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.
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Basic pay is the largest component of military service members' cash compensation, accounting for about 60 percent of the total. (Allowances for housing and food, along with the tax advantage that arises because those allowances are not subject to federal taxes, make up most of the remainder of that compensation.) Between 2008 and 2017, inflation-adjusted spending per person on basic pay rose by 10 percent. To set annual increases in basic pay, 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. Under current law, the pay raise for service members is, by default, set to equal the percentage change in the ECI. (In contrast, the default pay raise for federal civilian employees is the rate of increase in the ECI minus 0.5 percentage points, and lawmakers authorize a separate annual adjustment to account for regional differences in the cost of living.) Lawmakers have often overridden the formula for service members 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 lawmakers enacted pay raises equal to or higher than the increase in the ECI for each year from 2000 to 2013 and for 2017 and 2018, they granted pay raises that were smaller than the increase in the ECI in 2014, 2015, and 2016.
This option would cap basic pay raises for military service members at 0.5 percentage points below the increase in the ECI for five years starting in 2020 and then return them to the ECI benchmark in 2025.
Effects on the Budget
The Congressional Budget Office estimates that this option would reduce discretionary budget authority by nearly $18 billion from 2020 through 2028 compared with personnel costs if raises equaled the annual percentage increase in the ECI. About 1.3 million active-duty service members would be affected by that change annually. Over the next 10 years, on average, they would receive an increase of about $1,400 in basic pay each year, which is roughly $200 less per year than the amount they would receive if basic pay rose with the ECI over the first five years.
A source of uncertainty in the estimated savings over the next decade is CBO's expectation that the smaller pay raise would have little effect on recruiting and retention. CBO anticipates that the military services would not need to offer additional incentives to encourage people to join or stay in the military. Although the Department of Defense (DoD) has begun increasing the number of service members, those increases are small relative to the increases earlier in the 2000s and will be phased in over several years. DoD plans to boost the total number of military personnel by 51,500 (or 4 percent) by 2023.
A smaller reduction in basic pay than the amount specified in this option would probably result in proportionally smaller savings. Conversely, larger reductions in basic pay could result in larger savings, but if the reductions were large enough, they could adversely affect recruiting and retention and prompt DoD to offer additional bonuses or other incentives to maintain the number of people serving in the military. The point at which the military would incur additional costs to recruit or retain personnel depends on many factors, including labor market conditions in the broader economy at the time.
One argument 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 one recent study, the average cash compensation for enlisted personnel in 2016 exceeded the wages and salaries of 84 percent of their civilian counterparts; the corresponding value for officers was 77 percent. Furthermore, the annual increase in the ECI might not be the most appropriate benchmark for setting military 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 postsecondary 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 increases in the ECI. Capping raises also would constrain the amount service members receive 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.