What the Force Really Costs

The Military Times family of newspapers is out with a long piece on military personnel costs. Unlike most articles published on the subject, this one takes a critical look at what’s become the conventional wisdom over the last four years—that military personnel costs have grown far too much and that this growth is unsustainable.

Those of us who’ve been outspoken on the need to put military compensation on the table for reform shouldn’t be reflexively opposed to a deep dive on the subject from another perspective. This is an important issue and our fighting men and women, along with all our retirees, deserve to have the issue debated fully and fairly.

Unfortunately, this piece falls considerably short.

The main thrust is that personnel costs—as defined by the Military Personnel account—haven’t actually grown all that much when you see it as a percentage of the defense topline, and that other areas of the budget such as the modernization accounts (Procurement and Research, Development, Test, and Evaluation) and Operations and Maintenance (O&M) have grown faster.

Author Andrew Tilghman writes,

But at that time in 2011, the part of the defense budget labeled “military personnel” was smaller as a share of Pentagon spending than it was a decade before in 2001….

The portion of the defense budget titled “Military Personnel” was 24.16 percent of the Pentagon’s total budget in 2012, showing essentially no increase over 2001, when it was 24.13 percent, according to documents from the White House’s Office of Management and Budget.

On its face, this might be a compelling argument except that defining personnel costs by the personnel account omits tens of billions of dollars that we spend on people. This is the single biggest problem with the article; the definition of labor costs is far too narrow and at odds with standard business accounting practices. No organization in the world (that’s interested in accurate accounting) omits non-cash benefits when it accounts for the cost of people. This is known as the fully burdened cost.

DoD offers substantial non-cash benefits that include free healthcare; subsidized childcare, groceries, and consumer goods; fitness centers; and a host of family programs. These are not, as the article tendentiously suggests, “costs that are sometimes unofficially added onto the definition of ‘military personnel’ to help dramatize the problem.” The Congressional Budget Office considers all of these cash and non-cash benefits as part of military compensation. Moreover, the Eleventh Quadrennial Review of Military Compensation notes that “cash payments comprise approximately 51 percent of average military compensation; in-kind benefits 21 percent; and deferred compensation for retirees, veterans, and survivors another 28 percent.”

The Military Personnel account includes basic pay (salary); basic allowance for housing (not taxable); basic allowance for subsistence (not taxable); special and incentive payments (e.g. hazardous duty, jump, dive, etc.); bonuses; permanent change of station travel; retirement accrual fund payments; and other expenses such as death gratuities and education benefits.

But, due to arcane Pentagon accounting methods, major portions of military compensation appear in accounts other than Military Personnel. The O&M account includes Tricare, the military’s free healthcare plan; the commissaries and exchanges; and other accouterments such as subsidized childcare and fitness and recreation centers. Moreover, some of our personnel costs don’t even come from the Pentagon’s budget. DoD paid $18.9 billion into the Military Retirement Trust Fund in fiscal year (FY) 2012, yet total outlays from that fund to retirees and survivors totaled $54.1 billion. The difference came from the Department of the Treasury.

The second problem is that the definition of personnel cost seems to be fluid. When marshaling evidence that personnel costs haven’t grown substantially, the Military Personnel account is the benchmark. But later, when the article raises the threat of cuts, all those non-cash benefits are assumed to be part of the compensation package:

Pentagon leaders have hinted that the next DoD budget request for fiscal 2015, due out in February, will include a slew of budget-cutting proposals. Preliminary reports suggest they may include… Limiting access to Tricare health coverage for working-age retirees under 65 by requiring them to use their current employer health plans if available.

Non-cash compensation is either included in DoD’s personnel costs or it’s not; one can’t have it both ways.

Third, the article compares the Military Personnel account in 2012 with 1991, the high water mark in recent history when it was 30.5% of the budget. Conveniently, there’s no mention of the fact that we had nearly two million people on active duty in 1991, compared with just 1.2 million in 2012. Personnel costs have remained roughly the same, yet the size of our force is almost 50% smaller.

