Discretionary Spending Option 3

Function 050 - National Defense

Cap Increases in Basic Pay for Military Service Members

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2021 2017-2026
Change in Spending                        
  Budget authority 0 -0.3 -0.8 -1.2 -1.7 -2.3 -2.8 -3.4 -4.0 -4.7 -4.1 -21.3
  Outlays 0 -0.3 -0.7 -1.2 -1.7 -2.2 -2.8 -3.4 -4.0 -4.7 -4.0 -21.1

This option would take effect in January 2018.

About 20 percent of the savings displayed in the table reflect intragovernmental transfers and thus would not reduce the deficit.

Basic pay is the largest component of military members’ cash compensation, accounting for about 60 percent of the total. (Allowances for housing and for food, along with the tax advantage that arises because those allowances are not subject to federal taxes, make up the remainder of that compensation.) Between 2006 and 2015, real (inflation-adjusted) spending per capita on basic pay rose by 9 percent. Lawmakers typically use the percentage increase in the employment cost index (ECI) for private-sector workers’ wages and salaries (for all occupations and industries) as a benchmark for setting the annual increase in basic pay. Under current law, the pay raise is, by default, set to equal the percentage change in the ECI. However, lawmakers have often overridden that stipulation by temporarily changing the law to specify a different pay raise for a single year through the annual defense authorization and appropriations acts while reverting to current law for future years. Although for each of the years from 2000 to 2013 lawmakers enacted pay raises equal to or higher than the increase in the ECI, in recent years they have approved pay raises that were smaller than the increase in the ECI.

This option would, starting in January 2018, cap basic pay raises at 0.5 percentage points below the increase in the ECI for five years and then return them to the ECI benchmark in 2023. The Congressional Budget Office estimates that this option would reduce the need for discretionary budget authority by $21 billion from 2018 through 2026 compared with what personnel costs would be if the raises were equal to the annual percentage increase in the ECI. Discretionary outlays would decrease by about the same amount.

Although the prospect of smaller basic pay raises could make it harder to retain personnel, CBO anticipates that the effect would be small and that the military services would not need to offer additional incentives to service members to encourage them to stay in the military. Anticipated reductions in force size would make it easier for the Department of Defense (DoD) to tolerate small declines in retention rates and still maintain the services’ force structures. DoD has already implemented some reductions, decreasing the size of the Marine Corps and the Army beginning in 2010 and 2012, respectively. The Marine Corps has achieved its target for the number of active duty personnel, and the Army plans to reach its goal by 2018. For this estimate, CBO assumed that all four service branches will achieve their personnel goals as planned and that the numbers of military personnel in each service branch will remain at those levels—about 1.3 million active duty service members—for the rest of the 10-year estimation period.

One rationale for this option is that DoD has consistently exceeded its goal of ensuring that the average cash compensation for military personnel exceeds the wages and salaries received by 70 percent of civilians with comparable education and work experience. According to DoD’s analysis in 2012, the average cash compensation for enlisted personnel is greater than the wages and salaries of 90 percent of their civilian counterparts; the corresponding value 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 are, on average, older than military personnel and more likely to have a post-secondary degree. 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 if basic pay raises did not keep pace with the ECI. Capping raises would also 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.