The Congressional Budget Office (CBO) projects that the costs of the Department of Defense’s (DOD) five-year plan, the Future Years Defense Program (FYDP), will significantly exceed the budget caps established by the Budget Control Act of 2011 (BCA). The projected growth in the costs of DOD’s plans over the next 15 years is mostly attributable to the rising costs of operations and support—driven by significant increases in the costs of military health care and compensation of the department’s military and civilian employees.
Since 2001, the cost per service member in the active-duty force has increased by 41 percent, excluding war funding and adjusting for inflation. If personnel costs continue growing at that rate and the overall defense budget grows with inflation, military personnel costs will consume the entire defense budget by 2039.
Although the military’s retirement program serves only a small minority of the force—about 17 percent of military personnel eventually qualify for retired pay—it provides an exceptionally generous benefit, often providing 40 years of pension payments in return for 20 years of service. According to DOD’s Office of the Actuary, in FY 2012 there were 2.3 million military retirees and survivor-benefit recipients. They received approximately $52 billion in payments. Retirement outlays are expected to rise to about $55 billion by 2017 and to $59 billion by 2022 (all in 2012 dollars). The costs to the total federal budget of military retirement benefits have been rising each year because of a predictably slow rise in the number of retirees and survivors and cost-of-living increases. Between FY 2002 and FY 2012, payments to military retirees from the Military Retirement Fund rose by 49 percent.
The Budget Agreement
Generally, military-service members who have completed 20 years of service (regardless of age) are eligible for non-disability retirement—and with it, immediate retired pay. For most, retired pay is a percentage of the highest 36 months of the service member’s basic pay. A service member who retires after 20 years of service receives 50 percent of his or her high-three basic pay with the percentage increasing in 2.5 percent increments for each year above 20. Because service members can retire well before the normal retirement age in the private sector, most begin a second career after leaving the military. The budget agreement provides for a lower annual cost-of-living adjustment (COLA) for inflation (as measured by the Consumer Price Index). The COLA would be inflation minus 1 percentage point starting with the adjustment in December 2015—until the retiree reaches age 62. At age 62, the retired pay would be calculated as if each prior year’s COLA had been the full CPI. And after age 62, the COLA itself would be the full CPI. This modest reduction to retired pay for younger retirees will reduce the deficit by approximately $6 billion over the next ten years while still fully protecting retirees from inflation over the long-term.
Definition of Military Compensation
Some press reports have claimed that personnel costs have not actually grown all that much relative to the percentage of the defense topline—unlike other areas of the defense budget such as Procurement, Research Development Test and Evaluation, and Operation and Maintenance. But these reports are using an inaccurate measure of personnel costs. They’re looking only at the Military Personnel account, which is not a full representation of the true costs. DOD offers substantial non-cash benefits that include free health care; subsidized child care, groceries, and consumer goods; fitness centers; and a host of family programs that all make up elements of military compensation. Defining personnel costs by the Military Personnel account alone omits tens of billions of dollars.
The Military Personnel account includes basic pay (salary); basic allowance for housing; basic allowance for subsistence; special and incentive payments (e.g. for hazardous duties, jumps, dives, etc.); bonuses; permanent change of station travel; retirement-accrual-fund payments; and other expenses such as death gratuities and education benefits. But major portions of military compensation appear in accounts other than Military Personnel. The Operations and Maintenance account, for instance, includes TRICARE, the military’s health-care plan; the commissaries and exchanges; and other benefits such as subsidized child care and fitness and recreation centers. Moreover, retirement benefits—such as the unfunded liability in excess of the accrual payments DOD made—are paid outside the defense budget.
Current levels of military compensation are incompatible with the overall demands on the defense budget. Analysts from think tanks as diverse as the American Enterprise Institute, the Brookings Institution, the Cato Institute, the Center for a New American Security, and the Center for Strategic and International Studies have all called for an overhaul to the military-compensation system.
Both President George W. Bush and President Obama have repeatedly proposed military-compensation reforms. In 2013, Congress established a commission to investigate such reforms. And the defense community’s leadership has also advocated for them:
Defense Secretary Hagel
July 31, 2013: “Reflecting these realities, the President’s Fiscal Year 2014 budget included a package of modest compensation-related reforms that have the strong support of our uniform leadership. . . . [G]iven our current fiscal situation, DOD has no choice but to consider compensation changes of greater magnitude for military and civilian personnel.”
November 13, 2013: “Without serious attempts to achieve significant savings in [military compensation], which consumes roughly half of the DOD budget and is increasing every year, we risk becoming an unbalanced force.”
Defense Secretary Gates
General Ray Odierno, Army Chief of Staff
November, 2013: “The cost of [an Army] soldier has doubled since 2001; it’s going to almost double again by 2025. We can’t go on like this, so we have to come up with [new] compensation packages.”
Admiral Jonathan Greenert, Chief of Naval Operations
November, 2013: “About 50 percent of every Defense Department dollar goes to personnel predominantly as compensation. And if we keep going this way, it’ll be at 60, and then it’ll be at 70 in about a decade plus. . . . I think it’s our responsibility to take a hard look at it.”
 Estimate based on DOD data from the Long-Term Implications of the 2014 Future Years Defense Program, Congressional Budget Office, November 2013, and the National Defense Budget Estimates for FY 2014 (Green Book), Office of the Under Secretary of Defense (Comptroller), May 2013.
 Statement on Strategic Choices and Management Review, as Delivered by Secretary of Defense Chuck Hagel, Pentagon Press Briefing Room, Wednesday, July 31, 2013.
 Center for Strategic and International Studies Global Security Forum, as Delivered by Secretary of Defense Chuck Hagel, Washington, D.C., Tuesday, November 05, 2013.
 Shanker, Thom, Gates Takes Aim at Pentagon Spending, New York Times, May 8, 2010.
 Pincus, Walter. Personnel Costs are a Growing Threat to Defense, Military Leaders Tell Congress, Washington Post, November 13, 2013.