This leads to an important discussion about military personnel costs on a per person basis. Since personnel costs necessarily correspond with end strength, the best way to analyze cost growth is on a per person basis; doing so “isolates the effects of changing the size of the force from growth in the cost of paying and supporting personnel.”

Tilghman notes that personnel costs on a per person basis have increased dramatically, citing DoD budget documents that show an estimated 90% growth (not adjusted for inflation) from “$47,580 in 2001 to almost $92,000 in 2012.”

Unfortunately, this isn’t an accurate reflection of the cost per service member because it almost certainly omits the cost of healthcare and the other non-cash benefits. This is mostly the Pentagon’s fault for not knowing the fully burdened cost of its own people. According to a recent report from the Center for Strategic and Budgetary Assessment (CSBA), the cost per active duty service member rose from roughly $60,000 in 1991 to $80,000 in 2001 to $125,000 in 2012 (not including Overseas Contingency Operations funding). And if we included subsidized childcare, groceries, consumer goods, and youth and family programs, the all-in cost would be over $128,000.

Those opposed to military compensation reform, such as the Military Officers Association of America, claim that the reformers’ projections are wrong because their calculations “are based on an assumption that personnel costs will continue to grow at the same rate as over the past 12 years. Yet critics say that’s a flawed assumption because of a number of anomalies since 9/11 that fueled the growth in personnel budgets, but are unlikely to continue or be repeated.”

But the same CSBA study shows that personnel costs were growing well before 9/11. From FY 1985 through FY 1998—a period that included some of the Reagan buildup and the post-Cold War drawdown—the cost per service member grew by 27%. Todd Harrison, the study’s author, found that “military personnel costs not only grew on a per person basis during previous downturns, they grew faster during the downturns than during the buildups.” That doesn’t augur well for the drawdown underway.

CSBA isn’t alone in its assessment that military compensation needs to be reformed. Analysts from across the ideological spectrum at think tanks like the American Enterprise Institute, Brookings, Cato, Center for a New American Security, and the Center for Strategic and International Studies have reached the same assessment, calling for an overhaul to the military compensation system that has been in place since the transition to the All Volunteer Force in 1973. They all recognize that military compensation is not limited to the Military Personnel line item in the DoD budget.

The point here is not to demand major reforms to the military compensation system. It is not, as Tilghman misleadingly suggests, that military paychecks might be “the biggest threat to national security.” Using the Military Personnel account as the total cost of military personnel is not accurate because it omits tens of billions of dollars we spend on personnel in the form of non-cash compensation, benefits that are a standard part of labor costs. It is therefore disingenuous to criticize people who highlight the substantial growth in military personnel while neglecting to place it in the context of a faster growth in topline.

It’s doubly disingenuous because the article does the same thing it argues against—castigating those who fail to note the incredible growth in the topline over the last decade, while failing to adequately provide the context of sequestration for the next decade. Sequestration will lead to a $52 billion cut in FY 2014 and a 34% reduction over FY 2010 spending levels if it remains in place through FY 2023. This decrease in the topline makes controlling all components of the DoD budget imperative. Substantial increases in any one account will crowd out funding for the remaining accounts in a fiscal environment where the topline isn’t getting bigger.

And finally, attempts to sell papers notwithstanding; this debate is not about taking money out of paychecks. The irony of an article that claims the brass are using scare tactics to come after military paychecks that been exempted from sequestration should be lost on no one. This is about, as the Secretary of Defense notes, bending the cost curve for the future. It’s about getting control over (and not necessarily cutting) compensation for those people who join the service tomorrow. Let’s have a full and fair debate and leave the scare tactics on the floor under the copy desk.

W. Jonathan Rue is a senior policy analyst at a small consulting firm where he specializes in defense policy and budget issues. A former Marine captain, he served in Iraq as an intelligence advisor.

Correction: This article originally said the Congressional Budget Office considers certain cash and non-cash benefits as part of regular military compensation. The author meant “regular” as in “normal,” but Regular Military Compensation has a specific formal definition that was not intended. To avoid confusion, the word was removed. 

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