If it’s not the largest enterprise in the world, it’s close, says Raymond DuBois, the former defense under secretary and Base Realignment and Closure program manager for the George W. Bush administration, now a senior adviser for the nonprofit Center for Strategic and International Studies. “Maybe,” he mused, “the Indian railway system has more employees. But if the Department of Defense [DoD] were a country, it would be about the 15th or 16th largest economy in the world.”

More than 3 million people work for the United States Department of Defense – more than half the federal workforce, and far more employees than the nation’s two largest corporations, Walmart and ExxonMobil, combined – so it’s not surprising that the military spends a lot on personnel. What is surprising – and alarming – is the rate at which personnel costs have been increasing within the military budget. As Congress has enacted pay increases and expanded benefits for military personnel, retirees, and their dependents over the past decade, the costs of compensation and benefits have accelerated at a rate that surpasses inflation and any other defense-related expense. Every year, these costs consume a greater percentage of the military budget.

In July 2010, Todd Harrison, senior fellow for Defense Budget Studies at the Center for Strategic and Budgetary Assessments, a non-partisan policy institute, laid the problem bare in testimony before the House Committee on Oversight and Government Reform: “ … the labor cost structure within the military compensation system has grown out of balance.” Non-cash and deferred compensation such as health care benefits and pensions, he pointed out, typically comprise about 29 percent of total compensation in the private sector – but when automaker General Motors was forced into bankruptcy last year, these costs had ballooned to about 46 percent of GM workers’ total compensation. “For the Department of Defense,” Harrison said, “52 percent of total compensation goes to non-cash and deferred benefits. Just as GM struggled to remain competitive under the heavy burden of excessive labor costs, so too will the Department of Defense struggle in the years ahead to maintain its force structure if the labor cost structure is not brought back into balance.”

There is an unusual level of agreement, across the political spectrum and contained within the Defense Department’s own Quadrennial Review of Military Compensation (www.whs.mil/library/doc/Tenth.pdf), that the rate of increase in personnel costs is unsustainable and likely to weaken the military if nothing is done to contain it. There is less agreement, of course, on what measures will solve the problem.

Health Care and Pension Costs
Of the $548.2 billion “base” or “peacetime” 2011 defense budget (not including the costs of the wars in Iraq and Afghanistan) authorized by Congress, the nation will spend about $72 billion on health care and pension costs. This amount – 13 percent – is a greater percentage than GM’s ever was.

In February, Defense Secretary Robert Gates, in response to a reporter’s question, put his finger on the fundamental cause of the rise in military health care expenditures: While military health costs have risen from $19 billion in 2001 to $51 billion in 2010 – a rate of increase that will, projected forward, nearly double military health care costs every 10 years – premiums paid by service members and retirees have not risen since the TRICARE program was created in 1995. “I ask anybody,” Gates said, “to point me to a health insurance program that has not had a premium increase in 15 years.”

Military personnel and retirees now pay $460 a year for a family plan, compared to about $3,500 for private-sector workers, so there is no incentive, for the 70 percent of military retirees who are eligible for insurance through private-sector employers, to wean themselves from the military health care system. Today, 9.6 million Americans are eligible for military health care benefits, and as more retire from service, costs to the DoD will continue to grow.

Nearly half the increase in costs can be attributed to the TRICARE For Life program, established in 2001 for military retirees who are Medicare-eligible. Accrual payments to the TRICARE For Life program now total $11 billion annually. It’s important to note that military retirees are not in the same budget category as service-disabled combat veterans, whose medical care is provided through the Department of Veterans Affairs and whose benefits amount to about $120 billion a year.

One obvious answer to spiraling TRICARE costs is to raise premiums modestly – a solution Harrison said could save $6 billion a year. In terms of budget impacts it’s a reasonable goal but, he acknowledges, politically impossible; the George W. Bush administration tried to raise TRICARE premiums three times, only to be shot down by Congress.

According to Dr. Gordon Adams, a professor of foreign policy at American University and a distinguished fellow at the Henry L. Stimson Center, a global security think tank, a more realistic fix to these spiraling costs might be to separate the non-Medicare eligible portion of the military retiree pool and increase their co-payments and enrollment fees to the level they should be now. “Those were originally intended to cover 27 percent of the cost of the TRICARE eligibility for them, and now they’re covering 11 percent of the eligibility,” he said. “So it’s rational to say that they, like the rest of America, ought to be paying more in co-pays and in enrollment fees, which have been frozen now for 15 years.”

Some, including a former senior defense official interviewed for a Nov. 4, 2010, article appearing on the website Politico, argue that raising premiums and fees is mere tinkering, and say the entire military health care system needs to be overhauled – a merging of the different benefit programs, or the use of vouchers, in addition to other changes. Such wholesale changes, however, seem every bit as politically unfeasible as premium hikes.

For a number of different reasons, the military’s pension system – a “cliff vesting” program, whereby retirees who have served 20 years receive a full pension, and those who serve anything less (19 years, for example) receive no pension at all – is widely considered to be neither cost-effective nor a good way to retain employees. Said Adams: “It’s loony, frankly … The Federal Employees Retirement System vests at five years and increases over the following 15 so that you’ve got some stake in the system early on. It’s ridiculous that we don’t do that. It’s equally ridiculous that we pay [military] people their pension the minute they retire, which doesn’t happen anywhere else in the American economy.” Another problem with the current system is that many military employees draw their pensions while working civilian jobs. The Stimson Center proposes a one-time transition payment for military retirees, while Harrison and others – including Mackenzie Eaglen, a research fellow at the conservative Heritage Foundation – think a defined contribution plan, similar to a 401(k), is the way to go.

