Accounting for the Costs of Military Personnel
Over the past decade, the size of the U.S. military has fallen to historic lows in the post-World War II era by almost all measures. Active-duty end strength peaked in Fiscal Year 1952, during the Korean War, at 3.6 million servicemembers. Yet by FY2020, that figure had declined by over 60 percent, driven in part by significant post-Cold War reductions in the 1990s. This trend poses a key question: Can the Department of Defense afford a military force of sufficient size to support the country’s defense strategy in the coming years and decades? The answer hinges, in part, on whether it can manage the growth of military personnel costs, which have more than doubled between FY1952 and FY2020 when adjusted for inflation.
Initially driven by the need to recruit servicemembers to the all-volunteer force, which was instituted in 1973, personnel costs grew dramatically at the turn of the century due to changes in compensation and benefit structures. While pay and benefits should stay competitive with the private sector to attract candidates for military service, high personnel costs, by historical standards, threaten the long-term sustainability of the force. High costs also limit the Defense Department’s strategic flexibility to allocate resources to priority programs and missions. Servicemember pay and benefits may be a politically sensitive issue, but the department and Congress should take steps to modernize the military’s personnel and force management systems as they also work to modernize its capabilities for the future.
The Growth of Personnel Costs
Personnel costs and the total number of active-duty servicemembers generally rose and fell together from the end of World War II through the Vietnam War. However, the end of conscription and the transition to the all-volunteer force in 1973 eliminated the military’s source of cheap labor and its ability to quickly surge personnel. To attract new servicemembers, the Defense Department raised basic pay for junior enlisted and officers to compete better with the private sector.
Figure 1: Historical U.S. Military Personnel Spending
Source: Figure based on author’s analysis of Department of Defense and Office of Management and Budget data sources in a recent report. In-text references to changes in personnel costs are also based on this data.
Today, the total cost of paying and supporting military personnel includes more than the basic compensation, healthcare, and retirement benefits that most private-sector employers offer. Servicemembers receive allowances for housing and subsistence, as well as special pay for certain careers and hazardous-duty and retention bonuses for high-demand career fields. The department also pays for certain in-kind benefits like family housing, dependents’ education, and recreation programs. However, tracking all these costs can prove difficult as they are spread across different titles of the defense budget, not just under the military personnel title, and they do not include the personnel-related costs funded through other parts of the federal budget, such as that for the Department of Veterans Affairs.
Improved compensation for the all-volunteer force meant that even as end strength fell by over 60 percent from its Vietnam War high in FY1968 to its post-Cold War low in FY2000, total personnel costs remained roughly the same. However, costs grew dramatically after the turn of the century as a combination of policy changes and congressional action on personnel accounts took effect. Normalized for the size of the force, the average cost per servicemember grew by 64 percent between FY2000 and FY2012 when adjusted for inflation.
While some growth above inflation is normal given improvements in the quality of life for U.S. workers, the high rate of growth occurred as Congress mandated repeated pay raises above the Employment Cost Index — a measure of the growth in private sector wages — in 10 out of the 11 years between FY2000 and FY2010. In addition to accelerating the growth of basic pay, these repeated raises above the Employment Cost Index also required the department to dedicate more funding to cover servicemembers’ Social Security and retirement benefits. Rising healthcare costs, in part due to the creation of the Tricare for Life benefit in the FY2001 National Defense Authorization Act, and increasing military housing costs throughout the 2000s also contributed to significant growth in the cost per servicemember.
Personnel Costs and the “Ever-Shrinking” Force
Military personnel costs have levelled off over the past decade as budgetary pressures led the Obama administration to request pay raises below the Employment Cost Index, and Congress enacted reforms to military healthcare and retirement. Nevertheless, costs remain high relative to historical norms, when adjusted for inflation.
But how do high personnel expenses impact the military?
First — and perhaps most obvious — high personnel expenses create a more expensive force that is more costly to maintain. As the costs of compensating and supporting servicemembers continue to grow faster than inflation, the budget also needs to grow faster than inflation to maintain the force at its current size. As former Senate Armed Services Committee staff director and retired Marine Maj. Gen. Arnold Punaro noted recently in The Ever-Shrinking Fighting Force, high personnel costs have restricted the Defense Department’s ability to grow the size of the military and contributed to the department’s “low output” in terms of force structure (i.e., lower end strength, fewer ships, and fewer aircraft). Absent a concerted effort to reduce personnel costs, simply increasing the defense budget year after year is likely an unsustainable solution given budget politics on Capitol Hill.
