country and its military. There are two paths forward. One is to take steps that are incremental but leave the basic foundations of the current system in place, such as slowing the rate of annual raises or cutting funding for certain non-cash “extras.” The other path is to seize the opportunity to truly reform the compensation system to one that, while costing less, actually provides service members with the things they value most—which every indication suggests is a combination of money and other things. Military leaders should not have to choose between efficiency and fairly compensating those who serve.

Maren Leed is senior adviser, Harold Brown Chair in Defense Policy Studies at the Center for Strategic and International Studies. Ariel Robinson is a CSIS research assistant. 

By Maren Leed and Ariel Robinson

November 15, 2013