Report: Reforming Military Compensation, Addressing Runaway Personnel Costs Is A National Imperative

By Lawrence J. Korb, Alex Rothman and Max Hoffman

SOURCE: AP/Carolyn Kaster

Military personnel costs have nearly doubled since fiscal year 2001 and now consume one-third of the Pentagon’s base budget — about $180 billion per year.

The Pentagon’s personnel budget is composed of three major items: military pay, health care, and retirement. If left unreformed, increasing expenses for these programs will consume a growing share of the defense budget, diverting funds from other critical national security initiatives such as training and modernization.

In light of the pressing need to reform the military’s compensation systems, the Center for American Progress recently released “Reforming Military Compensation,” a new report which identifies opportunities to reduce personnel costs without breaking faith with the men and women who are serving or have served.

In the Pentagon’s FY 2013 budget request, Secretary of Defense Leon Panetta and the Joint Chiefs of Staff wisely seek to address the threat of mounting personnel costs. The request calls for significant changes to the Defense Department’s pay, health care, and retirement systems in order to ensure the solvency of the compensation system.

The reforms proposed in the FY 2013 request are a courageous first step by the Pentagon leadership to address personnel costs and ensure long-term military readiness. The CAP report endorses the Pentagon’s proposals while identifying areas in which the Defense Department can go further to ensure the long-term viability of the military’s compensation programs.

PAY: Each year the Pentagon spends $107 billion on salaries and allowances, which amounts to about 20 percent of its base budget. These costs have grown rapidly in the past 12 years, primarily due to a series of pay raises authorized by Congress over and above the Defense Department’s budget requests.

By repeatedly passing pay raises above and beyond the Pentagon’s requests, Congress has driven military pay out of line with the Pentagon’s own standards. To address this problem, the Pentagon proposes slowing down military pay increases beginning in FY 2015. Doing so would enable savings of $16.5 billion over the next five years and slow the exponential growth in military cash compensation without cutting any service member’s pay.

RETIREMENT: Under the Pentagon’s current retirement system, military personnel who serve for at least 20 years earn a generous annual pension for life and the ability remain on the military’s Tricare health insurance program. Those who leave with less than 20 years of service get nothing.

Eighty-three percent of troops remain in the force for less than 20 years. As a result, four out of five veterans leave the service with no retirement benefits. Perhaps most worrisome, enlisted troops in ground-combat units — who have borne the brunt of the fighting in Iraq and Afghanistan — are among the least likely to achieve retirement benefits. And while the military’s retirement program serves only a small minority of the force, the program costs taxpayers more than $100 billion per year.

In the Pentagon’s FY 2013 request, Secretary Panetta calls on Congress to authorize a BRAC-like Military Retirement Modernization Commission. But a commission is a slow solution to an immediate problem. Instead, the Pentagon should transition to a 401(k)-type retirement program, as recommended by the Defense Business Board, which would provide a retirement benefit to all the men and women who serve.

HEALTH CARE: Between FY 2001 and FY 2012, the military health care budget grew by nearly 300 percent and now consumes about 10 percent of the baseline defense budget. Most of this cost growth stems not from providing care for active-duty troops but from caring for the nation’s military retirees, who pay just $520 per year for health care for a family.

In order to achieve savings of $13 billion by FY 2017, the Pentagon has proposed responsible increases in the health care fees paid by military retirees, based on their ability to pay. Even with these increases, military retirees will continue to pay just 14 percent of their health care costs.
But to truly restore the Tricare program to stable financial ground, the Defense Department must also implement reforms to reduce overutilization and limit double coverage for working-age retirees. These changes, along with those proposed in the Department’s FY13 budget request, would enable savings of up to $15 billion per year, enough to hold Tricare costs steady in the near term.

None of these recommendations will affect active-duty service members, who will continue to receive health care at no cost. Nor will they impact lower-income or seriously injured veterans, who receive health coverage through the Department of Veterans Affairs rather than through the Defense Department’s Tricare program.

The Pentagon’s compensation system is no longer suited to the needs of the All Volunteer Force and must be reformed. Through smart adjustments and disciplined adherence to established standards, the rapid growth in personnel costs can be restrained and military readiness assured.