Do the proposed reductions consider the impact on the all-volunteer force? The question the Defense Department should be asking is not how to cut costs, but how to get better value for each dollar spent.
Updated: April 22, 2013 - 11:28 AM
Defense and entitlements. That’s how Washington has tried to define the debates over cutting federal spending, as if the two inhabited entirely distinct spheres. Yet, the Pentagon is dealing with an entitlements problem of its own, one that threatens to consume the defense budget if unchecked.
Over the past decade, the Defense Department experienced rapid growth in military compensation, in no small part because of health care and pensions. From 2001 to 2012, the average cost of pay and benefits per active-duty service member grew from $54,000 to $109,000, an increase of 56 percent once you consider inflation. That includes pay, allowances for housing and food, health care, and retirement benefits. It doesn’t include other kinds of compensation that are outside the regular military budget or in supplemental war funding - such as tax exemptions for service members, extra pay for deployments in Iraq or Afghanistan, or benefits from the Department of Veterans Affairs.
Americans rightly feel a sense of gratitude and obligation to our men and women in uniform; no one wants to break faith with the troops. Since the end of the draft four decades ago, compensation has become an important tool to entice men and women to sign up for military service. Any changes should be made with great thought and care, and out of fairness, they should not be forced on those who are currently serving or who have previously served. One of the best ways to honor the sacrifices of our troops is to put military compensation on a sustainable, long-term path - and in a way that considers the preferences of service members.
The rapid growth in military compensation over the past decade was due to several factors, some beyond the Pentagon’s control. From 2001 to 2012, basic pay grew by 20 percent, adjusting for inflation, because of higher-than-requested raises enacted by Congress. Annual payments by the Defense Department to the military retirement trust fund, which pays the future cost of pensions, rose by 39 percent. And military health-care costs increased by a stunning 118 percentas new benefits were added and more retirees and family members opted for the military health-care system rather than private insurance.
If military personnel costs continue increasing at the rate they did over the past decade - and if the overall defense budget grows only with inflation - these costs will consume the entire defense budget by 2039, leaving no funding for equipment, training, bases or other necessities. This is not a prediction of what will actually happen, but a clear indicator that the current path cannot be sustained.
One could take a lawn-mower approach to scaling back military compensation: cutting whatever grows fastest and sticks out above the rest. Indeed, this month’s budget request by the Pentagon calls for cuts in fast-expanding benefits, specifically health care and basic pay, to reduce costs. But are these forms of compensation the right ones to trim? Do the proposed reductions consider the impact on the all-volunteer force? Without answers to these questions, Congress may understandably be reluctant to act.
The question the Defense Department should be asking is not how to cut costs, but how to get better value for each dollar spent. To that end, it should consider which forms of compensation are most important to service members and the trade-offs they make among them.
Do they prefer cash compensation over benefits such as health care, and by how much? Do they like tuition assistance more than extra vacation days? Most important, do service members value benefits commensurate with what it costs the government to provide them? With such information, cuts can be aimed at the benefits troops value least, minimizing the negative effects on service members.
Reducing the cost of military compensation does not have to be all pain with no gain. Some portion of the savings from cutting the least desired benefits can be reinvested in areas that service members prefer. Thus, the military could maintain or even improve the total value of its compensation system as perceived by service members while reducing overall costs. This approach has been used successfully in the private sector for years.
Last year, the Center for Strategic and Budgetary Assessments conducted a study in collaboration with TrueChoice Solutionsasking some 2,600 current and former service members about different levels of 10 forms of compensation. While this trial study was no substitute for a larger, randomized study performed by the Defense Department, the preliminary results were revealing.
Previously, I supported cutting benefits such as military exchanges and commissaries - military-operated stores offering general merchandise and groceries. In a Wal-Mart and Target world, they seemed like an outdated and inefficient form of compensation, and cutting them could save more than $1.5 billion per year. Our study, however, suggested that a majority of service members from all ranks and age groups value the exchanges as much or more than they cost to provide. It turns out that these stores are a good value as a form of compensation.
Another surprise was how much service members disliked the idea of a performance-based bonus. In our study, opinions of such a bonus varied most significantly by age groups, with younger service members, ages 18 to 29, preferring it more than older ones. But that young age group valued it at only a fraction of what it would cost to implement. And the 50-and-older age group actually considered it equivalent to a pay cut. This suggests that, contrary to the recommendations of independent panels and scores of experts, a performance-based bonus would not be a good use of resources.
Military entitlement reform should not simply be about reducing costs. Before making decisions on which areas to cut, the Defense Department must better understand the preferences of service members. It should reach out and collect data using modern and readily available analytical tools.
This approach should inform decisions, not dictate them. Other imperatives, such as ensuring that all members of the military receive adequate health care, must also play into any choices, even if it means continuing to fund benefits that service members undervalue.
A preference-based approach would be smart even if the budget were increasing; it always makes sense to consider the needs and desires of the people you’re serving. But too often, it takes a crisis to focus the mind and force change. The Pentagon should capitalize on the current budget turmoil to modernize its compensation system, along with the methods used to evaluate it. The Defense Department can do better, the troops deserve better, and the future of America’s all-volunteer military depends on it.
Todd Harrison is a senior fellow at the Center for Strategic and Budgetary Assessments and the author of the study “Rebalancing Military Compensation: An Evidence-Based Approach.”
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