Such commonsense solutions, however, have proven unattainable for decades, cautioned DuBois. “When former Secretary of Defense [Thomas S.] Gates led a commission in the late ’60s to study the all-volunteer force, I believe he issued a report that said the all-volunteer force is the right way to go – but it’s only the right way to go if Congress and the executive branch agree to adjust what we call the ‘cliff’ retirement program … And that report was made in 1972, nearly [40] years ago.”

 

Salaries
While military pay lagged behind private-sector pay during the 1980s, Congress closed that gap during the 1990s and spent the 2000s opening up a gap on the opposite side, according to the Congressional Budget Office: Today, average cash compensation to military personnel, including housing and food allowances, is greater than that of more than 75 percent of civilians of comparable age, education, and experience. This is partly due to an annual tradition, recently established by Congress, of tacking on an extra half-percentage point to across-the-board salary raises proposed by the Pentagon. Such raises don’t look like much in a single budget – but they don’t just add a half-billion dollars to one year’s budget; they add it in turn to every budget that comes after, snowballing over time.

Adams, Harrison, DuBois, and the military’s own Quadrennial Review of Military Compensation see these across-the-board raises as unnecessary and, ultimately, destructive to the military. “Why aren’t we paying and promoting on the basis of performance as opposed to the basis of time and grade?” DuBois asked. “Sure, the four services pluck early risers and stars early, and they advance them more quickly than their peers in terms of deep selection and so forth. But it’s still essentially a time and grade payment system. It shouldn’t be.”

A more streamlined way of determining pay raises, Adams said, would be to target them to necessary capabilities. “We ought to be tailoring wage increases to specialties that we want in the force and want to retain in the force rather than doing across-the-board wage increases,” he said. “We should use specialty pays and bonuses to retain key skills. When we see we have a retention problem because of a wage differential, we could change the wages then. But across-the-board wage increases are killing us budgetarily.”

The Debate
While there is broad consensus that the exponential growth in personnel costs is unsustainable, that consensus is far from universal. Some politically powerful groups are dead-set against major changes to military compensation and benefits – including the 370,000-member Military Officers Association of America (MOAA). In early November 2010, Steve Strobridge, MOAA’s government relations director, weighed in on the health care costs debate, claiming that comparing the circumstances of military and private-sector workers is a false equivalence. “Military people,” he said, “pay a large part of their health care premium upfront in service and sacrifice – and pay at a level that no one else in the country pays.”

Even those who agree, in principle, that personnel cost increases need to be reined in are careful to warn about the hows and whys of the process. Winslow Wheeler, director of the Straus Military Reform Project at the Center for Defense Information, a nonprofit dedicated to strict oversight of the nation’s military, wonders if, given Gates’ commitment to “reinvest” any budget savings in readiness and modernization, personnel costs wouldn’t simply amount to a transfer of funds from one waste-and-inefficiency-plagued account to another. “A lot of people are saying: ‘Well, the people costs are so out of control,’” said Wheeler. “And they stop there. It’s basically a conscious or unconscious gambit to transfer personnel overhead costs to hardware costs. I think it’s better to take the position that both of them are out of control, and both of them need to be contained.”

Tom Donnelly, director of the Center of Defense Studies at the American Enterprise Institute for Public Policy Research, thinks that while the problem of personnel costs needs to be addressed, it needs to be addressed with the original purpose of compensation and benefits – the recruitment and retention of valuable personnel – in mind. “You need to think through what the effect would be of renegotiating personnel pay and benefits. It needs to be done – but it needs to be done in an analytical way. And I’m not sure that, because all the metrics we have are essentially peacetime, pre-9/11 metrics, we have the data we need. You want to be really careful and make sure you know what you’re doing before you start trimming these things.”

Within the National Defense Authorization Act of 2011, which was signed by President Barack Obama on Jan. 7, 2011, and established guidelines for the yet-to-come 2011 defense appropriation, there were signs that, at least in Congress, the debate over personnel cost increases was, once again, moot. While Congress hewed to the Pentagon’s proposed 1.4 percent across-the-board pay increase, it also authorized further augmentations of existing benefit programs: It extended TRICARE coverage to children of service members up to the age of 26; it made surviving dependents eligible for TRICARE dental coverage, whether or not they were enrolled prior to the death of their sponsor; and it delayed, for at least another year, any consideration of increases in most TRICARE premiums and fees.

Shrinking the size of the military and cutting modernization programs are the time-honored methods for cutting the nation’s defense budget – but to Harrison and other defense analysts, such cuts are unimaginative and do nothing to “rebalance” the budget in the way the Pentagon says it wants to. If unaddressed, Harrison warns, the rising costs of military personnel – from a total of $73,000 per person in health care, benefits, and pay in 2000 to about $127,000 today, adjusting for inflation – will place severe restrictions on the military’s ability to add more people in the future.

This article first appeared in The Year in Defense 2010 Annual Review Edition.