How the Budget Control Act Is Effecting Military Pay

CBO estimates that DoD’s funding for fiscal year 2013 will drop to $469 billion—about 11 percent below Department of Defense (DoD) request for the year—if all provisions of the Budget Control Act of 2011 are enforced.   The DoD requested about $150 billion to fund the pay and benefits of current and retired members of the military. That amount is more than one-quarter of DoD’s total base budget request (the request for all funding other than for military operations in Afghanistan and related activities).

Breakdown of Military Pay and Benefits ~$150 Billion

Summary of CBO Report:

For fiscal year 2013, the Department of Defense (DoD) requested about $150 billion to fund the pay and benefits of current and retired members of the military. That amount is more than one-quarter of DoD’s total base budget request (the request for all funding other than for military operations in Afghanistan and related activities).

Military Compensation Includes Cash Compensation and Substantial Retirement and Health Benefits

Of DoD’s $150 billion request for compensation in 2013, more than $90 billion would go to basic pay, food and housing allowances, bonuses, and various types of special pay. Another $16 billion would go to accrual payments that account for the future pensions of current service members who will retire from the military (generally after at least 20 years of service). In 2012, DoD paid 34 cents for each dollar of basic pay for active personnel and 24 cents for each dollar of basic pay for reserve personnel.

The remainder of DoD’s request for compensation in 2013—roughly $40 billion—would cover health benefits. Whereas 1.4 million military personnel serve on active duty, a total of nearly 10 million people are eligible for military health benefits. In addition to active-duty military personnel, the people who have access to health benefits include eligible family members of those personnel, retired military personnel and their eligible family members, survivors of service members who died while on active duty, and some members of the reserves and National Guard.

DoD’s request includes funding for TRICARE—the military health care program for current and certain retired service members. In addition, the department makes accrual payments for the future health care of current service members and their spouses (under a program called TRICARE for Life) who will retire from the military and become eligible for Medicare (generally at age 65).

Costs of Military Pay Have Been Increasing Faster Than the General Rate of Inflation and Wages and Salaries in the Private Sector

Over the past decade, the costs per active-duty service member in DoD’s military personnel account (which funds cash compensation and the accrual payments for retirees’ pensions and some of their health care) and the total costs for the military health care program have increased consistently, even with an adjustment for inflation in the general economy.

The upward trend in the military personnel account—which has increased at an average annual rate of 3.2 percent since 2000 (after 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 rate of private-sector wages and salaries.

The costs of health benefits grew as a result of medical costs per beneficiary that escalated more rapidly than did either general inflation or increases in per capita costs for medical care—such as inpatient care, outpatient care, and pharmaceuticals—in the national economy. Finally, the Congress has established new medical benefits; in particular, TRICARE for Life “wraps around” Medicare benefits and substantially reduces out-of-pocket expenses for eligible beneficiaries.

DoD’s Fiscal Situation Has Changed As a Result of the Budget Control Act of 2011

CBO estimates that DoD’s funding for fiscal year 2013 will drop to $469 billion—about 11 percent below DoD’s request for the year—if all provisions of the Budget Control Act of 2011 are enforced, including sequestration (the automatic cancellation of a portion of budgetary resources). Future cuts will be substantial as well under current law. To meet those constraints, significant changes will be needed in military compensation, procurement of weapon systems, or both. This report, which focuses on military compensation, discusses several approaches that could be taken to curtail federal spending.

One possibility would be to restrict basic pay raises, as DoD has proposed for three of the next five years in its 2013 Future Years Defense Program, which was submitted to the Congress in April 2012. Although smaller pay raises could lead to fewer enlistments and faster attrition from the armed services, those consequences might be mitigated by increasing the availability of enlistment bonuses and selective reenlistment bonuses (the latter are offered to service members in hard-to-fill occupations). Alternatively—or in combination with restricting pay raises—DoD could reduce the number of active-duty military personnel more aggressively than the cumulative 5 percent cut currently planned between 2013 and 2017.

Another approach might be to replace the current retirement system (under which active-duty members qualify for immediate benefits after 20 years of service) with a defined-benefit system that partially vests earlier in a member’s career, with a defined-contribution system under which DoD matches the service members’ contributions to a savings plan, or with some combination of the two systems. Those systems could cost less or more than the current system, depending on how they were structured and implemented, and savings might not be achieved for several years.

A third possible approach would be to restrain health care costs by making changes in enrollment fees, deductibles, copayments, or other aspects of current benefits. DoD has proposed various changes of this sort in its recent budget requests. Savings from some of those measures might be achieved immediately upon implementation.

Read the full report