CBO Testified on Military Compensation

April 28, 2010

To attract and retain the military personnel it needs, the Department of Defense (DoD) must offer a competitive compensation packageone that adequately rewards service members for their training and skills as well as for the rigors of military life, particularly the prospect of wartime deployment. This morning CBO senior analyst Carla Tighe Murray testified before the Senate Armed Services Committees Subcommittee on Personnel to discuss compensation for members of the armed forces.

The best barometer of the effectiveness of DoDs compensation system may be how well the military attracts and retains high-quality personnel. Between 2005 and 2008, the services periodically had trouble recruiting or retaining all of the high-quality personnel they needed. To address those problems, the Congress authorized increases in both cash compensation (such as pay raises and bonuses) and noncash compensation (such as expanded education benefits for veterans and their families). All of the services met their recruiting and retention goals in 2009 and are continuing to do so in 2010. However, the relationship between specific changes in pay rates and benefits and the amount of recruiting and retention is not clear. In particular, a variety of factorsincluding economic conditionsmay have significant effects on DoDs ability to recruit and retain personnel during a given period.

Another way to determine whether military compensation is competitive is to compare it with civilian compensation. Todays testimony focused primarily on such comparisonswhich can be useful but not definitive, in part because of the significant differences in working conditions and benefits between military and civilian jobs. The testimony addressed three questions:

How does military cash compensation compare with civilian wages and salaries?

CBOs most recent analysis, for calendar year 2006, found that average cash compensation for service members (including tax-free cash allowances for housing and food) was greater than that of more than 75 percent of civilians of comparable age and educational achievement. Since then, military pay raises have continued to exceed the increases of civilian wages and salaries, so that finding has not changed.

Is there a gap between civilian and military pay raises over the past few decades?

The answer depends on how narrowly military cash pay is defined. One common method of comparison is to calculate the cumulative difference between increases in military and civilian pay using military basic pay, a narrow measure of cash compensation that does not include, for example, tax-free allowances for housing and food. Applying that method would indicate that, cumulatively, civilian pay rose by about 2 percent more than military pay between 1982 and the beginning of 2010. But that measure does not encompass the full scope of military cash compensation. Using a broader measure that includes cash allowances for housing and food indicates that the cumulative increase in military compensation has exceeded the cumulative increase in private-sector wages and salaries by 11 percent since 1982. That comparison excludes the value of noncash and deferred benefits, which would probably add to the cumulative difference, because benefits such as military health care have expanded more rapidly than corresponding benefits in the private sector.

How would the costs of using bonuses to enhance recruiting and retention compare with the costs of adding more to basic pay?

Traditionally, service members receive an across-the-board increase in basic pay each calendar year, and proposals are frequently made to boost the rate of increase. Changing the basic-pay raise that would take effect on January 1, 2011, from the 1.4 percent requested by the President and DoD to 1.9 percent, for example, would increase DoDs costs by about $350 million in 2011 and by a total of about $2.4 billion through 2015, CBO estimates. A larger pay raise would probably enhance recruiting and retention, although the effect would be small. One possible alternative would be to increase cash bonuses by enough to achieve the same recruiting and retention effects as a higher across-the-board pay raise. That approach would have a smaller impact on DoDs costs because bonuses can be awarded only to the types of service members the military needs most. Bonuses can also be focused on current personnel or potential enlistees who are at the point of making career decisions. Unlike pay raises, bonuses do not compound from year to year (a higher pay raise in one year will cause the following years raise to be applied to a higher base), and bonuses do not affect retirement pay and other elements of compensation.