National Security vs. Social Security: Is the Defense Budget Sustainable?

As a presidential candidate, George W. Bush vowed to make the Pentagon "embrace the productivity revolution that has transformed American business." He promised to "force new thinking and hard choices" at the Pentagon and held out the prospect of "skipping" a whole generation of weapons technology.

Yet the defense budget for fiscal year 2003—the Bush administration's first reach for these lofty aims—offers no sense of tectonic plates in motion. Close readers will look in vain for new thinking, hard choices, or better practices. The president's budget plots an ambitious ramp-up in defense spending over the next five years, propelled, at least nominally, by the war on terrorism and homeland security. From 2003 to 2012, defense funding will increase $557 billion more than is needed to keep even with inflation. During the same period, the president's budget calls for tax cuts of $675 billion (on top of those enacted last year). In the language of policy wonks, an "on-budget deficit" results every year. In plain English, the president's budget will tap the Social Security trust fund far into the future.

What the president is said to seek in defense is nothing less than "transformation," a term with no settled meaning, which helps it gain acceptance. Though transformation means different things to different people, to many it promises more for less, at least over the long run. To borrow a phrase used by Admiral William Owens, former vice chairman of the Joint Chiefs of Staff, transformation can mean that we can buy more "tooth" (combat fighting ability) and less "tail" (overhead and support costs). But it is hard to discern significant savings or a shift in the "tooth to tail" ratio in the president's budget, even as it moves toward 2012.

The budget raises two crucial questions. Does it take national defense down a path that can be sustained? And will that path lead to a truly transformed defense?

The Defense Buildup

Under the president's budget, funding for the Department of Defense increases from $331 billion for 2002 to $379 billion for 2003 and continues growing until it reaches $451 billion in 2007. At that point the "Future Years Defense Plan" ends; thereafter funding is indexed up each year at the rate of inflation. As figure 1 indicates, when measured in real (inflation-adjusted) dollars, the department's budget will be larger than its average budget in any of the past five decades except for the 1980s. By 2007 it will reach virtual parity with defense spending in the 1980s.

Only about one-third ($14.7 billion) of the 2003 increase is directly attributable to homeland security and the war on terrorism. And though that increase is substantial, homeland security and the war make up only 8 percent of the Defense Department's overall budget for 2003 (figure 2). The 2003 budget includes a $10 billion "reserve" fund for the war on terrorism, an increment that is not included in the years beyond 2003.

Congress will fund the war on terrorism and support the increases for homeland security. But much of what the administration is seeking is not driven by the war or homeland security, which raises the question of whether the rest of this buildup is politically sustainable. From the 1980s through the mid-1990s, Social Security surpluses were used to finance deficits on other operations of government, rather than to retire Treasury debt and free private savings for real investment, but the practice was widely disavowed when the budget moved into surplus in the late 1990s. Terrorism has given the president dispensation once again to use Social Security surpluses to pay for deficits in the rest of government operations; and his budget taps these surpluses every year of its 10-year forecast, consuming in all likelihood the entire surplus of $2.5 trillion and continuing to borrow heavily even after the "baby boomers" begin to retire in 2008.

The Bush budget thus delivers a coup de grace to all the "lock-boxes" proposed over the past several years. Granted, the lock-boxes were gimmicks, but at their core was a sound concept. Instead of borrowing and spending the Social Security surpluses, the government would use them to buy back Treasury debt held by the public, thus adding more than $3 trillion to net national saving, boosting the economy, and in time retiring virtually all of the Treasury's debt owed to the public. After 2026, when revenues coming into Social Security are no longer sufficient to meet benefits being paid out, the trustees will be forced to liquidate trillions of dollars of trust fund bonds. If Treasury then owes relatively little debt to the public, it will be in far stronger shape to redeem these bonds.

This plan was a first step toward strengthening the U.S. economy so that it would be better equipped to shoulder the increased pension and health costs for a growing dependent population. The president's budget dashes any hope of implementing it now, but it enjoyed broad bipartisan support, at least until September 11.

As long as the case for more defense spending is compelling, its urgency may override all others, but the needs of the baby boomers remain and cannot be avoided. When French Foreign Minister Pierre Laval suggested that the Soviet Union should encourage Catholicism in order to be a better bulwark against Nazi Germany, Stalin is said to have asked disdainfully, "The Pope? How many legions has he got?" The baby boomers have many legions: 77 million marching to retirement and all expecting their full entitlement. Their claims start coming due in six years.

Figure 1. Defense Department Budgets, 2003 and Five Decades Past (Annual Average)














To see how the political pendulum can swing, recall the Reagan defense buildup. In 1980, just before President Reagan came to office, defense spending constituted 23 percent of all budget outlays and 5.3 percent of gross domestic product. Reagan proposed a five-year plan to boost the Pentagon's share of the budget to 38 percent and its share of GDP to 7.1 percent by 1986. At the same time, he proposed substantial tax cuts and largely spared the country any "guns-for-butter" trade-off. For four years, defense took precedence over the deficit. By 1985, defense spending had doubled, but with deficits rising endlessly, sentiment began to shift. When Congress passed the Balanced Budget and Emergency Deficit Control Act—better known as Gramm-Rudman-Hollings—in 1985, the pendulum swung back; reducing the deficit took priority over defense. Secretary of Defense Caspar Weinberger kept proposing larger defense budgets—his budgets peaked at well over $400 billion in 1989—but until the Persian Gulf War, defense funding did not rise above $300 billion, and in real terms, it declined.

