November 13, 2013

Discretionary SpendingOption 2

Function 050 - National Defense

Cap Increases in Basic Pay for Military Service Members

(Billions of dollars) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014-2018 2014-2023
Change in Spending                        
  Budget authority 0 -0.4 -0.9 -1.4 -2.0 -2.6 -3.3 -4.0 -4.8 -5.5 -4.7 -24.9
  Outlays 0 -0.3 -0.8 -1.4 -2.0 -2.6 -3.3 -4.0 -4.7 -5.5 -4.6 -24.6

Note: This option would take effect in January 2015. About 30 percent of the above savings reflect intragovernmental transfers and thus would not reduce the deficit.

The three major components of cash compensation for active-duty military personnel are basic pay and the allowances for food and for housing. Of those three, basic pay is the largest and accounts for about 70 percent. Between 2001 and 2012, in inflation-adjusted dollars, per capita spending on basic pay rose by 28 percent.

During most of the 1990s, lawmakers set the annual increase in basic pay for service members to be equal to the percentage increase in the employment cost index (ECI) for wages and salaries of workers in private industry or to 0.5 percentage points below that amount. From 2000 to 2010, lawmakers approved raises—including across-the-board increases and, in some cases, additional amounts for personnel at specific seniority levels—that, on average, exceeded the ECI by 0.5 percentage points. (Since 2004, the law has established the percentage change in the ECI as the default pay raise, but from that year through 2010, lawmakers overrode that specification via the annual defense authorization and appropriation acts and continued to enact pay raises equal to the increase in the ECI plus 0.5 percentage points; they have not done so since.) Starting in January 2015, this option would cap basic pay raises at 0.5 percentage points below the increase in the ECI. The Congressional Budget Office estimates that this option would reduce discretionary outlays by $25 billion from 2015 through 2023 compared with what personnel costs would be if the raises were equal to the percentage increase in the ECI.

The military services’ year-to-year continuation rates (which measure the proportion of active-duty personnel in one year who are still in active-duty status in the next) since 2010 are among the highest recorded since 2000. Although the prospect of smaller basic pay raises could make it harder to retain personnel, CBO anticipates that the effect of such an option would be minor and the military services would not need to offer additional incentives to service members (in the form of enlistment or reenlistment bonuses, for example).

For this estimate, CBO assumed that the number of military personnel in each service branch would remain at the current level throughout the decade. The Department of Defense (DoD) has announced plans to reduce the size of the Army and Marine Corps through 2017. If those plans are realized, the savings from this option would be smaller. However, the reductions in force size would make it easier for the Army and Marine Corps to tolerate small declines in retention and still fill out their (smaller) force structures, in turn making it less likely that they would need to enhance other forms of compensation.

One rationale for this option is that DoD has consistently exceeded its goal of ensuring that the average cash compensation for military personnel—including the tax advantage that arises because military food and housing allowances are not subject to federal taxes—exceeds the wages and salaries received by 70 percent of civilians with comparable education and work experience. According to the department’s most recent analysis, cash compensation for enlisted personnel is greater than the wages and salaries of 90 percent of their civilian counterparts; the corresponding figure for officers is 83 percent. Furthermore, the annual increase in the ECI might not be the most appropriate benchmark for setting pay raises over the long run. The comparison group for the ECI includes a broad sample of civilian workers who, on average, are older than military personnel and more likely to have postsecondary education. Historically, pay raises for those workers have been larger than for younger or less educated workers, who more closely match the demographic profile of military personnel.

An argument against this option is that, over the next decade, military recruiting and retention could be compromised unless basic pay raises keep pace with the ECI. Capping raises also would constrain the amount service members received in other benefits, such as the retirement annuities that are tied to a member’s 36 highest months of basic pay over the course of a military career.