Each year, the Department of Defense (DoD) adjusts its regular military compensation to attract and retain high-quality personnel. That compensation includes basic pay, housing and food allowances, and the tax advantage that arises because those allowances are not subject to federal income tax. Unless the Congress passes legislation directing otherwise, the law requires DoD to use the employment cost index (ECI) to make annual adjustments to basic pay, the largest component of regular military compensation. The department uses other methods to adjust the housing and food allowances.

In this report, CBO examines the implications of adjusting basic pay with an alternative wage index and adjusting all components of regular cash pay (that is, regular military compensation excluding the tax advantage) with the ECI.

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