Making It Personnel: The Need for Military Compensation Reform

Executive Summary: The United States is facing a significant financial crisis. The national debt is fast approaching $15 trillion and is expected to continue to grow at an alarming rate for the foreseeable future. Mandatory programs, such as entitlements and obligations on the debt, are largely responsible for the increasing debt and continued deficits, but escalating defense spending over the last decade has also contributed to the problem. To address the current economic situation, the Department of Defense is working to reduce spending by $450 billion over the next decade and, depending on how the debt ceiling issue is ultimately resolved, may face an additional reduction of $600 billion.

A reduction of this magnitude requires a reassessment of U.S. strategy with a discerning eye toward realistic goals and long-term fiscal sustainability. In addition to the efforts to rethink and potentially reset grand strategy, there is a critical need to focus on internal reforms as well. An assessment of how we are doing things is just as important as an assessment of whether they are the right things. DoD appears to be attempting to do both, as evidenced by the release of preliminary 2013 budget decisions. But while all the details have not yet been revealed, the initial assessment is that DoD may not have gone far enough to reform one of its biggest budgetary challenges: military compensation.

Military compensation costs are trending much the way of federal entitlements, effectively crowding out other elements of the defense budget. Even more worrisome, they are accounting for an ever increasing portion of the budget, meaning that painful cuts today will be less effective tomorrow if not accompanied by long overdue compensation reform. Unfortunately, military pay and benefits are one of the most controversial elements of the defense budget and DoD surely faces an uphill battle to see these reforms implemented. If recent history is any guide, DoD will face a daunting challenge to garner the congressional support required to enact reform. Ironically, DoD faces a significant battle to implement reforms that don’t go far enough to address the real issues with military pay and benefits. The context today has changed to the point where Congress must seriously consider DoD’s proposed reforms instead of treating them like a third rail issue as it has in the past.

Military compensation is composed of a series of cash compensations, noncash benefits, and deferred benefits. The roots of the current compensation system can be found in law dating back to the late 1790s. The Department seeks to provide competitive pay and benefits as part of the human capital strategy while also being fiscally responsible. It is important to recognize that the defense of the entire nation has been underwritten by only a small percentage of the US population. Today, less than one percent serves, and about 23 million veterans and beneficiaries receive benefits for prior service. Military compensation must reflect this fact. Ultimately, the effectiveness of military compensation is measured through the achievement of recruiting and retention goals, which ensure the force is manned with sufficient numbers of personnel with the appropriate skill sets. However, many critics of military compensation identify issues with its efficiency, equitability, and flexibility.

This paper evaluates the various components of military compensation using a construct of transparency, sustainability and perception. For any needed reform to be successful, first, the costs and benefits of compensation must be explicitly stated, easily accessible, and understandable. Second, compensation must be affordable, achieve recruiting and retention goals, and provide an appropriate level of quality of life for the service member throughout his/her career and retirement. And, finally, military compensation must be perceived as fair and effective not just by Congress and the public, but by the individual service member, targeting what he/she values most within the compensation strategy.

Based on this evaluation, a series of policy recommendations are provided for how the current military compensation system might be reformed and updated. Whereas DoD’s current proposed reforms will likely generate up to an estimated $70 billion in savings over the next decade, this paper advocates a more robust—not radical—series of policy recommendations that could garner an additional $40 billion dollars of savings over the same period, or $101-$112 billion of total savings. Perhaps more important than the immediate savings generated, these recommendations will also place military personnel costs on a more sustainable path for the future. DoD’s less aggressive approach may not adequately control pay and benefit costs in the long run and may lead to additional capability and capacity reductions in the future to offset personnel costs.

In sum, the recommendations slow cash compensation growth and reduce the value of non-cash and deferred benefits by transferring costs to the service member, retiree and their dependents. The recommended reforms were generated within the context of the human capital strategy and do not compromise effectiveness for the sake of efficiencies. The military compensation system will continue to provide competitive pay and benefits and allow the Department to continue to meet its recruiting and retention goals, but will now do so in a more fiscally-responsible manner. The proposed recommendations will also maintain the nation’s commitment to the All Volunteer Force by continuing to compensate it at levels commensurate with its sacrifice and commitment to the nation. While the Department’s system of compensation may look differently in the coming decade, the United States will still retain a strong and capable defense and trust will be preserved with those who serve the nation.