In addition to making the force itself more expensive, higher personnel costs have reduced the buying power of the defense budget by diminishing the Defense Department’s flexibility to allocate resources. As servicemember expenses increase, the department is forced to cover those costs — effectively a must-pay bill. Unless it elects to reduce end strength (which requires congressional approval), the department is obligated to support its personnel and thus has fewer dollars to dedicate to priorities like modernizing military capabilities. In fact, aspects of military compensation have grown more rigid over time. For example, the privatization of military housing in the FY1996 defense policy bill meant that the department could no longer defer maintenance on family housing (which had led to dilapidated housing facilities and a huge repair backlog in the first place) to fund other programs. Instead, it would have to pay more for servicemembers’ housing allowances, which it cannot defer like maintenance. Coupled with the growing cost of conducting operations and maintaining equipment, high personnel costs have made tradeoffs between the “iron triangle” of force structure, modernization, and readiness much starker.
The Future of the All-Volunteer Force
There is no easy solution to the challenge posed by growing military personnel costs. Rather, it requires a sustained commitment to reform. First and foremost, the welfare of servicemembers and their families, the bedrock of the U.S. military, should be accounted for. Consideration should also be paid to the impact of compensation on recruitment and retention. But simply increasing the topline budget each year to accommodate those expenses is both unsustainable and politically unlikely. Instead, policymakers in the Pentagon and on Capitol Hill need to be willing to expend political capital and pursue creative solutions to modernize the military’s personnel management system. During the Obama administration, a set of wide-ranging reforms to the Defense Department’s personnel structure were proposed as part of the “Force of the Future” initiative. But a lack of political backing and resistance from senior military leaders ultimately led to the watering-down of these proposed reforms.
A new round of military personnel reform will need to address servicemember compensation and the force management policies that affect staffing decisions and personnel actions like promotion, recruitment, and retention. It is almost inevitable that military compensation will continue to grow as private-sector wages increase, particularly with military pay raises pegged to the Employment Cost Index. But defense and congressional policymakers could consider alternatives to the current compensation structure that prioritize recruiting skilled individuals and retaining high-performing servicemembers. For example, the department could test the feasibility of a time-in-grade pay table or salary system, or explore shifting the weighting of compensation from basic pay to special pay and bonuses. However, changes to compensation would require thorough research and testing before they are implemented to determine their potential impact on recruitment, retention, and costs.
In addition to pay and benefits, personnel requirements for missions and platforms drive the services’ end strength requests and subsequently topline personnel costs. Leaders need to be willing to challenge traditional staffing paradigms to maximize their efficient employment of personnel. This could include reconsidering the number of personnel required for particular missions and whether enlisted servicemembers can carry out tasks traditionally performed by more expensive officers. While the Air Force has long required officers to pilot aircraft, including remotely piloted aircraft, the Army uses enlisted personnel as operators.
Exploring the use of technology such as AI for certain tasks provides another option for reducing personnel costs. However, simply employing new technologies is no guarantee they will actually substitute for labor. As Todd Harrison recently pointed out, the adoption of remotely piloted aircraft did not actually reduce overall personnel or operating costs significantly because the military staffed these units in essentially the same way that it staffed crewed aircraft squadrons.
But those tasked with modernizing personnel systems should also look to improve the experience of servicemembers and their families. Compensation is only one aspect of a servicemember’s career. The military should explore options to improve career flexibility by allowing personnel to prioritize certain career paths and explore opportunities outside of military service while simultaneously limiting permanent change-of-station moves that uproot families where possible. As part of its recommendations to more effectively manage military personnel, the National Commission on Military, National, and Public Service called for greater permeability between government service and the private sector as well as new personnel management structures for troops with specific skillsets. Improving the servicemember experience can yield benefits for retention that may ultimately reduce costs.
Addressing high personnel costs and modernizing the personnel system will not occur overnight. It requires the collection and centralization of personnel-related data, regular surveys of servicemember preferences, and a willingness to test policy options to determine their impact on recruitment and retention before rolling them out to the total force. Congress should be a willing partner with the Department of Defense to hold it accountable and ensure progress is made. But tackling the challenge of personnel costs now will ultimately provide for a more sustainable military going forward and allow the Defense Department to dedicate the necessary resources to tackle current and future threats.
Seamus P. Daniels is an associate fellow and associate director for Defense Budget Analysis within the International Security Program at the Center for Strategic and International Studies. He recently published a report exploring trends in and drivers of U.S. military personnel costs.