Social Security, important as it is, is only one of many competing needs. Its companion entitlement, Medicare, is another, and in time it could constitute a greater claim on GDP than Social Security, particularly if Congress adds prescription drug coverage to the hospitalization and medical care coverage. The Bush budget for 2003 diminishes the competition from Medicare on paper by projecting that the program will grow by $226 billion less than the Congressional Budget Office estimates it will grow over the next 10 years.

Defense spending is appropriated annually and competes most directly with other nonentitlement programs also appropriated annually. Under Bush's 2003 budget, defense funding averages 7 percent annual growth through 2007. Funding for other appropriated programs (excluding homeland security) averages an anemic 1.2 percent growth rate, well below that of inflation. Given the popular support for education, highways, law enforcement, Amtrak, veterans' medical care, the National Institutes of Health, the National Science Foundation, and much more, it is doubtful that nondefense discretionary spending can be kept below inflation for the next five years and beyond, but the Bush budget proceeds on that wishful assumption.

If the CBO is right about cost growth in Medicare and if the increase in nondefense appropriations merely keeps up with inflation, these two accounts alone will require about 93 percent of the funding that the Bush administration has designated for real growth in defense between now and 2012. Defense is the fastest-rising spike in the president's budget, but it will face stiff competition from other stakeholders.

Abandoning Reform

Congress will grant the president's request for 2003 because it wishes to present a united front in the war on terrorism. But the ease with which the Defense Department budget passes will be deceptive. As 2007 approaches, the budget increases will become more and more difficult to sustain.

If the Pentagon is to sustain its budget through 2007 and beyond, it needs to be a good steward of the money now being lavished on it. To many, "transformation" has to include "transformed management"—out of practical as well as political necessity. If the Defense Department is bent on change, one would expect to find evidence of better practices in the way it manages its most challenging programs—for example, ballistic missile defense. Many programs fall under this umbrella. The Navy's most basic system, known as "Area Wide," was canceled only months ago for subpar performance. A space-based sensor, SBIRs-Low, was almost killed by Congress in 2001 and will probably be redesigned before a decision to procure it is made. Even the most technologically mature ballistic missile defense program, the PAC-3 system, is experiencing cost-control problems. To this list, the Pentagon proposes to add three more kinetic interceptors, two ship-based and one space-based. And it proposes to take its airborne laser, a theater missile defense system in early development, and empower it to "fry" intercontinental ballistic missiles in the boost phase.

Ballistic missile defense spending went up nearly $3 billion in the president's first budget and will increase $3 billion more over the next five years. How does the Defense Department propose to manage so much money on such ambitious programs? It has come up with a "spiral" acquisition system that will dispense with most of the oversight that ensures accountability. Giving the Missile Defense Agency full rein, the Pentagon will not define what threats ballistic missile defense systems have to defend against, will not set performance standards or milestones that the systems must meet, and will not establish baseline cost estimates by which they must be measured.

Figure 2. The 2003 Defense Budget: Shares for the War on Terrorism and Homeland Security
















If better business practices are not apparent, what about demonstrable savings? In June 2001, Secretary Rumsfeld told the House Armed Services Committee that he would be seeking at least $347.2 billion for the Defense Department for 2003, an increase of $18.3 billion over the 2002 request. At the time, the increase seemed sizable, even to him, and he asked the right question and then answered himself, "So where do we find the money for the rest of our needs? We simply have got to find cost savings. We have an obligation to the taxpayers to spend the money wisely." Pentagon officials claimed in testimony that the budget reflects $9.3 billion in savings for 2003, but a close study of the list of savings uncovers only one-fifth of that figure. More than half, $4.8 billion, is unspecified. If the Pentagon cannot identify the savings as it is writing the budget, it is highly unlikely to find it while the money is being spent. Another 30 percent of the listed savings, $2.8 billion, is claimed from either postponing or restructuring programs. These steps may save money in one year but are not truly savings because they merely postpone costs. That leaves $1.7 billion—less than one-half of 1 percent of the overall Defense Department budget—in "savings."

In a 10-year budget committed to transformation, one would expect to find, in Admiral Owens's phrase, more "tooth" and less "tail." And one would expect savings from transformation to be evident as the budget approaches 2012. But only one day after seeing this budget, Owens, himself an ardent advocate of transformation, denounced it in the New York Times. He noted that "only 30 percent of the DoD budget is spent for direct war-fighting capability ("tooth") while 70 percent is spent on overhead and infrastructure ("tail"). No community would tolerate 7 out of every 10 police officers sitting at their desks pushing paper. The nation should not tolerate such a ratio in the military."

