Alternative Approaches to Adjusting Military Cash Pay

Each year, the Department of Defense (DoD) adjusts its regular military compensation, primarily to help 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. Currently, regular military compensation substantially exceeds DoD’s benchmark goal, which equals the 70th percentile of earnings for comparable civilians (meaning that 30 percent of comparable civilians would earn more).

In this report, the Congressional Budget Office examines two approaches to making the annual adjustments to regular cash pay (that is, regular military compensation excluding the tax advantage).

Adjusting Basic Pay With an Alternative Wage Index. CBO created an alternative wage index tailored to the characteristics of military personnel and a broad index for the entire labor force, comparable to the ECI, but the agency found only small differences between them. From 2004 to 2020, basic pay raises under CBO’s alternative index would have been broadly similar to those under its all-labor-force index, although slightly higher or lower in some years. The agency’s alternative index and the military-adjusted indexes of other researchers were sensitive to the methods used to construct them; their cumulative effect on basic pay over time was also sensitive to the starting year. The changes in those indexes varied from year to year.

Transitioning to an alternative index would entail some administrative costs and could garner less support than the ECI from some stakeholders. Effects on recruiting and retention might also be significant considerations in evaluating an alternative index.

Adjusting All Components of Regular Cash Pay With the ECI. CBO found that applying the ECI to all elements of regular cash pay could help slow the growth in compensation costs. If that method had been applied from 2004 to 2020, it would have reduced costs and helped narrow the gap between regular military compensation and DoD’s 70th percentile goal. If applied in the future, it could slightly slow the growth in spending for regular cash pay and associated expenses. In 2030, it could reduce annual costs by roughly $3 billion (or 1.7 percent). But other costs, such as special and incentive pays to address any recruiting and retention problems that might arise, could erode some or all of the savings.