The source of virtually all the "tail" costs that Admiral Owens finds indefensible is the Operations and Maintenance accounts—the "mother lode" of readiness funding. These accounts fund training, exercises, and operations; they buy spare parts, fuel, ammunition, and all the other supplies and materiel that the military needs to operate. And they have been increasing inexorably. The force structure approved by the Bush administration is essentially the same as that adopted by the Clinton administration in 1997 (see table 1), which, in turn, was only marginally different from that adopted in 1993. Yet the cost of operating and maintaining it has been rising in real terms at an annual average rate of 3.5 percent since 1997 (even excluding the costs of the war on terrorism from 2002 and 2003). Operations and Maintenance is taking a bigger and bigger bite out of the Pentagon budget, and no one can say precisely why. The Congressional Budget Office examined one conventional explanation—that older equipment costs more to maintain—and found it unsupportable. If the "tooth to tail ratio" is to change, this trend must be understood and dealt with. The Bush budget for 2003 merely brushes over it.
















Transformation

In his September 1999 speech at The Citadel, candidate Bush boldly promised: "We will modernize some existing weapons and equipment, necessary for current tasks." The real goal is to move beyond marginal improvements—to replace existing programs with new technologies and strategies. To use this window of opportunity to skip a generation of technology."

In his 2003 budget, President Bush pulled his punches. The administration made no discriminating selection of those systems "necessary for current tasks." All Cold War "legacy" systems survive and most flourish. The budget spends more, to be sure, but on a force that has remained basically the same for the past 10 years. The president does not terminate any of the three major tactical fighters—the F/A-18 E/F, or the F-22, or the Joint Strike Fighter—or several other systems, such as the Comanche helicopter or the V-22 tilt-rotor aircraft that is plagued by stubborn development problems and fatal crashes.

Instead of making choices and plowing the savings into research and development, the president's budget effectively freezes Science and Technology, the accounts that fund the breakthroughs in research. Overall research and development goes up, but much of the increase is driven by ballistic missile defense. The 2003 budget essentially freezes the Science and Technology accounts at $9.9 billion, about the same as in 2002 and 2001. In fact, if the $600 million in S&T funding primarily geared to homeland security (chemical and biological agent detection) is excluded, the Bush administration is spending less on S&T for 2003 than the Clinton administration did for 2001. Whether one believes in evolution or revolution of defense systems and strategy, one has to agree that these accounts must be well funded if we are to transform the technology of war.

Indeed, if transformation means anything to its advocates, it means a revolution in the implements of war. That is the kind of change implied by Governor Bush in his Citadel speech: "Power is increasingly defined, not by mass or size, but mobility and swiftness. Influence is measured in information, safety is gained in stealth, and force is projected on the long arc of precision-guided weapons. This revolution perfectly matches the strengths of our country...."

Advocates of radical change may be dismayed, but they should not be surprised. Bush is not the first presidential candidate to use rhetoric—"missile gaps" and "windows of vulnerability"—to good effect in his campaign and then, faced with the reality of governing, to jettison such ideas, in this case "skipping a generation of technology." In reality most weapon systems are the products of evolution rather than revolution; and systems like the V-22 should make us wary of what can happen when the envelope is pushed too far.

On the campaign trail, it is bold to talk of "skipping a generation" and easy to disparage the "legacy force" for its attachment to weapons and war-fighting doctrines that worked in the past. But it is the legacy force that protects us and our interests around the world—and the Bush budget for fiscal 2003 reflects that fact. The budget is also an early warning of how costly it will be to maintain a legacy force, modernize and train a transitional force, and at the same time, develop a transformed force.

None of this is to say that the quest for transformation is futile. But radical change requires more than rhetorical commitment—and far more than the president's budget offers in focus, trade-offs, and far-sighted investment.

Return to Hard Choices

Until September 11, the defense budget seemed destined for moderate increases at most. Secretary Rumsfeld sought to raise his budget for fiscal year 2002 by $40 billion, on top of a $10 billion increase already provided in Clinton's budget. The Office of Management and Budget held the increase to $18.4 billion. In the aftermath of September 11, the Pentagon quickly made up the difference. Congress provided it supplemental funding of $17.5 billion in the fall of 2001 and is now considering its request for another $14 billion. On top of that, OMB granted the Defense Department an increase of $49 billion for fiscal 2003 in the regular budget request.

This may be good news for the Pentagon, but not necessarily for reform. With plentiful budgets, the Defense Department will be spared hard choices and relieved of the fiscal pressure to change. Legacy systems will not be winnowed out; overhead will not be streamlined; and better business practices may not be implemented. A bulging defense budget will make it seem that we can have it all, a legacy force and a transformed force too, modernized systems and futuristic systems both. But when the war on terrorism winds down, and domestic needs, especially the retirement of the baby boomers, take precedence again, we may find ourselves with an amalgam of old and new systems, waning support for defense, and funds too little to take transformation on to fruition. The president declared at The Citadel that we are entering "a period of consequences." If the hard choices for defense are not made soon, the consequences may not be the ones that he intended.